================================================================================
                                  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, 2004

                                       OR

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

                   FOR THE TRANSITION PERIOD FROM __________ TO __________

                                _________________

                        Commission File Number 000-23597



                          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 |_|

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

The number of shares outstanding of the Registrant's Common Stock as of
December 31, 2004, was 15,170,363.
================================================================================
<PAGE>

                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

              FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004

                                TABLE OF CONTENTS

                                                                            PAGE
                                                                            ----

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements                                                 3
         --------------------

         Condensed Consolidated Balance Sheets as of December
         31, 2004 (unaudited) and June 30, 2004                               3

         Condensed Consolidated Statements of Operations for the
         Three and Six Months Ended December 31, 2004 and 2003 (unaudited)    4

         Condensed Consolidated Statements of Comprehensive Income (Loss)
         for the Three and Six Months Ended December 31, 2004 and 2003
         (unaudited)                                                          5

         Condensed Consolidated Statements of Cash Flows for the
         Six Months Ended December 31, 2004 and 2003 (unaudited)              6

         Condensed Consolidated Statements of Stockholders' Equity for
         the Six Months Ended December 31, 2004 (unaudited)                   7

         Notes to Condensed Consolidated Financial Statements (unaudited)     8


Item 2.  Management's Discussion and Analysis of Financial
         -------------------------------------------------
         Condition and Results of Operations                                 15
         -----------------------------------

Item 3.  Quantitative and Qualitative Disclosures About Market Risk          38
         ----------------------------------------------------------

Item 4.  Controls and Procedures                                             39
         -----------------------


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                   39
         -----------------

Item 4.  Submission of Matters to a Vote of Security Holders                 40
         ---------------------------------------------------

Item 6.  Exhibits                                                            41

         (Items 2, 3, and 5 of Part II are not applicable and
          have been omitted)

         SIGNATURES                                                          42

         CERTIFICATIONS                                                      43


                                        2
<PAGE>

PART I.  FINANCIAL INFORMATON

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
<TABLE><CAPTION>
                                                                               DECEMBER 31,       JUNE 30,
                                                                                   2004            2004
                                                                                ----------      ----------
<S>                                                                             <C>             <C>
ASSETS
Current:
      Cash and cash equivalents                                                 $    5,140      $    7,225
      Receivables, net of allowances of $633 and $446                                9,819           6,772
      Prepaid and other                                                              1,077           1,449
                                                                                ----------      ----------
           Total current assets                                                     16,036          15,446
      Property and equipment, net                                                    4,142           4,331
      Construction in progress                                                         911             384
      Goodwill                                                                      12,489          12,489
      Intangibles, net                                                                 459             576
      Other long-term assets                                                           122             130
                                                                                ----------      ----------
           Total assets                                                         $   34,159      $   33,356
                                                                                ==========      ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
      Accounts payable                                                          $    1,675      $    1,664
      Accrued expenses                                                               4,283           3,531
      Deferred revenue                                                               3,169           3,569
      Accrued restructuring                                                           --               116
      Current portion of long-term debt                                                108             325
      Current portion of capital leases                                                 20              25
                                                                                ----------      ----------
           Total current liabilities                                                 9,255           9,230
Non-current:
      Long-term debt                                                                 4,800           4,800
      Capital leases                                                                    11              17
      Other long-term liabilities                                                      153             153
                                                                                ----------      ----------
           Total non-current liabilities                                             4,964           4,970
                                                                                ----------      ----------
      Total liabilities                                                             14,219          14,200

Commitments and contingencies - Note 10

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;
           15,170 and 15,078 shares issued and outstanding                              15              15
      Additional paid-in capital                                                    48,453          48,005
      Treasury stock; $0.001 par value per share; 4 and 0 common shares               --              --
      Accumulated deficit                                                          (25,991)        (27,134)
      Unamortized stock-based compensation                                            (139)           (231)
      Accumulated other comprehensive loss                                          (2,398)         (1,499)
                                                                                ----------      ----------
           Total stockholders' equity                                               19,940          19,156
                                                                                ----------      ----------
           Total liabilities and stockholders' equity                           $   34,159      $   33,356
                                                                                ==========      ==========

The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>
                                       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,
                                                           --------------------------      --------------------------
                                                              2004            2003            2004            2003
                                                           ----------      ----------      ----------      ----------
<S>                                                        <C>             <C>             <C>             <C>
Revenue:
      License fees and royalties                           $    7,640      $    7,057      $   13,441      $   12,828
      Services and other                                        2,301           1,450           4,346           3,234
                                                           ----------      ----------      ----------      ----------
          Total net revenue                                     9,941           8,507          17,787          16,062
Costs and expenses:
      Cost of license fees and royalties                          129             144             196             226
      Cost of services and other                                1,060           1,033           1,945           2,136
      Amortization of identifiable intangibles                     43             155             117             344
      Research and development                                  1,918           1,496           3,628           3,164
      Marketing and sales                                       3,819           3,490           7,203           6,684
      General and administrative                                1,354           1,458           2,730           2,639
      Restructuring charges                                      --               261            --             1,329
      Patent litigation fees, license and settlement             --               776            --             1,345
      Non-cash stock compensation                                 291             168             439             168
                                                           ----------      ----------      ----------      ----------
          Total costs and expenses                              8,614           8,981          16,258          18,035
                                                           ----------      ----------      ----------      ----------
          Income (loss) from operations                         1,327            (474)          1,529          (1,973)
      Other income (expense), net                                 (91)            (18)            (88)             42
      Gain on sale of land                                       --             1,058            --             1,058
      Interest expense                                           (133)           (145)           (266)           (179)
                                                           ----------      ----------      ----------      ----------
          Income (loss) before income taxes                     1,103             421           1,175          (1,052)
      Income tax provision                                          7               9              32              13
                                                           ----------      ----------      ----------      ----------
          Income (loss) from continuing operations              1,096             412           1,143          (1,065)
      Discontinued operations, net of tax:
          Income from discontinued operations                    --                47            --                88
                                                           ----------      ----------      ----------      ----------
          Net income (loss)                                $    1,096      $      459      $    1,143      $     (977)
                                                           ==========      ==========      ==========      ==========

      Basic earnings (loss) per share:
          Earnings (loss) from continuing operations       $     0.07      $     0.03      $     0.07      $    (0.08)
          Earnings from discontinued operations                  --              --              --              0.01
                                                           ----------      ----------      ----------      ----------
      Net earnings (loss) per share                        $     0.07      $     0.03      $     0.07      $    (0.07)
                                                           ==========      ==========      ==========      ==========

      Diluted earnings (loss) per share:
          Earnings (loss) from continuing operations       $     0.07      $     0.03      $     0.07      $    (0.08)
          Earnings from discontinued operations                  --              --              --              0.01
                                                           ----------      ----------      ----------      ----------
      Net earnings (loss) per share                        $     0.07      $     0.03      $     0.07      $    (0.07)
                                                           ==========      ==========      ==========      ==========

      Number of shares used in per share calculations:
          Basic                                                15,119          14,083          15,104          14,036
          Diluted                                              15,207          14,597          15,264          14,036

The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>
                                       4
<PAGE>
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE><CAPTION>
                                                              THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                  DECEMBER 31,                    DECEMBER 31,
                                                           --------------------------      --------------------------
                                                              2004            2003            2004            2003
                                                           ----------      ----------      ----------      ----------
<S>                                                        <C>             <C>             <C>             <C>
Net income (loss)                                          $    1,096      $      459      $    1,143      $     (977)
Change in currency translation                                   (714)           (302)           (899)           (360)
                                                           ----------      ----------      ----------      ----------
    Comprehensive income (loss)                            $      382      $      157      $      244      $   (1,337)
                                                           ==========      ==========      ==========      ==========

The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>





































                                       5
<PAGE>
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE><CAPTION>
                                                                             SIX MONTHS ENDED
                                                                                DECEMBER 31,
                                                                         --------------------------
                                                                            2004            2003
                                                                         ----------      ----------
<S>                                                                      <C>             <C>
Cash flows from operating activities:
      Net income (loss)                                                  $    1,143      $     (977)
      Adjustments to reconcile net income (loss) to net cash used by
           operating activities:
           Provision for bad debts                                              117              29
           Depreciation and amortization                                        404             845
           Stock compensation                                                   439             667
           Gain on sale of property and equipment                              --              (998)
           Changes in assets and liabilities:
                Receivables                                                  (2,909)           (388)
                Prepaid and other assets                                        393              75
                Accounts payable and accrued expenses                          (598)           (678)
                Deferred revenue                                               (523)           (106)
                                                                         ----------      ----------
      Net cash used by operating activities                                  (1,534)         (1,531)
                                                                         ----------      ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures                                                     (589)           (235)
      Proceeds from sale of property and equipment                             --             1,561
      Other investing activities                                               --                19
                                                                         ----------      ----------
      Net cash provided (used) by investing activities                         (589)          1,345

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from sale-and-leaseback of building                             --             4,800
      Proceeds from the issuance of common stock                                100             891
      Payments on long-term debt and capital leases                            (228)           (229)
                                                                         ----------      ----------
      Net cash provided (used) by financing activities                         (128)          5,462

Effect of exchange rates on cash                                                166              71
                                                                         ----------      ----------
Net increase (decrease) in cash and cash equivalents                         (2,085)          5,347

CASH AND CASH EQUIVALENTS:
      Beginning of period                                                     7,225           3,502
                                                                         ----------      ----------
      End of period                                                      $    5,140      $    8,849
                                                                         ==========      ==========

The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>
                                       6
<PAGE>
EXTENDED SYSTEMS INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE><CAPTION>
                                                                                                       ACCUMULATED
                                         COMMON STOCK         ADDITIONAL     RETAINED                     OTHER         TOTAL
                                    ---------------------      PAID-IN       EARNINGS      DEFERRED   COMPREHENSIVE  STOCKHOLDERS'
                                    SHARES        AMOUNT       CAPITAL      (DEFICIT)    COMPENSATION      LOSS         EQUITY
                                    -------      --------      --------      --------      --------      --------      --------

<S>                                 <C>         <C>           <C>           <C>           <C>           <C>           <C>
Balance at June 30, 2004             15,078      $     15      $ 48,005      $(27,134)     $   (231)     $ (1,499)     $ 19,156

Net Income                                                                      1,143                                     1,143
Translation Adjustment                                                                                       (899)         (899)
Stock issued from stock option
     exercises                           40                         100                                                     100
Compensatory options                                                214                                                     214
Restricted stock grants                  56                         152                        (152)                       --
Restricted stock amortization                                                                   238                         238
Restricted stock repurchase              (4)                        (18)                          6                         (12)

                                    -------      --------      --------      --------      --------      --------      --------
Balance at December 31, 2004         15,170      $     15      $ 48,453      $(25,991)     $   (139)     $ (2,398)     $ 19,940
                                    =======      ========      ========      ========      ========      ========      ========
</TABLE>

























                                       7
<PAGE>

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include Extended
Systems Incorporated, a Delaware corporation, and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Tabular amounts are in thousands, except years, percentages and
per share amounts.

The accompanying condensed consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America. These accounting principles were applied on a basis consistent with
those of the consolidated financial statements contained in our Annual Report on
Form 10-K for the fiscal year ended June 30, 2004. 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, 2004, and our results of operations and cash flows for the three
months and six months ended December 31, 2004 and December 31, 2003. The results
for these interim periods are not necessarily indicative of the expected results
for any other interim period or the year ending June 30, 2005. 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 for the fiscal year ended June 30, 2004. The
condensed consolidated balance sheet at June 30, 2004 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.

We have a history of incurring losses from operations and have an accumulated
deficit of approximately $26 million as of December 31, 2004. For the six months
ended December 31, 2004, we recorded income from operations of approximately
$1.5 million, but operating activities used $1.5 million of cash. At December
31, 2004, we had cash and cash equivalents of $5.1 million.

We believe our existing working capital and borrowing capacity will be
sufficient to fund our anticipated working capital and capital expenditure
requirements through at least December 31, 2005. We cannot be certain, however,
that the underlying assumed levels of revenues and expenses will be accurate. If
operating results were to fail to meet our expectations, we could be required to
seek additional sources of liquidity. These sources of liquidity could include
raising funds through public or private debt financing, borrowing against our
line of credit or offering additional equity securities. If additional funds are
raised through the issuance of equity securities, substantial 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.

NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING DEVELOPMENTS. On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123(R), "Share-Based Payment". SFAS No. 123(R) requires companies
to measure all stock-based compensation awards using a fair value method and
record such expense in their consolidated financial statements. In addition, the
adoption of SFAS No. 123(R) will require additional accounting related to the
income tax effects and additional disclosure regarding the cash flow effects
resulting from share-based payment arrangements. SFAS No. 123(R) is effective
beginning the first quarter of our fiscal year ending June 30, 2006. We are
currently assessing the impact of SFAS No. 123(R) on our stock-based
compensation programs. However, we expect that the requirement to expense stock
options and other equity interests that have been or will be granted to
employees will significantly increase our operating expenses and result in lower
earnings per share.

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 a weighted average exchange rate for the period.

From time to time, we enter into foreign currency forward contracts, typically
against the euro, Canadian dollar, 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 currency exchange rates. Although 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

                                       8
<PAGE>

Instruments and Hedging Activities", and, as such, the contracts are recorded in
the consolidated balance sheet at fair value. We report a net currency gain or
loss based on changes in the fair value of forward contracts combined with the
changes in fair value of the underlying asset or liability being managed. We had
no forward contracts in place as of December 31, 2004. As of December 31, 2003,
we had forward contracts with a nominal value of approximately $8.5 million,
which matured within 30 days, in place against the Canadian dollar, euro and
British pound sterling. We recognized net currency exchange losses of
approximately $130 thousand and $213 thousand for the three and six months ended
December 31, 2004 and a net currency exchange loss of approximately $30 thousand
and a gain of approximately $29 thousand for the three and six months ended
December 31, 2003.

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 potentially dilutive common shares. We exclude stock
options and warrants from diluted earnings or loss per share to the extent that
their effect would have been antidilutive.

Our diluted earnings or loss per share computations exclude the following common
stock equivalents, as the impact of their inclusion would have been antidilutive
for the following periods:

                                 THREE MONTHS ENDED         SIX MONTHS ENDED
                                     DECEMBER 31,              DECEMBER 31,
                                ---------------------     ---------------------
                                  2004         2003         2004         2003
                                --------     --------     --------     --------

Stock options                      2,660        2,504        2,298        3,504
Warrants                              35           35           35           35

RECLASSIFICATIONS. We have reclassified certain prior year amounts to conform to
the current year presentation, including a reclassification between components
of income (loss) from operations, between components of current assets and
between components of current liabilities. These reclassifications had no impact
on net income (loss), income (loss) from operations, total costs and expenses,
total current assets or total current liabilities for the periods presented.

