SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

[X]  Annual Report  pursuant to section 13 or 15(d) of the  Securities  Exchange
     Act of 1934

      For the year ended December 31, 2003

[_]  Transition  Report  pursuant  to  section  13 or  15(d)  of the  Securities
     Exchange Act of 1934 for the transition period from________ to ________

                        COMMISSION FILE NUMBER: 000-26287

                               Axeda Systems Inc.
             (Exact name of registrant as specified in its charter)


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

                                 21 Oxford Road
                         Mansfield, Massachusetts 02048
                    (Address of Principal Executive Offices)
                           --------------------------

       Registrant's Telephone Number, Including Area Code: (508) 337-9200

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

           Securities registered pursuant to Section 12(g)of the Act:
                     Common Stock, par value $.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. [X]

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

The aggregate  market value of such common stock held by  non-affiliates  of the
registrant,  based on the closing  price of such  shares on the NASDAQ  National
Market was approximately $25,072,838 as of June 30, 2003. Shares of common stock
held by each  executive  officer and  director  and each person  known to us who
beneficially 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.

The number of shares of registrant's common stock outstanding as of March 22,
2004 was 32,469,862.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement prepared in connection with its
2004 Annual Meeting of Stockholders, which is expected to be filed with the
Securities and Exchange Commission on or before April 30, 2004, 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 84.

<PAGE>
                               Axeda Systems Inc.
                             Form 10-K Annual Report
                         (Year Ended December 31, 2002)

                                Table of Contents


                                     Part I
                                                                            Page

Item 1        Business ........................................................3

Item 2        Properties .....................................................19

Item 3        Legal Proceedings ..............................................20

Item 4        Submission of Matters to a Vote of Security Holders ............21


                                    Part II

Item 5        Market for Registrant's Common Equity and Related Stockholder
                 Matters .................................................... 22

Item 6        Selected Financial Data ........................................24

Item 7        Management's Discussion and Analysis of Financial Condition
                and Results of Operations ....................................25

Item 7A       Quantitative and Qualitative Disclosures About Market Risk .....43

Item 8        Financial Statements and Supplementary Data ....................44

Item 9        Changes in and Disagreements with Accountants on Accounting
                 and Financial Disclosure ....................................79

Item 9A       Controls and Procedures.................... ....................79

                                    Part III

Item 10       Directors and Executive Officers of the Registrant .............80

Item 11       Executive Compensation .........................................80


Item 12        Security Ownership of Certain Beneficial Owners and
                 Management and Related Stockholder Matters ..................80

Item 13       Certain Relationships and Related Transactions .................80

Item 14       Principal Accountant Fees and Services..........................80

                                    Part IV

Item 15       Exhibits, Financial Statement Schedules, and Reports
                 on Form 8-K .................................................81


                                       1
<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 to differ from those discussed herein. Such factors include, but
are not limited to: our ability to become profitable; future expenses; future
results of operations; uncertainties in the market for DRM solutions and the
potential for growth in the DRM market; our ability to raise capital; the
potential for NASDAQ delisting; our dependence on the cyclical software
industry; present and future competition; our ability to manage technological
change and respond to evolving industry standards; our ability to manage growth;
the long sales cycle for DRM solutions; our customers' ability to implement or
integrate our DRM solutions successfully and in a timely fashion; limited
distribution channels; dependence on strategic partners; the difficulty of
protecting proprietary rights; the potential for defects in products; claims for
damages asserted against us; risks from international operations; and others
discussed under "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, such
forward-looking statements are necessarily dependent upon assumptions, estimates
and dates that may be incorrect or imprecise and involve known and unknown risks
and other factors. Accordingly, any forward-looking statements included herein
do not purport to be predictions of future events or circumstances and may not
be realized. Forward-looking statements can be identified by, among other
things, the use of forward-looking terminology such as "believes," "expects,"
"may," "will," "should," "seeks," "pro forma," "anticipates," "plans,"
"estimates," or "intends," or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy or intentions.
Given these uncertainties, prospective investors are cautioned not to place
undue reliance on such forward-looking statements. All forward-looking
statements, and reasons why results may differ that are included in this report,
are made as of the date of this report, and except as required by law, we
disclaim any obligations to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained
herein or reasons why results might differ to reflect future events or
developments. References herein to "Axeda", "we," "our," and "us" collectively
refer to Axeda Systems Inc., a Delaware corporation, and all of its direct and
indirect U.S., Israeli, Japanese, European and Canadian subsidiaries.


                                       2
<PAGE>

PART I

ITEM 1.  BUSINESS OF AXEDA

This Annual Report on Form 10-K includes certain registered trademarks and
tradenames of Axeda Systems Inc. Axeda, Axeda Systems, Axeda DRM, Axeda Device
Relationship Management System, Axeda Agent, Axeda Applications, Axeda
Enterprise, Axeda Software Management, Axeda Usage, Axeda Access, Axeda Service,
Axeda Device, Axeda Administration, Axeda Supervisor, Axeda Connector, Axeda
Gateway, Axeda Builder, Wizcon, Axeda @aGlance/IT, Axeda Web@aGlance, Axeda
FactorySoft OPC, Firewall-Friendly and Access. Insight. In Real Time. are
trademarks of Axeda Systems Inc. All other trademarks are property of their
respective owners, and are hereby acknowledged.

OVERVIEW

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

Axeda customers include Global 2000 original equipment manufacturers, or OEMs,
in the Medical Instrument, Enterprise Technology, Printer and Copier and
Industrial and Building Automation industries.

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. On December 7, 2001, we
acquired all of the outstanding shares of eMation, Ltd., or eMation, a private
company organized under the laws of the State of Israel. The acquisition gave us
an entry into the DRM market. During 2002 our revenues were increasingly
generated from selling DRM products, and for 2003, substantially all of our
revenues were generated from selling DRM products. Our revenues in 2001 were
substantially generated from sales from our Internet Appliance, or IA, business,
our consumer electronics, or CE, business and our personal computer, or PC,
business.

Our IA business was involved in the development of products for the emerging
market in information appliances. This business sold IA hardware reference
designs and software technology through intellectual property licenses and
agreements with Internet service providers. This business provided us 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. We sold the assets of our IA
business, excluding inventory, to Phoenix Technologies Ltd., or Phoenix, for $18
million in March of 2001.

Our CE business designed, developed, licensed and marketed software solutions
that enabled digital video and audio stream management in CE devices. This
business also provided supporting hardware designs to selected customers as well
as customization services and customer support. Our CE solutions enabled
decoding (playback) and encoding (recording) of multimedia formats such as
digital versatile disk or DVD; direct broadcast satellite or DBS and
high-definition television or HDTV on existing CE platforms. We sold the assets
of our CE business to STMicroelectronics, NV in March 2001 for approximately
$55.6 million.

We also generated revenue from our PC business until our exit from this business
in 2002. Our PC business designed, developed, licensed and marketed software
solutions that enabled digital video and audio stream management in PC systems.
Our PC solutions enabled decoding (playback) and encoding (recording) of
multimedia formats such as DVD, DBS and HDTV on existing personal computers. We
exited the PC business pursuant to an exclusive license with Sonic IP, Inc. in
May 2002 for a $2 million license fee.

                                       3
<PAGE>
Our DRM and Other products generated the following revenues for the last three
years:
                                    Year Ended December 31,
                             --------------------------------------
                             2003             2002             2001
                             ----             ----             ----
                                         (In thousands)
Revenues:
    DRM                     $12,622          $10,876         $ 1,614
    Other                       572            7,253           5,975
                                ---            -----           -----
         Total             $ 13,194         $ 18,129         $ 7,589
                           ========         ========         =======

A description of our segments is provided in note 17 to the consolidated
financial statements included at Item 8 herein. Asset and revenue information
about the geographic areas we operate in is included in notes 13 and 16 to the
consolidated financial statements, filed herewith at Item 8.


DRM INDUSTRY BACKGROUND

Computer-based control systems are increasingly the heart of new devices,
machines or systems 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 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. These soft
interfaces could be local to the device or more recently, could be remotely
accessible via computer networks. In many markets and for many devices, this
remains the state of the art today.

eMation, a company we acquired in December 2001, has built and marketed products
to address real-time device control and data management needs in the industrial
automation market since the late 1980s. These products include supervisory
control and data acquisition or SCADA systems for single or multiple devices.
They feature computer-based human-machine interface, or 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.

eMation identified an opportunity in the late 1990s to develop a "DRM System" to
use the Internet to enable businesses to remotely monitor, manage and service
intelligent devices. The growth of the Internet provided a ubiquitous, open,
global network to tap into the data locked within intelligent devices. Devices
contain valuable information that could be used to control and 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 devices 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.

                                       4
<PAGE>
AXEDA DRM SOLUTIONS

The Axeda DRM System is a software solution that leverages the Internet to
provide real-time, continuous exchange of information between remote devices,
business systems and people. It allows 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. 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. This enables companies to connect directly to their deployed
products rather than relying on feedback filtered through their users.
The Axeda DRM System 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 installed at customer sites. Further, Axeda
DRM solutions can be used to feed information to existing installed enterprise
software systems. These could include enterprise resource planning, customer
relationship management or CRM, and supply chain and asset management systems.

The Axeda DRM System is our major business focus. We complement our DRM products
with professional services, training, and support offerings. We leverage our mix
of experience in embedded systems, enterprise software, and the Internet to
solve difficult problems with practical solutions. We also continue to
separately sell the Axeda Supervisor, Axeda @aGlance/IT, Axeda Web@aGlance and
Axeda FactorySoft OPC to support our industrial automation business.

OUR STRATEGY

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

     o    Reducing  service  costs in ready  markets.  We are 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
          System in customer service operations within our target accounts.

     o    Reaching  additional  information  stakeholders.  Device  data  stored
          within  the  Axeda  DRM  System  is  also   available  to   additional
          information stakeholders both inside and outside the company. We offer
          applications  that provide solutions to marketing,  sales,  operations
          and product  development  departments.  For  example,  our Axeda Usage
          application  enables  marketing and sales departments to monitor how a
          device is  performing  or how much  consumable  has been  used  during
          operation,  enabling  proactive  decisions about product  development,
          marketing programs, or automated upgrade or re-supply.

     o    DRM-enabling  complementary products and solutions.  We seek alliances
          with complementary solution suppliers whose customers can benefit from
          the availability of live device data within their businesses.

     o    Leverage our industrial automation  experience.  We are leveraging our
          industrial  automation  products from a broad library of  connectivity
          software we have established to accelerate acceptance of the Axeda DRM
          System within related  markets.  For example,  Axeda Supervisor can be
          used  as  part  of a full  Axeda  DRM  System  or  independently  on a
          stand-alone basis as per our industrial automation customers.

MARKETS

We market our DRM solutions to device 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:

     o    Medical Instruments
     o    Office and Print Production Systems
     o    Enterprise Technology Equipment
     o    Industrial and Building Automation

We believe these industries have the greatest current need and most appropriate
systems for our DRM Solutions, because they utilize complex, computer
controlled, electro-mechanical devices that cannot afford downtime. They also
often use "consumables" in their operation that operators want to automatically
and remotely monitor and re-supply.

                                       5
<PAGE>
PRODUCTS AND SERVICES

The Axeda DRM System is a distributed software system that lets companies use
the Internet to remotely monitor, manage, and service intelligent devices
deployed at their customers' sites. It consists of a three tier architecture
with Axeda Agent software deployed in or near the remote device, an Axeda
Enterprise server that centrally receives and securely manages the information
flowing to and from remote devices, and Axeda Applications that let field
service or other enterprise personnel access, analyze, process and use the DRM
device information for business purposes. Axeda Agent software is configured to
monitor specific device data, process or filter it locally, and securely package
the information for sending to and from the device through customer firewalls.
Axeda Enterprise software manages the two way information communication with
devices, collects, stores and manages this information, and triggers actions per
specified business rules. Axeda Applications provide a family of web
browser-based software solutions that use device data and connectivity for a
variety of business processes including remote diagnostics and repair, usage
tracking, access and control, and software release management. Certain Axeda
Applications control the administration and configuration of the DRM System
itself.

Axeda Applications

Axeda Applications employ web-architected interfaces for remote device
administration, application sharing, usage tracking, software management,
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 products, Axeda
DRM users access all information via their standard web browsers. No special
client-side software is required. Axeda Applications currently include:

     o    Axeda  Service  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.   Axeda  Service   provides   interactive   real-time  and
          historical data as well as automatic alarm  notification  and analysis
          to enable fast reaction to potential problems.

     o    Axeda Access extends the remote monitoring and diagnostics  capability
          of the Axeda DRM  System  to  include  the  remote  administration  of
          software  applications,  databases,  desktop  computers,  servers  and
          operating systems,  increasing responsiveness to customer problems and
          avoiding costly on-site service calls without  compromising  corporate
          network  security.  It also  allows  support  specialists  to remotely
          assist operators in the correct use of the device.

     o    Axeda  Administration  and Axeda Device let  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.  They  allow  organizations  to  provide  proactive
          service  worldwide while ensuring that only authorized  personnel have
          access to sensitive device information.

     o    Axeda  Usage  provides a window  into device  operation  and  customer
          behavior,  enabling  companies to  proactively  identify usage trends.
          Axeda Usage's flexible design lets it measure a wide variety of usage
          types as appropriate to the targeted device. Its built-in intelligence
          enables automatic interactions with existing enterprise  applications.
          For example,  medical device  manufacturers  can measure the number of
          tests performed by their  instruments;  service providers for printers
          and copiers can track toner usage or predict remaining equipment life;
          and enterprise  technology makers can track system performance or disk
          space utilization in data storage equipment.

     o    Axeda Software Management enables the efficient,  secure, reliable and
          cost-effective   mass   distribution  of  software   modules  such  as
          application and operating system updates,  patches,  documentation and
          help  files  via  Axeda  patent-pending   Firewall-Friendly   Internet
          communications  technology.  It also allows the rapid retrieval of key
          files,  such  as log,  data  and  configuration  files  from  deployed
          devices.  Axeda Software Management enables users to automate complex,
          remote   installation   and  retrieval   procedures  by  encapsulating
          sequences of device and configuration instructions with the files.

                                       6
<PAGE>
Axeda Enterprise
----------------
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   device  data  analysis  and
notification of people or initiate  transactions with other enterprise  business
systems such as billing, maintenance,  help-desk, inventory, re-supply, ordering
and  asset  management.  The  Axeda  Integrator  for  Siebel  provides  seamless
integration  between Axeda Enterprise and the Siebel 7 Field Service application
from Siebel Systems Inc. The Axeda Integrator for SAP provides similar certified
integration  with the mySAP.com  e-business  platform.  The Axeda Enterprise SDK
adds  the  ability  to  customize  Axeda  Applications  and  create  new  custom
applications  that  leverage  the power of the Axeda DRM  System.  Sophisticated
security features assure data is encrypted and authenticated as it moves between
devices  and users.  Access  controls  assure  only the right  people can access
designated devices. An integrated  reporting engine enables data to be published
and analyzed.

Intelligent Agents
------------------
Axeda Agent products 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 communications with the
enterprise. By putting intelligence on devices, Axeda DRM takes advantage of
distributed processing to enable large-scale deployment of proactive device
management.

Axeda 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 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.

Axeda Agents provide data acquisition, local decision-making, and web user
interface for intelligent devices and systems. Axeda Agents also pool 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 Agents include the functionality and extensible markup
language or XML processing needed to perform two-way Firewall-Friendly
communication between a group of local devices and the Axeda Enterprise server.

Axeda Builder provides a graphical development studio for creation, deployment
and remote administration of Axeda Agent applications. Axeda Policy Manager
gives authorized customer administrators the ability to establish and enforce
the privacy policy for all their devices.

Axeda Supervisor builds on this core agent capability and 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 System, or independently on a
stand-alone basis, as per our industrial automation customers.

A comprehensive library of customizable drivers, industry standard protocols,
and sophisticated programs complete the connection between Axeda Agents and the
device. These can include custom device drivers, pre-built industry standard
interfaces, or multi-protocol toolkits developed by Axeda, including Axeda
@aGlance/IT, Axeda Web@aGlance and Axeda FactorySoft OPC.

DRM Professional Services
-------------------------

Axeda delivers  experienced project and system integration  services designed to
provide  clients with DRM solutions that meet their  specific  business needs in
the shortest time possible.  Our software  developers and application  engineers
have a broad  range of  technical  and  commercial  e-business  experience.  Our
methodology begins with a detailed evaluation of the business issues surrounding
the Internet  enabling of the client's  products,  systems and  services.  Other
services  include  installation,  application  and  device  driver  development,
deployment  support,  migration  and  tuning.  Axeda  also  provides  a range of
educational and support services to assure successful 24x7 ongoing operation.

                                       7
<PAGE>
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. Our existing relationships include:

     o    Logicalis.   In  November  2003  we  partnered  with   Logicalis,   an
          international  provider of IT integration  services and solutions,  to
          deliver  DRM  solutions  for remote  monitoring  of  mission  critical
          systems in complex IT environments.

     o    IBM-Life  Sciences.  In June 2003 IBM  selected us as a Life  Sciences
          Partner.  Together,  we will bring the benefits of autonomic computing
          to  enable  diagnostic  device  manufacturers  with  automated  remote
          monitoring, management, and service solutions.

     o    TietoEnator.  In May 2003,  TietoEnator,  a provider of consulting and
          system integration  services in Scandinavia  entered into an agreement
          with us to jointly market the Axeda DRM System across Europe.

     o    Electronics  For Imaging (EFI).  In July 2002, we signed a multi-year,
          exclusive  agreement  with EFI,  a leader  in  software  and  hardware
          imaging  solutions  for  network  printing,   to  develop  and  market
          DRM-based  products  for  the  office  and  print  production  systems
          marketplace.

     o    Toshiba  IT-Solutions  Corporation,  a leading provider of information
          technology (IT) systems  integration and customer  support  solutions,
          entered into a reseller  agreement  with us in December  2002 to offer
          the  Axeda  DRM  system  as part of their  Total  Solutions  offering.
          Toshiba  IT-Solutions  sells and  supports  the Axeda DRM  system  and
          provides  related  implementation,  system  integration,  and  managed
          service  offerings  to their  Japanese  customers  in a wide  range of
          markets  including  industrial   equipment,   medical  and  scientific
          instruments,  power systems, building automation, traffic control, and
          computers and information equipment.

     o    Hitachi  High-Technologies  Corporation  (HHT).  In March 2002, HHT, a
          high-tech  trading  company and  equipment  maker,  selected us as its
          partner  for its new DRM  managed  services  business.  HHT  initially
          licensed  the Axeda DRM System for its  Japanese  application  service
          provider (ASP) center. In September 2002, Hitachi  High-Technologies -
          Kasado  Works,  a  major  Japanese  semiconductor  tool  manufacturer,
          licensed  the Axeda DRM System for use in Hitachi  Series  Plasma Etch
          System including its M700 and U700 series for 300mm wafer application.
          In November of 2003, HHT entered into a reseller  agreement with us to
          resell  the  Axeda DRM  System to  industrial  companies  in  multiple
          markets such as  facilities  management,  various  kinds of production
          equipment, industrial automation and office equipment.

     o    Agrex,  one  of  Japan's  major  information  technology  (IT)  system
          solution providers, entered into a reseller agreement with us in March
          2003 to offer  the Axeda  DRM  system  as part of their  comprehensive
          solutions offering.

     o    Siebel  Systems,  Inc. We are a  certified  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 and Siebel 7 Field Service  application  from Siebel Systems Inc.
          allowing  devices  to  automatically  feed data to and  start  service
          transactions with Siebel e-Business applications.

     o    SAP  has  certified  the  XML  Communication  Interface  (CA-XML)  for
          integrating  the Axeda DRM  System  with the  mySAP.com(R)  e-business
          platform,  thus extending the value of SAP(R) solutions with real-time
          device  information.   Customers  who  leverage  SAP's  world  leading
          solutions will be able to benefit from automated  access through Axeda
          DRM to real-time information from remote devices.

     o    Nokia.  We have  developed  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.

                                       8
<PAGE>
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 in the United States, Europe and Japan.
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.  These direct  resources  are
leveraged  in the  industrial  automation  market  through  a  network  of OEMs,
distributors and systems integrators who sell our industrial automation products
to end users,  some of which are smaller  customers in remote  markets,  such as
those in South America, Eastern Europe, and China.

Prior to being acquired by us in December 2001, eMation received grants from the
Israeli Government through the Fund for the Encouragement of Marketing
Activities, or the Marketing Fund, totaling $1.2 million, and, through December
31, 2003, paid royalties of $0.6 million. We are obligated to pay royalties of
4.0% of revenues derived from sales of products developed using such grants, up
to a maximum of the total amount of the grants received.

CUSTOMERS

We target our DRM solutions to OEMs that build and support  intelligent  devices
in industries that have significant  service costs and uptime  requirements.  We
currently  serve  Global 2000  companies in the medical  instrument,  enterprise
technology,  office and print  production  systems and  industrial  and building
automation  industries.  Our  customers  include  Bayer A.G.,  Fujifilm  Medical
Systems,  Agrex, Idexx  Laboratories,  Beckman Coulter,  Fr. Sauter AG, Shinkawa
Electric Co.,  Ltd.,  CERN,  Toshiba  IT-Solutions  Corporation,  Varian Medical
Systems, Chiron Corporation,  MAQUET, Procket Networks, Inc., Network Appliance,
Inc., Abbott  Laboratories,  Hitachi  High-Technologies - Kasado Works,  Applied
Biosystems Group, Xeikon International and Noritsu Koki Co., Ltd.

For the year ended December 31, 2003, five customers accounted for $2.9 million,
or 22%, of our total revenues.

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.  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.

For the  year  ended  December  31,  2003  our DRM  business  had  research  and
development  expenditures,   excluding  non-cash  compensation,   totaling  $5.0
million.  For  the  years  ended  December  31,  2002  and  2001,  eMation  as a
stand-alone entity had research and development expenditures, excluding non-cash
compensation, totaling $5.6 million and $5.9 million, respectively.

The  majority  of  our  DRM  product  line  is  developed  at our  research  and
development headquarters in Mansfield, Massachusetts.

Prior to being  acquired  by us in December  2001,  eMation  received  grants in
Israel from the Office of the Chief Scientist or OCS in the aggregate  amount of
$1.8 million to fund the  development of our Axeda  Supervisor  product.  We are
obligated  to pay  royalties  of 3.0% to 3.5% of revenues  derived from sales of
products  funded  through  grants  received  from the OCS,  plus interest on any
unpaid  outstanding  balance,  up to a maximum of the total amount of the grants
received.  We have paid  royalties  to the OCS in the  aggregate  amount of $1.4
million.  As of December  31,  2003,  the  remaining  $0.4  million of principal
liability is accrued in other current  liabilities.  The terms of the OCS grants
require that we manufacture our products that were developed with such grants in
Israel. In addition,  we may not transfer the technology  developed  pursuant to
the terms of these  grants to third  parties  without  the prior  approval  of a
governmental committee.

                                       9
<PAGE>
COMPETITION

Competition in the market for DRM solutions is emerging and expected to grow
stronger. The principal competitive factors that affect our performance in the
DRM market are :

o        our ability to effectively market and sell our products;

o        our customer service and support;

o        our product reputation, quality and performance; and

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

The Axeda DRM system faces competition from custom software development by
in-house developers within the machine and device manufacturers that are our
prime sales targets, or from system 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.

A number of vertical market solution suppliers have also begun to market device
management infrastructures for use in specific industries. Today, companies such
as IBM Global Services/ILS and Brooks-PRI (semiconductor), Questra (medical and
office), Invensys (industrial), Imaging Portals (copiers), NextNine (telecom)
and Motive (enterprise technology, telecom), compete in specific market segments
that we operate in.

We also expect to see new or increased competition from several areas, including
device-networking companies, providers of industrial automation products, and
e-Business platforms such as the large CRM companies.

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.

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 twelve patent applications pending in the
United States and thirteen patent applications pending internationally with
respect to our DRM technology. We have registered the trademark "AXEDA" in the
U.S. Patent and Trademark Office, and have numerous corresponding trademark
registrations or 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 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 February 29, 2004, we employed 116 individuals. 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. 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.

                                       10
<PAGE>
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 loss before income taxes of approximately $13.4 million for the year
ended December 31, 2003. To date, we have not achieved operating profitability
on an annual basis. We have invested and continue to invest significant
resources in product development, selling and marketing, services and support
and administrative expenses. To achieve profitability, we will need to increase
revenues and/or reduce expenses significantly. We cannot assure you that our
revenues will grow or that we will achieve or maintain profitability in the
future.

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

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

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

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

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

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

FAILURE TO COMPLY WITH NASDAQ'S LISTING STANDARDS COULD RESULT IN OUR DELISTING
BY NASDAQ FROM THE NASDAQ NATIONAL MARKET AND SEVERELY LIMIT THE ABILITY TO SELL
ANY OF OUR COMMON STOCK.

