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

                                  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 SEPTEMBER 30, 2001

                                       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 office) (Zip Code)

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

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

The number of shares outstanding of the registrant's Common Stock as of
September 30, 2001 was 10,972,764.

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

                          EXTENDED SYSTEMS INCORPORATED
                                    FORM 10-Q

                  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001

                                      INDEX



PART I.  FINANCIAL INFORMATION                                              PAGE
                                                                            ----
         Item 1. Financial Statements

                 Consolidated Statements of Operations
                 for the Three Months Ended September 30, 2001 and 2000       1

                 Consolidated Statements of Comprehensive Loss
                 for the Three Months Ended September 30, 2001 and 2000       1

                 Consolidated Balance Sheets
                 as of September 30, 2001 and June 30, 2001                   2

                 Consolidated Condensed Statements of Cash Flows
                 for the Three Months Ended September 30, 2001 and 2000       3

                 Notes to Consolidated Financial Statements                   4

         Item 2. Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                          7


         Item 3. Quantitative and Qualitative Disclosures about Market Risk  21


PART II.  OTHER INFORMATION

         Item 6. Exhibits and Reports on Form 8-K                            21


SIGNATURE                                                                    22
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE><CAPTION>
                                                                        THREE MONTHS ENDED
                                                                           SEPTEMBER 30,
                                                                   ---------------------------
                                                                     2001               2000
                                                                   --------           --------
<S>                                                                <C>                <C>
Net revenue .............................................          $  5,735           $  8,723
Cost of net revenue .....................................             1,193              3,770
                                                                   --------           --------
        Gross profit ....................................             4,542              4,953
Operating expenses:
    Research and development ............................             2,694              2,831
    Marketing and sales .................................             3,502              4,052
    General and administrative ..........................               967              1,295
    Amortization of intangibles .........................               243                243
                                                                   --------           --------
        Loss from operations ............................            (2,864)            (3,468)
Other income, net .......................................               (66)              (119)
                                                                   --------           --------
        Loss before income taxes ........................            (2,798)            (3,349)
Income tax provision (benefit) ..........................                19             (1,243)
                                                                   --------           --------
        Loss from continuing operations .................            (2,817)            (2,106)
Income from discontinued operations, net of tax .........              --                  526
                                                                   --------           --------
        Net loss ........................................          $ (2,817)          $ (1,580)
                                                                   ========           ========

Loss per share from continuing operations:
    Basic and diluted ...................................          $  (0.26)          $  (0.20)

Loss per share:
    Basic and diluted ...................................          $  (0.26)          $  (0.15)

Number of shares used in per share calculation:
    Basic and diluted ...................................            10,973             10,360
</TABLE>

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
<TABLE><CAPTION>
                                                                       THREE MONTHS ENDED
                                                                          SEPTEMBER 30,
                                                                   -------------------------
                                                                     2001              2000
                                                                   -------           -------
<S>                                                                <C>               <C>
 Net loss ...............................................          $(2,817)          $(1,580)
 Change in currency translation .........................               40              (113)
                                                                   -------           -------


     Comprehensive loss .................................          $(2,777)          $(1,693)
                                                                   =======           =======
</TABLE>

    The accompanying notes are an integral part of the financial statements

                                       1
<PAGE>


EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)

<TABLE><CAPTION>
                                                                         SEPTEMBER 30,        JUNE 30,
                                                                             2001               2001
                                                                           --------           --------
                                                                         (UNAUDITED)
<S>                                                                        <C>                <C>
ASSETS
Current:
    Cash and cash equivalents ...................................          $  5,284           $  6,585
    Receivables, net ............................................             6,511              8,490
    Inventories .................................................               405                441
    Prepaids and other ..........................................               642                996
                                                                           --------           --------
        Total current assets ....................................            12,842             16,512
Property and equipment, net .....................................             6,691              7,002
Intangibles, net ................................................             4,228              4,629
                                                                           --------           --------
        Total assets ............................................          $ 23,761           $ 28,143
                                                                           ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
    Accounts payable ............................................          $  2,219           $  3,371
    Accrued expenses ............................................             3,705              4,492
    Deferred revenue ............................................             1,612              1,342
                                                                           --------           --------
        Total current liabilities ...............................             7,536              9,205
                                                                           --------           --------

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; 10,973 and 10,971 shares issued
     and outstanding ............................................                11                 11
    Additional paid-in capital ..................................            32,712             32,648
    Accumulated deficit .........................................           (15,751)           (12,934)
    Accumulated other comprehensive loss ........................              (747)              (787)
                                                                           --------           --------
        Total stockholders' equity ..............................            16,225             18,938
                                                                           --------           --------
        Total liabilities and stockholders' equity ..............          $ 23,761           $ 28,143
                                                                           ========           ========
</TABLE>

