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                               Axeda Systems Inc.

Cautionary Statement Concerning Forward-Looking Statements

This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that involve a number of risks
and uncertainties. Such statements are based on current expectations of future
events that involve a number of risks and uncertainties that may cause the
actual events of future results to differ from those discussed herein. Such
factors include, but are not limited to: the transition in businesses we are
currently undergoing; fluctuating quarterly operating results; uncertainties in
the market for DRM products and the potential for growth in the pervasive
computing market; our ability to integrate acquisitions; present and future
competition; our ability to manage technological change and respond to evolving
industry standards; our ability to manage growth and attract and retain
additional personnel; the long sales cycle for DRM products; limited
distribution channels; the difficulty of protecting proprietary rights; the
potential for defects in products; claims for damages asserted against us; risks
associated with our digital media business and the search for strategic
alternatives for such business; our ability to raise capital; risks from
international operations; and others discussed under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks and other factors. Accordingly,
any forward-looking statements included herein do not purport to be predictions
of future events or circumstances and may not be realized. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"pro forma," "anticipates," "plans," "estimates," or "intends," or the negative
of any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. All forward-looking statements and reasons why results may differ
included in this report are made as of the date of this report, and except as
required by law, we disclaim any obligations to update any such factors or to
publicly announce the results of any revisions to any of the forward-looking
statements contained herein or reasons why results might differ to reflect
future events or developments. References herein to "Axeda", "we," "our," and
"us" collectively refer to Axeda Systems Inc., a Delaware corporation, and all
of its direct and indirect U.S., Israeli, Japanese, European and Canadian
subsidiaries.

PART I

ITEM 1.  Business of Axeda

EMATION ACQUISITION AND RECENT EVENTS

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

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

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

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

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

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

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

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

OVERVIEW

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

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

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

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

COMPANY HISTORY

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

We intend to focus our resources and attention in 2002 on the development of the
products and services we acquired with the acquisition of eMation, in December
2001. We expect future

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growth to be driven by the DRM products and services we acquired in the eMation
acquisition. Our DRM enterprise software and services business evolved from the
real-time information acquisition, visualization, and control products that have
been the basis for eMation's long standing industrial automation products
business. We have a significant installed customer base in industrial automation
products. However, we have limited experience in the new DRM enterprise software
market, as eMation introduced its first full DRM solution in the first quarter
of 2001. Prior to that time eMation's revenues were derived from industrial
automation products.

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

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

Sale of Consumer Electronics Business

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

Sale of Internet Appliance Business

Our continued involvement in the IA market would have required a commitment of
substantial resources to remain competitive. Therefore, we entered into
negotiations with Phoenix who were interested in integrating our IA products
with their information appliances products to provide a more complete solution
to PC OEMs. Effective as of March 23,

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2001, and pursuant to an asset acquisition agreement dated as of March 21, 2001,
we and certain of our subsidiaries, RAVISENT Technologies Internet Appliance
Group, Inc., RAVISENT I.P., Inc. and RAVISENT Operating Company, Inc. sold
substantially all of the assets of our IA business, excluding inventory, to
Phoenix for approximately $18 million in cash consideration, of which $1.8
million was being held by a third party in escrow for indemnification purposes
until March 2002. In March 2002 we received $1.3 million, including interest of
approximately $0.05 million. The remaining balance of approximately $0.55
million has been withheld pending the settlement of a claim submitted by
Phoenix. We are unable to predict the resolution of this matter, or reasonably
estimate a range of possible loss given the current status of this matter. Any
escrow amounts not returned to us will be recorded as a charge to the gain on
sale of assets in the period in which such determination is made. The assets
sold include certain of the contracts, equipment, intangible assets,
intellectual property, prepaid expenses and other assets primarily related to
the operation of the IA business. Under the agreement, Phoenix purchased, among
other things, our e-Surfer embedded software Internet browser and related
hardware designs for the IA market. In addition, in connection with this asset
sale, 13 of our employees associated with our IA business accepted employment
with Phoenix.

Digital Media Business

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

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

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

Our typical customers and partners in the digital media business are PC,
peripherals and semiconductor manufacturers that benefit from our digital
entertainment solutions. For the year

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ended December 31, 2001, three customers, Matrox Graphics, Inc., Gateway Inc.
and another customer accounted for 13%, 7% and 16%, respectively, of our
revenues. For the year ended December 31, 2000, three customers, Wongs
Electronics Co., Ltd., Gateway Inc. and Hewlett-Packard Company, accounted for
19%, 19% and 11%, respectively, of our revenues. For the year ended December 31,
1999, one customer, Dell, accounted for 53% of our revenues.

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

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

INDUSTRY BACKGROUND AND TRENDS

Computer-based control systems are at the heart of almost every new product,
machine or system made today. These "intelligent" systems consist of hardware
and software that is used to control the operation of the device as it is
running, perform diagnostics, and enable external systems or people to input or
query data that may be generated during operation. Depending on the cost and the
complexity of the device, all of this capability may be embedded within the
device itself or portions of it may reside on external computers that perform a
supervisory control function for one or more related devices.

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

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

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

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

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

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

Axeda is moving to help its customers realize this opportunity with a new
category of enterprise software that enables corporations, manufacturers and
service providers to use the Internet to manage their relationship with the
products and systems deployed at their customers and facilities. Known as Device
Relationship Management ("DRM"), it enables the real-time exchange of
information between remote devices and the people and business systems that can
profitably utilize this information.

THE AXEDA DRM/TM/ SOLUTION

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

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

The Axeda DRM/TM/ System comprises infrastructure and application software
products that run at the device or enterprise, and together interoperate to form
an Internet-based, information distribution system for device monitoring,
management and control. Axeda DRM/TM/ enables the seamless, yet secure,
integration of remote device information with a company's ongoing

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business practices. Patent-pending Axeda technology allows intelligent devices
hidden behind customer firewalls to have secure, two-way, Internet-based
communication with external sales and service personnel and their enterprise
applications.

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

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

     .    Attract and retain customers;

     .    Increase product uptime;

     .    Expand their offerings;

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

     .    Remotely install, calibrate, configure, and diagnose;

     .    Offer billing model flexibility and new revenue sources;

     .    Exploit customer and market intelligence to make better products;

     .    Provide continuous, automated monitoring of remote equipment;

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

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

Axeda DRM/TM/ Systems can be used on a stand-alone basis where, for example,
personnel in a service department use the System on a day-to-day basis to
monitor and diagnose remote devices. Further, Axeda DRM/TM/ solutions can be
used to feed information to existing installed enterprise software systems.
These could include enterprise resource planning ("ERP"), customer relationship
management ("CRM"), and supply chain and asset management systems. DRM can
provide live information feeds or transactions to drive these enterprise
applications to allow timely, accurate, unbiased information to be communicated
automatically between the device and the application. This enables companies to
use DRM to gain additional value from their existing complementary IT
investments. We offer complete DRM systems and we also continue to separately
sell components of the system, such as the Axeda Supervisor, Axeda @aGlance/IT
and Axeda FactorySoft OPC, to support our traditional industrial automation
business.

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

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

OUR STRATEGY

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

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

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

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

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

MARKETS

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

     .    Industrial and Building Automation;
     .    High-technology Devices;
     .    Medical Instrumentation;
     .    Office Automation; and
     .    Semiconductor Equipment.

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

For example, the medical instruments market is characterized by a variety of
sophisticated machines operated by non-technical personnel. These machines must
stay operational and many use chemical consumables. Service costs and quality of
service requirements are a serious issue, and manufacturers want to maximize
revenue from consumables. High-end printers and copiers also present a number of
opportunities for DRM. They are sophisticated, computer controlled

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machines that tend to have frequent failures. In addition they use consumables
like toner that represent the basis for much of their manufacturers revenue
stream.

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

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


PRODUCTS AND SERVICES

Device Relationship Management

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

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

Axeda Applications/TM/
----------------------

Axeda Applications employ web-architected interfaces for remote device
administration, desktop sharing, diagnostics and data visualization. Whether
remotely calibrating a product at a customer site, administering a remote
desktop, graphing real-time data for a device, or updating profile information
in hundreds of installed products, Axeda DRM/TM/ users access all information
via their standard web browsers. No special client-side software is required.
Axeda Applications currently include:

     .    Axeda Service/TM/ provides web-based access to global summaries and
          statistics of all operating devices and enables field service and
          technical support representatives to drill

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          down for information from an individual device to access the status
          for problem diagnosis and resolution. Integration of real-time device
          data with customer databases instantly provides a complete view of the
          system-wide status of a remote device. Axeda Service provides
          interactive real-time and historical data as well as alarm
          notification and analysis. E-mail notification of detected alarms can
          be set to enable fast reaction to potential problems.

     .    Axeda Access/TM/ extends the remote monitoring and diagnostics
          capability of the Axeda DRM/TM/ system beyond intelligent devices to
          include the remote administration of software applications, databases,
          desktop computers, servers and operating systems. It allows service
          and support specialists to use the Internet to remotely debug, update
          and administer software, increasing responsiveness to customer
          problems and avoiding costly on-site service calls compromising in
          corporate network security.

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

Axeda Enterprise/TM/
--------------------

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

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

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

Intelligent Agents
------------------

Axeda Intelligent Agents at the device allow distributed monitoring,
communications and control. These software products run on or are attached to
devices, allowing local data processing and two-

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                               Axeda Systems Inc.
                                Business of Axeda

way, Firewall-Friendly/TM/ communications with the enterprise. By putting
intelligence on devices, Axeda DRM/TM/ takes advantage of distributed processing
to enable large-scale deployment of proactive device management.

Axeda Intelligent Agents are fully portable across the most popular operating
systems and are easily integrated with existing designs or serve as the basis
for entirely new products. Intelligent Agent technology is offered in a variety
of forms: embedded within the chip or control processor, in an attached gateway,
or as a full supervisory system capable of managing multiple devices or a whole
facility. Our family of intelligent agents currently includes:

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

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

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

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

Axeda Agent Connectivity
------------------------

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

     .    Axeda @aGlance/IT/TM/, a multi-platform, client-server communications
          technology for industrial information access. Through the use of Axeda
          @aGlance/IT servers, process data stored in distributed control
          systems, supervisory control software, and data

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                               Axeda Systems Inc.
                                Business of Axeda

          historians is readily accessible to Axeda DRM/TM/ or other client
          applications. Axeda @aGlance/IT can be used to feed information to
          full DRM systems and is also sold on a stand-alone basis to companies
          needing inter-device communications.

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

Customization Products
----------------------

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

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

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

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

DRM Implementation Services
---------------------------

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

Service and Logistics Services
------------------------------

Axeda provides comprehensive service and logistics consulting and professional
services to assist clients in optimizing the value of their service management
business through improved service, revenue, materials and knowledge management.
Provided by experienced professionals in the industry, our solutions encompass
strategy, proven process design, proven best practices and applied technologies
designed to increase customer loyalty, increase revenue/profit, and reduce

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                               Axeda Systems Inc.
                                Business of Axeda

costs. Our full lifecycle of services span from functional and organizational
readiness evaluations and business case development to the delivery of business
transformation services, strategic/tactical and operational solutions, change
leadership, technology integration, metrics and measurements, and
experience-based capability models. Post-implementation support such as staffing
and mentoring services and performance evaluation are also provided to ensure
that our clients realize the full benefits from our services.

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

STRATEGIC ALLIANCES

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

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

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

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

SALES AND MARKETING

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

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

CUSTOMERS

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

RESEARCH AND DEVELOPMENT

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

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

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

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

In Israel, under the Law for the Encouragement of Industrial Research and
Development of 1984, a research and development program that meets specified
criteria is eligible for grants of up to

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

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

COMPETITION

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

     .    our customer service and support;
     .    our product reputation, quality, performance; and
     .    the price and features of our products such as adaptability,
          scalability, the ability to integrate with other products,
          functionality, and ease of use.

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

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

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                               Axeda Systems Inc.
                                Business of Axeda

whenever possible, selling buy over build economics and enabling these companies
to focus on their core application competencies.

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

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

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

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


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

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<PAGE>

                               Axeda Systems Inc.
                                Business of Axeda

We believe we can minimize competitive threats with extensive partnering
activities with Internet-enabling technology vendors and by providing a
comprehensive platform for vertical market application vendors who have specific
industry expertise. We believe the capabilities of our DRM solution, which span
from machine and device control to departmental data acquisition and to full
DRM, represent a significant offering that is currently unmatched in any of the
product competitors identified above.

INTELLECTUAL PROPERTY

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

EMPLOYEES

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

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

                                       18
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                               Axeda Systems Inc.
                                Business of Axeda

RISK FACTORS

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

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

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

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

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

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

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

We are seeking strategic alternatives for our digital media business.

Our future success depends upon the acceptance of our DRM solution

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

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

Our DRM products will involve significant capital expenditures by our customers.
We have a limited history of selling DRM products and will have to devote
substantial resources to educate prospective customers about the benefits of our
DRM products. Even if our DRM products are effective in reducing our customers'
costs or in providing our customers with new revenue sources, our target
customers may not choose them for technical, cost, support or other reasons. If
the market for our products fails to grow or grows more slowly than we
anticipate, our business will suffer.

We may not be able to successfully make or integrate acquisitions of other
companies

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

     .    the possibility that the business cultures may not mesh;

     .    interruption of the operations of the combined businesses;

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

     .    problems in retaining employees;

     .    challenges in retaining customers;

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

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

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

                                       20
<PAGE>

                               Axeda Systems Inc.
                                Business of Axeda

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

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

Our operating results have varied widely in the past, and we expect that they
will continue to vary significantly as we attempt to establish our products in
the DRM market and transition to a new business model. Furthermore;

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

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

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

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

     .    delays in introducing new products and services;

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

     .    the costs of litigation and intellectual property protection;

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

     .    new product introductions by competitors;

     .    the mix of license and services revenues;

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

     .    the mix of domestic and international sales;

     .    costs related to the acquisition of technologies or businesses;

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

     .    our ability to expand our operations; and

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

We determine our operating expenses largely on the basis of anticipated revenue
trends and a

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

We may not be able to compete effectively

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

     .    our ability to effectively market and sell our products;
     .    our customer service and support;
     .    our product reputation, quality, performance; and
     .    the price and features of our products such as adaptability,
          scalability, the ability to integrate with other products,
          functionality, and ease of use.


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

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

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                               Axeda Systems Inc.
                                Business of Axeda

We may not be able to keep pace with technological advances

The process of remotely extracting information from intelligent devices will
likely be characterized by rapid technological change, frequent new product
introductions and emerging industry standards. We also expect that the rapid
evolution of Internet-based applications and standards, as well as general
technology trends such as changes in or introductions of operating systems, will
require us to adapt our products to remain competitive. Our products could
become obsolete and unmarketable if we are unable to quickly adapt to new
technologies or standards.