Our common stock is currently traded on the NASDAQ National Market. There can be
no assurance that our common stock will remain eligible for trading on the
NASDAQ National Market. If our common stock does not maintain a minimum bid
price of one dollar for thirty consecutive days, we are subject to being
delisted from the Nasdaq National Market. If our stock is under $1.00 for thirty
consecutive business days, we will be able to maintain our listing if during the
next 90 day period, our stock maintains at least a minimum bid price of $1.00
for a ten consecutive day period. If our common stock is delisted from the
NASDAQ National Market, sales of our common stock would likely be conducted on
the SmallCap Market or on the over-the-counter market. This may have a negative
impact on the liquidity and price of our common stock.
                                       11
<PAGE>
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

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

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

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

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

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

     o    the complexities of the problems our solutions address;
     o    the breadth of the solution  required by the  customer,  including the
          technical, organizational and geographic scope of the license;
     o    the sales channel through which the solution is sold;
     o    the economic conditions in the United States and abroad; and
     o    any other delays arising from factors beyond our control.

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

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

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

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

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

                                       12
<PAGE>
IT MAY BE DIFFICULT, TIME-CONSUMING AND EXPENSIVE FOR OUR CUSTOMERS TO
INTEGRATE OUR DRM SOLUTIONS WITH THEIR PRODUCTS AND THEY MAY BE UNABLE TO DEPLOY
THEIR PRODUCTS SUCCESSFULLY OR OTHERWISE ACHIEVE THE BENEFITS ATTRIBUTABLE TO
OUR DRM SOLUTIONS.

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

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

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

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

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

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

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

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

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

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

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

                                       13
<PAGE>
OUR BUSINESS MODEL DEPENDS UPON LICENSING OUR INTELLECTUAL PROPERTY, AND IF WE
FAIL TO PROTECT OUR PROPRIETARY RIGHTS, OUR BUSINESS COULD BE HARMED.

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

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

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

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

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

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

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

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

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

Any failure to adequately protect our proprietary rights could result in our
competitors offering similar products, potentially resulting in the loss of some
of our competitive advantage and a decrease in our revenues. Infringement claims
and lawsuits would likely be expensive to resolve and would require management's
time and resources and, therefore, could harm our business.

                                       14
<PAGE>
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND REDUCED SALES BECAUSE OF
DEFECTS IN OUR PRODUCTS.

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

     o    delay or loss of revenues;
     o    it is  foreseeable  that a customer  could  cancel a  contract  due to
          defects;
     o    diversion of development resources;
     o    increased product development costs;
     o    damage to our reputation;
     o    delay or diminish market acceptance of our products;
     o    increased service and warranty costs; and
     o    litigation costs.

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

SUBSTANTIAL  LITIGATION  REGARDING  INTELLECTUAL  PROPERTY  RIGHTS EXISTS IN OUR
INDUSTRY.

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

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

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

                                       15
<PAGE>
WE HAVE RECEIVED NOTICES OF CLAIMS RELATED TO OUR FORMER PC PRODUCTS (OR DIGITAL
MEDIA PRODUCTS) REGARDING THE ALLEGED INFRINGEMENT OF THIRD PARTIES'
INTELLECTUAL PROPERTY RIGHTS THAT MAY CAUSE US TO PAY DAMAGES.

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

     A group of companies  formed a  consortium  known as MPEG-LA to enforce the
     proprietary  rights of other holders of patents covering  essential aspects
     of MPEG-2  technology that were  incorporated  into our former PC products.
     Another group of companies formed a consortium known as DVD6C (formerly DVD
     Patent License Program) to enforce the proprietary  rights of other holders
     of  patents  covering   essential  aspects  of  DVD  technology  that  were
     incorporated into our former PC products.

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

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

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

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

We conduct business in a number of different countries. We sell products in
several countries outside the United States, including France, Germany, the
Netherlands, Japan, the United Kingdom, Israel and other countries in Asia and
Latin America. Our operations outside the United States include facilities
located in France and Japan. For the year ended December 31, 2003, we derived
approximately 56% of our revenues from sales to foreign companies. We anticipate
that revenues from international operations will continue to represent a
significant portion of our revenues. As a result, we are subject to risks
associated with selling and operating in foreign countries. For example, some of
our contracts with foreign customers are denominated in foreign currencies. We
do not currently hedge against the risk of such transactions and as a result, we
face a risk of loss related to possible fluctuations in currency exchange rates.
Our geographic diversity requires significant management attention and financial
resources. Significant management attention and financial resources are needed
to develop our international sales, support and distribution channels. We may
not be able to maintain international market demand for our products. Our
business could be adversely impacted if we are unable to successfully launch our
DRM products into our international operations.

                                       16
<PAGE>
Additional risks related to selling and operating in foreign countries include,
among others:

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

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

Prior to being acquired by us in December 2001, eMation received grants in
Israel from the Office of the Chief Scientist of Israel's Ministry of Industry
and Trade, or OCS, in the aggregate amount of $1.8 million to fund the
development of our Axeda Supervisor product. We have paid royalties to the OCS
in the aggregate amount of $1.4 million. As of December 31, 2003, the remaining
$0.4 million of principal liability is accrued in accrued expenses. We are
obligated to pay royalties of 3.0% to 3.5% of revenues derived from sales of
products funded through grants received from the OCS, up to a maximum of the
total amount of the grants received. The terms of the OCS grants require that we
manufacture our products that are developed with such grants in Israel. In
addition, we may not transfer the technology developed pursuant to the terms of
these grants to third parties without the prior approval of a governmental
committee.

Additionally, prior to being acquired by us in December 2001, eMation received
grants from the Israeli Government through the Fund for the Encouragement of
Marketing Activities, or Marketing Fund, in the aggregate amount of $1.2 million
and royalties in the aggregate amount of $0.6 million have been repaid. As of
December 31, 2003, $0.4 million of the remaining potential $0.6 million of
principal liability is accrued in other current liabilities. We are obligated to
pay royalties of 4.0% of revenues derived from sales of products that result
from grants received through the Marketing Fund, up to a maximum of the total
amount of the grants received.


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

As of December 31, 2003, our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 4.0
million shares, or approximately 13%, of our outstanding common stock. These
stockholders, if acting together, would be able to significantly influence all
matters requiring approval by our stockholders, including the election of
directors, the approval of mergers or other business combination transactions or
a sale of all or substantially all of our assets.

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

The board of directors has the authority without any further vote or action on
the part of our stockholders to issue up to 5 million shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions of
the preferred stock. This preferred stock, if it is ever issued, may have
preference over and harm the rights of the holders of our common stock. Although
the issuance of this preferred stock will provide us with flexibility in
connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.
                                       17
<PAGE>
Our certificate of incorporation and by-laws include provisions that may have
the effect of deterring an unsolicited offer to purchase our stock. These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may delay or impede a merger, tender offer or proxy contest involving us.
Furthermore, our board of directors is divided into three classes, only one of
which is elected each year. Directors are only capable of being removed by the
affirmative vote of 66 2/3% or greater of all classes of voting stock. These
factors may further delay or prevent a change of control.

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

Our DRM solutions communicate through public and private networks over the
Internet. The success of our products may depend, in part, on our ability to
continue developing products that are compatible with the Internet. Critical
issues concerning the commercial use of the Internet, including security,
privacy, demand, reliability, cost, ease of use, accessibility, quality of
service and potential tax or other government regulation, remain unresolved and
may affect the use of the Internet as a medium to support the functionality of
our products. If these critical issues are not favorably resolved, our business,
financial condition or results of operations could be adversely affected.

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

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

                                       18
<PAGE>
                               Axeda Systems Inc.

ITEM 2.  PROPERTIES

In May 2002, we entered into a sub-lease for approximately 35,000 square feet of
space in an office building in Mansfield, Massachusetts. This facility is leased
at  an  annual  rental  of  approximately   $310,000,  plus  operating  expenses
(approximately $170,000 per year), utilities and taxes, and is used for research
and development,  sales and support, services and administrative activities. The
sub-lease commenced in June 2002 and expires in July 2007.

In September 2002, we entered into a lease for  approximately  4,500 square feet
of space in Malvern,  Pennsylvania.  This facility is leased at an annual rental
of approximately  $42,000,  plus operating expenses  (approximately  $19,000 per
year), utilities and taxes, and is used for administrative activities. The lease
commenced in December 2002 and expires in November 2005.

We currently lease 3 other  international  sales offices in France,  Holland and
Japan with a total of  approximately  4,169  square feet of space.  The combined
annual rental for these offices is approximately  $276,000 and $148,000 for 2004
and 2005,  respectively,  and approximately  $138,000 for 2006 through 2010. The
leases have terms expiring from August 2004 through February 2011. The lease for
our primary office in France expires in 2011, but is cancelable  without penalty
in 2008 upon 6 months written notice.

We believe our current facilities will be adequate to fulfill our needs for the
foreseeable future.

Prior to occupying our current  offices in Mansfield,  Massachusetts,  we leased
approximately 12,000 square feet of space in an office building,  located in the
same business  park as our current  offices,  for our research and  development,
sales and  support  and  administrative  activities.  The  lease for our  former
offices  expires  in July 2004 and  requires  us to pay  minimum  future  rental
payments totaling  approximately  $178,000,  including operating expenses, as of
December 31, 2003.

                                       19
<PAGE>
                               Axeda Systems Inc.

ITEM 3. LEGAL PROCEEDINGS

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  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.  We filed a motion to
dismiss the consolidated and amended class action complaint on July 3, 2000. 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.

On November 27, 2001, a putative  shareholder class action was filed against us,
certain of our officers and directors,  and several  investment  banks that were
underwriters of our initial public offering.  The action was filed in the United
States  District  Court for the Southern  District of New York,  purportedly  on
behalf of investors  who  purchased our stock between July 15, 1999 and December
6, 2000. The lawsuit alleges  violations of Sections 11 and 15 of the Securities
Act of 1933 and Section 10(b) and 20(a) of the  Securities  Exchange Act of 1934
and  Rule  10b-5  promulgated  thereunder  against  one or  both  of us and  the
individual defendants.  The claims are based on allegations that the underwriter
defendants agreed to allocate stock in our July 15, 1999 initial public offering
to certain  investors in exchange for excessive and undisclosed  commissions and
agreements by those investors to make additional purchases in the aftermarket at
pre-determined  prices.  Plaintiffs  allege that the  prospectus for our initial
public  offering was false and  misleading in violation of the  securities  laws
because it did not disclose these arrangements. Similar "IPO allocation" actions
have been filed  against  over 300 other  issuers  that have had initial  public
offerings since 1998 and all are included in a single coordinated  proceeding in
the Southern District of New York.  Certain of our employees were members of the
putative classes alleged in these actions (the "Individual Defendants"). On July
15, 2002, we moved to dismiss all claims against the  Individual  Defendants and
us. On October 9, 2002, the Court  dismissed the Individual  Defendants from the
case without prejudice.

A proposal has been made for the  settlement  and release of claims  against the
issuer  defendants,  including  us.  The  settlement  is  subject to a number of
conditions,  including  approval of the proposed settling parties and the court.
We believe the terms of the  settlement  will not have a material  impact on our
results of operations,  liquidity,  and financial  condition.  If the settlement
does not  occur,  and  litigation  against  us  continues,  we  believe  we have
meritorious defenses and intend to defend the case vigorously.  However, failure
to  successfully  defend this  action  could  substantially  harm our results of
operations, liquidity and financial condition.

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

                                       20
<PAGE>
From time to time, we have received  notices of claims of  infringement of other
parties'  proprietary  rights  and other  claims in the  ordinary  course of our
business.  See "Factors that may Affect Future  Results - Risk Factors - We have
received  notices of claims  related to our PC  products  regarding  the alleged
infringement of third parties' intellectual property rights that may cause us to
pay damages." We have accrued for estimated losses in the accompanying financial
statements  for those  matters  where we believe  the  likelihood  of an adverse
outcome is  probable  and the amount of the loss is  reasonably  estimable.  The
adverse  resolution  of any one or more of these  matters  could have a material
adverse effect on our business, financial condition or results of operations.

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

None.


                                       21
<PAGE>
                               Axeda Systems Inc.

                                     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 Market
under the symbol RVST. Prior to such time, there was no public market for our
common stock. On February 27, 2004, Axeda Systems Inc. had 32,469,862
outstanding shares of common stock held by 157 record holders, not including
stockholders who beneficially own common stock held in nominee or street name.
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.

                            2003                         2002
                     --------------------        -------------------
                     High            Low          High          Low
                     ----            ---          ----          ---
First Quarter        $0.81          $0.32         $3.86        $2.15
Second Quarter       $2.09          $0.30         $3.21        $1.11
Third Quarter        $1.99          $1.19         $1.77        $0.38
Fourth Quarter       $2.13          $1.27         $1.29        $0.25


                                       22
<PAGE>

                       UNREGISTERED ISSUANCE OF SECURITIES

None.

                                 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. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."


                      EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about our common stock that may be issued
upon the exercise of options under all of our Plans as of December 31, 2003:
<TABLE>
<CAPTION>
                                   (1)                    (2)                    (3)
                                                                         Number of Securities
                                                   Weighted-Average     Remaining Available for
                           Number of Securities    Exercise Price of   Future Issuance Under
                            to be Issued upon    Outstanding Options,    Equity Compensation
                               Exercise of       Warrants, and Rights      Plans (Excluding
                          Outstanding Options,        (per share)       Securities Reflected in
Plan Category                Warrants, and Rights                             Column (1)
-------------                -------------------- --------------------  ------------------------
<S>                                 <C>                  <C>                   <C>
Equity Compensation Plan
Approved by Shareholders .......    5,720,641            $   1.76              521,326
                                    =========            ========              =======
</TABLE>


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

     (B)  The  number of  shares  reserved  for  issuance  under our 1999  Stock
          Incentive Plan is automatically increased on January 1 of each year by
          an amount equal to 3% of the shares of our common stock outstanding on
          the last trading day of the immediately  preceding  calendar year, but
          in no event shall such annual increase  exceed  1,000,000  shares.  On
          January 1, 2003, 600,000 additional shares were reserved for issuance.
          At our 2003  annual  stockholders  meeting,  proposals  were  approved
          increasing  the limit of  600,000  shares  on the  amount by which the
          share reserve under the plan automatically  increases at the beginning
          of each year to 1,000,000 shares,  and increasing the number of shares
          authorized for issuance over the term of our 1999 Stock Incentive Plan
          (prior to any automatic increase) by an additional 500,000 shares.


                             Purchases of Securities

         None.

                                       23
<PAGE>
ITEM 6.  SELECTED FINANCIAL DATA
The following selected consolidated financial data (presented in thousands,
except share and per share amounts) are derived from our consolidated financial
statements. This data should be read in conjunction with the consolidated
financial statements and notes thereto (Item 8), and with Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                    -------------------------------------------------------
                                                                       2003        2002        2001        2000        1999
                                                                       ----        ----        ----        ----        ----
Revenues:
<S>                                                                  <C>        <C>          <C>        <C>         <C>
    License .......................................................  $9,134     $12,772      $ 6,036    $ 12,328    $ 12,710
    Services and maintenance ......................................   3,737       3,124          442       1,898         968
    Hardware ......................................................     323       2,233        1,111       6,628      15,740
                                                                        ---       -----        -----       -----      ------
Total revenues..................... ...............................  13,194      18,129        7,589      20,854      29,418
                                                                     ------      ------        -----      ------      ------
Cost of revenues:
    License......................... ..............................   1,292       2,849        1,629       3,374       1,874
    Services and maintenance ......................................   3,694       4,210          223         733         259
    Hardware........................ ..............................       1       1,288        1,122       6,189      13,732
    Software amortization .........................................     634       1,943          171           -           -
    Inventory charges .............................................       -           -       18,502       1,708           -
                                                                        ---         ---       ------       -----         ---
Total cost of revenues.............. ..............................   5,621      10,290       21,647      12,004      15,865
                                                                      -----      ------       ------      ------      ------

Gross profit ......................................................   7,573       7,839     (14,058)       8,850      13,553

Research and development (R&D)
    Non-cash compensation .........................................     102         163        2,100         801         200
    Other R&D expense ........................ ....................   4,992       7,162        5,691      10,187       8,107
Sales and marketing (S&M)
    Non-cash compensation and other expense .......................      31          71          147       3,480           -
    Other S&M expense .......................... ..................   8,421      16,642        7,670      10,863       5,296
General and administrative (G&A)
    Non-cash compensation .........................................     476       1,304          780         467         308
    Other G&A expense ...................... ......................   7,421      11,000        9,860      10,256       5,048
    Provision for doubtful accounts (net of recoveries) ...........    (15)        (45)          929       4,965          31
Depreciation and amortization .....................................   1,123       1,552        2,844       5,897       1,886
Special charges ...................................................       -         820            -           -           -
Impairment charges ................................................       -      22,413        3,916       2,831           -
Acquired in-process research and development ......................       -           -        3,112       1,373      1,888
                                                                        ---         ---        -----       -----      -----
        Operating loss ............................................(14,978)    (53,243)     (51,107)    (42,270)     (9,211)

Gains (losses) on disposals of assets .............................     743       (138)       52,037           -           -
Interest income (expense), net ....................................      19         441        1,753       1,792       1,192
Other income (expense), net .......................................     806         554        (133)          51           -
                                                                        ---         ---        -----         ---         ---

Income (loss) before provision for income taxes (benefit) .........(13,410)    (52,386)        2,550    (40,427)     (8,019)
     Provision for income taxes (benefit) .........................     198       (459)        1,123          40          52
                                                                        ---       -----        -----          --          --

Net income (loss) .............................................. $ (13,608)  $ (51,927)       $1,427   $(40,467)    $(8,071)
                                                                 ==========  ==========       ======   =========    ========

Accretion of discount on mandatory redeemable preferred stock ..          -           -            -           -         659

Net income (loss) attributable to common shareholders ..........  $(13,608)   $(51,927)       $1,427   $(40,467)    $(8,730)
                                                                  =========   =========       ======   =========    ========

Basic net income (loss) per weighted average common share
 outstanding ...................................................    $(0.48)    $ (1.92)       $ 0.08   $  (2.44)    $ (1.02)
                                                                    =======    ========       ======   =========    ========

Diluted net income (loss) per weighted average common share
 outstanding ...................................................    $(0.48)    $ (1.92)       $ 0.07   $  (2.44)    $ (1.02)
                                                                    =======    ========       ======   =========    ========

Weighted average number of common shares outstanding used in
 calculation of basic net income (loss) per common share ....... 28,631,975  27,063,751   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 ..... 28,631,975  27,063,751   20,194,713  16,606,795   8,532,140
                                                                 ==========  ==========   ==========  ==========   =========

Total assets ...................................................    $20,886     $32,513      $89,106     $60,193     $89,748
                                                                    =======     =======      =======     =======     =======
</TABLE>
                                       24
<PAGE>
                               Axeda Systems Inc.

ITEM 7: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
     OF OPERATIONS

The following  discussion and analysis should be read in conjunction  with other
sections of this Annual Report on Form 10-K. including "Item 1: Business," "Item
6: Selected Financial Data," and "Item 8: Financial Statements and Supplementary
Data."

All assumptions, anticipations,  expectations and forecasts contained herein are
forward-looking  statements  that involve  risks and  uncertainties.  Our actual
results  may differ  materially  from  those  projected  in the  forward-looking
statements as a result of various factors, including those described under "Risk
Factors"  included  under Item 1.  Except to fulfill our  obligations  under the
federal   securities   laws,   we   undertake  no   obligation   to  update  any
forward-looking  statements to reflect events or circumstances after the date on
which it is made.

The preparation of the consolidated  financial statements which are the basis of
the  following  discussion  and  analysis  requires  us to  make  estimates  and
judgments that affect the reported amounts of assets, liabilities,  revenues and
expenses,  and related  disclosure  of  contingent  assets and  liabilities.  We
evaluate  our  estimates,  including  those  related to bad debts,  inventories,
intangible assets, income taxes, warranty obligations,  purchase commitments and
contingencies. The estimates are based upon historical experience and on various
other  assumptions that are believed to be reasonable under the circumstances at
the time of the  estimate,  the  results  of which  form the  basis  for  making
judgments  about the  carrying  values of assets  and  liabilities  that are not
readily  apparent  from other  sources.  Actual  results  may differ  from these
estimates under different assumptions or conditions.

Overview

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

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

On December 7, 2001, we acquired all of the outstanding shares of eMation,  Ltd.
The acquisition  gave us an entry into the DRM market.  During 2002 our revenues
were   increasingly   generated  from  selling  DRM  products,   and  for  2003,
substantially all of our revenues were generated from selling DRM products.  Our
revenues  in 2001  were  substantially  generated  from  sales  from our  former
personal  computer,  or PC,  business,  our former  Internet  Appliance,  or IA,
business,  and our former consumer  electronics,  or CE,  business.  We sold the
assets of our IA business, excluding inventory, to Phoenix Technologies Ltd., or
Phoenix,  for $18  million  in March of 2001.  We also sold the assets of our CE
business  to  STMicroelectronics,  NV in  March  2001  for  approximately  $55.6
million.  We exited the PC business  pursuant to an exclusive license with Sonic
IP, Inc., or Sonic, in May 2002 for a $2.0 million license fee.

In the  second  quarter of 2002 we foresaw  that  revenue  would be short of our
expectations due to the macroeconomic climate impacting capital spending as well
as slower than expected development of the DRM market. As a result, beginning in
the  second  quarter  of 2002,  we  initiated  a series  of  steps  designed  to
consolidate and streamline our operations, and decrease our operating losses and
corresponding use of cash. We have halved the number of global offices,  reduced
staffing   levels  by   approximately   46%  and  have  closely   monitored  our
infrastructure   costs.   Due  to  the  lower   revenue  and  our  lower  market
capitalization,  we determined  that the fair value of our reporting  unit could
not support  the  carrying  value of its  intangible  assets  and,  accordingly,
recognized a goodwill  and  identified  intangible  asset  impairment  charge of
approximately  $22.4  million in 2002.  No such charge was recorded in 2003.  In
2002 and 2003,  we  recorded  approximately  $1.9  million  and $1.4  million in
restructuring  charges,  respectively,  to reduce staffing levels,  to terminate
certain  leases and  consolidate  our  operations.  Combined  with our  expected
continued year over year growth in DRM Systems revenues,  we believe that future
operating  losses will  continue to be lower.  We will  continue to evaluate our
cost structure and may undertake  additional  measures to reduce expenses in the
future.

                                       25
<PAGE>
We  currently  operate in 3 principal  regions:  the United  States,  Europe and
Japan.  Overall  revenues  declined by $4.9 million in 2003 due to our exit from
the PC and IA hardware  businesses.  Despite  the  continued  difficult  capital
spending climate,  our DRM revenues increased by $1.7 million in 2003 mainly due
to increases in the U.S. and Japan,  while Europe was  approximately  unchanged.
These net increases  were driven by an  accelerated  acquisition of new customer
accounts,  as well as  additional  spending  by our  existing  customers.  While
recurring  sales  from  existing  customers  and the  timing of more  widespread
adoption  of our  product  remains  difficult  to  predict,  we believe  overall
revenues will increase in 2004 due to further  orders from our current  customer
base, our sales pipeline and improvements in the marketplace.

For 2003 our operating expenses decreased by $38.5 million,  or 63%, compared to
the prior year. This includes the goodwill and identified  intangibles charge of
$22.4  million  from  2002.  We believe  the cost  reductions  combined  with an
increase  in  revenues  will be  sufficient  to allow us to meet our cash  needs
through the first quarter of 2005.

On September 23, 2003, we issued 4,918,100 shares of our common stock to certain
accredited  investors  in a  private  investment  in  public  equity,  or  PIPE,
financing.  The shares were sold at a price of $1.22 per share with net proceeds
of $5.6 million.  We also issued to the investors  warrants  exercisable for the
purchase of up to an  aggregate  of  2,459,050  shares of our common stock at an
initial  exercise  price of $1.71 per share.  At  December  31,  2003,  our cash
balance was $9.6 million compared with $19.1 million at year-end 2002. Operating
results and our liquidity position are discussed further below.


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 16 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.

Information  pertaining to long-lived assets is included in note 13 of the notes
to the  consolidated  financial  statements,  filed herewith at Item 8-Financial
Statements and Supplementary Data.

