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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

              |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002

                                       OR

              |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

      FOR THE TRANSITION PERIOD FROM _________________ TO _________________


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                        Commission File Number 000-23597

                          EXTENDED SYSTEMS INCORPORATED
             (Exact name of registrant as specified in its charter)

                    DELAWARE                               82-0399670
        (State or other jurisdiction of                (I.R.S. Employer
         incorporation or organization)               Identification No.)

       5777 NORTH MEEKER AVENUE, BOISE, ID                   83713
    (Address of principal executive offices)              (Zip Code)

       Registrant's telephone number, including area code: (208) 322-7575

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|

The number of shares outstanding of the Registrant's Common Stock as of December
31, 2002, was 13,821,393.

================================================================================
<PAGE>

                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

                   FOR THE SIX MONTHS ENDED DECEMBER 31, 2002

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements
         --------------------

         Condensed Consolidated Balance Sheets as of December 31,
         2002 and June 30, 2002                                               3

         Condensed Consolidated Statements of Operations for the
         Three and Six Months Ended December 31, 2002 and  2001               4


         Condensed Consolidated Statements of Comprehensive Loss
         for the Three and Six Months Ended December 31, 2002 and 2001        4


         Condensed Consolidated Statements of Cash Flows for the Six
         Months Ended December 31, 2002 and 2001                              5

         Notes to Condensed Consolidated Financial Statements                 6

Item 2.  Management's Discussion and Analysis of Financial Condition
         -----------------------------------------------------------
         and Results of Operations                                           14
         -------------------------

Item 3.  Quantitative and Qualitative Disclosures about Market Risk          35
         ----------------------------------------------------------

Item 4.  Controls and Procedures                                             35
         -----------------------

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                   36
         -----------------

Item 4.  Submission of Matters to a Vote of Security Holders                 36
         ---------------------------------------------------

Item 5.  Other Information                                                   37
         -----------------

Item 6.  Exhibits and Reports on Form 8-K                                    37
         --------------------------------

         (Items 2 and 3 of Part II are not applicable and have been omitted)

       . SIGNATURES                                                          38

         CERTIFICATIONS                                                      39

                                       2
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
         --------------------

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
(UNAUDITED)
<TABLE><CAPTION>
                                                                                 DECEMBER 31,       JUNE 30,
                                                                                     2002             2002
                                                                                   --------         --------
<S>                                                                                <C>              <C>
ASSETS
Current:
   Cash and cash equivalents ..............................................        $  4,036         $  5,439
   Receivables, net .......................................................           5,436            4,284
   Prepaids and other .....................................................             961            1,719
                                                                                   --------         --------
      Total current assets ................................................          10,433           11,442
Property and equipment, net ...............................................           5,813            5,786
Goodwill, net .............................................................          12,852            1,704
Intangibles, net ..........................................................           1,575            1,439
                                                                                   --------         --------
      Total assets ........................................................        $ 30,673         $ 20,371
                                                                                   ========         ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
   Accounts payable .......................................................        $  3,380         $  2,377
   Accrued expenses .......................................................           3,048            2,739
   Deferred revenue .......................................................           2,360            2,167
   Accrued restructuring ..................................................             325               --
   Current portion of long-term debt ......................................             217               --
   Capital leases .........................................................              17               --
                                                                                   --------         --------
      Total current liabilities ...........................................           9,347            7,283

Non-current:
   Long-term debt .........................................................             759               --
   Accrued restructuring ..................................................             533               --
   Capital leases .........................................................              65               --
                                                                                   --------         --------
      Total non-current liabilities .......................................           1,357               --
                                                                                   --------         --------
      Total liabilities ...................................................          10,704            7,283

Commitments and contingencies--Note 9

Stockholders' equity:
   Preferred stock; $0.001 par value per share, 5,000 shares authorized; no
      shares issued or outstanding ........................................              --               --

   Common stock; $0.001 par value per share, 75,000 shares authorized;
      13,821 and 11,208 shares issued and outstanding .....................              14               11

   Additional paid-in capital .............................................          44,200           34,053
   Accumulated deficit ....................................................         (23,353)         (20,124)
   Accumulated other comprehensive loss ...................................            (892)            (852)
                                                                                   --------         --------
      Total stockholders' equity ..........................................          19,969           13,088
                                                                                   --------         --------
      Total liabilities and stockholders' equity ..........................        $ 30,673         $ 20,371
                                                                                   ========         ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements

                                       3
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE><CAPTION>
                                                                          THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                              DECEMBER 31,                     DECEMBER 31,
                                                                      -------------------------         -------------------------
                                                                        2002             2001             2002             2001
                                                                      --------         --------         --------         --------
<S>                                                                   <C>              <C>              <C>              <C>
Revenue:
    License fees and royalties ...............................        $  5,327         $  5,628         $ 10,316         $  9,776
    Services and other .......................................           1,556              800            2,476            1,555
                                                                      --------         --------         --------         --------
      Total net revenue ......................................           6,883            6,428           12,792           11,331

Cost of net revenue:
    License fees and royalties ...............................             295              281              567              645
    Services and other .......................................             981              242            1,526              527
                                                                      --------         --------         --------         --------
      Total cost of net revenue ..............................           1,276              523            2,093            1,172
                                                                      --------         --------         --------         --------
          Gross profit .......................................           5,607            5,905           10,699           10,159
                                                                      --------         --------         --------         --------
Operating expenses:
   Research and development ..................................           1,896            2,919            3,849            5,544
   Acquired in-process research and development ..............              --               --              430               --
   Marketing and sales .......................................           3,641            3,524            6,931            6,954
   General and administrative ................................           1,384            1,195            2,507            2,130
   Amortization of goodwill ..................................              --              231               --              462
   Restructuring charges .....................................              --               --              136               --
                                                                      --------         --------         --------         --------
      Loss from operations ...................................          (1,314)          (1,964)          (3,154)          (4,931)
Other expense (income), net ..................................              72              (18)             100              (83)
Interest expense .............................................              70                5              199                9
                                                                      --------         --------         --------         --------
      Loss before income taxes ...............................          (1,456)          (1,951)          (3,453)          (4,857)
Income tax benefit ...........................................             (50)             (20)             (54)             (46)
                                                                      --------         --------         --------         --------
      Loss from continuing operations ........................          (1,406)          (1,931)          (3,399)          (4,811)
        Income (loss) from discontinued operations, net of tax             140              (59)             169                4
                                                                      --------         --------         --------         --------
      Net loss ...............................................        $ (1,266)        $ (1,990)        $ (3,230)        $ (4,807)
                                                                      ========         ========         ========         ========

Basic and diluted earnings (loss) per share:
   Loss from continuing operations ...........................        $  (0.10)        $  (0.18)        $  (0.26)        $  (0.44)
                                                                      --------         --------         --------         --------
   Earnings from discontinued operations .....................        $   0.01         $  (0.00)        $   0.01         $   0.00
                                                                      ========         ========         ========         ========
Net loss per share ...........................................        $  (0.09)        $  (0.18)        $  (0.25)        $  (0.44)
                                                                      ========         ========         ========         ========

Number of shares used in per share calculations:
   Basic and diluted .........................................          13,759           10,985           12,927           10,974

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
                                                                          THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                              DECEMBER 31,                     DECEMBER 31,
                                                                      -------------------------         -------------------------
                                                                        2002             2001             2002             2001
                                                                      --------         --------         --------         --------
 Net loss ....................................................        $ (1,266)        $ (1,990)        $ (3,230)        $ (4,807)
 Change in currency translation, net .........................             (79)             (19)             (39)              21
                                                                      --------         --------         --------         --------
    Comprehensive loss .......................................        $ (1,345)        $ (2,009)        $ (3,269)        $ (4,786)
                                                                      ========         ========         ========         ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements

                                       4
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 <TABLE><CAPTION>
                                                                                  SIX MONTHS ENDED
                                                                                     DECEMBER 31,
                                                                               -----------------------
                                                                                2002            2001
                                                                               -------         -------
<S>                                                                            <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss ...........................................................        $(3,230)        $(4,807)
   Adjustments to reconcile net loss to net cash used by operating
      activities:
      Provision for bad debts .........................................             84              89
      Provision for write-down of inventory ...........................             86              60
      Depreciation and amortization ...................................            935           1,490
      Acquired in-process research and development ....................            430              --
      Interest expense related to warrants ............................            124              --
      Other ...........................................................            121               3
      Changes in assets and liabilities, net of effect of acquisitions:
        Receivables ...................................................           (648)          2,152
        Inventories ...................................................             30             209
        Prepaids and other assets .....................................             37             513
        Deferred revenue ..............................................           (298)            353
            Accrued payroll expenses ..................................           (354)         (1,006)
        Accounts payable and accrued expenses .........................            176          (1,956)
                                                                               -------         -------
           Net cash used by operating activities ......................         (2,507)         (2,900)
                                                                               -------         -------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of property and equipment .................................            (71)            (61)
   Acquisition - ViaFone, net cash acquired ...........................          1,119              --
   Other investing activities .........................................            154              60
                                                                               -------         -------
           Net cash provided (used) by investing activities ...........          1,202              (1)
                                                                               -------         -------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from the issuance of common stock .........................            101             439
   Payments on long-term debt .........................................           (204)             --
                                                                               -------         -------
           Net cash provided (used) by financing activities ...........           (103)            439
   Effect of exchange rate changes on cash ............................              5               9
                                                                               -------         -------
   Net decrease in cash and cash equivalents ..........................         (1,403)         (2,453)

CASH AND CASH EQUIVALENTS:
   Beginning of period ................................................          5,439           6,585
                                                                               -------         -------
   End of period ......................................................        $ 4,036         $ 4,132
                                                                               =======         =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements

                                       5
<PAGE>

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION. The accompanying condensed consolidated financial
statements include Extended Systems Incorporated, a Delaware corporation, and
its subsidiaries. We have eliminated all significant intercompany accounts and
transactions. Tabular amounts are in thousands, except percentages and per share
amounts.

We have prepared these condensed consolidated financial statements without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). In the opinion of management, these unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of our financial
position as of December 31, 2002, and our results of operations and cash flows
for the three and six months ended December 31, 2002 and December 31, 2001. The
results for these interim periods are not necessarily indicative of the expected
results for any other interim period or the year ended June 30, 2003. These
condensed consolidated financial statements should be read in conjunction with
our audited consolidated financial statements and related notes thereto included
in our Annual Report on Form 10-K as filed with the SEC on September 23, 2002.
The condensed consolidated balance sheet at June 30, 2002 was derived from
audited financial statements but does not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements.

The preparation of financial statements in conformity with generally accepted
accounting principles requires that we make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of our financial statements. It
also requires that we make estimates and assumptions that affect the reported
amounts of our revenue and expenses during the reporting periods. Our actual
results could differ from those estimates.

As a result of discontinuing our infrared hardware business in the first quarter
of fiscal 2003, disposing of our Singapore subsidiary in the fourth quarter of
fiscal 2002, and disposing of our printing solutions business in the fourth
quarter of fiscal 2001, we have reclassified our consolidated statement of
operations and other related disclosures for all periods presented to present
the results of these businesses as discontinued operations. We have made other
reclassifications to the consolidated financial statements to conform the
presentations. These reclassifications had no impact on the net loss for the
years presented.

CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency. We translate assets and liabilities of international
subsidiaries into U.S. dollars using exchange rates in effect at the balance
sheet date, and we report gains and losses from this translation process as a
component of comprehensive income or loss. We translate revenue and expenses
into U.S. dollars using the average exchange rate for the period.

From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and the British pound sterling to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in currency exchange rates. While these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed.
These forward contracts do not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. As such, the
contracts are recorded in the consolidated balance sheet at fair value and the
changes in their fair value are recognized currently in earnings. We had forward
contracts with a nominal value of $5.9 million and $1.9 million in place against
the Canadian dollar, euro and British pound sterling at December 31, 2002, and
June 30, 2002, respectively, which matured within 30 days. The fair value of the
underlying forward contracts at December 31, 2002 approximated the value of
these contracts at inception. We recognized net currency exchange losses of
$63,000 and $8,000 for the three months ended December 31, 2002 and 2001,
respectively. We recognized net currency exchange losses of $118,000 and $41,000
for the six months ended December 31, 2002 and 2001, respectively.

EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued the potential dilutive common shares. We exclude stock options
and warrants from the diluted earnings or loss per share computations to the
extent that their effect would have been antidilutive.

                                       6
<PAGE>

Our diluted earnings or loss per share computations exclude the following common
stock equivalents, as the impact of their inclusion would have been antidilutive
as of December 31:
                                                 2002           2001
                                               --------       --------
Stock options.........................           3,472          3,067
Warrants..............................              35           --

ACCOUNTING CHANGES. We completed the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets," effective July 1, 2002. SFAS No.
141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting. SFAS No. 142 requires,
among other things, the discontinuance of goodwill amortization. In addition,
the standard requires, upon adoption, the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles and reclassification of certain intangibles out of
previously reported goodwill. Impairment of existing goodwill and other
intangibles must be tested at least annually thereafter.

As of the beginning of fiscal 2003, we discontinued amortization of
approximately $4.2 million of goodwill as required by SFAS No. 142. Because an
assembled workforce no longer meets the definition of an identifiable intangible
asset, we have reclassified $375,000 to goodwill as of the beginning of fiscal
2003. In lieu of amortization, we performed an impairment review of our goodwill
balance upon the initial adoption of SFAS No. 142. We concluded that there was
no impairment in our recorded goodwill.

In accordance with SFAS No. 142, the effect of adopting this accounting change
is reflected prospectively. The following table presents comparative financial
information showing the effects that discontinuance of goodwill amortization
would have had on the income statement for the three and six months ended
December 31:

<TABLE><CAPTION>
                                              THREE MONTHS ENDED                SIX MONTHS ENDED
                                                  DECEMBER 31,                     DECEMBER 31,
                                           -------------------------         -------------------------
                                             2002             2001             2002             2001
                                           --------         --------         --------         --------
<S>                                        <C>              <C>              <C>              <C>
Net loss:
  Reported net loss ...............        $ (1,266)        $ (1,990)        $ (3,230)        $ (4,807)
Goodwill amortization (1) .........              --              231               --              462
                                           --------         --------         --------         --------
 Adjusted net loss ................        $ (1,266)        $ (1,759)        $ (3,230)        $ (4,345)
                                           ========         ========         ========         ========

Basic and diluted loss per share:

Reported loss per share ...........        $  (0.09)        $  (0.18)        $  (0.25)        $  (0.44)
Goodwill amortization (1) .........              --             0.02               --             0.04
                                           --------         --------         --------         --------
Adjusted basic and diluted loss per
share .............................        $  (0.09)        $  (0.16)        $  (0.25)        $  (0.40)
Number of shares used in per share
calculations ......................          13,759           10,985           12,927           10,974
</TABLE>

(1)  Includes $19,000 of amortization for the three months ended December 31,
     2001 and $38,000 of amortization for the six months ended December 30, 2001
     related to assembled workforce assets that were reclassified as goodwill
     effective July 1, 2002.