To be successful, we will need to develop and introduce new products and product
enhancements that respond to technological changes, evolving industry standards
and other market changes and developments in a timely manner and on a
cost-effective basis. Although we plan to continue to spend substantial amounts
for research and development in the future, we cannot assure you that we will
develop new products and product enhancements successfully or that our products
will achieve broad market acceptance. Our failure to respond in a timely and
cost-effective manner to new and evolving technologies and other market changes
and developments could adversely impact our business.

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

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

We are dependent upon our key management for our future success, and few of our
key personnel are obligated to stay with us

Our success depends on the efforts and abilities of our senior management and
certain other key personnel. Many of our key employees are employed at will. If
any of these or other key employees left or was seriously injured and unable to
work and we were unable to find a qualified replacement, then our business could
be harmed. We have recently hired new managers and may hire key management
personnel as needed. We may not be able to successfully assimilate our recently
hired managers or to hire qualified key management personnel to replace them.

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

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

Our success depends upon the successful expansion of our sales force

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

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

Our future growth will be limited if:

     .    we fail to work effectively with indirect distribution channels;

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

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

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

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

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

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

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

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     .    policing unauthorized use of our products and trademarks is difficult,
          expensive and time-consuming and we are unable to determine the extent
          to which piracy of our

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                               Axeda Systems Inc.
                                Business of Axeda

          products and trademarks may occur, particularly overseas;

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

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

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

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

We may be subject to product returns, product liability claims and reduced sales
because of defects in our products

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

     .    delay or loss of revenues;

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

     .    diversion of development resources;

     .    increase product development costs;

     .    damage to our reputation;

     .    delay or diminish market acceptance of our products;

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                               Axeda Systems Inc.
                                Business of Axeda

     .    increased service and warranty costs; and

     .    litigation costs.

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

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

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

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

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

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

     .    A group of companies has formed a consortium known as MPEG-LA to
          enforce the proprietary rights of other holders of patents covering
          essential aspects of MPEG-2 technology that are incorporated into our
          products. MPEG-LA has notified us, as well as a number of PC
          manufacturers, including our customers, that the distribution of
          products that incorporate the MPEG-2 technology infringes patents
          owned by members of the consortium. MPEG-LA has requested that these
          PC manufacturers pay license fees for the use of the technology
          covered by MPEG-LA patents.

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                               Axeda Systems Inc.
                                Business of Axeda

     .    Another group of companies has formed a consortium known as DVD6C
          (formerly DVD Patent License Program) to enforce the proprietary
          rights of other holders of patents covering essential aspects of DVD
          technology that are incorporated into our products. DVD6C has notified
          us, as well as a number of PC manufacturers and other companies
          manufacturing or licensing DVD-related products, including our
          customers, that products that incorporate the DVD technology infringe
          patents owned by members of the consortium. DVD6C has requested that
          we as well as these PC manufacturers pay license fees for using the
          DVD6C patents.

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

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

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

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

We may be liable to some of our customers for damages that they incur in
connection with intellectual property claims. Some of our license agreements,
including many of the agreements we have entered into with our large PC OEM
customers, contain warranties of non-infringement and commitments to indemnify
our customers against liability arising from infringement of third-party
intellectual property, which may include third-party intellectual property such
as the patents held by members of MPEG LA, DVD6C, 3C and others. These
commitments may require us to indemnify or pay damages to our customers for all
or a portion of any license fees or other damages, including attorneys' fees,
they are required to pay or agree to pay these or other third parties. We have
received notices asserting rights under the indemnification provisions and
warranty provisions of our license agreements from several customers, including
Dell and Gateway.

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

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                               Axeda Systems Inc.
                                Business of Axeda

infringement.

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

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

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

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

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

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

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

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

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

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

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

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

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

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

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

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

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

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

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

     .    acceptance of and demand for our products;

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

     .    the costs of developing new products;

     .    the costs associated with our expansion; and

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

Although our current business plan does not foresee the need for further
financing to fund our operations for the next two years, due to risks and
uncertainties in the market place as well as a potential of pursuing further
acquisitions, we may need to raise additional capital. Additionally, to the
extent that the proceeds from the dispositions of our CE and IA assets are
exhausted, and if our existing sources of cash and cash flow from operations, if
any, are insufficient to fund our activities, we may need to raise additional
funds. If we issue additional stock to raise capital, your

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                               Axeda Systems Inc.
                                Business of Axeda

percentage ownership in Axeda would be reduced. Additional financing may not be
available when needed and, if such financing is available, it may not be
available on terms favorable to us.

Uncertainties exist regarding our stock repurchase program

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

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

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

Stock-based compensation will negatively affect our operating results

We have recorded deferred compensation in connection with the grant of stock
options to employees where the option exercise price is less than the estimated
fair value of the underlying shares of common stock as determined for financial
reporting purposes. We have recorded deferred compensation, net of forfeitures,
within stockholders' equity of $2.8 million at December 31, 2001, which is being
amortized over the vesting period of the related stock options, ranging from one
to four years. A balance of $1.8 million remains at December 31, 2001 and will
be amortized as follows: $1.3 million in 2002; $0.4 million in 2003; and $0.1
million in 2004.

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

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

We conduct business in a number of different countries. We sell products in
several countries outside the United States, including Israel, France, Holland,
the United Kingdom, Latin America and all of Asia. Our operations outside the
United States include facilities located in Israel, France, Holland, the United
Kingdom and Japan. In the year ended December 31, 2001, we, and

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                               Axeda Systems Inc.
                                Business of Axeda

eMation as a stand-alone entity, derived approximately 41% and 66% of our
revenues, respectively, from sales to foreign companies. We anticipate that
revenues from international operations will continue to represent a significant
portion of our revenues. As a result, we are subject to risks associated with
selling and operating in foreign countries. For example, some of our contracts
with foreign customers are denominated in foreign currencies. We do not
currently hedge against the risk of such transactions and as a result, we face a
risk of loss related to possible fluctuations in currency exchange rates.

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

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

     .    legal uncertainty regarding liability;

     .    language barriers in business discussions;

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

     .    time zone differences;

     .    reduced protection for intellectual property rights in some countries;

     .    differing labor regulations;

     .    tariffs, trade barriers and other regulatory barriers;

     .    problems in collecting accounts receivable;

     .    political and economic instability;

     .    changes in diplomatic and trade relationships;

     .    seasonal reductions in business activity;

     .    potentially adverse tax consequences;

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

     .    complexity and unexpected changes in local laws and regulations;

     .    greater difficulty in staffing and managing foreign operations; and

     .    increased financial accounting and reporting burdens and complexities.

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                               Axeda Systems Inc.
                                Business of Axeda

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

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

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

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

In the past, eMation was the beneficiary of certain governmental grants from
government agencies in Israel to encourage development and marketing of
technology under certain conditions. We do not expect to apply for additional
grants in the future of this nature. Through December 31, 2001, eMation received
grants from the Office of the Chief Scientist in the aggregate amount of $1.8
million and paid royalties in the aggregate amount of $1.3 million. As of
December 31, 2001, $0.1 million of the remaining potential $0.5 million of
principal liability is accrued in other current liabilities. eMation is
obligated to pay royalties of 3.0% to 3.5% of revenues derived from sales of
products funded through grants received from the Office of the Chief Scientist.
The terms of the Office of the Chief Scientist grants require that eMation
manufacture its products that are developed with such grants in Israel. In
addition, eMation may not transfer the technology developed pursuant to the
terms of these grants to third parties without the prior approval of a
governmental committee. Additionally, through December 31, 2001 eMation received
grants from the Israeli Government through the Fund for the Encouragement of
Marketing Activities in the aggregate amount of $1.2 million and paid royalties
in the aggregate amount of $0.5 million. As of December 31, 2001, $0.5 million
of the remaining potential $0.7 million of principal liability is accrued in
other current liabilities. eMation is obligated to pay royalties of 4.0% of
revenues derived from sales of products which result from grants received
through the Fund for the Encouragement of Marketing Activities.

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                               Axeda Systems Inc.
                                Business of Axeda

We face risks from the uncertainties of any future governmental regulation

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

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

As of December 31, 2001, our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 6.7
million shares, or 25% of our outstanding common stock. These stockholders, if
acting together, would be able to significantly influence all matters requiring
approval by our stockholders, including the election of directors, the approval
of mergers or other business combination transactions or a sale of all or
substantially all of our assets.

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

The board of directors has the authority without any further vote or action on
the part of our stockholders to issue up to 5,000,000 shares of preferred stock
and to determine the price, rights, preferences, privileges and restrictions of
the preferred stock. This preferred stock, if it is ever issued, may have
preference over and harm the rights of the holders of our common stock. Although
the issuance of this preferred stock will provide us with flexibility in
connection with possible acquisitions and other corporate purposes, this
issuance may make it more difficult for a third party to acquire a majority of
our outstanding voting stock. We currently have no plans to issue preferred
stock.

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

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

                                       34
<PAGE>

                               Axeda Systems Inc.
                                Business of Axeda

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

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

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

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

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

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

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

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

                                       35
<PAGE>

                               Axeda Systems Inc.
                                Business of Axeda

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.

                                       36
<PAGE>

                               Axeda Systems Inc.

Item 2

 Properties

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

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

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

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

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

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

                                       37
<PAGE>

                               Axeda Systems Inc.

Item 3

Legal Proceedings

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

Between February and April 2000, eleven class action lawsuits were filed against
certain of our current and former officers and directors and us in the United
States District Court for the Eastern District of Pennsylvania. On May 25, 2000,
the cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In
re RAVISENT Technologies Inc. Securities Litigation." Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Exchange Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder and seeks unspecified damages on behalf of a purported
class of purchasers of our stock during the period stated above. On July 3,
2000, we filed a motion to dismiss the consolidated and amended class action
complaint. The motion is presently fully briefed and the parties are waiting for
a hearing date to be set for the motion. Certain of our employees and certain
holders of 5% or more of Axeda common stock are members of the putative classes
alleged in these actions and therefore may have interests adverse to us with
respect to the alleged claims in these actions. We believe that such lawsuits or
claims are without merit and that we have meritorious defenses to the actions.
We plan to vigorously defend the litigation. However, failure to successfully
defend these actions could substantially harm our results of operations,
liquidity and financial condition.

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

      On November 27, 2001, a putative shareholder class action was filed
against us, certain of our officers and directors, and several investment banks
that were underwriters of the Company's initial public offering. The action was
filed in the United States District Court for the Southern

                                       38
<PAGE>

                               Axeda Systems Inc.

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

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

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

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

                                       39
<PAGE>

                               Axeda Systems Inc.

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

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

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

Directors
Robert M. Russell Jr.                15,615,444       511,596               --               --
Francis E. J. Wilde III              14,649,617     1,477,423               --               --

Ratify appointment of KPMG LLP       15,735,665       345,771           45,604               --
</TABLE>

ITEM 4(A)  Executive Officers of Axeda

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

--------------------------------------------------------------------------------
NAME                        AGE      POSITION WITH AXEDA
----                        ---      -------------------
--------------------------------------------------------------------------------
Robert M. Russell Jr.       50       Chairman of the Board and Chief Executive
                                     Officer
--------------------------------------------------------------------------------
Dale E. Calder              40       President and Director
--------------------------------------------------------------------------------
Thomas J. Fogarty           39       Executive Vice President, Chief Financial
                                     Officer and Treasurer
--------------------------------------------------------------------------------
Ned E. Barlas               38       Senior Vice President, Chief Legal Officer
                                     and Secretary
--------------------------------------------------------------------------------

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

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

                                       40
<PAGE>

                               Axeda Systems Inc.

Carolina at Charlotte and graduated with a degree in Electrical Engineering and
also attended the MBA program at Carnegie-Mellon University.

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

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

                                       41
<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 March 22, 2002, Axeda Systems Inc. had
27,223,566 outstanding shares of common stock held by 188 recordholders. Of
those, 19,096,046 shares of common stock were held by non-affiliates. The
following table sets forth, for the periods indicated, the high and low sales
prices per share of the common stock as reported on the NASDAQ National Market.

                                     2001                    2000
                            ----------------------------------------------
                               High        Low         High        Low
                            ----------------------------------------------
First Quarter............     $ 4.75      $ 1.75      $47.50      $11.63
Second Quarter...........     $ 2.55      $ 1.31      $15.50      $ 5.13
Third Quarter............     $ 2.08      $ 1.06      $ 9.13      $ 2.75
Fourth Quarter...........     $ 3.75      $ 1.50      $ 3.75      $ 1.47


 PRIVATE ISSUANCE OF STOCK

On December 7, 2001, we acquired all of the outstanding shares of eMation, Ltd.,
a private company organized under the laws of the State of Israel, pursuant to a
share purchase agreement amended and restated as of October 5, 2001, in
consideration for: 8 million shares of our common stock; options exercisable for
up to 1,428,710 shares of our common stock in connection with assumed eMation
stock options, 530,000 of which are exercisable for $0.01 per share and the
remaining 898,710 exercisable at $2.14 per share; options exercisable for up to
113,600 shares of our common stock issued at closing pursuant to our 1999 Stock
Incentive Plan; and warrants exercisable for up to 7,000 shares of our common
stock exercisable at $2.14 issued to ex-employees of eMation in consideration
for cancellation of outstanding options to purchase shares of eMation. We also
issued or assumed warrants at closing exercisable for up to 108,240 shares of
our common stock with exercise prices ranging from $4.88 to $21.51 per share to
holders of warrants exercisable for shares of eMation. The shareholders' agent
appointed pursuant to the share purchase agreement has agreed to a claim on the
escrow fund for the return of 23,843 shares of our common stock in consideration
for our issuance of these warrants. The total combined value of the securities
assumed and issued was approximately $20 million. The securities issued in the
acquisition were issued in reliance on an exemption from the registration
requirements of the Securities Exchange Act of 1933, as amended, by virtue of
Section 4(2) thereof.

An aggregate of 1.6 million of the 8 million shares of our common stock issued
in the eMation acquisition has been deposited with a third party escrow agent to
be held in escrow to compensate us for certain losses and taxes that may arise
as a result of the eMation acquisition. This escrow

                                       42
<PAGE>

                               Axeda Systems Inc.
                                Business of Axeda

arrangement will expire on December 7, 2002 and any shares remaining in escrow
will be returned to former eMation shareholders.

DIVIDEND POLICY

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

                                       43
<PAGE>

                               Axeda Systems Inc.

