<PAGE>

--------------------------------------------------------------------------------
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                                  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, 1999

                                       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, 1999 was 9,228,065.

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


                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

                  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999

                                      INDEX
<TABLE>
<CAPTION>

PART I.  FINANCIAL INFORMATION                                                                       PAGE
                                                                                                     ----
<S>      <C>                                                                                         <C>
         Item 1.  Financial Statements

                  Consolidated Statement of Operations
                  for the Three Months Ended September 30, 1999 and 1998                               1

                  Consolidated Statement of Comprehensive Income (Loss)
                  for the Three Months Ended September 30, 1999 and 1998                               1

                  Consolidated Balance Sheet
                  as of September 30, 1999 and June 30, 1999                                           2

                  Consolidated Condensed Statement of Cash Flows
                  for the Three Months Ended September 30, 1999 and 1998                               3

                  Notes to Consolidated Financial Statements                                           4

         Item 2.  Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                                            9

         Item 3.  Quantitative and Qualitative Disclosures about Market Risk                          24


PART II.  OTHER INFORMATION

         Item 1.  Legal Proceedings                                                                   24

         Item 6.  Exhibits and Reports on Form 8-K                                                    24

SIGNATURE                                                                                             25
</TABLE>


<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                        ------------------------
                                                                            1999          1998
                                                                        -----------   ----------
<S>                                                                     <C>           <C>
Net revenue                                                              $   13,089   $   13,543
Cost of net revenue                                                           6,978        5,817
                                                                        -----------   -----------
Gross profit                                                                  6,111        7,726

Operating expenses:
   Research and development                                                   2,237        1,537
   Acquired in-process research and development                               2,365            -
   Marketing and sales                                                        4,164        3,603
   General and administrative                                                 1,055        1,048
   Amortization of goodwill and other intangibles                               170            -
                                                                        -----------   ----------
      Income (loss) from operations                                          (3,880)       1,538

Other income (expense), net                                                     (79)         266
Interest expense                                                               (178)        (188)
                                                                        -----------   ----------
Income (loss) before income taxes                                            (4,137)       1,616
Income tax provision (benefit)                                               (1,076)         566
                                                                        -----------   ----------
      Net income (loss)                                                 $    (3,061)  $    1,050
                                                                        ===========   ==========

Earnings (loss) per share:
      Basic                                                             $     (0.34)  $     0.13
      Diluted                                                           $     (0.34)  $     0.12
Number of shares used in earnings (loss) per share calculation:
      Basic                                                                   8,995        8,250
      Diluted                                                                 8,995        8,423
</TABLE>


CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
                                                                           THREE MONTHS ENDED
                                                                              SEPTEMBER 30,
                                                                        ------------------------
                                                                            1999          1998
                                                                        -----------   ----------
<S>                                                                      <C>          <C>
Net income (loss)                                                       $    (3,061)  $    1,050
Change in currency translation                                                    -         (366)
                                                                        -----------   ----------
Comprehensive income (loss)                                             $    (3,061)  $    1,416
                                                                        ===========   ==========
</TABLE>


The accompanying notes are an integral part of the financial statements

                                       1
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                            SEPTEMBER 30,               JUNE 30,
                                                               1999                       1999
                                                          ---------------           ---------------
<S>                                                       <C>                       <C>
ASSETS
Current:
    Cash and cash equivalents                             $         2,304           $         9,668
    Short-term investments                                              -                     3,001
    Accounts receivable, net                                        9,423                     9,778
    Income taxes receivable                                           932                       664
    Other receivables                                               1,062                     1,147
    Inventories:
      Purchased parts                                               1,994                     2,060
      Work in process                                                 340                       860
      Finished goods                                                2,088                     2,097
    Prepaids and other                                                951                       945
    Deferred income taxes                                             416                       584
                                                          ---------------           ---------------
      Total current assets                                         19,510                    30,804

Property and equipment, net                                         8,132                     8,300
Intangibles, net                                                    7,462                     1,402
Deferred income taxes                                                 602                         -
Other assets                                                          350                       293
                                                          ---------------           ---------------
      Total assets                                        $        36,056           $        40,799
                                                          ===============           ===============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
    Accounts payable and accrued expenses                 $         4,891           $         4,609
    Accrued payroll and related benefits                            1,614                     1,297
    Current portion of long-term debt                               2,957                     8,206
                                                          ---------------           ---------------
      Total current liabilities                                     9,462                    14,112

Long-term debt                                                          -                        67
Deferred income taxes                                                   -                        25
                                                          ---------------           ---------------
      Total liabilities                                             9,462                    14,204
                                                          ===============           ===============

Shareholders' equity:
    Common stock                                                        9                         9
    Additional paid-in capital                                     15,007                    12,015
    Retained earnings                                              12,465                    15,525
    Deferred compensation                                            (486)                     (553)
    Accumulated other comprehensive loss                             (401)                     (401)
                                                          ---------------           ---------------
      Total shareholders' equity                                   26,594                    26,595
                                                          ---------------           ---------------
      Total liabilities and shareholders' equity          $        36,056           $        40,799
                                                          ===============           ===============
</TABLE>

The accompanying notes are an integral part of the financial statements


                                       2
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                            ---------------------------------
                                                                1999                 1998
                                                            -------------       -------------
<S>                                                         <C>                 <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES            $         799       $         (87)
                                                            -------------       -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition:
       Oval (1415) Limited, net of cash acquired                   (5,286)                  -
    Purchase of property and equipment                               (188)               (341)
    Maturities of available-for-sale securities                     3,001                   -
    Purchase of available-for-sale securities                           -              (1,750)
    Issuance of notes receivable                                        -                (279)
    Other investing activities                                        (38)                 48
                                                            -------------       -------------
             Net cash used by investing activities                 (2,511)             (2,322)
                                                            -------------       -------------

CASH FLOWS FROM FINANCING ACTIVITIES:

    Payments on long-term debt                                     (8,227)                (77)
    Net borrowings under line of credit agreement                   2,575                   -
    Purchase of treasury stock                                          -                 (43)
    Other financing activities                                          -                  63
                                                            -------------       -------------
             Net cash used by financing activities                 (5,652)                (57)

    Effect of exchange rate changes on cash                             -                  90
                                                            -------------       -------------
    Net decrease in cash and cash equivalents                      (7,364)             (2,376)

CASH AND CASH EQUIVALENTS:
    Beginning of period                                             9,668              15,006
                                                            -------------       -------------
    End of period                                           $       2,304       $      12,630
                                                            =============       =============


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
    Issuance of Common Stock in acquisition                 $       2,993       $           -
</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 Incorporated has two primary operating segments. The Mobile
Information Management segment includes both universal mobile connectivity and
mobile data management products that enable mobile users to access, synchronize,
collect, and retrieve information on demand. The Printing Solutions segment
provides printer connectivity solutions in network and non-network computer
environments.

BASIS OF PRESENTATION. The unaudited consolidated financial statements
include Extended Systems Incorporated and its subsidiaries (the "Company").
All significant intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting solely of normal
recurring adjustments) necessary to present fairly the consolidated financial
position of the Company, and their consolidated results of operations and
cash flows. Certain reclassifications have been made to the prior year
consolidated financial statements to conform to the fiscal 2000
presentation. Tabular amounts are in thousands, except per share amounts.

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 the
Company's 1999 Annual Report on Form 10-K.

CURRENCY TRANSLATION. The Company's international subsidiaries use their local
currency as their functional currency with the exception of Parallax Research,
Pte., which uses the U.S. dollar as its functional currency. The Company
translates the assets and liabilities of international subsidiaries into U.S.
dollars using exchange rates in effect at the balance sheet date. Gains and
losses from this translation process are reflected as a component of
comprehensive income or loss. Revenue and expenses are translated into U.S.
dollars using the average exchange rate for the period. The Company recognized
net currency exchange losses of $138,000 and $68,000 for the three months ended
September 30, 1999 and 1998, respectively, primarily as a result of intercompany
transactions.

USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the reporting
periods. Actual results could differ from those estimates.

INVENTORIES are valued at the lower of cost (principally standard cost, which
approximates actual cost on a first-in, first-out basis) or market.

REVENUE on hardware products is recognized when products are shipped to
customers, including when products are shipped to distributors and resellers,
net of an allowance for estimated product returns.

Revenue earned under software license agreements is recognized when there is
persuasive evidence of a contract, software has been delivered to the customer
and accepted, payment is due within 12 months, collectibility is probable and
there are no significant obligations remaining. The Company defers revenue for
material post contract customer support and extended technical support, which is
amortized over the support period, generally 12 months.


                                       4


<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

EARNINGS (LOSS) PER SHARE. Diluted earnings or loss per share computations
exclude stock options and potential shares for convertible debt to the extent
that their effect would have been antidilutive.