                                       26
<PAGE>
Results of Operations

The following table sets forth, for the periods indicated, the dollar amounts
and the dollar amounts expressed as a percentage of total revenues reflected in
our consolidated statements of operations:
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                            -----------------------------------------------------------------------
                                                                  2003                     2002                     2001
                                                            --------------------      ------------------        -------------------
                                                            $ `000's        %          $ `000's      %          $ `000's      %
                                                            --------      -----        --------    -----         --------    -----
<S>                                                            <C>         <C>         <C>          <C>          <C>          <C>
Revenues:
    License ..............................................     $ 9,134     69.2%       $ 12,772     70.5%        $ 6,036      79.6%
    Services and maintenance .............................       3,737     28.3           3,124     17.2             442       5.8
    Hardware .............................................         323      2.5           2,233     12.3           1,111      14.6
                                                                   ---      ---           -----     ----           -----      ----

Total revenues ...........................................      13,194    100.0          18,129    100.0           7,589     100.0
                                                                ------    -----          ------    -----           -----     -----

Cost of revenues:
    License......................... .....................       1,292      9.8           2,849     15.7           1,629      21.5
    Services and maintenance .............................       3,694     28.0           4,210     23.2             223       2.9
    Hardware........................ .....................           1        -           1,288      7.1           1,122      14.8
    Software amortization ................................         634      4.8           1,943     10.7             171       2.2
    Inventory charges ....................................           -        -               -        -          18,502     243.8
                                                                  ----      ---             ---      ---          ------     -----
Total cost of revenues ...................................       5,621     42.6          10,290     56.7          21,647     285.2
                                                                 -----     ----          ------     ----          ------     -----

Gross profit........................ .....................       7,573     57.4           7,839     43.3        (14,058)   (185.2)
                                                                 -----     ----           -----     ----        --------   -------

Research and development (R&D)
    Non-cash compensation ................................         102      0.8             163      0.9           2,100      27.7
    Other R&D expense ....................................       4,992     37.8           7,162     39.5           5,691      75.0
Sales and marketing (S&M)
    Non-cash compensation and other expense ..............          31      0.2              71      0.4             147       1.9
    Other S&M expense ....................................       8,421     63.8          16,642     91.8           7,670     101.1
General and administrative (G&A)
    Non-cash compensation ................................         476      3.6           1,304      7.2             780      10.3
    Other G&A expense ....................................       7,421     56.3          11,000     60.7           9,860     129.9
     Provision for doubtful accounts (net of recoveries) .        (15)    (0.1)            (45)    (0.2)             929      12.2
Depreciation and amortization ............................       1,123      8.5           1,552      8.6           2,844      37.5
Special charges ..........................................           -        -             820      4.5               -         -
Impairment charges .......................................           -        -          22,413    123.6           3,916      51.6
Acquired in-process research and development (IPR&D) .....           -        -               -        -           3,112      41.0
                                                                ------    -----          ------    -----          ------     -----
        Total operating costs ............................      22,551    170.9          61,082    336.9          37,049     488.2
                                                                ------    -----          ------    -----          ------     -----

        Operating loss ...................................    (14,978)  (113.5)        (53,243)  (293.7)        (51,107)   (673.4)

Gains (losses) on disposals of assets ....................         743      5.7           (138)    (0.7)          52,037     685.7
Interest income (expense), net ...........................          19      0.1             441      2.4           1,753      23.1
Other income (expense), net ..............................         806      6.1             554      3.1           (133)     (1.8)
                                                                   ---      ---             ---      ---           -----     -----

Income (loss) before provision for income taxes (benefit) .   (13,410)  (101.6)        (52,386)  (288.9)           2,550      33.6
Provision for income taxes (benefit) .....................         198      1.5           (459)    (2.5)           1,123      14.8
                                                                   ---      ---           -----    -----           -----      ----
Net income (loss) ........................................   $(13,608)  (103.1)%      $(51,927)  (286.4)%         $1,427      18.8%
                                                             =========  =======       =========  =======          ======      ====
</TABLE>
                                       27
<PAGE>
Revenues. Total revenues for the year ended December 31, 2003 decreased by $4.9
million, or 27%, to $13.2 million from $18.1 million in the previous year. For
the year ended December 31, 2003, sales of our DRM solutions increased $1.7
million, while sales of our IA inventories and PC license and services decreased
by $6.7 million compared to the prior year.

Currency  movements  in 2003  increased  revenues by $1.0 million from the prior
year due to more  favorable  exchange  rates.  Increases  in net revenues due to
currency  movements are due  primarily to the weakness  versus prior year of the
U.S.  dollar against the Euro, the British pound and the Japanese yen.  Although
we cannot predict the future movements in currency rates,  any  strengthening of
the U.S. dollar against our foreign  currencies will have an unfavorable  impact
on our revenues in 2004. Currency effects on our revenues for 2002 and 2001 were
insignificant.

Total revenues for the year ended December 31, 2002 increased by $10.5 million,
or 139%, to $18.1 million, from $7.6 million in the previous year. For the year
ended December 31, 2002 our DRM solutions contributed $9.2 million to the
increase in revenues, due to the acquisition of eMation, while sales of our IA
inventories and PC services added $1.7 million to our total revenues. These
increases were partially offset by a decrease of $0.4 million in our CE business
over the prior year.

For the year ended December 31, 2003 revenues across our license, services and
maintenance and hardware streams decreased $3.6 million, increased $0.6 million
and decreased $1.9 million, respectively, from the prior year. For the year
ended December 31, 2002 revenues from license, services and maintenance and
hardware increased $6.7 million, $2.7 million and $1.1 million, respectively,
from the prior year.

License revenues for the year ended December 31, 2003 decreased by approximately
$3.6 million to $9.1 million, from $12.8 million in the previous year. The
decrease in license revenues was mainly attributable to the discontinuation of
our former PC business, which declined by $4.3 million and was partially offset
by an increase in DRM license revenues of approximately $0.6 million for the
year ended December 31, 2003. License revenues for the year ended December 31,
2002 increased by approximately $6.8 million to $12.8 million, from $6.0 million
in the previous year. The increase was attributable to sales of our DRM
products, which added $6.7 million to our revenues for the year ended December
31, 2002. Due to the complete shift from our legacy PC, CE and IA businesses to
our DRM product line, we do not expect any future license revenues from our
former businesses, and we expect DRM System license revenues to increase as our
DRM Systems are more widely adopted.

Hardware revenues for the year ended December 31, 2003 decreased by $1.9 million
compared to the prior year, to $0.3 million, due to decreased sales of
components for our former Internet appliances and Internet set-top boxes.
Conversely, hardware revenues for the year ended December 31, 2002 increased by
approximately $1.1 million compared to the prior year, to $2.2 million, due to
increased sales of components related to Internet appliances and Internet
set-top boxes. In the future we expect hardware sales to be minimal.

Services and maintenance revenues for year ended December 31, 2003 increased
$0.6 million from the prior year to $3.7 million, due to a greater demand for
professional services in connection with existing DRM installations, as well as
additional maintenance plans sold with our DRM Systems. Services and maintenance
revenues for the year ended December 31, 2002 increased $2.7 million compared to
the prior year to $3.1 million. The increase was attributable to services and
maintenance plans sold with our DRM system products, as well as PC-related
services provided to Sonic, which contributed $2.6 million and $0.5 million,
respectively, for the year ended December 31, 2002, offset by a decrease in
services of $0.4 million associated with our former CE business, which was sold
to STMicroelectronics in March 2001. We anticipate services and maintenance
revenues will vary, as opportunities in this area are subject to our customers'
requirements and approval process.

For year ended December 31, 2003, our top five customers accounted for $2.9
million, or 22% of our revenues. During 2002 a substantial portion of our
revenues were derived from a small number of customers. For the year ended
December 31, 2002, five customers accounted for $6.2 million, or 34%, of our
total revenues. Our revenues are becoming less concentrated as our business has
changed to the DRM market. There has also been a shift in industry-wide buying
patterns for enterprise software, from large up-front purchases to smaller, more
frequent purchases over time.

We sell our DRM solutions primarily to companies in the industrial and building
automation, high technology devices, medical instrumentation and office
automation industries. For the year ended December 31, 2003 customers based in
North America accounted for 44% of our revenues. In the year ended December 31,
2002 companies based in North America accounted for 57% of our revenues. We
anticipate that revenues from international operations will continue to
represent a significant portion of our revenues.

                                       28
<PAGE>
Cost of Revenues. Cost of revenues for the year ended December 31, 2003
decreased $4.7 million from the prior year to $5.6 million. The decrease was due
to: a decrease in PC license and service expense of $1.5 million and $0.5
million, respectively, due to our exit from the PC business; a decrease in
hardware expense of $1.3 million, due to our exit from the IA business; a
decrease in software amortization of $1.3 million, due to the impairment of the
related intangible assets in 2002; and a decrease in other license fees of $0.2
million. Cost of revenues for the year ended December 31, 2002 decreased $11.4
million from the prior year to $10.3 million. The decrease was due to an $18.5
million inventory charge recorded during 2001 relating to our former IA
business, partially offset by increases relating to our DRM license and services
and maintenance, of approximately $1.2 million, $4.0 million, respectively,
hardware of approximately, $0.2 million, and DRM software amortization of
approximately $1.8 million.

Cost of revenues for license fees for the year ended December 31, 2003 decreased
by approximately $1.6 million, compared to the prior year, mainly due to a
decrease in costs associated with our former PC products, caused by our exit
from the PC business. For the year ended December 31, 2002, the $1.2 million
increase in cost of license revenues over the prior year was due to an
additional $1.0 million in costs associated with greater sales of our DRM
solutions and a net increase of $0.2 million for our former PC products. We
expect our cost of license fees as a percentage of license revenues to decline,
as our license revenues are now comprised entirely of our DRM products.

Cost of revenues for hardware sales for the year ended December 31, 2003
decreased by $1.3 million, compared to the prior year due to reduced hardware
sales, as well as the fully-reserved state of our inventories. The $0.2 million
increase in cost of revenues for hardware sales for the year ended December 31,
2002 from the prior year corresponds to the increase in our hardware sales. In
the future we expect hardware cost of sales to be minimal.

Cost of revenues for services and maintenance for the year ended December 31,
2003 decreased by $0.5 million from the prior year due to a decrease in PC
services expense, due to our exit from the PC business. The $4.0 million
increase in cost of services and maintenance for the year ended December 31,
2002 compared to the prior year is attributable to an approximate $3.6 million
increase from our DRM system services and maintenance plans, and a $0.5 million
increase in services related to our former PC business, offset by a $0.1 million
decrease in services related to our former CE business. We expect our cost of
services and maintenance as a percentage of services and maintenance revenues to
remain approximately the same, as our service and maintenance costs are adjusted
to meet the requirements of our customers.

Software amortization of our developed and core technologies for the year ended
December 31, 2003 decreased by $1.3 million, compared to the prior year, due to
the impairment of our identified intangible assets in the fourth quarter of 2002
that resulted in a decrease to the carrying amount of those assets, and
therefore a lower amortizable cost. Software amortization of our developed and
core technologies acquired in the eMation acquisition, added approximately $1.8
million to our cost of revenues for the year ended December 31, 2002. For the
year ended December 31, 2004 we expect non-cash amortization of acquired
technology to represent approximately $0.4 million of our cost of revenues.

Currency  movements  in 2003  increased  expenses  (operating  costs and cost of
revenues) by $1.0 million from the prior year due to unfavorable exchange rates.
Increases  in  expenses  due to  currency  movements  are due  primarily  to the
weakness  versus  prior year of the U.S.  dollar  against the Euro,  the British
pound and the Japanese yen.  Although we cannot predict the future  movements in
currency  rates,  any  strengthening  of the U.S.  dollar  against  our  foreign
currencies  will have a  favorable  impact  on our  expenses  in 2004.  Currency
effects on our expenses for 2002 and 2001 were insignificant.

                                       29
<PAGE>
Gross Profit. Gross profit for the year ended December 31, 2003 decreased $0.3
million, or 3%, to $7.6 million, compared to the prior year. The decrease in
gross profit was due to a decrease in gross profit from sales of our former PC
and IA hardware products of $3.4 million, due to our exit from these businesses,
offset by increases in gross profit from our DRM license fees, DRM service and
maintenance revenues and reduced software amortization expenses, which totaled
$3.2 million.

Gross profit as a percentage of total revenues for the year ended December 31,
2003 increased to 57%, from 43% in the prior year, due to improved margins from
our DRM professional services and reduced software amortization expense.

Gross profit as a percentage of total revenues (excluding the charges recorded
for inventory and software amortization) for the year ended December 31, 2002
decreased to 54%, from 61% in the prior year, due to negative gross profit from
our services and maintenance products. The negative gross profit from our
services and maintenance products was attributable to the delivery of a large
number of non-billable proof of concepts, or POCs, delivered to prospective
customers during the year. In order to establish a stronger market presence and
earn a prospective customer's commitment, we performed various marketing
activities including delivering POCs to potential customers. These POCs provided
a business case to demonstrate that our product can successfully operate in our
customer's environment, perform according to published specifications as well as
deliver cost savings.

The gross profit margin on DRM license revenue was 88% for the year ended
December 31, 2003, compared to 86% for the prior year, and resulted from
reductions in product packaging costs. Services and maintenance gross profit
margin was 1% and negative 42% for the years ended December 31, 2003 and
December 31, 2002, respectively. The change reflects an improvement in the
billable utilization of professional services employees. The variability in our
services and maintenance gross profit margin reflects the variability in our
services revenues, and cost savings from our recent restructuring efforts.

Other Research and Development (R&D) Expense. Other R&D expense consists of
staff, staff-related, professional and other development-related support costs
associated with the development of new DRM products, quality assurance and
testing. Other R&D expense for the year ended December 31, 2003 decreased $2.2
million, or 30%, to $5.0 million, compared with the prior year. The
discontinuance of the PC development team during 2002, in connection with the
license to Sonic, contributed $1.6 million to the decrease, and a decrease in
staff related expense, consulting fees, and other expense, contributed the
remaining $0.6 million. Other R&D expenses as a percentage of total revenues
decreased from 40% in 2002 to 38% in 2003, due to the reduction in other R&D
expense, offset by the decrease in revenues. We expect other R&D expense to
continue to decrease in 2004 and also expect other R&D expense to decrease as a
percentage of revenues as we expect our future revenues to increase.

R&D expense for the year ended December 31, 2002 increased $1.5 million, or 26%,
to $7.2 million, compared with the prior year. The increase was attributable to
a full year of DRM expenses (up $5.1 million, from $0.5 million in 2001 to $5.6
million in 2002). This increase was partially offset by a decrease in R&D
expenses of $2.2 million in our former PC development team, and the elimination
of the CE and IA development teams in 2001, which contributed approximately $0.7
million and $0.8 million, respectively, to the decrease. As a percentage of
total revenues, other R&D expenses decreased from 75% to 40% of total revenues
due to the proportionally larger increase in total revenues from the prior year.

Non-cash Compensation R&D Expense. Non-cash R&D expense consists of compensation
related to stock options. Non-cash R&D expense decreased 92% from $2.1 million
for the year ended December 31, 2001, to $0.2 million for the year ended
December 31, 2002. Approximately $1.5 million of the decrease is partially due
to the immediate recognition of prepaid and deferred stock compensation relating
to reductions in staffing in connection with the closing of our Vancouver office
in March 2001. In addition, $0.5 million of the decrease resulted from
amortization of deferred compensation recorded in 2001 in connection with stock
options granted to employees in December 2000. No similar expenses were recorded
for the year ended December 31, 2002. This expense is offset by amortization of
$0.1 million for deferred compensation recorded in connection with stock options
granted to employees in December 2001 at less than fair market value for which
no similar expense was recorded in 2001.

                                       30
<PAGE>
Other Sales and Marketing (S&M) Expense. Other S&M expense consists of salaries,
travel expenses and costs associated with trade shows, advertising and other
sales and marketing efforts. Other S&M expense for the year ended December 31,
2003 decreased approximately $8.2 million to $8.4 million, or 49%, as compared
with the prior year. The elimination of our former business development
personnel focused on professional services in 2002, decreases in sales staff
headcount, the elimination of our former PC sales team and initial branding
expense contributed $2.8 million, $1.1 million and $0.6 million, respectively,
to the decrease in other S&M expense for the year ended December 31, 2003
compared to the prior year. In addition, reduced public relations, trade shows
and advertising expense equally contributed approximately $0.7 million for the
year ended December 31, 2003 over the prior year. Also, reductions in travel,
subcontractors and the closure of our Israeli office, each contributed $0.4
million to the decrease in 2003. Finally, reduced marketing and sales
collateral, severance and other expenses in 2003 contributed $0.3 million, $0.7
million and $0.7 million, respectively, compared to the same period in the prior
year. As a percentage of revenues, other S&M expenses decreased from 92% to 64%,
due to reduced S&M expense from the prior year, offset by the decrease in
revenues. In 2004 we expect other S&M expenses to continue to decrease and also
expect other S&M expenses to decrease as a percentage of revenues as we expect
our future revenues to increase.

Other S&M expense for the year ended December 31, 2002 increased $9.0 million,
or 117%, to $16.6 million, as compared with the prior year. The increase in
other S&M expense was attributable to the inclusion of the acquired eMation
sales, marketing and business development groups, which contributed $15.1
million. Partially offsetting this increase was the elimination of the sales and
marketing teams associated with our former CE and IA businesses, which resulted
in decreases of $0.4 million and $0.5 million, respectively. Decreases of
approximately $1.8 million, relating to the settlement of a South American
distribution rights agreement, and $2.8 million, from reduced staff in our
former PC sales and marketing teams, also partially offset the increase.
Branding expenses in 2001 associated with our name change also contributed
approximately $0.6 million to the decrease. As a percentage of total revenues,
other S&M expenses decreased from 101% to 92%, due to the proportionally larger
increase in total revenues from the prior year.

Other General and Administrative (G&A) Expense. Other G&A expense consists of
staff, staff related, and support costs for our finance, human resources, legal
and other management departments. Other G&A expense for the year ended December
31, 2003 decreased $3.6 million to $7.4 million, or 32%, as compared with the
prior year. Reduced staff related expense, expenses to support our former PC
business and estimated intellectual property expense contributed $1.0 million,
$0.5 million and $0.4 million, respectively, to the decrease. Cost reductions
associated with the closure of our Israeli office, reduced travel and other
expense contributed $0.3 million, $0.2 million and $0.4 million, respectively,
to the decrease. In addition, decreased use of consultants and reductions in
accruals for estimated liabilities and sales taxes contributed $1.0 million in
total to the decrease. The above decreases were partially offset by a $0.3
million increase in severance expense. Other G&A expense as a percentage of
total revenues decreased from 61% in 2002 to 56% in 2003 due to the reduction in
other G&A expense, offset by the decrease in revenues. In 2004 we expect other
G&A expense to continue to decrease based on cost reductions that occurred
throughout 2003, and we also expect other G&A expense to decrease as a
percentage of revenues as we expect our future revenues to increase.

Other G&A expense for the year ended December 31, 2002 increased $1.1 million,
or 12%, to $11.0 million, compared to the prior year. The increase was mainly
due to the addition of the acquired eMation G&A function, which contributed $3.1
million to the increase, partially offset by decreases in severance costs of
$1.1 million, staff retention expense of $0.4 million, executive recruiting
expense of approximately $0.3 million and rent and other expense of $0.2
million. Included in the $3.1 million increase is a net one-time lease charge of
$0.2 million representing the excess of the future minimum rental payments to be
made over the future minimum sublease payments to be received for a property
vacated during the third quarter of 2002. Other G&A expense as a percentage of
total revenues decreased from 130% to 61%, due to the proportionally larger
increase in total revenues.

                                       31
<PAGE>
Non-cash Compensation G&A Expense. Non-cash general and administrative expense
consists of compensation related to stock options. Non-cash general and
administrative expense decreased from $1.3 million for the year ended December
31, 2002 to $0.5 million for the year ended December 31, 2003. The decrease is
primarily attributable to the acceleration of vesting of $0.4 million and
modifications to certain outstanding stock options of $0.2 million in 2002, and
certain deferred stock compensation balances that were fully expensed by
December 31, 2002, resulting in $0.2 million less expense in 2003. There were no
accelerations or significant modifications that resulted in additional non-cash
compensation G&A expense in 2003.

Non-cash general and administrative expense increased from $0.8 million for the
year ended December 31, 2001 to $1.3 million for the year ended December 31,
2002. The increase is attributable to a $0.4 million expense incurred for the
acceleration of option vesting in accordance with certain employment agreements
offset by $0.1 million for the acceleration of option vesting in 2001. The
remaining portion of the increase is attributable to a one-time charge
recognized in 2002 of $0.2 million for the modification of stock options held by
a former employee.

Depreciation and Amortization. Depreciation and amortization decreased $0.4
million for the year ended December 31, 2003 to $1.1 million from $1.6 million
in 2002, and decreased $1.3 million for the year ended December 31, 2002 to $1.6
million from $2.8 million in the prior year. The $0.4 million decrease during
the year ended December 31, 2003 is due to the partial impairment in 2002 of the
identified intangible assets recorded in connection with our acquisition of
eMation, which contributed $0.2 million, as well as reduced depreciation
expense, which contributed $0.2 million. The $1.2 million decrease in expense
for the year ended December 31, 2002 is due to sales of the assets of our CE and
IA businesses, both of which were sold in March 2001, and contributed $1.2
million of the decrease, while the decrease in amortization expense relating to
our Cinax goodwill accounted for $1.0 million. Offsetting these decreases was an
increase of approximately $0.9 million attributable to depreciation of assets
and amortization of intangibles acquired in the purchase of eMation. In the
future we expect depreciation and amortization expense to approximate the
current year expense.

Special Charges. Special charges for the year ended December 31, 2002 consist of
items related to our exit from the PC business in May 2002. The charges include
$0.3 million for furniture and equipment and employee inducements, termination
expenses related to our license agreement with Sonic Solutions, lease
termination costs and inducements totaling approximately $0.5 million, including
$0.2 million for furniture and equipment, for our former San Jose facility.

Impairment Charges. During November 2002 we completed our annual impairment test
of goodwill in accordance with SFAS 142. Due to adverse market conditions, and a
slower than expected rate of adoption of our software technology in our
industry, we determined that the fair value of our reporting unit could not
support the carrying value of its intangible assets and, accordingly, recognized
a goodwill and identified intangible asset impairment charge of approximately
$22.4 million in 2002. No such charge was recorded in 2003. If our current
financial projections or related assumptions are modified in the future, we may
be required to record additional impairment charges.

Impairment charges for the year ended 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 a DRM software and
services company.

Gains on Disposals of Assets. For the year ended December 31, 2001 we recorded
gains of approximately $47.5 million and $4.5 million as a result of the sale of
the assets related to our CE and IA businesses, respectively, in March 2001. We
signed a confidential settlement agreement in March 2003 for the escrow relating
to the sale of the assets of our former IA business. In connection with this
settlement agreement, we reversed accruals of approximately $0.7 million
recorded in March 2001 as part of the sale. During the year ended December 31,
2002 we recorded charges of $0.1 million for the disposal of certain assets that
were no longer utilized or needed for our continuing operations.

Interest Income (Expense), net. Net interest income decreased by $0.4 million or
96% for the year ended December 31, 2003 compared to the same period in 2002.
The decrease is the result of lower average cash balances and lower bank
interest rates in 2003. Net interest income and expense decreased by $1.3
million, or 75%, for the year ended December 31, 2002 compared to the comparable
period in 2001. The decrease was the result of lower average cash balances and
lower bank interest rates in 2002.

                                       32
<PAGE>
Other Income and (Expense), net. We entered into a registration rights agreement
with the investors in the PIPE financing pursuant to which we were obligated to
file a registration statement for the resale of the shares sold in the
transaction, and the shares issuable upon exercise of the warrants with the SEC.
The SEC declared the registration statement effective on October 23, 2003. In
the event that sales cannot be made because we have not updated the registration
statement to keep it effective, we will be required to pay liquidated damages to
each PIPE investor equal to 1.5% of the purchase price paid by such investor for
each thirty-day period or pro rata for any portion thereof after the deadline
that passes before the registration statement is updated and declared effective
by the SEC. While we view the liquidated damages contingency related to the
financing-related liability as neither probable nor reasonably estimable, we
recorded the estimated fair value of the warrant as of September 23, 2003 as a
financing-related liability in the consolidated balance sheet in accordance with
EITF 00-19. The fair value of the financing-related liability is adjusted at
each balance sheet date, with the non-cash change in fair value reported in the
consolidated statement of operations as other income or expense. The related
mark-to-market non-cash gain for the year ended December 31, 2003 was $0.8
million. Due to the uncertainty surrounding the variables required by the
valuation model for the financing-related liability and corresponding gain or
loss adjustment, it is difficult to estimate the future income or expense
resulting from the periodic valuations of the liability.

During the year ended December 31, 2002 we recorded, as other income, $0.5
million in connection with the settlement of a vendor disputeinvolving inventory
for which a portion of our total obligation was forgiven. There were no
equivalent charges recorded in the prior year.

Provision for Income Taxes (Benefit). The income tax expense recorded for the
year ended December 31, 2003 is attributable to the provision for certain
foreign income taxes. The income tax benefit recorded for the year ended
December 31, 2002 is attributable to the reversal of certain prior year U.S.
income tax accruals no longer necessary as a result of newly enacted tax
legislation in 2002, and partially offset by a provision for certain foreign
income taxes.