In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets," which
supersedes various existing standards on accounting for long-lived assets. This
new standard establishes a single accounting method under which long-lived
assets to be disposed of by sale are measured at the lower of book or fair value
less cost to sell. Additionally, this statement expands the reporting of
discontinued operations to include components of an entity that have been or
will be disposed of rather than limiting such discontinuance to a segment of a
business. We adopted this statement as of July 1, 2002, and the adoption of this
statement did not have a material effect on our consolidated financial
statements.

RECENTLY ISSUED ACCOUNTING STANDARDS. In June 2002, The FASB issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities", which
supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This new
standard requires companies to recognize costs associated with exit or disposal
activities when the costs are incurred rather than at the date of a commitment
to an exit or disposal plan. Costs covered by the standard include lease
termination costs and certain employee severance costs that are

                                       7
<PAGE>

associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. This standard is effective for exit or disposal
activities that are initiated after December 31, 2002. We do not believe
adoption of this statement will have a material effect on the amount of any
liability to be recorded for the costs covered by this standard; however, the
time at which such liability is recorded may be impacted.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. We are still
evaluating the impact that the adoption of this standard will have on our
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years beginning
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. We currently plan to continue
accounting for stock-based compensation under APB No. 25 and do not anticipate
changing to the fair value method of accounting. As a result, following the
effective date of SFAS No. 148, we will disclose in accordance with SFAS No. 123
on a quarterly basis.

NOTE 2.  DISCONTINUED OPERATIONS

In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
As a part of that plan, we wrote down our infrared hardware inventory to its
estimated net realizable value. Additionally, in June 2002, we sold our wholly
owned subsidiary, Extended Systems Singapore Pte Limited, and in May 2001, we
sold the assets of our printing solutions segment. As a result, the results of
these operations have been accounted for as discontinued operations for all
periods presented in accordance with SFAS No. 144 and Accounting Principles
Bulletin No. 30. Amounts in the financial statements and related notes for all
periods shown have been reclassified to reflect the discontinued operations.
Operating results for the discontinued operations are reported, net of tax,
under "Income from discontinued operations" on the accompanying Statements of
Operations.

The following summarizes the results of discontinued operations:

<TABLE><CAPTION>
                                                                THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                   DECEMBER 31,                  DECEMBER 31,
                                                               --------------------         --------------------
                                                                2002          2001           2002          2001
                                                               --------------------         --------------------
<S>                                                            <C>           <C>            <C>           <C>
 Net revenue ..........................................        $  303        $  398         $  623        $1,398
 Gross profit .........................................           197           136            241           458
 Income tax provision .................................            85            36            101            35
 Income (loss) from discontinued operations,
      net of taxes ....................................           140           (59)           169             4
Earnings (loss) per share from discontinued operations:
      Basic and diluted ...............................        $ 0.01        $(0.00)        $ 0.01        $ 0.00
</TABLE>

NOTE 3.  RESTRUCTURING CHARGES


We recorded $136,000 in workforce reduction costs during the first quarter of
fiscal 2003. The restructuring charge consisted primarily of severance,
benefits, and other costs related to the termination of 16 employees in research
and development, marketing and sales, manufacturing, and administration, of
which 14 were located in the United States and 2 in Europe. All of these charges
were paid in the first quarter of fiscal 2003.

                                       8
<PAGE>

During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone, Inc. ("ViaFone"). Prior
to our acquisition of the company, ViaFone had implemented a restructuring
program that resulted in charges for workforce reduction costs, costs related to
closing its office in France and excess facilities costs related to lease
commitments for space no longer used in Brisbane, California. At the time we
completed the ViaFone acquisition, there were $993,000 of future lease
commitments that had been accrued but not yet paid, $266,000 of workforce
reduction liabilities and $30,000 of liabilities relating to the closure of
ViaFone's French office. As of December 31, 2002, the balance of restructuring
liabilities accrued but not yet paid was $858,000.

A summary of the restructuring costs is outlined as follows:

<TABLE><CAPTION>
                                                                    Workforce      Facilities
                                                                    Reduction          and
                                                                      Costs        Other Costs        Total
                                                                     -------         -------         -------
<S>                                                                  <C>             <C>             <C>
Balance at June 30, 2002 ....................................        $    --         $    --         $    --
Restructuring charges accrued in first quarter of fiscal 2003            136              --             136
Restructuring accrual assumed with ViaFone acquisition ......            266           1,023           1,289
Cash payments ...............................................           (368)           (199)           (567)
                                                                     -------         -------         -------
Balance at December 31, 2002 ................................        $    34         $   824         $   858
                                                                     =======         =======         =======
</TABLE>

NOTE 4.  GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

We recorded $11 million of goodwill upon closing of the ViaFone acquisition in
the first quarter of fiscal 2003. In the second quarter of fiscal 2003, we
adjusted the purchase price allocation to reflect a reduction in accrued
acquisition costs and revisions to the fair values of certain assets acquired
and liabilities assumed at the date of acquisition. This adjustment resulted in
a net decrease to goodwill of approximately $198,000. No goodwill was impaired
or written off in the first six months of fiscal 2003. The changes in the
carrying amount of goodwill for the six months ended December 31, 2002 are as
follows:

Balance as of June 30, 2002...........................    $1,704
Reclassification of certain intangibles to goodwill
in connection with SFAS 142 adoption..................       375
Acquisitions during the period........................    10,971
Post-acquisition adjustments..........................     (198)
                                                         -------
Balance as of December 31, 2002.......................   $12,852
                                                         =======

During the first six months of fiscal 2003, we acquired purchased technology
valued at $780,000 with an amortization period of five years. Customer
relationship assets acquired in the first six months of fiscal 2003 were valued
at $80,000 with an amortization period of five years. Other identifiable
intangible assets, excluding goodwill, consist of the following:

<TABLE><CAPTION>
                                  AS OF DECEMBER 31, 2002                          AS OF JUNE 30, 2002
                          --------------------------------------        --------------------------------------
                           Gross                                         Gross
                          Carrying     Accumulated                      Carrying     Accumulated
                           Amount      Amortization        Net           Amount     Amortization         Net
                          -------        -------         -------        -------        -------         -------
<S>                       <C>            <C>             <C>            <C>            <C>             <C>
Purchased
technology .......        $ 3,691        $(2,191)        $ 1,500        $ 2,911        $(1,848)        $ 1,063
Customer
relationships ....             80             (5)             75             --             --              --
Non-compete
covenants ........              6             (6)             --              6             (6)             --
Other ............              5             (5)             --              5             (4)              1
                          -------        -------         -------        -------        -------         -------
Total ............        $ 3,782        $(2,207)        $ 1,575        $ 2,922        $(1,858)        $ 1,064
                          =======        =======         =======        =======        =======         =======
</TABLE>

Amortization of other intangible assets, reported as a component of cost of net
revenue, was $188,000 and $146,000 for the three months ended December 31, 2002
and 2001, respectively. Amortization of other intangible assets, reported as a
component of cost of net revenue, was $348,000 and $292,000 for the six months
ended December 31,

                                       9
<PAGE>

2002 and 2001, respectively. Based on the identified intangible assets recorded
at December 31, 2002, the estimated future amortization expense for the
remaining six months of fiscal year 2003 and fiscal years 2004, 2005, 2006, 2007
and 2008 is $378,000, $621,000, $204,000, $172,000, $172,000, and $29,000,
respectively.

NOTE 5.  BUSINESS COMBINATIONS

In August 2002, we completed our acquisition of ViaFone. ViaFone was a privately
held, leading provider of real-time, mobile platform and mobile applications
that connect field sales and service employees with critical business systems,
information and processes of their enterprise. As a result of the acquisition,
we expect to benefit from the licensing of ViaFone's software technology and
from the addition of an experienced professional services organization. We also
expect to benefit from the strong cross-selling opportunities present within
each company's customer base and strategic relationships. The adjusted total
purchase price of $10.7 million consisted of $9.9 million of Extended Systems
common stock (2,550,000 shares issued based on the average stock price for the
five trading days surrounding May 28, 2002) and $0.7 million of direct
transaction costs. The total purchase price decreased by $87,000 in the second
quarter of fiscal 2003 due to a $87,000 decrease in direct transaction costs
resulting from the true-up of accrued transaction costs at the time of payment.
In exchange for the Extended Systems common stock issued, all outstanding shares
of ViaFone common and preferred stock were acquired. As part of the acquisition
agreement, an additional 450,000 shares of Extended Systems common stock were
issued to shareholders of ViaFone and placed in an escrow fund for a period of
up to one year to be used as the exclusive source of reimbursement to us for
breaches of certain terms of the agreement, including, among other provisions,
failure of ViaFone to achieve certain revenue and net loss targets for the nine
months ended September 30, 2002. ViaFone did not meet these revenue and net loss
targets, and all 450,000 shares held in escrow were returned to us in December
2002 to satisfy our claims against the escrow. In accordance with the applicable
provisions of the Delaware General Corporation Law, all 450,000 shares
automatically became treasury stock.

The transaction was accounted for as a purchase pursuant to SFAS No. 141. The
purchase price was allocated as follows:

                                             AMORTIZATION
                                                PERIOD            AMOUNT
                                           -----------------    ----------
Existing technology......................       5 yrs.               $ 780
In-process research and development......        n/a                   430
Net tangible assets/liabilities (1)......        n/a               (1,404)
Customer relationships...................       5 yrs.                  80
Goodwill (2).............................        n/a                10,773
                                                                ----------
Purchase price (3).......................                          $10,659
                                                                ==========

(1)  This amount reflects a net adjustment of $111,000 to the fair values of
     certain assets acquired and liabilities assumed from ViaFone.
(2)  This amount reflects a reduction in accrued direct acquisition costs of
     $87,000 and a net adjustment of $111,000 to the fair values of certain
     assets acquired and liabilities assumed from ViaFone.
(3)  This amount reflects a reduction in accrued direct acquisition costs of
     $87,000.

The adjusted estimated fair value of tangible assets acquired and liabilities
assumed as of the purchase date are as follows:

Current assets..........................................         $    4,636
Property and equipment..................................                589
                                                                 ----------
Total assets acquired...................................              5,225
Current liabilities.....................................            (5,220)
Deferred revenue........................................              (491)
Non-current liabilities.................................              (918)
                                                                 ---------
Net tangible assets acquired............................         $  (1,404)
                                                                 =========

Pursuant to SFAS No. 142, goodwill related to the acquisition is not amortized
and will be tested at least annually for impairment. This goodwill is not
deductible for tax purposes.

The purchased in-process research and development was charged to operations
during the quarter as it had not yet reached technological feasibility and had
no alternative future use. The value assigned to in-process research and
development

                                       10
<PAGE>

was determined by estimating the costs to develop the purchased in-process
research and development into a commercially viable product, estimating the
resulting net cash flows from sale of those products once commercially viable,
and discounting the net cash flows back to their present values using discount
rates of either 19% or 21%, depending on the technology. These rates were based
on the industry segment for the technology, the nature of the products to be
developed, the length of time to complete development, and the overall maturity
and history of the development team. The in-process research and development
percentage of completion was estimated to range from 50% to 80%.

The results of operations for the three and six months ended December 31, 2002
include the operations of ViaFone from August 31, 2002. The following unaudited
pro forma consolidated results of continuing operations assume the ViaFone
acquisition occurred at the beginning of each period presented:

<TABLE><CAPTION>
                                                         PRO FORMA (UNAUDITED)            PRO FORMA (UNAUDITED)
                                                          THREE MONTHS ENDED                 SIX MONTHS ENDED
                                                             DECEMBER 31,                      DECEMBER 31,
                                                     -----------------------------------------------------------
                                                        2002             2001             2002             2001
                                                     -----------------------------------------------------------
<S>                                                  <C>              <C>              <C>              <C>
Net revenue from continuing operations ......        $  6,883         $  7,317         $ 13,142         $ 13,138
Loss from continuing operations .............          (1,406)          (8,147)          (6,678)         (17,428)

Loss per share from continuing operations:
Basic and diluted ...........................        $  (0.10)        $  (0.60)        $  (0.52)        $  (1.29)
</TABLE>

The pro forma information above is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the
acquisition occurred at the beginning of fiscal 2002, nor is it indicative of
results of operations for any future period.



                                             AS OF              AS OF
                                          DECEMBER 31,         JUNE 30,
NOTE 6.  RECEIVABLES                          2002               2002
                                           ----------         ----------
Accounts receivable ...............        $    6,355         $    5,109
Other receivables .................                46                 67
Allowance for doubtful accounts ...              (965)              (892)
                                           ----------         ----------
                                           $    5,436         $    4,284
                                           ==========         ==========


                                             AS OF              AS OF
                                          DECEMBER 31,         JUNE 30,
NOTE 7.  PROPERTY AND EQUIPMENT               2002               2002
                                           ----------         ----------
Land and land improvements ........        $      897         $      897
Buildings .........................             5,903              5,864
Computer equipment ................             5,833              5,443
Furniture and fixtures ............             2,387              2,302
                                           ----------         ----------
                                               15,020             14,506
Less accumulated depreciation .....            (9,207)            (8,720)
                                           ----------         ----------
                                           $    5,813         $    5,786
                                           ==========         ==========

                                       11
<PAGE>

                                                   AS OF              AS OF
                                                DECEMBER 31,        JUNE 30,
NOTE 8.  ACCRUED EXPENSES                           2002              2002
                                                 ----------        ----------

Accrued payroll and related benefits ....        $    1,128        $    1,211
Other ...................................             1,920             1,528
                                                 ----------        ----------


                                                 $    3,048        $    2,739
                                                 ==========        ==========

NOTE 9.  COMMITMENTS AND CONTINGENCIES

COMMITMENTS. We currently lease certain office space and equipment under
non-cancelable operating and capital leases. Lease expense under operating lease
agreements was $167,000 and $72,000 for the three months ended December 31, 2002
and 2001, respectively. Lease expense under operating lease agreements was
$323,000 and $192,000 for the six months ended December 31, 2002 and 2001,
respectively.

In connection with our acquisition of ViaFone, we assumed operating lease
obligations for office space located in Brisbane, California; Toronto, Canada;
and Atlanta, Georgia. We also assumed capital lease obligations for various
pieces of office equipment.

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank ("SVB"). We have restructured
that debt into a term loan due in 30 equal monthly installments bearing interest
at 8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005.

Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations are as follows (in thousands):

<TABLE><CAPTION>
                                                            YEAR ENDING JUNE 30,
                                           --------------------------------------------------
                                            2003       2004       2005       2006       2007    THEREAFTER    TOTAL
                                           ------     ------     ------     ------     ------     ------     ------
<S>                                        <C>        <C>        <C>        <C>        <C>           <C>     <C>
Restructuring-related commitments:
   Operating leases (1) ..............     $  291     $  533     $   --     $   --     $   --     $   --     $  824
Other commitments:
   SVB debt principal (2) ............        217        434        325         --         --         --        976
   SVB debt interest .................         36         46         11         --         --         --         93
   Capital leases (2) ................         21         28         28         14          7         --         98
   Operating leases ..................        341        601        193        149        144        271      1,699
                                           ------     ------     ------     ------     ------     ------     ------
Total other commitments ..............        615      1,109        557        163        151        271      2,866
                                           ------     ------     ------     ------     ------     ------     ------
Total commitments ....................     $  906     $1,642     $  557     $  163     $  151     $  271     $3,690
                                           ======     ======     ======     ======     ======     ======     ======
</TABLE>

(1)      The restructuring accrual related to the Brisbane lease obligation is
         reported both as an accrued expense in the current liabilities section
         and in the non-current liabilities section of the balance sheet,
         depending on the timing of when payments are due.
(2)      The term debt and capital leases are reported on the balance sheet as
         current and non-current liabilities, depending on the timing of when
         payments are due.

Non-current capital lease obligations are as follows (in thousands):

                                                            AS OF DECEMBER
                                                               31, 2002
                                                               --------
Gross capital lease obligations.....................              $98
Less imputed interest...............................              (16)
                                                               --------
Present value of net minimum lease payments.........               82
Less current portion................................              (17)
                                                               --------
Non-current capital lease obligations...............              $65
                                                               ========

                                       12
<PAGE>

GUARANTEES. We have provided a letter of credit that secures our rental payments
at our Brisbane, California location. We could be required to perform under this
guarantee if we were to default with respect to any of the terms, provisions,
covenants, or conditions of the lease agreement. This guarantee is renewed
annually for successive one-year terms until the expiration of our lease on May
31, 2004. The maximum potential amount of future payments we could be required
to make under this letter of credit as of December 31, 2002 is $120,000.

We have also provided a guarantee that secures our rental payments at our
Bristol, England location. We could be required to perform under this guarantee
if we were to default with respect to any of the terms, provisions, covenants,
or conditions of the lease agreement. This guarantee is valid until the
expiration of our lease on January 13, 2005. The maximum potential amount of
future payments we could be required to make under this letter of credit as of
December 31, 2002 is approximately $25,000.

WARRANTIES. We offer warranties and free support on certain products and record
an accrual for the estimated future costs associated with warranty claims and
support. We accrue these costs based upon our historical experience and our
estimate of the level of future costs. We assess the adequacy of our warranty
reserve on a quarterly basis and make adjustments, if needed.

The following table reconciles the changes in our warranty reserve for the three
months ended December 31, 2002:


Balance at September 30, 2002........................................    $ 175
Accrual for warranty reserve for sales made during
the quarter ended December 31, 2002..................................       65
Warranty expirations during the quarter ended December 31, 2002......     (115)
                                                                         -----
Balance at December 31, 2002.........................................    $ 125
                                                                         =====

LINE OF CREDIT. On January 15, 2002, we entered into a loan and security
agreement with Silicon Valley Bank, under which we can access up to $5.0 million
of financing in the form of a demand line of credit, subject to current accounts
receivable balances and current payments due on our long-term debt. Certain of
our assets collateralize the line of credit. Interest on any borrowings will be
paid at prime plus one percent but not less than 5.5%. The line of credit
agreement requires us to maintain certain financial ratios and expires on
January 15, 2004. To date we have had no borrowings on this line of credit. At
December 31, 2002, we were in compliance with all financial covenants required
under the line of credit.

LITIGATION. On April 22, 2002, Pumatech, Inc. filed a patent infringement action
against us in the U.S. District Court in Northern California. An amended
complaint was filed on May 28, 2002. The action alleges that our XTNDConnect
server and desktop synchronization products infringe on seven of Pumatech's
synchronization-related patents, that our alleged use of the trademark
"Satellite Forms" constitutes trademark infringement, and that other alleged
actions constitute unfair competition and interference with contract. The action
seeks an injunction against further sales of our server and desktop
synchronization products and use of the allegedly infringing trademark, as well
as unspecified damages and attorneys' fees. On June 25, 2002, we filed an answer
and counterclaim in response to Pumatech's complaint in which we deny Pumatech's
charges, raise a number of affirmative defenses and request a declaration from
the court that Pumatech synchronization software patents are invalid and not
infringed by our products. On December 11, 2002, Pumatech filed a second amended
complaint, which adds allegations that unspecified synchronization products,
infringe an eighth Pumatech patent. On December 31, 2002, we filed an amended
answer and counterclaim in which we deny all of Pumatech's charges, including
this additional charge, and amend our defenses and counterclaims to include this
additional patent. We believe that Pumatech's claims are without merit, and we
intend to defend the suit vigorously. Discovery and other pretrial proceedings
are on-going; trial is currently scheduled for April, 2004. Litigation is
inherently uncertain, and we may not prevail in our defenses or counterclaims
against the claims. In addition, litigation is frequently expensive and
time-consuming, and management may be required to spend significant time in the
defense of the suit; such costs and the diversion of management time could have
a material adverse effect on our business. The ultimate outcome of any
litigation is uncertain and the range of loss that could occur upon resolution
of this matter is not estimable. We cannot estimate the costs of any potential
settlement. Were an unfavorable outcome to occur, the impact could be material
to our financial position, results of operations, or cash flows.

We are also, from time-to-time, a party to legal disputes and proceedings
arising in the ordinary course of general business activities. After taking into
consideration legal counsel's evaluation of such disputes, we do not believe
their outcome will have a material effect on our financial position or results
of operations.

                                       13
<PAGE>

NOTE 10.  INCOME TAXES

For the three months ended December 31, 2002, we recorded $35,000 of income tax
expense related primarily to foreign withholding taxes. We recorded no income
tax benefit associated with our loss from operations. We allocated $85,000 of
income tax expense to income from discontinued operations. We allocated a tax
benefit of $85,000 to continuing operations for a net tax benefit from
continuing operations of $50,000.


NOTE 11.  BUSINESS SEGMENT, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS

We determine our reportable segments by evaluating our management and internal
reporting structure based primarily on the nature of the products offered to
customers and type or class of customers.

At December 31, 2002, we had one operating segment. Our mobile information
management segment provides the expertise, strategy and solutions to help
enterprise organizations realize their business goals through mobile technology.
Our software and services portfolio includes data synchronization and device
management solutions; mobile applications for sales, service and pharmaceutical
professionals; mobile application development tools and services; embedded
client/server database management systems; and Bluetooth and IrDA wireless
connectivity software. We sell our mobile information management solutions
primarily to enterprises, application developers, resellers and original
equipment manufacturers.

In the six months ended December 31, 2002 and 2001, no customer accounted for
more than 10% of our net revenue from continuing operations.

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          ---------------------------------------------------------------
          RESULTS OF OPERATIONS
          ---------------------

In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements. The words "expects," "anticipates,"
"believes," "intends," "will" and similar expressions identify forward-looking
statements that are based upon information currently available to us, speak only
as of the date hereof and are subject to certain risks and uncertainties. These
forward-looking statements include, but are not limited to, statements
regarding:

o    levels of software product license fees and royalties;
o    levels of international sales;
o    levels of service revenue;
o    levels of original equipment manufacturer sales;
o    anticipated gross margin;
o    staffing and expense levels;
o    future profitability;
o    future results of operations;
o    future operating cash flows;
o    levels of accounts receivable;
o    levels of capital expenditures;
o    anticipated costs of research and development;
o    anticipated costs of marketing and sales;
o    anticipated revenue from discontinued operations;
o    sufficiency of working capital and borrowing capacity;
o    anticipated cash funding needs;
o    claims made by Pumatech, Inc.;
o    expected benefits from our acquisition of ViaFone; and
o    future acquisitions; and
o    effects of fluctuations in exchange rates.

We assume no obligation to update any forward-looking statements and our actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that may cause a difference include, but are not limited to,
those discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results and
Market Price of Stock." You should also carefully review the risk factors
described in other documents that we file from time to time with the Securities
and Exchange Commission, including our 2002 Annual Report on Form 10-K filed on
September 23, 2002 and other Quarterly Reports on Form 10-Q that we will file in
fiscal 2003. All period references are to our second fiscal quarters ended
December 31, 2002, and 2001, the six months ended December 31, 2002 and 2001 and
our fiscal years ended June 30, 2003 and 2002, unless otherwise indicated. All
tabular amounts are in thousands, except percentages.

                                       14
<PAGE>

SIGNIFICANT EVENTS
------------------

On August 30, 2002, we completed our acquisition of ViaFone, Inc., a
privately-held, leading provider of real-time, mobile platform and mobile
applications that connect field sales and service employees with critical
business systems, information and processes of their enterprise. ViaFone merged
with and into a subsidiary of Extended Systems, and all outstanding shares of
ViaFone common and preferred stock were exchanged for approximately 3,000,000
newly issued shares of Extended Systems common stock in a tax-free transaction.
As part of the acquisition agreement, 450,000 of these shares were placed in an
escrow fund for a period of up to one year to be used as the exclusive source of
reimbursement to us for breaches of certain terms of the agreement, including,
among other provisions, failure of ViaFone to achieve certain revenue and loss
targets for the nine months ended September 30, 2002. ViaFone did not meet these
revenue and net loss targets, and all 450,000 shares held in escrow were
returned to us in December 2002 to satisfy our claims against the escrow. In
accordance with applicable provisions of the Delaware General Corporation Law,
all 450,000 shares automatically became treasury stock. We accounted for this
transaction using the purchase method of accounting pursuant to Statement of
Financial Accounting Standards No. 141, "Business Combinations." Accordingly,
the results of operations of ViaFone are included in our consolidated statement
of operations from the completion date of the acquisition.

CRITICAL ACCOUNTING POLICIES
----------------------------

In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States, we make estimates,
assumptions and judgments that can have a material impact on our net revenue,
operating income and net income (loss), as well as on the value of certain
assets on our consolidated balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our consolidated financial statements, and
consider these to be our critical accounting policies. The policies described
below are not intended to be a comprehensive list of all our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. Our audited consolidated financial statements and
notes thereto contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies
that we consider critical to an understanding of the consolidated financial
statements are highlighted below.

REVENUE RECOGNITION

To recognize software revenue we apply the provisions of Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION (SOP 97-2), as amended by SOP 98-9, and
generally recognize revenue when all of the following criteria are met: (1)
persuasive evidence of an arrangement exists, (2) delivery has occurred, (3) the
fee is fixed or determinable and (4) collection of the resulting receivable is
reasonably assured.

At the time of the transaction, we assess whether the fee associated with our
revenue transactions is fixed or determinable, based on the payment terms
associated with the transaction. If a significant portion of a fee is due after
the shorter of our normal payment terms or 90 days, we account for the fee as
not being fixed or determinable. In these cases, we recognize revenue as the
fees become due and payable. If we had assessed the fixed or determinable
criterion differently, the timing and amount of our revenue recognition may have
differed materially from that reported.

At the time of the transaction we also assess whether or not collection is
reasonably assured based on a number of factors, including past transaction
history with the customer and credit-worthiness of the customer. We generally do
not request collateral from our customers. If we determine that collection of a
fee is not reasonably assured, we defer recognition of the fee as revenue, and
recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of cash. If we had assessed collectibility differently,
the timing and amount of our revenue recognition may have differed materially
from that reported.

For arrangements with multiple obligations (for instance, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method. This means that we defer revenue
from the total fees associated with the arrangement equivalent to the
vendor-specific objective evidence of fair value of the elements of the
arrangement that have not yet been delivered. The vendor-specific objective
evidence of fair value of any undelivered element is established by using
historical evidence specific to Extended Systems. For example, the
vendor-specific objective evidence of fair value for maintenance and support is
based upon separate sales of renewals to other customers or upon the renewal
rates quoted in the contracts, and the fair value of services, such as training
or consulting, is based upon separate sales by us of these services to other
customers. If we had allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed

                                       15
<PAGE>

materially from that reported. For certain of our products, we do not sell
maintenance separately but do provide minimal support and bug fixes and, from
time to time, minor enhancements to ensure that the products comply with their
warranty provisions. Accordingly, we accrue for warranty costs at the time the
product revenue is recognized.

When we license our software to original equipment manufacturers or to companies
that include our software in their software offering, royalty revenue is
generally recognized when customers report to us the sale of software to their
end user customer. In cases where the arrangement with our customer provides for
a prepaid nonrefundable royalty, we generally recognize revenue when persuasive
evidence of an arrangement exits, delivery has occurred, the fee is fixed or
determinable and collection of the resulting receivable is reasonably assured.

We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we generally recognize revenue
from training services as these services are performed. For professional
services that involve significant implementation, customization, or modification
of our software that is essential to the functionality of the software, we
recognize revenue over the period of the engagement, generally using the
percentage-of-completion method. In cases where our professional services
involve customizations for which the amount of customization effort cannot be
reasonably estimated, where significant uncertainty about the project completion
exists, or where an arrangement provides for customer acceptance, we defer the
contract revenue under the completed contract method of accounting until the
uncertainty is sufficiently resolved or the contract is complete. If we were to
make different judgments or utilize different estimates of the total amount of
work we expect to be required to complete an engagement, the timing of our
revenue recognition from period to period, as well as the related margins, might
differ materially from that previously reported.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS

We assess the impairment of identifiable intangibles, fixed assets and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important that could trigger an
impairment review include, but are not limited to: (1) significant operating
underperformance relative to historical or projected future operating results,
(2) significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, (3) significant negative industry or economic
trends, (4) a significant decline in our stock price for a sustained period, and
(5) our market capitalization equal to or below our net book value. When we
determine that the carrying value of long-lived assets 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 market capitalization approach when the
information is readily available. When the information is not readily available,
we use a projected discounted cash flow method using a discount rate
commensurate with the risk inherent in our current business model to measure any
impairment. If we had made different judgments or utilized different estimates
our measurement of any impairment may have differed materially from that
reported.

INCOME TAXES

On a quarterly basis we evaluate our deferred tax asset balance for
realizability. To the extent we believe it is more likely than not that some or
all of our deferred tax assets will not be realized, we establish a valuation
allowance against the deferred tax assets. As of December 31, 2002, we had
recorded a valuation allowance against 100 percent of our net deferred tax
assets due to uncertainties related to our ability to utilize our deferred tax
assets, primarily consisting of certain net operating losses and foreign tax
credits, before they expire. This valuation allowance was recorded based on our
recent losses, estimates of future U.S. and foreign jurisdiction taxable income
and our judgments regarding the periods over which our deferred tax assets will
be recoverable. If we had made different judgments or utilized different
estimates, the amount or timing of the valuation allowance recorded may have
differed materially from that reported. In the event that actual results differ
from these estimates or we adjust these estimates in future periods, we may need
to reduce the valuation allowance, potentially resulting in an income tax
benefit in the period of reduction, which could materially impact our financial
position and results of operations.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

We maintain an allowance for doubtful accounts based on our ongoing review of
customer accounts, payment patterns and specific collection issues. Where
specific collection issues are identified, we record a specific allowance based
on the amount that we believe will be collected. For accounts where specific
collection issues are not identified, we record a reserve based on the age of
the receivable and historical collection patterns. If we had made different
judgments or utilized different estimates, the timing and amount of our reserve
may have differed materially from that reported.