<TABLE>
<CAPTION>
                                                            BASIC               NET EFFECT             DILUTED
                                                        EARNINGS (LOSS)         OF DILUTIVE         EARNINGS (LOSS)
                                                          PER SHARE                STOCK               PER SHARE
                                                        ---------------       ---------------       ---------------
<S>                                                      <C>                    <C>                 <C>
For the three months ending September 30, 1999:
    Net loss                                               $   (3,061)               -                   $   (3,061)
    Shares                                                      8,995                -                        8,995
       Loss per share                                      $    (0.34)                                   $    (0.34)

For the three months ending September 30, 1998:
    Net income                                             $    1,050                -                   $    1,050
    Shares                                                      8,250               173                       8,423
       Earnings per share                                  $     0.13                                    $     0.12
</TABLE>

BUSINESS COMBINATIONS. In August 1999, the Company acquired of all of the
outstanding stock of Oval (1415) Limited ("Oval") for $5.5 million in cash,
including acquisition expenses, and 625,000 shares of the Company's Common Stock
valued at $3.0 million. This transaction was accounted for by the purchase
method of accounting in accordance with Accounting Principles Board Opinion No.
16, "Business Combinations" ("APB 16"), and, accordingly, the results of
operations of both companies have been included in the consolidated statement of
operations since the acquisition dates.

Oval, based in Bristol, England, is the parent company of Advance Systems
Limited ("ASL") and Zebedee Software Limited ("Zebedee"). ASL is a developer of
server-based synchronization software for portable computing devices and
high-end cellular phones that allows the update and exchange of data with
enterprise applications such as Microsoft Exchange, Lotus Notes and ODBC-based
corporate databases. Zebedee is a software consulting company. Substantially all
of the net assets owned by, and operations of, the Oval consolidated group are
attributable to ASL, therefore, the Company will refer to ASL herein when
referring to net assets acquired in the acquisition.

A summary of the net assets acquired at the date of the acquisition, as
determined in accordance with APB 16, is as follows:

<TABLE>
<S>                                                        <C>
Net working capital                                         $        112
Property and equipment                                                45
Developed technology, goodwill and other intangibles               5,971
Acquired in-process research and development                       2,365
                                                           -------------
                                                           $       8,493
                                                           =============
</TABLE>

The following unaudited pro forma consolidated results of operations assume the
Oval acquisition occurred at the beginning of each period.

<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                                      SEPTEMBER 30,
                                                            ---------------------------------
                                                                1999                 1998
                                                            -------------       -------------
<S>                                                         <C>                 <C>
Net revenue                                                 $      13,317       $      13,816
Net income (loss)                                                  (3,042)                950
Earnings (loss) per share:
     Basic                                                          (0.36)               0.11
     Diluted                                                        (0.36)               0.11
</TABLE>


                                       5


<PAGE>


Valuation of the intangible assets acquired from ASL, including acquired
in-process research and development, developed technology and goodwill was
determined by independent appraisers. Management, based upon such independent
appraisals, estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $2.4 million. The amount
allocated to acquired in-process research and development was expensed as a
charge to operations in the first quarter of fiscal 2000.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based on estimates made
by the Company's management and excluded amounts expected to result from
existing products and technologies. Projected net revenue included the expected
evolution of the technology and the reliance of future technologies on the
in-process technologies over time, but excluded amounts expected to result from
existing products and technologies. Management based the estimated cost of net
revenue and estimated operating expenses on the Company's cost structure and
that of comparable companies.

The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 50%
to 65%. The discount rates were based on various factors such as; the stage of
completion at the acquisition date; the complexity of the work completed as of
the acquisition date; costs incurred as of the valuation date; difficulties of
completing the remaining development in a reasonable time; technical
uncertainties of the remaining tasks; and the costs remaining to complete the
projects.

The Company used a portion of the acquired in-process research and development
to further enhance ASL's existing server-based synchronization technology by
implementing a plug-in architecture. This type of design allows users and third
party software providers to develop small software components that plug into the
Company's XTNDConnect product and extends the range of applications supported by
XTNDConnect. In September 1999, the Company implemented the first phase of this
architecture with the release of XTNDConnect Version 2.2, which supports IBM's
DB2 Everywhere 1.1 (DB2E) handheld relational database and Microsoft's ActiveX
Data Object (ADO) interface, and provides other enhanced management tools. The
acquired in-process research and development assigned to this project was valued
at $951,000 as of the date of the acquisition. The Company incurred an estimated
$69,000 to complete Version 2.2.

In November and December of 1999, the Company expects to release versions of
XTNDConnect that support encryption, Lotus Notes/Domino R5 and Symbian's EPOC
operating system. The acquired in-process research and development assigned
to this project was valued at $1.2 million at the date of the acquisition.
This project was approximately 60% complete at the time of the acquisition
and was expected to require an additional $41,000 to complete.

The Company will use the remaining acquired in-process research and
development to provide further enhancements to the architecture of its
XTNDConnect product line, which at the time of the acquisition were only
approximately 10-15% complete. The acquired in-process research and
development assigned to this project was valued at $186,000 as of the date of
the acquisition. The Company expects to incur an additional $123,000, from
the date of the acquisition, to develop the in-process technology into a
commercially viable product with the nature of the efforts principally
relating to development and testing that is required to establish that the
product can be produced to meet its design specifications, including
functions, features and technical performance requirements. The primary risk
with the completion of this project is the overall scope and complexity. The
Company expects to complete this project by May 2000.

If these products are not successfully developed, or are not developed on a
timely basis, the Company's competitive position, business and results of
operations may be adversely affected in future periods.

In October 1998, the Company acquired all of the outstanding stock of Rand
Software Corporation ("Rand") for $710,000 in cash and 104,998 shares of Common
Stock valued at $735,000. In November 1998, the Company acquired a controlling
interest in Parallax Research, Pte. ("Parallax") for $347,000 in cash and by
assuming $375,000 in debt and, in May 1999, acquired the remaining outstanding
stock of Parallax for $91,000 in cash. These transactions were accounted for by
the purchase method of accounting in accordance with APB 16. Pro forma results
of operations have not been presented since the effects of these acquisitions
were not material for the periods presented.


                                       6

<PAGE>

Rand was the developer of Harmony, a data synchronization software for mobile
devices such as Windows CE Handheld PCs and Palm-size computers. This
synchronization technology allows mobile devices to update and exchange data
with enterprise applications such as Microsoft Exchange, Microsoft Outlook,
Lotus Notes and Symantec Act! Parallax develops infrared connectivity products
primarily for sale to Original Equipment Manufacturers ("OEMs") and manages the
Company's relationship with its manufacturers in Asia.

A summary of the net assets acquired at the date of the acquisitions, as
determined in accordance with APB 16, is as follows:

<TABLE>

<S>                                                         <C>
Net working capital                                         $       (146)
Property and equipment                                               114
Developed technology, goodwill and other intangibles               1,532
Acquired in-process research and development                         758
                                                            ------------
                                                            $      2,258
                                                            ============
</TABLE>

Valuation of the intangible assets acquired from Rand and Parallax, including
acquired in-process research and development, developed technology and goodwill
was determined by independent appraisers. Management, based upon such
independent appraisals, estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $758,000. The amount allocated
to acquired in-process research and development was expensed as a charge to
operations in the second quarter of 1999.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based on estimates made
by the Company's management and excluded amounts expected to result from
existing products and technologies. Projected net revenue included the expected
evolution of the technology and the reliance of future technologies on the
in-process technologies over time, but excluded amounts expected to result from
existing products and technologies. Management based the estimated cost of net
revenue and estimated operating expenses on the Company's cost structure and
that of comparable companies.

The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 25%
to 35%. The discount rates were based on various factors such as lack of
operating history, aggressive projections for certain products, reliance on OEM
customers, management depth and product diversification.

The Company used acquired in-process research and development from Parallax to
develop new products using the developing Fast IR technology standard. A product
being developed for an OEM customer, used in a printer-based product, accounted
for a substantial majority of the acquired in-process research and development
from Parallax. All projects in process at the time of the acquisition were
completed in 1999 at an estimated cost of $58,000.

Rand's research and development in-process on the date of the acquisition
related to a server-based data synchronization software product that was
estimated to be approximately 14% complete and would require an estimated
$464,000 and 38 man-months of time to complete. Development in-process at the
time of the acquisition of Rand was subsequently utilized to develop a web-based
synchronization product and will continue to be incorporated into additional
Mobile Information Management products, including products complementary to the
server-based product acquired with ASL in August 1999.

BUSINESS SEGMENT, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS. The Company's
reportable segments have been determined by evaluating the Company's management
and internal reporting structure based primarily on the nature of the products
offered to customers and type or class of customers.

The Company's Mobile Information Management ("MIM") segment includes both
universal mobile connectivity and mobile data management solutions that enable
mobile users to access, synchronize, collect and retrieve information on demand.
The Company's products in the MIM segment include wireless connectivity
products, data synchronization software, virtual private network remote access
servers, Internet


                                       7


<PAGE>


appliances and database management systems with remote access capabilities. MIM
products are sold primarily to OEM customers, application developers and
computer resellers.