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 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 a 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 payment terms are extended for a significant
portion of the fee or there is a risk that the customer will expect a
concession, 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 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 our ability to collect
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 an undelivered element is generally 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 materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support, patches, bug fixes and other
modifications to ensure that the products comply with their warranty provisions.
Accordingly, we allow for warranty costs at the time the product revenue is
recognized.

When a contractual relationship with one of our customers stipulates the
submission of a royalty report to us, revenue is generally recorded when the
royalty report is received and recognized in the period that the report covers.
If a royalty report is not received by the desired date to facilitate the
closing of the books for a given fiscal period and there exists the basis to
make a fair and reasonable estimate of the revenue related to that royalty
report, this estimate will be recorded as revenue. Estimated royalty fees and
revenues are subsequently adjusted based upon actual amounts realized. If the
actual amount realized differs materially from the recorded estimate and is
reported to us after an estimate has been recorded and before financial results
are announced externally, the recorded amount will be adjusted to reflect the
actual amount realized. If the amount differs, and is reported after

                                       9
<PAGE>

financial results are announced externally or does not differ materially, the
adjustment will be made in the subsequent fiscal period. In cases where the
arrangement with our customer provides for a prepaid nonrefundable royalty, we
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 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 generally
recognize both the service and related software license revenue over the period
of the engagement, using the percentage-of-completion method. We recognize no
more than 90% of the total contract amount until project acceptance is obtained.
In cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, or where
significant uncertainty about the project completion or customer acceptance
exists, we defer the contract revenue under the completed contract method of
accounting until the uncertainty is sufficiently resolved or the contract is
complete and accepted by the customer. If we were to make different judgments or
use 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.

NOTE 3.  STOCK-BASED COMPENSATION PLANS

We apply Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting
for Stock Issued to Employees" and its related interpretations to measure
compensation expense for stock-based compensation plans. Under APB No. 25, we
generally recognize no compensation expense with respect to stock option grants
and shares issued under our employee stock purchase plan. Our stock option plans
allow for the issuance of restricted stock awards, under which shares of our
common stock are issued at par value to employees or directors, subject to
vesting restrictions, and for which compensation expense equal to the fair
market value on the date of grant less par value paid is amortized over the
vesting period.

Had we elected to recognize stock-based compensation expense based on the grant
date fair value as prescribed by SFAS No. 123, our net loss would have been
equal to the pro forma amounts indicated below for the following periods:

<TABLE><CAPTION>
                                                    THREE MONTHS ENDED          SIX MONTHS ENDED
                                                       DECEMBER 31,                DECEMBER 31,
                                                  ----------------------      ----------------------
                                                    2004          2003          2004          2003
                                                  --------      --------      --------      --------
<S>                                               <C>           <C>           <C>           <C>
Net income (loss), as reported                    $  1,096      $    459      $  1,143      $   (977)
Add:  Stock-based compensation included in
      reported net income (loss)                       291           119           439           556
Less:  Stock-based compensation determined
      under SFAS No. 123                              (917)       (2,206)       (1,808)       (3,342)
                                                  --------      --------      --------      --------
Pro forma net income (loss)                       $    470      $ (1,628)     $   (226)     $ (3,763)
                                                  ========      ========      ========      ========

Basic and diliuted earnings (loss) per share:
      As reported                                 $   0.07      $   0.03      $   0.07      $  (0.07)
      Pro forma                                   $   0.03      $  (0.12)     $  (0.01)     $  (0.27)
</TABLE>

We estimated the fair value of shares and options issued pursuant to our
stock-based compensation plans at the date of grant using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
Option valuation models require the input of assumptions, including the expected
stock price volatility. Our options have characteristics significantly different
from those of traded options, and changes in the input assumptions can
materially affect the fair value estimates. The following weighted-average
assumptions and weighted-average fair values were used in determining our
stock-based compensation under SFAS No. 123 for the options granted during the
following periods:


                                       10
<PAGE>

<TABLE><CAPTION>
                                       THREE MONTHS ENDED                  SIX MONTHS ENDED
                                          DECEMBER 31,                        DECEMBER 31,
                                 ------------------------------      ------------------------------
                                     2004              2003              2004              2003
                                 ------------      ------------      ------------      ------------
<S>                                      <C>               <C>         <C>               <C>
Risk-free interest rate:
      Option plans                       3.92%             3.85%       3.92-4.13%        3.85-4.04%
      Purchase plan                         0%             3.84%                0%          0-3.84%

Expected life in years:
      Option plans                        7.6               7.6               7.6               7.6
      Purchase plan                      --              0-0.97              --              0-0.97

Volatility factor:
      Option plans                       98.9%            103.1%       98.9-99.1%      101.7-103.1%
      Purchase plan                         0%            103.1%                0%       0.0-103.1%

Dividend yield                              0%                0%                0%                0%

Weighted average fair value:
      Option plans               $       1.41      $       3.12      $       1.81      $       3.33
      Purchase plan              $       --        $       1.15      $       --        $       1.15
                                 ============      ============      ============      ============
</TABLE>

On December 31, 2004 our Employee Stock Purchase Plan (the "Plan") was
terminated. No purchase of stock was made from the Plan for the six-month
purchase period ending December 31, 2004. In order to replace the number of
shares of stock and the discounted purchase price employees were expecting to
receive under the terms of the Plan, the Board of Directors granted
non-qualified stock options with an exercise price below the fair market value
on the date of grant to employees that were participants in the Plan. This grant
resulted in a non-cash stock compensation expense of $214 thousand for the three
months ended December 31, 2004.

NOTE 4.  DISCONTINUED OPERATIONS

We exited our infrared hardware business in the quarter ended September 30,
2002, we sold our wholly owned subsidiary, Extended Systems Singapore Pte
Limited, in the quarter ended June 30, 2002 and we sold the assets of our
printing solutions segment in the quarter ended June 30, 2001. 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
Board Opinion No. 30. 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 for the
following periods:

                              THREE MONTHS ENDED       SIX MONTHS ENDED
                                 DECEMBER 31,             DECEMBER 31,
                            ---------------------     ---------------------
                              2004         2003         2004         2003
                            --------     --------     --------     --------

Net revenue                 $   --       $     29     $   --       $    169
Gross profit                    --             76         --            145
Income tax provision            --             29         --             52
Income, net of tax              --             47         --             88

Earnings per share:
      Basic and diluted     $   --       $   --       $   --       $   0.01

NOTE 5.  RESTRUCTURING CHARGES

We did not incur restructuring charges for the three and six months ended
December 31, 2004. We recorded approximately $261 thousand and $1.3 million in
workforce reduction costs during the three and six months ended December 31,
2003 that consisted primarily of severance, benefits, and other costs related to
the resignation of Steven Simpson, our former President and Chief Executive
Officer, and Karla Rosa, our former Vice President of Finance and Chief
Financial Officer, and the termination of thirteen employees from our marketing
and sales, research and development, administration and operations groups. Of
the terminated employees, nine were located in the United States and four were
in Europe. The restructuring charge included $62 thousand and $499 thousand of
non-cash compensation resulting from the accelerated vesting of employee stock
options during the three and six months ended December 31, 2003, respectively.

A summary of changes in the accrued restructuring balance for the six months
ended December 31, 2004 is as follows:

                                       11
<PAGE>
                                                                    WORKFORCE
                                                                    REDUCTION
                                                                      COSTS
                                                                     --------
Balance at June 30, 2004                                             $    116
Costs incurred in first quarter of fiscal 2005                           --
Cash payments                                                             (76)
                                                                     --------
Balance at September 30, 2004                                              40
Costs incurred in second quarter of fiscal 2005                          --
Cash payments                                                             (40)
                                                                     --------
Balance at December 31, 2004                                         $   --
                                                                     ========
NOTE 6.  GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

Goodwill and other identifiable intangible assets relate to our acquisitions of
Rand Software Corporation in 1998, Oval (1415) Limited in 1999, and AppReach and
ViaFone Inc. in 2002.

Goodwill is reviewed annually for impairment or more frequently if indicators of
impairment arise. We completed our annual impairment assessment in the quarter
ended June 30, 2004 and concluded that goodwill was not impaired. The carrying
amount of goodwill as of December 31, 2004 and June 30, 2004 was approximately
$12.5 million.

Other identifiable intangible assets consisted of the following:

<TABLE><CAPTION>
                                        AS OF DECEMBER 31, 2004                               AS OF JUNE 30, 2004
                           ------------------------------------------------     ------------------------------------------------
                              GROSS                                                GROSS
                             CARRYING        ACCUMULATED                          CARRYING        ACCUMULATED
                              AMOUNT         AMORTIZATION           NET            AMOUNT         AMORTIZATION           NET
                           ------------      ------------      ------------     ------------      ------------      ------------
<S>                        <C>               <C>               <C>              <C>               <C>               <C>
Purchased technology       $      3,691      $     (3,275)     $        416     $      3,691      $     (3,165)     $        526
Customer relationships               80               (37)               43               80               (30)               50
Non-compete covenants                 6                (6)             --                  6                (6)             --
Other                                 5                (5)             --                  5                (5)             --
                           ------------      ------------      ------------     ------------      ------------      ------------
                           $      3,782      $     (3,323)     $        459     $      3,782      $     (3,206)     $        576
                           ============      ============      ============     ============      ============      ============
</TABLE>

Amortization of identifiable intangible assets was $43 thousand and $117
thousand for the three and six months ended December 31, 2004 and was $155
thousand and $344 thousand for the three and six months ended December 31, 2003.
The purchased technology and customer relationship assets are being amortized
over five years. Based on the identifiable intangible assets recorded at
December 31, 2004, the estimated future amortization expense for the remainder
of fiscal 2005 and fiscal 2006, 2007, and 2008 is $86 thousand, $172 thousand,
$172 thousand, and $29 thousand, respectively.

NOTE 7.  RECEIVABLES

<TABLE><CAPTION>
                                                        AS OF DECEMBER 31,        AS OF JUNE 30,
                                                               2004                    2004
                                                        ------------------      ------------------
<S>                                                     <C>                     <C>
Accounts receivable                                     $           10,452      $            7,218
Allowance for doubtful accounts and product returns                   (633)                   (446)
                                                        ------------------      ------------------
                                                        $            9,819      $            6,772
                                                        ==================      ==================
</TABLE>

NOTE 8.  PROPERTY AND EQUIPMENT

<TABLE><CAPTION>
                                                        AS OF DECEMBER 31,        AS OF JUNE 30,
                                                               2004                    2004
                                                        ------------------      ------------------
<S>                                                     <C>                     <C>
Land and land improvements                              $              533      $              533
Buildings                                                            5,927                   5,927
Computer equipment                                                   4,656                   4,030
Furniture and fixtures                                               1,896                   2,285
                                                        ------------------      ------------------
                                                                    13,012                  12,775
Less accumulated depreciation                                       (8,870)                 (8,444)
                                                        ------------------      ------------------
                                                        $            4,142      $            4,331
                                                        ==================      ==================
</TABLE>
                                       12
<PAGE>

NOTE 9.  ACCRUED EXPENSES

<TABLE><CAPTION>
                                                        AS OF DECEMBER 31,        AS OF JUNE 30,
                                                               2004                    2004
                                                        ------------------      ------------------
<S>                                                     <C>                     <C>
Accrued payroll and related benefits                    $            1,991      $            1,623
Accrued warranty and support costs                                     127                     156
Other                                                                2,165                   1,752
                                                        ------------------      ------------------
                                                        $            4,283      $            3,531
                                                        ==================      ==================
</TABLE>

NOTE 10.  COMMITMENTS AND CONTINGENCIES

COMMITMENTS. We currently lease office space at our locations in Boise, Idaho;
Herrenberg, Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol,
England; San Diego, California; American Fork, Utah; and `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $168 thousand
and $179 thousand for the three months ended December 31, 2004 and 2003,
respectively. For the six months ended December 31, 2004 and 2003, operating
lease expense was $303 thousand and $406 thousand, respectively.

On September 26, 2003, we closed a transaction with Hopkins Financial Services
for the sale-and-leaseback of our headquarters building and land in Boise,
Idaho. Because we have a 10-year option to repurchase the building and land at a
price of $5.1 million and we sublet more than a small portion of the building
space, the sale-and-leaseback was recorded as a financing transaction and is
shown as $4.8 million of long-term debt on our balance sheet at December 31,
2004. As part of the agreement, we entered into a 10-year master lease for the
building with annual lease payments equal to 9.2% of the sale price. We are also
obligated to pay all expenses associated with the building during our lease,
including the costs of property taxes, insurance, operating expenses and
repairs.

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 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. At December 31, 2004, the loan balance was $108 thousand.

Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations as of December 31, 2004 are as
follows:

<TABLE><CAPTION>
                                                                        YEAR ENDING JUNE 30,
                                          -------------------------------------------------------------------------
                                            2005         2006         2007         2008         2009      THEREAFTER     TOTAL
                                          --------     --------     --------     --------     --------     --------     --------
<S>                                       <C>          <C>          <C>          <C>          <C>          <C>          <C>
SVB debt principal (1)                    $    108     $   --       $   --       $   --       $   --       $   --       $    108
SVB debt interest                                1         --           --           --           --           --              1
Monthly payments pursuant to building
      sale-and-leaseback                       221          442          442          442          442        1,875        3,864
Capital leases (1)                              14           11            6         --           --           --             31
Operating leases                               316          442          319          258          256           64        1,655
Post-retirement benefits (1)                    17           17           17           17           17           68          153
                                          --------     --------     --------     --------     --------     --------     --------
                                          $    677     $    912     $    784     $    717     $    715     $  2,007     $  5,812
                                          ========     ========     ========     ========     ========     ========     ========
</TABLE>

(1) These amounts are reported on the balance sheet as liabilities.

Non-current capital lease obligations are as follows:

                                                                  AS OF
                                                             DECEMBER 31, 2004
                                                               ------------
Gross capital lease obligations                                $         33
Less:  Imputed interest                                                  (2)
                                                               ------------
Present value of net minimum lease payments                              31
Less:  Current portion                                                  (20)
                                                               ------------
Non-current capital lease obligations                          $         11
                                                               ============

GUARANTEES. We have 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

                                       13
<PAGE>

amount of future payments we could be required to make under this letter of
credit as of December 31, 2004 is approximately $25 thousand.

INDEMNIFICATIONS. We enter into standard indemnification agreements in our
ordinary course of business. Pursuant to these agreements, we indemnify, defend,
hold harmless, and agree to reimburse the indemnified party for losses suffered
or incurred by the indemnified party in connection with any U.S. patent,
copyright or other intellectual property infringement claim by any third party
with respect to our products. The term of these indemnification agreements is
generally perpetual any time after execution of the agreement. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited. To date, we have not incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.

As permitted under Delaware law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was, serving at our request in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have a director and officer
insurance policy that limits our exposure and may enable us to recover a portion
of any future amounts paid. We have not incurred costs to defend lawsuits or
settle claims related to these indemnification agreements.