                                       16
<PAGE>

OVERVIEW
--------

We classify our product offerings into one operating segment, our mobile
information management segment, which offers the expertise, strategy and
solutions to help enterprise organizations realize their business goals through
mobile technology. Our software and services portfolio includes online and
offline mobile groupware software; our mobile solutions platform; our mobile
business solutions for sales, service and pharmaceutical environments; embedded
client/server database software; and our infrared and Bluetooth wireless
connectivity software. Our future results of operations will be highly dependent
upon the success of this suite of software products.

We sell our mobile information management solutions primarily to enterprises,
application developers, resellers, and original equipment manufacturers both
directly and through our e-commerce storefronts on the Internet. We derive
revenue from:

o    software license fees and royalties;
o    support and maintenance fees; and
o    professional services, including non-recurring development fees that we
     generate when we adapt products to customers' specifications and consulting
     services.

We derive a significant amount of our revenue from sales to customers outside of
the United States, principally from our international sales subsidiaries,
overseas original equipment manufacturers and from a limited number of
international distributors. Based on the region in which the customer resides,
net revenue from continuing operations may be analyzed as follows for the three
and six months ended December 31:

<TABLE><CAPTION>
                                                              THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                 DECEMBER 31,                   DECEMBER 31,
                                                            ---------------------         ---------------------
NET REVENUE PERCENTAGES BY REGION                            2002           2001           2002           2001
                                                            ------         ------         ------         ------
<S>                                                         <C>            <C>            <C>            <C>
Domestic ..........................................            44%            56%            49%            53%
International:
   Europe
   Comprehensive loss .............................            48             35             42             35
   Asia ...........................................             4              6              6              8
   Other regions ..................................             4              3              3              4
                                                            ------         ------         ------         ------
     Total international ..........................            56%            44%            51%            47%
                                                            ------         ------         ------         ------
        Net revenue from continuing operations ....           100%           100%           100%           100%
                                                            ======         ======         ======         ======
</TABLE>

In both the second quarter and first six months of fiscal 2003, our percentage
of net revenue generated outside of North America increased from the same period
in fiscal 2002 primarily due to an increase in sales of our XTNDConnect and
Advantage software products by our international subsidiaries and to customers
who received delivery of our product outside of North America.

We expect that international sales will continue to represent a substantial
portion of our net revenue in the foreseeable future and will comprise between
45% and 55% of our net revenue throughout fiscal 2003.

Revenue generated from sales to original equipment manufacturers and to
companies that license our software to include in their own software offering
has fluctuated in the past. We expect it will also fluctuate in future quarters,
as such revenue is dependent upon the timing of customer projects and the
effectiveness of their marketing efforts.

We sell our products directly to end-user customers and also market and sell
many of our products through multiple indirect channels, primarily distributors
and resellers. In the six months ended December 31, 2002 and 2001, no customer
accounted for more than 10% of our net revenue from continuing operations.

                                       17
<PAGE>

NET REVENUE
-----------
<TABLE><CAPTION>
                                             THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                 DECEMBER 31,                         DECEMBER 31,
                                     ----------------------------------  -----------------------------------
                                         2002       CHANGE     2001          2002      CHANGE       2001
                                     ----------------------------------   ----------------------------------
<S>                                     <C>           <C>      <C>         <C>            <C>      <C>
Revenue:
License fees and royalties..........    $5,327        (5)%     $5,628      $10,316        6%       $ 9,776
Services and other..................     1,556        95          800        2,476       59          1,555
                                     ----------------------------------   ----------------------------------
    Total net revenue...............    $6,883         7%      $6,428      $12,792       13%       $11,331
</TABLE>

LICENSE FEES AND ROYALTIES. License and royalty revenue consists of fees for
licenses of our software products. The decrease in license fees and royalties in
the second quarter of fiscal 2003 from the same period in fiscal 2002 was due
primarily to a decrease in license revenue from our embedded Bluetooth and
infrared software products as a result of a decrease in the number of software
development kits sold and a decrease in the number of Advantage Database Server
software licenses sold. This decline was partially offset by an increase in
royalty revenue from our XTNDConnect products as well as the addition of license
revenue from our OneBridge mobile solutions, which were added with our
acquisition of ViaFone.

The increase in license fees and royalties in the six months ended December 31,
2002 from the same period in fiscal 2002 was primarily due to our fulfillment of
contract obligations to IBM in the first quarter of fiscal 2003 that allowed us
to recognize $518,000 of previously deferred revenue, the addition of revenue
from our OneBridge mobile solutions, and an increase in royalty revenue from our
XTNDConnect products. These increases were partially offset by a decrease in our
Bluetooth and infrared software revenue resulting from a decrease in the number
of software development kits sold and a decrease in one-time Bluetooth royalty
payments in the first six months of fiscal 2002.

We expect revenue from license fees and royalties to increase in the remaining
quarters of fiscal 2003. This increase is expected to result primarily from
increased license and royalty revenue from our XTNDConnect products, increased
revenue from our embedded Bluetooth and infrared software development kits, and
increased license revenue from our OneBridge mobile solutions. Although we are
beginning to see shipment of Bluetooth products from some of our customers, we
do not currently anticipate that Bluetooth royalty revenue will be a material
component of our net revenue in the remaining quarters of fiscal 2003.

SERVICES AND OTHER. Services and other revenue consist primarily of support and
maintenance contracts sold to our customers and of fees for professional
services. Our professional services typically consist of standard product
installations, training, significant customization of our standard license
product, or non-recurring engineering. Our service revenue increased in the
three and six months ended December 31, 2002 from the same periods in fiscal
2002 primarily due to an increase in professional services associated with sales
of our OneBridge mobile solutions. We also experienced an increase in support
and maintenance revenue resulting from sales of support and maintenance
contracts on new software licenses sold and from renewals of support and
maintenance contracts. These increases were partially offset by a decrease in
revenue from non-recurring engineering, which fluctuates as a result of the
timing of our customer's projects.

We expect services revenue to continue to increase in fiscal 2003, although we
expect it may fluctuate from quarter to quarter based on the timing of
professional services and non-recurring engineering fees earned. We are
expecting an increase in revenue primarily as a result of our increased
strategic focus on professional services and solutions, as evidenced by the
addition of a dedicated professional services group in the first quarter of
fiscal 2003. As of December 31, 2002, this group was comprised of a team of 13
professionals formerly with ViaFone and of 11 engineers formerly dedicated to
development within our company. We also expect that service revenue will
increase in fiscal 2003 due to an increase in the number of support and
maintenance contracts sold on new licenses and contract renewals.

DEFERRED REVENUE. Deferred revenue was $2.4 million at December 31, 2002
compared to $2.2 million at June 30, 2002. During the first six months of fiscal
2003 there was an increase of $491,000 in deferred revenue related to contracts
we assumed in the ViaFone acquisition where professional services had not yet
been completed or where support and maintenance obligations still existed. We
also experienced an increase in deferred revenue due to an increase in support
and maintenance contracts added during the period, and in increase in deferred
license revenue. These increases were partially offset by a decrease in deferred
revenue attributable to our fulfillment of contractual obligations to IBM, which
resulted in the recognition of $518,000 of previously deferred revenue, and
decreases related to the completion of professional services contracts and
monthly amortization of our support and maintenance contracts.

                                       18
<PAGE>

GROSS MARGIN
------------
<TABLE><CAPTION>
                                                     THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                         DECEMBER 31,                               DECEMBER 31,
                                         ------------------------------------------  ----------------------------------------
                                             2002         CHANGE         2001            2002         CHANGE        2001
                                         ------------------------------------------  ----------------------------------------
<S>                                         <C>                <C>        <C>           <C>                 <C>   <C>
Gross profit:
     License fees and royalties.........    $5,032             (6)%       $5,347        $  9,749            7%    $  9,131
     Services and other.................       575              3            558             950           (8)       1,028
                                         ------------------------------------------  ----------------------------------------
     Total gross profit.................    $5,607             (5)%       $5,905         $10,699            5%     $10,159

                                                     THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                         DECEMBER 31,                               DECEMBER 31,
                                         ------------------------------------------  ----------------------------------------
                                             2002       CHANGE IN        2001            2002       CHANGE IN       2001
                                                         MARGIN %                                    MARGIN %
                                         ------------------------------------------  ----------------------------------------
Gross margin:
     License fees and royalties.........        94%            (1)         95%             95%              2          93%
     Services and other.................        37            (33)         70              38             (28)         66
                                         ------------------------------------------  ----------------------------------------
     Total gross margin.................        81%           (11)         92%             84%             (6)         90%
</TABLE>

Our cost of net revenue consists primarily of costs associated with:

o    post-sales support;
o    personnel providing professional services;
o    amortization of purchased technology;
o    royalties for the use of third-party software; and
o    other production-related activities.

In general, the costs of license fees and royalties represent a far smaller
percentage of license fees and royalties net revenue than service costs, which
have a much higher cost structure. Additionally, costs of license fees and
royalties, such as royalties for the use of third-party software, are variable,
based on license revenue volume. Services costs tend to be fixed within certain
services revenue ranges. We would expect that an increase in service revenue as
a percentage of our total net revenue would generate a lower overall gross
margin as a percentage of total net revenue. Also, given the high level of fixed
costs associated with the professional services group, our inability to generate
sufficient services revenue to absorb these fixed costs could lead to negative
services gross margins.

LICENSE FEES AND ROYALTIES. The slight decrease in gross profit and gross margin
for the three months ended December 31, 2002 from the same period of fiscal 2002
was primarily due to the decrease in net revenue from license fees and
royalties. The increase in amortization of purchased technology resulting from
our acquisition of ViaFone also contributed to the decrease in gross profit and
gross margin for the three months ended December 31, 2002. For the six months
ended December 31, 2002, the slight increase in gross profit and gross margin
was the result of an increase in net revenue from license and royalty revenues
and a decrease in operations-related overhead resulting from our restructurings
and cost containment efforts, partially offset by an increase in amortization of
purchased technology from our acquisition of ViaFone.

SERVICES AND OTHER. The decline in gross margin from services and other net
revenue in the three months and six months ended December 31, 2002 as compared
to the same periods in fiscal 2002 was primarily attributable to the addition of
a dedicated professional services organization in the first quarter of fiscal
2003, which increased our cost of services as a percentage of net service
revenue. The decrease in gross margin caused by the addition of a dedicated
professional services group was offset, in part, by an increase in our support
and maintenance revenue, which typically generates higher margins due to a lower
cost structure.

We expect our gross profit to increase as our revenue increases. We expect our
gross margin to range between 82% to 85% for the remaining quarters of fiscal
2003. This range is primarily driven by an expected increase in license fees and
royalties net revenue and an expected increase in services net revenue, as well
as the expected mix between license fees and services. In addition, amortization
of purchased technology will increase from the prior year as a result of our
acquisition of ViaFone.

                                       19
<PAGE>

OPERATING EXPENSES
------------------

Our operating expenses were $6.9 million and $7.9 million for the three months
ended December 31, 2002 and 2001, respectively. The decrease in operating
expenses for the three months ended December 31, 2002 as compared to the same
period in fiscal 2002 is primarily attributable to cost reduction efforts
implemented in prior quarters, as well as the elimination of goodwill
amortization in accordance with our adoption of SFAS No. 142.

Our operating expenses were $13.9 million and $15.1 million for the six months
ended December 31, 2002 and 2001, respectively. The decrease in operating
expenses for the first six months of fiscal 2003 from the same period in fiscal
2002 is primarily attributable to cost reductions implemented in the first
quarter of fiscal 2003 and in prior quarters, as well as the elimination of
goodwill amortization in accordance with our adoption of SFAS No. 142. This
decrease in operating expenses was offset, in part, by the $430,000 acquired
in-process research and development charge in the first quarter of fiscal 2003
related to the acquisition of ViaFone.

RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------
<TABLE><CAPTION>
                                             THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                 DECEMBER 31,                        DECEMBER 31,
                                      ----------------------------------  ----------------------------------
                                         2002       CHANGE      2001          2002      CHANGE      2001
                                      ----------------------------------  ----------------------------------
<S>                                       <C>        <C>       <C>           <C>         <C>        <C>
Research and development.............     $1,896     (35)%     $2,919        $3,849      (31)%      $5,544
     As a % of net revenue...........       28%                   45%           30%                    49%
</TABLE>

Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, consulting costs and
facility expenses. The decrease in research and development expenses in the
three and six months ended December 31, 2002 from the same periods in fiscal
2002 was primarily the result of a reduction in personnel subsequent to our
restructurings, offset in part by an increase in engineering personnel in
connection with the completion of the ViaFone acquisition. At December 31, 2002
we had 89 full-time equivalent research and development personnel and
contractors, including 13 added with the ViaFone acquisition, a decrease from
the 101 full-time equivalent personnel at the same time last year.

For the remaining two quarters of fiscal 2003, we expect our research and
development costs to decrease slightly from current levels as a result of the
termination on December 31, 2002 of a bonus plan in place for two former
employees and workforce reductions undertaken in January of 2003.

MARKETING AND SALES EXPENSES
----------------------------
<TABLE><CAPTION>
                                             THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                 DECEMBER 31,                        DECEMBER 31,
                                      ----------------------------------  ----------------------------------
                                         2002       CHANGE      2001          2002      CHANGE      2001
                                      ----------------------------------  ----------------------------------
<S>                                       <C>        <C>       <C>           <C>         <C>        <C>
Marketing and sales..................      $3,641      3%        $3,524       $6,931     (1)%       $6,954
   As a % of net revenue.............       53%                    55%          54%                   61%
</TABLE>

Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing and sales staff, promotional expenses and
pre-sales support costs. The slight increase in marketing and sales expenses in
the three months ended December 31, 2002 from the same period in fiscal 2002 was
primarily due to a increase in personnel costs associated with an increase in
our sales force. This was offset, in part, by a decrease of $180,000 in
company-wide promotional expenses. For the six months ended December 31, 2002,
our marketing and sales expenses were relatively flat. At December 31, 2002, we
had 113 full-time equivalent marketing, sales, and support personnel and
contractors, including 10 added with the ViaFone acquisition, as compared to 109
full-time equivalent personnel and contractors at the same time last year.

We expect marketing and sales expenses to decrease slightly in the remaining two
quarters of fiscal 2003 as a result of the recent workforce reduction undertaken
in January 2003 and other reductions in discretionary spending.