The Printing Solutions segment includes the Company's maturing network print
server and non-network printer sharing product lines that are sold primarily
through the Company's world-wide distribution channel to computer resellers and
Fortune 1000 companies. Printing Solutions products are also sold to a number of
OEM customers.

The Company's Other Products segment primarily includes the discontinued line of
mechanical port replicator products.

The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies. There are no intersegment sales.
Segment operating results are measured based on income or loss from operations.
The Company does not generally distinguish its assets by reportable segment.
Depreciation expense and other indirect expenses are allocated to reportable
segments using various methods such as percentage of square footage used to
total square footage and percent of direct expense to total direct expenses.

Segment information is as follows:

<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDED
                                                     SEPTEMBER 30,
                                              ----------------------------
                                                 1999              1998
                                              -----------      -----------
<S>                                           <C>              <C>
Net revenue:
     Mobile Information Management            $     8,485      $     4,486
     Printing Solutions                             4,579            8,011
     Other Products                                    25            1,046
                                              -----------      -----------
          Total                               $    13,089      $    13,543
                                              ===========      ===========
Income (loss) from operations:
     Mobile Information Management            $    (3,648)     $       642
     Printing Solutions                              (214)           1,448
     Other Products                                   (18)            (552)
                                              -----------      -----------
          Total                               $    (3,880)     $     1,538
                                              ===========      ===========
</TABLE>

The MIM segment's loss from operations includes an acquired in-process research
and development charge of $2.4 million in the first fiscal quarter of 2000 and
amortization of goodwill and other intangibles of $301,000.

Sales to an OEM customer accounted for 22% and 13% of net revenue in the first
fiscal quarter of 2000 and in fiscal 1999, respectively, and were primarily in
the Mobile Information Management segment. Sales to a distributor accounted for
10% of the Company's net revenue in fiscal 1999 and were primarily in the
Printing Solutions and Other Products segments.

RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. The statement requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. Under current operations,
adoption of SFAS No. 133 is not expected to have a material impact on the
Company's results of operations and financial position. SFAS No. 133 is
effective for the Company's fiscal year ending June 30, 2001.

SUBSEQUENT EVENT. On October 28, 1999, Mobility Electronics, Inc. ("Mobility")
filed suit against the Company and certain other parties in the Superior Court
for Maricopa County, Arizona, seeking unspecified compensatory and punitive
damages relating to an alleged breach of a contract between Mobility and the
Company. The Company believes that Mobility's claims are without merit. However,
litigation is inherently


                                       8

<PAGE>

uncertain and there can be no assurance that the Company will prevail. As a
result, the Company believes that there is a reasonable possibility of an
unfavorable outcome. The Company is unable to estimate the magnitude of its
exposure at this time.

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 THE COMPANY, SPEAK ONLY AS OF THE DATE HEREOF AND ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, STATEMENTS REGARDING FUTURE UNIT SALES AND AVERAGE
SELLING PRICES OF PRINT SERVER PRODUCTS, FUTURE PRODUCT MIX, FUTURE OEM
SALES, FUTURE EXPENSE LEVELS, FUTURE ACQUISITIONS, THE EFFECT OF THE YEAR
2000 ISSUE AND PENDING LITIGATION. THE COMPANY ASSUMES NO OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING
STATEMENTS. FACTORS THAT MAY CAUSE SUCH 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." READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THAT THE
COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION"), INCLUDING THE 1999 ANNUAL REPORT ON FORM 10-K AND THE
QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN FISCAL 2000. ALL
PERIOD REFERENCES ARE TO THE COMPANY'S FISCAL YEARS ENDED JUNE 30, 2000, 1999
AND 1998, UNLESS OTHERWISE INDICATED. ALL TABULAR DOLLAR AMOUNTS ARE
PRESENTED IN THOUSANDS.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED SEPTEMBER 30,
                             -----------------------------------------------
                                 1999            % CHANGE           1998
                             -----------------------------------------------
<S>                           <C>                <C>              <C>
NET REVENUE                   $   13,089           -3.4%          $  13,543
</TABLE>

Excluding $1.0 million in the first quarter of 1999 from the Company's
discontinued mechanical port replicator business, net revenue increased $600,000
or 5% in the first quarter of 2000 from 1999. The increase in net was primarily
the result of the Company's Mobile Information Management ("MIM") product lines,
which grew 89% from the prior year. The increase in revenue from MIM products
was offset by a decline in revenue from the Printing Solutions segment, which
declined 43% from the first quarter of 1999.

The Company derives a substantial portion of its net revenue from
international sales, principally from its international sales subsidiaries, a
limited number of distributors and from original equipment manufacturer
("OEM") customers. Revenue from Asian customers was 31% of total revenue for
the first quarter of 2000, compared to 13% for the first quarter of 1999. The
increasing Asian revenue is primarily related to OEM sales to large
multi-national companies who incorporate the Company's solutions into their
products and sell their products worldwide. In the first quarter of 2000 and
in fiscal 1999, total sales outside of North America represented 79% and 63%,
of net revenue, respectively. The Company expects that international sales
will continue to represent a substantial portion of net revenue in the
foreseeable future, although such sales may vary as a percentage of total net
revenue. International sales are subject to a number of risks, including
changes in foreign government regulations, export license requirements,
tariffs and taxes, other trade barriers, fluctuation in currency exchange
rates, difficulty in collecting accounts receivable, difficulty in staffing
and managing international operations and political and economic instability.

Several of the Company's products, in particular its ExtendNet print servers,
JetEye IrDA products, infrared software and data synchronization software are
sold to OEM customers, and the Company intends to continue to increase sales to
OEM customers in the future, particularly with the MIM product lines. In the
first quarter of 2000 and in fiscal 1999, OEM sales of MIM products and services
to Hewlett-Packard Company accounted for 22% and 13% of the Company's total net
revenue, respectively. Revenue from OEM sales is expected to fluctuate on a
quarterly basis, as demand in the OEM market is difficult to predict and
dependent on the timing of OEM projects and the effectiveness of the marketing
efforts of OEM customers.


                                       9

<PAGE>

The Company markets and sells certain of its products through multiple indirect
channels, primarily distributors and resellers. The Company supports its
indirect channels with its own sales and marketing organization. The Company's
largest distributor is Ingram Micro, Inc. ("Ingram Micro") and, in fiscal 1999,
sales to Ingram Micro accounted for 10%, of the Company's net revenue and were
primarily for Printing Solutions products. The Company provides price protection
rights and limited product return rights for stock rotation to most of its
distributors and resellers. The Company's distributors maintain inventory of the
Company's products. Changes in inventory management policies at any of the
Company's key distributors could have a material adverse effect on the Company's
business and results of operations.

The loss of, or reduction in sales to, any of the Company's key customers could
have a material adverse affect on the Company's business and results of
operations.

The markets for the Company's products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. The Company's future success will depend, to a
substantial degree, upon its ability to enhance its existing products and to
develop and introduce, on a timely and cost-effective basis, new products and
features that meet changing customer requirements and emerging and evolving
industry standards. The introduction of new or enhanced products also requires
the Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, to avoid excessive levels of older
product inventories and to ensure that adequate supplies of new products can be
delivered to meet customer demand. There can be no assurance that the Company
will successfully develop, introduce or manage the transition to new products.
The Company seeks to mitigate the effects of declining prices on hardware
products by improving product design and reducing costs, primarily manufacturing
and component costs.

<TABLE>
<CAPTION>
                                    THREE MONTHS ENDED SEPTEMBER 30,
                                -----------------------------------------
                                    1999        % CHANGE        1998
                                -----------------------------------------
<S>                              <C>            <C>           <C>
GROSS PROFIT                     $    6,111      -20.9%       $   7,726
GROSS MARGIN                          46.7%                       57.0%
</TABLE>

The decline in gross margin in the first quarter of 2000 from the same period
last year is primarily the result of higher shipments of lower margin MIM
hardware products to OEM customers and a shift in product mix in the Printing
Solutions segment to lower priced and lower margin products.

The Company's cost of net revenue consists primarily of costs associated with
components, out-sourced manufacturing of certain subassemblies, and in-house
labor associated with assembly, testing, shipping and quality assurance. The
Company's gross margin is affected by a number of factors, including product
mix, competitive product pricing pressures, manufacturing costs, component
costs, provisions for obsolete inventory and warranty costs. The Company expects
that its gross margin for Printing Solutions products may continue to decline as
a result of a continued shift in product mix toward lower priced products. The
Company also expects that gross margin from the MIM segment will fluctuate due
to shifts in mix between hardware and software products and the timing of
non-recurring engineering revenue.