    The accompanying notes are an integral part of the financial statements

                                       2
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE><CAPTION>
                                                                              THREE MONTHS ENDED
                                                                                 SEPTEMBER 30,
                                                                           -------------------------
                                                                            2001              2000
                                                                           -------           -------
<S>                                                                        <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss ....................................................          $(2,817)          $(1,580)
    Adjustments to reconcile net loss to net cash
        used by operating activities:
        Provision for bad debts .................................                8                46
        Provision for write-down of inventory ...................                3               210
        Depreciation and amortization ...........................              755               767
        Tax benefit from employee stock options .................             --                 771
        Deferred income taxes ...................................             --              (1,702)
        Other ...................................................               21                41
        Changes in assets and liabilities, net of
           effect of acquisitions:
           Receivables ..........................................            1,999            (1,351)
           Inventories ..........................................               35               480
           Prepaids and other assets ............................              355                (1)
           Deferred revenue .....................................              270               244
           Accounts payable and accrued expenses ................           (1,951)              759
                                                                           -------           -------
               Net cash used by operating activities ............           (1,322)           (1,316)
                                                                           -------           -------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment ..........................              (36)             (202)
    Other investing activities ..................................               39                21
                                                                           -------           -------
               Net cash provided by (used by)
                investing activities ............................                3              (181)
                                                                           -------           -------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of common stock ..................                8               802
    Payments on long-term debt ..................................             --                 (67)
                                                                           -------           -------
               Net cash provided by financing activities ........                8               735
    Effect of exchange rate changes on cash .....................               10               (40)
                                                                           -------           -------
    Net decrease in cash and cash equivalents ...................           (1,301)             (802)
CASH AND CASH EQUIVALENTS:
    Beginning of period .........................................            6,585             6,191
                                                                           -------           -------
    End of period ...............................................          $ 5,284           $ 5,389
                                                                           =======           =======
</TABLE>
    The accompanying notes are an integral part of the financial statements

                                       3
<PAGE>

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Extended Systems provides mobile information management products, including both
mobile data management and universal mobile connectivity products, that extend
enterprise applications to mobile and wireless environments.

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

As a result of the disposition of our printing solutions business in our fourth
quarter of fiscal 2001, we have reclassified our consolidated statements of
operations and other related disclosures for all periods presented to present
the results of the printing solutions segment as discontinued operations. We
have made other reclassifications to the consolidated financial statements to
conform the presentations.

The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Notes thereto included in our 2001
Annual Report on Form 10-K.

CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency except for our Singapore subsidiary, which uses the
United States dollar as its 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 reflect gains and losses from this
translation process as a component of comprehensive income or loss. We translate
revenue and expenses into United States dollars using the average exchange rate
for the period.

From time to time, we enter into foreign currency forward contracts, typically
against the British Pound and the Euro to manage fluctuations in the value of
foreign currencies on transactions with our international subsidiaries, thereby
limiting our risk that would otherwise result from changes in currency exchange
rates. While these instruments are subject to fluctuations in value, these
fluctuations are generally offset by fluctuations in the value of the underlying
asset or liability being managed. We had $2.0 million and $2.8 million in
forward contracts in place, which approximated fair value, against the Euro and
British pound sterling at September 30 and June 30, 2001, respectively, which
matured within 30 days. We recognized net currency exchange losses of $33,000
and $64,000 in the three months ended September 30, 2001 and 2000, respectively.

EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted-average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted-average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued the potential dilutive common shares. We exclude from the
diluted earnings or loss per share computations stock options and potential
shares for convertible debt to the extent that their effect would have been
antidilutive. Our diluted earnings or loss per share computations exclude 2.7
million and 2.3 million stock options as of September 30, 2001 and 2000,
respectively, because to include such shares would have been antidilutive.

RECENTLY ISSUED ACCOUNTING STANDARDS. In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," which addresses how intangible assets
that are acquired individually or with a group of other assets, other than those
acquired in a business combination, should be accounted for in financial
statements upon their acquisition. This statement also addresses how goodwill
and other intangible assets should be accounted for after they have been
initially recognized in the financial statements. We are currently evaluating
the impact that this statement may have on our operations. We are required to
adopt this statement in our first quarter of fiscal 2003 ending September 30,
2002.

                                       4
<PAGE>

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets," which supersedes various existing standards on accounting
for long-lived assets. This new standard establishes a single accounting model
for long-lived assets to be disposed of by sale and is based on the framework of
Statement of Financial Accounting Standard No. 121. We are required to adopt
this statement in our first quarter of fiscal 2003 ending September 30, 2002.