From time to time we enter into indemnification agreements in our ordinary
course of business with certain service providers, such as financial
consultants, whereby we indemnify such service providers from claims, losses,
damages, liabilities, or other costs or expenses arising out of or related to
their services. The maximum potential amount of future payments we could be
required to make under these indemnification agreements is unlimited. To date,
we have not incurred costs to defend lawsuits or settle claims related to these
indemnity obligations.

WARRANTIES. We offer warranties on both our software products and discontinued
hardware products. We record an accrual for the estimated future costs
associated with warranty claims based upon our historical experience and our
estimate of future costs. We also include in the warranty reserve an accrual for
the estimated future costs associated with free support that we provide on
certain products. The adequacy of our warranty reserve is reviewed at least
quarterly and if necessary, adjustments are made.

The following table reconciles the changes in our warranty reserve for the six
months ended December 31, 2004:

<TABLE><CAPTION>
<S>                                                                               <C>
Balance at June 30, 2004                                                          $    156
Net changes in warranty accrual for the three months ended September 30, 2004         --
                                                                                  --------
Balance at September 30, 2004                                                          156
Net changes in warranty accrual for the three months ended December 31, 2004           (29)
                                                                                  --------
Balance at December 31, 2004                                                      $    127
                                                                                  ========
</TABLE>

LINE OF CREDIT. We have a loan and security agreement with SVB under which we
can access up to $2.5 million of financing in the form of a demand line of
credit. Our borrowing capacity is limited to 80% of eligible accounts
receivable. Interest on any borrowings is payable at prime and certain of our
assets collateralize the line of credit. We are required to maintain certain
financial ratios under the terms of the agreement, which will expire on August
30, 2006. As of December 31, 2004, we had no outstanding borrowings on the line
of credit, and we were in compliance with all financial covenants required under
the line of credit.

LITIGATION. On June 29, 2004 AppForge, Inc. ("AppForge") filed a complaint
against us in the United States District Court for the District of Delaware. An
amended complaint was filed on August 12, 2004 joining Extended Systems of
Idaho, Inc. ("ESI-Idaho") and four of our European subsidiaries. ESI-Idaho and
AppForge are parties to a distribution and license agreement related to certain
AppForge software. AppForge alleges that the defendant Extended Systems
companies have used AppForge's technology and trademarks in a manner not
authorized by the parties' agreement. We believe that our use and distribution
of AppForge's software has been within the scope of the parties' agreement.

Since the parties' license agreement provides for arbitration of disputes,
ESI-Idaho filed a demand for arbitration with the American Arbitration
Association on August 3, 2004 seeking a declaration of the parties' respective
rights and obligations. At the same time, in the Delaware action, the Extended
Systems defendants have moved the Court for dismissal or a stay of the case,
because the parties' license agreement provides that arbitration is the sole
forum for resolution of disputes arising out of or related to the license and
distribution agreement. Our four European subsidiaries have moved for dismissal
of the case on the ground they are not subject to personal jurisdiction in
Delaware.

We believe that we have meritorious defenses against this action, and we will
continue to vigorously defend it.

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.

                                       14
<PAGE>

NOTE 11.  INCOME TAXES

We recorded income tax expense from continuing operations of $7 thousand and $32
thousand for the three and six months ended December 31, 2004, respectively, and
$9 thousand and $13 thousand for the three and six months ended December 31,
2003, respectively. The expense related primarily to foreign withholding taxes.
For the three and six months ended December 31, 2003 we recorded $29 thousand
and $52 thousand, respectively, of income tax expense for discontinued
operations.

NOTE 12.  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.

We classify our product offerings into one operating segment, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions that we sell to enterprises, original
equipment manufacturers, application developers, distributors and valued-added
resellers.

Our headquarters is located in the United States. We have research and
development facilities in the United States, United Kingdom and Canada. We
conduct sales, marketing and customer service activities throughout the world,
and we have sales offices in North America and Western Europe. The following
table presents our geographic revenue information based on the location of the
selling entity.

<TABLE><CAPTION>
                                             THREE MONTHS ENDED         SIX MONTHS ENDED
                                                 DECEMBER 31,              DECEMBER 31,
                                            ---------------------     ---------------------
                                              2004         2003         2004         2003
                                            --------     --------     --------     --------
<S>                                         <C>          <C>          <C>          <C>
Net revenue from Continuing Operations:
North  America                              $  5,162     $  4,275     $  9,563     $  8,900
Germany                                        2,715        2,001        4,794        3,341
Other countries                                2,064        2,231        3,430        3,821
                                            --------     --------     --------     --------
      Total net revenue                     $  9,941     $  8,507     $ 17,787     $ 16,062
                                            ========     ========     ========     ========
</TABLE>

Substantially all of our long-lived assets are in the United States.

No customer accounted for more than 10% of our net revenue from continuing
operations in the three and six months ended December 31, 2004 or 2003.

NOTE 13. RESTRICTED STOCK

In our fiscal year ended June 30, 2004, we granted shares of restricted stock
with a purchase price equal to $.001 per share to certain employees. Annually,
we grant shares of restricted stock with a purchase price equal to $.001 per
share to directors on the date of the annual stockholders' meeting. The issuance
of restricted stock grants results in unamortized stock-based compensation based
on the closing price of Extended Systems common stock on the date of the stock
grants. This compensation is amortized as a non-cash compensation charge as the
restrictions lapse.

We amortize non-cash stock compensation charges on a straight-line basis over
the vesting period. The restricted stock awards granted to employees in our
fiscal year ended June 30, 2004 vested in full on October 31, 2004, the first
anniversary of the grant date. The restricted stock awards granted to directors
vest in the amount of one-third on the first anniversary of the grant date and
one-third in each of the following two years. If the director attends the
required number of board meetings held during the year, the restrictions on his
awards will lapse in full on the first anniversary of the grant date. If an
employee or director terminates service before vesting is complete, the
restricted stock is repurchased from the individual and any compensation expense
previously recognized is reversed, thereby reducing the amount of stock-based
compensation amortization during the period.

During the three and six months ended December 31, 2004, we recognized stock
compensation expense of $77 thousand and $226 thousand related to the above
restricted stock grants. Compensation expense related to restricted stock grants
was $112 thousand for the three and six months ended December 31, 2003.

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

INTRODUCTION
------------

We begin Management's Discussion and Analysis of Financial Condition and Results
of Operations with an overview to give the reader management's perspective on
our results for the second quarter of fiscal 2005 and our general outlook for
the remainder of the current fiscal year. This is followed by a discussion of
the critical accounting policies that we believe are important to understanding
the assumptions and judgments incorporated in our reported financial results. In
the next section, we discuss our

                                       15
<PAGE>

results of operations for the second quarter and first half of fiscal 2005
compared to the second quarter and first half of fiscal 2004. We then provide an
analysis of our liquidity and capital resources.

This discussion and other parts of this Quarterly Report on Form 10-Q contain
forward-looking statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended). These statements are based upon current
expectations that involve risks, uncertainties and assumptions, and we undertake
no obligation to publicly release any revisions to the forward-looking
statements or reflect events or circumstances after the date of this report.

Any statements contained in this Quarterly Report on Form 10-Q that are not
statements of historical fact may be deemed to be forward-looking statements.
These forward-looking statements include words such as "may," "will," "should,"
"estimates," "predicts," "potential," "continue," "strategy," "believes,"
"anticipates," "plans," "expects," "intends," "outlook," "could," "estimate,"
"project," "forecast," or similar expressions that are intended to identify
forward-looking statements.

Our actual results may differ materially from the results discussed in these
forward-looking statements. Factors that may cause a difference include, but are
not limited to, those discussed under the sections titled "Factors That May
Affect Future Results and Market Price of Stock" and "Liquidity, Capital
Resources and Financial Condition". The following discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and notes
thereto appearing elsewhere in this Quarterly Report on Form 10-Q. All yearly
references are to our fiscal years ended June 30, 2005 and 2004, unless
otherwise indicated. All tabular amounts are in thousands, except percentages.

OVERVIEW
--------

We are a leading provider of software and services that delivers solutions to
help companies streamline their business processes and improve workforce
productivity through mobilizing corporate applications and data. We also provide
software and expertise that enable our mobile device manufacturer customers to
accelerate their product development cycles and enhance the functionality of new
products they bring to market. The users of our products are enterprise
employees that complete their jobs or portions of their jobs outside of the
company-owned facilities where they have traditionally accessed, viewed and
updated information through wired networks. Also advancing the adoption of
enterprise mobility solutions is the increased availability and capability of
powerful mobile devices, such as PDAs, mobile phones and smartphones.
Enterprises are increasingly realizing they can improve their competitiveness by
mobilizing corporate information.

We believe a full understanding of our operating results for the second quarter
of fiscal 2005 requires an understanding of how the mobility solutions market is
evolving and how this evolution influences our company's performance. Although
the mobility solutions market is still in the early phases of development,
organizations are increasingly developing a mobile computing strategy as part of
their plans to increase productivity, improve competitiveness and enhance
customer relationships. However, the slow growth recovery occurring in most
global economies coupled with customers demonstrating a very disciplined
approach to information technology spending continue to restrain information
technology spending and cause enterprises to focus spending on mobile technology
investments that can achieve a 12 to 18 month payback. Many companies launch
their mobile strategy with a mobile contacts, calendar, task and e-mail
application. Our mobile solution that meets this need, OneBridge Mobile
Groupware, comprises the dominant portion of our enterprise mobility software
revenue.

Device manufacturers are also evolving their products to address this growing
enterprise mobility market. Notebooks, mobile phones and standard PDAs have been
the dominant mobile infrastructure devices. However, as mobile device designers
and marketers have launched campaigns to communicate the added value of
smartphones and converged devices, adoption rates for these devices have
increased. To address the growth in this market, the rapid product development
cycles, and the demand for a robust feature set, device manufacturers have
increasingly turned to third parties to provide the technology for short-range
wireless connectivity products. Our mobile device solutions revenue declined in
the first half of fiscal of 2005 as handset manufacturers reduced the volume of
shipments that included our products, and we also experienced declines in
pricing.

We believe Europe has been the global leader in the deployment of wireless
infrastructure. The coverage and data capacity of wireless networks developed
more rapidly in Europe than in other global markets, and the market for mobility
solutions has grown in Europe. We have a long operating history in Europe with
offices in four countries. We have gained market awareness in Europe and
developed long-standing customer relationships. A significant portion of our
revenue in the second fiscal quarter of 2005 and for the six months ended
December 31, 2004 was derived from European customers purchasing our enterprise
mobility solutions and European device manufacturers introducing successful
converged devices that contained our mobile device solutions products. Our
second fiscal quarter has historically produced strong revenue in our European
geographies. Our revenue from European customers that purchase our products in
either British pound sterling or euros is affected by changes in the exchange
rate between these currencies and the U.S. dollar. In both the first and second
quarter of fiscal 2005, the weakening of the U.S. dollar positively affected our
reported revenue.

In 1993, we introduced our first enterprise database products. We continue to
market and sell these products to application developers and enterprises to
support the data requirements of both mobile and traditional enterprise
applications. Revenue from these products was essentially the same in the first
half of fiscal 2005 as compared to the first half of fiscal 2004. Application
developers that purchase our enterprise database products have required a
solution that is stable, mature and priced competitively. We have developed an
extensive network of resellers that market these products globally. Because
these products do not require heavy research and development investment or
significant sales and marketing support, they have been an

                                       16
<PAGE>

important and significant source of positive cash flow to our company in the
first half of fiscal 2005. We expect this product line to continue the trend of
flat to slightly declining revenue for the remainder of fiscal 2005.

In the remaining quarters of fiscal 2005 we will continue to focus on revenue
growth by generating more sales of our solutions to enterprise customers and
mobile device manufacturers. We believe enterprise customers will continue the
trend of investing first in mobile mail and messaging software and later move
toward purchasing mobile applications that can have an immediate financial
impact. Examples of these mobile applications are field service, supply chain
and logistics, healthcare, field sales and education applications. Enterprises
will choose vendors with knowledge of workflows and business processes and those
that can provide a business case for investment. We expect to compete directly
with both larger companies that have significant resources and experience and
smaller companies that focus on a particular mobile vertical. We also expect to
experience longer sales cycles, which is typical for sales of larger, essential
business applications.

Our operating expenses declined in the second fiscal quarter of 2005 as compared
to the second quarter of last year by $367 thousand. However, the decline was
due primarily to restructuring charges and costs associated with defending
ourselves in a patent infringement case in the second quarter of last year that
did not recur in fiscal 2005. Without these expenditures, our operating expenses
increased $670 thousand primarily as a result of higher marketing and sales
expenses and research and development expenses. Revenue increased $1.4 million
in the second quarter of fiscal 2005 compared to the prior year's second
quarter. Due to revenue growth outpacing the spending increases, we experienced
both income from operations of $1.3 million and net income of $1.1 million in
the second quarter of fiscal 2005.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
-------------------------------------------------

In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, 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, so
we 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. The audited consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended June
30, 2004 contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies we
consider critical to an understanding of the consolidated financial statements
are highlighted below.

REVENUE RECOGNITION
-------------------

Revenue recognition rules for software companies are very complex. We follow
specific and detailed guidelines in determining the proper amount of revenue to
be recorded; however, certain judgments must be made by management in
interpreting the rules and in applying our revenue recognition policy. Revenue
results are difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly.

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
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 a 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 payment terms are extended for a significant
portion of the fee or there is a risk that the customer will expect a
concession, 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 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 our ability to collect
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 an undelivered element is generally 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

                                       17
<PAGE>

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

When a contractual relationship with one of our customers stipulates the
submission of a royalty report to us, revenue is generally recorded when the
royalty report is received and recognized in the period that the report covers.
If a royalty report is not received by the desired date to facilitate the
closing of the books for a given fiscal period and there exists the basis to
make a fair and reasonable estimate of the revenue related to that royalty
report, this estimate will be recorded as revenue. Estimated royalty fees and
revenues are subsequently adjusted based upon actual amounts realized. If the
actual amount realized differs materially from the recorded estimate and is
reported to us after an estimate has been recorded and before financial results
are announced externally, the recorded amount will be adjusted to reflect the
actual amount realized. If the amount differs, and is reported after financial
results are announced externally or does not differ materially, the adjustment
will be made in the subsequent fiscal period. In cases where the arrangement
with our customer provides for a prepaid nonrefundable royalty, we 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 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 generally
recognize both the service and related software license revenue over the period
of the engagement, using the percentage-of-completion method. We recognize no
more than 90% of the total contract amount until project acceptance is obtained.
In cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, or where
significant uncertainty about the project completion or customer acceptance
exists, we defer the contract revenue under the completed contract method of
accounting until the uncertainty is sufficiently resolved or the contract is
complete and accepted by the customer. If we were to make different judgments or
use 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.

BUSINESS COMBINATIONS AND ACQUIRED INTANGIBLE ASSETS
----------------------------------------------------

We account for our purchases of acquired companies in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
account for the related acquired intangible assets in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 141, we
allocate the cost of the acquired companies to the identifiable tangible and
intangible assets acquired and liabilities assumed, with the remaining amount
being classified as goodwill. Certain intangible assets, such as "developed
technologies," are amortized to expense over time, while in-process research and
development costs ("IPR&D"), if any, are immediately expensed in the period the
acquisition is completed. Identifiable intangible assets are currently amortized
over a five-year period using the straight-line method.