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30,
                                     ------------------------------------------
                                         1999        % CHANGE         1998
                                     ------------------------------------------
<S>                                  <C>             <C>           <C>
RESEARCH AND DEVELOPMENT             $    2,237        45.5%       $   1,537
  as a % of net revenue                   17.1%                        11.3%
</TABLE>

The increase in research and development in the first quarter of 2000 from
the same period last year is the result of increased development for MIM
products and the addition of engineering staff as the result of the Company's
acquisitions of Oval (1415) Limited ("Oval") in August 1999, Rand Software
Limited ("Rand") in October 1998 and Parallax Research, Pte. ("Parallax") in
November 1998. This increase was offset, in part, by reduced personnel costs
in the Printing Solutions segment.

The Company expects research and development expense to continue to increase in
the future, although such expense may vary as a percentage of net revenue.


                                       10

<PAGE>

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30,
                                     ------------------------------------------
                                         1999        % CHANGE         1998
                                     ------------------------------------------
<S>                                  <C>             <C>          <C>
MARKETING AND SALES                  $    4,164         15.6%     $   3,603
     as a % of net revenue                31.8%                       26.6%
</TABLE>

The increase in marketing and sales expenses for the first quarter of 2000 from
the same period last year was primarily due to increased personnel costs and
promotional activities for the MIM product lines both domestically and at the
Company's European subsidiaries. The increases were partially offset by
decreased promotional activities associated with Printing Solutions product
lines and the Other Products segment.

The Company expects marketing and sales expense to continue to increase in the
future, although such expense may vary as a percentage of net revenue.

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30,
                                     ------------------------------------------
                                         1999        % CHANGE         1998
                                     ------------------------------------------
<S>                                  <C>             <C>           <C>
GENERAL AND ADMINISTRATIVE           $    1,055       0.7%         $   1,048
  as a % of net revenue                    8.1%                         7.7%
</TABLE>

The slight increase in general and administrative expense in the first
quarter of 2000 from the same period last year was primarily attributable to
increased administrative expenses in the MIM group subsequent to the
acquisition of Parallax and Oval, offset by a decrease in compensation
expense related to stock options.

The Company expects general and administrative expense to continue to increase
in the future, although such expense may vary as a percentage of net revenue.

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30,
                                     ------------------------------------------
                                         1999        % CHANGE         1998
                                     ------------------------------------------
<S>                                  <C>             <C>           <C>
INCOME TAX PROVISION (BENEFIT)       $   (1,076)     -290.1%       $    566
   as a % of income before taxes          26.0%                       35.0%
</TABLE>

The change in the income tax benefit for the first quarter of 2000 from the
same period in 1999 was primarily due to a net loss before income taxes. The
change in the estimated effective tax rate is primarily the result of a
valuation allowance to reflect the estimated amount of deferred tax assets
arising from the Oval acquisition that may not be realized due to the
expiration of tax credit carryforwards. Although realization is not assured,
management believes it is more likely than not that the remaining net
deferred tax asset will be realized

RESULTS OF OPERATIONS BY SEGMENT

The Company's product offerings are classified into three segments; the Mobile
Information Management segment, the Printing Solutions segment and the Other
Products segment. The discussion below addresses the operating results
attributable to each of the three product segments.

MOBILE INFORMATION MANAGEMENT SEGMENT

The Company's Mobile Information Management segment includes both universal
mobile connectivity and mobile data management solutions that enable mobile
users to access, synchronize, collect, and retrieve information on demand. The
Company's products in the MIM segment include wireless connectivity products,
data synchronization software, virtual private network remote access servers,
Internet appliances and database management systems with remote access
capabilities.


                                       11

<PAGE>

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30,
                                     -----------------------------------------
                                         1999         % CHANGE         1998
                                     -----------------------------------------
<S>                                  <C>              <C>           <C>
Net revenue                          $   8,485            89%       $   4,486
Income (loss) from operations           (3,648)         -668%             642
</TABLE>

Net revenue from the MIM product lines grew 89% in the first quarter of 2000
from the same period last year and grew to 65% of the Company's total net
revenue in the first quarter of 2000, up from 33% in the first quarter of 1999.
The increase was due primarily to increased unit sales of OEM hardware products
and, to a lesser extent, to increased sales of Internet appliance products,
Advantage Database Server products and data synchronization software.

The Company believes that net revenue from MIM products will continue to become
a larger percentage of total net revenue as the Company continues to focus on
Mobile Information Management product lines and as MIM products continue to
achieve increased market acceptance. The Company's future results of operations
will be highly dependent upon the success of recently introduced products and
the success of the Company's recent acquisitions.

MIM products are sold primarily to OEM customers, application developers and
computer resellers both directly and through the Company's e-commerce
storefronts on the Internet. The Company expects to increase sales to OEM
customers in the future; however, sales to OEM customers are difficult to
predict and are expected to fluctuate from quarter to quarter based on the
timing of the closure of OEM business and the effectiveness of OEM customers'
marketing efforts.

The loss from operations for the MIM segment in the first quarter of fiscal
2000 is primarily the result of the acquired in-process research and
development charge of $2.4 million from the Company's August 1999 acquisition
of Oval and amortization of goodwill and other intangibles. The loss is also
attributed to increases in the Company's spending for MIM research and
development projects for both mobile data management and universal mobile
connectivity products. The Company also increased its spending in marketing
and sales for all MIM products both domestically and internationally.

PRINTING SOLUTIONS SEGMENT

The Printing Solutions segment includes the Company's maturing network print
server and non-network printer sharing product lines, sold primarily through the
Company's worldwide distribution channel to computer resellers and Fortune 1000
companies. Although the Printing Solutions business is not the primary focus of
the Company's research and development or marketing strategies in the future,
the Company intends to continue to keep the product line up to date by adding
technology enhancements including fiber and mobile connectivity options.

<TABLE>
<CAPTION>
                                          THREE MONTHS ENDED SEPTEMBER 30,
                                     -----------------------------------------
                                         1999         % CHANGE         1998
                                     -----------------------------------------
<S>                                  <C>              <C>            <C>
Net revenue                          $    4,579         -43%         $   8,011
Income (loss) from operations              (214)       -115%             1,448
</TABLE>

The decrease in net revenue for the first quarter of 2000 from the same
period in the prior year was principally due to decreased unit sales of both
network print server products and non-networked printer sharing products
coupled with a decrease in the average selling prices caused by a shift in
product mix to lower priced products.

Income (loss) from operations from the Printing Solutions segment decreased in
the first quarter of 2000 from the prior year primarily due to decreased gross
profit from both network print server and non-network printer sharing products
as the Company continues to experience a shift in product mix to lower gross
margin products. The decrease in gross profit was partially offset by a decrease
in operating expenses as the Company shifts resources to support the MIM product
lines.

OTHER PRODUCTS SEGMENT

The primary component of the Company's Other Products segment has been the
Company's mechanical port replicator product line. In December 1998, the Company
announced its decision to exit the mechanical


                                       12

<PAGE>

port replicator business. The Company's decision was based on two primary
factors. The Company saw a decrease in demand for third-party port replicator
products as laptop vendors became more successful in providing similar products
in a more timely manner. In addition, the Company was experiencing
quality-related problems with its supplier and, consequently, faced a lack of a
reliable source for port replicators to support future releases of laptop PC
models in the increasingly competitive environment.

<TABLE>
<CAPTION>
                                            THREE MONTHS ENDED SEPTEMBER 30,
                                     --------------------------------------------
                                         1999           % CHANGE         1998
                                     --------------------------------------------
<S>                                  <C>              <C>              <C>
Net revenue                          $     25             -98%         $   1,046
Loss from operations                      (18)            -97%              (552)
</TABLE>

BUSINESS COMBINATIONS

In August 1999, the Company acquired of all of the outstanding stock of Oval
for $5.5 million in cash, including acquisition expenses and 625,000 shares
of the Company's Common Stock valued at $3.0 million. This transaction was
accounted for by the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations" ("APB
16"), and, accordingly, the results of operations of Oval have been included
in the consolidated statement of operations since the acquisition dates.

Oval, based in Bristol, England, is the parent company of Advance Systems
Limited ("ASL") and Zebedee Software Limited ("Zebedee"). ASL is a developer of
server-based synchronization software for portable computing devices and
high-end cellular phones that allows the update and exchange of data with
enterprise applications such as Microsoft Exchange, Lotus Notes and ODBC-based
corporate databases. Zebedee is a software consulting company. Substantially all
of the net assets owned by, and operations of, the Oval consolidated group are
attributable to ASL, therefore, the Company will refer to ASL herein when
referring to net assets acquired in the acquisition.

A summary of the net assets acquired at the date of the acquisition, as
determined in accordance with APB 16, is as follows:

<TABLE>

<S>                                                       <C>
Net working capital                                        $        112
Property and equipment                                               45
Developed technology, goodwill and other intangibles              5,971
Acquired in-process research and development                      2,365
                                                           ------------
                                                           $      8,493
                                                           ============
</TABLE>


Valuation of the intangible assets acquired from ASL, including acquired
in-process research and development, developed technology and goodwill was
determined by independent appraisers. Management, based upon such independent
appraisals, estimated that, in aggregate, the fair value of acquired in-process
research and development that had not yet reached technological feasibility and
had no alternative future use was $2.4 million. The amount allocated to acquired
in-process research and development was expensed as a charge to operations in
the first quarter of fiscal 2000.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based on estimates made
by the Company's management and excluded amounts expected to result from
existing products and technologies. Projected net revenue included the expected
evolution of the technology and the reliance of future technologies on the
in-process technologies over time, but excluded amounts expected to result from
existing products and technologies. Management based the estimated cost of net
revenue and estimated operating expenses on the Company's cost structure and
that of comparable companies.