                                               AS OF              AS OF
                                            SEPTEMBER 30,        JUNE 30,
                                                2001               2001
                                              --------           --------
RECEIVABLES
-----------
Accounts receivable ......................    $  7,247           $  8,835
Other receivables ........................          36                442
Allowance for doubtful accounts ..........        (772)              (787)
                                              --------           --------
                                              $  6,511           $  8,490
                                              ========           ========
INVENTORIES
-----------
Purchased parts ..........................    $    168           $     93
Work in process ..........................          32                 48
Finished goods ...........................         205                300
                                              --------           --------
                                              $    405           $    441
                                              ========           ========
PROPERTY AND EQUIPMENT
----------------------
Land and land improvements ...............    $    897           $    897
Buildings ................................       5,891              5,891
Computer equipment .......................       5,649              5,621
Furniture and fixtures ...................       2,333              2,259
                                              --------           --------
                                                14,770             14,668
Less accumulated depreciation ............      (8,079)            (7,666)
                                              --------           --------
                                              $  6,691           $  7,002
                                              ========           ========
INTANGIBLE ASSETS
-----------------
Goodwill .................................    $  4,415           $  4,415
Purchased technology .....................       3,128              3,128
Other intangibles ........................         447                447
                                              --------           --------
                                                 7,990              7,990
Less accumulated amortization ............      (3,762)            (3,361)
                                              --------           --------
                                              $  4,228           $  4,629
                                              ========           ========
ACCRUED EXPENSES
----------------
Accrued payroll and related benefits .....    $  1,948           $  2,600
Accrued warranty and support costs .......         317                317
Other ....................................       1,440              1,575
                                              --------           --------
                                              $  3,705           $  4,492
                                              ========           ========

DISCONTINUED OPERATIONS
-----------------------
We entered into an Asset Purchase Agreement, dated May 30, 2001, pursuant to
which we agreed to sell various assets, including all assets primarily used in
our printing solutions segment, to Troy Group, Inc for an aggregate purchase
price of $1.6 million, net of expenses. In accordance with the Asset Purchase
Agreement, on May 31, 2001, we transferred to Troy certain inventory, equipment,
patents, trademarks and other intellectual property rights, customer and
supplier lists and rights

                                       5
<PAGE>

under certain contracts that existed as of the close of business on May 30,
2001. Troy also assumed certain of our contractual and warranty obligations and
purchase commitments.

As a result of this disposition in our fourth quarter of fiscal 2001, our
printing solutions segment was accounted for as discontinued operations in
accordance with Accounting Principles Bulletin No. 30. Amounts in the financial
statements and related notes for all prior periods shown have been reclassified
to reflect the discontinued operations. Operating results for the discontinued
operations are reported, net of tax, under "Income from discontinued operations"
on the accompanying Statements of Operations.

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000:

 Net revenue..................................................        $3,506
 Gross profit.................................................         1,554
 Income tax provision.........................................           314
 Income from discontinued operations, net of taxes............           526
 Earnings per share from discontinued operations:
    Basic and diluted.........................................          0.05

INCOME TAXES
------------
As of September 30, 2001, we had a valuation allowance of $20.8 million to
reduce our deferred tax assets to estimated realizable value. The valuation
allowance primarily relates to net operating loss carryforwards resulting from
tax benefits from employee stock transactions and from our operating losses,
deferred tax assets arising from our acquisition of Advance Systems and foreign
tax credit carryforwards.

BUSINESS SEGMENTS
-----------------
We determine our reportable segments by evaluating our management and internal
reporting structure based primarily on the nature of the products offered to
customers and type or class of customers. At September 30, 2001, we had only one
operating segment.

MAJOR CUSTOMERS
---------------
No customers accounted for more than 10% of our net revenue from continuing
operations in the three months ended September 30, 2001. Sales to a distributor
accounted for 20% of net revenue from continuing operations in the three months
ended September 30, 2000.

                                        6
<PAGE>

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

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

o           future profitability;
o           levels of software product sales;
o           levels of international sales;
o           levels of original equipment manufacturer sales;
o           anticipated gross margin;
o           staffing and expense levels;
o           levels of accounts receivable;
o           levels of capital expenditures;
o           renewal or replacement of our credit facility;
o           anticipated cash funding needs; and
o           future acquisitions.

We assume no obligation to update any forward-looking statements. Our actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that may cause a difference include, but are not limited to,
those discussed in this section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock." You should carefully review the risk factors
described in other documents that we file from time to time with the Securities
and Exchange Commission, including our 2001 Annual Report on Form 10-K and other
Quarterly Reports on Form 10-Q that we will file in fiscal 2002.

All period references are to our first fiscal quarters ended September 30, 2001
and 2000 and our fiscal year ended June 30, 2002 and 2001, unless otherwise
indicated. Tabular amounts are in thousands, except percentages.

OVERVIEW
--------
We classify our product offerings into one operating segment, our mobile
information management segment, which includes both mobile data management and
universal mobile connectivity products that extend enterprise applications to
mobile and wireless environments. The products in our mobile information
management segment include data synchronization and management software,
wireless connectivity products and client/server database management systems
with remote access capabilities. Until April 2001, we also marketed and sold
enterprise Internet appliances.

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

o           software license fees;
o           royalties;
o           sales of hardware products;
o           support and maintenance fees; and
o           non-recurring development fees that we generate when we adapt
            products to customers' specifications.

                                       7
<PAGE>

Our future results of operations will be highly dependent upon the success of
our software products, specifically our XTNDConnect data synchronization and
management software and our XTNDAccess and XTNDConnect infrared and Bluetooth
wireless connectivity software. We expect these products to continue to generate
a majority of our net revenue.