                                       20
<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
<TABLE><CAPTION>
                                             THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                 DECEMBER 31,                        DECEMBER 31,
                                      ----------------------------------  ----------------------------------
                                         2002       CHANGE      2001          2002      CHANGE      2001
                                      ----------------------------------  ----------------------------------
<S>                                       <C>        <C>       <C>           <C>         <C>        <C>


General and administrative............   $1,384        16%      $1,195       $2,507       18%      $2,130
     As a % of net revenue............       20%                    19%          20%                   19%
</TABLE>

General and administrative expenses primarily consist of salaries and other
personnel costs for our finance, management information systems, human resources
and other administrative groups, as well as professional service fees and
directors' and officers' insurance costs. The increase in general and
administrative expenses for the three months ended December 31, 2002 from the
same period in fiscal 2002 was primarily attributable to an increase in legal
fees of approximately $383,000 due largely to the Pumatech lawsuit. This
increase was partially offset by a decrease in personnel costs resulting from
our restructuring in prior quarters. The increase in general and administrative
expenses for the first six months of fiscal 2003 from the same period in fiscal
2002 was primarily attributable to an increase in legal fees of approximately
$557,000 due largely to the Pumatech lawsuit, offset in part by a decrease in
personnel costs resulting from our restructuring in prior quarters.

We expect general and administrative expenses in the remaining two quarters of
fiscal 2003 to be consistent with the level we saw in the second quarter of
fiscal 2003. At December 31, 2002, we had 30 full-time equivalent employees in
administration, as compared to 46 full-time equivalent personnel at the same
time last year. No general and administrative personnel were added with our
acquisition of ViaFone.

RESTRUCTURING CHARGES
---------------------

There were no restructuring charges for the three months ended December 31, 2002
and 2001. During our first quarter ended September 30, 2002, we continued our
efforts to streamline operations and completed a restructuring plan to further
reduce costs and improve operating efficiencies. As a result, we recorded
$136,000 in workforce reduction costs during the quarter. The restructuring
charge consisted primarily of severance, benefits, and other costs related to
the termination of 16 employees in research and development, marketing and
sales, manufacturing, and administration, of which 14 were located in the United
States and 2 in Europe. All of these charges were paid in the first quarter of
fiscal 2003. We expect that operating costs will be reduced by approximately
$300,000 each quarter as a result of this workforce reduction.

During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone. Prior to our
acquisition of the company, ViaFone had implemented a restructuring program that
resulted in charges for workforce reduction costs, costs related to closing its
office in France and excess facilities costs related to lease commitments for
space no longer used in Brisbane, California. At the time we completed the
ViaFone acquisition, there were $993,000 of future lease payments that had been
accrued but not yet paid, $266,000 of workforce reduction liabilities and
$30,000 of French office liabilities. As of December 31, 2002, the balance of
restructuring liabilities accrued but not yet paid was $858,000.

A summary of the restructuring costs is outlined as follows:

<TABLE><CAPTION>
                                                                           Workforce
                                                                           Reduction     Facilities and
                                                                             Costs         Other Costs       Total
                                                                          -------------  ---------------- ------------
<S>                                                                             <C>                <C>           <C>
Balance at June 30, 2002.............................................           $ --               $--           $--

Restructuring charges accrued in first quarter of fiscal 2003........              136              --            136
Restructuring accrual assumed with ViaFone acquisition...............              266             1,023        1,289
Cash payments........................................................            (368)             (199)        (567)
                                                                          --------------------------------------------
Balance at December 31, 2002.........................................             $ 34             $ 824        $ 858
                                                                          ============================================
</TABLE>

In January 2003, we implemented additional cost reductions to further increase
our operating efficiencies. As part of those efforts, we reduced our workforce
by an additional ten people. In the third quarter of fiscal 2003 we expect to
record a restructuring charge of approximately $132,000 related to severance and
benefits for these terminated

                                       21
<PAGE>

employees. We expect to reduce operating costs by approximately $200,000 each
quarter as a result of this workforce reduction.

AMORTIZATION OF INTANGIBLES
---------------------------

We report amortization of non-goodwill intangibles, primarily consisting of
purchased technology, as a component of our cost of net revenue. Amortization of
non-goodwill intangibles was $188,000 and $146,000 for the three months ended
December 31, 2002 and 2001, respectively. Amortization of non-goodwill
intangibles was $348,000 and $292,000 for the six months ended December 31, 2002
and 2001, respectively. The net increase in amortization of non-goodwill
intangibles is a result of the addition of non-goodwill intangibles from our
acquisition of ViaFone. This increase was partially offset by a decrease in
amortization resulting from our adoption of SFAS No. 142, which resulted in
$375,000 of intangible assets, comprised of assembled workforce intangibles,
being reclassified as goodwill in the first quarter of fiscal 2003.

 As a result of our adoption of SFAS No. 142, which requires that goodwill no
longer be amortized, we did not record amortization of goodwill for the six
months ended December 31, 2002. Amortization of goodwill was $231,000 and
$462,000 for the three months and six months ended December 31, 2001,
respectively. This amount was reflected in our statement of operations as an
operating expense.

INCOME TAX BENEFIT
------------------
<TABLE><CAPTION>
                                             THREE MONTHS ENDED                   SIX MONTHS ENDED
                                                 DECEMBER 31,                        DECEMBER 31,
                                      ----------------------------------  ----------------------------------
                                         2002       CHANGE      2001          2002      CHANGE      2001
                                      ----------------------------------  ----------------------------------
<S>                                       <C>        <C>       <C>           <C>         <C>        <C>


Income tax benefit...................     $(50)      150%        $(20)        $(54)      17%        $(46)
   As a % of income (loss)
   before taxes......................        3%                     1%           2%                    1%
</TABLE>


During the three and six months ended December 31, 2002 and 2001, we recorded
income tax expense for foreign withholding taxes and foreign taxes payable by
our international subsidiaries. In all periods we allocated income tax expense
to income from discontinued operations, which resulted in our allocating a tax
benefit to continuing operations. We recorded a valuation allowance against
additional income tax benefits associated with our loss from continuing
operations. The change in the income tax benefit from continuing operations for
the second quarter and the first six months of fiscal 2003 from the same periods
in fiscal 2002 was primarily the result of an increase in income tax expense
from discontinued operations caused by an increase in income from discontinued
operations. During the first quarter of fiscal 2003, in connection with our
acquisition of ViaFone, we recorded an additional $25 million of deferred tax
assets and a corresponding valuation allowance. ViaFone's deferred tax assets
consisted mainly of historical net operating loss carryforwards, which may not
be available to us in the future due to the loss carryforward limitations of
Internal Revenue Code Section 382.

BUSINESS COMBINATIONS
---------------------

 In August 2002, we completed our acquisition of ViaFone, Inc. ("ViaFone").
ViaFone was a privately-held, leading provider of real-time, mobile platform and
mobile applications that connect field sales and service employees with critical
business systems, information and processes of their enterprise. As a result of
the acquisition, we expect to benefit from the licensing of ViaFone's software
technology and from the addition of an experienced team of engineers to our
newly formed professional services organization. We also expect to benefit from
the strong cross-selling opportunities present within each company's customer
base and strategic relationships. The adjusted total purchase price of $10.7
million consisted of $9.9 million of Extended Systems common stock (2,550,000
shares issued based on the average stock price for the five trading days
surrounding May 28, 2002) and $0.7 million of direct transaction costs. The
total purchase price decreased by $87,000 in the second quarter of fiscal 2003
due to a $87,000 decrease in direct transaction costs resulting from the true-up
of accrued transaction costs at the time of payment. In exchange for the
Extended Systems common stock issued, all outstanding shares of ViaFone common
and preferred stock were acquired. As part of the acquisition agreement, an
additional 450,000 shares of Extended Systems common stock were issued to
shareholders of ViaFone and placed in an escrow fund for a period of up to one
year to be used as the exclusive source of reimbursement to us for breaches of
certain terms of the agreement, including, among other provisions, failure of
ViaFone to achieve certain revenue and net loss targets for the nine months
ended September 30, 2002. ViaFone did not meet these revenue and net loss
targets, and all 450,000 shares held in escrow were returned to us in December
2002 to satisfy our claims against the escrow. In accordance

                                       22
<PAGE>

with the applicable provisions of Delaware General Corporation Law, all 450,000
shares automatically became treasury stock.

The transaction was accounted for as a purchase pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 141. The purchase price was
allocated as follows:

                                            AMORTIZATION
                                               PERIOD            AMOUNT
                                          ------------------   --------------
Existing technology.....................       5 yrs.                 $  780
In-process research and development.....         n/a                     430
Net tangible assets/liabilities (1).....         n/a                 (1,404)
Customer relationships..................       5 yrs.                     80
Goodwill (2)............................         n/a                  10,773
                                                               --------------
Purchase price (3)......................                             $10,659
                                                               ==============

(1)  This amount reflects a net adjustment of $111,000 to the fair values of
     certain assets acquired and liabilities assumed from ViaFone.
(2)  This amount reflects a reduction in accrued direct acquisition costs of
     $87,000 and a net adjustment of $111,000 to the fair values of certain
     assets acquired and liabilities assumed from ViaFone.
(3)  This amount reflects a reduction in accrued direct acquisition costs of
     $87,000.

The adjusted estimated fair value of tangible assets acquired and liabilities
assumed as of the purchase date are as follows:

Current assets........................................         $4,636
Property and equipment................................            589
                                                           -----------
Total assets acquired.................................          5,225
Current liabilities...................................        (5,220)
Deferred revenue......................................          (491)
Non-current liabilities...............................          (918)
                                                           -----------
Net tangible assets acquired..........................       $(1,404)
                                                           ===========

Pursuant to SFAS No. 142, goodwill related to the acquisition is not amortized
and will be tested at least annually for impairment. This goodwill is not
deductible for tax purposes.

The purchased in-process research and development was charged to operations
during the quarter as it had not yet reached technological feasibility and had
no alternative future use. The value assigned to in-process research and
development was determined by estimating the costs to develop the purchased
in-process research and development into a commercially viable product,
estimating the resulting net cash flows from sale of those products once
commercially viable, and discounting the net cash flows back to their present
values using discount rates of either 19% or 21%, depending on the technology.
These rates were based on the industry segment for the technology, the nature of
the products to be developed, the length of time to complete development, and
the overall maturity and history of the development team. The in-process
research and development percentage of completion was estimated to range from
50% to 80%.

                                       23
<PAGE>

The results of operations for the three months and six months ended December 31,
2002 include the operations of ViaFone from August 31, 2002. The following
unaudited pro forma consolidated results of continuing operations assume the
ViaFone acquisition occurred at the beginning of each period presented:
<TABLE><CAPTION>
                                                 PRO FORMA (UNAUDITED)     PRO FORMA (UNAUDITED)
                                                   THREE MONTHS ENDED        SIX MONTHS ENDED
                                                      DECEMBER 31,              DECEMBER 31,
                                                 ---------------------     ---------------------
                                                   2002         2001         2002         2001
<S>                                               <C>          <C>         <C>           <C>
Net revenue from continuing operations            $6,883       $7,317      $13,142       $13,138
Loss from continuing operations                   (1,406)      (8,147)     (6,678)       (17,428)

Loss per share from continuing operations:
Basic and diluted                                 $(0.10)      $(0.60)     $(0.52)       $ (1.29)
</TABLE>

The pro forma information above is presented in response to applicable
accounting rules relating to business acquisitions and is not necessarily
indicative of the actual results that would have been achieved had the
acquisition occurred at the beginning of fiscal 2002, nor is it indicative of
results of operations for any future period.

RESULTS OF DISCONTINUED OPERATIONS
----------------------------------

In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
As a part of that plan, we wrote down the infrared hardware inventory to its
estimated net realizable value. Additionally, in June 2002, we sold our wholly
owned subsidiary, Extended Systems Singapore Pte Limited, and in May 2001, we
sold the assets of our printing solutions segment. The results of these
operations have been accounted for as discontinued operations for all periods
presented in accordance with SFAS No. 144 and Accounting Principles Bulletin No.
30. Amounts in the financial statements and related notes for all periods shown
have been reclassified to reflect the discontinued operations. Operating results
for the discontinued operations are reported, net of tax, under "Income (loss)
from discontinued operations" on the accompanying Statements of Operations.

The following summarizes the results of discontinued operations:
<TABLE><CAPTION>
                                                 THREE MONTHS ENDED              SIX MONTHS ENDED
                                                     DECEMBER 31,                   DECEMBER 31,
                                            ----------------------------    ----------------------------
                                             2002      CHANGE      2001      2002     CHANGE      2001
                                            ----------------------------    ----------------------------
<S>                                          <C>        <C>        <C>       <C>       <C>       <C>
Net revenue                                  $303       (24)%      $398      $623      (55)%     $1,398
Income from discontinued operations,
  net of taxes                               $140        337%      $(59)     $169      4125%     $    4
</TABLE>

In the three months and six months ended December 31, 2002, our revenue from
discontinued operations consisted primarily of revenue from our discontinued
infrared hardware business. The decrease in net revenue from discontinued
operations for the three months and six months ended December 31, 2002 from the
same periods of fiscal 2002 was primarily a result of there being no material
revenue from our discontinued printing solutions segment and no revenue from our
former Singapore subsidiary in the six months ended December 31, 2002.

Income from our discontinued operations increased in the three and six months
ended December 31, 2002 from the same periods of fiscal 2002 primarily due to an
increase in net income from our infrared hardware operations in fiscal 2003.
Although our infrared hardware business was discontinued in the first quarter of
fiscal 2003, we continued to see revenue from this business in the second
quarter as customers continued to place orders. Net income for the business was
up, because we significantly reduced expenses related to these products once we
implemented our plan to discontinue these products. Income from discontinued
operations was also higher in the first three and six months of fiscal 2003
compared to the same periods in the prior year, because in fiscal 2003 there are
no results from Singapore, which generated a loss in the first three and six
months of fiscal 2002.

We expect revenue from discontinued operations to continue to decrease in future
quarters. We expect to continue to generate revenue from our discontinued
infrared hardware business for the next quarter as we fulfill orders from our
customers.

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<PAGE>

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
----------------------------------------------------

NET CASH USED BY OPERATING ACTIVITIES

                                        SIX MONTHS ENDED DECEMBER 31,
                                        ----------------------------
                                            2002            2001
                                        ------------    ------------

Net cash used by operating activities     $(2,507)        $(2,900)


Net cash used by operating activities in the six months ended December 31, 2002
was primarily the result of our net loss and the result of an increase in
receivables and a decrease in both deferred revenue and accounts payable and
accrued expenses, adjusted for such non-cash items as depreciation, amortization
and acquired in-process research and development. Net cash used by operating
activities in the six months ended December 31, 2001 was primarily the result of
our net loss, adjusted for such non-cash items as depreciation and amortization,
and the result of a decrease in accounts payable and accrued expenses. These
cash outflows were partially offset by a decrease in receivables, prepaid
expenses and other assets, and inventories, and an increase in deferred revenue.