The majority of entities we acquire do not have significant tangible assets and,
as a result, a significant portion of the purchase price is typically allocated
to intangible assets and goodwill. Our future operating performance will be
affected by the future amortization of intangible assets, potential charges
related to IPR&D for future acquisitions, and potential impairment charges
related to goodwill. Accordingly, the allocation of the purchase price to
intangible assets and goodwill has a significant effect on our future operating
results. The allocation of the purchase price of the acquired companies to
intangible assets and goodwill requires us to make significant estimates and
assumptions, including estimates of future cash flows expected to be generated
by the acquired assets and the appropriate discount rate for these cash flows.
Should different conditions prevail, material write-downs of intangible assets
and/or goodwill could occur. Under SFAS No. 142, goodwill is no longer subject
to amortization. Rather, we evaluate goodwill for impairment at least annually,
during the fourth quarter of each fiscal year, or more frequently if events and
changes in circumstances suggest that the carrying amount may not be
recoverable. Impairment of goodwill is tested at the reporting unit level by
comparing the reporting unit's carrying value, including goodwill, to the fair
value of the reporting unit. The fair values of the reporting units are
estimated using a combination of the income, or discounted cash flows, approach
and the market approach, which utilizes comparable companies' data. If the
carrying amount of the reporting unit exceeds its fair value, goodwill is
considered impaired and we then compare the "implied fair value" of the goodwill
to its carrying amount to determine the impairment loss, if any.

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. Goodwill is reviewed for impairment annually in accordance
with SFAS No. 142. Factors we consider important that could trigger an
impairment review include, but are not limited to: (1) significant under
performance 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 relative to 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

                                       18
<PAGE>

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 used 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, 2004 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 carried forward and
foreign tax credits, before they expire. This valuation allowance was recorded
based on our 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 used 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 AND SALES RETURNS
-------------------------------------------------

We maintain an allowance for doubtful accounts based on a continuous 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 not 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 used different estimates, the timing and amount of our reserve may
have differed materially from that reported.

RESTRUCTURING
-------------

We report costs associated with employee terminations and other exit activity in
accordance with SFAS No. 112, "Employers' Accounting for Postemployment Benefits
- an amendment of FASB Statements No. 5 and 43," and SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities". We record employee
termination benefits as an operating expense when the benefit arrangement is
communicated to the employee and no significant future services are required. We
recognize facility lease termination obligations, net of estimated sublease
income, and other exit costs when we have future payment with no future economic
benefit or a commitment to pay the termination costs of a prior commitment.
These termination and other exit costs are reported at fair value.

DETERMINING FUNCTIONAL CURRENCIES FOR THE PURPOSE OF CONSOLIDATION
------------------------------------------------------------------

In preparing our consolidated financial statements, we are required to translate
the financial statements of our international subsidiaries from their functional
currencies, generally the local currency, into U.S. dollars. This process
results in exchange gains and losses, or cumulative translation adjustments,
which are included as a separate part of our net equity under the caption
"Accumulated other comprehensive loss."

Under the relevant accounting guidance, the computation method and treatment of
these translation gains or losses is dependent upon management's determination
of the functional currency of each subsidiary. The functional currency is
determined based on management's judgment and involves consideration of all
relevant economic facts and circumstances affecting the subsidiary. Generally,
the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures is considered the
functional currency, but any dependency upon the parent and the nature of the
subsidiary's operations is also considered.

Cumulative translation adjustments include any gain or loss associated with the
translation of that subsidiary's financial statements when the functional
currency of any subsidiary is the local currency. However, if the functional
currency were deemed to be the U.S. dollar then any gain or loss associated with
the remeasurement of these financial statements would be included within our
statement of operations. If we dispose of any of our subsidiaries, any
cumulative translation gains or losses would be realized and recorded within our
statement of operations in the period during which the disposal occurs. If we
determine that there has been a change in the functional currency of a
subsidiary to the U.S. dollar, any translation gains or losses arising after the
date of change would be included within our statement of operations.

Based on our assessment of the factors discussed above, we consider the relevant
subsidiary's local currency to be the functional currency for each of our
international subsidiaries. Accordingly, during the quarters ended December 31,
2004 and 2003 translation adjustments of $714 thousand and $302 thousand,
respectively, were recorded as additions to our accumulated other comprehensive
loss. At December 31, 2004 and June 30, 2004, cumulative translation losses of
approximately $2.4 million and $1.5 million were included as part of accumulated
other comprehensive loss within our balance sheet. These translation losses have
accumulated since we formed our first non-U.S. subsidiary in 1991. Had we
determined that the functional currency of our subsidiaries was the U.S. dollar,
we would have computed a remeasurement gain or loss using a different method and
such gain or loss would have been included in our results of operations for each
of the periods presented.

                                       19
<PAGE>

The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the U.S. dollar and the significance of the assets, liabilities, revenue and
expenses denominated in foreign currencies. These currencies include the euro,
the British pound sterling and Canadian dollar. Any future translation gains or
losses could be significantly higher than those noted in each of these periods
presented. In addition, if we determine that a change in the functional currency
of one of our subsidiaries has occurred at any point in time or we sell or
liquidate one of our subsidiaries, we would be required to include any
translation gains or losses from the date of change in our statement of
operations.

LEGAL CONTINGENCIES
-------------------

From time to time we may be involved in various legal proceedings and claims.
Periodically, but not less than quarterly, we review the status of each
significant matter and assess our potential financial exposure. If the potential
loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated, we accrue a liability for the estimated loss.
Significant judgment is required in both the determination of probability and
the determination as to whether an exposure is reasonably estimable. Due to the
uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending litigation and claims
and may revise our estimates. Such revisions could have a material impact on our
results of operations and financial condition.

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

CONTINUING OPERATIONS
---------------------

The following table sets forth the selected condensed consolidated financial
data, expressed as a percentage of total revenue, for the three and six months
ended December 30, 2004 and 2003:

<TABLE><CAPTION>
                                                           THREE MONTHS ENDED             SIX MONTHS ENDED
                                                               DECEMBER 31,                  DECEMBER 31,
                                                         -----------------------       -----------------------
                                                           2004           2003           2004           2003
                                                         --------       --------       --------       --------
<S>                                                            <C>            <C>            <C>            <C>
Revenue:
      License fees and royalties                               77%            83%            76%            80%
      Services and other                                       23             17             24             20
                                                         --------       --------       --------       --------
           Total net revenue                                  100            100            100            100
Costs and expenses:
      Cost of license fees and royalties                        1              2              1              1
      Cost of services and other                               11             12             11             13
      Amortization of identifiable intangibles                  1              2              1              2
      Research and development                                 19             18             20             20
      Marketing and sales                                      38             41             41             42
      General and administrative                               14             17             15             17
      Restructuring charges                                  --                3           --                8
      Patent litigation fees, license and settlement         --                9           --                8
      Non-cash stock compensation                               3              2              2              1
                                                         --------       --------       --------       --------
           Total costs and expenses                            87            106             91            112
                                                         --------       --------       --------       --------
           Income (loss) from operations                       13             (6)             9            (12)
      Other income (expense), net                              (1)          --               (1)          --
      Gain on sale of land                                   --               12           --                6
      Interest expense                                         (1)            (2)            (2)            (1)
                                                         --------       --------       --------       --------
           Income (loss) before income taxes                   11              4              6             (7)
      Income tax provision                                   --             --             --             --
                                                         --------       --------       --------       --------
           Income (loss) from continuing operations            11              4              6             (7)
      Discontinued operations, net of tax:
           Income from discontinued operations               --                1           --                1
                                                         --------       --------       --------       --------
           Net income (loss)                                   11%             5%             6%            (6)%
                                                         ========       ========       ========       ========
</TABLE>


                                       20
<PAGE>

COMPARISON OF THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2004 AND 2003

REVENUE
-------

The following table presents our license fees and royalties, support and
maintenance, and professional services and other revenue for the three and six
months ended December 31, 2004 and 2003, and the percentage changes from the
prior year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Revenue:
      License fees and royalties          $  7,640            8%     $  7,057     $ 13,441            5%     $ 12,828
      Support and maintenance                1,374           45           950        2,635           32         1,992
      Professional services and other          927           85           500        1,711           38         1,242
                                          --------     --------      --------     --------     --------      --------
      Total net revenue                   $  9,941           17%     $  8,507     $ 17,787           11%     $ 16,062
                                          ========     ========      ========     ========     ========      ========
</TABLE>

We sell our adaptive mobility products to enterprises, original equipment
manufacturers ("OEMs"), application developers, distributors and valued-added
resellers. No customer accounted for greater than 10% of revenue from continuing
operations in the second quarter or the first six months of fiscal 2005 or 2004.

LICENSE FEES AND ROYALTIES. The majority of our product license revenue consists
of fees related to products licensed to customers on a perpetual basis. Product
license fees can be associated with a customer's licensing of a given software
product for the first time or with a customer's purchase of the right to run a
previously licensed product on additional computing capacity or by additional
users. Our royalty revenue primarily consists of fees related to our OEM
customers periodically increasing the number of units they are authorized to use
of a licensed software product and these fees are normally paid on a quarterly
basis.

We classify our product offerings into one operating segment, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions.

The table below presents total net license fees and royalty revenue by product
line and each product line's percentage of license fees and royalty revenue for
the three and six months ended December 31, 2004 and 2003.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
License fees and royalties:
Enterprise Mobility Solutions             $  3,766           22%     $  3,076     $  6,451           19%     $  5,426
      % of license fees and royalty
        revenue                                 50%          44%           48%          42%
Mobile Device Solutions                      1,934           (6)        2,056        3,423          (11)        3,834
      % of license fees and royalty
        revenue                                 25%          29%           25%          30%
Enterprise Database Solutions                1,940            1         1,925        3,567            0         3,568
      % of license fees and royalty
        revenue                                 25%          27%           27%          28%
                                          --------     --------      --------     --------     --------      --------
Total net revenue                         $  7,640            8%     $  7,057     $ 13,441            5%     $ 12,828
                                          ========     ========      ========     ========     ========      ========
</TABLE>

We sell our enterprise mobility products to corporate customers either directly
through our field sales staff or through distributors, valued-added resellers
and other channel partners. License revenue from our enterprise mobility
products increased $690 thousand in the second quarter of fiscal 2005 compared
to the second quarter of fiscal 2004 and approximately $1 million for the six
months ended December 31, 2004 compared to the six months ended December 31,
2003. The increase in enterprise mobility product license revenue was the result
of several factors, including an OEM sale of our enterprise XTNDConnect PC
product for use in connection with a third party's mail and messaging software.
We do not anticipate significant license revenue from this sale for the
remainder of fiscal 2005 since the contract was essentially completed in the
second quarter. Additionally, the weakening of the U.S. dollar versus the
British pound sterling and the euro increased reported revenue in the first half
of fiscal 2005. See "International Revenue" below for further discussion. The
increase in revenue recorded was also a result of our installed customer base
rolling out additional licenses of our OneBridge Mobile Groupware application
and sales of this product to new enterprise customers in both Europe and North
America. We believe these customers purchased OneBridge Mobile Groupware because
of its competitive total cost of ownership combined with the OneBridge platform
design, which enables customers to roll out future mobile applications, such as
mobile field service and mobile sales force automation applications, using the
same infrastructure as the devices that receive e-mail.

We sell our mobile device products either directly or through distributors,
primarily to OEMs that supply the mobile handset and the telematics industries.
License fees and royalty revenue from our mobile device products decreased $122
thousand in the second quarter of fiscal 2005 compared to the second quarter of
fiscal 2004 and decreased $411 for the first six months of fiscal 2005 compared
to the first six months of fiscal 2004. The decline in revenue was due primarily
to a lower level of royalties from a

                                       21
<PAGE>

European handset manufacturer. Although our products continue to be licensed by
the manufacturer, volumes and unit pricing for both the first and the second
quarter of fiscal 2005 were lower than the amounts for the previous year's
comparable quarters. We do not expect revenue from this customer to increase
significantly in the remaining quarters of fiscal 2005. Offsetting this decline
somewhat was approximately $450 thousand in the second quarter and $350 thousand
in the first quarter of revenue related to products embedded in handsets that
were shipped by our customers prior to the beginning of each of these quarters.
Revenue related to these shipments was not recognized in the quarter the
customer products were shipped due to the lack of timely reporting of royalties
by our customers or lack of appropriate customer signatures on the license
agreements.

Royalty revenue generated from sales to OEMs has fluctuated from quarter to
quarter in the past. We expect it will also fluctuate in future quarters,
because demand in these markets is difficult to predict, as it is dependent upon
the timing of customer projects and the effectiveness of their marketing
efforts. We currently have a large opportunity to license our software to a
major semi-conductor manufacturer, which could, if it continues to develop and
close during the third quarter, positively impact revenue growth for this
product line in the third quarter of fiscal 2005. Without this significant
revenue opportunity, we expect this product to have flat to decreasing revenue
in comparison to quarterly results for the prior year. Additionally, quarterly
fluctuations in revenue can occur due to the nature of the arrangements with
customers, which can vary between quarterly royalty payments that become due as
devices are shipped by the manufacturer and one-time payments that allow the
customer either unlimited or a capped number of licenses. Finally, we have
experienced late royalty reporting from our customers, and despite efforts to
coordinate more closely with our customers, we anticipate late reporting could
recur in future quarters.

We sell our database products to enterprise customers and software developers
who write applications utilizing our product's data management capabilities.
License revenue from our enterprise database product lines in the first quarter
and second quarter of fiscal 2005 was approximately the same as the revenue
recorded in the first and second quarters of fiscal 2004. We anticipate flat to
declining revenue from this product line for the remainder of fiscal 2005.

SUPPORT AND MAINTENANCE. Support and maintenance revenue is derived
predominantly from our enterprise mobility products and represents the ratable
recognition of fees to enroll customers in our software maintenance and support
programs. Enrollment in these programs generally entitles customers to product
enhancements, technical support services and ongoing product updates for
compatibility with new mobile devices and mobile device operating systems. These
fees are generally charged annually, and, for software products sold directly to
enterprises, have been generally in the range of 15% to 20% of the discounted
price of the product. For software products sold through resellers that provide
support directly to their customers, this range has been 11% to 14%. Software
sold to mobile device solutions OEM customers generally does not include support
and maintenance agreements or the support and maintenance revenue is much lower
in comparison to the license revenue, as technical issues are generally resolved
before our software is embedded into our customers' devices and the sales
transaction is completed.