We derive a majority of our net revenue from sales to customers outside of the
United States, principally from our international sales subsidiaries, original
equipment manufacturers and from a limited number of distributors.

Based on the region in which the customer resides, net revenue from continuing
operations is as follows:

<TABLE><CAPTION>
                                                                 FOR THE THREE MONTHS ENDED
                                                                       SEPTEMBER 30,
                                                                ---------------------------
                                                                  2001               2000
                                                                --------           --------
<S>                                                              <C>               <C>
Domestic .............................................                44%                38%
International:
   Europe ............................................                39                 30
   Asia ..............................................                14                 30
    Other regions ....................................                 3                  2
                                                                --------           --------
       Total international ...........................                56                 62
                                                                --------           --------
          Net revenue from continuing operations .....               100%               100%
                                                                ========           ========
</TABLE>

In the first quarter of fiscal 2001, ended September 30, 2000, sales to CF
Company, an international distributor of our mobile information management
products and the account manager for a number of our Asian original equipment
manufacturer customers, accounted for 20% of our net revenue from continuing
operations and consisted primarily of sales of our infrared hardware products.

We expect that international sales will continue to represent a substantial
portion of our net revenue in the foreseeable future and will comprise between
55% and 65% of our net revenue throughout fiscal 2002.

Revenue from sales of our hardware products to original equipment manufacturers
has been declining and we expect it will continue to decline in future quarters.
Demand in the original equipment manufacturer market is difficult to predict and
is dependent upon the timing of original equipment manufacturer projects and the
effectiveness of their marketing efforts.

We market and sell most of our products through multiple indirect channels,
primarily distributors and resellers. We support our indirect channels with our
own marketing and sales organization. We provide some of our distributors and
resellers with price protection rights, which have not had a material impact on
our results of operations.

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

<TABLE><CAPTION>
                                                         THREE MONTHS ENDED SEPTEMBER 30,
                                                 --------------------------------------------------
                                                  2001             % CHANGE                   2000
                                                 ------             ------                   ------
<S>                                              <C>                 <C>                     <C>
Net revenue..................................    $5,735               (34)%                  $8,723
</TABLE>

The decrease in net revenue in the first quarter of fiscal 2002 from the same
period in fiscal 2001 was due primarily to an expected decrease in unit sales
and average selling price of our mobile information management hardware
products, primarily our infrared products sold to original equipment
manufacturers and our Internet products. The decrease in net revenue was also
the result of a decrease in the number of Bluetooth and infrared software
licenses sold. These decreases were partially offset by an increase in the
number of XTNDConnect Server software licenses sold.

                                       8
<PAGE>

Throughout fiscal 2001, we consolidated three of our offices in the US and
Europe and, as a result, reduced operating expenses and reduced our workforce by
approximately 40 employees. During our first quarter of fiscal 2002 ended
September 30, 2001, we also completed the restructuring plan that we announced
in our fourth quarter of fiscal 2001 to further reduce costs and improve
operating efficiencies. This restructuring included the termination of
approximately 40 employees in research and development, marketing and sales,
administration and manufacturing. The effect of these and other cost-saving
measures are reflected in our cost of goods sold and our operating expenses for
our first quarter of fiscal 2002 as compared to the same period last year.

<TABLE><CAPTION>
                                                         THREE MONTHS ENDED SEPTEMBER 30,
                                                 --------------------------------------------------
                                                  2001             % CHANGE                   2000
                                                 ------             ------                   ------
<S>                                              <C>                <C>                      <C>
Gross profit.................................    $4,542                 (8)%                 $4,953
Gross margin.................................        79%                                         57%
</TABLE>

Our cost of net revenue consists primarily of component and direct and indirect
labor and overhead costs of our hardware products, costs associated with
post-sales support, amortization of purchased technology, royalties for the use
of third-party software and facility costs. The increase in gross margin in the
first quarter of fiscal 2002 from the same period in fiscal 2001 was the result
of an increase in net revenue from sales of software products sold, which have
higher gross margins than our hardware products. Our higher margin mobile
information management software products represented 85% of our net revenue from
continuing operations in the first quarter of fiscal 2001 compared to 57% in the
same quarter last year. The increase was also due, to a much lessor extent, to
the cost reductions implemented throughout fiscal 2001 and in our first quarter
of fiscal 2002, as described above.

We expect that increased sales of our mobile information management software
products will continue to have a positive impact on our gross margin and we
expect our gross margin to be in the range of 80% to 85% throughout fiscal 2002.

<TABLE><CAPTION>
                                                         THREE MONTHS ENDED SEPTEMBER 30,
                                                 --------------------------------------------------
                                                  2001             % CHANGE                   2000
                                                 ------             ------                   ------
<S>                                              <C>                <C>                      <C>
Research and development.....................    $2,694                 (5)%                 $2,831
    as a % of net revenue....................        47%                                         32%
</TABLE>

Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, consulting costs,
facility costs and travel expenses. The decrease in research and development
expenses in the first quarter of fiscal 2002 from the same period last year was
primarily the result of a reduction in personnel subsequent to our
restructuring. At September 30, 2001, we had 104 full-time equivalent research
and development personnel and contractors, an 18% decrease from the 127
full-time equivalent personnel at the same time last year.

