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

                                  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 MARCH 31, 2003

                                       OR

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

                        FOR THE TRANSITION PERIOD FROM TO

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

                        Commission File Number 000-23597



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


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


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


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



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

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

The number of shares outstanding of the Registrant's Common Stock as of April
30, 2003, was 13,842,877.


================================================================================
<PAGE>
                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

                    FOR THE NINE MONTHS ENDED MARCH 31, 2003

                                TABLE OF CONTENTS


                                                                            PAGE
                                                                            ----
PART I.   FINANCIAL INFORMATION

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

          Condensed Consolidated Balance Sheets as of March 31, 2003
          and June 30, 2002 ...............................................   3

          Condensed Consolidated Statements of Operations for the Three
          and Nine Months Ended March 31, 2003 and 2002 ...................   4

          Condensed Consolidated Statements of Comprehensive Loss for
          the Three and Nine Months Ended March 31, 2003 and 2002 .........   4

          Condensed Consolidated Statements of Cash Flows for the Nine
          Months Ended March 31, 2003 and 2002 ............................   5

          Notes to Condensed Consolidated Financial Statements ............   6


Item 2.   Management's Discussion and Analysis of Financial Condition
          -----------------------------------------------------------
          and Results of Operations .......................................  16
          -------------------------


Item 3.   Quantitative and Qualitative Disclosures about Market Risk ......  37
          ----------------------------------------------------------


Item 4.   Controls and Procedures .........................................  37
          -----------------------




PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings ...............................................  38
          -----------------


Item 5.   Other Information ...............................................  38
          -----------------


Item 6.   Exhibits and Reports on Form 8-K ................................  38
          --------------------------------
          (Items 2, 3, and 4 of Part II are
          not applicable and have been omitted)



          SIGNATURES ......................................................  39

          CERTIFICATIONS ..................................................  40


                                        2
<PAGE>
                          PART I. FINANCIAL INFORMATION

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

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
<TABLE><CAPTION>
                                                                MARCH 31, 2003     JUNE 30, 2002
                                                                 ------------      ------------
<S>                                                              <C>               <C>
ASSETS
Current:
     Cash and cash equivalents...............................    $      3,679      $      5,439
     Receivables, net .......................................           5,767             4,284
     Prepaids and other .....................................             628             1,719
                                                                 ------------      ------------
         Total current assets ...............................          10,074            11,442
Property and equipment, net .................................           5,543             5,786
Goodwill ....................................................          12,506             1,941
Intangibles, net ............................................           1,386             1,202
                                                                 ------------      ------------
         Total assets........................................    $     29,509      $     20,371
                                                                 ============      ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
     Accounts payable........................................    $      2,594      $      2,377
     Accrued expenses .......................................           3,178             2,739
     Deferred revenue .......................................           2,327             2,167
     Accrued restructuring ..................................             799                --
     Short-term debt ........................................             290                --
     Current portion of long-term debt ......................             434                --
     Capital leases .........................................              25                --
                                                                 ------------      ------------
         Total current liabilities ..........................           9,647             7,283

Non-current:
     Accrued restructuring ..................................              97                --
     Long-term debt .........................................             434                --
     Capital leases .........................................              48                --
     Other long-term liabilities ............................             127                --
                                                                 ------------      ------------
         Total non-current liabilities ......................             706                --
                                                                 ------------      ------------
         Total liabilities ..................................          10,353             7,283

Commitments and contingencies--Note 9

Stockholders' equity:
     Preferred stock; $0.001 par value per share,
        5,000 shares authorized; no shares issued
        or outstanding ......................................              --                --
     Common stock; $0.001 par value per share,
        75,000 shares authorized; 13,821 and 11,208
        shares issued and outstanding .......................              14                11
     Additional paid-in capital .............................          44,202            34,053
     Accumulated deficit.....................................         (24,002)          (20,124)
     Accumulated other comprehensive loss ...................          (1,058)             (852)
                                                                 ------------      ------------
         Total stockholders' equity .........................          19,156            13,088
                                                                 ------------      ------------
         Total liabilities and stockholders' equity..........    $     29,509      $     20,371
                                                                 ============      ============
</TABLE>
                 The accompanying notes are an integral part of
                 the condensed consolidated financial statements

                                        3
<PAGE>
EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)