Acquired In-Process Research and Development

In connection with the acquisition of eMation in December 2001, 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 DRM 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 were expected to include
product enhancements to enable the products to perform on an increased number of
platforms. In September 2002, we completed the next generation DRM product,
Axeda DRM 3. Release 3 expanded the diagnosis and repair, reporting,
performance, connectivity and security features of the Axeda DRM system. Also in
September 2002, we completed the new Windows XP version of our industrial
automation solution, Wizcon, version 8.2, supervisory control and data
acquisition, or SCADA, system. These products, along with any related services
and maintenance, are expected to generate revenues for the next several years.


                                       33
<PAGE>
Quarterly Results of Operations
The following table presents certain unaudited quarterly consolidated statements
of operations data for the eight quarters ended December 31, 2003. 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 our audited consolidated financial statements included at Item 8 herein.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire year or for any future period.

<TABLE>
<CAPTION>

                                             Mar. 31,   Jun. 30,   Sept. 30,  Dec. 31,   Mar. 31,   Jun. 30,   Sept. 30,  Dec. 31,
                                               2002       2002       2002       2002       2003       2003       2003       2003
                                               ----       ----       ----       ----       ----       ----       ----       ----
(In thousands, except share and per share data)
<S>                                             <C>        <C>        <C>        <C>         <C>        <C>       <C>         <C>
 Revenues:
     License ................................   $ 3,040    $ 2,578    $ 3,421    $ 3,733     $2,317     $2,158    $ 2,575     $2,084
     Services and maintenance ...............       543        674        795      1,112        963        570        924      1,280
     Hardware ...............................     1,057        291        153        732        137         46        104         36
                                                  -----        ---        ---        ---        ---         --        ---         --

 Total revenues .............................     4,640      3,543      4,369      5,577      3,417      2,774      3,603      3,400
                                                  -----      -----      -----      -----      -----      -----      -----      -----
 Cost of revenues:
     License ................................     1,035        782        579        453        511        314        151        316
     Services and  maintenance ..............       717        990      1,163      1,340      1,012      1,025        757        900
     Hardware ...............................     1,009        243         29          7          -          1          -          -
     Software amortization ..................       529        525        525        364        157        159        159        159
                                                    ---        ---        ---        ---        ---        ---        ---        ---
 Total cost of revenues .....................     3,290      2,540      2,296      2,164      1,680      1,499      1,067      1,375
                                                  -----      -----      -----      -----      -----      -----      -----      -----

 Gross profit ...............................     1,350      1,003      2,073      3,413      1,737      1,275      2,536      2,025
                                                  -----      -----      -----      -----      -----      -----      -----      -----
 Research and development (R&D)
     Non-cash compensation ..................        64         34         31         34         28         28         28         18
     Other R&D expense ......................     2,232      2,090      1,655      1,185      1,714      1,407        969        902
 Sales and marketing (S&M)
     Non-cash compensation and other expense .       19         19         17         16         11          6         10          4
     Other S&M expense .....................      4,802      4,990      3,836      3,014      2,505      2,276      1,777      1,863
 General and administrative (G&A)
     Non-cash compensation .................        860        239        103        102        103        170        108         95
     Other G&A expense .....................      3,018      3,076      2,401      2,505      2,570      1,943      1,763      1,145
     Provision for doubtful  accounts
      (net of recoveries) ..................        45       (67)       (27)          4        (9)         13       (16)        (3)
 Depreciation and amortization .............        310        330        422        490        308        262        278        275
 Impairment charges ........................          -          -          -     22,413          -          -          -          -
 Special charges ...........................          -        820          -          -          -          -          -          -
                                                    ---        ---        ---        ---        ---        ---        ---        ---

   Total operating costs ...................     11,350     11,531      8,438     29,763      7,230      6,105      4,917      4,299
                                                 ------     ------      -----     ------      -----      -----      -----      -----

   Operating loss ..........................   (10,000)   (10,528)    (6,365)   (26,350)    (5,493)    (4,830)    (2,381)    (2,274)

 Gains (losses) on disposals of assets .....          -       (37)       (86)       (15)        743          -          -          -
 Interest income (expense), net ............        220         93         93         35         31         22       (24)       (10)
 Other income (expense),net ................          -        (3)         47        510       (18)          -        639        185
                                                    ---        ---        ---        ---       ----        ---        ---        ---

 Loss before provision for income taxes
  (benefit) ................................    (9,780)   (10,475)    (6,311)   (25,820)    (4,737)    (4,808)    (1,766)    (2,099)
 Provision for income taxes (benefit) ......      (668)          -          -        209         50         45         45         58
                                                  -----        ---        ---        ---        ---        ---        ---        ---
 Net loss ..................................  $ (9,112) $ (10,475)  $ (6,311) $ (26,029)  $ (4,787)  $ (4,853)  $ (1,811)  $ (2,157)
                                              ========= ==========  ========= ==========  =========  =========  =========  =========

 Basic and diluted net loss per weighted
  average common share outstanding .........    $(0.34)    $(0.39)    $(0.23)    $(0.96)    $(0.18)    $(0.18)    $(0.07)    $(0.07)
                                                =======    =======    =======    =======    =======    =======    =======    =======

 Weighted average number of common shares
  outstanding - basic and diluted .......... 26,789,174 26,986,387 27,222,368 27,250,263 27,179,237 27,245,700 27,741,394 32,314,920
                                             ========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
                                       34
<PAGE>
                               Axeda Systems Inc.

LIQUIDITY AND CAPITAL RESOURCES

Since March 2001, our operations have largely been financed through the sales of
the assets of our Consumer Electronics and Internet Appliance businesses and the
September 2003 PIPE financing. As of December 31, 2003, we had approximately
$9.6 million in cash and cash equivalents.

Net cash used in operating activities for the year ended December 31, 2003 was
$15.2 million, compared to $23.9 million for the year ended December 31, 2002.
Cash used in operating activities for the year ended December 31, 2003 was
primarily the result of our net loss of approximately $13.6 million and other
changes in working capital of approximately $2.4 million, offset by
approximately $0.8 million for the net non-cash expenses, gains on asset
disposals and financing-related gain. The reduction in net cash used in
operations is primarily the result of the lower net loss.

Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations, and decrease our operating losses
and corresponding use of cash. We have halved the number of global offices,
reduced staffing levels by approximately 46%, by eliminating or not replacing 96
employees, engaged partners to provide us with variable staffing capabilities to
meet peak demand periods and have closely monitored our infrastructure costs. In
2002 we exited the PC business and focused our efforts on several key markets
for DRM Systems products. In 2002 and 2003, we recorded $1.9 million and $1.4
million in restructuring charges, respectively, to reduce staffing levels, to
terminate certain leases and consolidate our operations. As a result of these
actions, our cash and cash equivalents balance decreased by $11.3 million and
$3.7 million (excluding the $5.6 million received in September 2003) during the
first and second halves of 2003, respectively. We will continue to evaluate our
cost structure and may undertake additional measures to reduce expenses in the
future.

Net cash used in investing activities for the year ended December 31, 2003 was
$0.3 million, as compared to $2.3 million for the year ended December 31, 2002,
and consisted of purchases of furniture and equipment in both periods. We have
no material commitments for capital expenditures, and we anticipate minimal
spending on capital expenditures as our needs in operations, infrastructure and
personnel arise.

Net cash provided by financing activities was $5.8 million for the year ended
December 31, 2003 and consisted primarily of net proceeds from the issuance of
common stock of $5.6 million and borrowings under a bank line of credit of $0.4
million, offset by principal payments reducing other indebtedness of
approximately $0.2 million. Net cash used in financing activities of $2.0
million for the year ended December 31, 2002 consisted of principal payments
reducing other indebtedness.

In June 2003, we executed a loan and security agreement with Silicon Valley Bank
that provides us with a line of credit, or the Line, in the amount of the lesser
of $2.0 million or the borrowing base, as defined (limited to a percentage of
eligible accounts receivable). As of December 31, 2003, we had $0.4 million in
borrowings under the Line, which was repaid in January 2004. In addition, we
repaid the remaining balance under an equipment loan facility in December 2003.
As of December 31, 2003, we were in compliance with all of our covenants under
the Line.

                                       35
<PAGE>
In September 2003, we issued 4,918,100 shares of our common stock to certain
accredited investors in the PIPE financing. The shares were sold at a price of
$1.22 per share with proceeds of approximately $5.6 million, net of placement
and legal and accounting fees of approximately $0.4 million. In connection with
the PIPE financing, we also issued to the investors warrants exercisable through
September 23, 2008 for the purchase of up to an aggregate of 2,459,050 shares of
our common stock at an initial exercise price of $1.71 per share.

As of December 31, 2003, we have $1.2 million of estimated accrued costs related
to facilities that we no longer occupy. We have made significant efforts to
terminate certain of these occupancy arrangements, but if these arrangements
cannot be terminated, we may be required to make these payments.

We maintain an irrevocable, cash-secured, standby letter of credit, or the
letter of credit, from a bank for $0.15 million as security for our corporate
headquarters lease. The letter of credit expires on August 31, 2004 and provides
for automatic one-year renewals, but not beyond August 2007. The letter of
credit is secured by a certificate of deposit for $0.15 million from the same
bank, and also expires on August 31, 2004. This amount is restricted for
withdrawal and is included in other assets (non-current) in our consolidated
balance sheets.

Based on our cash resources, our expected continued year over year growth in DRM
Systems  revenues  and the  continued  realization  of savings  from our already
implemented expense  reductions,  we expect to have sufficient cash resources to
meet our cash needs through the first quarter of 2005. However, due to risks and
uncertainties,  we cannot assure  investors that our future operating cash flows
will be sufficient to meet our requirements.  Additionally, financing may not be
available  when  needed  and,  if such  financing  is  available,  it may not be
available on terms favorable to us. In such event,  our operations and liquidity
will be materially adversely affected.



                                       36
<PAGE>
                               Axeda Systems Inc.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to goodwill, intangible assets, income taxes, litigation and other
contingencies. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a summary of all of our significant accounting
policies, including the critical accounting policies discussed below, see note 1
to the accompanying consolidated financial statements filed herewith at Item 8.

Revenue recognition. We derive our revenues from primarily two sources (i)
product revenues, which includes software license, royalties and hardware
revenues, and (ii) services and support revenues, which includes professional
services, software license maintenance, training and consulting revenues. 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 generally license our software products on a perpetual basis. Some of our
licenses include maintenance and support, which typically are for renewable
periods of one year.

We apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," or SOP 97-2, as amended by Statement of Position 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions," or SOP 98-9, to all transactions involving the sale of software
products.

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 or
determinable and collection of the resulting receivable is probable. 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 or determinable. In these cases, we recognize revenue as the
fees become due and payable.

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 probable, we defer the fee and recognize revenue at
the time collection becomes probable, which is generally upon receipt of cash.

For all sales we use either a signed agreement or a binding purchase order as
evidence of an arrangement. 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 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 vendor-specific objective evidence of fair value, or 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, or 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.

                                       37
<PAGE>
We recognize revenues for maintenance services ratably over the contract term.
Our training and professional services are billed based on daily rates, and we
generally recognize revenues as these services are performed. However, if our
services are bundled with a license component and the arrangement requires us to
perform significant work, such as altering the underlying software or building
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. For
arrangements that include services that, under SOP 97-2, qualify for separate
accounting, we follow the provisions of SOP 97-2 and allocate revenues to the
services element based on VSOE and recognize the revenues as the services are
performed. 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
collectibility of our accounts receivable. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer creditworthiness, 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 $3.2 million, net of allowance for
doubtful accounts of less than $0.1 million as of December 31, 2003.

Valuation of long-lived assets and intangible assets with finite lives, and
goodwill. We evaluate long-lived assets, including intangible assets other than
goodwill, for impairment under SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets," or SFAS 144. In accordance with SFAS 144, we
evaluate long-lived assets, including intangible assets other than goodwill, for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable based on expected undiscounted
cash flows attributable to that asset. The amount of any impairment is measured
as the difference between the carrying value and the fair value of the impaired
asset. As of December 31, 2003, the carrying amount of our identified intangible
assets was $1.4 million.

Factors we consider important which could trigger an impairment review include
the following:

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

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

     o    significant negative industry or economic trends; and

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

We evaluate goodwill on a quarterly basis for indications of impairment based on
our fair value as determined by our market capitalization in accordance with
Statement of Financial Standards No. 142, or SFAS 142, "Goodwill and Other
Intangible Assets." If this evaluation indicates that the value of the goodwill
may be impaired, we make an assessment of the impairment of the goodwill using
the two-step method prescribed by SFAS 142. Any such impairment charge could be
significant and could have a material adverse effect on our reported financial
statements. During the fourth quarter of 2003, we performed the annual goodwill
impairment test, which indicated that goodwill was not impaired. We did not
record any impairment charges on our goodwill during 2003. As of December 31,
2003, the carrying amount of our goodwill was $3.6 million.

Contingencies. Management's current estimated range of liability related to our
pending legal claims is based on claims for which management can estimate the
amount or range of loss. We have accrued for estimated losses in the
accompanying consolidated financial statements for those matters where we
believe the likelihood of an adverse outcome is probable and the amount of the
loss is reasonably estimable. 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.

Income Taxes. The relative proportions of our domestic and foreign revenue and
income directly affect our effective tax rate. We are also subject to changing
tax laws in the multiple jurisdictions in which we operate. We have recorded a
valuation allowance for our entire deferred tax asset balance due to
uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses carried forward, before
they expire. The valuation allowance is based on our estimates of taxable income
by jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable.
                                       38
<PAGE>

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations as of December 31,
2003 (in thousands):
<TABLE>
<CAPTION>

                                                               Payments Due By Period
                                ------------------------------------------------------------------------
                                                  Less than 1                                 More than 5
Contractual obligation               Total            year        1-3 years     3-5 years        years
----------------------------         -----            ----        ---------     ---------        -----
<S>                                  <C>              <C>            <C>            <C>            <C>
Long-term debt obligation            $  14            $  14        $  --          $ --           $ --
Operating lease obligations          3,925            1,230          1,411           819            465
Purchase obligations                 1,404            1,191            213             -              -
                                     -----            -----            ---           ---            ---
     Total                          $5,343           $2,435         $1,624           819            465
                                    ======           ======         ======           ===            ===
</TABLE>

A purchase obligation is defined as an agreement to purchase goods or services
that is enforceable and legally binding on the registrant and that specifies all
significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable price provisions; and the approximate timing of the
transaction.



                                       39
<PAGE>
Employee and Director Stock Options

Option Program Description

         Our stock option program is a broad-based, long-term retention program
that is intended to attract, retain and provide performance incentives for
talented employees, officers and directors, and to align stockholder and
employee interests. Currently, we grant options from the 1999 Stock Incentive
Plan, as amended (the "1999 Plan"). The 1999 Plan has three separate programs
which include: the discretionary option grant program, under which employees may
be granted options to purchase shares of common stock; the stock issuance
program, under which eligible employees may be granted shares of common stock;
and the automatic grant program, whereby eligible non-employee board members are
granted options to purchase shares of common stock. To date, we have not issued
any shares under the stock issuance program. In addition, our stock option
program includes the 1995 Stock Option Plan (the "1995 Plan"), from which we no
longer grant options. In connection with the eMation acquisition, we assumed
options issued under eMation, Ltd.'s 2001 Stock Option Plan that became
exercisable for up to 1,428,710 shares of our common stock, 530,000 of which are
exercisable for $0.01 per share and the remaining 898,710 exercisable at $2.14
per share. No options have been or will be granted under the eMation, Ltd. 2001
Stock Option Plan subsequent to our acquisition of eMation, Ltd. The plans
listed above are collectively referred to in the following discussion as "the
Plans." We consider our option programs critical to our operation and
productivity; essentially all of our employees participate. Option vesting
periods are generally 1 to 4 years and expire 10 years from the grant date for
the 1999 Plan. Option vesting periods are generally 2 to 5 years and expire 5 to
10 years from the grant date for the 1995 Plan.

         All stock option grants to executive officers are made after a review
by and with the approval of the Compensation Committee of the Board of
Directors. All members of the Compensation Committee are independent directors,
as defined in the current and proposed rules applicable to issuers traded on the
NASDAQ Stock Market. See the "Compensation Committee Report in Executive
Compensation" appearing in our 2004 Proxy Statement for further information
concerning our policies and procedures, including those of the Compensation
Committee, regarding the use of stock options.

Distribution and Dilutive Effect of Options

The table below provides  information  about stock options granted for the years
ended  December 31, 2003 and 2002 to our Chief  Executive  Officer and our three
other executive officers, Dale E. Calder, Thomas J. Fogarty and John C. Roberts.
This group is referred to as the "Named Executive Officers."

<TABLE>
<CAPTION>
                                                                          2003       2002
                                                                          ----       ----
<S>                                                                        <C>       <C>
Net grants during the period as % of outstanding shares (#) ...............4.11%     9.17%
Grants to Named Executive Officers during the period as % of
total options granted (%) ................................................11.66%    13.82%
Grants to Named Executive Officers during the period as % of
outstanding shares granted (%) ........................................... 0.48%     1.27%
Cumulative options held by Named Executive Officers as % of total
options outstanding (%) ..................................................34.98%    40.90%
</TABLE>

                                       40
<PAGE>
General Option Information

The following  table sets forth the summary of activity  under the Plans for the
years ended December 31, 2003 and 2002:

<TABLE>
<CAPTION>
                                                                  Options Outstanding
                                                        -------------------------------------
                                    Number of Shares     Number of Shares    Weighted Average
                                     Available for     Issuable on Exercise   Exercise Price
                                        Options             of Options          (per share)
<S>                                     <C>                  <C>                  <C>
December 31, 2001                         771,301              3,781,592            $2.43
                                          -------              ---------
Grants                                (2,533,700)              2,533,700             1.63
Exercises                                       -              (207,331)             0.26
Cancellations*                            925,823            (1,029,142)             3.27
Additional shares reserved              1,100,000                    N/A
                                        ---------                    ---
December 31, 2002                         263,424              5,078,819            $1.95
                                          =======              =========
Grants                                (1,329,000)              1,329,000             1.47
Exercises                                       -               (85,645)             0.17
Cancellations*                            486,902              (601,533)             2.88
Additional shares reserved              1,100,000                    N/A
                                        ---------                    ---
December 31, 2003                         521,326              5,720,641            $1.76
                                          =======              =========
</TABLE>

* The "Number of Shares Available for Options" does not include options under
assumed plans exercisable for 114,631 and 103,319 shares that were cancelled
during 2003 and 2002, respectively, as no options will be granted in the future
pursuant to these assumed plans.

The following table sets forth a comparison, as of December 31, 2003, of the
number of shares subject to our options whose exercise prices were at or below
the closing price of our common stock on December 31, 2003 ("In-the-Money"
options) to the number of shares subject to options whose exercise prices were
greater than the closing price of our common stock on such date
("Out-of-the-Money" options):
<TABLE>
<CAPTION>

                                      Exercisable                    Unexercisable                  Total
                               -------------------------     -------------------------      ------------------------
                                                Weighted                      Weighted                     Weighted
                                                 Average                       Average                     Average
                                Number of       Exercise        Number of      Exercise      Number of     Exercise
                                  Shares          Price             Shares      Price          Shares        Price
                                  ------          -----             ------      -----          ------        -----
<S>                             <C>              <C>            <C>             <C>          <C>           <C>
In-the-money                    1,424,805        $ 0.17         941,007         $ 0.54       2,365,812     $ 0.32
Out-of-the-money (1)            1,783,796        $ 3.48       1,571,033         $ 1.99       3,354,829      $2.78
Total options outstanding       3,208,601        $ 2.01       2,512,040         $ 1.45       5,720,641     $ 1.76
</TABLE>


(1) Out-of-the-money options are those options with an exercise price equal to
or above the closing price of $1.36 as of December 31, 2003, as reported by the
NASDAQ National Market.

                                       41
<PAGE>
Executive Options

     The following table sets forth information regarding stock options granted
     in 2003, to our Named Executive Officers, each under our 1999 Plan. Options
     were granted with an exercise price equal to or less than the closing price
     of our common stock on the date of grant. Potential realizable values are
     net of exercise price, but before taxes associated with exercise. These
     amounts represent hypothetical gains that could be achieved for the options
     if exercised at the end of the option term of ten (10) years. The assumed
     5% and 10% rates of stock price appreciation are provided for purposes of
     illustration only and do not represent our estimate or projection of the
     future price of our common stock.
<TABLE>
<CAPTION>
                                                   Individual Grants
                          -----------------------------------------------------------------
                              Number of                                                        Potential Realizable Value
                              Securities     Percentage of Total   Exercise                   at Assumed Annual Rates of
                          Underlying Option  Options Granted to   Price (Per     Expiration    Stock Price Appreciation for
Name                          Per Grant          Employees *        Share)            Date            Option Terms
----                          ---------          -----------        ------            ----            ------------
                                                                                                     5%            10%
                                                                                                     --            ---
<S>                                   <C>                   <C>         <C>          <C>  <C>          <C>          <C>
Robert M. Russell, Jr.                     -                    -          N/A             N/A           N/A          N/A
Dale E. Calder                             -                    -          N/A             N/A           N/A          N/A
Thomas J. Fogarty                    100,000                7.52%       $ 0.01       4/28/2013         $66,703     $111,272
John C. Roberts                       55,000                4.14%       $ 1.45       9/24/2013         $40,450      $67,476
</TABLE>

*Based on a total of 1,329,000 shares subject to options granted to employees
under our option plans during 2003.

Stock Option Exercises and Option Holdings

The following table shows stock options exercised by the Named Executive
Officers for the year ended December 31, 2003, if any, including the total value
of gains on the date of exercise based on actual sale prices or on the closing
price that day if the shares were not sold that day, in each case less the
exercise price of the stock options. In addition, the number of shares covered
by both exercisable and non-exercisable stock options, as of December 31, 2003,
is shown. Also reported are the values for "In-the-Money" options. The dollar
amounts shown in the "In-the-Money" column represent the positive spread between
the exercise price of any such existing stock options and the closing price as
of December 31, 2003 of our common stock.
<TABLE>
<CAPTION>

                            Number of
                             Shares
Named Executive            Acquired on      Value        Number of Securities Underlying               Values of Unexercised
 Officer                    Exercise      Realized            Unexercised Options                       In-the-Money Options*
-------------------         --------      --------       -----------------------------------        -------------------------------
                                                             Exercisable       Unexercisable        Exercisable        Unexercisable
                                                             -----------       -------------        -----------        -------------
<S>                                          <C>                <C>                <C>                 <C>                <C>
 Robert M. Russell              -            $ -                513,663            367,337             $364,252           $ 221,908
 Dale E. Calder                 -             -                 521,874             53,126              437,749              72,251
 Thomas J. Fogarty              -             -                 343,538             86,462              335,749              72,251

 John C. Roberts                -             -                  29,790             85,210               20,966              19,834

</TABLE>

* Option values based on stock price of $1.36 on December 31, 2003.

                                       42
<PAGE>
Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is provided in note 1q to
the consolidated financial statements included at Item 8 herein.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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


                                       43
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>

Consolidated Financial Statements
Axeda Systems Inc.
<S>                                                                                                           <C>
  Independent Auditors' Report ...................................................... .........................45

  Consolidated Balance Sheets, December 31, 2003 and 2002 ........................... .........................46

  Consolidated Statements of Operations, Years ended December 31, 2003, 2002, and 2001 ........................47

  Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31, 2003, 2002, and 2001 ...48

  Consolidated Statements of Cash Flows, Years ended December 31, 2003, 2002, and 2001 ........................50

  Notes to the Consolidated Financial Statements ..................................... ........................51
</TABLE>





                                       44
<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.  and  subsidiaries  as of  December  31,  2003 and  2002,  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, 2003.
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,  2003 and 2002,  and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 2003, in conformity  with  accounting  principles  generally
accepted in the United States of America.

As discussed in Note 1e to the consolidated financial statements,  Axeda Systems
Inc. adopted Statement of Financial  Accounting  Standard No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002.