The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 50%
to 65%. The discount rates were based on various factors such as; the stage of
completion at the acquisition date; the complexity of the work completed as of


                                       13

<PAGE>

the acquisition date; costs incurred as of the valuation date; difficulties of
completing the remaining development in a reasonable time; technical
uncertainties of the remaining tasks; and the costs remaining to complete the
projects.

The Company used a portion of the acquired in-process research and development
to further enhance ASL's existing server-based synchronization technology by
implementing a plug-in architecture. This type of design allows users and third
party software providers to develop small software components that plug into the
Company's XTNDConnect product and extends the range of applications supported by
XTNDConnect. In September 1999, the Company implemented the first phase of this
architecture with the release of XTNDConnect Version 2.2, which supports IBM's
DB2 Everywhere 1.1 (DB2E) handheld relational database and Microsoft's ActiveX
Data Object (ADO) interface, and provides other enhanced management tools. The
acquired in-process research and development assigned to this project was valued
at $951,000 as of the date of the acquisition. The Company incurred an estimated
$69,000 to complete Version 2.2.

In November and December of 1999, the Company expects to release versions of
XTNDConnect that support encryption, Lotus Notes/Domino R5 and Symbian's EPOC
operating system. The acquired in-process research and development assigned to
this project was valued at $1.2 million at the date of the acquisition.This
project was approximately 60% complete at the time of the acquisition and was
expected to require an additional $41,000 to complete.

The Company will use the remaining acquired in-process research and development
to provide further enhancements to the architecture of its XTNDConnect product
line, which at the time of the acquisition were only approximately 10-15%
complete. The acquired in-process research and development assigned to this
project was valued at $186,000 as of the date of the acquisition. The Company
expects to incur an additional $123,000, from the date of the acquisition, to
develop the in-process technology into a commercially viable product with the
nature of the efforts principally relating to development and testing that is
required to establish that the product can be produced to meet its design
specifications, including functions, features and technical performance
requirements. The primary risk with the completion of this project is the
overall scope and complexity. The Company expects to complete this project by
May 2000.

If these products are not successfully developed, or are not developed on a
timely basis, the Company's competitive position, business and results of
operations may be adversely affected in future periods.

In October 1998, the Company acquired all of the outstanding stock of Rand
Software Corporation for $710,000 in cash and 104,998 shares of Common Stock
valued at $735,000. In November 1998, the Company acquired a controlling
interest in Parallax Research, Pte. for $347,000 in cash and by assuming
$375,000 in debt. In May 1999, acquired the remaining outstanding stock of
Parallax for $91,000 in cash. These transactions were accounted for by the
purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations" ("APB 16"), and, accordingly, the
results of operations of both companies have been included in the consolidated
statement of operations since the acquisition dates.

Rand was the developer of Harmony, a data synchronization software for mobile
devices such as Windows CE Handheld PCs and Palm-size computers. This
synchronization technology allows mobile devices to update and exchange data
with enterprise applications such as Microsoft Exchange, Microsoft Outlook,
Lotus Notes and Symantec Act! Parallax develops infrared connectivity products
primarily for sale to OEM customers and manages the Company's relationships with
its manufacturers in Asia.

A summary of the total net assets acquired at the date of the acquisitions, as
determined in accordance with APB 16 is as follows:

<TABLE>

<S>                                                         <C>
Net working capital                                         $       (146)
Property and equipment                                               114
Developed technology, goodwill and other intangibles               1,532
Acquired in-process research and development                         758
                                                            ------------
                                                            $      2,258
                                                            ============
</TABLE>

The valuation of the intangible assets acquired from Rand and Parallax,
including the acquired in-process research and development, developed technology
and goodwill, was determined by independent appraisers.


                                       14

<PAGE>

Management, based upon such independent appraisals, estimated that, in
aggregate, the fair value of acquired in-process research and development that
had not yet reached technological feasibility and had no alternative future use
was $758,000. The amount allocated to acquired in-process research and
development was expensed as a charge to operations in the second quarter of
1999.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based on estimates made
by the Company's management. Projected net revenue included the expected
evolution of the technology and the reliance of future technologies on the
in-process technologies over time, but excluded amounts expected to result from
existing products and technologies. Management based the estimated cost of sales
and estimated operating expenses on the Company's cost structure and that of
comparable companies.

The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 25%
to 35%. The discount rates were based on various factors such as lack of
operating history, aggressive projections for certain products, reliance on OEM
customers, management depth and product diversification.

Rand's research and development in process on the date of the acquisition
related to a server-based data synchronization software product that was
estimated to be approximately 14% complete and would require an estimated
$464,000 and 38 man-months of time to complete. Development in process at the
time of the acquisition of Rand was subsequently utilized to develop a web-based
synchronization product and will continue to be incorporated into additional MIM
products, including products complementary to the server-based product acquired
with ASL in August 1999.

The Company used acquired in-process research and development from Parallax to
develop new products using the developing Fast IR technology standard. A product
being developed for an OEM customer, to be used in a printer-based product,
accounted for a substantial majority of the acquired in-process research and
development from Parallax. All projects in process at the time of the
acquisition were completed in 1999 at an estimated cost of $58,000.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED SEPTEMBER 30,
                                                         ------------------------------------------
                                                             1999        % CHANGE         1998
                                                         ------------------------------------------
<S>                                                       <C>            <C>            <C>
Net cash provided by (used by) operating activities       $     799       -1,018%       $   (87)
</TABLE>

Historically, the Company has funded its operations primarily through cash
generated from operations. The net cash provided by operations in the first
quarter of 2000 was primarily a result of a decrease inventory and an increase
in payables, offset in part by an increase in total receivables.

Accounts receivable decreased to $9.4 million at September 30, 1999 from $9.8
million at June 30, 1999. Days sales outstanding ("DSO") in receivables were 63
days at September 30, 1999 and 61 days at June 30, 1999. The Company expects
that accounts receivable may increase as net revenue increases and as net
revenue from OEM and international customers represent a higher percentage of
the Company's total revenue.

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED SEPTEMBER 30,
                                                         ------------------------------------------
                                                             1999        % CHANGE         1998
                                                         ------------------------------------------
<S>                                                       <C>            <C>            <C>
Net cash used by investing activities                     $   (2,511)       8%          $  (2,322)
</TABLE>

Net cash used by investing activities in the first quarter of 2000 consisted
largely of cash payments for the acquisition of Oval.

The Company currently plans to incur aggregate capital expenditures of
approximately $1.5 million during 2000, primarily for system improvements,
leasehold improvements, software and personal computers.


                                       15

<PAGE>

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED SEPTEMBER 30,
                                                         ------------------------------------------
                                                             1999        % CHANGE         1998
                                                         ------------------------------------------
<S>                                                       <C>             <C>             <C>
Net cash used by financing activities                      $  (5,652)       9,816%         $  (57)
</TABLE>

Net cash provided by financing activities in the first quarter of 2000 consisted
primarily of payments on long-term debt.

The Company has an uncollateralized bank revolving line of credit of $10 million
that expires on October 31, 2000. Interest on borrowings is at the lender's
prime rate minus 1%. There were borrowings under this line at September 30, 1999
of $2.6 million. There were no borrowings under this line at June 30, 1999. The
lease agreement and line of credit have restrictive covenants that require the
Company to maintain certain financial ratios.

The Company believes that its existing working capital and borrowing capacity,
coupled with the funds generated from the Company's operations, will be
sufficient to fund its acquisition, anticipated working capital, capital
expenditures and debt payment requirements through 2000. In the longer term, the
Company may require additional sources of liquidity to fund future growth. Such
sources of liquidity may include additional equity offerings or debt financing.

In addition to the Rand and Parallax acquisitions in 1999 and the Oval
acquisition in the first fiscal quarter of 2000, the Company intends to continue
to pursue strategic acquisitions of, or strategic investments in, companies with
complementary products, technologies or distribution networks in order to
broaden its product lines and to provide more complete Mobile Information
Management product offerings. The Company has no additional commitments or
agreements with respect to any such transaction; however, the Company may
acquire businesses, products or technologies in the future. There can be no
assurance that the Company will not require additional financing in the future
or, if the Company were required to obtain additional financing in the future,
that sources of capital will be available on terms favorable to the Company, if
at all.

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES

The Company derives a substantial portion of its revenue from international
sales, principally through its international subsidiaries and through a limited
number of independent distributors. Sales made by the Company's 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 affect the Company's financial condition, results of operations
and cash flows.