Accounts receivable, net of allowance, were $5.4 million and $4.3 million at
December 31, 2002 and June 30, 2002 respectively. The increase in accounts
receivable at December 31, 2002 is due primarily to an increase in net revenue
and receivables added in our acquisition of ViaFone. We expect that our accounts
receivable will continue to increase in the remainder of fiscal 2003 as a result
of an expected increase in net revenues. Accounts receivable may also increase
in the future if net revenue from original equipment manufacturers and
international customers becomes a higher percentage of our net revenue.
Generally, these customers have longer payment cycles, but not longer than our
standard payment terms.

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES

                                                   SIX MONTHS ENDED DECEMBER 31,
                                                   ----------------------------
                                                       2002            2001
                                                   ------------    ------------

Net cash provided (used) by investing activities      $1,202           $(1)

Net cash provided by investing activities in the six months ended December 31,
2002 was primarily the result of completing the acquisition of ViaFone and
proceeds from payments of employees' notes receivable. These proceeds were
partially offset by purchases of property and equipment. As part of our effort
to control cash and expenses, we did not make a significant investment in
property and equipment in the six months ended December 31, 2002. Net cash used
by investing activities in the six months ended December 31, 2001 consisted
primarily of purchases of property and equipment. These proceeds were offset, in
part, by payments of employees' notes receivables.

We plan to incur aggregate capital expenditures of approximately $150,000 during
the remaining quarters of fiscal 2003, primarily for software, system
improvements and personal computers.

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

                                                   SIX MONTHS ENDED DECEMBER 31,
                                                   ----------------------------
                                                       2002            2001
                                                   ------------    ------------

Net cash provided by (used in) financing activities   $(103)           $439

Net cash used by financing activities in the six months ended December 31, 2002
consisted of payments on term debt assumed as part of our acquisition of
ViaFone, offset in part by proceeds from the issuance of common stock under our
stock plans. Net cash provided by financing activities in the six months ended
December 31, 2001 consisted primarily of proceeds from the issuance of common
stock under our stock plans.

On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank, under which we can access up to $5.0 million of financing in the
form of a demand line of credit. Our borrowings under this facility are limited
to a percentage of our current accounts receivable balances and are also subject
to current payments due on our long-term debt. Certain of our assets
collateralize the line of credit. Interest on any borrowings will be paid at
prime plus one percent but not less than 5.5%. The line of credit agreement
requires us to maintain certain financial

                                       25
<PAGE>

ratios and expires on January 15, 2004. We are in compliance with all covenants.
To date we have made no draws on this line of credit.

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank. We have restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005. We are in compliance with all covenants related to this debt.

We believe that our existing working capital and borrowing capacity, the funds
we expect to generate from our operations, and the cash we acquired in the
ViaFone merger will be sufficient to fund our anticipated working capital and
capital expenditure requirements for the next twelve months. We cannot be
certain, however, that our underlying assumed levels of revenues and expenses
will be accurate. If our operating results were to fail to meet our expectations
or if accounts receivable or other assets were to require a greater use of cash
than is currently anticipated, we could be required to seek additional sources
of liquidity. These sources of liquidity could include borrowing against our
line of credit or offering additional equity securities. Additionally, we
currently own our facility in Boise, Idaho, debt free. We may consider a
sale/leaseback or mortgage on this facility as an additional source of working
capital and liquidity. If additional funds are raised through the issuance of
equity securities, dilution to our stockholders could result. In the event
additional funds are required, adequate funds may not be available when needed
or may not be available on favorable terms, which could have a negative effect
on our business and results of operations.

We intend to continue to pursue strategic acquisitions of, or strategic
investments in, companies with complementary products, technologies or
distribution networks in order to broaden our mobile information management
product offerings. We currently have no commitments or agreements regarding any
material transaction of this kind; however, we may acquire businesses, products
or technologies in the future. As a result, we may require additional financing
in the future and, if we were required to obtain additional financing in the
future, sources of capital may not be available on terms favorable to us, if at
all.

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES
------------------------------------------

We derive a substantial portion of our net revenue from international sales,
principally through our international subsidiaries and through a limited number
of independent distributors and overseas original equipment manufacturers. Sales
made by our international subsidiaries are generally denominated in each
country's respective currency. Fluctuations in exchange rates could cause our
results to fluctuate when we translate revenue and expenses denominated in other
currencies into U.S. dollars. Fluctuations in exchange rates also may make our
products more expensive to original equipment manufacturers and independent
distributors who purchase our products in U.S. dollars.

In participating countries, we have completed the transition of our product
prices to the European single currency, the euro, and have converted financial
systems from local denominations to the euro. We did not experience significant
costs to make the transition and all such costs were expensed to operations as
they were incurred.

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and British pound sterling, to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. While these instruments are subject to fluctuations
in value, these fluctuations are generally offset by fluctuations in the value
of the underlying asset or liability being managed, resulting in minimal net
exposure for us. These forward contracts do not qualify for hedge accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. As such, the contracts are recorded in the consolidated balance
sheet at fair value and the changes in their fair value are recognized currently
in earnings. The success of these currency activities depends upon estimation of
intercompany balances denominated in various foreign currencies. To the extent
that these forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. When
determining whether to enter into foreign currency forward contracts, we also
consider the impact that the settlement of such forward contracts may have on
our cash position. To eliminate a potential cash settlement of a forward
position we may, from time to time, decide not to use foreign currency forward
contracts to manage fluctuations in the value of foreign currencies on
transactions with our international subsidiaries. In a period where we do not
enter into foreign currency forward contracts, we could experience significant
non-cash currency gains or losses if the value of the U.S. dollar strengthens or
weakens significantly in relation to the value of the foreign currencies. We had
forward contracts with a nominal value of $5.9 million and $1.9 million in place
against the Canadian dollar, euro and British pound sterling at December 31 and
June 30, 2002, respectively, which matured within 30 days. The fair value of the
underlying forward contracts at December 31, 2002 approximated the value of

                                       26
<PAGE>

these contracts at inception. We recognized net currency exchange losses of
$63,000 and $8,000 for the three months ended December 31, 2002 and 2001,
respectively. We recognized net currency exchange losses of $118,000 and $41,000
for the six months ended December 31, 2002 and 2001, respectively.

RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------

In June 2002, The Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities", which supercedes Emerging Issues Task Force
("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). This new standard requires companies to recognize costs
associated with exit or disposal activities when the costs are incurred rather
than at the date of a commitment to an exit or disposal plan. Costs covered by
the standard include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued operation, plant
closing, or other exit or disposal activity. This standard is effective for exit
or disposal activities that are initiated after December 31, 2002. We do not
believe adoption of this statement will have a material effect on the amount of
any liability to be recorded for the costs covered by this standard, however,
the time at which the liability will be recognized may be impacted.

In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a reconciliation of changes in the entity's product warranty
liabilities. The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, irrespective of the guarantor's fiscal year-end. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. We are still
evaluating the impact that the adoption of this standard will have on our
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation, Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also requires
that disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the
pro forma effect in interim financial statements. The transition and annual
disclosure requirements of SFAS No. 148 are effective for fiscal years beginning
after December 15, 2002. The interim disclosure requirements are effective for
interim periods beginning after December 15, 2002. We currently plan to continue
accounting for stock-based compensation under APB No. 25 and do not anticipate
changing to the fair value method of accounting. As a result, following the
effective date of SFAS No. 148, we will disclose in accordance with SFAS No. 123
on a quarterly basis.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
----------------------------------------------------------------

WE HAVE A RECENT HISTORY OF LOSSES AND MAY CONTINUE TO GENERATE LOSSES IN FISCAL
2003.

Since the third quarter of our fiscal 1999, we have devoted significant
financial resources to the research and development of, and marketing and sales
for, our mobile information management software products and, as a result, we
have generated operating losses. We intend to continue to devote significant
financial resources to product development and marketing and sales. Our ability
to reach break-even from operations and our ability to reach profitability and
positive cash flow from operations in subsequent periods, will depend on a
number of factors, including:

o    our ability to generate sufficient revenue and control expenses;
o    buying patterns of our corporate information technology and original
     equipment manufacturer customers;
o    our ability to realize the benefits of the acquisition of ViaFone while
     minimizing the costs of integrating our business operations and products;
o    changes in customer demand for our products;
o    the timing of customer orders, which can be influenced by fiscal year-end
     buying patterns, seasonal trends or general economic conditions;
o    announcements or introductions of new products or services by our
     competitors;
o    the outcome of our dispute with Pumatech, Inc. and the impact of any
     litigation on our financial and management resources;
o    delays in our development and introduction of new products and services;
o    changes in our pricing policies as a result of increased competition;

                                       27
<PAGE>

o    the mix of distribution channels through which we sell our products;
o    the market acceptance of our new and enhanced products and the products of
     our original equipment manufacturers;
o    the market adoption rate of Bluetooth or other technologies on which a
     number of our products are based;
o    the emergence of new technologies or industry standards;
o    normal seasonality that we typically experience in the first quarter of our
     fiscal year; and
o    a shift in the mix of our products sold, which may result in fluctuations
     in our gross margin.

OUR BUSINESS RELIES ON ENTERPRISES IMPLEMENTING MOBILE APPLICATIONS AND DEVICES
AND MAY BE HARMED BY DECLINES IN INFORMATION TECHNOLOGY SPENDING.

The market for our products depends on economic conditions affecting the broader
economic climate and spending on information technology, including mobile
applications and devices. Downturns in the overall economy may cause enterprises
to delay implementation of mobile device and application rollouts, reduce their
overall information technology budgets or reduce or cancel orders for our
products. Our original equipment manufacturer customers may also limit
development of new products that incorporate our products or reduce their level
of purchases of our products in the face of slower information technology
spending by their customers. We have seen a severe downturn in the worldwide
economy in the past year. We expect this downturn to continue and are uncertain
as to the severity and duration of the downturn. In particular, capital spending
in the information technology sector generally has decreased in the past 12
months and many of our customers and potential customers have experienced
declines in their revenue and operations. In this environment, customers may
experience financial difficulty or cease operations.

While we believe we have adequately factored these conditions into our current
revenue forecasts, if these conditions worsen or continue longer than expected,
demand for our products may be reduced as a result of enterprises reducing
information technology spending on our products and original equipment
manufacturers reducing their use of our products in their own products. As a
result, our revenue may fail to grow or decline, which would harm our operating
results. If the current economic slowdown persists or worsens, we also may be
forced to reduce our operating expenses, which could result in additional
charges incurred in connection with restructuring or other cost-cutting measures
we may implement. For example, in both the fourth quarter of fiscal 2002 and the
first quarter of fiscal 2003, we announced restructuring plans to reduce costs
and improve operating efficiencies and, as a result, incurred restructuring
costs, primarily for severance payments to terminated employees. Additionally,
in order to keep operating costs in line with near-term revenue expectations, in
January 2003 additional positions were eliminated resulting in ten employee
terminations.

WE MAY NOT REALIZE THE BENEFITS OF OUR RECENT ACQUISITION OF VIAFONE, INC.

Whether we realize the benefits of our acquisition of ViaFone will depend on our
ability to integrate the people, operations, technology and products of ViaFone
in a timely, efficient and effective manner. Integrating ViaFone will be a
complex, time-consuming and expensive process and may result in revenue
disruption, operational difficulties and diversion of management resources.
Successful integration of ViaFone will be affected by the following:

o  we may be unable to combine our product offerings and product lines with
   those of ViaFone quickly and smoothly, resulting in our having to spend
   additional time or money on integration of products and technology;
o  we may be unable to successfully demonstrate the benefits of the combined
   company's product line to our customers, resulting in delay or deferral of
   purchasing decisions by our customers;
o  our management may spend too much time on integration issues, resulting in
   the diversion of our management's attention from other business concerns,
   including product development, marketing and operations;
o  we may be unable to retain and motivate key employees, resulting in delays
   and disruptions in integrating ViaFone's operations, products and technology
   and additional costs associated with recruiting and training replacement
   employees;
o  we may be unable to retain key alliances, resulting in an impairment of our
   ability to achieve our product development and marketing objectives;
o  we may be unable to integrate our business culture with that of ViaFone,
   resulting in additional costs and delays in integrating ViaFone's operations
   and employees; and
o  we may discover unknown liabilities associated with the acquired business and
   technology of ViaFone, resulting in unforeseen business expenses and delays
   in product development.

If we do not successfully integrate ViaFone in a timely, efficient and effective
manner, our business, financial condition and results of operations could be
adversely affected.

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<PAGE>

OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY AND FAIL
TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, WHICH COULD CAUSE
OUR STOCK PRICE TO DECLINE.

Our operating results have fluctuated in the past and may continue to do so in
the future. Our revenue and operating results will vary from quarter to quarter
for many reasons beyond our control, including those described in this section.
If our operating results fall below the expectations of securities analysts or
investors, the price of our stock may fall. In addition, quarter-to-quarter
variations in our revenue and operating results could create uncertainty about
the direction or progress of our business, which could result in a decline in
the price of our stock.

WE FORECAST MANY OF OUR OPERATING EXPENSES BASED ON FORECASTED REVENUE AND GROSS
PROFIT, WHICH IS DIFFICULT TO PREDICT. IF WE FAIL TO ACCURATELY PREDICT REVENUE
AND GROSS PROFIT IN A PARTICULAR PERIOD, WE MAY BE UNABLE TO ADJUST OUR
EXPENDITURES IN THAT PERIOD AND OUR OPERATING RESULTS WOULD BE HARMED.

Our quarterly revenue and operating results currently depend in large part on
the volume and timing of orders received within the quarter and on the number of
software seats licensed, which are difficult to forecast. In addition, a
significant portion of our revenue results from the sale of products to a number
of resellers and distributors, which are difficult to predict. Significant
portions of our expenses are related to personnel and, therefore, are fixed in
advance, based in large part on our forecast of future revenue. If revenue and
gross profit are below expectations in any given quarter, the adverse impact of
the shortfall on our operating results may be magnified by our inability to
adjust personnel and other expenditures to compensate for the shortfall.

THE SUCCESS OF OUR BUSINESS MAY DEPEND ON US IDENTIFYING AND SECURING ADDITIONAL
SOURCES OF FINANCING, WHICH SOURCES MAY NOT BE AVAILABLE WHEN NEEDED OR MAY NOT
BE AVAILABLE ON FAVORABLE TERMS.