Support and maintenance revenue increased $424 thousand in the second quarter of
fiscal 2005 compared to the second quarter of fiscal 2004 and $643 thousand for
the six months ended December 31, 2004 compared to the six months ended December
31, 2003. This increase was the result of customers who had previously purchased
our OneBridge products renewing support and maintenance contracts combined with
the ratable recognition of revenue from new support and maintenance contracts
sold to customers purchasing our products for the first time in the second
quarter of fiscal 2005. Our support and maintenance revenue depends on both our
software license revenue and renewals of support and maintenance agreements by
our existing customers. Our support and maintenance revenue has increased as a
result of both support and maintenance sold with new licenses and support and
maintenance renewals. We expect that our support and maintenance revenue will
increase as our license revenue increases and decrease as our license revenue
decreases.

PROFESSIONAL SERVICES AND OTHER. Professional services and other revenue is
derived primarily from our work related to enterprise mobility products and
consists of fees for consulting, product installations, training, and developing
custom applications that utilize our middleware products such as OneBridge
Mobile Data Suite. Professional services revenue is driven by our customers
purchasing services to aid them in developing software solutions for their
mobile workforce in both Europe and North America. Additionally, we derive
professional services revenue as we perform custom modifications or porting of
our mobile device solutions products for OEM customers.

Professional services revenue increased $427 thousand in the second quarter of
fiscal 2005 compared to the second quarter of fiscal 2004 and increased $469
thousand for the six months ended December 31, 2004 compared to the six months
ended December 31, 2003. The increased revenue in the second quarter of fiscal
2005 was the result of increased customer demand for services from our
enterprise mobility group to build custom applications and assist with OneBridge
Mobile Groupware deployments. In the first quarter of fiscal 2005, our
professional services group substantially completed a significant project for
one of our European carrier partners to develop a mobile field service
application for use by its workers.

Based on the projects currently scheduled for the third quarter of fiscal 2005,
we expect professional services revenue in the third quarter of fiscal 2005 to
be approximately the same as the revenue in the second quarter of fiscal 2005.
Although we expect approximately the same amount of billable hours for our
professional services group, professional services revenue may fluctuate from
quarter to quarter based on the amount of revenue we may be required to defer
under our revenue recognition policy and the timing of services engagements.

                                       22
<PAGE>

INTERNATIONAL REVENUE

We derive a significant amount of our revenue from sales to customers outside of
the United States, principally from our European-based sales force and channel
partners, overseas OEMs and a number of international distributors. Based on the
region in which the customer resides, the table below presents total net revenue
by region and each region's percentage of total net revenue for the three and
six months ended December 31, 2004 and 2003.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
International revenue:
North America                             $  3,376           11%     $  3,050     $  6,666            6%     $  6,285
      % of total net revenue                    34%                        36%          37%                        39%
Europe                                       5,278           12         4,698        9,013           14         7,923
      % of total net revenue                    53%                        55%          51%                        49%
Asia Pacific and Rest of World               1,287           70           759        2,108           14         1,854
      % of total net revenue                    13%                         9%          12%                        12%
                                          --------     --------      --------     --------     --------      --------
Total net revenue                         $  9,941           17%     $  8,507     $ 17,787           11%     $ 16,062
                                          ========     ========      ========     ========     ========      ========
</TABLE>

Sales to North American customers increased $326 thousand in the second quarter
of fiscal 2005 compared to the second quarter of fiscal 2004 and increased $381
thousand in the six months ended December 31, 2004 compared to the six months
ended December 31, 2003. The sales increase was a result of a significant OEM
sale of our enterprise XTNDConnect PC product for use in connection with a third
party's mail and messaging software.

Sales in Europe grew $580 thousand in the second quarter of fiscal 2005 compared
to the second quarter fiscal 2004 and increased $1.1 million for the six months
ended December 31, 2004 compared to the six months ended December 31, 2003. This
growth was a result of increased license and professional services revenue from
our enterprise mobility and database products sold to our European customers.
Over the past several years we have made significant investments in our
European-based pre-sales, sales, and technical support teams, and these
investments have resulted in both obtaining new customers and increasing the
amount of sales to existing customers. We believe the adoption rate of mobile
devices and wireless infrastructure in Europe is more advanced than in North
America and we are benefiting from our significant presence in this market. We
have also developed an extensive network of resellers in Europe that market our
products, particularly our OneBridge Mobile Groupware products, to a wide range
of companies. These increases were offset somewhat by the decline in the sales
of our mobile device solutions products to a major European handset
manufacturer.

Additionally, the increase in revenue from our European customers was a result
of the decrease in the strength of the U.S. dollar compared to the euro and
British pound sterling, which resulted in sales to our European customers
invoiced in local currencies being greater in U.S. dollars than they would have
been had the exchange rate remained constant. Total reported revenue, including
revenue from our European customers invoiced in local currency, grew 17% between
the second quarter of fiscal 2005 and the second quarter of fiscal 2004, but had
the exchange rate for the U.S. dollar remained constant between those years,
revenue would have increased only 12%. For the six months ended December 31,
2004, total reported revenue, including revenue from our European customers
invoiced in local currency, grew 11% compared to the six months ended December
31, 2003, but had the exchange rate for the U.S. dollar remained constant
between those years, revenue would have increased only 7%. We expect that
international sales will continue to represent a significant portion of our net
revenue in the foreseeable future.

Our revenue from Asia Pacific and the rest of the world is primarily from sales
to OEM customers of our mobile device solutions products. We also sell our
enterprise mobility products in these regions through distributors and
value-added resellers. We sell our products in these regions in U.S. dollars and
do not have significant revenue derived from sales in foreign currencies from
these regions. In the second quarter of fiscal 2005 revenue from these regions
increased $528 thousand compared to the second quarter of fiscal 2004 and
increased $254 thousand for the six months ended December 31, 2004 as compared
to the six months ended December 21, 2003. These increases reflect the continued
transition from domestic customers to Asian-based original design manufacturers
and Asian handset manufacturers for sales of our mobile device solutions
products.

COST OF REVENUE
---------------

The following table sets forth our costs of license fees and royalties,
technical support services and professional services and other for the three and
six months ended December 31, 2004 and 2003, and the percentage change from the
prior year:

                                       23
<PAGE>

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Cost of revenue:
Cost of license fees and royalties        $    129          (10)%    $    144     $    196          (13)%    $    226
      % of license fees and royalty
        revenue                                  2%                         2%           1%                         2%
Cost of technical support services             439          (18)          533          906          (11)        1,017
      % of support and maintenance
        revenue                                 32%                        56%          34%                        51%
Cost of professional services and other        621           24           500        1,039           (7)        1,119
      % of professional services and
        other revenue                           67%                       100%          61%                        90%
                                          --------     --------      --------     --------     --------      --------
Total cost of revenue                     $  1,189            1%     $  1,177     $  2,141           (9)%    $  2,362
                                          ========     ========      ========     ========     ========      ========
</TABLE>

COST OF LICENSE FEES AND ROYALTIES. The cost of license fees and royalty revenue
consists primarily of royalties for the use of third-party software. The cost of
license fees and royalties remained relatively constant due to the fixed cost
nature of the licensing agreements we have arranged with third parties. As we
introduce new products into the marketplace that incorporate technology from
third parties, such as OneBridge Mobile Secure and OneBridge Mobile Sales, we
expect the cost of license fees and royalties to increase as we increase the
number of licenses we sell for these new products.

COST OF TECHNICAL SUPPORT SERVICES. The cost of technical support services
consists primarily of compensation and benefits, third-party contractor costs
and related expenses incurred in providing customer support. The increase in
gross margin during the second quarter of fiscal 2005 compared to the prior
year's second quarter was due to an increase in support revenue resulting from
new support and maintenance contracts and renewals of previous contracts. The
gross margin was improved through cost reductions achieved by transferring a
portion of the technical support service work to lower cost outsourced contract
providers. The same factors resulted in the improved margins reported for the
first half of fiscal 2005. We expect increases in our cost of technical support
services as we add staff to our technical services group to support the
deployment of enterprise mobility software solutions to additional new
customers.

COST OF PROFESSIONAL SERVICES AND OTHER. The cost of professional services and
other consists primarily of compensation and benefits incurred in providing
services for building custom applications, training, consulting, installations
and assisting with customer deployments. Professional services gross margin was
33% for the second quarter of fiscal 2005 compared to 0% in the second quarter
of fiscal 2004. The increased gross margin was due to increased utilization of
our professional services group allowing us to increase revenue with current
fixed resources. The increased revenue was slightly offset by increased costs
related to procurement of third-party subcontractor services and an increased
number of professional services staff resulting from transfers from the research
and development group. Additionally, we substantially completed a significant
professional services engagement for a field services application that
effectively optimized the resources of our European professional services
organization and was completed at a gross margin higher than we have
historically experienced.

We expect professional services revenue to remain at approximately the same
levels in the remaining quarters of fiscal 2005 as more of our customers begin
work on mobile applications projects. However, given the high level of fixed
costs associated with the professional services group, an inability to generate
sufficient services revenue to absorb these fixed costs could lead to lower or
negative gross margins. We have also experienced fluctuations in our
professional services revenue on a quarterly basis due to the timing of revenue
recognition, which may be delayed due to specific contract terms. We expect our
professional services revenue will continue to experience these fluctuations in
the future.

AMORTIZATION OF IDENTIFIABLE INTANGIBLES

The following table presents our amortization of identifiable intangibles for
the three and six months ended December 31, 2004 and 2003 and the percentage
change from the prior year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Amortization of identifiable intangibles  $     43          (72)%    $    155     $    117          (66)%    $    344
      as a % of net revenue                      0%                         2%           1%                         2%
</TABLE>

Amortization decreased in the first and second quarters of fiscal 2005 compared
to the first and second quarters of fiscal 2004 as a result of the intangibles
related to our acquisition of Rand Software Corporation and Oval (1415) Limited
becoming fully amortized in the second quarter of fiscal 2004 and first quarter
of fiscal 2005, respectively.

For the remaining quarters of fiscal 2005, we expect amortization of
identifiable intangibles to remain consistent with the amount incurred in the
second quarter.

                                       24
<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------

The following table presents our research and development expenses for the three
and six months ended December 31, 2004 and 2003 and the percentage change from
the prior year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Research and development                  $  1,918           28%     $  1,496     $  3,628           15%     $  3,164
      as a % of net revenue                     19%                        18%          20%                        20%
</TABLE>


Research and development (or "R&D") expenses consist of compensation and
benefits for our software developers and development support personnel,
including software programmers, testing and quality assurance personnel, product
managers and writers of technical documentation, such as product manuals and
installation guides. These expenses also include consulting costs, facility and
communications costs, costs for software development tools and equipment, and
the cost of training our outsourced quality assurance and technical support
service provider. During the periods presented above, all software development
costs have been expensed.

R&D expenses increased $422 thousand in the second quarter of fiscal 2005
compared to the second quarter of fiscal 2004. The spending increases were the
result of retaining additional contract R&D services to advance product
development. We also incurred additional costs to retain our current R&D team as
well as replace and recruit new R&D team members. R&D expenses increased $464
thousand for the six months ended December 31, 2004 compared to the six months
ended December 31, 2003. This increase was a result of the higher second quarter
spending as spending in the first quarter was relatively unchanged from the
previous year's first quarter. We expect research and development costs to
increase in the remaining quarters of fiscal 2005 as we add additional resources
to complete our planned new products and enhanced functionality of our existing
products. We expect to incur these expenses through the recruiting and hiring of
additional employees in our engineering, quality assurance and technical support
departments.

MARKETING AND SALES EXPENSES
----------------------------

The following table presents our marketing and sales expenses for the three and
six months ended December 31, 2004 and 2003 and the percentage change from the
prior year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Marketing and sales                       $  3,819            9%     $  3,490     $  7,203            8%     $  6,684
      as a % of net revenue                     38%                        41%          40%                        42%
</TABLE>

Marketing and sales expenses consist primarily of salaries for our sales, inside
sales, marketing and technical sales staff, sales-related commissions and
bonuses paid to our direct sales force, commissions to third-party distributors
and other marketing-related expenses including trade shows, promotional
materials, public relations and advertising.

Marketing and sales expenses increased $329 thousand in the second quarter of
fiscal 2005 compared to the second quarter of fiscal 2004. The increased
spending was a result of $131 thousand of higher third-party commissions we paid
to our agents for sales of our IrDA and Bluetooth products. Additionally, we
incurred $109 thousand of higher marketing and sales consulting and third-party
services expenses, and we recorded $104 thousand higher bad debt expense in the
second quarter of fiscal 2005 compared to the prior year's second quarter.
Marketing and sales expenses increased $519 thousand for the six months ended
December 31, 2004 compared to the six months ended December 31, 2003. The
increased spending was primarily the result of $169 thousand in increased sales
salaries and commissions. These higher costs were the result of higher levels of
sales as well as retaining more experienced sales leadership and increasing the
experience level of the people who are accountable for the sales of our
enterprise mobility solutions. We also incurred $91 thousand of increased
third-party commissions and $119 thousand of increased bad debt expense in the
first six months of fiscal 2005 compared to the first six months of fiscal 2004.
Moreover, we also incurred $85 thousand of costs associated with the termination
of the Vice President of North American Sales in the first quarter of fiscal
2005.

We expect marketing and sales expenses to increase in fiscal 2005 as a result of
an expected increase in commissions paid caused by both an expected increase in
revenue and changes to our sales commission plans that increase the commission
rates as sales representatives increase cumulative sales totals in subsequent
quarters and approach annual quota targets.

GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------

The following table presents our general and administrative expenses for the
three and six months ended December 31, 2004 and 2003 and the percentage change
from the prior year.

                                       25
<PAGE>

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
General and administrative                $  1,354           (7)%    $  1,458     $  2,730            3%     $  2,639
      as a % of net revenue                     14%                        17%          15%                        16%
</TABLE>

General and administrative expenses primarily consist of salaries and other
personnel costs for our executive management, finance and accounting, management
information systems, human resources and other administrative groups. Other
expenses included in general and administrative expenses are fees paid for
outside legal and accounting services, directors' and officers' insurance costs
and SEC compliance and NASDAQ listing fees.

General and administrative expenses decreased by $104 thousand in the second
quarter of fiscal 2005 as compared to the second quarter of fiscal 2004. The
decline was a result of a reduction in professional fees in the second quarter
of fiscal 2005 that was partially offset by an increase in management bonuses.
General and administrative expenses increased $91 thousand in the first six
months of fiscal 2005 as compared to the first six months of fiscal 2004
primarily due to the accrual of expenses for our management bonus program in the
first six months of fiscal 2005.

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

The following table presents our restructuring charges for the three and six
months ended December 31, 2004 and 2003 and the percentage change from the prior
year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>

Restructuring charges                     $   --            NM*%     $    261     $   --            NM*%     $  1,329
      as a % of net revenue                      0%                         3%           0%                         8%

      *  percentage change not meaningful
</TABLE>

We did not incur restructuring charges in the first or second quarters of fiscal
2005. We recorded approximately $1.3 million in workforce reduction costs during
the first and second quarters of fiscal 2004 that consisted primarily of
severance, benefits, and other costs related to the resignation of Steven
Simpson, our former President and Chief Executive Officer, the resignation of
Karla Rosa, our former Chief Financial Officer, and the termination of thirteen
employees from our marketing and sales, research and development, administration
and operations groups. Of the terminated employees, nine were located in the
United States and four were in Europe. The restructuring charge for the first
and second quarters of fiscal 2004 included $499 thousand of non-cash
compensation resulting from the accelerated vesting of employee stock options.
As of December 31, 2004 all restructuring charges had been paid.