ITEM 6.    Selected Consolidated Financial Data
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
                                                           2001            2000            1999            1998           1997
                                                       ------------    ------------    ------------    ------------    ------------

Revenues:
<S>                                                    <C>             <C>             <C>             <C>             <C>
     License .......................................   $      6,036    $     12,328    $     12,710    $      3,262    $        936
     Services ......................................            442           1,898             968             185             509
     Hardware ......................................          1,111           6,628          15,740          26,841           5,376
                                                       ------------    ------------    ------------    ------------    ------------

Total revenues .....................................          7,589          20,854          29,418          30,288           6,821
                                                       ------------    ------------    ------------    ------------    ------------

Cost of revenues:

     License .......................................          1,629           3,374           1,874             248              --
     Services ......................................            223             733             259             106             331
     Hardware ......................................          1,122           6,189          13,732          24,192           8,072
     Software amortization .........................            171              --              --              --              --
     Inventory charges .............................         18,502           1,708              --              --              --
                                                       ------------    ------------    ------------    ------------    ------------
Total cost of revenues .............................         21,647          12,004          15,865          24,546           8,403
                                                       ------------    ------------    ------------    ------------    ------------

Gross profit .......................................        (14,058)          8,850          13,553           5,742          (1,582)

Research and development
     Non-cash compensation .........................          2,100             801             200             139              --
     Other research and development expense ........          5,691          10,187           8,107           3,121           1,828
Sales and marketing
     Non-cash compensation and other expense .......            147           3,480              --              --              --
     Other selling  and marketing expense ..........          7,670          10,863           5,296           1,964           1,158
General and administrative
     Non-cash compensation .........................            780             467             308              --           1,408
     Other general and administrative expense ......          9,860          10,256           5,048           4,625           1,509
    Provision for doubtful accounts ................            929           4,965              31              48             201
Depreciation and amortization ......................          2,844           5,897           1,886             906              86
Impairment charges .................................          3,916           2,831              --              --              --
Acquired in-process research and development .......          3,112           1,373           1,888           7,900              --
                                                       ------------    ------------    ------------    ------------    ------------

         Operating loss ............................        (51,107)        (42,270)         (9,211)        (12,961)         (7,772)

Gains on sales of assets ...........................         52,037              --              --              --              --
Interest (income) expense, net .....................         (1,753)         (1,792)         (1,192)            722             197
Other (income) expense, net ........................            133             (51)             --              --            (716)
                                                       ------------    ------------    ------------    ------------    ------------

Income (loss) before provision for income taxes ....          2,550         (40,427)         (8,019)        (13,683)         (7,253)

     Provision for income taxes ....................          1,123              40              52              --              --
                                                       ------------    ------------    ------------    ------------    ------------

Net income (loss) ..................................   $      1,427    $    (40,467)   $     (8,071)   $    (13,683)   $     (7,253)
                                                       ============    ============    ============    ============    ============
Accretion of discount on mandatory redeemable
preferred stock ....................................             --              --             659             754              --

Net income (loss) attributable to common
shareholders .......................................   $      1,427    $    (40,467)   $     (8,730)   $    (14,437)   $     (7,253)
                                                       ============    ============    ============    ============    ============
Basic net income (loss) per weighted average
common share outstanding ...........................   $       0.08    $      (2.44)   $      (1.02)   $      (4.94)   $      (3.52)
                                                       ============    ============    ============    ============    ============
Diluted net income (loss) per weighted average
common share outstanding ...........................   $       0.07    $      (2.44)   $      (1.02)   $      (4.94)   $      (3.52)
                                                       ============    ============    ============    ============    ============
Weighted average number of common shares outstanding
used in calculation of basic net income (loss)
per common share ...................................     18,559,185      16,606,795       8,532,140       2,920,677       2,060,668
                                                       ============    ============    ============    ============    ============
Weighted average number of common shares outstanding
used in calculation of diluted net income (loss)
per common share ...................................     20,194,713      16,606,795       8,532,140       2,920,677       2,060,668
                                                       ============    ============    ============    ============    ============
</TABLE>

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

                                       44
<PAGE>

                               Axeda Systems Inc.

ITEM 7:

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Overview and Recent Events

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

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

Effective as of March 23, 2001, pursuant to an asset acquisition agreement dated
as of March 21, 2001, along with certain of our subsidiaries, we sold
substantially all of the assets, excluding inventory, related to our IA business
to Phoenix Technologies Ltd., a Delaware corporation, for $18 million in cash
consideration, of which $1.8 million was being held in escrow by a third party
for indemnification purposes until March 2002. In March 2002 we received $1.3
million, including interest of approximately $0.05 million. The remaining
balance of approximately $0.55 million has been withheld pending the settlement
of a claim submitted by Phoenix. We are

                                       45
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                               Axeda Systems Inc.
                              Management Discussion

unable to predict the resolution of this matters, or reasonably estimate a range
of possible loss given the current status of this matter. Any escrow amounts not
returned to us will be recorded as a charge to the gain on sale of assets in the
period in which such determination is made. The assets sold include certain of
the contracts, equipment, intangible assets, intellectual property, prepaid
expenses and other assets primarily related to the operation of the IA business.
Under the asset acquisition agreement, Phoenix Technologies purchased our
e-Surfer embedded software Internet browser and related hardware designs for the
IA market. In addition, in connection with this asset sale, 13 of our employees
associated with the IA business accepted employment with Phoenix Technologies.
Revenues and gross margin for the IA business totaled approximately $1 million,
or 13% of total revenues, and less than $0.1 million, or less than 1 % of total
gross profit, excluding inventory charges, respectively, for the year ended
December 31, 2001. These amounts are not necessarily indicative of the results
that would have been obtained for any future period. In the future, any revenue
and gross margins, from this business are expected to be nominal as inventory is
either sold in the open market or scrapped.

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

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

An aggregate of 1.6 million shares of our common stock issued in the eMation
acquisition has been deposited with a third party escrow agent to be held in
escrow to compensate us for certain

                                       46
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                               Axeda Systems Inc.
                              Management Discussion

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

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

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

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

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

DRM

Since December 7, 2001, our main strategic focus has been the enterprise
software and services market. Our revenue recognition policy with respect to DRM
related licenses, maintenance agreements and services arrangements will remain
consistent with our current practice. Thus far, our DRM licensing arrangements
have consisted of upfront license fees accompanied by maintenance fees at a
fixed percentage with renewable annual amounts. To date we have not sold our DRM
license fees individually and therefore do not have vendor-specific objective
evidence of fair value ("VSOE") for this element. However, when offered with
our DRM

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                               Axeda Systems Inc.
                              Management Discussion

maintenance, which we sell at a fixed percentage, on an annual renewable basis,
we apply the provisions of Statement of Position 98-9, "Modification of SOP 97-
2, Software Revenue Recognition, With Respect to Certain Transactions." Under
this method, revenue is allocated to each delivered element using the residual
method based upon the fair value of the undelivered elements, which in our case
is the deferred maintenance. Revenues from license fees also consist of fees
paid on a per-unit basis for our Industrial Technology for Automation ("ITA")
product lines. In cases where we sell our products on a per-unit basis, revenues
are recognized when the product ships to an original equipment manufacturer
("OEM") or distributor. Service revenues consist of maintenance and support
agreements, consulting fees, and training. With the exception of prepaid
maintenance, which is initially deferred and later recognized on a ratable basis
over the term of the maintenance period, service revenues are recognized on a
time and material basis.

Digital Media Business

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

License revenues for our digital media products consist of either fees paid on a
per-unit basis, each time a manufacturer ships a product that incorporates our
software solutions, or may consist of flat fee arrangements, bulk license
purchases, or license grants. Services revenues consist of engineering fees from
PC, peripheral and semiconductor manufacturers for custom engineering services.
During the first quarter of 2001, we earned services revenues from CE
manufacturers for custom engineering. Services are generally billed on either a
time and material basis or on a project or contract basis. License revenues for
fees paid on a per-unit basis are recognized when earned, which is generally
based on receiving notification from a licensee detailing the shipments of
products incorporating our technology. In a number of cases, this occurs in the
quarter following the sale of the licensee's product to its customers. Our PC
license agreements generally have a term of one year or less and typically
require payment within 30 days after the end of the month or calendar quarter in
which the product is shipped. Some of our contracts may also require payment of
an up-front license fee. License fees paid in advance, with no further future
commitment, are recognized in the period that the license agreement is signed,
the fee is fixed or determinable, the technology is delivered and accepted and
collectibility is probable.

The amount and timing of some fixed fees could cause our operating results to
vary significantly from period to period due to the timing and number of
agreements, as well as the timing of the recognition of the associated revenues.
In cases where a fixed or lump-sum license fee is associated with the delivery
of multiple elements and VSOE cannot be established for the individual elements,
the entire fee from the arrangement is deferred until the earlier of the
establishment of VSOE or the delivery of all the elements of the arrangement. In
cases where a license grants a customer unspecified upgrade rights, the fixed or
lump sum license fee is deferred and recognized ratably over the term of the
arrangement. Billed amounts due from customers in excess of revenues recognized
are recorded as deferred revenues. Services revenues are

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                               Axeda Systems Inc.
                              Management Discussion

recognized upon delivery of the service in the case of time and material
contracts or on a percentage completion basis in the case of project-based
contracts. Hardware product sales are recognized upon shipment of the product to
the manufacturer or end user.

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

Other Acquisitions

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

We acquired Cinax Designs Inc. ("Cinax") in August 2000. The acquisition of
Cinax provided us with complementary products such as WinVCR, a product which
allows users to record any video and audio source onto their PC hard drive in
real time. In addition, the Cinax acquisition brought with it a skilled set of
developers, which we believed would allow us to accelerate the delivery of new
products that leverage our core competencies. We acquired all of the outstanding
capital stock of Cinax for approximately $3.5 million in cash and an aggregate
of 825,000 shares of Axeda common stock and shares of no par, non-voting
exchangeable preferred stock of our subsidiary, Ravisent British Columbia Inc.,
which shares of preferred stock are exchangeable, at the option of the holder,
on a one-for-one basis at any time, into shares of Axeda common stock. The
approximate value of the stock consideration on the date of acquisition was $3.7
million. The acquisition was recorded under the purchase method of accounting.
In connection with the acquisition, we expensed $1.4 million of the purchase
price as IPR&D. Goodwill and other intangible assets of $3.2 million were
recorded and were being amortized on a straight-line basis over four years. We
retained this intellectual property and did not transfer or sell it as a result
of the STMicroelectronics or Phoenix Technologies transactions. In December
2001, following a periodic review of the expected future cash flows from our
products using the Cinax technology, we determined that the carrying value of
the goodwill and other intangible assets at December 31,

                                       49
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                               Axeda Systems Inc.
                              Management Discussion

2001 was not recoverable and we recorded an impairment charge of approximately
$2.2 million. This determination was based upon factors including the projected
cash flows expected from the use of the Cinax technology and cash flows expected
from its eventual disposition, as well as our strategic shift to becoming an
enterprise software and services company.

Other Charges

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


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

Geographic Areas

Information pertaining to revenues attributed to our country of domicile, the
United States of America, foreign sales in total and individual foreign
countries is included in note 20 of the notes to the consolidated financial
statements, filed herewith at Item 8 - Financial Statements and

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                               Axeda Systems Inc.
                              Management Discussion

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 16 of the notes
to the consolidated financial statements, filed herewith at Item 8 - Financial
Statements and Supplementary Data.

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                               Axeda Systems Inc.
                              Management Discussion

Results of Operations

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

                                                           Year Ended December 31,
                                                      2001         2000         1999
<S>                                                     <C>          <C>          <C>
 Revenues:
      License ....................................       79.6%        59.1%        43.2%
      Services ...................................        5.8          9.1          3.3
      Hardware ...................................       14.6         31.8         53.5
                                                    ---------    ---------    ---------

 Total revenues ..................................      100.0        100.0        100.0

 Cost of revenues:
      License ....................................       21.5         16.2          6.4
      Services ...................................        2.9          3.5          0.8
      Hardware ...................................       14.8         29.7         46.7
      Software amortization ......................        2.2           --           --
      Inventory charges ..........................      243.8          8.2           --
                                                    ---------    ---------    ---------
 Total cost of revenues ..........................      285.2         57.6         53.9
                                                    ---------    ---------    ---------

 Gross profit ....................................     (185.2)        42.4         46.1

 Research and development
      Non-cash compensation ......................       27.7          3.8          0.7
      Other research and development expense .....       75.0         48.8         27.6
 Sales and marketing
      Non-cash compensation and other expense ....        1.9         16.7           --
      Other selling  and marketing expense .......      101.1         52.1         18.0
 General and administrative
      Non-cash compensation ......................       10.3          2.2          1.0
      Other general and administrative expense ...      129.9         49.2         17.2
      Provision for doubtful accounts ............       12.2         23.8          0.1
 Depreciation and amortization ...................       37.5         28.3          6.4
 Impairment charges ..............................       51.6         13.6           --
 Acquired in-process research and development ....       41.0          6.6          6.4
                                                    ---------    ---------    ---------

          Operating loss .........................     (673.4)      (202.7)       (31.3)

 Gains on sales of assets ........................      685.7           --           --
 Interest (income) expense, net ..................      (23.1)        (8.6)        (4.0)
 Other (income) expense, net .....................        1.8         (0.2)          --
                                                    ---------    ---------    ---------

 Income (loss) before provision for income taxes..       33.6       (193.9)       (27.3)

 Provision for income taxes ......................       14.8          0.2          0.2
                                                    ---------    ---------    ---------

 Net income (loss) ...............................       18.8%      (194.1)%      (27.5)%
                                                    =====================================
</TABLE>

                                       52
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

Years Ended December 31, 2001 and 2000

Revenues. Total revenues decreased 64% or $13.3 million from $20.9 million for
the year ending December 31, 2000 to $7.6 million for the year ending December
31, 2001. Revenues across our PC, CE & IA businesses decreased from the prior
year by $7.2 million, $1.2 million and $6.5 million, respectively, and were
partially offset by an increase of $1.6 million in our revenues as a result of
our acquisition of eMation. Revenues across our license, services and hardware
streams decreased $6.3 million, $1.5 million, and $5.5 million, respectively,
from the prior year. The decrease in revenues was due to the discontinuance of
new hardware product lines during 2000, increased competition and continued
weakness in the personal computer industry, and the Company's sale of
substantially all of the assets of its CE and IA businesses in March 2001.

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

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

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

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

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

                                       53
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                               Axeda Systems Inc.
                              Management Discussion

Cost of Revenues. Excluding the charges for inventory reserves, cost of revenues
decreased 69% or $3.2 million from $10.3 million for the year ended December 31,
2000 to $3.1 million for the year ended December 31, 2001. Cost of revenues
relating to our license, services and hardware revenues decreased $1.7, $0.5,
and $6.8 million, respectively, from the prior year. The $1.7 million decrease
in cost of license revenues corresponds directly to the decrease in license
revenues, offset by higher per unit Dolby Digital fees, which were associated
with lower unit volumes. The decrease in cost of hardware is directly associated
with a decrease in our Internet appliance sales. As we license more of our DRM
products in the future, we expect our cost of revenues as a percentage of
revenue to decrease. Partially offsetting this decrease, as a percentage of
revenues, will be the addition of non-cash amortization of acquired technology,
which will add approximately $2.1 million to the cost of revenues in 2002.