We believe that our existing working capital and borrowing capacity, the funds
we expect to generate from our operations, and the cash we acquired in the
ViaFone merger will be sufficient to fund our anticipated working capital and
capital expenditure requirements for the next twelve months. We cannot be
certain, however, that our underlying assumed levels of revenues and expenses
will be accurate. If our operating results were to fail to meet our expectations
or if accounts receivable or other assets were to require a greater use of cash
than is currently anticipated, we could be required to seek additional sources
of liquidity. These sources of liquidity could include borrowing against our
line of credit, offering additional equity securities, obtaining a mortgage on
our building, or pursuing a sale/leaseback of our building. If additional funds
are raised through the issuance of equity securities, dilution to our
stockholders could result. In the event additional funds are required, adequate
funds may not be available when needed or may not be available on favorable
terms, which could have a negative effect on our business and results of
operations.

IF THE MARKETS FOR OUR PRODUCTS DO NOT CONTINUE TO GROW OR DO NOT GROW AT
EXPECTED RATES, DEMAND FOR OUR PRODUCTS WOULD BE REDUCED AND OUR BUSINESS WOULD
BE HARMED.

The success of our products currently will rely to a large degree on the
increased use by individuals and enterprises of mobile devices, including
personal digital assistants, cell phones, pagers and laptop and handheld
computers, and on increased use of technologies such as SyncML and Bluetooth.
Even if markets for our products grow, our products may not be successful.
Enterprises and original equipment manufacturers may not develop sufficient
confidence in mobile devices to deploy our products to a significant degree. Any
inability to continue to penetrate the existing markets for mobile data
management and wireless connectivity product solutions, the failure of current
markets to grow, new markets to develop or these markets to be receptive to our
products and technologies on which our products are based, could harm our
business. The emergence of these markets will be affected by a number of factors
beyond our control.

WE DEPEND ON A NUMBER OF KEY BUSINESS RELATIONSHIPS AND IF WE FAIL TO MAINTAIN
THESE RELATIONSHIPS, OR ARE UNABLE TO DEVELOP NEW RELATIONSHIPS, OUR BUSINESS
WOULD SUFFER.

An important element of our strategy is the development of key business
relationships with other companies that are involved in product development,
joint marketing and the development of mobile communication protocols. If we
fail to maintain our current relationships or are unable to develop new
relationships, our business would suffer. Some of these relationships impose
substantial product support obligations on us, which may not be offset by
significant revenue. The benefits to us may not outweigh or justify our
obligations in these relationships. Also, in order to meet our current or future
obligations to original equipment manufacturers, we may be required to allocate
additional internal resources to original equipment manufacturers' product
development projects, which may delay the completion dates of our other current
product development projects.

                                       29
<PAGE>

Our existing key business relationships do not, and any future key business
relationships may not, provide us any exclusive rights. Many of the companies
with which we have established and intend to establish key business
relationships have multiple strategic relationships, and these companies may not
regard their relationships with us as significant. In most of these
relationships, either party may terminate the relationship with little notice.
In addition, these companies may attempt to develop or acquire products that
compete with our products. They may do so on their own or in collaboration with
others, including our competitors. Further, our existing business relationships
may interfere with our ability to enter into other business relationships.

OUR INVESTMENT IN GOODWILL AND INTANGIBLES RESULTING FROM OUR ACQUISITIONS COULD
BECOME IMPAIRED.

As of December 31, 2002, the amount of goodwill and other identifiable
intangibles recorded on our books, net of accumulated amortization, was $14.4
million. We ceased to amortize our existing goodwill upon our adoption of SFAS
No. 142 as of the beginning of fiscal 2003, and we expect to amortize $1.6
million of identifiable intangibles over the next six fiscal years. However, to
the extent that our goodwill or other identifiable intangibles are considered to
be impaired because circumstances indicate their carrying value may not be
recoverable, all or a portion of these assets may be subject to write-off in the
quarter of impairment. Such impairment and any resulting write-off could have a
negative impact on our results of operations in the period goodwill or other
identifiable intangibles are written off.

MARKETS FOR OUR PRODUCTS ARE BECOMING INCREASINGLY COMPETITIVE, WHICH COULD
RESULT IN LOWER PRICES FOR OUR PRODUCTS OR A LOSS OF MARKET SHARE.

We may not compete successfully against current or future competitors, some of
whom have longer operating histories, greater name recognition, more employees
and significantly greater financial, technical, marketing, public relations and
distribution resources. Increased competition may result in price reductions,
reduced margins, loss of market share and a change in our business and marketing
strategies, any of which could harm our business. The competitive environment
may require us to make changes in our products, pricing, licensing, services or
marketing to maintain and extend the market acceptance of our products. Price
concessions or the emergence of other pricing or distribution strategies by our
competitors or us may diminish our revenue.

We compete with:

o    mobile data management companies, including Synchrologic, Aether Systems,
     Pumatech, Microsoft, IBM, AvantGo and iAnywhere, a division of Sybase;
o    client/server database providers, including Microsoft, Interbase, Pervasive
     Software and Oracle;
o    mobile connectivity companies, including Widcomm, Open Interface and IVT
     Corporation; and
o    internal research and development departments of original equipment
     manufacturers, many of whom are our current customers.

As the markets for mobile information management products grow, we expect
competition from existing competitors to intensify. We also expect new
competitors, including original equipment manufacturers to which we sell our
products, to introduce products that compete with ours.

WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP OR INTRODUCE NEW PRODUCTS.

The markets for our products are characterized by:

o    rapidly changing technologies;
o    evolving industry standards;
o    frequent new product introductions; and
o    short product life cycles.

Any delays in the introduction or shipment of new or enhanced products, the
inability of our products to achieve market acceptance or problems associated
with new product transitions could harm our business. The product development
process involves a number of risks. Development of new, technologically advanced
products is a complex and uncertain process requiring high levels of innovation,
as well as the accurate anticipation of technological and market trends. The
introduction of new or enhanced products also requires us to manage the
transition from older products to minimize disruption in customer ordering
patterns.

                                       30
<PAGE>

IF SPECIFIC INDUSTRY-WIDE STANDARDS AND PROTOCOLS UPON WHICH OUR PRODUCTS ARE OR
WILL BE BASED, DO NOT ACHIEVE WIDESPREAD ACCEPTANCE, OUR BUSINESS WOULD BE
HARMED.

We have designed a number of our current and upcoming products to conform to
industry standards and protocols, such as:

o    Bluetooth, a short-range radio communication protocol;
o    SyncML, a data synchronization protocol; and
o    IrDA, a wireless communication protocol created by the Infrared Data
     Association.

If these standards and protocols do not achieve acceptance, our business would
be harmed. Even if accepted, these industry-wide specifications may not be
widely adopted, or competing specifications may emerge. In addition,
technologies based on these standards and specifications may not be adopted as
the standard or preferred technologies for wireless connectivity, thereby
discouraging manufacturers of personal computers and mobile devices from
bundling or integrating these technologies in their products.

IF OUR CUSTOMERS DO NOT ADOPT WIRELESS TECHNOLOGIES, DEMAND FOR OUR PRODUCTS
WOULD BE REDUCED AND OUR BUSINESS WOULD BE HARMED.

Our products support the exchange of data with mobile devices via wired and
wireless connections. Our future growth will depend, in part, on the adoption of
wireless solutions by our customers. The adoption of wireless solutions is
dependent upon the development of 2.5 generation or 3rd generation ("2.5G" or
"3G") networks that are intended to support more complex applications and to
provide end users with a more satisfying user experience than today's networks.
If communication service providers delay their deployment of 2.5G or 3G networks
or fail to roll such networks out successfully, our customers may not adopt
wireless technologies, there could be less demand for our products and services
and our business could be harmed. In addition, if communication service
providers fail to continue to make investments in their networks or invest at a
slower pace in the future, there may be less demand for our products and
services and our business could suffer.

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENT, TRADEMARK, COPYRIGHT OR
OTHER INTELLECTUAL PROPERTY RIGHTS FROM COMPETITORS, AND WE MAY BE REQUIRED TO
USE A SIGNIFICANT AMOUNT OF OUR RESOURCES TO DEFEND OURSELVES FROM INFRINGEMENT
CLAIMS MADE BY OTHERS.

Our patents, trademarks or copyrights may be invalidated, circumvented or
challenged, and the rights granted under these patents, trademarks and
copyrights might not provide us with any competitive advantage, which could harm
our business. Any of our pending or future patent applications may not be issued
with the scope of the claims we are seeking, if at all. In addition, others may
develop technologies that are similar or superior to our technology, duplicate
our technology or design around our patents. Further, effective intellectual
property protection may be unavailable or limited in some countries outside of
the United States.

Companies in the software industry frequently resort to litigation over
intellectual property rights. If a court finds that we infringe on the
intellectual property rights of any third party, we could be subject to
liabilities, which could harm our business. As a result, we might be required to
seek licenses from other companies or to refrain from using, manufacturing or
selling specific products or using specific processes. Holders of patents and
other intellectual property rights may not offer licenses to use their patents
or other intellectual property rights on acceptable terms, or at all. Failure to
obtain these licenses on commercially reasonable terms or at all could harm our
business.

For instance, on April 22, 2002, Pumatech, Inc. filed a patent infringement
action against us in the U.S. District Court in Northern California. An amended
complaint was filed on May 28, 2002. The action alleges that our XTNDConnect
server and desktop synchronization products infringe on seven of Pumatech's
synchronization-related patents, that our alleged use of the trademark
"Satellite Forms" constitutes trademark infringement, and that other alleged
actions constitute unfair competition and interference with contract. The action
seeks an injunction against further sales of our server and desktop
synchronization products and use of the allegedly infringing trademark, as well
as unspecified damages and attorneys' fees. On June 25, 2002, we filed an answer
and counterclaim in response to Pumatech's complaint in which we deny Pumatech's
charges, raise a number of affirmative defenses and request a declaration from
the court that Pumatech's synchronization software patents are invalid and not
infringed by our product. On December 11, 2002, Pumatech filed a second amended
complaint, which adds allegations that unspecified synchronization products,
infringe an eighth Pumatech patent. On December 31, 2002, we filed an amended
answer and counterclaim in which we deny all of Pumatech's charges, including
this additional charge, and amend our defenses and counterclaims to include this
additional patent. We believe that Pumatech's claims are without merit, and we
intend to defend the suit vigorously. Discovery and other pretrial proceedings
are on-going; trial is currently

                                       31
<PAGE>

scheduled for April 2004. Litigation is inherently uncertain, and we may not
prevail in our defenses or counterclaims. In addition, litigation is frequently
expensive and time-consuming, and management may be required to spend
significant time in the defense of the suit; such costs and the diversion of
management time could have a material adverse effect on our business. The
ultimate outcome of any litigation is uncertain and the range of loss that could
occur upon resolution of this matter is not estimable. We cannot estimate the
costs of any potential settlement. Were an unfavorable outcome to occur, the
impact could be material to our financial position, results of operations, or
cash flows.

In order to protect our proprietary rights, we may decide to sue third parties.
Any litigation, whether brought by or against us, could cause us to incur
significant expenses and could divert a large amount of management time and
effort. A claim by us against a third party could, in turn, cause a counterclaim
by the third party against us, which could impair our intellectual property
rights and harm our business.

WE INTEND TO PURSUE ADDITIONAL ACQUISITIONS, AND ANY ACQUISITIONS COULD PROVE
DIFFICULT TO INTEGRATE WITH OUR BUSINESS, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR ADVERSELY AFFECT OUR OPERATING RESULTS.

As part of our strategy, we intend to continue to pursue the acquisition of
companies that either complement or expand our existing business. If we fail to
properly evaluate and execute acquisitions, our business would be harmed. We may
not be able to properly evaluate the technology and accurately forecast the
financial impact of the transaction, including accounting charges and
transaction expenses. Acquisitions involve a number of risks and difficulties,
including:

o    the integration of acquired technologies with our existing products and
     technologies;
o    diversion of management's attention and other resources to the assimilation
     of the operations and employees of the acquired companies;
o    availability of equity or debt financing on terms favorable to us and our
     stockholders;
o    integration of management information systems, employees, research and
     development, and marketing, sales and support operations;
o    expansion into new markets and business areas;
o    potential adverse short-term effects on our operating results; and
o    retention of customers and employees post-acquisition.

In addition, if we conduct acquisitions using debt or equity securities, our
existing stockholders' investments may be diluted, which could affect the market
price of our stock.

OUR BUSINESS MAY BE HARMED DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS, WHICH REPRESENT A SUBSTANTIAL PORTION OF OUR REVENUE.

In the second quarter of fiscal 2003, based on the region where the customer
resides, 56% of our revenue was generated from international sales. We expect
that international sales will continue to represent a substantial portion of our
revenue for the foreseeable future. International sales are subject to a number
of risks, including:

o    changes in government regulations;
o    export license requirements;
o    tariffs, taxes and trade barriers;
o    fluctuations in currency exchange rates, which could cause our products to
     become relatively more expensive to customers in a particular country and
     lead to a reduction in sales in that country; longer collection and payment
     cycles than those in the United States;
o    difficulty in staffing and managing international operations; and
o    political and economic instability, including military and terrorist
     actions.

CURRENCY EXCHANGE RATE FLUCTUATIONS COULD CAUSE OUR OPERATING RESULTS TO
FLUCTUATE.

The transactions made through our subsidiaries in Canada, France, Germany,
Italy, the Netherlands and the United Kingdom are primarily denominated in local
currencies. Accordingly, these international operations expose us to currency
exchange rate fluctuations, which in turn could cause our operating results to
fluctuate when we translate revenue and expenses denominated in other currencies
into U.S. dollars.

From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro, and British pound sterling, to manage
currency fluctuations on payments and receipts of foreign currencies on
transactions

                                       32
<PAGE>

with our international subsidiaries. The success of these currency activities
depends upon estimation of intercompany balances denominated in various foreign
currencies. To the extent that these forecasts are overstated or understated
during periods of currency volatility, we could experience unanticipated
currency gains or losses. When determining whether to enter into foreign
currency forward contracts, we also consider the impact that the settlement of
such forward contracts may have on our cash position. To eliminate a potential
cash settlement of a forward position we may, from time to time, decide not to
use foreign currency forward contracts to manage fluctuations in the value of
foreign currencies on transactions with our international subsidiaries. In a
period where we do not enter into foreign currency forward contracts, we could
experience significant non-cash currency gains or losses if the value of the
U.S. dollar strengthens or weakens significantly in relation to the value of the
foreign currencies.

WE DEPEND ON NON-EXCLUSIVE LICENSES FOR SOME OF THE TECHNOLOGY WE USE WITH OUR
PRODUCTS.

We license technology on a non-exclusive basis from several companies for use
with our products and anticipate that we will continue to do so in the future.
For example, we license authentication and encryption technology that we include
in our XTNDConnect Server products. Our inability to continue to license this
technology, or to license other technology necessary for use with our products,
could result in the loss of, or delays in the inclusion of, important features
of our products or result in substantial increases in royalty payments that we
would have to pay pursuant to alternative third-party licenses, any of which
could harm our business. In addition, the effective implementation of our
products depends upon the successful operation of licensed software in
conjunction with our products. Any undetected errors in products resulting from
this licensed software may prevent the implementation or impair the
functionality of our products, delay new product introductions and injure our
reputation.