PATENT LITIGATION FEES, LICENSE AND SETTLEMENT
----------------------------------------------

The following table presents our patent litigation, license and settlement
expense for the three and six months ended December 31, 2004 and 2003 and the
percentage change from the prior year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>

Patent litigation fees, license and
  settlement                              $   --           NM*%      $    776     $   --           NM*%      $  1,345
      as a % of net revenue                      0%                         9%           0%                         8%

      *  percentage change not meaningful
</TABLE>

In April 2002, Intellisync Corporation filed a patent infringement action
against us in the U.S. District Court in Northern California. The action alleged
that our XTNDConnect server and desktop synchronization products infringed on
seven of Intellisync's synchronization-related patents. We incurred legal fees
and other related costs in connection with defending this action. On March 4,
2004 we mutually agreed with Intellisync Corporation ("Intellisync"), formerly
known as Pumatech, Inc., to settle the patent infringement lawsuit. Both
companies agreed to settle all claims and to immediately terminate litigation
proceedings. In connection with the settlement, we made a one-time payment to
Intellisync in the third quarter of fiscal 2004 of $2.0 million and received a
license to certain Intellisync patents. This payment covers estimated past and
future royalties on revenue related to our products shipped and covered under
Intellisync's licensed patents. Both companies have agreed there will be no
further patent litigation actions for a period of five years and that
Intellisync will release all of our customers from any claims of infringement
relating to their purchase and future use of our products. The expenses incurred
during the first and second quarters of fiscal 2004 were for legal and other
costs to defend against the lawsuit.

                                       26
<PAGE>

NON-CASH STOCK COMPENSATION
---------------------------

The following table presents our non-cash stock compensation expense for the
three and six months ended December 31, 2004 and 2003 and the percentage change
from the prior year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Non-cash stock compensation               $    291           73%     $    168     $    439          161%     $    168
      as a % of net revenue                      3%                         2%           2%                         1%
</TABLE>

In the second quarter of fiscal 2004, our Employee Stock Purchase Plan was
terminated. The Board of Directors approved a grant of options to employees that
had been participating in the plan with an exercise price below the then current
fair market value of the stock to replace the number of shares and the purchase
price the employees expected under the terms of the terminated plan. In the
second quarter of fiscal 2005, we recorded a non-cash stock compensation expense
of $214 thousand in connection with this grant. We do not expect any expense in
future quarters related to the plan termination and do not expect any future
grants to employees of options with exercise prices below fair market value.

In fiscal 2004, we changed the compensation for the members of our Board of
Directors to include annual grants of restricted stock. Additionally, we made
restricted stock grants to some of our employees in October 2003. These expenses
reflect the charges related to the amortization of the related compensation
expense over the period the stock vests. The grants to employees fully vested in
the second quarter of fiscal 2005 and, accordingly, there will be no future
expense associated with these grants. However, future amortization expense
related to additional annual grants of restricted stock made to the members of
our Board of Directors will be recorded in future quarters, and we expect these
costs to be approximately $38 thousand per quarter for the remainder of fiscal
2005.

OTHER INCOME (EXPENSE), NET
---------------------------

The following table presents our other income and expense for the three and six
months ended December 31, 2004 and 2003 and the percentage change from the prior
year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Foreign currency exchange gain (loss)     $   (130)         333%     $    (30)    $   (213)        NM*%      $     29
Interest income                                (10)        (143)           23           11          (58)           26
Net rental income                               61           33            46          129           39            93
Other net income (expense), net                (12)         (79)          (57)         (15)         (86)         (106)
                                          --------     --------      --------      --------    --------      --------
      Total other income (expense), net   $    (91)         406%     $    (18)    $    (88)        (310)%    $     42
                                          ========     ========      ========      ========    ========      ========

      *  percentage change not meaningful
</TABLE>

Other income and expense consists primarily of foreign currency exchange gains
or losses related to the mark-to-market of intercompany amounts owed to us by
our international subsidiaries, rental income generated from subleasing the
excess space at our headquarters facility and interest income earned on cash,
cash equivalents and short-term investment balances.

We recognized a foreign currency loss in the second quarter of fiscal 2005 and
for the six months ended December 31, 2004, primarily due to our intercompany
balance forecasts differing from our projections in periods of currency
volatility. We recognized a foreign currency gain in the first quarter of fiscal
2004 as a result of the decrease in the strength of the U.S. dollar at a time
when we were not entering into foreign currency forward contracts. For
additional information on our foreign currency exposure see Item 3 of this Form
10-Q.

Interest income decreased in the second quarter and the first half of fiscal
2005 as a result of writing-off approximately $25 thousand of interest income on
a note receivable that was accrued in prior periods and was determined to be
uncollectible.

The increase in net rental income in the second quarter of fiscal 2005 and for
the six months ended December 31, 2004 compared to the same three and six month
periods ended December 31, 2003 was due primarily to an increase in rent
received as a result of our leasing additional unused space at our headquarters
facility in Boise, Idaho.

The decrease in other expense in the first half of fiscal 2005 compared to the
same period last year was due primarily to a decrease in sales and use tax
expense that was recorded in the first quarter of fiscal 2004 in connection with
a sales tax audit.

                                       27
<PAGE>

The amount of any foreign currency exchange gain or loss for the remainder of
fiscal 2005 will depend upon currency volatility, the amount of our intercompany
balances and our ability to accurately predict such balances, and whether we
decide to enter into foreign currency forward contracts. We expect interest
income and net rental income to remain relatively constant.

INTEREST EXPENSE
----------------

The following table presents our interest expense for the three and six months
ended December 31, 2004 and 2003 and the percentage change from the prior year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Interest expense                          $    133           (8)%    $    145     $    266           49%     $    179
      as a % of net revenue                      1%                         2%           1%                         1%
</TABLE>

Interest expense consists primarily of interest associated with the
sale-and-leaseback of our headquarters land and building, which is accounted for
as a financing transaction, and interest paid on the term debt that we assumed
in connection with our acquisition of ViaFone in August 2002. Interest expense
increased by approximately $87 thousand in the first six months of fiscal 2005
compared to the first six months of fiscal 2004 primarily as a result of
entering into the sale-and-leaseback agreement at the end of the first quarter
of fiscal 2004.

INCOME TAX PROVISION
--------------------

The following table presents our income tax provision for the three and six
months ended December 31, 2004 and 2003 and the percentage change from the prior
year.

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>
Income tax provision                      $      7          (22)%    $      9     $     32          146%     $     13
      as a % of income (loss) before
        income taxes                             1%                         2%           3%                        (1)%
</TABLE>

We recorded an income tax provision in the first and second quarters of fiscal
2005 and 2004, consisting primarily of foreign withholding taxes for which no
credit is currently available against U.S. taxes due to our cumulative net loss
position. We expect to record an income tax provision in the remaining quarters
of fiscal 2005 related primarily to payments of foreign withholding taxes.

DISCONTINUED OPERATIONS
-----------------------

The following summarizes the results of discontinued operations:

<TABLE><CAPTION>
                                                 THREE MONTHS ENDED                       SIX MONTHS ENDED
                                                     DECEMBER 31,                            DECEMBER 31,
                                          -----------------------------------    ------------------------------------
                                            2004       % CHANGE        2003         2004       % CHANGE        2003
                                          --------     --------      --------     --------     --------      --------
<S>                                       <C>          <C>           <C>          <C>          <C>           <C>

Net revenue                               $   --           NM*%      $     29     $   --           NM*%      $    169
Income from discontinued operations,
   net of tax .                           $   --           NM*%      $     47     $   --           NM*%      $     88

      *  percentage change not meaningful
</TABLE>

Our revenue from discontinued operations for the first and second quarters of
fiscal 2004 consisted of revenue from our discontinued infrared hardware
business, for which we adopted a formal exit plan in the first quarter of fiscal
2003. Although our infrared hardware business was discontinued in the first
quarter of fiscal 2003, we continued to see revenue throughout fiscal 2003 as
customers continued to place last-time orders and we saw revenue in the first
and second quarters of fiscal 2004 as we shipped final orders.

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

NET CASH USED BY OPERATING ACTIVITIES

                                             SIX MONTHS ENDED DECEMBER 31,
                                            ------------------------------
                                                2004              2003
                                            ------------      ------------
Net cash (used) by operating activities     $     (1,534)     $     (1,531)

                                       28
<PAGE>

Net cash used by operating activities in the first six months of fiscal 2005 was
primarily the result of our net income plus the adjustments to net income for
non-cash expenses offset by cash invested in accounts receivable of $2.9
million. Included in net income were non-cash charges for depreciation and
amortization of $404 thousand, which declined from the prior year primarily as a
result of assets becoming fully depreciated without replacement purchases. Also
included were $439 thousand of non-cash charges for stock compensation related
to the amortization of restricted stock grants and grants of stock options with
exercise prices below the then current fair market value.

Net cash used by operating activities in the first six months of fiscal 2004 was
primarily the result of our net loss of $977 million. Included in the net loss
was a non-cash gain on the sale of land of $998 thousand. Other non-cash charges
included depreciation and amortization of $845 thousand and non-cash charges for
stock compensation of $667 thousand related to the termination of employees
including the former Chief Executive Officer and Chief Financial Officer. In
addition to these non-cash charges, accounts payable and accrued expenses
increased by $678 thousand.

Accounts receivable, net of allowances, increased from $6.8 million at June 30,
2004 to $9.8 million at December 31, 2004. The increase in accounts receivable
was a result of the higher level of sales we experienced in the second quarter
of fiscal 2005 combined with an increase in our days sales outstanding. Our days
sales outstanding for the quarter ended December 31, 2004 was approximately 89
days, compared to 80 days for the quarter ended June 30, 2004. The increase in
days sales outstanding has been the result of a combination of factors,
including sales to our Asian customers that have historically been slower
paying, sales to European customers where payment times are longer, and sales
for a significant OEM transaction that is not past due but remains in trade
accounts receivable. We expect our days sales outstanding to return to more
historical levels because we do not believe the events that increased the days
sales outstanding this quarter will be a recurring pattern in future quarters.
We expect that our accounts receivable will increase in the remaining quarters
of fiscal 2005 as a result of an expected increase in net revenue. Accounts
receivable may also increase in the future if net revenue from international
customers becomes a higher percentage of our net revenue.

NET CASH USED BY INVESTING ACTIVITIES

                                             SIX MONTHS ENDED DECEMBER 31,
                                            ------------------------------
                                                2004              2003
                                            ------------      ------------
Net cash provided (used) by
   investing activities                     $       (589)     $      1,345

Net cash used by investing activities in the first six months of fiscal 2005 was
related to expenditures for software and other expenses related to a project to
upgrade our accounting and transactional infrastructure. We plan to incur
aggregate capital expenditures of approximately $200 thousand during the
remainder of fiscal 2005, primarily for tenant improvements, software, system
improvements and personal computers.

Net cash provided by investing activities in the first six months of fiscal 2004
was primarily the result of the proceeds from the sale of land adjacent to our
Boise headquarters building. Offsetting this somewhat was cash used for tenant
improvements we were required to make to the subleased portion of the unused
space at our headquarters building pursuant to the sublease agreements.

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES

                                             SIX MONTHS ENDED DECEMBER 31,
                                            ------------------------------
                                                2004              2003
                                            ------------      ------------
Net cash provided (used) by
   financing activities                     $       (128)     $      5,462

Net cash used for financing activities in the first six months of fiscal 2005
was primarily the result of $228 thousand of payments made on term debt and
capital leases assumed as part of our acquisition of ViaFone in 2002. This use
of cash was partially offset by $100 thousand of proceeds from the issuance of
common stock under our stock option plans.

Net cash provided from financing activities in the first six months of fiscal
2004 was generated primarily from the cash received in the sale-and-leaseback of
our headquarters facility. On September 26, 2003, we closed the
sale-and-leaseback transaction and received proceeds of $4.8 million, netting
$4.6 million after deducting transaction costs. As part of the agreement, we
entered into a 10-year master lease for the building with annual payments equal
to approximately $442 thousand.

On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank and renewed and restructured this agreement effective as of August
31, 2004. Under this agreement we can access up to $2.5 million of financing in
the form of a demand line of credit. Our borrowing capacity is limited to 80% of
eligible accounts receivable balances and is collateralized by certain of our
assets. Interest on any borrowings will be paid at prime. The line of credit
agreement requires us to maintain certain financial ratios and expires in August
2006. We are in compliance with all financial covenants. There is no outstanding
balance on this facility at December 31, 2004.

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.

                                       29
<PAGE>

We believe that our existing working capital, our borrowing capacity and the
funds we expect to generate from our operations 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 revenue 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. If we were required to obtain
additional financing to fund future operations, sources of capital may not be
available on terms favorable to us, if at all.

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 adaptive mobility product
offerings. We currently have no commitments or agreements regarding any material
transaction of this kind. At some point in the future we may require additional
funds for either operating or strategic purposes and may seek to raise
additional funds. These sources of liquidity could include raising funds through
public or private debt financing, borrowing against our line of credit or
offering additional equity securities. If additional funds are raised through
the issuance of equity securities, substantial 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.

OFF-BALANCE SHEET ARRANGEMENTS
------------------------------

As part of our on-going business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities ("SPEs"), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited proposes. As of December 31, 2004, we were not involved in any
unconsolidated SPE transactions.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS
---------------------------------------

We currently lease office space at our locations in Boise, Idaho; Herrenberg,
Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol, England;
San Diego, California; American Fork, Utah; and `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $168 thousand
and $179 thousand for the three months ended December 31, 2004 and 2003,
respectively. For the six months ended December 31, 2004 and 2003, operating
lease expense was $303 thousand and $406 thousand, respectively.

On September 26, 2003, we closed a transaction with Hopkins Financial Services
for the sale-and-leaseback of our headquarters building and land in Boise,
Idaho. Because we have a 10-year option to repurchase the building and land at a
price of $5.1 million and we sublet more than a small portion of the building
space, the sale-and-leaseback was recorded as a financing transaction and is
shown as $4.8 million of long-term debt on our balance sheet at December 31,
2004. As part of the agreement, we entered into a 10-year master lease for the
building with annual lease payments equal to 9.2% of the sale price, or
approximately $442 thousand. We are also obligated to pay all expenses
associated with the building during our lease, including the costs of property
taxes, insurance, operating expenses and repairs.

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 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. At December 31, 2004, the loan balance was $108 thousand.

Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations as of December 31, 2004 are as
follows:

<TABLE><CAPTION>
                                                                        YEAR ENDING JUNE 30,
                                          -------------------------------------------------------------------------
                                            2005         2006         2007         2008         2009      THEREAFTER     TOTAL
                                          --------     --------     --------     --------     --------     --------     --------
<S>                                       <C>          <C>          <C>          <C>          <C>          <C>          <C>
SVB debt principal (1)                    $    108     $   --       $   --       $   --       $   --       $   --       $    108
SVB debt interest                                1         --           --           --           --           --              1
Monthly payments pursuant to building
      sale-and-leaseback                       221          442          442          442          442        1,875        3,864
Capital leases (1)                              14           11            6         --           --           --             31
Operating leases                               316          442          319          258          256           64        1,655
Post-retirement benefits (1)                    17           17           17           17           17           68          153
                                          --------     --------     --------     --------     --------     --------     --------
                                          $    677     $    912     $    784     $    717     $    715     $  2,007     $  5,812
                                          ========     ========     ========     ========     ========     ========     ========
</TABLE>

(1) These amounts are reported on the balance sheet as liabilities.


                                       30
<PAGE>

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES

We derive a significant 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.

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. Although 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", and, as such, the contracts are recorded in the
consolidated balance sheet at fair value. We report a net currency gain or loss
based on changes in the fair value of forward contracts combined with changes in
fair value of the underlying asset or liability being managed. 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 no
forward contracts in place as of December 31, 2004. As of December 31, 2003, we
had forward contracts with a nominal value of $8.5 million in place against the
euro, Canadian dollar and British pound sterling, which matured within 30 days.
We recognized net currency exchange losses of approximately $130 thousand and
$213 thousand for the three and six months ended December 31, 2004 and a net
currency exchange loss of approximately $30 thousand and a gain of approximately
$29 thousand for the three and six months ended December 31, 2003.

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

WE HAVE A RECENT HISTORY OF OPERATING PROFITS, BUT A PRIOR HISTORY OF OPERATING
LOSSES. DECLINES IN OUR QUARTERLY REVENUE OR OTHER FACTORS COULD RETURN THE
COMPANY TO REPORTING OPERATING LOSSES IN FISCAL 2005.

For the past few quarters, we have reported income from operations; however, for
the period from the third quarter of our fiscal year ended June 30, 1999 through
our third quarter of fiscal 2004, we have reported operating losses. These
losses have been the result of devoting significant financial resources to
defense of a patent infringement suit, restructuring costs, and research and
development and marketing and sales cost for our adaptive mobility software
products. We intend to continue to devote significant financial resources to
product development and to marketing and sales activities. Our ability to
maintain income from operations and our ability to reach 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 enterprise, application developer and original
     equipment manufacturer customers;
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    delays in our development and introduction of new products and services;
o    changes in our pricing policies as a result of increased competition;
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 customers that are application developers and original equipment
     manufacturers;
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 professional services and licensing revenue, which
     may result in fluctuations in our gross margin.

WE ARE ADVANCING OUR ENTERPRISE MOBILITY SOLUTIONS PRODUCT LINE, WHICH CURRENTLY
DERIVES ITS REVENUE PRIMARILY FROM PERSONAL INFORMATION MANAGEMENT AND E-MAIL
APPLICATIONS, BY INCREASING THE EMPHASIS ON MOBILE APPLICATIONS, INCLUDING LINE
OF BUSINESS APPLICATIONS FOR FIELD SERVICE, SALES FORCE AUTOMATION AND OTHER
CUSTOM APPLICATIONS. IF WE ARE UNABLE TO COMPLETE THIS PROGRESSION, OUR
OPERATING RESULTS COULD BE HARMED.

   o    CHANGES IN OUR PARTNERING AND GO-TO-MARKET STRATEGY. To effectively
        compete in mobile line of business applications we need to partner with
        independent software vendors and system integrators that have knowledge
        of the specific industries

                                       31
<PAGE>

        and workflows for the targeted vertical applications. One of our core
        capabilities is our knowledge of how mobile access to corporate
        information can impact and improve the productivity of mobile workers.
        To achieve a successful partnering arrangement we must attract the
        business interests of these prospective partners and coordinate the
        efforts of our marketing, sales and professional services organizations.
        These tasks are complicated and involve many people and processes. If we
        fail to attract these partners or effectively coordinate these efforts
        we will not be able to broaden the acceptance of our mobile middleware
        platform into other applications and would remain dependent on revenue
        from PIM and e-mail applications, which we believe could be subject to
        price erosion in the marketplace.

   o    CHANGES IN THE MAKE-UP OF OUR EXECUTIVE TEAM. We believe we have taken
        steps to strengthen our management team and have added people with the
        skills and experience to lead the Company through the progression
        described above. Several members of our executive team, including our
        Chief Executive Officer, our Chief Financial Officer, our Vice President
        of Research and Development, Vice President of Human Resources and Vice
        President of EMEA have joined the company within the past twenty-four
        months. Additionally, several members of the management team have
        resigned, including the Vice President of North American Sales, Vice
        President of Marketing and the former Vice President of Research and
        Development. As a result, the executive team has a relatively short
        history of working together, and we cannot be certain whether they will
        be able to manage the transition of the Company. If they are unable to
        work together effectively or do not execute the business plan
        efficiently, our business will suffer.

   o    CHANGES IN THE SALES ORGANIZATION. We have many new sales
        representatives in our enterprise mobility solutions sales force that
        may take time to reach productivity. Late in fiscal 2003 and into fiscal
        2004 we began to reorganize our sales force and replace the previous
        sales team with people that have more tenure and experience selling to
        large enterprises. We also established a new focus on large strategic
        accounts, re-allocated territories and terminated a number of
        representatives. As a result of these changes many of our account
        representatives operated under new leadership, began working with new
        customers or were relatively new to our Company. We have a number of
        sales representatives that are working toward achieving acceptable
        productivity. If the new members of our sales team are unable to become
        fully productive in a reasonable time frame or we are unable to retain
        these new sales representatives, we may lose sales opportunities and
        market share, take longer to close anticipated sales and experience a
        shortfall in revenue.

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. We expect increasing price pressure for several of our
products, including our mobile PIM and e-mail applications and IrDA and
Bluetooth products as these technologies become more commodity oriented and less
differentiated in the marketplace. 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.

DEFECTS IN OUR SOFTWARE PRODUCTS, INCLUDING OUR UPGRADED ONEBRIDGE PRODUCTS,
COULD RESULT IN A LOSS OF REVENUE, DECREASED MARKET ACCEPTANCE, INJURY TO OUR
REPUTATION AND PRODUCT LIABILITY CLAIMS.

The software products we offer, particularly our enterprise mobility software,
are inherently complex. Significant technical challenges arise with our products
because our customers purchase and deploy our products across a wide variety of
mobile device hardware types and operating systems, operate over various carrier
networks and interface into a wide variety of enterprise scale applications and
data configurations. This risk increases when we release new products or make
significant enhancements to our existing products or where we have limited
experience with new or complex customer environments. We have not experienced
substantial, unresolved problems to date; however, customers have in the past
and may in the future experience delays and difficulties when deploying our
products into large, complex and variable environments. Product deployment
issues can arise from a customer's configuration of their load balancing,
clustering, authentication profiles or the data structures of their IBM Lotus
Domino or Microsoft Exchange Server systems and may require professional
services to resolve these issues. Despite quality control processes and testing
by our current and potential customers and us, we cannot be sure that errors
will not be found in current versions, new products or enhancements of our
products after commencement of commercial shipments.

We recently began shipping and customers have recently begun installing
OneBridge 4.2. In the course of the customer implementation activities that we
have been involved with to date, we have encountered what we believe to be
errors of the type generally associated with a release of major software
programs. However, there is no assurance that significant defects will not be
detected as customers deploy the product in larger volumes into even more
complex environments. Software errors, if significant, or market perception that
our software is not fully ready for production use - whether accurate or not -
could result in:

     o  failure to achieve market acceptance;
     o  loss of customers;
     o  loss or delay in revenue;
     o  loss of market share;
     o  diversion of development resources;

                                       32
<PAGE>

     o  damage to our reputation;
     o  increased service and warranty costs; and
     o  claims or litigation for breach of contract or warranty.

OUR INCREASING FOCUS ON ENTERPRISE CUSTOMERS MAY LENGTHEN OUR SALES CYCLES AND
INCREASE FLUCTUATIONS IN OUR FINANCIAL RESULTS.

As we have sought to license our software to large enterprises and increase the
average value of each sales transaction through our varied channel approach, we
have experienced sales cycles that can be substantially more lengthy and
uncertain than sales to smaller organizations of less complex product offerings.
As we focus on large mobile application solutions that involve essential
business applications, our enterprise customers generally require us to expend
substantial time, effort and money in establishing the relationship and
educating them about our solutions and how our solutions can provide benefits to
their business. Also, sales to enterprise customers generally require an
extensive sales effort throughout the customer's organization and often require
final approval by the customer's chief information officer or other senior
executive employee. These factors substantially extend the sales cycle and
increase the uncertainty of whether a sale will be made in any particular
quarter, or at all. We have experienced and expect to continue to experience
delays and uncertainty in our sales cycle as well as increased up-front expenses
in connection with our enterprise sales efforts. The timing of the execution of
the enterprise volume licenses or the length of the contract negotiation process
could cause our revenue and results of operations to vary significantly from
quarter to quarter.

WE MAY INCUR SUBSTANTIAL COSTS TO COMPLY WITH THE REQUIREMENTS OF THE
SARBANES-OXLEY ACT OF 2002.

The Sarbanes-Oxley Act of 2002 (the "Act") introduced new requirements
applicable to us regarding corporate governance and financial reporting. Among
many other requirements is the requirement under Section 404 of the Act for
management to report on our internal controls over financial reporting and for
our registered public accountant to attest to this report. We expect to dedicate
significant time and resources during fiscal 2005 to ensure compliance. There is
no assurance that we will be successful in our efforts to comply with Section
404 of the Act. Failure to do so could result in penalties and additional
expenditures to meet the requirements, which could affect the ability of our
auditors to issue an unqualified report.

OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO PREDICT. THE
TIMING OF LARGE ORDERS IS MORE UNPREDICTABLE. OUR EXPENSES ARE RELATIVELY FIXED
IN THE SHORT-TERM AND UNPREDICTABLE REVENUE SHORTFALLS COULD DISPROPORTIONATELY
AND ADVERSELY AFFECT OPERATING RESULTS.

Our quarterly operating results have fluctuated in the past and may continue to
do so in the future. As we increase our focus on sales to large enterprises and
increase our sales through independent software vendors, the lack of
predictability of our sales cycle will increase. The time required to close
orders remains difficult to accurately predict as a result of the overall
economic conditions, cautious capital spending by businesses and the
complexities of selling to large enterprises. In contrast, our expense levels
are relatively fixed in the near term and based, in part, on our revenue
expectations. If revenue is 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 on a rapid basis.

OUR STOCK PRICE IS VOLATILE. 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 stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of our future revenue, earnings and cash
flows from operations. If our operating results fall below the expectations of
securities analysts, prospective investors or current stockholders, 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 or create a negative change in our perceived long-term growth
prospects, which could result in a decline in the price of our stock.

Other factors that may have a significant impact on the market price of our
common stock include:

     o  announcements of acquisitions by us or our competitors;
     o  changes in our management team;
     o  our ability to obtain financing when needed;
     o  sales of significant numbers of shares within a short period of time;
     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 or our customers.

                                       33
<PAGE>

CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE EFFECTIVELY.

Consolidation continues to occur among companies that compete in our markets as
firms seek to offer more extensive suites of mobility software products and to
take advantage of efficiencies and economies of scale. In fiscal 2004 our
competitors completed acquisitions including, but not limited to, the following
examples: Intellisync Corporation acquired Synchrologic, Sybase, Inc. acquired
XcelleNet, Inc., Broadcom Corporation acquired Widcomm, Inc. and Infowave
Software Inc. acquired Telispark Inc. Changes resulting from these and other
consolidations may harm our competitive position. In addition, as the trend
toward consolidation continues, we may encounter increased competition for
attractive acquisition targets and may have to pay higher prices for those
businesses or technologies we seek to acquire.

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

Our future success will depend on our ability to attract and retain experienced,
qualified employees, particularly highly skilled software engineers, effective
enterprise sales representatives and management personnel. Our plans include
adding a number of new employees, most significantly in our research and
development group. Competition for qualified personnel in the computer software
industry is growing as the software industry rebounds from the technology
downturn experienced in the past several years. We are not certain that our
efforts to retain our key employees will succeed or that we will be successful
in recruiting new qualified employees. If we lose the services of one or more
key employees, or if one or more of them decide to join a competitor or
otherwise compete directly or indirectly with us, our business could be harmed.
Searching for replacements for our key employees could divert management's time
and result in increased operating expenses that may not be offset by either
improved productivity or higher prices. New employees generally require
substantial training, which may require significant resources and management
attention.

OUR BUSINESS RELIES ON ENTERPRISES IMPLEMENTING MOBILE APPLICATIONS AND DEVICES.
THE MARKET FOR THESE PRODUCTS IS DEVELOPING AND MAY BE HARMED IF CUSTOMERS ARE
SLOW, OR DO NOT ADOPT OUR PRODUCTS OR BY DECLINES IN OVERALL INFORMATION
TECHNOLOGY SPENDING.

The enterprise mobile application market is still developing and enterprises are
exploring the benefits of mobilizing corporate information including their
essential applications. Mobile contacts, calendar and e-mail are becoming more
generally accepted mobile applications, however, our customers and potential
customers have not traditionally mobilized their other enterprise applications.
Because this is a relatively new market, we cannot be certain that this market
will develop and grow. We expect that we will continue to need to pursue
intensive marketing and selling efforts to educate prospective customers about
the benefits to their operations through use of our products. This could cause
our sales and marketing expenses to increase without a corresponding increase in
revenue.

The market for our products also depends on the broader economic climate and
spending on information technology, including mobile applications and devices.
The global economic downturn and the slower growth in the geographies
experiencing economic recovery 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. A general
weakening of the global economy and weakening of business conditions,
particularly in the information technology, telecommunications, financial
services and manufacturing industry sectors, could result in potential customers
experiencing declines in their revenue and operations. In such an environment,
customers may experience financial difficulty or cease operations.

Although we believe we have adequately factored the current economic conditions
into our revenue forecasts, if the global economy experiences another downturn,
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 could decline, which would harm our
operating results. If there is another global economic downturn, we also may be
forced to reduce our operating expenses, which could result in our incurring
additional charges in connection with restructuring or other cost-cutting
measures we may implement. For example, in both fiscal 2003 and fiscal 2004, we
announced restructuring plans to replace or reduce personnel, reduce costs, and
improve operating efficiencies and, as a result, incurred restructuring costs,
primarily for severance payments to terminated employees.

WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE AGAINST CURRENT AND POTENTIAL
COMPETITORS.