From time to time, the Company enters into foreign currency forward contracts,
typically against the Euro and British Pound to hedge payments and receipts of
foreign currencies related to the purchase and sale of goods to international
subsidiaries. While these hedging instruments are subject to fluctuations in
value, such fluctuations are generally offset by the value of the underlying
exposures being hedged. Gains and losses on these foreign currency investments
would generally be offset by corresponding losses and gains on the related
hedging instruments, resulting in minimal net exposure to the Company. The
Company does not hold or issue financial instruments for speculative purposes.
To the extent that the Company implements hedging activities in the future with
respect to foreign currency transactions, there can be no assurance that the
Company will be successful in such hedging activities.

The Company has not experienced significant costs as a result of the
introduction of a European single currency (the "Euro") introduced on January 1,
1999. At an appropriate point before the end of the transition period, December
31, 2001, product prices in participating countries will be denominated in the
Euro and converted to local denominations. During the transition period, the
Company's financial systems located in the participating countries will be
converted from local denominations to the Euro. The Company does not presently
expect that the transition to the Euro will materially affect the Company's
foreign currency exchange and hedging activities. Further, the Company does not
expect that the transition to the Euro will result in any material increase in
costs to the Company and all costs associated with the transition to the Euro
will be expensed to operations as incurred. While the Company will continue to
evaluate the impact of the transition of the Euro, based on currently available
information, the Company does not believe that the


                                       16

<PAGE>

introduction of the Euro will have a material adverse impact on the Company's
financial condition, results of operations and cash flows.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit year entries to distinguish 21st century dates
from 20th century dates. To address such "Year 2000" issues, the Company
established a Year 2000 Project Team which is currently in phase four of its
five-phase plan to assess the Company's Year 2000 compliance. In prior phases,
the Company identified three key areas critical to successful Year 2000
compliance: products, financial and information systems and third-party
relationships.

The Company has successfully completed testing of current products and products
under development and does not believe there is significant risk of
noncompliance. There can be no assurance that certain previous releases of the
Company's products, which are no longer under support, will prove to be Year
2000 compliant. Further information about the Company's products is available on
its Year 2000 Internet web site at www.extendedsystems.com.

The Company has completed initial evaluation, analysis and testing of its core
internal systems and the Company does not currently expect any significant
issues to be identified during further review; however, further inquiry and
review is expected to continue throughout calendar 1999 and 2000. The failure of
the Company to correct any issues with internal systems could result in material
disruption to the Company's operations.

The Company has completed its initial assessment of the readiness of third
parties with which the Company has business relationships, including significant
vendors and customers. The assessment of the compliance of third parties is on
going and is also expected to continue throughout calendar 1999 and 2000. Even
where assurances are received from third parties there remains a risk that
failure of systems and products of other companies on which the Company relies
could have a material adverse effect on the Company.

Contingency plans will be developed if it appears that the Company or its key
suppliers will not be Year 2000 compliant and if such noncompliance is expected
to have a material adverse impact on the Company's operations.

Based on the work done to date, the Company estimates the total cost to address
the Year 2000 problem for its systems and products will approximate $60,000 of
which an estimated $45,000 has been incurred to date. All costs have been and
are included in existing operating budgets. At this time, the Company cannot
reasonably estimate the potential impact on its financial position, results of
operations and cash flows if internal systems are found to be non-compliant or
if key suppliers, customers and other business partners do not become Year 2000
compliant on a timely basis.

Because many companies may need to upgrade or replace computer systems and
software to comply with Year 2000 requirements, the Company believes that the
purchasing patterns of customers and potential customers may be affected by Year
2000 issues as companies expend significant resources to upgrade their current
software systems for Year 2000 compliance. These expenditures may result in
reduced funds available to purchase products such as those offered by the
Company, which could have a material adverse effect on the Company's business,
results of operations and cash flows.

The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and suppliers in addressing
the Year 2000 issue. The Company's evaluation is on going and it expects
different information will become available to it as that evaluation continues.
Consequently, there is no guarantee that all material elements will be Year 2000
ready in time.


                                       17


<PAGE>


FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

IN ADDITION TO THE RISK FACTORS DISCUSSED ELSEWHERE IN THIS FORM 10-Q, THE
FOLLOWING ARE IMPORTANT FACTORS, WHICH COULD CAUSE ACTUAL RESULTS OR EVENTS TO
DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD LOOKING STATEMENTS MADE BY
OR ON BEHALF OF THE COMPANY.

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results
have fluctuated significantly in the past and are likely to fluctuate
significantly in the future on a quarterly and an annual basis. Prior growth
rates that the Company has experienced in net revenue and net income should not
be considered indicative of future growth rates. Factors that could cause the
Company's future operating results to fluctuate include the level of demand for
the Company's products, the Company's success in developing new products, the
timing of new product introductions and product enhancements by the Company and
its competitors, market acceptance of the Company's new and enhanced products
and OEM customers' products, the emergence of new industry standards, the timing
of customer orders, the mix of products sold, discontinuation of product
offerings by the Company or its suppliers, competition, the mix of distribution
channels through which the Company's products are sold and general economic
conditions. Many of such factors are beyond the Company's control. In this
regard, in the second quarter of fiscal 1999, the Company discontinued its
mechanical port replicator product line and, as a result, recorded $2.1 million
in total charges for product returns, an allowance for product returns and an
increase in the inventory valuation allowance for port replicators.

The Company typically operates with a relatively small order backlog. As a
result, quarterly sales and operating results depend in large part on the volume
and timing of orders received within the quarter, which are difficult to
forecast. Significant portions of the Company's expenses are fixed in advance,
based in large part on the Company's forecast of future revenue. If revenue is
below expectations in any given quarter, the adverse impact of the shortfall on
the Company's operating results may be magnified by the Company's inability to
adjust spending to compensate for the shortfall. Therefore, a shortfall in
actual revenue as compared to estimated revenue could have a material adverse
effect on the Company's business, results of operations and cash flows.

A substantial majority of the Company's net revenue results from the sale of
products to OEM customers and distributors, which sales are difficult to predict
and may have lower margins than sales through other channels. Sales through such
channels may contribute to increased fluctuations in operating results. A
significant portion of the Company's revenue in any quarter is typically derived
from sales to a limited number of OEM customers and distributors. Any
significant deferral of purchases of the Company's products by its distributors
or OEM customers could have a material adverse effect on the Company's business,
results of operations and cash flows in any particular period.

The Company has experienced some degree of seasonality of net revenue, and the
Company expects to continue to experience seasonality in the future. Net revenue
in the first fiscal quarter typically is lower than net revenue in the fourth
fiscal quarter, reflecting lower sales in Europe and certain other regions in
the summer months when business activities are reduced.

As a result of the foregoing factors, the Company's operating results may be
subject to significant volatility. It is likely that in a future period the
Company will fail to achieve anticipated operating results. Any shortfall in net
revenue, gross profit or net income from levels expected by securities analysts
in any period could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock.

DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS. The Company's future results of
operations will be highly dependent upon the success of recently introduced
products, including newer versions of the XTNDConnect data synchronization
software, the ExtendNet 4000 Internet Appliance, Advantage Database Server
Version 5.5 with STREAMLINE SQL, and recently released ExtendNet print server
products. Newly introduced products are subject to a number of risks, including
failure to achieve market acceptance and poor product performance. The Company
is unable to predict with any degree of certainty the rate of market acceptance
of these newly introduced products. No assurance can be given that any of such
products will not require additional development work, enhancement, testing or
refinement before they achieve market acceptance. If such new and recently
introduced products have performance, reliability, quality or other
shortcomings, then


                                       18


<PAGE>


such products could fail to achieve market acceptance and the Company may
experience reduced orders, higher manufacturing costs, delays in collecting
accounts receivable and additional warranty and service expenses, which in each
case could have a material adverse effect on the Company's business, results of
operations and cash flows.

RISKS ASSOCIATED WITH NEW AND EVOLVING MARKETS. The markets for universal mobile
connectivity and mobile data management solutions are still emerging, and there
can be no assurance that they will continue to grow or that, even if the markets
grow, the Company's products that address these markets will be successful. The
Company's success in generating significant revenue in these evolving markets
will depend upon, among other things, its ability to demonstrate the benefits of
its technology to potential distributors, OEM customers and end users, to
maintain and enhance its relationships with leading distributors and to expand
successfully its distribution channels. The success of the Company's infrared
and data synchronization products will rely, to a large degree, on the increased
use of mobile devices including cellular phones and other handheld organizers
and devices. The success of the ExtendNet 4000 Internet Appliance and ExtendNet
VPN products will rely, to a large degree, on the increased use of the Internet
by businesses as replacements for, or enhancements to, their private networks.