/s/KPMG LLP

Philadelphia, Pennsylvania
February 2, 2004


                                       45
<PAGE>
                               AXEDA SYSTEMS INC.
                           CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)

<TABLE>
<CAPTION>

                                                                                           December 31,
                                                                                     ----------------------
                                                                                         2003         2002
                                                                                         ----         ----
ASSETS
Current assets:
<S>                                                                                        <C>          <C>
   Cash and cash equivalents, including restricted cash of  $650 in 2002 .........       9,617       19,065
   Accounts receivable, net of provision for doubtful accounts of $68 in 2003 and
    $84 in 2002 ..................................................................       3,200        3,305
   Prepaid expenses ..............................................................         307          546
   Other current assets ..........................................................         121          427
                                                                                     ---------    ---------
       Total current assets ......................................................      13,245       23,343

   Furniture and equipment, net ..................................................       2,229        3,111
   Goodwill ......................................................................       3,640        3,651
   Identified intangible assets, net .............................................       1,423        2,087
   Other assets ..................................................................         349          321
                                                                                     ---------    ---------
       Total assets ..............................................................   $  20,886    $  32,513
                                                                                     =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of notes payable ..............................................   $     417    $     238
   Accounts payable ..............................................................       1,253        2,448
   Accrued expenses ..............................................................       4,866        8,015
   Income taxes payable ..........................................................         733          616
   Deferred revenue ..............................................................       1,422        1,078
                                                                                     ---------    ---------
       Total current liabilities .................................................       8,691       12,395

Non-current liabilities:
   Other non-current liabilities .................................................         862        1,046
    Financing-related liability ..................................................       2,608         --
                                                                                     ---------    ---------
     Total liabilities ...........................................................      12,161       13,441
                                                                                     ---------    ---------

Commitments and contingencies (note 12)

Stockholders' equity:
   Preferred stock, $.001 par value; 5,000,000 shares authorized in 2003 and 2002,
    none issued or outstanding ...................................................        --           --
   Common stock, $.001 par value 50,000,000 shares authorized; 32,913,211 shares
    issued in 2003 and 27,822,217 shares issued in 2002 ..........................          33           28
   Additional paid-in capital ....................................................     146,644      143,847
   Deferred stock compensation ...................................................        (310)        (578)
   Accumulated deficit ...........................................................    (136,488)    (122,880)
   Accumulated other comprehensive income ........................................         226           35
   Treasury stock at cost, 603,800 shares in 2003 and 2002 .......................      (1,380)      (1,380)
                                                                                     ---------    ---------

       Total stockholders' equity ................................................       8,725       19,072
                                                                                     ---------    ---------
       Total liabilities and stockholders' equity ................................   $  20,886    $  32,513
                                                                                     =========    =========
</TABLE>

          See accompanying notes to the consolidated financial statements.


                                       46
<PAGE>
                               AXEDA SYSTEMS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
<TABLE>
<CAPTION>

                                                                                        Year Ended December 31,
                                                                               --------------------------------------------
                                                                                   2003            2002            2001
                                                                               ------------    ------------    ------------
Revenues:
<S>                                                                                     <C>           <C>             <C>
    License .................................................................  $      9,134    $     12,772    $      6,036
    Services and maintenance ................................................         3,737           3,124             442
    Hardware ................................................................           323           2,233           1,111
                                                                               ------------    ------------    ------------

  Total revenues ............................................................        13,194          18,129           7,589
                                                                               ------------    ------------    ------------
Cost of revenues:
    License .................................................................         1,292           2,849           1,629
    Services and maintenance ................................................         3,694           4,210             223
    Hardware ................................................................             1           1,288           1,122
    Software amortization ...................................................           634           1,943             171
    Inventory charges .......................................................          --              --            18,502
                                                                               ------------    ------------    ------------

  Total cost of revenues ....................................................         5,621          10,290          21,647
                                                                               ------------    ------------    ------------

Gross profit ................................................................         7,573           7,839         (14,058)
                                                                               ------------    ------------    ------------
Research and development
    Non-cash compensation ...................................................           102             163           2,100
    Other research and development expense ..................................         4,992           7,162           5,691
Sales and marketing
    Non-cash compensation and other expense .................................            31              71             147
    Other selling and marketing expense .....................................         8,421          16,642           7,670
General and administrative
    Non-cash compensation ...................................................           476           1,304             780
    Other general and administrative expense ................................         7,421          11,000           9,860
    Provision for doubtful accounts (net of recoveries) .....................           (15)            (45)            929
Depreciation and amortization ...............................................         1,123           1,552           2,844
Special charges .............................................................          --               820            --
Impairment charges ..........................................................          --            22,413           3,916
Acquired in-process research and development ................................          --              --             3,112
                                                                               ------------    ------------    ------------

Total operating costs .......................................................        22,551          61,082          37,049
                                                                               ------------    ------------    ------------

  Operating loss ............................................................       (14,978)        (53,243)        (51,107)

Gains (losses) on disposals of assets .......................................           743            (138)         52,037
Interest income (expense), net ..............................................            19             441           1,753
Other income (expense), net .................................................           806             554            (133)
                                                                               ------------    ------------    ------------

Income (loss) before provision for income taxes (benefit) ...................       (13,410)        (52,386)          2,550
     Provision for income taxes (benefit) ...................................           198            (459)          1,123
                                                                               ------------    ------------    ------------

Net income (loss) ...........................................................  $    (13,608)   $    (51,927)   $      1,427
                                                                               ============    ============    ============

Basic net income (loss) per weighted average common share outstanding .......  $      (0.48)   $      (1.92)   $       0.08
                                                                               ============    ============    ============
Diluted net income (loss) per weighted average common share
 outstanding ................................................................. $      (0.48)   $      (1.92)   $       0.07
                                                                               ============    ============    ============
Weighted average number of common shares outstanding used in calculation
 of basic net income (loss) per common share .................................   28,631,975      27,063,751      18,559,185
                                                                               ============    ============    ============
Weighted average number of common shares outstanding used in calculation
 of diluted net income (loss) per common share ...............................   28,631,975      27,063,751      20,194,713
                                                                               ============    ============    ============
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       47
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                       Additional     Deferred
                                                             Common stock                paid-in      stock          Accumulated
                                                          Shares       Amount           capital     compensation      deficit
                                                          ------       ------         ------------    -------        -------------
<S>                                                      <C>           <C>             <C>            <C>              <C>
Balances as of December 31, 2000 .................        17,594,429        $17        $ 121,330         $(3,241)        $ (72,380)
                                                          ----------        ---        ---------         -------         ---------
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 ......................................              --           --             --              --                --
Reclassification adjustment for available-for-sale
 investment sold .................................              --           --             --              --                --
Net income .......................................              --           --             --              --               1,427
                                                          ----------        ---        ---------         -------         ---------
Balances as of December 31, 2001 .................        27,274,962        $27        $ 143,454         $(1,842)        $ (70,953)
                                                          ----------        ---        ---------         -------         ---------
Issuance of common stock upon exercise of
 options .........................................           207,331         --               53            --                --
Issuance of common stock for employee stock
 purchase plan ...................................            68,085         --               65            --                --

Issuance of equity securities related to Cinax....           271,839          1               (1)           --                --
Compensation related to stock options and warrants              --           --              276              45              --
Amortization of deferred stock
 compensation ....................................              --           --             --             1,219              --
Common stock received as repayment of officer loan
 receivable ......................................              --           --             --              --                --
Foreign currency translation
 adjustment ......................................              --           --             --              --                --
Net loss .........................................              --           --             --              --             (51,927)
                                                          ----------        ---        ---------         -------         ---------
Balances as of December 31, 2002 .................        27,822,217        $28        $ 143,847         $  (578)        $(122,880)
                                                          ----------        ---        ---------         -------         ---------
Issuance of common stock in private placement
 transaction, net                                          4,918,100          5            2,165            --               --
Escrow shares returned from acquisition of eMation, Ltd.     (98,127)        --              182            --               --
Issuance of common stock upon exercise of options
 and warrants.......                                         147,238         --               15            --               --
Issuance of common stock for employee stock
 purchase plan............                                   123,783         --               50            --               --
Compensation related to stock options and warrants              --           --              385            (279)            --
Amortization of deferred stock compensation ....                --           --             --               547             --
Foreign currency translation adjustement.....                   --           --             --              --               --
Net loss........................................                --           --             --              --             (13,608)
                                                          ----------        ---        ---------         -------         ---------
Balances as of December 31, 2003                          32,913,211        $33        $ 146,644           $(310)        $(136,488)
                                                          =========         ===        =========         =======         =========
          See accompanying notes to the consolidated financial statements.
</TABLE>

                                       48
<PAGE>

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

<TABLE>
<CAPTION>
                                                     Accumulated                         Total
                                                      other                           stockholders'       Comprehensive
                                                    comprehensive      Treasury         equity              income
                                                     income (loss)      stock        (deficiency)          (loss)
                                                    --------------   ------------    --------------      ---------------
<S>                                                      <C>           <C>                <C>              <C>
Balances as of December 31, 2000 .................        $(178)        $  (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              112
Reclassification adjustment for available-for-sale
 investment sold .................................           87            --                    87               87
Net income .......................................         --              --                 1,427            1,427
                                                          ---------      -------            --------         --------
Balances as of December 31, 2001 .................        $  21         $(1,341)           $ 69,366         $  1,626
                                                          ----------    --------             -------         ---------
Issuance of common stock upon exercise of
 options .........................................         --              --                    53             --
Issuance of common stock for employee stock
 purchase plan ...................................         --              --                    65             --
Issuance of equity securities related to Cinax
.. ................................................         --              --                  --               --
Compensation related to stock options and warrants         --              --                   321             --
Amortization of deferred stock
 compensation ....................................         --              --                 1,219             --
Common stock received as repayment of officer loan
 receivable ......................................         --               (39)                (39)            --
Foreign currency translation
 adjustment ......................................           14            --                    14               14
Net loss .........................................         --              --               (51,927)         (51,927)
                                                          -----         -------            --------         --------
Balances as of December 31, 2002 .................        $  35         $(1,380)           $ 19,072         $(51,913)
                                                          -----         -------            --------         --------

Issuance of common stock in private placement
 transaction, net                                           --             --                 2,170             --
Escrow shares returned from acquisition of
 eMation, Ltd.                                              --             --                   182             --
Issuance of common stock upon exercise of options
 and warrants.......                                        --             --                    15             --
Issuance of common stock for employee stock
 purchase plan............                                  --             --                    50             --
Compensation related to stock options and warrants          --             --                   106             --
Amortization of deferred stock compensation                 --             --                   547             --
Foreign currency translation adjustment                     191            --                   191             191
Net loss......................................              --             --               (13,608)        (13,608)
                                                         -------       -------              -------         -------
Balances as of December 31, 2003                           $226        $(1,380)              $8,725         $(13,417)
                                                          =====       ========               ======        =========
</TABLE>

        See accompanying notes to the consolidated financial statements.

                                       49
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31,
                                                                                 ----------------------------------
                                                                                  2003         2002        2001
                                                                                  ----         ----        ----
Cash flows from operating activities:
<S>                                                                              <C>         <C>         <C>
  Net income (loss) ..........................................................   $(13,608)   $(51,927)   $  1,427
  Adjustments to reconcile net income (loss) to net cash used in operating
  activities:
    Depreciation and amortization ............................................      1,757       3,495       3,015
    Impairment charges .......................................................       --        22,413       3,916
    (Gains) losses on disposals of assets ....................................       (729)        472     (52,037)
    Unrealized gain on financing-related liability ...........................       (802)       --          --
    Non-cash compensation and other expenses .................................        610       1,523       2,599
    Provision for doubtful accounts (recoveries) .............................        (65)        (97)        929
    Provision for inventory ..................................................       --          --        18,783
     Acquired in-process research and development ............................       --          --         3,112

  Changes in items affecting operations (excluding the effects of acquisitions
  and divestitures):
    Accounts receivable ......................................................        121       1,415       2,252
    Inventories ..............................................................       --         2,070        (895)
    Loan receivable--officer .................................................       --          --           494
    Prepaid expenses and other current assets ................................        589         680      (1,590)
    Other assets and intangible assets .......................................        (17)         35         572
    Accounts payable .........................................................     (1,195)     (2,439)    (15,623)
    Accrued expenses and other current and non-current liabilities ...........     (2,316)     (1,266)      2,257
    Income taxes payable .....................................................        117        (459)      1,075
    Deferred revenue .........................................................        344         152        (765)
                                                                                 --------    --------    --------
Net cash used in operating activities ........................................    (15,194)    (23,933)    (30,479)
                                                                                 --------    --------    --------

Cash flows from investing activities:
  Capital expenditures .......................................................       (293)     (2,334)       (505)
  Net proceeds from sales of assets ..........................................       --          --        68,112
  Acquisition, net of cash acquired ..........................................       --          --           497
                                                                                 --------    --------    --------
Net cash provided by (used in) investing activities ..........................       (293)     (2,334)     68,104
                                                                                 --------    --------    --------

Cash flows from financing activities:
  Net proceeds from issuance of common stock .................................      5,597        --          --
  Net borrowings under bank line of credit ...................................        417        --          --
  Net proceeds from exercise of stock options and warrants ...................         10          53       1,538
  Repayments of long-term debt ...............................................       (238)     (2,084)       --
  Repurchases of common stock ................................................       --          --          (621)
  Repayments under other liabilities .........................................       --          --          (132)
  Repayment of shareholder bridge loan .......................................       --          --          (750)
  Repayments under capital lease obligations .................................       --          --           (38)
                                                                                 --------    --------    --------
Net cash provided by (used in) financing activities ..........................      5,786      (2,031)         (3)

Effect of exchange rate changes on cash and cash equivalents .................        253          14         112
                                                                                 --------    --------    --------

Net increase (decrease) in cash and cash equivalents .........................     (9,448)    (28,284)     37,734

Cash and cash equivalents:
  Beginning of period ........................................................     19,065      47,349       9,615
                                                                                 --------    --------    --------
  End of period, including restricted cash of  $650 in 2002 and $2,549 in 2001   $  9,617    $ 19,065    $ 47,349
                                                                                 ========    ========    ========
</TABLE>
        See accompanying notes to the consolidated financial statements.


                                       50
<PAGE>
                               AXEDA SYSTEMS INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

1)       Summary of Significant Accounting Policies

     a) Description of Business

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

     In December  2001 we  purchased  all of the  outstanding  capital  stock of
     eMation,  Ltd., or eMation,  a private company  organized under the laws of
     the State of Israel and headquartered near Boston,  Massachusetts (note 4).
     In 2003 our revenues  have been  substantially  generated  from selling DRM
     products.

     We have  sustained  significant  net  losses and  negative  cash flows from
     operations since our inception. For the years ended December 31, 2003, 2002
     and 2001,  our net  losses,  excluding  gains and  losses on  disposals  of
     assets, were $14,351, $51,789, and $50,610,  respectively.  There can be no
     assurances that we will be able to generate sufficient revenues or positive
     cash flows from operations necessary to achieve or sustain profitability in
     the short or long term.  Management believes that the current cash and cash
     equivalent amounts will be sufficient to sustain our operations through the
     first quarter of 2005. However,  due to risks and uncertainties,  there can
     be no assurances that our future operating cash flows will be sufficient to
     meet our requirements.  In such event, our operations and liquidity will be
     materially  adversely affected.  Additional  financing may not be available
     when needed and, if such financing is available, it may not be available on
     terms favorable to us.

     Beginning  in the second  quarter of 2002,  we  initiated a series of steps
     designed to  consolidate  and  streamline  our  operations and decrease our
     losses and  corresponding  use of cash. We have halved the number of global
     offices,  reduced  staffing  levels by  approximately  46% and have closely
     monitored our infrastructure costs. We exited the personal computer, or PC,
     business  and  focused  our  efforts on several key markets for DRM Systems
     products.  In 2002 and 2003, we recorded  approximately  $1,900 and $1,400,
     respectively, in restructuring charges to reduce staffing levels, terminate
     certain leases and consolidate our operations. As a result of these actions
     our cash and cash  equivalents  balance  decreased  by  $11,305  and $3,740
     (after taking into  consideration the net $5,597 raised in September 2003 -
     note  10),  during  the  first and  second  halves  of 2003,  respectively.
     Combined with our expected  continued  year over year growth in DRM Systems
     revenues, we believe that future operating losses will continue to be lower
     than in previous years. We will continue to evaluate our cost structure and
     may undertake additional measures to reduce expenses in the future.

     b) Principles of Consolidation

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

     c) Cash and Cash Equivalents

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

                                       51
<PAGE>
     d) 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:

                     Purchased software ........... .. 3-5 years
                     Computer and other equipment . .. 3-5 years
                     Furniture and equipment ...... ..  7 years


     e) Goodwill and Intangible Assets (Note 1f)

     In July 2001, the Financial  Accounting  Standards  Board, or FASB,  issued
     Statement of Financial  Accounting  Standards,  or SFAS, No. 141, "Business
     Combinations,"  or  SFAS  141,  and  SFAS  No.  142,  "Goodwill  and  Other
     Intangible Assets," or SFAS 142. SFAS 141 requires that the purchase method
     of  accounting  be used  for  all  business  combinations.  SFAS  141  also
     specifies  criteria that  intangible  assets  acquired in a purchase method
     business  combination  must meet to be recognized  and reported  apart from
     goodwill.  SFAS 142,  which was  effective  January 1, 2002,  requires that
     intangible  assets with  indefinite  useful  lives  should not be amortized
     until  their  lives are  determined  to be finite and all other  intangible
     assets with finite lives must be amortized over their useful lives to their
     estimated  residual  values.  SFAS 142 also  requires  that goodwill not be
     amortized,  but instead be tested for  impairment  in  accordance  with the
     provisions of SFAS 142 at least  annually or between  annual tests upon the
     occurrence  of certain  events or upon  certain  changes in  circumstances.
     Intangible  assets with finite useful lives are reviewed for  impairment in
     accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
     Long-Lived Assets," or SFAS 144. See "Impairment of Goodwill and Long-lived
     Assets," below.

     We adopted SFAS 141 in 2001.  Effective  July 1, 2001,  we adopted  certain
     provisions of SFAS 142, as required in the  transition  guidance  contained
     therein, and adopted the remaining provisions on January 1, 2002. There was
     not a cumulative  transition adjustment upon adoption as of July 1, 2001 or
     January 1, 2002. SFAS 141 and SFAS 142 required us to perform the following
     as of January  1,  2002:  (i) review  goodwill  and  intangible  assets for
     possible  reclassifications;  (ii) reassess the lives of intangible assets;
     and (iii) perform a transitional  goodwill impairment test. We reviewed the
     balances of goodwill and identifiable intangible assets and determined that
     we did not have any  amounts  that were  required to be  reclassified  from
     goodwill to identifiable intangible assets, or vice versa. We also reviewed
     the useful lives of our identifiable  intangible assets and determined that
     the original  estimated useful lives remain  appropriate.  We completed the
     transitional goodwill impairment test and determined that we did not have a
     transitional impairment of goodwill.

     As required by SFAS 142, we have not  amortized  goodwill  associated  with
     acquisitions  completed  after June 30, 2001 for any period  presented  and
     ceased  amortization  of goodwill  associated with  acquisitions  completed
     prior to July 1, 2001, effective January 1, 2002. Prior to January 1, 2002,
     we amortized  goodwill  associated  with the pre-July 1, 2001  acquisitions
     over four years using the  straight-line  method.  Identifiable  intangible
     assets  (acquired  technology,  patent  applications and customer base) are
     currently amortized over two or five years using the straight-line method.

     We test  goodwill for  impairment  in  accordance  with SFAS 142.  SFAS 142
     requires that  goodwill be tested for  impairment  at the  "reporting  unit
     level," or Reporting Unit, at least annually,  and more frequently upon the
     occurrence of certain  events,  as defined by SFAS 142.  Goodwill is tested
     for impairment  annually,  in the fourth  quarter,  in a two-step  process.
     First,  we determine if the carrying  amount of the Reporting  Unit exceeds
     the "fair value" of the Reporting Unit,  which would indicate that goodwill
     may be impaired.  If we determine that goodwill may be impaired, we compare
     the "implied  fair value" of the  goodwill,  as defined by SFAS 142, to its
     carrying  amount  to  determine  if there  is an  impairment  loss.  If the
     carrying  amount  exceeds  the  implied  fair  value,  we  will  record  an
     impairment charge for the excess, if any, but not in an amount in excess of
     the carrying amount, in the period in which the determination of impairment
     is made. Refer to notes 1f, 4 and 7 for further discussion of acquisitions,
     intangible assets and goodwill.

                                       52
<PAGE>
     Goodwill  represents  the  excess  of cost  over  fair  value of  assets of
     businesses  acquired.  In  accordance  with  SFAS 142,  $3,640 of  goodwill
     acquired subsequent to June 30, 2001, in connection with the acquisition of
     eMation. (notes 1e, 1f and 4), is not being amortized. Also under SFAS 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 and customer base, are being  amortized on a straight-line
     basis over periods from two to five years.  Amortization  expense was $664,
     $2,177 and $2,418 in 2003, 2002 and 2001, respectively.  See notes 1f, 4, 6
     and 7 for further  discussion of acquisitions,  acquired  intangible assets
     and goodwill.

     f) Impairment of Goodwill and Long-Lived Assets

     We evaluate  long-lived  assets,  including  intangible  assets  other than
     goodwill,  for  impairment  under  SFAS 144  whenever  events or changes in
     circumstances  indicate  that the  carrying  value  of an asset  may not be
     recoverable based on expected  undiscounted cash flows attributable to that
     asset.  The amount of any impairment is measured as the difference  between
     the carrying value and the fair value of the impaired asset.

     During  the fourth  quarter  of 2003,  we  performed  the  annual  goodwill
     impairment test (note 1e), which indicated that goodwill was not impaired.

     During the fourth quarter of 2002,  with the assistance of an  independent,
     national  valuation firm, we completed our annual goodwill  impairment test
     under  SFAS 142,  and also  tested  our  identified  intangible  assets for
     impairment  under  SFAS  144.  Due to the  severity  and the  length of the
     industry  downturn,  including the decrease in the fair market value of our
     common stock during 2002,  and  uncertainty of the timing of improvement in
     industry  conditions,  we  revised  our  earnings  forecasts  for  the  DRM
     reporting unit. As a result, we recognized impairment charges of $17,124 to
     reduce  goodwill and $5,290 to reduce the identified  intangible  assets in
     the DRM reporting  unit.  The  impairment  charges  pertain to the core and
     developed  technologies,  customer  list and patent  applications  acquired
     from, and goodwill related to the acquisition of eMation. The weighted fair
     value of the DRM  reporting  unit was estimated  using the Market  Approach
     (70%) and the Income Approach (30%). The market approach  weighted the fair
     values  determined  by valuing  the market  value of our common  stock (the
     Quoted Price  Methodology  - 35%),  transactions  of minority  interests in
     publicly-traded  companies  engaged  in a  similar  business  to ours  (the
     Exchange Method - 30%) and the median  value-to-revenue  multiple of recent
     transactions  in  the  software  industry,  adjusted  for  term  debt  (the
     Acquisition  Method - 5%).  The  income  approach  weighted  the fair value
     determined  by the  expected  present  value  of  future  cash  flows  (the
     Discounted  Cash Flow  Methodology - 30%). The fair value of the identified
     intangible assets was determined using the expected present value of future
     cash flows. The aggregate  charges of $22,414 recorded in 2002 are included
     in  impairment  charges  in  the  accompanying  consolidated  statement  of
     operations.

     In 2001, we recognized an impairment  charge of $2,199 to reduce the amount
     of goodwill and intangible  assets  associated with a prior  acquisition to
     their estimated fair value of zero. The impairment  charge was attributable
     to  certain   technology   acquired  from,  and  goodwill  related  to  the
     acquisition  of Cinax  Designs Inc. in 2000.  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 did not anticipate  material
     future sales of the  products.  Also in 2001,  we  recognized an impairment
     charge of  $1,716  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  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 did not anticipate any material  future sales of products
     incorporating this technology.  The aggregate amount of impaired long-lived
     assets of $3,915 recorded in 2001 is included in impairment  charges in the
     accompanying consolidated statement of operations.

                                       53
<PAGE>
     g) Revenue Recognition

     Since December 2001, we license our DRM system products to customers in the
     industrial,  building automation,  technology,  medical instrumentation and
     office and semiconductor  equipment  industries (note 4). Prior to December
     2001, our primary revenue categories consisted of: software licenses for PC
     and consumer  electronics,  or CE, products,  including  Digital  Versatile
     Disc,  or DVD (note 5);  Internet  Appliance,  or 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.

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

     For software arrangements that include multiple elements, SOP 97-2 requires
     us to allocate the fee to the individual  elements based on vendor-specific
     objective evidence of fair value, or VSOE,  regardless of the prices stated
     within the  contract.  VSOE is generally  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,   we  allocate  revenue  to  the  delivered   elements  of  the
     arrangement using the residual value method.  Therefore,  we defer 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, or 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 our separate sales 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.

     Our Axeda Supervisor, Axeda @aGlance/IT, Axeda Web@aGlance, Axeda Connector
     and Axeda  FactorySoft  OPC  products may be sold on a per-unit  basis.  In
     cases where we sell such DRM  products on a per-unit  basis,  revenues  are
     recognized when the product ships to an OEM, distributor or end user.

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

     Revenues   related   to   development   contracts   involving   significant
     modification  or  customization  of hardware or software under  development
     arrangements  are  recognized  in accordance  with the  provisions of AICPA
     Statement   of   Position   81-1,    "Accounting    for    Performance   of
     Construction-Type  and  Certain  Production-Type  Contracts,"  or SOP 81-1,
     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,  we apply  the
     percentage-of-completion  method  of  contract  accounting  to  the  entire
     arrangement.  For arrangements  that include services that, under SOP 97-2,
     qualify for separate  accounting,  we follow the provisions of SOP 97-2 and
     allocate  revenues to the services  element based on VSOE and recognize the
     revenues as the services are  performed.  Revenues  related to services are
     recognized  upon  delivery of the service in the case of time and  material
     contracts.  Losses on contracts are recognized  for the entire  anticipated
     loss, if any, as soon as the loss becomes evident.