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

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

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

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

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

                                       54
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                               Axeda Systems Inc.
                              Management Discussion

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

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

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

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

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

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

                                       55
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

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

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

Under SFAS No. 142, goodwill acquired in a business combination after June 30,
2001 is no longer amortized. The provisions of SFAS No. 142 require that
goodwill be tested for impairment on an annual basis at the same time every
year. Accordingly, we have not recorded amortization expense in 2001 for
goodwill of approximately $20.8 million acquired in our purchase of eMation in
December 2001. Intangible assets acquired in a business combination and
recognized as an asset apart from goodwill must arise from contractual or other
legal rights or otherwise are separable. Under SFAS No. 142, recognized
intangible assets with finite useful lives are amortized over the period which
the assets are expected to contribute directly or indirectly to the Company's
future cash flows. We recorded identified intangible assets totaling
approximately $9.7 million in connection with our purchase of eMation, comprised
of developed and core technologies of approximately $1.4 million and $7.0
million, respectively, patent applications of approximately $1.0 million and
customer base of approximately $0.3 million. The developed and core technologies
will be amortized over their estimated useful lives of 2 and 5 years,
respectively, and will be recorded as cost of revenues which totaled $0.2
million in 2001. The patent applications and customer base will be amortized
over their estimated useful life of 5 years and will be included with operating
expenses.

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

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

Interest (Income) and Expense, Net. Net interest income decreased by $0.04
million, or 2%, for

                                       56
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                               Axeda Systems Inc.
                              Management Discussion

the year ended December 31, 2001 compared to the comparable period in 2000. The
decrease is the result of lower bank interest rates in 2001.

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


Years Ended December 31, 2000 and 1999

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

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

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

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

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

Cost of revenues for hardware decreased approximately $7.5 million or 55% from
$13.7 million in 1999 to $6.2 million in 2000.

                                       57
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

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

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

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

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

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

                                       58
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

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

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

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

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

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

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

                                       59
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

growing business operations were also incurred in 2000.

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

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

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

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

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

                                       60
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

Quarterly Results of Operations(Unaudited)

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

                       Mar. 31,      Jun. 30,      Sept. 30,     Dec. 31,      Mar. 31,      Jun. 30,     Sept. 30,      Dec. 31,
                         2000          2000          2000          2000          2001          2001          2001          2001
                     ------------  ------------  ------------  ------------  ------------  ------------  ------------  ------------
<S>                  <C>           <C>           <C>           <C>           <C>           <C>           <C>           <C>
Revenues:
     License ....... $      2,774  $      3,180  $      3,318  $      3,056  $      2,363  $        673  $        571  $      2,429
     Services ......          147           119           435         1,197           407            --            --            35
     Hardware ......        2,789         1,547           475         1,817            46           121           270           674
                     ---------------------------------------------------------------------------------------------------------------

Total revenues .....        5,710         4,846         4,228         6,070         2,816           794           841         3,138

Cost of revenues:
     License .......          790           959           676           949           523           432           207           467
     Services ......          274            26           110           323            94            --            --           129
     Hardware ......        2,579         1,356           477         1,777            37           104           303           678
    Software
    amortization ...           --            --            --            --            --            --            --           171
    Inventory
    charges ........           --            --            --         1,708            --        13,420            --         5,082
                     ---------------------------------------------------------------------------------------------------------------
Total cost of
revenues ...........        3,643         2,341         1,263         4,757           654        13,956           510         6,527
                     ---------------------------------------------------------------------------------------------------------------

Gross profit .......        2,067         2,505         2,965         1,313         2,162       (13,162)          331        (3,389)

Research and
development
     Non-cash
     compensation ..           81            81            95           544         1,738           116           228            18
     Other research
     and development
     expense .......        2,143         2,970         2,686         2,388         2,407           999         1,084         1,201
Sales and marketing
     Non-cash
     compensation
     and other
     expense .......          359           143         1,525         1,453            69            --            18            60
     Other selling
     and marketing
     expense .......        1,882         2,602         4,298         2,081         3,492           842         1,075         2,261
General and
administrative
     Non-cash
     compensation ..           41            55            71           300            64            48           275           393
     Other general
     and
     administrative
     expense .......        2,343         3,277         2,086         2,549         2,289         1,588         2,620         3,363
     Provision for
     doubtful
     accounts ......           --            90            96         4,780           126           658            --           145
Depreciation and
amortization .......        1,356         1,385         1,489         1,667         1,666           389           358           431
Impairment charges .           --            --            --         2,831            --            --            --         3,916
Acquired in-process
research and
development ........           --            --         1,373            --            --            --            --         3,112
                     ---------------------------------------------------------------------------------------------------------------

Operating loss .....       (6,138)       (8,098)      (10,754)      (17,280)       (9,689)      (17,802)       (5,327)      (18,289)

Gains on sales
of assets ..........           --            --            --            --        52,037            --            --            --
Interest (income)
expense, net
and other (income) .         (616)         (598)         (433)         (196)         (366)         (681)         (520)          (53)
                     ---------------------------------------------------------------------------------------------------------------

Provision for
income taxes
(benefit) ..........           15            23             7            (5)        2,979        (1,171)         (685)           --
                     ---------------------------------------------------------------------------------------------------------------

Net income (loss) .. $     (5,537) $     (7,523) $    (10,328) $    (17,079) $     39,735  $    (15,950) $     (4,122) $    (18,236)
                     ============  ============  ============  ============  ============  ============  ============  ============
Basic net income
(loss) per
weighted average
common share
outstanding ........ $      (0.34) $      (0.46) $      (0.61) $      (0.99) $       2.28  $      (0.89) $      (0.22) $      (0.87)
                     ============  ============  ============  ============  ============  ============  ============  ============
Diluted net income
(loss) per
weighted average
common share
outstanding ........ $      (0.34) $      (0.46) $      (0.61) $      (0.99) $       2.14  $      (0.89) $      (0.22) $      (0.87)
                     ============  ============  ============  ============  ============  ============  ============  ============
Weighted average
number of common
shares outstanding
used in calculation
of basic net income
(loss) per
common share .......   16,068,969    16,289,587    16,834,358    17,225,572    17,415,045    17,840,876    18,720,363    20,916,050
                     ============  ============  ============  ============  ============  ============  ============  ============
Weighted average
number of common
shares outstanding
used in calculation
of diluted net
income (loss) per
common share .......   16,068,969    16,289,587    16,834,358    17,225,572    18,582,846    17,840,876    18,720,363    20,916,050
                     ============  ============  ============  ============  ============  ============  ============  ============
</TABLE>

                                       61
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

Acquired In-Process Research and Development

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

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

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

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

                                      62
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

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

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

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

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

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

                                       63
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

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

                                       64
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

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

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

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

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

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

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

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

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

                                       65
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

                                       66
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

agreement governing the relationship together with binding purchase orders on a
transaction-by-transaction basis.

For multiple-element arrangements that are not accounted for using long-term
contract accounting (for example, undelivered maintenance and support), we
allocate revenue to the delivered elements of the arrangement using the residual
value method when there is VSOE for each of the undelivered elements. We defer
revenue from the arrangement fee equivalent to the fair value of the undelivered
elements and the difference between the total arrangement fee and the amount
deferred for the undelivered elements is recognized as revenue related to the
delivered elements. The fair value of DRM maintenance and postcontract customer
support ("PCS") obligations is based upon separate sales of renewals to other
customers or upon renewal rates quoted in the contracts. The fair value of DRM
services, such as training or consulting, is based upon separate sales by us of
these services to other customers.

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

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

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

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

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

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

                                       67
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

..    significant underperformance relative to expected historical or projected
     future operating results;
..    significant changes in the manner of our use of the acquired assets or the
     strategy for our overall business;
..    significant negative industry or economic trends;
..    significant decline in our stock price for a sustained period; and o our
     market capitalization relative to net book value.


When we determine that the carrying value of identified intangible assets,
long-lived assets and related goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a projected discounted cash flow method using a discount
rate determined by our management to be commensurate with the risk inherent in
our current business model. Net identified intangible assets, long-lived assets,
and goodwill amounted to $30.4 million as of December 31, 2001.

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

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

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

                                       68
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

Recent Accounting Pronouncements

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

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

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

In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill

                                       69
<PAGE>

                               Axeda Systems Inc.
                              Management Discussion

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


ITEM 7 a.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       70
<PAGE>

                               Axeda Systems Inc.

ITEM 8.
Financial Statements and Supplementary Data
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------
<S>                                                                                            <C>
Consolidated Financial Statements
---------------------------------------------------------------------------------------------
Axeda Systems Inc.
---------------------------------------------------------------------------------------------
  Independent Auditors' Report                                                                 71
---------------------------------------------------------------------------------------------
  Consolidated Balance Sheets, December 31, 2001 and 2000                                      72
---------------------------------------------------------------------------------------------
 Consolidated Statements of Operations, Years ended December 31, 2001, 2000, and 1999          73
---------------------------------------------------------------------------------------------
 Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31,
 2001, 2000, and 1999                                                                          74
---------------------------------------------------------------------------------------------
 Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000, and 1999          75
---------------------------------------------------------------------------------------------
 Notes to the Consolidated Financial Statements                                                76
---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------
</TABLE>

                                       71
<PAGE>

                               Axeda Systems Inc.


INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Axeda Systems Inc.:

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

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

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

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

KPMG LLP

Philadelphia, Pennsylvania
February 25, 2002

                                       72
<PAGE>

<TABLE>
<CAPTION>

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


PART II
ITEM 8:  FINANCIAL STATEMENTS
                                                                                                          December 31,
                                                                                                       2001         2000
                                                                                                    ---------    ---------
ASSETS
Current assets:
<S>                                                                                                 <C>          <C>
    Cash and cash equivalents, including restricted cash of $2,549 in 2001 and $1,806 in 2000....   $  47,349    $   9,615
    Accounts receivable, net of provision for doubtful accounts of $179 in 2001 and $2,405 in
    2000 ........................................................................................       4,623        5,901
    Inventories, net ............................................................................       2,070       20,883
    Prepaid expenses ............................................................................         934          963
    Loans receivable--officers, net .............................................................          34          662
    Other current assets ........................................................................         685          547
                                                                                                    ---------    ---------
         Total current assets ...................................................................      55,695       38,571
                                                                                                    ---------    ---------
    Furniture and equipment, net ................................................................       2,567        3,995

    Goodwill, net of accumulated amortization of $7,425 in 2000 .................................      20,819       15,814
    Identified intangible assets, net of accumulated amortization of $192 in 2001 ...............       9,553        1,716
    Loan receivable--officer ....................................................................          --           25
    Other assets ................................................................................         472           72
                                                                                                    ---------    ---------
         Total assets ...........................................................................   $  89,106    $  60,193
                                                                                                    =========    =========

 LIABILITIES AND STOCKHOLDERS' EQUITY
 Current liabilities:
    Current portion of notes payable ............................................................   $   2,149    $      --
    Accounts payable ............................................................................       5,047       11,088
    Accrued expenses ............................................................................       8,928        2,147
    Income taxes payable ........................................................................       1,075           --
    Deferred revenue ............................................................................         926        1,473
    Other current liabilities ...................................................................          --          626
                                                                                                    ---------    ---------
         Total current liabilities ..............................................................      18,125       15,334
                                                                                                    ---------    ---------

 Non-current liabilities:
    Notes payable, less current portion .........................................................         187           --
    Other non-current liabilities ...............................................................       1,428           31
                                                                                                    ---------    ---------
       Total liabilities ........................................................................      19,740       15,365
                                                                                                    ---------    ---------

 Commitments and contingencies (note 15)

 Stockholders' equity:
    Preferred stock, $.001 par value; 5,000,000 shares authorized in 2001 and 2000, none
    issued or outstanding .......................................................................          --           --
    Common stock, $.001 par value 50,000,000 authorized; 27,274,962 shares issued in 2001 and
    17,594,429 in 2000 ..........................................................................          27           17
    Additional paid-in capital ..................................................................     143,454      121,330

    Deferred stock compensation .................................................................      (1,842)      (3,241)
    Accumulated deficit .........................................................................     (70,953)     (72,380)
    Accumulated other comprehensive income (loss) ...............................................          21         (178)

    Treasury stock at cost, 583,800 shares in 2001 and 200,000 shares in 2000 ...................      (1,341)        (720)
                                                                                                    ---------    ---------


         Total stockholders' equity .............................................................      69,366       44,828
                                                                                                    ---------    ---------
         Total liabilities and stockholders' equity .............................................   $  89,106    $  60,193
                                                                                                    =========    =========
                               See accompanying notes to consolidated financial statements.
</TABLE>

                                       73
<PAGE>

<TABLE>
<CAPTION>

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


                                                                                              December 31,
                                                                              --------------------------------------------
                                                                                  2001            2000            1999
                                                                              ------------    ------------    ------------
<S>                                                                           <C>             <C>             <C>
Revenues:
     License ..............................................................   $      6,036    $     12,328    $     12,710
     Services .............................................................            442           1,898             968
     Hardware .............................................................          1,111           6,628          15,740
                                                                              ------------    ------------    ------------

   Total revenues .........................................................          7,589          20,854          29,418
                                                                              ------------    ------------    ------------

Cost of revenues:
     License ..............................................................          1,629           3,374           1,874
     Services .............................................................            223             733             259
     Hardware .............................................................          1,122           6,189          13,732
     Software amortization ................................................            171              --              --
     Inventory charges ....................................................         18,502           1,708              --
                                                                              ------------    ------------    ------------

   Total cost of revenues .................................................         21,647          12,004          15,865
                                                                              ------------    ------------    ------------

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

Research and development
     Non-cash compensation ................................................          2,100             801             200
     Other research and development expense ...............................          5,691          10,187           8,107
Sales and marketing
     Non-cash compensation and other expense ..............................            147           3,480              --
     Other selling and marketing expense ..................................          7,670          10,863           5,296
General and administrative
     Non-cash compensation ................................................            780             467             308
     Other general and administrative expense .............................          9,860          10,256           5,048
     Provision for doubtful accounts ......................................            929           4,965              31
Depreciation and amortization .............................................          2,844           5,897           1,886
Impairment charges ........................................................          3,916           2,831              --
Acquired in-process research and development ..............................          3,112           1,373           1,888
                                                                              ------------    ------------    ------------

Operating loss ............................................................        (51,107)        (42,270)         (9,211)

Gains on sales of assets ..................................................         52,037              --              --
Interest (income) expense, net ............................................         (1,753)         (1,792)         (1,192)
Other (income) expense, net ...............................................            133             (51)             --
                                                                              ------------    ------------    ------------

Income (loss) before provision for income taxes ...........................          2,550         (40,427)         (8,019)

     Provision for income taxes ...........................................          1,123              40              52
                                                                              ------------    ------------    ------------