We expect research and development expenses to increase slightly through the
remainder of fiscal 2002, but decrease as a percentage of net revenue.

<TABLE><CAPTION>
                                                         THREE MONTHS ENDED SEPTEMBER 30,
                                                 --------------------------------------------------
                                                  2001             % CHANGE                   2000
                                                 ------             ------                   ------
<S>                                              <C>                <C>                      <C>
Marketing and sales..........................    $3,502                (14)%                 $4,052
    as a % of net revenue....................        61%                                         46%
</TABLE>

Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing and sales personnel, promotional expenses
and pre-sales support costs. The decrease in marketing and sales expenses for
the first quarter of fiscal 2002 from the same period last year was primarily
due to a reduction in personnel expenses and other promotional expenses
subsequent to our restructuring.

We expect marketing and sales expenses to continue to increase throughout fiscal
2002 as our revenue increases, but decrease as a percentage of net revenue.

                                       9
<PAGE>

<TABLE><CAPTION>
                                                         THREE MONTHS ENDED SEPTEMBER 30,
                                                 --------------------------------------------------
                                                  2001             % CHANGE                   2000
                                                 ------             ------                   ------
<S>                                              <C>                <C>                      <C>
General and administrative...................      $967                (25)%                 $1,295
    as a % of net revenue....................        17%                                         15%
</TABLE>

General and administrative expenses generally consist of salaries and other
personnel costs of our finance, management information systems, human resources
and other administrative employees and professional service expenses. The
decrease in general and administrative expenses in the first quarter of fiscal
2002 from the same period last year was primarily attributable to a decrease in
personnel expenses subsequent to our restructuring and a decrease in premiums
for our directors and officers insurance, as a result of a decrease in the
coverage limit for our directors and officers insurance.

We expect general and administrative expenses to continue to increase in the
future as our operations expand, but decrease as a percentage of net revenue.

<TABLE><CAPTION>
                                                         THREE MONTHS ENDED SEPTEMBER 30,
                                                 --------------------------------------------------
                                                  2001             % CHANGE                   2000
                                                 ------             ------                   ------
<S>                                              <C>                <C>                      <C>
Income tax provision (benefit)...............       $19                102%                 $(1,243)
    as a % of (loss) before taxes............        (1)%                                        37%
</TABLE>

The change in income taxes for the first quarter of fiscal 2002 from the same
period last year was attributable to a valuation allowance recorded in the first
quarter of fiscal 2002 against our income tax benefit that resulted in income
tax expense for the current quarter.

As of September 30, 2001, we had recorded a full valuation allowance of $20.8
million against our deferred tax assets. In assessing our ability to realize
deferred income tax assets, we consider whether it is more likely than not that
some or all of the deferred tax assets will be realized. The ultimate
realization of the deferred tax assets is dependent on whether we generate
taxable income during periods in which the temporary differences reverse and net
operating loss and tax credit carryforwards expire.

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

On May 31, 2001, we sold our printing solutions segment, which included our
network print server and non-network printer sharing products, to Troy Group,
Inc. for $1.6 million in cash, net of expenses. Pursuant to the terms of the
Asset Purchase Agreement between the parties, on May 31, 2001, we transferred to
Troy certain inventory, equipment, patents, trademarks and other intellectual
property rights, customer and supplier lists and rights under certain contracts
that existed as of the close of business on May 30, 2001. Troy also assumed from
us certain contractual and warranty obligations and purchase commitments.
Subsequent to the sale of our printing solutions segment, Troy hired
approximately 40 of our employees.

As a result of this disposition in our fourth quarter of fiscal 2001, our
printing solutions segment has been accounted for as discontinued operations in
accordance with Accounting Principles Bulletin No. 30. Amounts in this Quarterly
Report on Form 10-Q for our printing solutions segment, including the financial
statements and related notes, have been reclassified in the prior year to
reflect the discontinued operations.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
----------------------------------------------------
<TABLE><CAPTION>
                                                            THREE MONTHS ENDED SEPTEMBER 30,
                                                         --------------------------------------
                                                          2001                           2000
                                                         -------                        -------
<S>                                                      <C>                            <C>
Net cash used by operating activities..........          $(1,322)                       $(1,316)
</TABLE>

Net cash used by operating activities in the first quarter of fiscal 2002 was
primarily the result of our net loss, adjusted for such non-cash items as
depreciation and amortization, and the result of a decrease in accounts payable
and accrued expenses. These cash uses were partially offset by a decrease in
receivables.


                                       10
<PAGE>

Net cash used by operating activities in the first quarter of fiscal 2001 was
primarily the result of our net loss, adjusted for such non-cash items as
depreciation and amortization, and the result of an increase in receivables.
These cash uses were partially offset by an increase in accounts payable and
accrued expenses and a decrease in inventories.