                                       54
<PAGE>
     h) 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."  Amortization  of
     capitalized  software costs is computed on a  straight-line  basis over the
     estimated  economic life of the product (notes 4 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  consolidated statements 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," or 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 our  operating  results or
     financial position.

     i) Advertising Costs

     Advertising costs are expensed as incurred.  Advertising  expense was $311,
     $1,125 and $1,908 for the years ended  December  31,  2003,  2002 and 2001,
     respectively.

     j) Income Taxes

     Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
     for Income  Taxes," or SFAS 109.  Under the asset and  liability  method of
     SFAS 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.

     k) Financial Instruments

     Our financial instruments principally consist of cash and cash equivalents,
     accounts receivable, accounts payable and notes payable that are carried at
     cost,  which  approximates  fair  value.  The  financing-related  liability
     financial instrument is recorded at fair value (note 10).

     l) Stock-based Compensation

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

                                       55
<PAGE>
     At December 31, 2003 we have two stock-based  employee  compensation plans,
     which are described more fully in note 11. We account for those plans under
     the  recognition   and  measurement   principles  of  APB  25  and  related
     interpretations.  The following table  illustrates the effect on net income
     (loss) and net income  (loss)  per share if we had  applied  the fair value
     recognition provisions of SFAS 123 to stock-based compensation:
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                                                -----------------------
                                                                           2003          2002         2001
                                                                           ----          ----         ----
<S>                                                                  <C>           <C>           <C>
     Net income (loss), as reported.........................         $  (13,608)   $  (51,927)   $   1,427
     Add:  Stock-based employee compensation included in
      reported net income, net of related tax effects ..............        609         1,538        3,027
     Deduct: Total stock-based employee compensation expense
      determined under fair value based method for all awards,
      net of related tax effects ...................................     (2,560)       (4,860)      (4,369)
                                                                     ----------    ----------    ---------
     Pro forma
                                                                     $  (15,559)   $  (55,249)   $      85
                                                                     ==========    ==========    =========

Net income (loss) per common share - basic:
     As reported ................................................... $    (0.48)   $    (1.92)   $    0.08
                                                                     ==========    ==========    =========
     Pro forma ..................................................... $    (0.54)   $     (2.04)  $    0.00
                                                                     ==========    ===========   =========
Net income (loss) per common share - diluted:
     As reported ................................................... $    (0.48)   $    (1.92)   $    0.07
                                                                     ==========    ==========    =========
     Pro forma ..................................................... $    (0.54)   $    (2.04)   $    0.00
                                                                     ==========    ==========    =========
</TABLE>

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

                                           2003           2002         2001
                                          ----           ----         ----
     Dividend yield.....................      0%            0%           0%
     Expected volatility................    116%          145%         192%
     Average expected option life....... 4 years       4 years      4 years
     Risk-free interest rate............   1.28%         1.41%        2.28%

     m) 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  statements  and  the  reported
     amounts of revenues and expenses during the reporting  period.  Significant
     items subject to estimates in these financial  statements  include goodwill
     and  intangible  assets,  valuation  allowances  for  accounts  receivable,
     deferred tax assets and deferred tax  liabilities and foreign income taxes.
     Actual results could differ from those estimates.

     n) Foreign Currency Translation

     Except for our subsidiary in Israel, we consider the functional currency of
     our foreign  subsidiaries to be the local currency,  and  accordingly,  the
     foreign  currency is translated  into U.S.  dollars using exchange rates in
     effect at period end for assets and liabilities and average  exchange rates
     during each reporting period for the results of operations.  The functional
     currency  of  our  Israeli  subsidiary  is  the  U.S.  dollar.  Adjustments
     resulting from translation of foreign subsidiary  financial  statements are
     reported in accumulated other comprehensive  income (loss). Gains or losses
     on foreign currency  transactions are recognized in current  operations and
     historically  have not been  significant  to our  operating  results in any
     period  presented.  For the year ended  December 31, 2002,  we recorded net
     foreign currency gains of $67, primarily from our operations in Israel.

                                       56
<PAGE>
     o) Computation of Net Income (Loss) Per Share

     We compute earnings per share in accordance with SFAS No. 128, "Computation
     of Earnings Per Share," or SFAS No. 128. In accordance with SFAS 128, basic
     earnings per share is computed using the weighted  average number of common
     shares  outstanding  during  the  period.  Diluted  earnings  per  share is
     computed using the weighted  average  number of common and dilutive  common
     equivalent shares outstanding  during the period.  Common equivalent shares
     consist of the  incremental  common  shares  issuable  upon the exercise of
     stock  options and warrants  (using the  treasury  stock  method),  and the
     incremental  common shares  issuable upon the conversion of the convertible
     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 (loss):

          i) Year Ended December 31, 2003

              Options to purchase 5,720,641 shares of common stock with a
              weighted-average exercise price of $1.76 were outstanding during
              the year ended December 31, 2003 but were not included in the
              computation of diluted EPS because the effects of assumed
              conversion or exercise would have an anti-dilutive effect on EPS.
              The outstanding options include 3,208,601 options that are vested,
              with a weighted average exercise price of $2.01, of which
              1,389,083 are vested and in the money, with a weighted average
              exercise price of $0.15. The options have various expiration dates
              during the next 10 years.

              Warrants to purchase 1,019,625 shares of common stock with a
              weighted-average exercise price of $2.37 were vested and
              outstanding, including 673,712 warrants with a weighted average
              exercise price of $1.71 that were not exercisable as of December
              31, 2003, during the year ended December 31, 2003, but were not
              included in the calculation of diluted EPS because the effects of
              assumed conversion or exercise would have an anti-dilutive effect
              on EPS. The outstanding warrants include 163,345 warrants that are
              in the money, with a weighted average exercise price of $0.51. The
              warrants have various expiration dates during the next 5 years.

          ii) Year Ended December 31, 2002

          Options to purchase  5,078,819 of common stock with a weighted-average
          exercise  price of  $1.95  were  outstanding  during  the  year  ended
          December 31, 2002 but were not included in the  computation of diluted
          EPS because the effects of assumed  conversion or exercise  would have
          an  anti-dilutive  effect  on EPS.  The  outstanding  options  include
          2,115,396  options that are vested,  with a weighted  average exercise
          price of $2.69,  of which 738,640 are vested and in the money,  with a
          weighted  average  exercise  price of $0.01.  The options have various
          expiration dates during the next 10 years.

          Warrants  to  purchase   464,191   shares  of  common   stock  with  a
          weighted-average  exercise price of $3.28 were vested and  outstanding
          during the year ended  December 31, 2002, but were not included in the
          calculation  of diluted EPS because the effects of assumed  conversion
          or exercise would have an anti-dilutive effect on EPS. The outstanding
          warrants  include  243,919  warrants that are vested and in the money,
          with a weighted  average  exercise  price of $0.28.  The  warrants are
          fully  vested  and have  various  expiration  dates  during the next 5
          years.

                                       57
<PAGE>
iii) Year Ended December 31, 2001
<TABLE>
<CAPTION>
                                                                    Income         Shares          Per-Share
                                                                  (Numerator)   (Denominator)       Amount
                                                                  -----------   -------------       ------
<S>                                                            <C>                <C>              <C>
Basic EPS
    Net income available to common stockholders ............   $        1,427      18,559,185       $  0.08
                                                               --------------      ----------       -------

Effect of Dilutive Securities
     Warrants ..............................................            --            218,258
     Outstanding options ...................................            --            658,879
     Contingently issuable shares ..........................            --            758,391
                                                                      ------       ----------

Diluted EPS
     Net income available to common stockholders and
      assumed conversions ..................................   $        1,427      20,194,713       $  0.07
                                                               ==============      ==========       =======
</TABLE>

          Options  to  purchase   2,001,263   shares  of  common  stock  with  a
          weighted-average  exercise price of $4.15 were outstanding  during the
          year ended December 31, 2001 but were not included in the  computation
          of diluted EPS because the effects of assumed  conversion  or exercise
          would have had an anti-dilutive effect on EPS. The outstanding options
          included  1,226,192 options that were vested,  with a weighted average
          exercise  price of $3.45,  of which  383,214  were  vested  and in the
          money,  with a weighted  average  exercise price of $0.01. The options
          had various expiration dates during the next 10 years.

          Warrants  to  purchase   815,907   shares  of  common   stock  with  a
          weighted-average  exercise price of $4.86 were vested and  outstanding
          during the year ended  December 31, 2001, but were not included in the
          calculation  of diluted EPS because the effects of assumed  conversion
          or exercise would have been  anti-dilutive.  The outstanding  warrants
          include  243,919  warrants  that were vested and in the money,  with a
          weighted  average  exercise  price of $0.22.  The warrants  were fully
          vested and had various expiration dates during the next 5 years.

     p)  Guarantees

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

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

     q) Recent Accounting Pronouncements

     On December 17, 2003, the Staff of the Securities and Exchange  Commission,
     or SEC,  issued Staff  Accounting  Bulletin  No. 104, or SAB 104,  "Revenue
     Recognition,"  which supersedes SAB 101, "Revenue  Recognition in Financial
     Statements."  SAB  104's  primary  purpose  is to  rescind  the  accounting
     guidance  contained  in  SAB  101  related  to   multiple-element   revenue
     arrangements that was superseded as a result of the issuance of EITF 00-21,
     "Accounting for Revenue  Arrangements with Multiple  Deliverables," or EITF
     00-21.   Additionally,   SAB  104  rescinds  the  SEC's  related   "Revenue
     Recognition in Financial Statements Frequently Asked Questions and Answers"
     issued  with SAB 101  that had been  codified  in SEC  Topic  13,  "Revenue
     Recognition."  While the  wording of SAB 104 has  changed  to  reflect  the
     issuance  of EITF  00-21,  the revenue  recognition  principles  of SAB 101
     remain  largely  unchanged by the issuance of SAB 104,  which was effective
     upon  issuance.  The  adoption  of SAB 104 did not  have an  effect  on our
     financial position or results of operations.

                                       58
<PAGE>
     In November  2002,  the FASB  issued  Interpretation  No. 45,  "Guarantor's
     Accounting and Disclosure  Requirements for Guarantees,  Including Indirect
     Guarantees of Indebtedness of Others - an Interpretation of FASB Statements
     No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34," or FIN 45.
     FIN 45 requires  that a guarantor  recognize,  at the  inception of certain
     guarantees,  a liability for the fair value of the obligation undertaken in
     issuing  such  guarantee.   FIN  45  also  requires  additional  disclosure
     requirements about a guarantor's  obligations under certain guarantees that
     it has issued. The initial  recognition and measurement  provisions of this
     interpretation  are applicable on a prospective  basis to guarantees issued
     or modified  after December 31, 2002 and the  disclosure  requirements  are
     effective for financial  statement  periods ending after December 15, 2002.
     We added certain  disclosures in our consolidated  financial  statements to
     reflect the guidance proscribed in FIN 45; however,  the adoption of FIN 45
     did not have a significant  impact on our results of operations,  financial
     position or cash flows.

     In  November  2002,  the EITF  reached  a  consensus  on issue  No.  00-21,
     "Accounting  for Revenue  Arrangements  with Multiple  Deliverables,"  on a
     model to be used to  determine  when a revenue  arrangement  with  multiple
     deliverables  should be divided into separate  units of accounting  and, if
     separation is  appropriate,  how the  arrangement  consideration  should be
     allocated  to the  identified  accounting  units.  The EITF also  reached a
     consensus   that  this  guidance   should  be  effective  for  all  revenue
     arrangements  entered into in fiscal periods beginning after June 15, 2003.
     The  adoption  of EITF  00-21  did not have an  effect  on our  results  of
     operations or financial position.

     In March  2003 the FASB  added a project  to its  agenda  that will seek to
     improve  the   accounting   and   disclosures   relating   to   stock-based
     compensation,  The FASB continued its deliberations on this project through
     the fourth  quarter of 2003,  and plans to issue an  Exposure  Draft in the
     first  quarter  of  2004.  The  FASB  has  set a  goal  of  completing  its
     redeliberations and issuing a final statement in the third quarter of 2004.
     The effective date of the proposed  standard would be for all  equity-based
     compensation  awards granted,  modified or settled in years beginning after
     December 15, 2005, with early adoption permitted.

     In March and May 2003, respectively,  the United States Congress introduced
     proposed  legislation titled the Broad-Based Stock Option Plan Transparency
     Act (H.R. 1372 and S. 979,  respectively),  or the Transparency  Bill, that
     calls for a three-year  moratorium  on mandatory  expensing of  stock-based
     compensation and directs the Securities and Exchange Commission to call for
     improved  disclosure on employee stock option plans.  H.R. 1372 directs the
     SEC to require,  by rule,  enhanced  reporting  disclosures of all employee
     stock options given by  publicly-traded  companies.  Additionally,  the SEC
     would not be permitted to recognize any new accounting  standard related to
     stock  options  until  they  have  submitted  a report to  Congress  on the
     effectiveness  of the new  disclosures,  following  a three year  period of
     study.  The  Transparency  Bill would also  require  that the  Secretary of
     Commerce spend one year studying the impact of  broad-based  employee stock
     option plans in expanding corporate ownership,  recruiting skilled workers,
     stimulating   research  and  innovation  and  growing  the  U.S.   economy.
     Committees  and  subcommittees  of the House and Senate are  reviewing  the
     Transparency Bill.

     In November 2003 the United States Congress introduced proposed legislation
     titled  the Stock  Option  Accounting  Reform  Act (H.R.  3574 and S. 1890,
     respectively),  or the Reform Bill, that would require mandatory  expensing
     of stock options  granted to executive  officers.  The Reform Bill provides
     for limited exemptions to the expensing requirement, but also prohibits the
     SEC from recognizing any accounting  principle as generally accepted unless
     and until the Secretary of Commerce and Secretary of Labor complete a joint
     study on the  impact  of the  mandatory  expensing  of all  employee  stock
     options.  Committees or subcommittees of the House and Senate are reviewing
     the Reform Bill and conducting hearings.

     In May 2002 the FASB added a project to its  technical  agenda to develop a
     comprehensive  Statement  of  Financial  Accounting  Standards  on  revenue
     recognition.  The FASB plans to issue Exposure  Drafts for the Statement in
     the latter part of 2004, and to finalize them in 2005.

     r) Reclassifications

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

                                       59
<PAGE>
2) Furniture and Equipment

Furniture and equipment consist of the following at December 31, 2003 and 2002:
<TABLE>
<CAPTION>

                                                                  2003             2002
                                                                  ----             ----
        <S>                                                    <C>             <C>
           Furniture and fixtures............................... $  647          $  793
           Leasehold improvements..............................   1,117           1,145
           Computer and other equipment                           1,627           1,670
           Purchased software                                     1,003             851
                                                                  -----             ---
                                                                  4,394           4,691
           Less: accumulated depreciation and amortization        2,165           1,579
                                                                  -----           -----

           Furniture and equipment, net                          $ 2,229         $ 3,111
                                                                 =======         =======
</TABLE>

         Depreciation expense was $1,093, $1,319 and $597 for the years ended
December 31, 2003, 2002 and 2001, respectively.

3)       Restricted Cash

Restricted cash consisted of a portion of the sales price, held by a third party
in escrow for indemnification  purposes,  related to the 2001 sale of the assets
of our IA business totaling $550. The remaining escrow balance had been withheld
pending the  settlement  of a claim  submitted  by Phoenix  and was  included in
restricted  cash in the  consolidated  balance sheet as of December 31, 2002. In
March 2003 we entered  into a  confidential  settlement  agreement  with Phoenix
Technologies  and the remaining $550 of the purchase price was paid to us and is
no longer restricted.

4)       Acquisition

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 and
headquartered near Boston, Massachusetts, a developer of Internet-based
solutions that extract and manage information from intelligent devices and make
that information available to people and business systems. As a result of the
acquisition, we are a provider of DRM solutions worldwide. The results of
eMation's operations are included in our consolidated financial statements since
the date of acquisition.

We acquired eMation in consideration for: 8,000,000 shares of Axeda common
stock, valued at $17,440; 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 our 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 $2,570. The total
combined value of the securities assumed and issued was $20,010 and we incurred
transaction costs of $3,415 related to the acquisition, for an aggregate
purchase price of $23,425. We also assumed approximately $5,000 of eMation net
debt.

The value of the common stock issued was determined based on the average market
price of our 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. We
expensed $3,112 of the purchase price as in-process research and development, or
IPR&D, in connection with the eMation acquisition.

We also issued or assumed warrants at closing exercisable for up to 108,240
shares of Axeda common stock with exercise prices ranging from $4.88 to $21.51
per share to holders of warrants exercisable for shares of eMation. Prior to the
acquisition, we loaned eMation $4,300, with an interest rate of 3-month LIBOR
plus 2.5%, for working capital purposes. On the date of the closing of the
transaction, we paid certain employees of eMation for joining us sign-on bonuses
totaling $300.
                                       60
<PAGE>
An aggregate of 1,600,000 shares of our common stock issued in the eMation
acquisition was deposited with a third party escrow agent to be held in escrow
to compensate us for certain losses and taxes that may have arisen as a result
of the eMation acquisition. This escrow arrangement expired February 21, 2003.
In February 2003 98,127 shares were returned to us from escrow.



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

    Current assets ................................................   $  3,856
    Property and equipment ........................................      1,168
    Identified intangible assets ..................................      9,745
    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
                                                                      ========

     The   acquired   identifiable   intangible   assets  that  are  subject  to
     amortization consist of the following:

                                 December 31, 2003      December 31, 2002
                                -----------------       -----------------
                                          Weighted                Weighted
                                          Average                 Average
                                        Estimated                 Estimated
                                       Useful Life              Useful Life
                               Amount   (Years)         Amount   (Years)
        Developed Technology   $  210       -*          $  210        1
        Core Technology ....    1,840        3           1,840        4
        Customer Base ......      110        3             110        4
                               ------   ------          ------   ------
        Total ..............   $2,160        3          $2,160        4
                               ======   ======          ======   ======


 * - fully amortized as of December 31, 2003

     The amount allocated to IPR&D was determined by independent appraisal.  The
     projects in  progress,  the next  generation  DRM  product  and  industrial
     automation   products,   required   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  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.

                                       61
<PAGE>
     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," or 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  corresponded  to 530,000 of the
     total 1,550,000 stock options and warrants assumed and issued,  of $847 was
     deducted  from the fair value of the awards for purposes of the  allocation
     of the purchase  price and  allocated to deferred  stock  compensation.  We
     amortized this amount over the respective vesting periods of 6 to 24 months
     and  recorded  approximately  $359,  $439 and $40 of non-cash  compensation
     expense in 2003, 2002 and 2001, respectively, related to these awards.

     The  following  unaudited  pro forma  information  is  presented  as if the
     acquisition of eMation  occurred as of the beginning of 2001. 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.

         Revenues........................................ $ 18,148
                                                          ========

         Net loss....................................... $ (17,718)
                                                         =========
         Basic and  diluted net loss per  weighted
           average common share outstanding ............. $ (0.68)
                                                          =======

5) Transaction With Sonic Solutions

     In May 2002 we  entered  into a  Software  Distribution  Agreement,  or the
     Agreement,  with Sonic IP, Inc.,  or Sonic,  a  wholly-owned  subsidiary of
     Sonic  Solutions.  As a result,  we exited the  digital  media  market (see
     discussion  of  Services,  below) and, as of June 30, 2002,  terminated  or
     assigned to Sonic,  substantially  all of the customer  contracts of our PC
     business.  Under the terms of the  Agreement,  Sonic paid us $2,000 for the
     exclusive and perpetual license to all of the intellectual  property, or IP
     of our PC business,  which was delivered  effective with the closing of the
     Agreement,  and  for  certain  furniture  and  computer  equipment,  or the
     Equipment.  The  Equipment,  which had a net book value  totaling $331, was
     used by the  employees  of our PC  business  and was not  essential  to the
     functionality  of the licensed IP. Sonic also received  certain  trademarks
     and  World  Wide Web  domain  names  associated  with the PC  business.  In
     connection  with the  closing  of the  Agreement,  approximately  10 of our
     employees in the PC business  accepted  employment offers from Sonic and we
     paid inducements to those employees  related to their  acceptance  totaling
     $107. These  inducements were paid in June 2002 and are included in special
     charges in the  accompanying  consolidated  statement of operations for the
     year ended December 31, 2002. In addition,  the Axeda stock options held by
     certain  of these  employees  were  modified  to  accelerate  vesting  upon
     termination.  In May  2002 we  recorded  a  charge  of $24  related  to the
     modifications,  which is  included in special  charges in the  consolidated
     statement of  operations  for the year ended  December 31, 2002.  Under the
     terms  of  the   Agreement  we  also  agreed  to  designate  our  remaining
     approximately  14  employees  of the PC  business  to  provide  unspecified
     services to Sonic to create  improvements,  R&D  information,  and computer
     software  (collectively,  the  "Services")  through  December 31, 2002.  We
     provided  the  Services  for May  through  August  2002 as part of the base
     license agreement without  additional charge to Sonic. Sonic maintained the
     Services  agreement  through  December 31, 2002, and paid Axeda $423, which
     approximated  our cost,  for the Services  provided from August to December
     31, 2002. The Services fees were  recognized as services  revenues  ratably
     over the period.  For the year ended December 31, 2002, we recognized  $423
     of services revenues and cost of revenues related to these services.

     Because we did not have vendor-specific  evidence of fair value for each of
     the  elements of this  license  arrangement,  and  because we provided  the
     Services  to Sonic  after  the  initial  delivery  of the  licensed  IP, we
     recognized the $2,000 license fee on a  straight-line  basis over the seven
     months  ended  December  31,  2002,  which was the period that we agreed to
     provide  the  Services.  Approximately  $166 of the net  book  value of the
     Equipment was charged to expense and was included in special charges in the
     accompanying  consolidated  statement  of  operations  for the  year  ended
     December 31, 2002.  The  remaining net book value of the Equipment of $165,
     which was  attributed to the  Equipment  that was utilized by our employees
     who provided the services to Sonic through December 31, 2002, was amortized
     over the seven-month term of the Services.
                                       62
<PAGE>
     Also as part of our  strategy  to exit  the PC  business,  we  vacated  our
     offices  in San  Jose,  California  in May  2002,  and,  in July  2002,  we
     terminated  our lease for this  facility.  The  original  term of the lease
     ended in March 2005. In July 2002, we paid $135,  including $64 held by the
     lessor as security  from the  inception  of the lease,  to the lessor as an
     inducement  to cancel  the lease.  We also paid $210 in July 2002 and,  for
     nominal  consideration,  sold furniture,  computer  equipment and leasehold
     improvements  to the new  lessee as  incentives  to the new lessee to enter
     into a lease for the premises  with the lessor.  The total cash payments of
     $345,  including the foregone security  deposit,  and the net book value of
     the assets sold of $168 are included in special charges in the accompanying
     consolidated statement of operations for the year ended December 31, 2002.

     A summary of special charges recorded for the year ended December 31, 2002,
     all in connection with our exit from the PC business, is as follows:

          Net book value of equipment.......  $ 166
          Employee termination expenses.....    130
          Inducements to other employees....     11
          Lease termination costs...........    513
                                                ---
          Total special charges               $ 820
                                              =====

6) Acquired Intangible Assets (note 1e and 1f)

Acquired intangible assets that are subject to amortization at December 31, 2003
and 2002, consist of the following:
<TABLE>
<CAPTION>

                               Gross Carrying Amount            Accumulated Amortization
                               ---------------------            ------------------------
                               2003             2002              2003            2002
                               ----             ----              ----            ----
<S>                         <C>              <C>                  <C>           <C>
Developed Technology ......   $  210           $  210             $210           $  21
Core Technology ...........    1,840            1,840              497              50
Customer Base .............      110              110               30               2
                                 ---              ---               --              --
     Total ................  $ 2,160          $ 2,160             $737           $  73
                             =======          =======             ====            =====
</TABLE>


Aggregate  amortization  expense was $664, $2,200 and $2,400 for the years ended
December 31, 2003, 2002 and 2001, respectively.  Estimated aggregate expense for
each of the next 3 years is as follows:

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

                                       63
<PAGE>
7) Goodwill (note 1e and 1f)

The changes in the gross carrying  amount of goodwill,  all  attributable to our
DRM segment, for the years ended December 31, 2003 and 2002, are as follows:

             Balance as of December 31, 2001 .......... $ 20,819
                                                        ========
             Impairment charges....... ................  (17,168)
                                                        ========
             Balance as of December 31, 2002... .......  $ 3,651
                                                         =======
             Other ....................................     (11)
                                                            ====
             Balance as of December 31, 2003 ..........   $3,640
                                                          ======

     Goodwill acquired in 2001 is not deductible for income tax purposes.