Our markets are increasingly competitive and our competitors are some of the
largest software providers in the world. As the markets for adaptive mobility
products grow, we expect competition from both existing and new competitors to
intensify. We compete with:

o    mobile solutions companies, including CommonTime, Good Technology, IBM,
     iAnywhere (a Sybase company), Infowave, JP Mobile, Microsoft, Intellisync,
     RIM, SEVEN, and Visto;
o    mobile application companies, including Dexterra, Everypath, iAnywhere,
     IBM, Infowave, Microsoft, Oracle, SAP, TCS, and Wavelink;
o    client/server database providers, including Borland, Microsoft, Oracle and
     Pervasive Software;

                                       34
<PAGE>

o    mobile device solutions companies, including IVT Corporation, Agilent,
     EMBEDnet, CSR, Broadcom, Stonestreet One, Link Evolution and Open Interface
     North America; and
o    internal research and development departments of original equipment
     manufacturers, many of whom are our current customers.

To date, our solutions have been differentiated from our competitors based on
total cost of ownership, interoperability, performance and reliability. We may
not be able to maintain our competitive position against current and potential
competition, particularly competitors that have longer operating histories and
significantly greater financial, technical, marketing, sales and other resources
than we do and therefore may be able to respond more quickly than us to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged to gain market share to our
detriment. These competitors may be able to undertake more extensive promotions
activities, adopt more aggressive pricing policies, and offer more attractive
terms to purchasers than we can. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their products. Additionally, if existing or new
competitors were to merge or form strategic alliances, our market share may be
reduced or pressure may be put on us to reduce prices resulting in reduced
revenue and margins. These and other competitive factors could result in price
reductions, reduced revenue and gross margins and lost market share and an
inability to expand into new markets and industries, any one of which could
materially affect our results of operations.

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 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

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 our existing working capital, our borrowing capacity and the funds we
expect to generate from our operations 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 revenue 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 raising funds through public or private debt financing, borrowing
against our line of credit or offering additional equity securities. If
additional funds are raised through the issuance of equity securities,
substantial 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 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.

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.

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

As of December 31, 2004, the amount of goodwill and other identifiable
intangibles recorded on our books, net of accumulated amortization, was $13
million. We ceased amortizing goodwill upon our adoption of SFAS No. 142 as of
the beginning of fiscal 2003, and we expect to amortize approximately $459
thousand of net identifiable intangibles in the remainder of fiscal 2005 and
fiscal 2006 through 2009. 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. Any impairment
and resulting write-off could have a negative impact on our results of
operations in the period goodwill or other identifiable intangibles are written
off.

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.

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 often resort to litigation over intellectual
property rights and there has been a substantial amount of litigation in the
software industry regarding intellectual property rights. During fiscal 2004 we
settled an intellectual property dispute that required a significant amount of
Company resources. It is possible in the future that third parties may claim
that our current or potential future products infringe on their intellectual
property. 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.

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.

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

In the second quarter of fiscal 2005, based on the region where the customer
resides, approximately 66% of our revenue was generated from international
sales. We expect that international sales will continue to represent a
significant portion of our revenue for the foreseeable future. International
sales are subject to a number of risks, including:

o    changes in regulatory requirements and resulting costs;
o    export license requirements;
o    export restrictions, tariffs, taxes and other trade barriers;
o    potentially reduced or less certain protection for intellectual property
     rights than is available under the laws of the United States;
o    longer collection and payment cycles than those in the United States;
o    difficulty in staffing and managing international operations;
o    restrictive labor laws in the European Union that restrict working hours
     and constrain our ability to react quickly in certain situations; and

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<PAGE>

o    political and economic instability, including the threat or occurrence of
     military and terrorist actions and enhanced national security measures.

One or more of these risks could harm our future overseas research operations
and international sales and support. If we are unable to manage these risks of
doing business internationally, our results could suffer.

OUR BUSINESS MAY BE HARMED IF OUR PROFESSIONAL SERVICES ORGANIZATION DOES NOT
GENERATE AN ACCEPTABLE PROFIT LEVEL, INCURS COSTS IN EXCESS OF AMOUNTS BILLABLE
TO CUSTOMERS OR IF OUR PROFESSIONAL SERVICES REVENUE INCREASES AS A PERCENTAGE
OF TOTAL REVENUE.

Our professional services business is subject to a variety of risks including:

o    we may be unable to accurately predict staffing requirements and therefore
     the expense of fulfilling our service contracts may be greater than we
     anticipate;
o    we may have an inappropriate level of resources dedicated to the
     professional services business in relation to the number of projects we are
     able to sell, resulting in a low utilization rate of resources;
o    we may enter into professional services engagements that are complex and
     for which it is difficult to estimate resource requirements and costs due
     to the nature and scope of the engagement and the need to integrate our
     work product with the products of other contractors retained by our
     customers; and
o    we have and may in the future enter into contractual arrangements with our
     professional services customers that subject us to damages and other
     liabilities if our work product does not conform to the agreed
     specifications.

If we are unable to operate the professional services organization effectively,
the profitability of this business could decline, or even result in a loss,
which could harm our business. In addition, we may enter into professional
services projects that charge customers a fixed fee for a defined deliverable.
We have at times in the past underestimated and may in the future underestimate
the amount of time or resources required to complete this work and receive
customer acceptance. If we do not correctly estimate the amount of time or
resources required for a large project or a significant number of projects, our
gross margins could decline, adversely affecting our operating results.

We realize lower margins on our professional services revenue than on license
revenue. As a result, if professional services revenue increases as a percentage
of total revenue our gross margins may decline and our operating results may be
adversely affected.

WHEN WE ARE REQUIRED TO ACCOUNT FOR EMPLOYEE STOCK OPTION AND EMPLOYEE STOCK
PURCHASE PLANS USING A FAIR-VALUE METHOD, OUR NET INCOME AND EARNINGS PER SHARE
COULD BE REDUCED SIGNIFICANTLY.

The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment". SFAS No. 123(R)
requires companies to measure all stock-based compensation awards using a
fair-value method and record such expense in their consolidated financial
statements. SFAS No. 123(R) is effective beginning the first quarter of our
fiscal year 2006. We are currently assessing the impact of SFAS No. 123(R) on
our stock-based compensation programs; however, we expect to have significant
accounting charges that will reduce our net income and earnings per share. For
example, in the first half of fiscal 2005, had we accounted for stock-based
compensation plans using the fair-value method prescribed in SFAS No. 123(R), we
would have recorded an additional operating expense of approximately $1.4
million. See Note 3 of "Notes to Condensed Consolidated Financial Statements"
for a more detailed presentation of accounting for stock-based compensation
plans. When we are required to treat all stock-based compensation as an expense,
we may change both our cash and stock-based compensation practices.

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 encryption technology that we include in our OneBridge
Mobile Groupware 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.


SOME ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND RIGHTS PLAN, AS WELL AS PROVISIONS OF DELAWARE LAW, COULD IMPAIR A
TAKEOVER ATTEMPT.


We have provisions in our certificate of incorporation and bylaws that could
have the effect of rendering more difficult or discouraging an acquisition
deemed undesirable by our Board of Directors. These include provisions:

o    dividing our board of directors into three classes, each serving a
     staggered three-year term;
o    authorizing blank check preferred stock, which could be issued with voting,
     liquidation, dividend and other rights superior to our common stock;

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<PAGE>

o    granting dividend and other rights superior to our common stock;
o    limiting the liability of, and providing indemnification to, directors and
     officers;
o    requiring advance notice of stockholder proposals for business to be
     conducted at meetings of stockholders and for nominations of candidates for
     election to our Board of Directors;
o    specifying that stockholders may take action only at a duly called annual
     or special meeting of shareholders.

These provisions, alone or together, could deter or delay hostile takeovers,
proxy contests and changes in control or management of Extended Systems. As a
Delaware corporation, we also are subject to provisions of Delaware law,
including Section 203 of the Delaware General Corporation Law, which prevents
some stockholders from engaging in certain business combinations without
approval of the holders of substantially all of our outstanding common stock.

In June 2003, pursuant to a Preferred Stock Rights Agreement, our Board of
Directors issued certain Preferred Share Purchase Rights. The Rights were not
intended to prevent a takeover of Extended Systems. However, the Rights may have
the effect of rendering more difficult or discouraging an acquisition of
Extended Systems deemed undesirable by our Board of Directors. The Rights would
cause substantial dilution to a person or group that attempted to acquire
Extended Systems on terms or in a manner not approved by our Board of Directors,
except pursuant to an offer conditioned upon redemption of the Rights.

Any provision of our certificate of incorporation or bylaws or Delaware law that
has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of common
stock and also could affect the price that some investors are willing to pay for
our common stock.

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    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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sales made by our international subsidiaries are generally denominated in the
foreign country's currency. Fluctuations in exchange rates between the U.S.
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. We report a net currency gain or loss based on changes in the fair value
of forward contracts combined with changes in fair value of the underlying asset
or liability being managed. 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 no forward contracts in place as of December 31,
2004. As of December 31, 2003, we had forward contracts with a nominal value of
approximately $8.5 million, which matured within 30 days, in place against the
Canadian dollar, euro and British pound sterling. We recognized net currency
exchange losses of approximately $130 thousand and $213 thousand for the three
and six months ended December 31, 2004 and a net currency exchange loss of
approximately $30 thousand and a gain of approximately $29 thousand for the
three and six months ended December 31, 2003.


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ITEM 4.  CONTROLS AND PROCEDURES

We maintain "disclosure controls and procedures" as defined in Rules 13a -15(e)
and 15d -15(e) of the Securities Exchange Act of 1934 ("Disclosure Controls and
Procedures"). Our Disclosure Controls and Procedures are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Our Disclosure Controls and Procedures are also designed
to ensure that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. It
should be noted, however, that controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

Based on an evaluation of the Company's Disclosure Controls and Procedures
performed by our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, as of the end of the period covered by this
Quarterly Report on Form 10-Q, these officers have concluded that the Disclosure
Controls and Procedures are effective.

There has been no change in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On December 2, 2004, Extended Systems of Idaho, Incorporated ("ESI"), a wholly
owned subsidiary of the Company, filed a complaint in the United States District
Court for the District of Idaho against Agilent Technologies Singapore Pte.,
Ltd. ("Agilent") for failure to pay royalties due under a license agreement and
for contributing to infringement of ESI's registered copyrights in ESI's IrDA
software. Subsequently, based on factual representations from Agilent concerning
the alleged conduct of Samsung Electronics Co., Ltd. ("Samsung"), on February 3,
2005, ESI filed an Amended Complaint joining Samsung, Samsung Electronics
America, Inc. and Samsung Telecommunication America, L.P. (collectively, the
"Samsung Defendants") on copyright infringement claims alleging, based on
Agilent's representations, that the Samsung Defendants have infringed certain of
ESI's registered copyrights in IrDA software by knowingly copying the software
into Samsung phones with non-royalty bearing Agilent transceivers and importing
and selling those cell phones in the United States without the permission of
ESI.

The claims in the lawsuit relate to a business arrangement entered into by ESI
with Agilent and Samsung in 2002 whereby Agilent agreed to sell certain
royalty-bearing transceivers to Samsung for use by Samsung with ESI software in
Samsung cell phones. Agilent would pay ESI royalties based on Samsung's use of
the ESI software with royalty-bearing Agilent transceivers and Samsung was
licensed to use ESI Software only with Agilent royalty-bearing transceivers. ESI
alleges that Samsung knowingly has been using ESI software with non-royalty
bearing Agilent transceivers outside the scope of its license from ESI and that
Agilent has aided and abetted Samsung's conduct and has failed and refused to
pay royalties to ESI for Samsung's use of ESI software with Agilent
transceivers.

ESI seeks payments in accordance with the agreed contractual royalty rates for
all uncompensated use of its software by Samsung and is seeking a full
accounting from Agilent and Samsung as to the number of Agilent transceivers
shipped to Samsung that were compatible with ESI software and as to the number
of Samsung cell phones in which ESI software has been copied.

ESI has also filed a motion for preliminary injunction asking the Court to
restrain Agilent from shipping transceivers to Samsung for use with ESI software
without payment of agreed royalties and to restrain Samsung from selling or
importing in the United States any cell phones incorporating unauthorized copies
of ESI software.

None of the defendants have yet appeared in the action and a time has not been
set for a hearing on ESI's motion for preliminary injunction. ESI is seeking a
hearing in March.




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<PAGE>

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

At our 2004 Annual Meeting of Stockholders, which was held on December 9, 2004,
there were 15,097,542 shares of common stock entitled to vote at the meeting and
a total of 13,326,788 shares were represented at the meeting. The following
proposals were submitted to a vote of the stockholders:

(a)       The following nominee for Class II Director was elected. He will serve
          for a two-year term that expires upon the 2006 Annual Meeting of
          Stockholders or until his successor is elected and qualified.

                Name of Nominee            Votes For          Votes Against
            ----------------------     ----------------   --------------------

            Klaus-Dieter Laidig           12,961,613             365,175

(b)       The following nominees for Class III Director were elected. The Class
          III Directors will serve for a three-year term that expires upon the
          2007 Annual Meeting of Stockholders or until their successors are
          elected and qualified.

                Name of Nominee            Votes For          Votes Against
            ----------------------     ----------------   --------------------

            Archie Clemins                12,705,041             621,747
            Raymond Smelek                12,855,945             470,843

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

          o    4,057,007 votes in favor;
          o    1,109,934 votes against; and
          o    59,740 abstentions.

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

          o    4,084,734 votes in favor;
          o    1,080,915 votes against; and
          o    61,032 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    4,049,580 votes in favor;
          o    1,118,596 votes against; and
          o    58,505 abstentions.

Following the election of the Class II and Class III directors described above,
our Board of Directors consists of the following members: (1) Raymond A. Smelek,
(2) James R. Bean, (3) Archie Clemins, (4) Robert J. Frankenberg, (5) Ralph B.
Godfrey, (6) Klaus-Dieter Laidig and (7) Jody B. Olson.


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<PAGE>

ITEM 6.    EXHIBITS

          EXHIBIT NUMBER     DESCRIPTION
          --------------     -----------

               3.1       Restated Certificate of Incorporation. (1)

               3.2       Restated Bylaws. (2)

              10.57      Separation Agreement between the Company and Kerrin
                         Pease.*

               31        Certification of Executive Officers pursuant to Section
                         302 of the Sarbanes-Oxley Act of 2002. *

               32        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. *

(1)       Incorporated by reference from the Registrant's Registration Statement
          on Form S-1 (File No. 333-42709) filed with the Securities and
          Exchange Commission on March 4, 1998.

(2)       Incorporated by reference from our Quarterly Report on Form 10-Q filed
          with the Securities and Exchange Commission on May 14, 1998.

*         Filed herewith.























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                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Boise, Idaho, on February 14, 2005.

                           EXTENDED SYSTEMS INCORPORATED

                           By:                /s/ CHARLES W. JEPSON
                                     -------------------------------------------
                                                CHARLES W. JEPSON
                                      PRESIDENT AND CHIEF EXECUTIVE OFFICER


































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