Accounts receivable, net of our allowance for bad debts, was $6.5 million at
September 30, 2001 and $8.0 million at June 30, 2001. We expect that accounts
receivable may increase in the future if our net revenue increases and if net
revenue from original equipment manufacturers and international customers
becomes a higher percentage of our net revenue, as such customers generally have
longer payment cycles.

<TABLE><CAPTION>
                                                                                THREE MONTHS ENDED SEPTEMBER 30,
                                                                             --------------------------------------
                                                                              2001                           2000
                                                                             -------                        -------
<S>                                                                          <C>                            <C>
Net cash provided by (used by) investing activities..................        $     3                        $  (181)
</TABLE>

Net cash used by investing activities in the first quarter of fiscal 2001
consisted primarily of purchases of property and equipment. As part of our
effort to control cash and expenses, we did not make significant purchases of
property and equipment in our first quarter of fiscal 2002.

We currently plan to incur aggregate capital expenditures of approximately
$500,000 during fiscal 2002, primarily for software, system improvements and
personal computers.

<TABLE><CAPTION>
                                                                                     THREE MONTHS ENDED SEPTEMBER 30,
                                                                                  --------------------------------------
                                                                                   2001                           2000
                                                                                  -------                        -------
<S>                                                                               <C>                            <C>
Net cash provided by financing activities............................             $     8                        $   735
</TABLE>


Net cash provided by financing activities in the first quarter of fiscal 2002
and fiscal 2001 consisted primarily of proceeds from the issuance of common
stock under our stock plans.

We have extended our revolving line of credit with KeyBank through January 15,
2002 while we finalize negotiations and documentation for a longer-term
facility. The KeyBank extension is for $5.0 million with interest paid on
borrowings at the lender's prime rate. There were no borrowings under this line
at September 30, 2001. The line of credit agreement has restrictive covenants
that require us to maintain certain financial ratios. We expect to finalize
negotiations and documentation on our new credit facility prior to January 15,
2002.

We believe that our existing working capital and borrowing capacity, coupled
with the funds we expect to generate from our operations, will be sufficient to
fund our anticipated working capital and capital expenditure requirements
through fiscal 2002. In the longer term, we may require additional sources of
liquidity to fund future growth. These sources of liquidity may include
additional equity offerings, which could result in dilution to our stockholders,
or additional debt financing.

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

                                       11
<PAGE>

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES
------------------------------------------
We derive a substantial portion of our net revenue from international sales,
principally through our international subsidiaries and through a limited number
of original equipment manufacturers and independent distributors. Sales made by
our international subsidiaries, excluding our Singapore subsidiary, are
generally denominated in foreign currency. Fluctuations in exchange rates could
cause our results to fluctuate when we translate revenue and expenses
denominated in other currencies into United States dollars. Fluctuations in
exchange rates also may make our products more expensive to original equipment
manufacturers and independent distributors who purchase our products in United
States dollars.

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

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the British Pound and the Euro, to manage fluctuations in the value of
foreign currencies on transactions with our international subsidiaries. While
these instruments are subject to fluctuations in value, these fluctuations are
generally offset by fluctuations in the value of the underlying asset or
liability being managed, resulting in minimal net exposure for us. 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. We had $2.0 million and $2.8
million in forward contracts in place, which approximated fair value, against
the Euro and British pound sterling at September 30 and June 30, 2001,
respectively, which matured within 30 days. We recognized net currency exchange
losses of $33,000 and $64,000 in our first quarters of fiscal 2002 and fiscal
2001, respectively.

RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
which addresses how intangible assets that are acquired individually or with a
group of other assets, other than those acquired in a business combination,
should be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. We are currently evaluating the impact that this statement may have
on our operations. We are required to adopt this statement in our first quarter
of fiscal 2003 ending September 30, 2002.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets," which supersedes various existing standards on accounting
for long-lived assets. This new standard establishes a single accounting model
for long-lived assets to be disposed of by sale and is based on the framework of
Statement of Financial Accounting Standard No. 121. We are required to adopt
this statement in our first quarter of fiscal 2003 ending September 30, 2002.

                                       12
<PAGE>

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

WE HAVE A RECENT HISTORY OF LOSSES AND ANTICIPATE CONTINUED LOSSES AND NEGATIVE
CASH FLOW THROUGH OUR FIRST THREE QUARTERS OF FISCAL 2002.

Since the third quarter of our fiscal 1999, we have devoted significant
financial resources to the research and development and marketing and sales for
our mobile information management software products and, as a result, we have
generated operating losses. We intend to continue to devote significant
financial resources on product development and sales and marketing and, as a
result, we expect to continue to incur operating losses and negative cash flow
from operations for the first three quarters of fiscal 2002. We do currently
believe that we will be profitable and will generate positive cash flow from
operations for the fourth quarter of fiscal 2002. Our ability to do so, and our
ability to maintain profitability in subsequent periods, will depend on a number
of factors, including:

o       our ability to generate sufficient revenue and otherwise control
        expenses;
o       changes in the buying patterns of corporate information technology
        or our original equipment manufacturer customers;
o       changes in customer demand for our products;
o       the market adoption rate of Bluetooth or other technologies on which
        a number of our products are based;
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 original equipment manufacturers;
o       the emergence of new technologies or industry standards;
o       the timing of customer orders, which can be influenced by fiscal
        year-end buying patterns, seasonal trends or general economic
        conditions; and
o       a shift in the mix of products sold, resulting in fluctuations in
        gross margin.