     Summarized below are the effects on net income and net income per share
     data, if we had followed the amortization provisions of SFAS 142 for 2001:

       Reported net income .......................... $1,427
       Add Back:  Goodwill amortization .............  2,246
                                                       -----
       Adjusted net income ..........................  3,673
                                                       =====

       Basic earnings per share:
                Reported net income .................  $0.08
                Goodwill amortization ...............   0.12
                                                        ----
                Adjusted net income .................  $0.20
                                                       =====
       Diluted earnings per share:
                Reported net income .................  $0.07
                Goodwill amortization ...............   0.11
                                                        ----
                Adjusted net income .................  $0.18
                                                       =====

8)       Line of Credit

      In June 2003 we executed a loan and security agreement with Silicon Valley
      Bank, or the Bank, that provides us with a line of credit, or the Line, in
      the amount of the lesser of $2,000 or the borrowing base, as defined
      (limited to a percentage of eligible accounts receivable). The Line also
      provides for a maximum of $1,000 in the form of letters of credit or other
      services from the Bank that reduces the amount of available borrowings
      under the Line. The Line matures in June 2004, bears interest at the prime
      rate plus 1% (5.25% at December 31, 2003), with a minimum rate of 5.25%,
      and is collateralized by substantially all of our assets. We are required
      to comply with a tangible net worth covenant, as defined in the loan and
      security agreement, and a minimum available cash (including amounts
      available but undrawn under the Line) covenant. At December 31, 2003 there
      were no letters of credit or other amounts for bank services outstanding
      under the Line. At December 31, 2003, we were in compliance with our
      covenants and approximately $567 was available and $417 was outstanding
      under the terms of the Line at December 31, 2003.


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

                                       64
<PAGE>
9) Accrued Expenses

Accrued expenses consist of the following:

                                                  December 31,
                                                  2003     2002
                                                ------   ------
Legal and professional fees ....................$  558   $1,202
Payroll and related costs ...................... 1,477    2,778
Severance ......................................    88      355
Unutilized leased facilities ...................   547      566
Royalties to Israeli government agencies .......   759      828
Legal settlements ..............................  --        277
Sales, excise and other taxes ..................   266      689
Other .......................................... 1,171    1,320
                                                ------   ------
                                                $4,866   $8,015
                                                ======   ======


10) Equity Transactions and Capital Stock

Private Placement

On September 23, 2003, we issued 4,918,100 shares of our common stock to certain
accredited  investors  in a  private  investment  in  public  equity,  or  PIPE,
financing. The shares were sold at $1.22 per share with net proceeds of $5,597.

In connection with the PIPE financing,  we also issued to the investors warrants
exercisable  for the purchase of up to an  aggregate of 2,459,050  shares of our
common  stock at an initial  exercise  price of $1.71 per  share.  The number of
shares issuable upon exercise of the warrants and the exercise price thereof are
subject to adjustment  for stock splits and similar  transactions.  In addition,
the number of shares  issuable  upon  exercise of the  warrants and the exercise
price are  subject to  adjustment  on a weighted  average  basis in the event of
certain dilutive financings,  subject to customary exceptions.  The warrants are
exercisable  any time  beginning  March 23, 2004  through  September  23,  2008,
provided that,  subject to certain  limitations,  any unexercised  warrants will
expire upon 30 days  notice if the closing bid price of a share of common  stock
on NASDAQ equals or exceeds $3.42  (appropriately  adjusted for any stock split,
recapitalization  or similar  event) for twenty  consecutive  trading days after
September 23, 2005.

The number of shares of common  stock that may be acquired  upon any exercise of
any of the warrants is limited to the extent necessary to insure that, following
such  exercise,  the total  number of shares of common  stock then  beneficially
owned by such  exercising  holder and its affiliates  does not exceed 19.999% of
the total number of issued and outstanding shares of common stock.

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

The FASB's Emerging Issues Task Force ("EITF") Issue No. 00-19,  "Accounting for
Derivative  Financial  Instruments  Indexed  to, and  Potentially  Settled in, a
Company's Own Stock", or EITF 00-19,  addresses accounting for equity derivative
contracts  indexed to, and  potentially  settled in, a company's  own stock,  or
equity derivatives,  by providing guidance for distinguishing  between permanent
equity,  temporary equity and assets and  liabilities.  EITF 00-19 addresses and
clarifies whether specific contract  provisions or other  circumstances  cause a
net-share or physical settlement alternative to be within or outside the control
of the  issuer.  Under  EITF  00-19,  to  qualify  as  permanent  equity all the
following  criteria must be met: the equity derivative  contract must permit the
company to settle in  unregistered  shares,  the  company  must have  sufficient
authorized but unissued  shares  available to settle the contract,  the contract
must  contain an  explicit  limit on the number of shares to be  delivered  in a
share  settlement,  there  can  be  no  requirement  in  the  contract  to  post
collateral,  there can be no "make whole" provisions in the contract,  there can
be no provisions  that could require a net cash  settlement to the holder of the
contract  and there can be no  provisions  in the  contract  that  indicate  the
counterparty  has rights that rank  higher  than those of a common  shareholder.
Equity  derivative  contracts  accounted for as permanent equity are recorded at
their initial fair value and subsequent changes in fair value are not recognized
unless a change  in the  contracts'  classification  occurs.  Equity  derivative
contracts not  qualifying for permanent  equity  accounting are recorded at fair
value as an asset or liability with subsequent  changes in fair value recognized
through the statement of operations.
                                       65
<PAGE>
EITF 00-19  provides that the ability to keep SEC filings  current is beyond the
control of a registrant.  Therefore,  the potential liquidated damages we may be
required to pay pursuant to the registration rights agreement if we fail to keep
our registration statement effective is a potential net cash settlement pursuant
to EITF 00-19.  While we view this  liquidated  damages  contingency  as neither
probable nor reasonably  estimable,  we recorded the estimated fair value of the
warrant as of September 23, 2003 of $3,410 as a  financing-related  liability in
the consolidated  balance sheet in accordance with EITF 00-19. The fair value of
the financing-related liability is adjusted at each balance sheet date, with the
non-cash  change  in  fair  value  reported  in the  consolidated  statement  of
operations  as other income or expense.  Upon the earlier of the exercise of the
warrants or the  expiration  of the period for which  liquidated  damages may be
assessed against us, the fair value of the  financing-related  liability will be
reclassified to additional paid-in capital.

The estimated fair value of the  financing-related  liability as of December 31,
2003 was $2,608.  The $802 net change in the fair value from  September 23, 2003
was recorded as other income in the consolidated statement of operations.

The estimated fair value of the warrant was calculated  using the  Black-Scholes
model and using the following assumptions:

                                         December 31, 2003    September 23, 2003
                                         -----------------    ------------------
Current market price/share ............   $     1.36                $     1.70
Exercise price/share ..................   $     1.71                $     1.71
Dividend yield ........................            0%                        0%
Expected volatility ...................          115%                       115%
Expected life .........................        4.7 years                 5 years
Risk-free interest rate ...............         3.13%                      3.13%


 Other Equity Transactions

         In May 2002 we reached an agreement with a former officer to re-pay a
portion of the remaining balance of a loan for $160 that was originally extended
to the officer in February 2000. The officer previously paid $15 of the loan,
leaving a balance of $145. Under the agreement, in June 2002, the former officer
paid us $50 and surrendered 20,000 shares of Axeda common stock held by the
former officer. On the day that we received the shares, the fair market value of
our common stock was $1.97 per share. As a result, during the quarter ended June
30, 2002, we recorded treasury stock of $39. The aggregate amount of $89 was
recorded as a recovery of bad debt expense in the consolidated statement of
operations for the year ended December 31, 2002.

11) Stock Options, Stock Purchases and Warrants

     a) Stock Options

     We adopted the 1995 Stock Option Plan, or 1995 Plan, in May 1995.  The 1995
     Plan provided for the grant of incentive  stock  options and  non-qualified
     stock options to employees,  consultants,  our advisors, 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  were 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 our 1995 Plan in which the total number
     of options  available for grant was increased to 8,500,000.  In April 1999,
     we,  with the  approval of the board of  directors,  adopted the 1999 Stock
     Incentive  Plan,  or 1999 Plan,  as a successor to the 1995 Plan.  The 1999
     Plan has reserved 6,105,361,  4,505,361 and 3,905,361 shares as of December
     31, 2003,  2002 and 2001,  respectively.  The 1999 Plan has three  separate
     programs which included: 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), we 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 our  common  stock of $2.14 on the date of the
     acquisition.  We  recorded  deferred  stock  compensation  of $847 that was
     amortized  on a pro rata basis over the vesting  periods of 6 to 24 months.
     Also in connection  with the  acquisition  of eMation,  we 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 our common stock on the date of
     the acquisition.
                                       66
<PAGE>
     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.  We  recorded  deferred  stock  compensation  of $543  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
     we recorded additional non-cash  compensation  expense of $132 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,  or
     $1.65.  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.

A summary of stock option activity follows:
<TABLE>
<CAPTION>
                                                2003                      2002                      2001
                                      ------------------------   ----------------------     --------------------------
                                                      Weighted                  Weighted                     Weighted
                                                       average                   average                      average
                                      Number of       exercise    Number of      exercis     Number of       exercise
                                       Options          price     Options          price      Options          price
                                       -------          -----     -------          -----      -------          -----
<S>                                   <C>             <C>         <C>             <C>         <C>             <C>
Balance as of beginning of year       5,078,819       $   1.95    3,781,592       $   2.43    3,055,318       $   5.69
Options granted ...............       1,329,000       $   1.47    2,533,700       $   1.63    1,600,300       $   1.07
Options assumed ...............            --         $    --          --         $    --     1,428,710       $   1.35
Options (forfeited) ...........        (601,533)      $   2.88   (1,029,142)      $   3.27   (1,135,604)      $   9.53
Options (exercised) ...........         (85,645)      $   0.17     (207,331)      $   0.26   (1,167,132)      $   1.35
                                        -------       --------     --------       --------   ----------       --------
 Balance at end of year .......       5,720,641       $   1.76    5,078,819       $   1.95    3,781,592       $   2.43
                                      =========       ========    =========       ========    =========       ========
</TABLE>

     At December 31, 2003,  3,208,601 options with a  weighted-average  exercise
     price of $2.01 were fully  vested and  exercisable.  At December  31, 2002,
     2,115,396  options  with a  weighted-average  exercise  price of $2.69 were
     fully vested and exercisable.  At December 31, 2001, 1,226,317 options with
     a   weighted-average   exercise  price  of  $3.45  were  fully  vested  and
     exercisable.

     The  weighted-average  exercise prices and weighted average grant-date fair
     value of options granted during 2003, 2002 and 2001 are as follows:

<TABLE>
<CAPTION>
                                                2003                       2002                          2001
                                                ----                       ----                          ----
                                       Weighted                  Weighted                     Weighted
                                        average     Weighted      average       Weighted       average        Weighted
                                       exercise      average     exercise    average fair     exercise     average fair
                                         price     fair value      price         value          price          value
                                         -----     ----------      -----         -----          -----          -----
<S>                                         <C>          <C>          <C>             <C>          <C>               <C>
  Exercise price equals fair market
   value ..............................     $1.59        $1.36        $1.62           $1.39        $1.96             $1.85
  Exercise price exceeds fair
   market value .......................       N/A          N/A        $1.96           $1.36          N/A               N/A
  Exercise price is less than fair
   market value .......................     $0.01        $0.39        $0.01           $2.52        $0.01             $1.96

  Weighted average - all options
   granted ............................     $1.47        $1.28        $1.63           $1.39        $1.07             $1.90

</TABLE>

                                       67
<PAGE>
The following  summarizes  information  about our stock options  outstanding  at
December 31, 2003:
<TABLE>
<CAPTION>
                                          Options outstanding                         Options exercisable
                           -----------------------------------------------        --------------------------
                                             Weighted average     Weighted                         Weighted
                                                remaining          average                          average
                               Number        contractual life     exercise            Number       exercise
Range of exercise prices    outstanding          (years)            price          outstanding       price
------------------------    -----------          -------            -----          -----------       -----
<S>                        <C>                    <C>            <C>              <C>            <C>
$ 0.01- 3.88 ..............  5,382,575              8.1           $    1.29         2,880,131      $    1.18
$ 3.89- 7.75 ..............    127,050              5.8           $    6.58           118,002      $    6.58
$ 7.76-11.63 ..............    200,316              0.6           $   10.01           199,797      $   10.01
$ 15.51-19.38 .............      5,850              1.6           $   15.94             5,821      $   15.94
$ 19.39-38.75 .............      4,850              6.0           $   38.75             4,850      $   38.75
                                 -----              ---           ---------             -----      ---------
      Totals . ............   5,720,641             7.8           $    1.76         3,208,601      $    2.01
                              =========             ===           =========         =========      =========
</TABLE>

     b) Employee Stock Purchase Plan

     In April 1999, we, 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 our 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 our 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 our initial public offering in July 1999.


         A summary of the shares purchased is as follows:

                                              Number of
                    Purchase Date          Shares Purchased       Purchase Cost
                    -------------           ---------------       -------------
                    January 31, 2000 ...........  27,513                $ 281
                    July 31, 2000 ..............  48,378                  190
                    January 31, 2001 ...........  27,330                   71
                    July 31, 2001 ..............  11,405                   15
                    February 1, 2002 ...........   9,627                   14
                    July 31, 2002 ..............  58,458                   60
                    January 31, 2003 ...........  70,652                   28
                    July 31, 2003 ..............  53,131                   22
                                                  ------                   --
                    Total............. ........  306,494                $ 681
                                                 =======                =====

     On the January 31, 2004 purchase date, 50,390 shares were purchased at an
     aggregate cost of $21.

                                       68
<PAGE>
     c) Warrants

     The warrants that we issue generally contain customary provisions requiring
     proportionate  adjustment  of the  exercise  price in the  event of a stock
     split or stock dividend.

         A summary of warrant activity follows:
<TABLE>
<CAPTION>

                                                           Common stock
                                                           ------------
                                                      Number of    Weighted Average
                                                      Warrants      exercise price
                                                      --------      --------------
<S>                                                   <C>             <C>
Balance as of December 31, 2000 ...............       1,835,633       $   5.96
                                                     ==========       ========

     Warrants granted .........................          48,077          12.84
     Warrants assumed .........................          74,661           5.52
     Warrants canceled.........................      (1,500,000)          7.00
     Warrants exercised ......................            --               --
                                                     ----------       --------
Balance as of December 31, 2001 ...............         458,371       $   3.19
                                                     ----------       --------

     Warrants granted .........................           3,750           6.64
     Warrants assumed (note 4) ................           2,068          18.03
     Warrants canceled........................            --              --
     Warrants exercised ......................            --              --
                                                     ----------       --------
Balance as of December 31, 2002................         464,189       $   3.28
                                                     ==========       ========

     Warrants granted .........................       2,652,092           1.66
     Warrants canceled.........................        (326,904)          1.59
     Warrants exercised........................        (100,000)      $   0.59
                                                     ----------       --------
Balance as of December 31, 2003................       2,689,377       $   1.99
                                                     ==========       ========
</TABLE>

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

     12) Commitments and Contingencies

     a) Leases

     We lease our office facilities and various equipment under operating leases
     that expire at various dates through 2011. We also lease  automobiles  with
     combined  annual  rentals of  approximately  $83, $44 and $28 for the years
     ending December 31, 2004, 2005 and 2006, respectively. The automobile lease
     terms expire at various dates  through  November  2006.  The following is a
     schedule by year of future minimum lease payments relating to noncancelable
     operating leases as of December 31, 2003:

          Year ending December 31,                        Amount
                                                          -----
               2004.......................................$ 1,233
               2005.......................................    750
               2006.......................................    666
               2007.......................................    502
               2008.......................................    319
               Thereafter.................................    465
                                                              ===
               Total minimum lease payments............   $ 3,935
                                                          =======

                                       69
<PAGE>
     The  following  table  shows the  composition  of total  rent  expense  for
     operating  leases,  except  those with terms of one month or less that were
     not renewed:

                                                  Year Ended December 31,
                                                -----------------------
                                               2003      2002       2001
                                               ----      ----       ----
               Minimum rentals ** .........  $ 1,132    $ 1,915    $ 1,023
               Less: Sublease rentals ** ..       92        441         92
                                                 ---        ---         --
                                             $ 1,040    $ 1,474      $ 931
                                             =======    =======      =====
               ** In 2002 minimum rentals and minimum sublease rentals include
               $545 and $344, respectively, for amounts accrued for an
               unutilized leased facility, which we subleased to an unrelated
               third party. Minimum rentals for 2003 include $199 for the
               reversal of a portion of the sublease accrued in 2002.

     In September 2002, we entered into a lease for  approximately  4,500 square
     feet of space in an office building in Malvern, Pennsylvania. This facility
     is leased at an annual  rental of $42,  plus  operating  expenses  ($17 per
     year), utilities and taxes, and is used for administrative  activities. The
     lease commenced in December 2002 and expires in November 2005.

     In May 2002,  we entered into a sub-lease for  approximately  35,000 square
     feet of space in an  office  building  in  Mansfield,  Massachusetts.  This
     facility is leased at an annual  rental of $310,  plus  operating  expenses
     ($170  per  year),  utilities  and  taxes,  and is used  for  research  and
     development,  sales and support and  administrative  activities.  The lease
     commenced in June 2002 and expires in July 2007.

     Prior to occupying  our current  offices in  Mansfield,  Massachusetts,  we
     leased  approximately  12,000  square feet of space in an office  building,
     located in the same business park as our current offices,  for our research
     and  development,  sales and  support  and  administrative  activities.  We
     completed  our  occupation  of the  current  offices  in July 2002 and,  in
     September 2002, we entered into a sublease with a subtenant,  or Subtenant,
     for the balance of the term of this lease for our former offices. The lease
     for our former offices  expires in July 2004 and required us to pay minimum
     future rental payments,  including operating expenses,  totaling $545 as of
     December 31, 2002.  Under the terms of the sublease  agreement,  we were to
     receive  minimum  future rental  payments,  including  operating  expenses,
     totaling $344 from the Subtenant.  For the year ended December 31, 2002, we
     recorded a charge of approximately $201, which is included in other general
     and administrative  expense,  for the amount representing the excess of the
     future minimum rental payments to be made over the future minimum  sublease
     payments to be received.  The Subtenant had made rental  payments  totaling
     $92 through and  including  June 30, 2003,  and in August  2003,  filed for
     bankruptcy  protection.  We have not found an alternate  Subtenant and have
     reversed  and  expensed in 2003 the  remaining  subrental  accrual of $199,
     which is  included  in other  general and  administrative  expense.  We are
     required to pay minimum future rental  payments  totaling  $131,  including
     operating expenses, as of December 31, 2003.

     We currently lease 3 other international sales offices in France, Japan and
     Holland,  with a total of 4,169 square feet of space.  The combined  annual
     rental for these offices is $276 and $148 for 2004 and 2005,  respectively,
     and $138 for 2006 through 2010.  The leases have terms  expiring from April
     2003 through  February  2011. The lease for our office in France expires in
     2011,  but is  cancelable  without  penalty  in 2008 upon 6 months  written
     notice.

     We are associated with  approximately  9,000 square feet of office space in
     Marlborough, Massachusetts, which is no longer used for operating purposes.
     The lease  requires  annual  rental  payments  totaling $181 and expires in
     February 2009. The present value of the future lease  payments,  discounted
     at 5%, of $1,200 was accrued by eMation as of the date of acquisition.

     b) Royalties

     Under  various  licensing  agreements,  we are  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
     $1,275,  $2,688 and $1,324 for the years ended December 31, 2003,  2002 and
     2001, respectively, and is included in cost of revenues in the consolidated
     statements of operations.
                                       70
<PAGE>
     Royalty Commitments to the Chief Scientist:

     Prior to 2001,  eMation had  received  grants from the Chief  Scientist  of
     Israel's  Ministry  of  Industry  and Trade to  finance  the  research  and
     development  of certain  products.  We are  obligated to pay royalties at a
     rate of 3.0 - 3.5%  resulting from sales of the products  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 bear  interest at an annual rate equal to 12-month  LIBOR
     (1.4582%  at  December  31,  2003).  As of December  31,  2003,  we accrued
     royalties of $372.

     Royalties to the Fund for the Encouragement of Marketing Activities:

     Prior  to  2001,  the  Israeli   Government,   through  the  Fund  for  the
     Encouragement   of  Marketing   Activities,   awarded  eMation  grants  for
     participation  in  foreign  marketing  expenses.  We  are  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  (1.2192% at December 31, 2003).  As of December 31, 2003,
     we accrued royalties of $387.

     DRM License Fees:

     In  June  2002  we  entered  into  a  Software  License  Agreement,  or the
     Agreement,  with a vendor to  provide  server  and  client  software  that,
     beginning in August 2002, is  incorporated  into our DRM Enterprise  Server
     products.  License  fees  are due and  payable  at the rate of 2.5% of each
     billable sale, as defined. Under the Agreement, we agreed to pay a minimum,
     non-refundable   prepaid  license  fee  of  $400,   which  was  payable  in
     installments.  We paid  $100  in July  2002,  $100  in  June  2003  and the
     remaining $200 in January 2004.

     c) Contingencies

     On November 27, 2001, a putative shareholder class action was filed against
     us, certain of our officers and  directors,  and several  investment  banks
     that were underwriters of our initial public offering. The action was filed
     in the United States District Court for the Southern  District of New York,
     purportedly on behalf of investors who purchased our stock between July 15,
     1999 and December 6, 2000.  The lawsuit  alleges  violations of Sections 11
     and 15 of the  Securities  Act of 1933 and  Section  10(b) and 20(a) of the
     Securities  Exchange  Act of 1934 and  Rule  10b-5  promulgated  thereunder
     against  one or both of us and the  individual  defendants.  The claims are
     based on allegations  that the  underwriter  defendants  agreed to allocate
     stock in our July 15, 1999 initial public offering to certain  investors in
     exchange for excessive and undisclosed  commissions and agreements by those
     investors to make additional purchases in the aftermarket at pre-determined
     prices.  Plaintiffs  allege  that the  prospectus  for our  initial  public
     offering  was false and  misleading  in violation  of the  securities  laws
     because it did not disclose these  arrangements.  Similar "IPO  allocation"
     actions  have  been  filed  against  over 300 other  issuers  that have had
     initial  public  offerings  since  1998  and all are  included  in a single
     coordinated proceeding in the Southern District of New York. Certain of our
     employees  were members of the putative  classes  alleged in these  actions
     (the  "Individual  Defendants").  On July 15, 2002, we moved to dismiss all
     claims  against the  Individual  Defendants and us. On October 9, 2002, the
     Court dismissed the Individual Defendants from the case without prejudice.

     A proposal has been made for the  settlement  and release of claims against
     the issuer defendants,  including us. The settlement is subject to a number
     of conditions,  including approval of the proposed settling parties and the
     court.  We  believe  the terms of the  settlement  will not have a material
     impact on our results of operations, liquidity, and financial condition. If
     the  settlement  does not occur,  and litigation  against us continues,  we
     believe  we have  meritorious  defenses  and  intend  to  defend  the  case
     vigorously.  However,  failure to  successfully  defend this  action  could
     substantially  harm our  results of  operations,  liquidity  and  financial
     condition.
                                       71
<PAGE>
     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 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.  We filed a motion
     to dismiss the  consolidated  and amended class action complaint on July 3,
     2000. 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.

     On March 20,  2003,  Industria  Politecnica  Meridionale  Spa.,  or IPM, an
     Italian  corporation,  filed a  complaint  against us in the United  States
     District Court for the Northern District of California. The lawsuit alleges
     breach of an agreement between IPM and our wholly owned subsidiary Ravisent
     Technologies  Internet  Appliance  Group,  Inc.,  or  RTIAG,  and  fraud in
     connection  with the  delivery  of  circuit  boards to IPM that were not in
     compliance with the agreement,  and claims damages of $15,000 for breach of
     contract and fraud,  and unspecified  punitive damages and attorney's fees.
     On May 2, 2003, we moved to dismiss all claims against  RTIAG.  On or about
     June 23, 2003,  IPM filed an amended  complaint  adding RTIAG as a party in
     the action and providing further  specificity on the fraud  allegation.  We
     withdrew our motion to dismiss shortly thereafter. Axeda and RTIAG filed an
     answer to the  amended  complaint  on July 3, 2003  denying  the  breach of
     contract and fraud claims.  RTIAG filed a counterclaim  on July 3, 2003 for
     breach of contract against IPM,  seeking damages of $2,733,  plus interest,
     fees and costs.  IPM filed an answer to the amended  complaint  on July 22,
     2003  denying  the breach of contract  claims.  IPM filed a motion to amend
     their complaint on February 19, 2004, which if granted would withdraw their
     fraud  complaint and modify their breach of contract  claim to specify that
     the defendants breached the contract by providing circuit boards which were
     underpowered,  and to an  unacceptable  extent,  incapable  of operating in
     IPM's  products.  We filed a motion  seeking  summary  judgment on March 9,
     2004. 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.  We are  unable to  predict  the  outcome  of these  matters  or
     reasonably  estimate  an amount of loss  given the  current  status of this
     matter.