There can be no assurance that businesses will develop sufficient confidence in
the Internet to deploy the Company's products to a significant degree. The
inability of the Company to continue to penetrate the existing markets for
universal mobile connectivity and mobile data management solutions or the
failure of current markets to grow or new markets to develop or be receptive to
the Company's products could have a material adverse effect on the Company's
business, results of operations and cash flows. The emergence of markets for the
Company's products will be affected by a number of factors beyond the Company's
control. For example, the Company's products are designed to conform to certain
standard infrared and networking specifications. There can be no assurance that
these specifications will be widely adopted or that competing specifications
will not emerge that would be preferred by the Company's customers. In addition,
there can be no assurance that infrared technology itself will be adopted as the
standard or preferred technology for wireless connectivity or that manufacturers
of personal computers will elect to bundle the infrared technology in their
products. The emergence of markets for the Company's products is critically
dependent upon continued expansion of the market for mobile computing devices
and the timely introduction and successful marketing and sale of mobile
computing products such as notebook computers and personal digital assistants,
of which there can be no assurance.

RELIANCE ON DISTRIBUTION CHANNELS. The Company sells certain of its products,
primarily its Printing Solutions products, domestically and internationally,
primarily to distributors and resellers and, to a lesser extent, to OEM
customers. The Company's success depends on the continued sales efforts of its
network of distributors and resellers. The loss of, or reduction in sales to,
any of the Company's key customers could have a material adverse affect on the
Company's business, results of operations and cash flows.

The Company provides most of its distributors and resellers with limited product
return rights for stock rotation. There can be no assurance that the Company
will not experience significant returns in the future or that it will have made
adequate allowances to offset such returns. The Company also provides most of
its distributors and resellers with price protection rights. Price protection
rights require that the Company grant retroactive price adjustments for
inventories of the Company's products held by distributors or resellers if the
Company lowers its prices for such products. The short life cycles of the
Company's products and the difficulty in predicting future sales increase the
risk that new product introductions, price reductions by the Company or its
competitors or other factors affecting the markets in which the Company competes
could result in significant product returns. In addition, new product
introductions by competitors or other market factors could require the Company
to reduce prices in a manner or at a time which has a material adverse impact
on the Company's business, results of operations and cash flows.

The Company's distributors maintain inventory of the Company's products. Changes
in inventory management policies at any of the Company's kiey distributors could
have a material adverse effect on the Company's business and results of
operations.

The Company intends to continue to enhance and diversify its international and
domestic distribution channels. None of the Company's distributors or OEM
customers is obligated to purchase the Company's products except pursuant to
current purchase orders. The Company's ability to achieve future revenue growth
will depend in large part on its success in recruiting and training sufficient
sales personnel, distributors, VARs and OEM customers. Certain of the Company's
existing distributors currently distribute, or


                                       19


<PAGE>


may in the future distribute, the product lines of the Company's competitors.
There can be no assurance that the Company will be able to attract, train and
retain a sufficient number of its existing or future third-party distributors or
direct sales personnel, that such third-party distributors will recommend, or
continue to recommend, the Company's products or that the Company's distributors
will devote sufficient resources to market and provide the necessary customer
support for such products.

Sales to OEM customers involve a number of potential risks, including lengthy
sales cycles, potential competition from OEM customers and effectiveness of the
marketing efforts of OEM customers. The Company's OEM customers may in the
future incorporate competing products into their systems or internally develop
competing solutions. In the event that the Company's OEM customers reduce their
purchases of the Company's products, the Company's future growth would be
adversely affected. All of these factors could have a material adverse effect on
the Company's business, results of operations and cash flows.

COMPETITION. The markets for the Company's products are intensely competitive,
and are characterized by frequent new product introductions, rapidly changing
technology and standards, constant price pressure and competition for
distribution channels. The principal competitive factors in the Company's
markets include product performance, reliability, price, breadth of product
line, sales and distribution capability and technical support and service.
Certain of these factors are outside the Company's control. There can be no
assurance that the Company will be able to compete successfully in the future
with respect to these or any other competitive factors or that competition will
not have a material adverse effect on the Company's business, results of
operations and cash flows.

RISKS OF INTERNATIONAL SALES AND OPERATIONS. The Company derives a substantial
portion of its net revenue from international sales, principally through its
international sales subsidiaries and a limited number of distributors. The
Company expects that international sales will continue to represent a
substantial portion of its net revenue for the foreseeable future. If any
significant international distributor were to cease purchasing products or were
to significantly reduce its orders from the Company for any reason, the
Company's business and operating results could be materially and adversely
affected. International sales are subject to a number of risks, including
changes in government regulations, export license requirements, tariffs and
taxes, other trade barriers, fluctuations in currency exchange rates, difficulty
in collecting accounts receivable, difficulty in staffing and managing
international operations, political and economic instability, including
instability caused by the European monetary union and military actions. Many of
such factors are beyond the Company's control.

A substantial portion of the Company's international sales are typically
denominated in U.S. dollars. As a result, fluctuations in currency exchange
rates could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. Transactions made through the Company's
subsidiary in Singapore are primarily denominated in U.S. dollars. The
transactions made through the Company's subsidiaries in France, Germany, Italy,
the United Kingdom and the Netherlands are primarily denominated in local
currencies and, accordingly, the Company's international operations impose a
risk upon its business as a result of currency exchange rate fluctuations. There
can be no assurance that exchange rate fluctuations will not have a material
adverse effect on the Company's business, results of operations and cash flows.
Payment cycles for international customers are typically longer than payment
cycles for customers in the United States. There can be no assurance that
foreign markets will continue to develop or that the Company will receive
additional orders to supply its products for use in foreign markets.

RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT. The markets for the Company's
products are characterized by rapidly changing technologies, evolving industry
standards, frequent new product introductions and short product life cycles. The
Company's future success will depend to a substantial degree upon its ability to
enhance its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing customer
requirements and emerging and evolving industry standards. The Company budgets
research and development expenses based on planned product introductions and
enhancements; however, actual expenses may differ significantly from budget. The
product development process involves a number of risks. The development of new,
technologically advanced hardware and software 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 the Company to manage the transition from older
products in order to minimize disruption in customer ordering patterns, to avoid
excessive levels of older product inventories and to ensure that adequate
supplies of new products can be delivered to meet customer demand. For example,
in August


                                       20


<PAGE>


1999 the Company released the ExtendNet 4000, its next generation Internet
appliance product, which replaces the ExtendNet IAS product. As a result, the
Company may be required to reduce the carrying value of ExtendNet IAS product
currently in inventory if the market adopts the ExtendNet 4000 faster than the
Company anticipates. There can be no assurance that the Company will
successfully develop, introduce or manage the transition to new products. The
Company has in the past experienced, and is likely in the future to experience,
delays in the introduction of new products, due to factors internal and external
to the Company. Any future delays in the introduction or shipment of new or
enhanced products, the inability of such products to achieve market acceptance
or problems associated with new product transitions could adversely affect the
Company's business, results of operations and cash flows.

RISKS ASSOCIATED WITH THIRD-PARTY MANUFACTURERS AND SUPPLIERS. The Company's
future success will depend, in part, on its ability to continue to have third
parties manufacture its products successfully, cost-effectively and in
sufficient volumes to meet customer demand. The Company maintains a limited
in-house manufacturing capability for performing materials procurement, final
assembly, testing, quality assurance and shipping. The Company relies primarily
on independent subcontractors to manufacture its products, and the Company
intends to increase its reliance upon third-party manufacturers in the future.

Certain of the Company's products are manufactured in their entirety by third
parties. For example, eSoft, Inc. (formerly Apexx Technology, Inc.) manufactured
the Company's first Internet access product, the ExtendNet IAS. The reliance on
third-party manufacturers involves a number of risks, including the potential
inability to obtain an adequate supply of existing and new products and reduced
control over delivery schedules, product quality and product cost. In this
regard, in December 1998, the Company announced its decision to exit the port
replicator business due, in part, to quality problems associated with the sole
supplier of this product. The decision to exit the port replicator business was
the primary cause of the decline in the Company's net revenue in the second
fiscal quarter ended December 31, 1998. There can be no assurance that the
Company will not experience similar problems in the future should the Company
rely on other third party suppliers. In the event that the Company is unable to
maintain good relationships with its third-party manufacturers there could be a
material adverse effect on the Company's business, results of operations and
cash flows.

From time to time the Company has agreed with certain suppliers that the
Company will purchase certain components exclusively from such suppliers.
Because the manufacturing of the Company's products can involve long lead
times, in the event of unanticipated increases in demand for the Company's
products, the Company could be unable to manufacture certain products in a
quantity sufficient to meet its customers' demands. The Company also relies
on third party suppliers for components used in its products. Certain of the
components used in the Company's products, including certain semiconductor
components and infrared transmission components, are currently available from
a limited number of suppliers. From time to time, the Company experiences
difficulty is obtaining components from suppliers due to increased industry
demand and a lack of available supply. The Company is currently experiencing
some difficulty in obtaining an adequate supply of flash memory to supply the
demand for the Company's Printing Solutions products. Any inability
to obtain adequate deliveries or any increased cost or other circumstance
that would require the Company to seek alternative manufacturers could affect
the Company's ability to ship its products on a timely basis, which could
damage relationships with current and prospective customers, could affect the
manufacturing cost of the Company's products and could therefore have a
material adverse affect on the Company's business, results of operations and
cash flows.