Net income (loss) .........................................................          1,427         (40,467)         (8,071)

Accretion of discount on mandatory redeemable preferred stock .............             --              --             659
                                                                              ------------    ------------    ------------
Net income (loss) attributable to common shareholders .....................   $      1,427    $    (40,467)   $     (8,730)
                                                                              ============    ============    ============
Basic net income (loss) per weighted average common share outstanding .....   $        .08    $      (2.44)   $      (1.02)
                                                                              ============    ============    ============
Diluted net income (loss) per weighted average common share outstanding ...   $        .07    $      (2.44)   $      (1.02)
                                                                              ============    ============    ============
Weighted average number of common shares outstanding used in calculation of
basic net income (loss) per common share ..................................     18,559,185      16,606,795       8,532,140
                                                                              ============    ============    ============
Weighted average number of common shares outstanding used in calculation of
diluted net income (loss) per common share ................................     20,194,713      16,606,795       8,532,140
                                                                              ============    ============    ============

                               See accompanying notes to consolidated financial statements.
</TABLE>

                                       74
<PAGE>

<TABLE>
<CAPTION>

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


                                                                         Accumulated                           Total       Compre-
                     Common stock       Additional  Deferred    Accumu-     other                           stockholders'  hensive
                                         paid-in     stock       lated   comprehensive  Treasury    Note       equity      income
                    Shares    Amount     capital  compensation  deficit  income (loss)   stock    receivable (deficiency)  (loss)
                 ------------------------------------------------------------------------------------------------------------------
<S>               <C>       <C>        <C>        <C>         <C>         <C>         <C>         <C>        <C>         <C>
Balance
as of
December
31, 1998 .......  3,520,851 $        3 $   13,097 $     (749) $  (23,842) $      (25) $     (720) $       -- $  (12,236) $  (13,708)
                 ---------- ---------- ---------- ----------  ----------  ----------  ----------  ---------- ----------  ==========
Issuance
of Series B
preferred
stock
and stock
subscription
receivable .....         --         --        125         --          --          --          --        (500)      (375)         --
Transaction
costs
related to
sale of
Series C
preferred
stock ..........         --         --        (30)        --          --          --          --          --        (30)         --
Issuance of
common
stock upon
exercise of
options ........     83,061         --        129         --          --          --          --          --        129          --
Conversion of
subordinated
notes payable
upon initial
public
offering .......         --         --        625         --          --          --          --          --        625          --
Issuance of
common stock
upon exercise
of warrants ....    926,002          1         54         --          --          --          --          --         55          --
Accretion of
discount
on mandatory
redeemable
preferred
stock ..........         --         --       (659)        --          --          --          --          --       (659)         --
Initial
public
stock
offering, net ..  5,750,000          6     61,416         --          --          --          --          --     61,422          --
Conversion of
preferred
stock to
common stock
upon public
offering .......  5,508,207          6     20,460         --          --          --          --          --     20,466          --
Deferred
stock
compensation
related
to stock
options ........         --         --      1,371     (1,371)         --          --          --          --         --          --
Amortization
of deferred
stock
compensation ...         --         --         --        442          --          --          --          --        442          --
Compensation
related to
stock options ..         --         --        470         --          --          --          --          --        470          --
Issuance of
common stock
to acquire
Teknema ........    264,745         --     12,402         --          --          --          --          --     12,402          --
Foreign
currency
translation
adjustment .....         --         --         --         --          --         (55)         --          --        (55)        (55)
Net loss .......         --         --         --         --      (8,071)         --          --          --     (8,071)     (8,071)
                 ---------- ---------- ---------- ----------  ----------  ----------  ----------  ---------- ----------  ----------


                                                                         Accumulated                           Total       Compre-
                     Common stock       Additional  Deferred    Accumu-     other                           stockholders'  hensive
                                         paid-in     stock       lated   comprehensive  Treasury    Note       equity      income
                    Shares    Amount     capital  compensation  deficit  income (loss)   stock    receivable (deficiency)  (loss)
                 ------------------------------------------------------------------------------------------------------------------
Balances
as of
December
31, 1999 ....... 16,052,866 $       16 $  109,460 $   (1,678) $  (31,913) $      (80) $     (720) $     (500)$   74,585  $   (8,126)
                 ---------- ---------- ---------- ----------  ----------  ----------  ----------  ---------- ----------  ==========
Repayment
of stock
subscription
receivable .....         --         --         --         --          --          --          --         500        500          --
Issuance of
common
stock upon
exercise of
options ........    888,272          1      1,040         --          --          --          --          --      1,041          --
Issuance of
common
stock upon
exercise of
warrants .......    405,298         --         20         --          --          --          --          --         20          --
Deferred
compensation
related to
stock
options ........     33,647         --        890       (758)         --          --          --          --        132          --
Amortization
of deferred
stock
compensation ...         --         --         --      1,271          --          --          --          --      1,271          --
Issuance of
equity
securities to
acquire Cinax ..    138,455         --      3,725     (2,076)         --          --          --          --      1,649          --
Issuance of
warrants
under
distribution
rights
agreement
and other
services .......         --         --      5,724         --          --          --          --          --      5,724          --
Foreign
currency
translation
adjustment .....         --         --         --         --          --         (11)         --          --        (11)        (11)
Unrealized loss
on available-
for-sale
investment .....         --         --         --         --          --         (87)         --          --        (87)        (87)
Issuance of
common stock
for employee
stock
purchase
plan ...........     75,891         --        471         --          --          --          --          --        471          --
Net loss .......         --         --         --         --     (40,467)         --          --          --    (40,467)    (40,467)
                 ---------- ---------- ---------- ----------  ----------  ----------  ----------  ---------- ----------  ----------


                                                                         Accumulated                           Total       Compre-
                     Common stock       Additional  Deferred    Accumu-     other                           stockholders'  hensive
                                         paid-in     stock       lated   comprehensive  Treasury    Note       equity      income
                    Shares    Amount     capital  compensation  deficit  income (loss)   stock    receivable (deficiency)  (loss)
                 ------------------------------------------------------------------------------------------------------------------
Balances
as of
December
31, 2000 ....... 17,594,429 $       17 $  121,330 $   (3,241) $  (72,380) $     (178) $     (720) $       -- $   44,828  $  (40,565)
                 ---------- ---------- ---------- ----------  ----------  ----------  ----------  ---------- ----------  ==========
Issuance of
common
stock upon
exercise of
options ........  1,167,132          1      1,570         --          --          --          --          --      1,571          --
Issuance of
common
stock upon
exercise of
warrants .......         --         --          4         --          --          --          --          --          4          --
Issuance of
common
stock for
employee stock
purchase plan ..     38,735         --         86         --          --          --          --          --         86          --
Issuance of
equity
securities
related to
Cinax ..........    474,666          1         14        344          --          --          --          --        359          --
Issuance of
common
stock to
acquire
eMation,
Ltd. ...........  8,000,000          8     19,752       (847)         --          --          --          --     18,913          --
Compensation
related to
stock
options
and warrants ...         --         --        698        549          --          --          --          --      1,247          --
Amortization
of deferred
stock
compensation ...         --         --         --      1,353          --          --          --          --      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       1,427
                 ---------- ---------- ---------- ----------  ----------  ----------  ----------  ---------- ----------  ----------
Balances
as of
December
31, 2001 ....... 27,274,962 $       27 $  143,454 $   (1,842) $  (70,953) $       21  $   (1,341) $       -- $   69,366  $    1,626
                 ---------- ---------- ---------- ----------  ----------  ----------  ----------  ---------- ----------  ==========

                                    See accompanying notes to consolidated financial statements.
</TABLE>

                                       75
<PAGE>

<TABLE>
<CAPTION>

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

                                                                             December 31,
                                                                    ------------------------------
                                                                       2001       2000      1999
                                                                    ------------------------------
<S>                                                                 <C>        <C>        <C>
Cash flows from operating activities:
   Net income (loss) .............................................  $  1,427   $(40,467)  $ (8,071)
   Adjustments to reconcile net income (loss) to net cash used
   in operating activities:
     Depreciation and amortization ...............................     3,015      5,897      1,886
     Impairment charges ..........................................     3,916      2,831         --
     Gain on sales of assets .....................................   (52,037)        --        (17)
     Non-cash compensation and other expenses ....................     2,599      4,496        937
     Provision for doubtful accounts .............................       929      4,965         31
     Provision for inventory .....................................    18,783         --         --
     Acquired in-process research and development ................     3,112      1,373      1,888

   Changes in items affecting operations (excluding the effects of
   acquisitions and divestitures):
     Accounts receivable .........................................     2,252      4,822       (262)
     Inventories .................................................      (895)   (19,560)       260
     Loan receivable--officer ....................................       494       (209)      (418)
     Prepaid expenses and other current assets ...................    (1,590)      (220)    (1,042)
     Other assets and intangible assets ..........................       572        152         --
     Accounts payable ............................................   (15,623)     4,980    (10,152)
     Accrued expenses, other current other non-current
       liabilities ...............................................     2,257     (1,205)     1,136
     Income taxes payable ........................................     1,075         --         --
     Deferred revenue ............................................      (765)    (3,186)     4,486
                                                                    --------   --------   --------
Net cash used in operating activities ............................   (30,479)   (35,331)    (9,338)
                                                                    --------   --------   --------

Cash flows from investing activities:
   Capital expenditures ..........................................      (505)    (3,204)    (1,139)
   Net proceeds from sales of assets .............................    68,112        141        129
   Acquisition, net of cash acquired .............................       497     (2,763)    (3,267)
   Proceeds from (investment in) short-term investment ...........        --      1,018     (1,018)
                                                                    --------   --------   --------
Net cash provided by (used in) investing activities ..............    68,104     (4,808)    (5,295)
                                                                    --------   --------   --------

Cash flows from financing activities:
   Net proceeds from exercise of stock options and warrants ......     1,538        970        184
   Repurchases of common stock ...................................      (621)        --         --
   Borrowings (repayments) under capital lease obligations .......       (38)       (40)        60
   Repayments under other liabilities ............................      (132)      (441)    (2,321)
   Repayment of shareholder bridge loan ..........................      (750)        --         --
   Note receivable ...............................................        --        500         --
   Net proceeds from issuance of common stock ....................        --         --     61,422
   Net proceeds from Series B and C preferred stock ..............        --         --      3,125
   Payments for convertible securities ...........................        --         --        (30)
                                                                    --------   --------   --------
Net cash provided by (used in) financing activities ..............        (3)       989     62,440

Effect of exchange rate changes on cash and cash equivalents .....       112        (11)       (55)
                                                                    --------   --------   --------

Net increase (decrease) in cash and cash equivalents .............    37,734    (39,161)    47,752
Cash and cash equivalents:
   Beginning of period ...........................................     9,615     48,776      1,024
                                                                    --------   --------   --------
   End of period .................................................  $ 47,349   $  9,615   $ 48,776
                                                                    ========   ========   ========

Supplemental disclosure of cash flow information:
Cash paid during the year for:
     Interest ....................................................  $     20   $     33   $    356
     Income taxes ................................................       308         --         --
Non-cash investing and financing activities:
     Equipment acquired under capital lease obligation ...........        --         --        109
     Issuance of warrants and options in connection with equity
     transactions ................................................     2,262      8,253      1,437
     Amortization of deferred stock compensation .................     1,353      1,271        442
</TABLE>

                   See accompanying notes to consolidated financial statements.

                                       76
<PAGE>

                               AXEDA SYSTEMS INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1)      Summary of Significant Accounting Policies

        a)  Description of Business

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

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

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

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

                                       77
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


sustain profitability in the short or long term. However, management believes
that the current cash and cash equivalent amounts will be sufficient to sustain
the Company's operations through December 31, 2002.

        b)  Principles of Consolidation

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

        c)  Cash and Cash Equivalents

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

        d)  Inventories

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

        e)  Furniture and Equipment

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

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

        f)  Goodwill and Intangible Assets

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

                                       78
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


        g)  Long-lived Assets

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

         In 2001, the Company recognized an impairment charge of approximately
$2.2 million to reduce the amount of goodwill and intangible assets associated
with a prior acquisition to their estimated fair value of zero. The impairment
charge is attributable to certain technology acquired from, and goodwill related
to the acquisition of Cinax Designs Inc. in 2000. During the fourth quarter of
2001, the Company determined that it would not allocate future resources to
assist in the market growth of this technology and the Company does not
anticipate material future sales of the products. Also in 2001, the Company
recognized an impairment charge of approximately $1.7 million to reduce the
amount of acquired technology rights associated with a prior equity financing to
its estimated fair value of zero. This impairment charge is attributable to
certain technology acquired from Intel in connection with the sale of the
Company's Series C preferred stock in 1999. During the fourth quarter of 2001,
the Company determined that it would not allocate future resources to assist in
the market growth of this technology and the Company does not anticipate any
material future sales of products incorporating this technology. The aggregate
amount of impaired long-lived assets of approximately $3.9 million recorded in
2001 is included in impairment charges in the accompanying statement of
operations.

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

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

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

        h)  Revenue Recognition

         In 2001 and 2000, the Company's primary revenue categories consist of:
software licenses for PC and CE products, including DVD; IA products, including
Internet browser software and

                                       79
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

         The Company recognizes software revenues in accordance with the
American Institute of Certified Public Accountants' (AICPA) Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended by SOP
98-9, "Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" ("SOP 98-9"). License revenues are recognized in the
period in which the license agreement is signed, the fee is fixed and
determinable, delivery of the technology has occurred requiring no significant
production modification or customization and collectibility is probable.
Royalties representing software license fees paid on a per unit basis are
recognized when earned, which is generally based on receiving notification from
licensees stating the number of products sold which incorporate the licensed
technology from the Company and for which license fees, based on a per unit
basis, are due. The terms of the license agreements generally require the
licensees to give notification to the Company within 45 to 60 days of the end of
the quarter during which the sales of the licensees' products take place. In a
number of cases, the revenue recorded by the Company will occur in the quarter
following the sale of the licensee's products to its customers.

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

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

         Hardware revenues are recognized upon shipment of products to
customers. The Company's sales to original equipment manufacturers do not
provide a right of return unless in the event of manufacturing defect, which is
the responsibility of the Company's third party contract manufacturers. For
hardware transactions where no software is involved, we apply the

                                       80
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


provisions of Staff Accounting Bulletin 101 "Revenue Recognition" ("SAB 101")
issued by the U.S. Securities and Exchange Commission ("SEC").