     Various  third  parties  have  notified  us, as well as some of our  former
     customers  for our  former  digital  media  products,  that our  former DVD
     products  infringe  patents held by such third  parties.  We have  received
     notices  of up  to an  aggregate  of  $6,500  asserting  rights  under  the
     indemnification   provisions   and  warranty   provisions  of  our  license
     agreements from several customers  relating to such claims of infringement.
     We have not determined  whether and to what extent the patents held by such
     third parties are valid and whether and to what extent our former  products
     may have  infringed  such patents.  We are unable to predict the outcome of
     these  matters,  however,  we are able to reasonably  estimate an amount of
     possible loss given the current status of certain of these matters, and, in
     2002, accrued $375.

     In March 2003 we entered  into a  confidential  settlement  agreement  with
     Phoenix  Technologies  and the remaining $550 of the purchase price for the
     sale of the  assets  of our  former IA  business  held in escrow by a third
     party for indemnification purposes (included in restricted cash at December
     31, 2002), was paid to us and is no longer  restricted.  In connection with
     this settlement agreement,  we reversed accruals of $743 initially recorded
     in March 2001 as part of the sale of the assets of our former IA business.

                                       72
<PAGE>
     From time to time we are involved in lawsuits,  claims,  investigations  or
     proceedings,   in  addition  to  those  identified  above,   consisting  of
     intellectual  property,  commercial,  employment and other  matters,  which
     arise in the ordinary  course of business.  In  accordance  with SFAS 5, we
     make a provision for a liability  when it is both probable that a liability
     has been incurred,  and the amount of the loss can be reasonably estimated.
     These  provisions  are reviewed at least  quarterly and adjusted to reflect
     the impacts of negotiations,  settlements, rulings, advice of legal counsel
     and other  information  and events  pertaining to a particular  case. It is
     possible that our cash flows or results of operations  could be affected in
     any  particular   period  by  the  resolution  of  one  or  more  of  these
     contingencies.

     d) Employment Agreements

     We have entered into employment agreements with certain of our officers and
     employees.  The  agreements  are generally  for two to three-year  periods,
     generally  provide for annual  salaries  and bonuses,  guaranteed  bonuses,
     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 month's to one year's salary and health insurance
     coverage in the event the  individual is terminated  under the terms of the
     agreements.  The  aggregate  amount  payable  for  salaries in the event of
     employee severance totals approximately $2,931 as of December 31, 2003.

     13) Business Risks and Credit Concentration

     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.

     We perform ongoing credit evaluations of our customers' financial condition
     and  generally  no  collateral   is  required.   We  had  three   customers
     representing,  in the aggregate, 28%, 19% and 26% of accounts receivable at
     December 31, 2003, 2002 and 2001, respectively.

     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 United States, for the following years noted:

                                         December 31,
                                         ------------
Country                        2003        2002        2001
-------                        ----        ----        ----
United States ..............  $3,714      $3,919      $2,994
France .....................     540         369         113
Germany ....................      11          10        --
Japan ......................      90          89          64
Holland ....................      39         109          79
Israel .....................    --           195         240
United Kingdom .............    --          --             5
                                          ------      ------
Total ......................  $4,394      $4,691      $3,495
                              ======      ======      ======

                                       73
<PAGE>
14)      Income Taxes

     The provision for income taxes (benefit) is as follows:

                                      Years ended December 31,
                                      ------------------------
                                   2003        2002         2001
                                 ------      ------       ------
     Federal ................     $ --        $ (668)      $  668
     State ..................       --          --             55
     Foreign ................        198         209          400
                                  ------      ------       ------

     Total ..................     $  198      $ (459)      $1,123
                                  ======      ======       ======

     The table below reconciles the U.S.  federal  statutory income taxes to the
     recorded provision for income taxes (benefit):

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                      ------------
                                                                              2003         2002         2001
                                                                            --------     --------     --------
<S>                                                                            <C>         <C>          <C>
Federal income tax expense (benefit) at U.S. federal statutory rate .....   $ (4,559)    $(17,811)    $    864
State income tax benefit, net of federal income tax expense
 (benefit) ..............................................................       (183)      (1,539)        (656)
In-process research and development expenses and goodwill ...............       --          6,702        6,560
Foreign income taxes ....................................................        114          209          400
Warrant and option expense ..............................................       --            419        1,162
Non-deductible acquisition costs ........................................       --           --            630
Change in valuation allowance ...........................................      2,111       20,835       (3,045)
Benefit related to change in tax legislation ............................       --           (668)        --
Acquired deferred tax assets, including provision to return
 adjustments ............................................................      3,160       (8,518)      (4,526)
Other ...................................................................       (445)         (88)        (266)
                                                                            --------     --------     --------
                                                                            $    198     $   (459)    $  1,123
                                                                            ========     ========     ========
</TABLE>

         The components of the net deferred tax assets (liabilities) consist of:

                                                               December 31,
                                                               ------------
                                                           2003          2002
                                                           ----          ----
Deferred tax assets:
Net operating losses                                    $44,571        $40,234
Reserves and accruals not currently deductible            1,228            727
Depreciation and amortization                              (729)          (476)
Deferred compensation and other.......................    2,573          5,048
                                                           -----          -----
                                                         47,643         45,533
Valuation allowance                                     (47,643)       (45,533)
                                                        -------        --------

                      Net deferred tax assets          $   --          $   --
                                                         ======          ======

          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 our ability to realize
          the benefit of the  deferred  tax assets,  the deferred tax assets are
          fully offset by a valuation allowance at December 31, 2003 and 2002.

                                       74
<PAGE>
          As of  December  31,  2003,  we have  approximately  $111,359  of U.S.
          federal  and  $81,592  of  state  net  operating  loss   carryforwards
          available to offset future taxable income.  The federal  carryforwards
          will begin  expiring  in 2011 and the state  carryforwards  will begin
          expiring in 2006, respectively, if not utilized. Approximately $50,697
          of the state net operating loss  carryforwards  is subject to a $2,000
          annual  limitation.  In  addition,  we have  approximately  $4,210  of
          foreign net operating loss carryforwards of which approximately $1,700
          begins to expire in 2006 with the remaining  amounts  carried  forward
          indefinitely.

          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 our prior and recent transactions, our
          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. We have
          not yet determined the limitation as defined by the Act. Additionally,
          because U.S. tax laws limit the time during which these  carryforwards
          may be applied  against future taxes,  we may not be able to take full
          advantage of these attributes for Federal income tax purposes.

          Additionally,  approximately  $5,063 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,   we  did  not  owe  federal
          alternative minimum tax liability for 2001 and, in 2002, we received a
          refund of alternative minimum taxes paid in 2001. We recorded this tax
          benefit of $668 in the first quarter of 2002.

15) Defined Contribution Plan

We have 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,  we can make  discretionary  contributions.  In  addition,  in
December 2001, we assumed the defined  contribution plan of eMation.  Both plans
are Internal Revenue Code section 401(k) plans.  Both plans provide for employer
matching contributions for all participants 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.  We paid
matching  contributions  totaling $207 and $275 for both plans in 2003 and 2002,
respectively.


16) Segment and Major Customer Information

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

We had the following  customers that combined  represented in excess of 15%, 28%
and 37% of  revenues  for the years  ended  December  31,  2003,  2002 and 2001,
respectively:

                                                    December 31,
                                                    ------------
Customer                                      2003      2002      2001
--------                                      ----      ----      ----
     1 ..................................    $  970    $2,512    $1,250
     2 ..................................    $  557    $1,823    $  990
     3 ..................................    $  493    $  694    $  585

                                       75
<PAGE>
We sell and license our  technology  to customers  primarily  in North  America,
Europe and Asia. A majority of our revenues are derived from our North  American
operations,  and our total  revenues were derived from the following  geographic
regions:

                                             Year Ended December 31,
                                             -----------------------
Country/ Geographic Region                  2003      2002      2001
--------------------------                  ----      ----      ----

North America:
     United States ....................   $ 5,556   $ 8,459   $ 4,461
     Canada ...........................       265     1,912     1,208
                                          -------   -------   -------
          Total - North America .......     5,821    10,371     5,669
                                          -------   -------   -------

Europe:
     Italy ............................       240       247         4
     Germany ..........................       573     1,330       525
     France ...........................     1,425     1,778       419
     Netherlands ......................       461       785      --
     Switzerland ......................     1,213       707      --
     United Kingdom ...................       536       466      --
     Belgium ..........................       390       162      --
     Other ............................       615       569       419
                                          -------   -------   -------
          Total - Europe ..............     5,453     6,044     1,367
                                          -------   -------   -------

Asia-Pacific:
     Israel ...........................       326       450        42
     Japan ............................     1,352       856       390
     Other ............................       113       261       106
                                          -------   -------   -------
          Total - Asia-Pacific ........     1,791     1,567       538
                                          -------   -------   -------

Other .................................       129       147        15
                                          -------   -------   -------

Total .................................   $13,194   $18,129   $ 7,589
                                          =======   =======   =======


17)      Segment Reporting

Segment  information  is presented  in  accordance  with  Statement of Financial
Account  Standards  No.  131,  or SFAS 131,  "Disclosures  About  Segments Of An
Enterprise And Related  Information." This standard requires  segmentation based
upon our internal  organization  and disclosure of revenue and operating  income
based upon internal accounting methods. For the year ended December 31, 2003 DRM
was our reportable segment.

DRM was 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,  sensors or systems incorporating computer-based control technology)
and the people that build,  service and use them.  The Axeda DRM System  enables
manufacturers  and service providers to use the Internet to establish and manage
continuous  connections with devices  deployed at their  customers'  facilities,
allowing them to stay in touch with their products  throughout  their lifecycle,
tapping the value of remote device  information with new,  automated  e-service,
operations  monitoring and e-commerce  offerings.  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.

Other is comprised  of our former PC business,  the assets of which were sold in
May 2002, and our former CE and IA businesses,  the assets of which were sold in
March of 2001.

                                       76
<PAGE>
We evaluate operating segment  performance based on revenue and gross profit. We
have not historically evaluated segment performance based on operating income or
allocated assets to our individual operating segments.

                                             Year Ended December 31,
                                             -----------------------
                                             2003       2002       2001
                                         --------   --------   --------

Revenues:
     DRM ..............................  $ 12,622   $ 10,876   $  1,614
     Other ............................       572      7,253      5,975
                                         --------   --------   --------
          Total .......................  $ 13,194   $ 18,129   $  7,589
                                         ========   ========   ========

Gross profit:
     DRM ..............................  $  7,231   $  4,075   $  1,177
     Other ............................       342      3,764    (15,235)
                                         --------   --------   --------
          Total .......................  $  7,573   $  7,839   $(14,058)
                                         ========   ========   ========

18) Consolidated Statements of Cash Flows

Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                                                -----------------------
                                                                                 2003     2002     2001
                                                                                -----   ------   ------
Cash paid during the year for:
<S>                                                                             <C>     <C>      <C>
    Interest .................................................................  $  37   $  148   $   20
                                                                                =====   ======   ======
    Income taxes (refund) ....................................................   --       (308)     308
                                                                                =====   ======   ======

Non-cash investing and financing activities:
    Common stock financing-related liability (note 10) .......................  2,608     --       --
                                                                                =====   ======   ======
    Issuance of warrants and options in connection with equity
      transactions ...........................................................    114       90    2,262
                                                                                =====   ======   ======
    Amortization of deferred stock compensation ..............................    547    1,562    1,353
                                                                                =====   ======   ======
    Issuance of warrants in connection with bank line of credit (note 8) .....     44     --       --
                                                                                =====   ======   ======
    Settlement of pre-acquisition liability related to acquisition of
      eMation ................................................................   --        160     --
                                                                                =====   ======   ======
    Fair value of 20,000 shares of Axeda common stock received in
      connection with the settlement of a loan receivable (note10) ...........   --         39     --
                                                                                =====   ======   ======
</TABLE>


                                       77
<PAGE>
19)      Selected Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>

                                                                          Per Share of Common Stock (Loss)      Closing Stock Prices
                                                                          --------------------------------      --------------------
                                                                             Assuming
                           Revenues     Gross Profit        Net Loss         Dilution            Basic             High        Low
                           --------     ------------        --------         --------            -----             ----        ---
2003
----
<S>                            <C>              <C>             <C>               <C>              <C>               <C>       <C>
First Quarter (A)              $3,417           $1,737          $(4,787)          $(0.18)          $(0.18)           $0.81     $0.32
Second Quarter                  2,774            1,275           (4,853)          $(0.18)          $(0.18)           $2.09     $0.30
Third Quarter (B)               3,603            2,536           (1,811)          $(0.07)          $(0.07)           $1.99     $1.19
Fourth Quarter ( C )            3,400            2,025           (2,157)          $(0.07)          $(0.07)           $2.13     $1.27
                                -----            -----           -------
Total (F) (H)                 $13,194           $7,573         $(13,608)          $(0.48)  *       $(0.48)  *
                              =======           ======         =========
2002
----
First Quarter                 $ 4,640          $ 1,350          $(9,112)         $ (0.34)         $ (0.34)           $3.86     $2.15
Second Quarter (D)              3,543            1,003          (10,475)          $(0.39)          $(0.39)           $3.21     $1.11
Third Quarter                   4,369            2,073           (6,311)          $(0.23)          $(0.23)           $1.77     $0.38
Fourth Quarter (E)             5,577            3,413          (26,029)           $(0.96)          $(0.96)           $1.29     $0.25
                               ------           ------         ---------
Total (G) (H)                $18,129            7,839          (51,927)          $ (1.92)  *      $ (1.92)  *
                             ========           ======         =========
</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 may not equal the full-year EPS.

Notes to Selected Quarterly Financial Data (unaudited)

         Axeda's net loss per common share in 2003 and 2002 has been affected by
         certain unusual or infrequently occurring items. These items consisted
         of:

A. First quarter 2003

     1) reversal of accruals related to confidential  settlement  agreement with
     Phoenix Technologies of $743 (note 12c) )

B. Third quarter 2003

     1) other  income for the fair  value  adjustment  of the  financing-related
     liability of $645 (note 10)

C. Fourth quarter 2003

     1) other  income for the fair  value  adjustment  of the  financing-related
     liability of $157 (note 10)

D. Second quarter 2002

     1) special charges related to exit from PC business of $820 (note 5)

E. Fourth quarter 2002

     1) an impairment  charge of $17,124 for goodwill related to the acquisition
     of eMation (notes 1f and 4)

     2) an impairment charge of $5,290 for identified  intangible assets related
     to the acquisition of eMation (notes 1f and 4)

     3) settlement of an aggregate vendor liability of $1,060 for $550

F. The  aggregate  net effect of these items in 2003 was to  decrease  basic and
diluted  net loss per  share by $0.03 in the first  quarter,  $0.02 in the third
quarter and $0.01 in the fourth quarter,  thereby  aggregating net loss of $0.05
per basic and diluted common share outstanding for the year (see Note H below).

G. The  aggregate  net effect of these items in 2002 was to  increase  basic and
diluted  net loss per  share by $0.03 in the  second  quarter  and  $0.80 in the
fourth  quarter,  thereby  aggregating  net loss of $0.84 per basic and  diluted
common share outstanding for the year (see Note H below).

H. 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.
                                       78
<PAGE>

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

  None.


ITEM 9A. CONTROLS AND PROCEDURES

Based on their  evaluation  of our  disclosure  controls  and  procedures  as of
December 31, 2003, our Chief Executive  Officer and Chief Financial Officer have
concluded  that our  disclosure  controls  and  procedures  (as  defined in Rule
13a-15(e) or Rule 15d-15(e)  promulgated  under the  Securities  Exchange Act of
1934) were effective as of December 31, 2003. There were no significant  changes
in our internal  controls over financial  reporting during the fourth quarter of
2003.



                                       79
<PAGE>

                               Axeda Systems Inc.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to our Proxy
Statement for the 2004 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2004 under the
captions "Election of directors", "Security Ownership of Certain Beneficial
Owners and Management" and "Section 16(a) Beneficial Ownership Reporting
Compliance."

We have adopted a Code of Business Conduct applicable to all employees and Board
members. A copy of the Corporate Code may be obtained upon request, without
charge, by writing to us at 21 Oxford Road, Mansfield, Massachusetts 02048,
Attn: Director, Investor Relations.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to our Proxy
Statement for the 2004 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2004 under the
caption "Executive Compensation."

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

The information required by this item is incorporated by reference to our Proxy
Statement for the 2004 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2004 under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Equity Compensation Plan Information."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to our Proxy
Statement for the 2004 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2004 under the
caption "Certain Transactions."

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated by reference to our Proxy
Statement for the 2004 Annual Meeting of Stockholders to be filed by Axeda with
the Securities and Exchange Commission on or before April 30, 2004 under the
caption "Ratification of Appointment of Auditors."


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<PAGE>

PART IV

ITEM 15. 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
44.

          (2) Financial Statement Schedules

                        Report of Independent Auditors

The Board of Directors and Stockholders
Axeda Systems Inc.:

Under date of February 2, 2004, we reported on the  consolidated  balance sheets
of Axeda Systems Inc. and subsidiaries as of December 31, 2003 and 2002, 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,
2003. 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.

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 1e to the consolidated financial statements,  Axeda Systems
Inc. adopted Statement of Financial  Accounting  Standard No. 142, "Goodwill and
Other Intangible Assets," effective January 1, 2002.

KPMG LLP

Philadelphia, Pennsylvania
February 2, 2004

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<PAGE>

The following  consolidated  financial  statement schedule of Axeda Systems Inc.
for each of the years ended  December 31, 2001,  2002 and 2003 should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto
contained herein at Item 8.

<TABLE>
<CAPTION>

                                          Axeda Systems Inc. and Subsidiaries
                                     Schedule of Valuation and Qualifying Accounts
                                                      (in thousands)
                                            Balance at         Charged     Charged to
                                            beginning of     to cost and      other                         Balance at
                                                year          expense       accounts       Deductions      end of year
                                                ----          -------       --------       ----------      -----------
Accounts receivable reserve
---------------------------
<S>                                              <C>            <C>              <C>           <C>              <C>
For   the   year   ended   December   31,
2001 .......................................       $2,405          $ 929     $  -          $(3,155)           $ 179
For   the   year   ended   December   31,
2002 .......................................        $ 179         $ (45)     $  -          $   (50)           $  84

For the year ended December 31, 2003 .......         $ 84         $ (16)     $  -          $    (-)           $  68

Inventory reserves
------------------

For   the   year   ended   December   31,
2001 .......................................       $3,800        $18,783     $  -         $ (1,264)         $21,319
For   the   year   ended   December   31,
2002 .......................................      $21,319          $   -     $  -         $(18,127)         $ 3,192
For   the   year   ended   December   31,
2003 .......................................       $3,192          $   -     $  -         $   (110)         $ 3,082
</TABLE>

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.

     (3) Exhibits

          The exhibits listed in the accompanying Index to Exhibits are filed or
          incorporated by reference as part of this report.


b) Current reports on Form 8-K during the quarter ended December 31, 2003.

On October 30, 2003 the Company submitted an 8-K related to its October 29, 2003
press  release  announcing,  among other things,  its financial  results for the
third quarter of 2003.


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<PAGE>


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Mansfield, Commonwealth of Massachusetts on this 24th day of March 2004.

Axeda Systems Inc.

March 24, 2004

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

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 Chairman of the Board           March 24, 2004
Robert M. Russell Jr.                 (Principal Executive Officer)

/s/ Dale E. Calder                    Director and President                                      March 24, 2004
Dale E. Calder

/s/ Thomas J. Fogarty                 Chief  Financial  Officer,  Executive  Vice  President and  March 24, 2004
Thomas J. Fogarty                     Treasurer (Principal Financial and Accounting Officer)

/s/Paul A. Vais                       Director                                                    March 24, 2004
Paul A. Vais

/s/ Walter L. Threadgill              Director                                                    March 24, 2004
Walter L. Threadgill

/s/ Bruce J. Ryan                     Director                                                    March 24, 2004
Bruce J. Ryan

/s/ James McDonald                    Director                                                    March 24, 2004
James McDonald
</TABLE>




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<PAGE>
                               AXEDA SYSTEMS INC.

                                  EXHIBIT INDEX

Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately
precedes the exhibits. The following exhibits are included, or incorporated by
reference, in this Annual Report on Form 10-K (and are numbered in accordance
with Item 601 of Regulation S-K):

<TABLE>
<CAPTION>

Exhibit
Number          Exhibit Title
------          -------------
<S>            <C>
2.1              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. (2)

2.2              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. (3)

2.3              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. (5)

3.1              Amended and Restated Certificate of Incorporation.(1)

3.2              Bylaws of Axeda Systems Inc., as amended by the Board of Directors on February 22,
                 2002.  (7)

3.3              Certificate of Ownership and Merger of Axeda Systems Inc., a Delaware corporation with
                 and into Ravisent Technologies Inc., a Delaware corporation, dated as of January 10,
                 2002. (10)

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

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

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

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

10.4+            Employment Agreement, as amended, dated August 6, 2001 by and between RAVISENT and
                 Robert M. Russell, Jr. (4)

10.5+            Employment Agreement, dated December 7, 2001 by and between RAVISENT and Dale Calder
                 (8)

10.6+            Employment Agreement, dated December 7, 2001 by and between RAVISENT and Thomas J.
                 Fogarty  (8)

10.7+            Employment Agreement, dated December 7, 2001 by and between RAVISENT and  Francis X.
                 Brown III (8)

10.8             eMation Ltd. 2001 Share Incentive Plan.(6)

10.9             eMation Ltd. 2001 Share Incentive Plan Form of Stock Option Agreement.(6)

10.10            Form of Assumption Agreement. (6)

10.11@           License and Distribution Agreement, dated July 26, 2002, by and between Electronics for
                 Imaging, Inc. and Axeda Systems Operating Company, Inc. (9)

10.12@           Software Distribution Agreement, dated May 24, 2002, by and between Sonic IP, Inc. and
                 AXEDA SYSTEMS, Inc., RAVISENT I.P., Inc and RAVISENT OPERATING COMPANY, Inc. (11)

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<PAGE>

10.13             Loan and Security Agreement, dated June 25, 2003 by and between Axeda Systems
                 Operating Company, Inc. and Silicon Valley Bank (12)

10.14            Purchase Agreement, dated September 22, 2003, by and among Axeda Systems Inc. and the
                 investors named on the signature pages thereto. (13)

10.15            Registration Rights Agreement, dated September 23, 2003, by and among Axeda Systems
                 Inc. and the investors named on the signature pages thereto. (13)

10.16            Form of Common Stock Warrant. (13)

10.17 +          Employment Agreement dated September 25, 2003 by and between Axeda Systems Inc. and
                 John C. Roberts (14)

10.18            Amendment #1 to Electronics for Imaging, Inc. and Axeda Systems Operating Company, Inc.
                 License and Distribution Agreement, effective August 15, 2003 (14)

10.19+*          Employment Agreement, dated as of December 7, 2003 by and between Axeda Systems Inc.
                 and  Thomas J. Fogarty

21.1*            Subsidiaries of AXEDA.

23.1*            Consent of KPMG LLP, Independent Auditors.

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

(1)              Incorporated by reference to The registrant'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 the registrant's current report on
                 Form 8-K dated March 1, 2001, as filed with the Securities and
                 Exchange Commission on March 16, 2001.

(3)              Incorporated by reference to the registrant's current report on
                 Form 8-K dated March 23, 2001, as filed with the Securities and
                 Exchange Commission on April 9, 2001.

(4)              Incorporated by reference to the registrant's quarterly report on Form 10-Q for the
                 quarterly period ended September 30, 2001.

(5)              Incorporated by reference to the registrant's Definitive Proxy Statement on Form 14A
                  dated November 9, 2001, as filed with the Securities and Exchange Commission on
                  November 19, 2001.

(6)              Incorporated by reference to Axeda's registration statement on Form S-8 as filed with
                 the Securities and Exchange Commission on February 11, 2002.

(7)              Incorporated by reference to Axeda's current report on Form 8-K dated February 25, 2002
                 as filed with the Securities and Exchange Commission on February 27, 2002.

(8)              Incorporated by reference to the registrant's annual report on Form 10-K for the period
                 ended December 31, 2002.

(9)              Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
                 period ended September 30, 2002.

(10)             Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
                 period ended March 31, 2002.

(11)             Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
                 period ended June 30, 2002.

(12)             Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
                 period ended June 30, 2003.

(13)             Incorporated by reference to the registrant's current report on Form 8-K dated
                 September 23, 2003 as filed with the Securities and Exchange Commission on September
                 23, 2003.

(14)             Incorporated by reference to Axeda's quarterly report on Form 10-Q for the quarterly
                 period ended September 30, 2003.

@                Confidential treatment granted for portions of this agreement
+                Compensation plans and arrangements for executives and others
*                Filed herewith
</TABLE>

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