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

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

WE ARE EXPOSED TO RECENT UNFAVORABLE ECONOMIC CONDITIONS, WHICH HAS AND MAY
CONTINUE TO HARM OUR BUSINESS.

We have seen a rapid and increasingly severe downturn in the worldwide economy
in the past year and particularly since the terrorist attacks on the United
States on September 11, 2001. We expect this downturn to continue and are
uncertain as to the severity and duration of the downturn, principally because
of the uncertainly regarding the potential long-term impact of the terrorist
attacks and the resulting military actions against the terrorists. In the
future, fears of global recession, war and additional acts of terrorism in the
aftermath of the September 11, 2001 attacks may continue to impact global
economies. We believe that these conditions have led our current and potential
customers to reduce their spending on and use of our products, which has reduced
our revenue. While we believe we have adequately factored these conditions into
our current revenue forecasts, if these conditions worsen, demand for our
products and services may be further reduced as a result of enterprises reducing
information technology spending on our products and services. These economic
slowdowns may also adversely affect our customers' ability to pay for our
products and services and cause our revenues to fail to grow or decline, which
would harm our operating results. If the current economic slowdown persists or
worsens, we may be forced to reduce our operating

                                       13
<PAGE>

expenses, which could result in one-time charges incurred in connection with
restructuring or other cost-cutting measures we may take.

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

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

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, 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 potential relationships.

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

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

                                       14
<PAGE>

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, many of
whom have longer operating histories, greater name recognition, more employees
and significantly greater financial, technical, marketing, public relations and
distribution resources. Increased competition may result in price reductions,
reduced margins, loss of market share and a change in our business and marketing
strategies, any of which could harm our business. The competitive environment
may require us to make changes in our products, pricing, licensing, services or
marketing to maintain and extend the market acceptance of our products. Price
concessions or the emergence of other pricing or distribution strategies by our
competitors or us may diminish our net revenue.

We compete with:

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

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

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

The markets for our products are characterized by:

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

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

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

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

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

                                       15
<PAGE>

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

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     expansion into new markets and business areas;
o     the integration of acquired technologies with our existing products
      and technologies;
o     diversion of management's attention and other resources to the
      assimilation of the operations and personnel 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, personnel, research
      and development and marketing, sales and support operations; and
o     potential adverse short-term effects on our operating results.

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.

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

We derive a substantial portion of our net revenue from international sales. We
expect that international sales will continue to represent a substantial portion
of our net revenue for the foreseeable future. International sales are subject
to a number of risks, including:

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

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

We license technology on a non-exclusive basis from several companies for use
with our products and anticipate that we will continue to do so in the future.
For example, we license authentication and encryption technology from Certicom
Corporation, which we include in our XTNDConnect Server products. Our inability
to continue to license this technology, or to license other necessary technology
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.

                                       16
<PAGE>

IF ORIGINAL EQUIPMENT MANUFACTURERS REDUCE THEIR PURCHASES OF OUR HARDWARE
FASTER THAN ANTICIPATED, OUR OPERATING RESULTS COULD BE HARMED.

A portion of our net revenue in any quarter is typically derived from sales to
original equipment manufacturers. Revenue from hardware product sales to
original equipment manufacturers has been declining and we expect it will
continue to decline in future quarters. In the event that original equipment
manufacturers reduce their purchases of our hardware products faster than
anticipated, our operating results and future growth could be harmed. In
addition, any significant deferral of purchases of our products by original
equipment manufacturers could harm our quarterly operating results.

Sales to original equipment manufacturers frequently involve lengthy sales
cycles, typically nine to 12 months, and may be subject to a number of
significant risks over which we have little or no control, including:

o    competing products or technologies that original equipment manufacturers
     may incorporate into their systems or internally develop;
o    original equipment manufacturers' budgetary constraints and internal
     acceptance review procedures;
o    the timing of original equipment manufacturers' budget cycles;
o    the timing of original equipment manufacturers' competitive product
     evaluation processes; and
o    the effectiveness of original equipment manufacturers' marketing efforts
     for their own products.

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

The transactions made through our subsidiaries in 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 United States dollars.

From time to time, we enter into foreign currency forward contracts, typically
against the British Pound and the Euro, to manage currency fluctuations on
payments and receipts of foreign currencies on transactions with 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.

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

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

                                       17
<PAGE>

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 may 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.

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

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

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

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

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

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

                                       18
<PAGE>

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

Our success depends upon the continuing contributions of our key management,
engineering, sales and marketing and finance personnel and our ability to
attract and retain key personnel. We do not maintain any key-person life
insurance policies. The loss of key personnel could harm our business.