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

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

        i)  Computer Software Costs

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

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

        j)  Advertising Costs

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

        k)  Income Taxes

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

                                       81
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards.

        l)  Financial Instruments

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

        m)  Stock Options

         SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS No.
123"), provides companies the alternative to adopt the fair value method for
expense recognition of employee stock options and stock-based awards or to
continue to account for such items using the intrinsic value method as outlined
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25") with pro forma disclosures of results of operations as
if the fair value method had been applied. The Company applies APB 25 for stock
options and stock-based awards to employees and has disclosed pro forma net
income (loss) as if the fair value method had been applied (note 14).

        n)  Use of Estimates

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

        o)  Foreign Currency Translation

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

        p)  Computation of Net Income (Loss) Per Share

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

                                       82
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                             Income         Shares        Per-Share
                                                           (Numerator)   (Denominator)      Amount
----------------------------------------------------------------------------------------------------
<S>                                                         <C>                <C>        <C>
Basic EPS
----------------------------------------------------------------------------------------------------
    Net income available to common stockholders .........   $    1,427         18,559     $     0.08
                                                            ----------     ----------     ----------
----------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------
Effect of Dilutive Securities
----------------------------------------------------------------------------------------------------
    Warrants ............................................           --            218
----------------------------------------------------------------------------------------------------
    Outstanding options .................................           --            659
----------------------------------------------------------------------------------------------------
    Contingently issuable shares ........................           --            759
                                                            ----------     ----------
----------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------
Diluted EPS
----------------------------------------------------------------------------------------------------
    Net income available to common stockholders
    and assumed conversions .............................   $    1,427         20,195     $     0.07
                                                            ==========     ==========     ==========
----------------------------------------------------------------------------------------------------
</TABLE>

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

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

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

        q)  Recent Accounting Pronouncements

         In October 2001, the Financial Accounting Standards Board (FASB) issued
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), which supersedes both FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of (SFAS No. 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (APB 30), for the disposal of a segment of a business
(as previously defined in that Opinion). SFAS No. 144 retains the fundamental
provisions in SFAS No. 121 for recognizing and measuring impairment losses on
long-lived assets held for use and long-lived assets to be disposed of by sale,
while also resolving significant implementation issues associated with SFAS No.
121. For example, SFAS No. 144 provides guidance on how a long-

                                       83
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


lived asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. SFAS No. 144 retains the basic provisions of APB 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike SFAS No. 121, an impairment assessment under SFAS No. 144 will
never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under SFAS No. 142, Goodwill and Other Intangible Assets.

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

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

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

                                       84
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


No. 141 in 2001. The Company adopted certain provisions of SFAS No.142, as
required in the transition guidance contained therein, in 2001 and adopted the
remaining provisions on January 1, 2002.

        r)  Reclassifications

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

2)    Furniture and Equipment

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

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

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

3)    Restricted Cash

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

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

                                       85
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

4)    Acquisitions

        a)  eMation, Ltd.

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

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

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

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

         The Company also issued or assumed warrants at closing exercisable for
up to 108,238 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.

                                       86
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

         An aggregate of 1.6 million shares of Axeda common stock issued in the
eMation acquisition has been deposited with a third party escrow agent to be
held in escrow to compensate the Company for certain losses and taxes that may
arise as a result of the eMation acquisition. The shareholders' agent appointed
pursuant to the share purchase agreement agreed to the Company submitting a
claim on the escrow fund for the return of 23,843 shares of the Company's common
stock in consideration for the Company's issuance of 106,172 warrants, described
above, at the closing. This escrow arrangement will expire on December 7, 2002
and any shares remaining in escrow will be returned to former eMation
shareholders.

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

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

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

  ---------------------------------------------------------------------------------------
<S>                                                                             <C>
      Current assets ........................................................   $  3,856
  ---------------------------------------------------------------------------------------
      Property and equipment ................................................      1,168
  ---------------------------------------------------------------------------------------
      Identified intangible assets ..........................................      9,745
  ---------------------------------------------------------------------------------------
      In-process research and development ("IPR&D") .........................      3,112
  ---------------------------------------------------------------------------------------
      Goodwill ..............................................................     20,819
                                                                                --------
  ---------------------------------------------------------------------------------------
           Total assets acquired ............................................     38,700
                                                                                --------
  ---------------------------------------------------------------------------------------

  ---------------------------------------------------------------------------------------
      Current liabilities ...................................................     12,358
  ---------------------------------------------------------------------------------------
      Long-term debt ........................................................      2,336
  ---------------------------------------------------------------------------------------
      Other non-current liabilities .........................................      1,428
                                                                                --------
  ---------------------------------------------------------------------------------------
           Total liabilities assumed ........................................     16,122
                                                                                --------
  ---------------------------------------------------------------------------------------

  ---------------------------------------------------------------------------------------
      Unvested stock options allocated to deferred stock compensation .......       (847)
                                                                                --------
  ---------------------------------------------------------------------------------------
           Net assets acquired ..............................................   $ 23,425
                                                                                ========
  ---------------------------------------------------------------------------------------
</TABLE>

                                       87
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


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

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

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

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


         The following unaudited pro forma information is presented as if the
acquisition of eMation occurred as of the beginning of each of the respective
years. The pro forma information,

                                       88
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


however, is not necessarily indicative of the results that would have resulted
had the acquisition occurred at the beginning of the period presented, nor is it
necessarily indicative of future results.

<TABLE>
<CAPTION>
  -------------------------------------------------------------------------------------------
                                                        (in thousands, except per share data)
  -------------------------------------------------------------------------------------------

  -------------------------------------------------------------------------------------------
                                                                     2001           2000
  -------------------------------------------------------------------------------------------
<S>                                                               <C>            <C>
    Revenues ..................................................   $   18,148     $   30,866
                                                                  ==========     ==========
  -------------------------------------------------------------------------------------------

  -------------------------------------------------------------------------------------------
    Net loss ..................................................   $  (17,718)    $  (61,160)
                                                                  ==========     ==========
  -------------------------------------------------------------------------------------------

  -------------------------------------------------------------------------------------------
    Basic and diluted net loss per weighted average
    common share outstanding ..................................   $    (0.68)    $    (2.49)
                                                                  ==========     ==========
  -------------------------------------------------------------------------------------------
</TABLE>

        b)  Cinax Designs Inc.

        In August 2000, the Company acquired all of the outstanding capital
stock of Cinax Designs Inc. ("Cinax"), a company located in British Columbia,
Canada involved in the development of digital video software products based on
MPEG audiovisual compression for approximately $3.5 million in cash and an
aggregate of 825,000 shares of our common stock and shares of no par, non-voting
exchangeable preferred stock ("preferred stock") of our subsidiary, Ravisent
British Columbia Inc. ("Ravisent BC"). The shares of preferred stock are
exchangeable, at the option of the holder at any time, on a one-for-one basis,
into shares of the Company's common stock, have an automatic redemption date of
August 1, 2005, and contain certain dividend restrictions, as defined. The
acquisition was recorded under the purchase method of accounting. The results of
operations of Cinax have been included in the Company's consolidated financial
statements from August 11, 2000.

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

        On the date of acquisition the Company recorded prepaid compensation of
$0.8 million and deferred stock compensation of $2.1 million in connection with
the cash, common stock (39,807 shares or $0.2 million) and preferred stock
(420,806 shares or $1.9 million), that were held in escrow and subject to
vesting and continued employment subsequent to the acquisition. The deferred
stock compensation included amounts recorded for common stock (10,719 shares)
and preferred stock (88,990 shares) with an aggregate value of $0.4 million,
held in escrow for the former non-employee stockholders of Cinax, which were for
Company indemnification purposes and were not subject to post-acquisition
employment requirements. No cash was held in escrow for the former non-employee
stockholders. When the employment of the former employees of Cinax was
terminated by the Company in March 2001, the remaining balance of $0.3 million
of prepaid compensation was released from the escrow, paid to the former
employees, and charged to non-cash research and development expense in the
accompanying statement of operations. In addition, the unamortized balance of
$0.9 million of the initial $2.1 million recorded as deferred stock compensation
related to 22,840 of the escrowed shares of the

                                       89
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


Company's common stock and 260,526 shares of the escrowed preferred stock was
released from the escrow, paid to the former employees, and charged to non-cash
research and development expense in the accompanying statement of operations. In
August and September 2001, an additional 11,847 shares of common stock and
111,903 shares of preferred stock, for a total of 123,750 shares were released
from escrow resulting in a charge of $0.1 million to non-cash research and
development expense for the net book value of deferred stock compensation
recorded for these shares. In September 2001, at the end of the escrow claim
period, 53,497 shares were returned to the Company, comprised of common stock
(5,120 shares) and preferred stock (48,377 shares) recorded at an aggregate
amount of $0.2 million, which was recorded as a reduction to deferred stock
compensation.

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

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

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

        c)  Teknema Inc.

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

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

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

                                       90
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


risks, probabilities and uncertainties, including the stage of development of
the technology, viability of target markets and other factors. The three
development projects ranged in percentage of completion at the date of
acquisition from 15% to 50%.

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

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

5)    Sales of Assets

        a)  Sale of Consumer Electronics Assets

On March 1, 2001, pursuant to an Asset Acquisition Agreement, the Company sold
certain assets related to its CE business to STMicroelectronics NV
("STMicroelectronics"), a Dutch corporation. The assets sold included certain
contracts, equipment, intangible assets, intellectual property, prepaid
expenses, accounts receivable and other assets primarily related to the
operations of the CE business. In connection with the sale, the Company and
STMicroelectronics entered into certain agreements including an Assignment and
Assumption of Lease with respect to the Company's former corporate headquarters
office facility located in Malvern, Pennsylvania. Certain employees of the
Company entered into employment agreements with STMicroelectronics. Pursuant to
the terms of the Asset Acquisition Agreement, STMicroelectronics paid
approximately $55.6 million in cash consideration, of which $0.7 million remains
held in escrow by a third party in escrow for indemnification purposes until
September 2002 and is included in restricted cash in the consolidated balance
sheet as of December 31, 2001. In connection with the asset sale, the Company
and certain of its subsidiaries granted to STMicroelectronics certain
non-exclusive rights to license and distribute certain of its technology used in
its IA products (note 5b) and PC products.

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

-------------------------------------------------------------------------------
Sale price .........................................................   $ 55,602
-------------------------------------------------------------------------------
Accounts receivable acquired .......................................       (261)
-------------------------------------------------------------------------------
Accrued expenses assumed ...........................................        137
-------------------------------------------------------------------------------
Net book value of deferred stock compensation ......................       (498)
-------------------------------------------------------------------------------
Net book value of furniture and equipment sold .....................     (2,036)
-------------------------------------------------------------------------------
Net book value of goodwill and intangible assets ...................       (968)
-------------------------------------------------------------------------------
Other assets .......................................................        (18)
-------------------------------------------------------------------------------
Employee transition and inducement costs ...........................     (2,956)
-------------------------------------------------------------------------------
Professional and legal fees ........................................     (1,487)
                                                                       --------
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Gain on sale of CE assets ..........................................   $ 47,515
                                                                       ========
-------------------------------------------------------------------------------

                                       91
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)


        b)  Sale of Internet Appliance Assets

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

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

-------------------------------------------------------------------------------
Sale Price .........................................................   $ 18,000
-------------------------------------------------------------------------------
Prepaid expenses ...................................................       (954)
-------------------------------------------------------------------------------
Net book value of deferred stock compensation ......................       (121)
-------------------------------------------------------------------------------
Net book value of furniture and equipment sold .....................       (466)
-------------------------------------------------------------------------------
Net book value of goodwill and intangible assets ...................    (10,586)
-------------------------------------------------------------------------------
License fee ........................................................       (250)
-------------------------------------------------------------------------------
Employee transition and inducement costs ...........................       (763)
-------------------------------------------------------------------------------
Professional and legal fees incurred ...............................       (338)
                                                                       --------
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Gain on sale of IA assets ..........................................   $  4,522
                                                                       ========
-------------------------------------------------------------------------------

        c)  Unaudited Pro Forma Financial Information

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

<TABLE>
<CAPTION>
    -------------------------------------------------------------------------------------
                                                                      2001        2000
    -------------------------------------------------------------------------------------
<S>                                                                 <C>         <C>
    Revenues ....................................................   $  7,142    $ 11,739
                                                                    ========    ========
    -------------------------------------------------------------------------------------

    -------------------------------------------------------------------------------------
    Net loss ....................................................   $(49,487)   $(15,734)
                                                                    ========    ========
    -------------------------------------------------------------------------------------

    -------------------------------------------------------------------------------------
    Basic and diluted net loss per weighted average common          $  (2.67)   $  (2.49)
    share outstanding ...........................................   ========    ========
    -------------------------------------------------------------------------------------
</TABLE>

                                       92
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

6)    Acquired Intangible Assets

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

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

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

      -------------------------------------------------------------------------
                                                                Charged to:
      -------------------------------------------------------------------------
                                                           Cost of    Operating
                                                Total      revenues    expense
                                                -----      --------    -------
      -------------------------------------------------------------------------
      Fiscal year ending December 31,
      -------------------------------------------------------------------------
      2002 .................................   $  2,367    $  2,104    $    263
      -------------------------------------------------------------------------
      2003 .................................      2,305       2,043         262
      -------------------------------------------------------------------------
      2004 .................................      1,673       1,411         262
      -------------------------------------------------------------------------
      2005 .................................      1,673       1,411         262
      -------------------------------------------------------------------------
      2006 .................................      1,535       1,294         241
      -------------------------------------------------------------------------

7)    Goodwill

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

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

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

      * Because the Company has not completed its assignment of the goodwill
      acquired in 2001 to reporting units, it is not practicable to disclose the
      amount of this goodwill by reportable segment (note 4a).

                                       93
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

                                Business of Axeda


8)    Inventories

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

      ---------------------------------------------------------------------
                                                              December 31,
      ---------------------------------------------------------------------
                                                            2001      2000
      ---------------------------------------------------------------------
      Raw materials ...................................   $   936   $17,369
      ---------------------------------------------------------------------
      Products in process .............................        --       762
      ---------------------------------------------------------------------
      Finished products ...............................     1,134     2,752
                                                          -------   -------
      ---------------------------------------------------------------------

      ---------------------------------------------------------------------
      Inventories, net ................................   $ 2,070   $20,883
                                                          =======   =======
      ---------------------------------------------------------------------

9)    Notes Payable

      Note Payable - Bank Leumi

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

      Equipment Line of Credit

      As of December 31, 2001, the Company had approximately $686,000
outstanding on an equipment line of credit with EVP with interest rates ranging
from 12% to 13% and payments due monthly over a 36 month period. The line of
credit was available to finance purchases of capital equipment through September
30, 2001. In connection with the agreement, EVP has a senior security interest
in substantially all of eMation's capital equipment. In addition, the line of
credit agreement requires the Company to provide EVP with copies of quarterly
financial statements within 45 days of the end of each quarter and audited
annual financial statements within 90 days of the end of each fiscal year as
well as other information and notifications regarding eMation's financial and
operating results.