DEPENDENCE ON LICENSED TECHNOLOGY. The Company licenses technology on a
non-exclusive basis from several companies for use with its products and
anticipates that it will continue to do so in the future. The inability of the
Company to continue to license this technology or to license other necessary
technology for use with its products, or substantial increases in royalty
payments pursuant to third-party licenses, could have a material adverse effect
on the Company's business, results of operations and cash flows. In addition,
the effective implementation of the Company's products depends upon the
successful operation of this licensed software in conjunction with the Company's
products, and therefore any undetected errors in products resulting from such
software may prevent the implementation or impair the functionality of the
Company's products, delay new product introductions and injure the Company's
reputation. Such problems could have a material adverse effect on the Company's
business, results of operations and cash flows.

PRODUCT ERRORS; PRODUCT LIABILITY. Software and hardware products as complex as
those offered by the Company typically contain undetected errors when first
introduced or as new versions are released. Testing of the Company's products is
particularly challenging because it is difficult to simulate the wide variety of


                                       21


<PAGE>


computing environments in which the Company's customers may deploy these
products. Accordingly, there can be no assurance that, despite testing by the
Company and by current and potential customers, errors will not be found after
commencement of commercial shipments. Any such errors, or "bugs," could result
in dissatisfied customers and the loss of or delay in market acceptance of the
new product, any of which could have a material adverse effect upon the
Company's business, results of operations and cash flows. Although to date the
Company has not experienced any material product liability claims, there can be
no assurance that the Company will not face material product liability claims in
the future. A successful product liability claim brought against the Company
could have a material adverse effect upon the Company's business, results of
operations and cash flows.

MANAGEMENT OF GROWTH. Any future growth experienced by the Company is likely to
place a significant strain on the Company's administrative, operational and
financial resources and to increase demands on the Company's systems and
controls. Future growth may also result in an increase in the scope of
responsibility for management personnel. The Company anticipates that growth and
expansion will require it to recruit, hire, train and retain a substantial
number of new engineering, executive, sales and marketing personnel. As is the
case with many technology companies, from time to time the Company has
experienced difficulty in recruiting qualified personnel, and continued
difficulty in this regard could limit the Company's ability to grow. In order to
manage its growth successfully, the Company will continue to expand and improve
its operational, management and financial systems and controls. There can be no
assurance that the Company will successfully implement such systems and controls
on a timely basis. If the Company's management is unable to manage growth
effectively, the Company's business, results of operations and cash flows could
be materially adversely affected.

RISKS ASSOCIATED WITH ACQUISITIONS BY THE COMPANY. As part of its growth
strategy, the Company intends to continue to pursue the acquisition of companies
that either complement or expand its existing business, as the Company did with
its acquisitions of Rand, in October 1998; Parallax, in November 1998; and Oval,
in August 1999. The Company is continually evaluating potential acquisition
opportunities, which may be material in size and scope. Acquisitions involve a
number of risks and difficulties, including the expansion into new markets and
business areas, the diversion of management's attention to the assimilation of
the operations and personnel of the acquired companies, the integration of the
acquired companies' management information systems with those of the Company,
potential adverse short-term effects on the Company's operating results, the
amortization of acquired intangible assets and the need to present a unified
corporate image. In addition, acquisitions could result in the need to expend
substantial amounts of cash. While the Company believes that it has sufficient
funds to finance its operations for at least the next 12 months, to the extent
that such funds are insufficient to fund the Company's activities, including any
potential acquisitions, the Company may need to raise additional funds through
public or private equity or debt financing or from other sources. The sale of
additional equity or convertible debt may result in additional dilution to the
Company's shareholders and such securities may have rights, preferences or
privileges senior to those of the Company's Common Stock. There can be no
assurance that additional equity or debt financing will be available or that, if
available, it can be obtained on terms favorable to the Company or its
shareholders.

There can be no assurance that the Company will be successful in identifying
acquisition candidates, that the Company will have adequate resources to
consummate any acquisition, that any acquisition by the Company will or will not
occur, that if any acquisition does occur it will not have a material adverse
effect on the Company's business, results of operations and cash flows or that
any such acquisition will be successful in enhancing the Company's business.

PROPRIETARY RIGHTS AND RISKS OF INFRINGEMENT. There can be no assurance that any
patent, trademark or copyright owned by the Company will not be invalidated,
circumvented or challenged, that the rights granted thereunder will provide
competitive advantages to the Company or that any of the Company's pending or
future patent applications will be issued with the scope of the claims sought by
the Company, if at all. Further, there can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology,
duplicate the Company's technology or design around the patents owned by the
Company. Effective intellectual property protection may be unavailable or
limited in certain foreign countries. There can be no assurance that the steps
taken by the Company will prevent misappropriation of its technology by foreign
companies.

If the Company were found to be infringing on the intellectual property rights
of any third party, the Company could be subject to liabilities for such
infringement, which could be material. As a result, the Company could


                                       22


<PAGE>


be required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, no assurance can be given
that licenses would be offered, that the terms of any offered license would be
acceptable to the Company or that the failure to obtain a license would not
adversely affect the Company's business, results of operations and cash flows.

In order to protect its proprietary rights, the Company may in the future
initiate proceedings against third parties. Any litigation, whether brought by
or against the Company, could result in the incurrence of significant expenses
by the Company. In addition, any such litigation could result in a diversion of
management's time and efforts. A claim by the Company against a third party
could prompt a counterclaim by the third party against the Company, which could
have an adverse effect on the Company's intellectual property rights. Any of the
foregoing could result in a material adverse effect on the Company's business,
results of operations and cash flows.

DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend to a
significant degree upon the continuing contributions of its key management,
engineering, sales and marketing personnel. The Company does not maintain any
key person life insurance policies. The loss of key management or technical
personnel could adversely affect the Company. The Company believes that its
future success will depend in large part upon its ability to attract and retain
highly skilled management, engineering, sales and marketing personnel. In
particular, the Company is currently attempting to recruit new engineering
personnel; however, there can be no assurance that the Company will be
successful at hiring or retaining these personnel. Failure to recruit, hire,
train and retain key personnel would limit future growth and could have a
material adverse effect on the Company's business, results of operations and
cash flows.

STOCK PRICE VOLATILITY. The trading price of the Company's Common Stock could be
subject to wide fluctuations in response to quarter-to-quarter variations in
operating results, announcements of technological innovations or new products by
the Company or its competitors, general conditions in the computer industry,
changes in earnings estimates or recommendations by analysts, or other events or
factors. In addition, the public stock markets have experienced extreme price
and trading volume volatility in recent months. This volatility has
significantly affected the market prices of securities of many technology
companies for reasons that may be unrelated to the operating performance of the
specific companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's long-term capital lease is at a fixed imputed interest rate and,
therefore, the fair value of this instrument is affected by changes in market
interest rates. Because the Company's long-term debt is due in September of
2000, the Company believes that the market risk arising from its long-term debt
is minimal.

The Company derives a substantial portion of its revenue from international
sales, principally through its international subsidiaries in France, Germany,
Italy, Singapore, the United Kingdom and the Netherlands, and through a limited
number of OEM customers and independent distributors, therefore, the Company
faces exposure to adverse movements in foreign currency exchange rates. Sales
made by the Company's foreign subsidiaries are generally denominated in the
foreign country's currency with the exception of the Company's subsidiary in
Singapore. Fluctuations in exchange rates between the U.S. dollar and other
foreign currencies could materially affect the Company's financial condition and
results of operations.

The Company does not hold or issue financial instruments for speculative
purposes. From time to time, the Company enters into foreign currency forward
contracts, typically against the Euro and British Pound to hedge payments and
receipts of foreign currencies related to the purchase and sale of goods to
international subsidiaries. At September 30, 1999, the Company had contracts in
place totaling $2.6 million that matured within 30 days. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by the value of the underlying exposures being hedged. 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,
the Company could experience unanticipated currency gains or losses.


                                       23


<PAGE>


PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On October 28, 1999, Mobility filed suit against the Company and certain other
parties in the Superior Court for Maricopa County, Arizona, seeking unspecified
compensatory and punitive damages relating to an alleged breach of a contract
between Mobility and the Company. The Company believes that Mobility's claims
are without merit. However, litigation is inherently uncertain and there can be
no assurance that the Company will prevail. If the Company does not prevail,
these claims could require the expenditure of significant financial and
managerial resources and have a material adverse effect on the Company.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)      EXHIBITS

27.1  Financial Data Schedule

(b)      REPORTS ON FORM 8-K

The Company filed a Form 8-K on August 18, 1999 to announce the Company's August
4, 1999 acquisition of Oval (1415) Limited, parent company of Advance Systems
Limited and Zebedee Software Limited.

ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.


                                       24


<PAGE>


                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1923, 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)


                                       25