THE COMPLEX COMPUTER SOFTWARE PRODUCTS THAT WE PRODUCE MAY CONTAIN DEFECTS FOR
WHICH WE MAY BE LIABLE.

The complex software products we offer may contain undetected errors when first
introduced or as new versions are released. These errors could result in
dissatisfied customers, product liability claims and the loss of or delay in
market acceptance of new or enhanced products, any of which could harm our
business. Testing of our products is particularly challenging because it is
difficult to simulate the wide variety of computing environments in which our
customers may deploy our products. For example, our mobile information
management products are used in a wide variety of telecommunications
environments. Changes in technology standards or an increase in the number of
telecommunications technologies used in the marketplace may create compatibility
issues with our products and our customers' environments. Accordingly, despite
testing by us and by current and potential customers, errors could be found
after commencement of commercial shipment. A successful product liability claim
brought against us could result in our payment of significant legal fees and
damages, which would harm our business.

OUR STOCK PRICE MAY BE VOLATILE AND COULD DROP SIGNIFICANTLY, RESULTING IN THE
PARTIAL OR TOTAL LOSS OF A STOCKHOLDER'S INVESTMENT.

The trading price of our common stock may fluctuate significantly, which may
cause a stockholder's investment to decrease in value. The following factors may
have a significant impact on the market price of our common stock:

o    announcements of acquisitions by us or our competitors;
o    quarter-to-quarter variations in our operating results;
o    sales of significant numbers of shares within a short period of time;
o    the outcome of our litigation with Pumatech;
o    announcements of technological innovations or new products by us or our
     competitors;
o    general conditions in the computer and mobile device industry;
o    general economic conditions and their impact on corporate information
     technology spending;
o    price and trading volume volatility in the public stock markets in general;
o    announcements and updates of our business outlook; and
o    changes in security analysts' earnings estimates or recommendations
     regarding our competitors, our customers or us.

SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK MAY BE SOLD CAUSING OUR STOCK PRICE TO
DECLINE SIGNIFICANTLY WHEN THE SHARES OF STOCK ISSUED IN CONNECTION WITH THE
VIAFONE ACQUISITION ARE RELEASED FROM THEIR LOCK-UP AGREEMENTS.

A substantially large number of shares of our common stock may be sold into the
public market within short time periods at various dates following the close of
the merger on August 30, 2002. As a result, our stock price could fall. Of the
approximately 3,000,000 shares of Extended Systems common stock issued in
connection with this merger,

                                       33
<PAGE>

approximately 439,612 shares were immediately available for resale by the former
stockholders of ViaFone and 2,482,809 shares of Extended Systems common stock
are subject to "lock-up" agreements that restrict the timing of the resale of
these shares. Under the lock-up agreements, 827,603 shares will be released and
available for sale in the public market on February 28, 2003, six months after
the closing date of the merger, an additional 827,603 shares will be released
and available for sale in the public market on May 31, 2003, nine months after
the closing date of the merger and an additional 455,191 shares will be
available for sale in the public market on August 31, 2003, 12 months after the
closing date of the merger and at anytime thereafter. In comparison, the average
daily trading volume of our common stock for the five-day period ending on
January 31, 2003 was 8,026 shares. While Rule 145 under the Securities Act may
impose some limitations on the amount of shares certain ViaFone stockholders may
sell, sales of a large number of newly released shares of Extended Systems
common stock could occur that could result in a sharp decline in our stock
price.

IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS WILL SUFFER.

Growth in our business may place a significant strain on our administrative,
operational and financial resources and increase demands on our systems and
controls, which could harm our business. Growth may also result in an increase
in the scope of responsibility for management personnel.

We anticipate that our growth and expansion will require that we recruit, hire,
train and retain new engineering, executive, sales and marketing, and
administrative personnel. Difficulty in recruiting qualified personnel could
require us to incur significant costs to recruit personnel or could limit our
ability to grow. In addition, in order to manage our growth successfully, we
will need to continue to expand and improve our operational, management and
financial systems and controls. The failure to do so could harm our business.

THE LOSS OF KEY PERSONNEL, OR OUR INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, MAY HARM OUR BUSINESS.

Our success depends upon the continuing contributions of our key management,
engineering, sales and marketing, and administrative personnel and our ability
to attract and retain key personnel. In three of the past six quarters, we
completed restructuring plans that reduced our workforce by a total of
approximately 80 employees. Additionally, in order to reduce operating costs and
increase operating efficiencies, in January 2003 we reduced our workforce by an
additional ten people. Despite these reductions in workforce, we plan to
continue to recruit personnel with the specific technical skills that are
critical to our business. For example, throughout the remainder of fiscal 2003,
we expect to hire additional sales personnel as needed in order to capitalize on
market opportunities. In addition, Donald Baumgartner, our Vice President of
Worldwide Marketing recently resigned and we have begun a search for his
replacement. However, we might be unable to attract the personnel we need, and
we may fail to retain other key personnel. We do not maintain any key-person
life insurance policies. The loss of key personnel, or our inability to attract
and retain additional personnel, could harm our business.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.

Provisions in our restated certificate of incorporation and our bylaws may have
the effect of deterring hostile takeovers or delaying or preventing changes in
control or management of us, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices.
For example, our restated certificate of incorporation divides the board of
directors into three classes, each serving a staggered three-year term, and does
not permit action by written consent of the stockholders or cumulative voting.
In addition, our board of directors has the authority to issue up to 5,000,000
shares of preferred stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by our
stockholders. The rights of the holders of common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. While we have no present intention to issue
shares of preferred stock, the issuance of preferred stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. Further, we
are subject to the anti-takeover provisions of Section 203 of the Delaware
General Corporation Law, which prohibits us from engaging in a business
combination with an interested stockholder for three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control.

                                       34
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
        ----------------------------------------------------------

Substantially all of our liquid investments are at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. All of our liquid investments mature within 90 days or less of
December 31, 2002, therefore, we believe that the market risk arising from our
holdings of liquid investments is minimal.

Sales made by our international subsidiaries are generally denominated in the
foreign country's currency. Fluctuations in exchange rates between the United
States dollar and other currencies could materially harm our business. From time
to time, we enter into foreign currency forward contracts, typically against the
Canadian dollar, euro and British pound sterling, to manage fluctuations in the
value of foreign currencies on transactions with our international subsidiaries,
thereby limiting our risk that would otherwise result from changes in exchange
rates. While these instruments are subject to fluctuations in value, these
fluctuations are generally offset by fluctuations in the value of the underlying
asset or liability being managed, resulting in minimal net exposure for us. The
success of these hedging activities depends upon estimation of intercompany
balances denominated in various foreign currencies. To the extent that these
forecasts are overstated or understated during periods of currency volatility,
we could experience unanticipated currency gains or losses. When determining
whether to enter into foreign currency forward contracts, we also consider the
impact that the settlement of such forward contracts may have on our cash
position. To eliminate a potential cash settlement of a forward position we may,
from time to time, decide not to use foreign currency forward contracts to
manage fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. In a period where we do not enter into foreign
currency forward contracts, we could experience significant non-cash currency
gains or losses if the value of the U.S. dollar strengthens or weakens
significantly in relation to the value of the foreign currencies. We had forward
contracts with a nominal value of $5.9 million and $1.9 million in place against
the Canadian dollar, euro, and British pound sterling at December 31 and June
30, 2002, respectively, which matured within 30 days. The fair value of the
underlying forward contracts at December 31, 2002 approximated the value of
these contracts at inception.

ITEM 4. CONTROLS AND PROCEDURES
        -----------------------

(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Based on an evaluation of
the Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
and 15d-14(c) under the Securities Exchange Act of 1934 (the "Exchange Act"))
performed by the Company's principal executive officer and principal financial
officer as of a date within 90 days of the filing date of this Quarterly Report
on Form 10-Q, such officers have concluded that the company's disclosure
controls and procedures are effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms.

(b) CHANGES IN INTERNAL CONTROLS. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

                                       35
<PAGE>

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
        -----------------

On April 22, 2002, Pumatech, Inc. filed a patent infringement action against us
in the U.S. District Court in Northern California. An amended complaint was
filed on May 28, 2002. The action alleges that our XTNDConnect server and
desktop synchronization products infringe on seven of Pumatech's
synchronization-related patents, that our alleged use of the trademark
"Satellite Forms" constitutes trademark infringement, and that other alleged
actions constitute unfair competition and interference with contract. The action
seeks an injunction against further sales of our server and desktop
synchronization products and use of the allegedly infringing trademark, as well
as unspecified damages and attorneys' fees. On June 25, 2002, we filed an answer
and counterclaim in response to Pumatech's complaint in which we deny Pumatech's
charges, raise a number of affirmative defenses and request a declaration from
the court that Pumatech synchronization software patents are invalid and not
infringed by our products. On December 11, 2002, Pumatech filed a second amended
complaint which adds allegations that unspecified synchronization products
infringe an eighth Pumatech patent. On December 31, 2002, we filed an amended
answer and counterclaim in which we deny all of Pumatech's charges, including
this additional charge, and amend our defenses and counterclaims to include this
additional patent. We believe that Pumatech's claims are without merit, and we
intend to defend the suit vigorously. Discovery and other pretrial proceedings
are on-going; trial is currently scheduled for April, 2004. Litigation is
inherently uncertain, and we may not prevail in our defenses or counterclaims
against the claims. In addition, litigation is frequently expensive and
time-consuming, and management may be required to spend significant time in the
defense of the suit; such costs and the diversion of management time could have
a material adverse effect on our business. The ultimate outcome of any
litigation is uncertain and the range of loss that could occur upon resolution
of this matter is not estimable. We cannot estimate the costs of any potential
settlement. Were an unfavorable outcome to occur, the impact could be material
to our financial position, results of operations, or cash flows.

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

At our 2002 Annual Meeting of Stockholders, which was held on October 24, 2002,
there were 14,210,038 shares of common stock entitled to vote at the meeting and
a total of 11,461,912 shares were represented at the meeting. The following
proposals were submitted to a vote of the stockholders:

(a)  The following nominees for Class I Directors were elected. Each person
     elected as a Class I Director will serve for a three-year term that expires
     upon the 2005 Annual Meeting of Stockholders or until their successors are
     elected and qualified.

            Name of Nominee           Votes For         Votes Withheld
         -----------------------   ---------------   --------------------

         Steven D. Simpson           11,243,773            218,139
         Douglas B. Winterrowd       11,259,661            202,251

(b)  The following nominee for Class II Director was elected. The Class II
     Director will serve for a one-year term that expires upon the 2003 Annual
     Meeting of Stockholders or until his or her successor is elected and
     qualified.

            Name of Nominee           Votes For         Votes Withheld
         -----------------------   ---------------   --------------------

         Russel McMeekin             11,210,875             251,037

(c)  The ratification of the appointment of PricewaterhouseCoopers LLP as our
     independent public accountants for the year ended June 30, 2003 was
     approved:

     o    11,411,795 votes in favor;
     o    22,350 votes against; and
     o    22,767 abstentions.

                                       36
<PAGE>

(d)  An increase in the number of shares of common stock reserved for issuance
     under the Extended Systems Incorporated 1998 Stock Plan was approved:

     o    5,234,611 votes in favor;
     o    553,575 votes against; and
     o    29,766 abstentions.


(e)  An increase in the number of shares of common stock reserved for issuance
     under the Extended Systems Incorporated 2001 Approved Share Option Scheme
     was approved:

     o    5,241,719 votes in favor;
     o    543,130 votes against; and
     o    33,103 abstentions.

Following the election of the Class I directors and Class II director described
above, our Board of Directors consists of the following members: (1) Steven D.
Simpson, (2) Douglas B. Winterrowd, (3) Russel McMeekin, (4) John J. Katsaros,
(5) John M. Russell, (6) Charles W. Jepson, (7) Raymond A. Smelek, and (8) S.
Scott Wald.


ITEM 5. OTHER INFORMATION
        -----------------

Effective January 31, 2003, Donald Baumgartner, our Vice President of Worldwide
Marketing, resigned. We have begun a search for Mr. Baumgartner's replacement.
In the meantime, Steven Simpson, our President and Chief Executive Officer, will
be the acting Interim Vice President of Worldwide Marketing.


ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
        --------------------------------

(A) EXHIBITS

    EXHIBIT NUMBER    DESCRIPTION

        99.1          Certification of Executive Officers pursuant to 18 U.S.C.
                      Section 1350, as adopted pursuant to Section 906 of the
                      Sarbanes-Oxley Act of 2002


(B) REPORTS ON FORM 8-K

    Not applicable

ITEMS 2 AND 3 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.








                                       37
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.


                                EXTENDED SYSTEMS INCORPORATED
Dated: February 14, 2003
                                By: /s/ KARLA K. ROSA
                                    --------------------------------
                                    KARLA K. ROSA
                                    VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
                                    (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)





















                                       38
<PAGE>

                                 CERTIFICATIONS

I, Steven D. Simpson, President and Chief Executive Officer of Extended Systems
Incorporated, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Extended Systems
     Incorporated;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this quarterly
          report is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing of this
          quarterly report (the "Evaluation Date"); and

     c)   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent functions):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     quarterly report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: February 14, 2003                By: /s/ STEVEN D. SIMPSON
                                           ---------------------------------
                                           Steven D. Simpson
                                           President and Chief Executive Officer


                                       39
<PAGE>

                                 CERTIFICATIONS

I, Karla K. Rosa, Vice President and Chief Financial Officer of Extended Systems
Incorporated, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Extended Systems
     Incorporated;

2.   Based on my knowledge, this quarterly report does not contain any untrue
     statement of a material fact or omit to state a material fact necessary to
     make the statements made, in light of the circumstances under which such
     statements were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this quarterly report, fairly present in all
     material respects the financial condition, results of operations and cash
     flows of the registrant as of, and for, the periods presented in this
     quarterly report;

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed such disclosure controls and procedures to ensure that
          material information relating to the registrant, including its
          consolidated subsidiaries, is made known to us by others within those
          entities, particularly during the period in which this quarterly
          report is being prepared;

     b)   evaluated the effectiveness of the registrant's disclosure controls
          and procedures as of a date within 90 days prior to the filing of this
          quarterly report (the "Evaluation Date"); and

     c)   presented in this quarterly report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent functions):

     a)   all significant deficiencies in the design or operation of internal
          controls which could adversely affect the registrant's ability to
          record, process, summarize and report financial data and have
          identified for the registrant's auditors any material weaknesses in
          internal controls; and

     b)   any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          controls; and

6.   The registrant's other certifying officers and I have indicated in this
     quarterly report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: February 14, 2003           By: /s/ KARLA K. ROSA
                                      -----------------------------------
                                      Karla K. Rosa
                                      Vice President and Chief Financial Officer


                                       40