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

      Bridge Loan

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

                                       94
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

10)   Accrued Expenses

Accrued expenses consist of the following:

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


11)   Loans Receivable--Officers

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

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

         In August and September 2000, the Company entered into agreements to
loan an executive officer of the Company $52,000 and $96,000, respectively, for
an aggregate loan amount of $148,000. The loans are secured by all of the
Company's stock held or subsequently acquired by the officer. The loans bear
interest at 5% per annum and were originally due and payable on December 31,
2000, including all accrued and unpaid interest. In July 2001, the Company
advanced this executive officer of the Company an additional $250,000. Under the
terms of the executive officer's separation agreement, the aggregate amount of
the advances of $414,000, including interest of approximately $16,000 was
forgiven.

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

      In November 1999, the Company entered into an agreement to loan an officer
of the Company approximately $288,800. The loan was to be repaid in twenty-four
monthly installments of approximately $13,000, and bears an interest rate of 8%.
The agreement also provided for a monthly bonus to the officer in an amount
equal to the monthly loan repayment. In

                                       95
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

connection with the sale of the IA assets (note 5b) in March 2001, the unpaid
loan balance of approximately $114,000 was forgiven.

12)   Other Liabilities

      Severance

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

      Acquisition

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

13)   Equity Transactions and Capital Stock

Stock Repurchase Program and Treasury Stock

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

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

Capital Stock and Stock Splits

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

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

                                       96
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

Initial Public Offering

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

Preferred Stock

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

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

Preferred Stock Subscription

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

14)   Stock Options, Stock Purchases and Warrants

      a)    Stock Options

            The Company adopted the 1995 Stock Option Plan (the 1995 Plan) in
May 1995. The 1995 Plan provides for the grant of incentive stock options and
non-qualified stock options to employees, consultants, advisors to the Company,
and members of the board of directors to

                                       97
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

           In May 2000, the Company granted 78,500 options to purchase common
stock to employees, with an exercise price of $0.01 per share. The Company has
recorded approximately $633,000 of deferred stock compensation in connection
with these options that is being amortized over the option vesting periods,
ranging from 18 to 24 months. In June 2000 the Company granted 17,500 options to
purchase common stock, with an exercise price of $0.01 per share. The Company
recorded approximately $112,000 of deferred stock compensation in connection
with these options that are being amortized over the option vesting period of 24
months.

                                       98
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

A summary of stock option activity follows:
<TABLE>
<CAPTION>

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

                                       99
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

           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 2001 is as follows:

--------------------------------------------------------------------------------
                                                             2001
--------------------------------------------------------------------------------
                                              Weighted average  Weighted average
                                               exercise price     fair value
--------------------------------------------------------------------------------
Exercise price equals fair
market value ...........................          $   1.96          $   1.85
--------------------------------------------------------------------------------
Exercise price exceeds fair
market value ................................          N/A               N/A
--------------------------------------------------------------------------------
Exercise price is less than
fair market value ...........................     $   0.01          $   1.96
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                                                  $   1.07          $   1.90
--------------------------------------------------------------------------------

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

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

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

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

                                      100
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

--------------------------------------------------------------------------------
                                             2001         2000         1999
--------------------------------------------------------------------------------
Dividend yield........................          0%           0%           0%
--------------------------------------------------------------------------------
Expected volatility...................        192%         167%         119%
--------------------------------------------------------------------------------
Average expected option life..........     4 years      4 years      4 years
--------------------------------------------------------------------------------
Risk-free interest rate...............       2.28%        5.71%        5.51%
--------------------------------------------------------------------------------

        b)  Employee Stock Purchase Plan

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

A summary of the shares purchased is as follows:

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

        c)  Warrants

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

                                      101
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

  A summary of warrant activity follows:

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
                                                   Preferred                   Common
----------------------------------------------------------------------------------------------
                                                          Weighted                   Weighted
                                                          Average                    Average
                                            Number of     exercise     Number of     exercise
                                             Warrants       price      Warrants        price
----------------------------------------------------------------------------------------------
<S>                                           <C>        <C>           <C>          <C>
Balance as of December 31, 1998 ........      920,006    $     0.60    1,608,171    $     0.35
                                           ==========    ==========   ==========    ==========
----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
     Warrants granted ..................           --            --       51,079          0.06
----------------------------------------------------------------------------------------------
     Warrants canceled .................           --            --           --            --
----------------------------------------------------------------------------------------------
     Warrants exercised ................     (920,006)   $     0.60     (926,936)         0.10
                                           ----------    ----------   ----------    ----------
----------------------------------------------------------------------------------------------
Balance as of December 31, 1999 ........           --            --      732,314    $     0.65
                                           ==========    ==========   ==========    ==========
----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
     Warrants granted ..................                               1,509,166          6.98
----------------------------------------------------------------------------------------------
     Warrants canceled .................                                      --            --
----------------------------------------------------------------------------------------------
     Warrants exercised ................                                (405,847)         0.18
                                                                      ----------    ----------
----------------------------------------------------------------------------------------------
Balance as of December 31, 2000 ........                               1,835,633    $     5.96
                                                                      ==========    ==========
----------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------
     Warrants granted ..................                                  48,079         12.84
----------------------------------------------------------------------------------------------
     Warrants assumed (note 4) .........                                  74,661          5.52
----------------------------------------------------------------------------------------------
     Warrants canceled .................                              (1,500,000)         7.00
----------------------------------------------------------------------------------------------
     Warrants exercised ................                                      --
                                                                      ----------
----------------------------------------------------------------------------------------------
Balance as of December 31, 2001 ........                                 458,373    $     3.19
                                                                      ==========    ==========
----------------------------------------------------------------------------------------------
</TABLE>

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

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

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

                                      102
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

15)   Commitments and Contingencies

      a)  Leases

         The Company leases its office facilities and various equipment under
operating leases that expire at various dates through 2012. The following is a
 schedule by year of future minimum lease payments (in thousands) relating to
 non-cancelable operating leases as of December 31, 2001. The schedule includes
 the effects of the assumption by STMicroelectronics, effective March 1, 2001,
 of the Company's corporate headquarters lease (note 5a), which expires in May
 2007. As a result, our future minimum required lease payments were reduced by
 approximately $6.8 million.

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

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

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

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

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

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

                                      103
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

      b)  Royalties

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

         Royalty Commitments to the Chief Scientist:

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

                 eMation received and accrued no grants in 2001

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

           Royalties to the Fund for the Encouragement of Marketing Activities:

                 The Israeli Government, through the Fund for the Encouragement
         of Marketing Activities, awarded eMation grants for participation in
         foreign marketing expenses. The Company is required to pay royalties at
         the rate of 3.5% of the increase in export sales, up to an amount equal
         to 100% of the grants received linked to the U.S. dollar. Grants
         received after January 1, 1998 bear interest at an annual rate equal to
         6-month LIBOR (1.983% at December 31, 2001).

                                      104
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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


        c)  Contingencies

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


        Between February and April 2000, eleven class action lawsuits were filed
against Axeda and certain of its officers and directors in the United States
District Court for the Eastern District of Pennsylvania. On May 25, 2000, the
cases were consolidated under Civil Action No. 00-CV-1014, and entitled "In re
RAVISENT Technologies Inc. Securities Litigation". Pursuant to the court's
consolidation order, a consolidated and amended class action complaint was filed
on June 14, 2000 with an alleged class period of July 15, 1999 through April 27,
2000. This complaint alleges violations of the federal securities laws,
specifically Sections 11 and 15 of the Securities Exchange Act of 1933, Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder and seeks unspecified damages on behalf of a purported
class of purchasers of our stock during the period stated above. On July 3,
2000, we filed a motion to dismiss the consolidated and amended class action
complaint. The motion is presently fully briefed and the parties are awaiting a
hearing date to be set for the motion. In connection with the Company's initial
public offering, the Company purchased directors and officers insurance that
provides the Company with protection from claims made against officers,
directors or the Company arising from claims including but not limited to any
written demand for damages and any civil, criminal, administrative, or
regulatory proceedings and appeals. Certain of our employees and certain holders
of 5% or more of our common stock are members of the putative classes alleged in
these actions and therefore may have interests adverse to us with respect to the
alleged claims in these actions. We believe that such lawsuits or claims are
without merit and that

                                      105
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

we have meritorious defenses to the actions. We plan to vigorously defend the
litigation. However, failure to successfully defend these actions could
substantially harm our results of operations, liquidity and financial condition.

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

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

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

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

         On or about August 10, 2000, Corum Group, Ltd. filed an action against
Axeda and Cinax Designs Inc. in the United States District Court for the Western
District of Washington (No. C00-

                                      106
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

        d)  Employment Agreements

         The Company has entered into employment agreements with certain
officers and employees of the Company. The agreements are generally for two to
three-year periods, generally provide

                                      107
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

16)   Business Risks and Credit Concentration

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

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


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

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

                                      108
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

Geographic Areas

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

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

                                      109
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

17)   Income Taxes

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

      --------------------------------------------------------------------
                                               Years ended December 31,
      --------------------------------------------------------------------
                                            2001        2000        1999
      --------------------------------------------------------------------
      Federal .........................   $    668    $     --    $     --
      --------------------------------------------------------------------
      State ...........................         55          --          --
      --------------------------------------------------------------------
      Foreign .........................        400          40          52
                                          --------    --------    --------
      --------------------------------------------------------------------

      --------------------------------------------------------------------
      Total ...........................   $  1,123    $     40    $     52
                                          ========    ========    ========
      --------------------------------------------------------------------

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

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

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
                                                                                            December 31,
-----------------------------------------------------------------------------------------------------------------
                                                                                   2001        2000        1999
-----------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>         <C>         <C>
Federal income tax expense (benefit) at U.S. federal statutory rate ..........   $    864    $(13,745)   $ (2,726)
-----------------------------------------------------------------------------------------------------------------
State income tax benefit, net of federal income tax expense
   (benefit) .................................................................       (656)     (1,966)       (524)
-----------------------------------------------------------------------------------------------------------------
In-process research and development expenses and goodwill ....................      6,560       2,221       1,005
-----------------------------------------------------------------------------------------------------------------
Foreign income taxes .........................................................        400          40          52
-----------------------------------------------------------------------------------------------------------------
Warrant and option expense ...................................................      1,162      (1,271)         --
-----------------------------------------------------------------------------------------------------------------

Non-deductible acquisition costs .............................................        630          --          --
-----------------------------------------------------------------------------------------------------------------
Change in valuation allowance ................................................     (3,045)     13,047       2,180
-----------------------------------------------------------------------------------------------------------------
Acquired deferred tax assets .................................................     (4,526)         --          --
-----------------------------------------------------------------------------------------------------------------
Other ........................................................................       (266)      1,714          65
-----------------------------------------------------------------------------------------------------------------
                                                                                 $  1,123    $     40    $     52
                                                                                 ========    ========    ========
-----------------------------------------------------------------------------------------------------------------
</TABLE>

           The components of the net deferred tax assets (liabilities) as of
December 31, 2001 and 2000, consist of the following (in thousands):
-------------------------------------------------------------------------------
                                                                December 31,
-------------------------------------------------------------------------------
                                                              2001        2000
-------------------------------------------------------------------------------
Deferred tax assets:
-------------------------------------------------------------------------------
Net operating losses ....................................   $22,283    $ 20,452
-------------------------------------------------------------------------------
Reserves and accruals not currently deductible ..........       214       2,296
-------------------------------------------------------------------------------
Depreciation/Amortization ...............................      (189)      3,152
-------------------------------------------------------------------------------
Deferred compensation and other .........................     2,390       1,843
                                                           --------    --------
-------------------------------------------------------------------------------
                                                             24,698      27,743
-------------------------------------------------------------------------------
Valuation allowance .....................................   (24,698)    (27,743)
                                                           --------    --------
-------------------------------------------------------------------------------
Net deferred tax assets .................................  $     --    $     --
                                                           ========    ========
-------------------------------------------------------------------------------

                                      110
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

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

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

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

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

18)   Related-Party Transactions

      Severance

         The Company paid severance to former officers of the Company totaling
approximately $572,000, $158,000 and none for the years ended December 31, 2001,
2000 and 1999, respectively. In addition, as of December 31, 2001 the Company
accrued additional severance of approximately $899,000 for former employees,
whose employment was terminated in December 2001. Approximately $630,000 of
severance was paid in January 2002 and the remaining severance will be paid by
October 2002. See note 11 for loans receivable - officers.

19)   Defined Contribution Plan


         The Company has a defined contribution plan for qualified employees as
defined in the plan. Participants may contribute up to 20% of pre-tax
compensation, as defined. Under the plan, the Company can make discretionary
contributions. To date, the Company has not made any

                                      111
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

contributions to the plan. In addition, in December 2001, the Company assumed
the defined contribution plan of eMation, Ltd. (the eMation plan) (note 4a).
Both plans are Internal Revenue Code section 401(k) plans. The eMation plan
provides for employer matching contributions for all employees equal to 50% of
salary reductions of up to 6% of a participant's compensation. During 2001 and
prior to the acquisition, eMation paid its matching contribution to the plan

20) Segment and Major Customer Information

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

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

-------------------------------------------------------------------------
                                                  December 31,
-------------------------------------------------------------------------
Customer                                2001         2000         1999
-------------------------------------------------------------------------
     1..........................        $1,250       $4,019       $15,689
-------------------------------------------------------------------------
     2..........................        $  990       $3,900       $ 2,461
-------------------------------------------------------------------------
     3..........................        $  585       $2,292       $ 1,213
-------------------------------------------------------------------------

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

                                      112
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

-------------------------------------------------------------------------------
                                                   Year Ended December 30,
-------------------------------------------------------------------------------
Country/ Geographic Region                     2001         2000         1999
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
North America:
-------------------------------------------------------------------------------
     United States .....................    $   4,461    $   9,235    $  18,279
-------------------------------------------------------------------------------
     Canada ............................        1,208        2,972        4,437
                                            ---------    ---------    ---------
-------------------------------------------------------------------------------
          Total - North America ........        5,669       12,207       22,716
                                            ---------    ---------    ---------
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Europe:
-------------------------------------------------------------------------------
     Italy .............................            4        2,312          131
-------------------------------------------------------------------------------
     Germany ...........................          525          878        1,977
-------------------------------------------------------------------------------
     France ............................          419           75        1,137
-------------------------------------------------------------------------------
     Turkey ............................            6           62          105
-------------------------------------------------------------------------------
     Spain .............................            1           20           --
-------------------------------------------------------------------------------
     Other .............................          412           51        1,471
                                            ---------    ---------    ---------
-------------------------------------------------------------------------------
          Total - Europe ...............        1,367        3,398        4,821
                                            ---------    ---------    ---------
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Asia-Pacific:
-------------------------------------------------------------------------------
     Taiwan ............................           --        4,020        1,230
-------------------------------------------------------------------------------
     Japan .............................          390          841          631
-------------------------------------------------------------------------------
     China .............................           76           --           --
-------------------------------------------------------------------------------
     Other .............................           30           --           --
                                            ---------    ---------    ---------
-------------------------------------------------------------------------------
          Total - Asia-Pacific .........          496        4,861        1,861
                                            ---------    ---------    ---------
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
South America - Other ..................           15          383           --
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Israel .................................           42           --           --
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Australia and New Zealand - Other ......           --            5           20
                                            ---------    ---------    ---------
-------------------------------------------------------------------------------

-------------------------------------------------------------------------------
Total ..................................    $   7,589    $  20,854    $  29,418
                                            =========    =========    =========
-------------------------------------------------------------------------------

21)   Segment Reporting

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

                                      113
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

decision maker.