In our first quarter of fiscal 2002, we completed a restructuring plan and
reduced our workforce by approximately 40 employees. Despite this reduction in
workforce, we will continue to recruit personnel, particularly sales, with the
specific technical skills that are critical to our business.

WE FORECAST CERTAIN COMPONENT INVENTORY PURCHASES BASED ON FORECASTED SALES
VOLUME OF HARDWARE UNITS, WHICH ARE DIFFICULT TO PREDICT. IF WE FAIL TO
ACCURATELY PREDICT SALES VOLUME IN A PARTICULAR PERIOD, WE MAY BE UNABLE TO
ADJUST OUR COMPONENT INVENTORY PURCHASING IN THAT PERIOD AND OUR OPERATING
RESULTS COULD BE HARMED.

Our quarterly net revenue and operating results depend in part on the volume and
timing of orders for hardware products received within the quarter, which are
difficult to forecast. We typically operate with a relatively small order
backlog and significant component inventory purchases are fixed in advance,
based in large part on our forecast of future sales volume. In addition, a
significant portion of our net revenue results from the sale of products to a
number of original equipment manufacturers, which are difficult to predict. None
of our distributors or original equipment manufacturers are obligated to
purchase our products or certain component inventory that is used in the
manufacturing of our products except pursuant to current purchase orders or
purchase agreements.

If sales volume on our hardware products 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 component inventory purchasing to
compensate for the shortfall. Also, we may be required to record an increase in
our provision for write-down of inventory if certain component inventory that we
purchase in anticipation of a higher level of product sales cannot be returned
to vendors and the inventory cannot be used in the manufacture of our other
products.

IF OUR THIRD-PARTY MANUFACTURER FAILS TO PROVIDE US WITH QUALITY, COST-EFFECTIVE
HARDWARE PRODUCTS IN A TIMELY MANNER OR IN SUFFICIENT VOLUMES TO MEET CUSTOMER
DEMAND, OUR BUSINESS AND OPERATING RESULTS MAY BE HARMED.

We maintain a limited in-house manufacturing capability for performing materials
procurement, final assembly, testing, quality assurance and shipping. We rely
primarily on a third-party manufacturer to manufacture our hardware products.
Our reliance on third-party manufacturers involves a number of risks, including:

o     the potential inability to obtain an adequate supply of existing and new
      products and reduced control over delivery schedules;
o     product quality; and
o     product cost.

IF OUR THIRD-PARTY SUPPLIERS FAIL TO MAKE DELIVERIES THAT MEET OUR MANUFACTURING
SCHEDULES, OUR BUSINESS MAY BE HARMED.

We rely on third-party suppliers for components used in our products. Because
the manufacturing of our products can involve long lead times, in the event of
unanticipated increases in demand for our products, we could be unable to obtain
product components quickly enough to manufacture particular products in a
quantity sufficient to meet customer demand. As a result, our business may be
harmed. Some of the components used in our products, including particular
semiconductor components and infrared transmission components, are currently
available from a limited number of suppliers. From time to time, we have
experienced difficulty in obtaining components from suppliers due to increased
industry demand and a lack of available supply. Any inability to obtain adequate
deliveries, increased costs or other circumstances that would require us to seek
alternative suppliers could impair our ability to ship our products on a timely
basis. This could damage relationships with

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current and prospective customers and increase the manufacturing cost of our
products, either of which would harm our business.

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

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Substantially all of our liquid investments are at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. All of our liquid investments mature within 90 days or less of
September 30, 2001, therefore, we believe that the market risk arising from our
holdings of liquid investments is minimal.

Sales made by our international subsidiaries are generally denominated in the
foreign country's currency, with the exception of our Singapore subsidiary.
Fluctuations in exchange rates between the United States dollar and other
currencies could materially harm our business. From time to time, we enter into
foreign currency forward contracts, typically against the British Pound and the
Euro, to manage fluctuations in the value of foreign currencies on transactions
with our international subsidiaries, thereby limiting our risk that would
otherwise result from changes in exchange rates. While these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed,
resulting in minimal net exposure for us. The success of these hedging
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, we could experience
unanticipated currency gains or losses. We had $2.0 million and $2.8 million in
forward contracts in place at September 30 and June 30, 2001, respectively,
which matured within 30 days and which approximated fair value

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                           PART II. OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(b)  REPORTS ON FORM 8-K

We filed no reports on Form 8-K in our quarter ended September 30, 2001.

ITEMS 1, 2, 3, 4, 5 AND 6(A) OF PART II ARE NOT APPLICABLE AND HAVE BEEN
OMITTED.




























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                                    SIGNATURE

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


                                Extended Systems Incorporated



                                By: /s/ Karla K. Rosa
                                    --------------------------------------------
                                    Karla K. Rosa
                                    Vice President, Finance
                                    Chief Financial Officer

                                    (Principal Financial and Accounting Officer
                                    and Duly Authorized Officer)


























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