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

PC: This segment designs, develops, licenses and markets core-based modular
software solutions that enable digital video and audio stream management in PC
systems. The segment also provides supporting hardware designs to selected
customers as well as customization services and customer support. The segments
solutions enable decoding (playback) and encoding (recording) of multimedia
formats such as digital versatile disk (DVD); direct broadcast satellite (DBS)
and high-definition television (HDTV) on existing personal computers.

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

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

                                      114
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
                                                                Year Ended December 31,
---------------------------------------------------------------------------------------------
                                                              2001         2000         1999
---------------------------------------------------------------------------------------------
                                                                      (In thousands)
---------------------------------------------------------------------------------------------
Revenues:
---------------------------------------------------------------------------------------------
<S>                                                        <C>          <C>          <C>
     PC............................................        $  4,534     $ 11,739     $ 24,460
---------------------------------------------------------------------------------------------
     CE............................................             421        1,614          986
---------------------------------------------------------------------------------------------
     IA............................................           1,020        7,501        3,972
---------------------------------------------------------------------------------------------
     DRM...........................................             554           --           --
---------------------------------------------------------------------------------------------
     Other.........................................           1,060           --           --
                                                           --------     --------     --------
---------------------------------------------------------------------------------------------
          Total....................................        $  7,589     $ 20,854     $ 29,418
                                                           ========     ========     ========
---------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------
Gross profit:
---------------------------------------------------------------------------------------------
     PC excluding inventory charges of $0 and $1.1
     million for 2001 and 2000, respectively ......        $  2,925     $  7,359     $ 10,270
---------------------------------------------------------------------------------------------
     CE............................................             327        1,211          637
---------------------------------------------------------------------------------------------
     IA, excluding net inventory charges of $18.5
     million and $0.6 million for 2001 and 2000,
     respectively .................................              15        1,988        2,646
---------------------------------------------------------------------------------------------
     DRM...........................................             360           --           --
---------------------------------------------------------------------------------------------
     Other.........................................             817           --           --
                                                           --------     --------     --------
---------------------------------------------------------------------------------------------
          Total....................................        $  4,444     $ 10,558     $ 13,553
                                                           ========     ========     ========
---------------------------------------------------------------------------------------------
</TABLE>


22)   Selected Quarterly Financial Data (unaudited)

(in thousands except per share amounts and stock prices)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
                                                               Per Share of Common
                                                               Stock Income (Loss)     Stock Prices
-----------------------------------------------------------------------------------------------------
                                      Gross       Net Income  Assuming
-----------------------------------------------------------------------------------------------------
                           Revenue    Profit        (Loss)    Dilution     Basic       High     Low
-----------------------------------------------------------------------------------------------------
2001
-----------------------------------------------------------------------------------------------------
<S>                        <C>       <C>           <C>         <C>        <C>         <C>      <C>
First Quarter (A)          $ 2,816   $  2,162      $ 39,735    $ 2.14     $  2.28     $ 4.75   $ 1.75
-----------------------------------------------------------------------------------------------------
Second Quarter (B)             794    (13,162)      (15,950)    (0.89)      (0.89)      2.55     1.31
-----------------------------------------------------------------------------------------------------
Third Quarter                  841        331        (4,122)    (0.22)      (0.22)      2.08     1.06
-----------------------------------------------------------------------------------------------------
Fourth Quarter (C)           3,138     (3,389)      (18,236)    (0.87)      (0.87)      3.75     1.50
-----------------------------------------------------------------------------------------------------
Total (G) (I)              $ 7,589   $(14,058)     $  1,427    $ 0.08 *   $  0.07 *
-----------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------------------------------------
2000
-----------------------------------------------------------------------------------------------------
First Quarter              $ 5,710   $  2,067      $ (5,537)   $(0.34)    $ (0.34)    $47.50   $11.63
-----------------------------------------------------------------------------------------------------
Second Quarter (D)           4,846      2,505        (7,523)    (0.46)      (0.46)     15.50     5.13
-----------------------------------------------------------------------------------------------------
</TABLE>

                                      115
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
<S>                        <C>       <C>           <C>         <C>        <C>         <C>      <C>
Third Quarter (E)            4,228      2,965       (10,328)    (0.61)      (0.61)      9.13     2.75
-----------------------------------------------------------------------------------------------------
Fourth Quarter (F)           6,070      1,313       (17,079)    (0.99)      (0.99)      3.75     1.47
-----------------------------------------------------------------------------------------------------
Total (H) (I)              $20,854   $  8,850      $(40,467)   $(2.44) *  $ (2.44) *
-----------------------------------------------------------------------------------------------------
</TABLE>

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

Notes to Selected Quarterly Financial Data (unaudited)

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

               A.   First quarter 2001
                    1)   gain on sale of assets of CE business of $47.5 million
                         (notes 5a and 5c)
                    2)   gain on sale of assets of IA business of $4.5 million
                         (notes 4c, 5b and 5c)
                    3)   non-cash charges of $1.2 million to write off balances
                         of prepaid and deferred stock compensation no longer
                         subject to vesting
                    4)   a charge of $1.8 million related to the settlement of a
                         distribution rights agreement, net of $0.4 million for
                         the fair value of the warrant issued to the distributor
                         that was canceled (notes 1f and 15c)

               B.   Second quarter 2001
                    1)   inventory charges of $13.4 million
                    2)   doubtful account charges of $0.7 million for accounts
                         related to the IA business, certain assets of which
                         were sold in March 2001 (notes 4c, 5b and 5c)

               C.   Fourth quarter 2001
                    1)   inventory charges of $5.1 million, net of warranty
                         write-off of $(0.3) million
                    2)   IPR&D charge of $3.1 million for the acquisition of
                         eMation (note 4a)
                    3)   an impairment charge of $2.2 million for goodwill
                         related to the acquisition of Cinax (notes 1f and 4b)
                    4)   an impairment charge of $1.7 million for acquired
                         technology rights (notes 1g and 13)
                    5)   non-capitalizable acquisition-related costs of $0.9
                         million for the acquisition of eMation related to
                         branding and marketing fees

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

                                      116
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

               E.   Third quarter 2000
                    1)   Joint marketing initiatives of $2.5 million related to
                         a distribution rights agreement (note 15c)
                    2)   IPR&D charge of $1.4 million for the acquisition of
                         Cinax (note 4b)

               F.   Fourth quarter 2000
                    1)   doubtful account charges of $5 million, primarily for
                         accounts related to the IA business, certain assets of
                         which were sold in March 2001 (note 4c, 5b and 5c)
                    2)   an impairment charge of $2.8 million for intangible
                         distribution rights fee (notes 1g and 15c)
                    3)   inventory charges of $1.7 million

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

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

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


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

  None.

                                      117
<PAGE>

                               Axeda Systems Inc.


PART III

ITEM 10.  Directors and Executive Officers of the Registrant

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

--------------------------------------------------------------------------------
NAME                           AGE     POSITION WITH AXEDA
----                           ---     -------------------
--------------------------------------------------------------------------------
Robert M. Russell Jr.           50     Chairman of the Board and Chief Executive
                                       Officer
--------------------------------------------------------------------------------
Dale E. Calder                  40     President and Director
--------------------------------------------------------------------------------
Walter L. Threadgill            55     Director
--------------------------------------------------------------------------------
Paul A. Vais                    42     Director
--------------------------------------------------------------------------------
Evangelos Simoudis              41     Director
--------------------------------------------------------------------------------
Bruce J. Ryan                   58     Director
--------------------------------------------------------------------------------
Thomas J. Fogarty               39     Executive Vice President, Chief Financial
                                       Officer and Treasurer
--------------------------------------------------------------------------------
Ned E. Barlas                   38     Senior Vice President, Chief Legal
                                       Officer and Secretary
--------------------------------------------------------------------------------

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

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

Paul A. Vais. Mr. Vais has served as one of our directors since April 1998. Mr.
Vais has been a Managing Director of Apax Partners, a venture capital firm,
since March 1997. From March 1995 to December 1996, Mr. Vais served as Vice
President of Enterprise Partners V.C., a venture capital firm. From October 1994
to March 1995, Mr. Vais served as a consultant for International Business
Machines and several early stage companies, providing expertise in strategic
marketing and technology development. Mr. Vais also worked at NeXT Computer,
Inc., from July 1988 to October 1994, where he served as the Executive Director
of Worldwide Marketing and with Apollo Computer, an engineering workstation
company. Mr. Vais serves as a director of Icarian,

                                      118
<PAGE>

                               Axeda Systems Inc.


Inc., Oblix, Inc. and InfoLibria, Inc. Mr. Vais holds a B.A. in Computer Science
from the University of California at Berkeley. Mr. Vais is a member of the
compensation and audit committees of the board of directors, but holds no other
position or offices of Axeda.

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

ITEM 11.  Executive Compensation

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

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

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

ITEM 13.  Certain Relationships and Related Transactions

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

                                      119
<PAGE>

                               Axeda Systems Inc.


PART IV

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

   a)  Documents filed as a part of this Report

       (1) Consolidated Financial Statements

The Consolidated Financial Statements of Axeda Systems, Inc. and related Notes
thereto as set forth in Item 8 of this Annual Report on Form 10-K begin at page
71.

       (2) Financial Statement Schedules

               Report of Independent Auditors

The Board of Directors and Stockholders
Axeda Systems Inc.:

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

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

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

KPMG LLP

Philadelphia, Pennsylvania
February 25, 2002

                                      120
<PAGE>

                               Axeda Systems Inc.


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

<TABLE>
<CAPTION>

                                    Axeda Systems Inc. and Subsidiaries
                               Schedule of Valuation and Qualifying Accounts
                                              (in thousands)
                                            Balance at   Charge to     Charged to
                                           beginning of  cost and        other                 Balance at
                                               year       expense       accounts   Deductions  end of year
                                         -----------------------------------------------------------------
<S>                                         <C>          <C>              <C>      <C>          <C>
Accounts receivable

For the year ended December 31, 1999        $     265    $     165       $   --    $    (111)   $     319
For the year ended December 31, 2000        $     319    $   4,966       $   --    $  (2,880)   $   2,405
For the year ended December 31, 2001        $   2,405    $     929       $   --    $  (3,155)   $     179

Inventories

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


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

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



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

                                      121
<PAGE>

                               Axeda Systems Inc.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Malvern, Commonwealth of Pennsylvania on this 28th day of March 2002.

Axeda Systems Inc.

March 28, 2002

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

                                      122
<PAGE>

                               Axeda Systems Inc.


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

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

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


<TABLE>
<CAPTION>
Signature                        Title                                                Date

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

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

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

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

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

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

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

                                      123
<PAGE>

                               Axeda Systems Inc.


Exhibit
Number                        Exhibit Title

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

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

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

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

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

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

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

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

3.1        Amended and Restated Certificate of Incorporation.(1)

3.2        Amended and Restated Bylaws. (1)

3.3        Certificate of Incorporation. (1)

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

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

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

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

4.4        Quadrant International, Inc. Common Stock Purchase Warrant
           Certificate, dated July 30, 1998, by and between RAVISENT and
           Progress Capital, Inc. for the purchase of up to

                                      124
<PAGE>

                               Axeda Systems Inc.


           200,000 shares of common stock.(1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      125
<PAGE>

                               Axeda Systems Inc.


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

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

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

10.11      Form of Software License Agreement.(1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                      126
<PAGE>

                               Axeda Systems Inc.


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

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

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

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

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

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

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

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

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

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

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

10.39+*    Not used.

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

10.41+*    Employment Agreement, dated June 27, 2001 by and between RAVISENT and
           Paul Henderson

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

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

10.44      Form of Assumption Agreement. (15)

21.1*      Subsidiaries of AXEDA.

23.1*      Consent of KPMG LLP, Independent Auditors.

24.1*      Power of Attorney. (reference is made to page 116)

(1)        Incorporated by reference to identically numbered exhibit to
           RAVISENT's registration statement on Form S-1 declared effective with
           Securities and Exchange Commission on July 15, 1999 (File NO.
           333-77269).

(2)        Incorporated by reference to identically numbered exhibit to
           RAVISENT's quarterly report on Form 10-Q for the quarterly period
           ended September 30, 1999.

(3)        Incorporated by reference to identically numbered exhibit to
           RAVISENT's current report

                                      127
<PAGE>

                               Axeda Systems Inc.


           on Form 8-K dated November 8, 1999, as filed with the Securities and
           Exchange Commission on November 22, 1999 (File No. 00-26287).

(4)        Incorporated by reference to identically numbered exhibit to
           RAVISENT's annual report on Form 10-K for the period ended December
           31, 1999.

(5)        Incorporated by reference to identically numbered exhibit to
           RAVISENT's quarterly report on Form 10-Q for the quarterly period
           ended June 30, 2000.

(6)        Incorporated by reference to exhibit 99 to RAVISENT's quarterly
           report on Form 10-Q for the quarterly period ended September 30,
           2000.

(7)        Incorporated by reference to exhibit 2.1 to RAVISENT's current report
           on Form 8-K dated March 1, 2001, as filed with the Securities and
           Exchange Commission on March 16, 2001.

(8)        Incorporated by reference to exhibit 2.1 to RAVISENT's current report
           on Form 8-K dated March 23, 2001, as filed with the Securities and
           Exchange Commission on April 9, 2001.

(9)        Incorporated by reference to identically numbered exhibit to
           RAVISENT's annual report on Form 10-K for the period ended December
           31, 2000.

(10)       Incorporated by reference to identically numbered exhibit to
           RAVISENT's quarterly report on Form 10-Q for the quarterly period
           ended June 30, 2001.

(11)       Incorporated by reference to identically numbered exhibit to
           RAVISENT's quarterly report on Form 10-Q for the quarterly period
           ended September 30, 2001.

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

(13)       Incorporated by reference to exhibit 99.2 to Axeda's registration
           statement on Form S-8 as filed with the Securities and Exchange
           Commission on February 11, 2002.

(14)       Incorporated by reference to exhibit 99.3 to Axeda's registration
           statement on Form S-8 as filed with the Securities and Exchange
           Commission on February 11, 2002.

(15)       Incorporated by reference to exhibit 99.4 to Axeda's registration
           statement on Form S-8 as filed with the Securities and Exchange
           Commission on February 11, 2002.


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

                                      128