<TABLE><CAPTION>
                                                         THREE MONTHS ENDED              NINE MONTHS ENDED
                                                             MARCH 31,                       MARCH 31,
                                                     --------------------------      --------------------------
                                                        2003            2002            2003            2002
                                                     ----------      ----------      ----------      ----------
<S>                                                  <C>             <C>             <C>             <C>
Revenue:
    License fees and royalties .................     $    5,696      $    5,011      $   16,012      $   14,787
    Services and other .........................          1,665             816           4,141           2,372
                                                     ----------      ----------      ----------      ----------
        Total net revenue ......................          7,361           5,827          20,153          17,159

Cost of net revenue:
    License fees and royalties .................            287             351             854             996
    Services and other .........................            785             338           2,311             866
                                                     ----------      ----------      ----------      ----------
        Total cost of net revenue ..............          1,072             689           3,165           1,862
                                                     ----------      ----------      ----------      ----------
              Gross profit .....................          6,289           5,138          16,988          15,297

Operating expenses:
    Research and development ...................          1,709           2,406           5,558           7,950
    Acquired in-process research and development             --              --             430              --
    Marketing and sales ........................          3,830           3,360          10,761          10,314
    General and administrative .................          1,240           1,143           3,747           3,273
    Amortization of goodwill ...................             --             231              --             694
    Restructuring charges ......................            361              --             497              --
                                                     ----------      ----------      ----------      ----------
        Total operating expenses ...............          7,140           7,140          20,993          22,231
                                                     ----------      ----------      ----------      ----------
        Loss from operations ...................           (851)         (2,002)         (4,005)         (6,934)
Other expense (income), net ....................            (42)             33              58             (50)
Interest expense ...............................             65              35             264              44
                                                     ----------      ----------      ----------      ----------
        Loss before income taxes ...............           (874)         (2,070)         (4,327)         (6,928)
Income tax benefit .............................            (79)         (1,700)           (133)         (1,746)
                                                     ----------      ----------      ----------      ----------
        Loss from continuing operations ........           (795)           (370)         (4,194)         (5,182)
Income from discontinued operations, net of tax             147             147             316             152
                                                     ----------      ----------      ----------      ----------
        Net loss ...............................     $     (648)     $     (223)     $   (3,878)     $   (5,030)
                                                     ==========      ==========      ==========      ==========

Basic and diluted earnings (loss) per share:
    Loss from continuing operations ............     $    (0.06)     $    (0.03)     $    (0.31)     $    (0.47)
    Earnings from discontinued operations ......           0.01            0.01            0.02            0.01
                                                     ----------      ----------      ----------      ----------
Net loss per share .............................     $    (0.05)     $    (0.02)     $    (0.29)     $    (0.46)
                                                     ==========      ==========      ==========      ==========

Number of shares used in per share calculations:
    Basic and diluted ..........................         13,821          11,083          13,221          11,013
</TABLE>


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
<TABLE><CAPTION>
                                                        THREE MONTHS ENDED               NINE MONTHS ENDED
                                                             MARCH 31,                       MARCH 31,
                                                     --------------------------      --------------------------
                                                        2003            2002            2003            2002
                                                     ----------      ----------      ----------      ----------
<S>                                                  <C>             <C>             <C>             <C>
Net loss ..........................                  $     (648)     $     (223)     $   (3,878)     $   (5,030)
Change in currency translation, net                        (167)             10            (207)             31
                                                     ----------      ----------      ----------      ----------
    Comprehensive loss ............                  $     (815)     $     (213)     $   (4,085)     $   (4,999)
                                                     ==========      ==========      ==========      ==========
</TABLE>
                 The accompanying notes are an integral part of
                 the condensed consolidated financial statements

                                        4
<PAGE>
EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)



<TABLE><CAPTION>
                                                                                      NINE MONTHS ENDED MARCH 31,
                                                                                    ------------------------------
                                                                                        2003              2002
                                                                                    ------------      ------------
<S>                                                                                 <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss ..................................................................     $     (3,878)     $     (5,030)
    Adjustments to reconcile net loss to net cash used by operating activities:
        Provision for bad debts ...............................................              110               238
        Provision for excess and obsolete inventory ...........................               86                 3
        Depreciation and amortization .........................................            1,418             2,213
        Acquired in-process research and development ..........................              430                --
        Interest expense related to warrants ..................................              151                --
        Other .................................................................              132                42
        Changes in assets and liabilities, net of effect of acquisitions:
           Receivables ........................................................             (871)            1,495
           Inventories ........................................................               25               317
           Prepaids and other assets ..........................................              359               476
           Deferred revenue ...................................................             (331)              653
           Accrued payroll expenses ...........................................                4            (1,113)
           Accounts payable and accrued expenses ..............................             (609)           (1,884)
                                                                                    ------------      ------------
               Net cash used by operating activities ..........................           (2,974)           (2,590)


CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment ........................................              (82)              (51)
    Acquisition - AppReach, net of cash acquired ..............................               --               (15)
    Acquisition - ViaFone, net of cash acquired ...............................            1,119                --
    Other investing activities ................................................              156                77
                                                                                    ------------      ------------
               Net cash provided by investing activities ......................            1,193                11
                                                                                    ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of common stock ................................              101               614
    Borrowings on line of credit ..............................................              290                --
    Payments on long-term debt ................................................             (342)               --
                                                                                    ------------      ------------
               Net cash provided by financing activities ......................               49               614
    Effect of exchange rate changes on cash ...................................              (28)                8
                                                                                    ------------      ------------
    Net decrease in cash and cash equivalents .................................           (1,760)           (1,957)

CASH AND CASH EQUIVALENTS:
    Beginning of period .......................................................            5,439             6,585
                                                                                    ------------      ------------
    End of period .............................................................     $      3,679      $      4,628
                                                                                    ============      ============
</TABLE>




                 The accompanying notes are an integral part of
                 the condensed consolidated financial statements

                                        5
<PAGE>

EXTENDED SYSTEMS INCORPORATED

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

NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and the British pound sterling to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in currency exchange rates. While these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed.
These forward contracts do not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and, as such, the
contracts are recorded in the consolidated balance sheet at fair value. We
report a net currency gain or loss based on changes in the fair value of forward
contracts combined with the changes in fair value of the underlying asset or
liability being managed. As of March 31, 2003, we had no forward contracts in
place. We had forward contracts with a nominal value of $1.9 million in place
against the euro and British pound sterling at June 30, 2002 that matured within
30 days. We recognized a net currency exchange gain of $36,000 for the three
months ended March 31, 2003 and a net currency exchange loss of $26,000 for the
three months ended March 31, 2002. We recognized net currency exchange losses of
$82,000 and $67,000 for the nine months ended March 31, 2003 and 2002,
respectively.

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

                                       6
<PAGE>

Our diluted earnings or loss per share computations exclude the following common
stock equivalents, as the impact of their inclusion would have been antidilutive
as of March 31:
                                                    2003           2002
                                                    ----           ----
Stock options.......................               3,501          2,912
Warrants............................                  35             35

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

As of the beginning of fiscal 2003, we discontinued amortization of
approximately $1.9 million of net goodwill as required by SFAS No. 142. Because
an assembled workforce no longer meets the definition of an identifiable
intangible asset, we reclassified the net assembled workforce balance on our
books of $138,000 to goodwill as of the beginning of fiscal 2003. In lieu of
amortization, we performed an impairment review of our goodwill balance upon the
initial adoption of SFAS No. 142. We concluded that there was no impairment in
our recorded goodwill.

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

<TABLE><CAPTION>
                                                THREE MONTHS ENDED                    NINE MONTHS ENDED
                                                      MARCH 31,                            MARCH 31,
                                           -----------------------------         ---------------------------
                                              2003               2002               2003             2002
                                           ----------         ----------         ----------       ----------
<S>                                        <C>                <C>                <C>              <C>
Net loss:
 Reported net loss ................        $     (648)        $     (223)        $   (3,878)      $   (5,030)
Goodwill amortization (1) .........              --                  231               --                694
                                           ----------         ----------         ----------       ----------
 Adjusted net loss ................        $     (648)        $        8         $   (3,878)      $   (4,336)
                                           ==========         ==========         ==========       ==========

Basic and diluted loss per share:
Reported loss per share ...........        $    (0.05)        $    (0.02)        $    (0.29)      $    (0.46)
Goodwill amortization (1) .........              --                 0.02               --               0.07
                                           ----------         ----------         ----------       ----------
Adjusted basic and diluted loss per
share .............................        $    (0.05)        $     0.00         $    (0.29)      $    (0.39)
Number of shares used in per share
calculations ......................            13,821             11,083             13,221           11,013
</TABLE>

(1)   Includes $19,000 of amortization for the three months ended March 31, 2002
      and $56,000 of amortization for the nine months ended March 31, 2002
      related to assembled workforce assets that were reclassified as goodwill
      effective July 1, 2002.

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

RECENTLY ISSUED ACCOUNTING STANDARDS. Effective January 1, 2003, we adopted SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities",
which supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring). This new
standard requires companies to recognize costs associated with exit or disposal
activities when the costs are incurred rather than at the date of a commitment
to an exit or disposal plan. Costs covered by the standard include lease
termination costs and certain employee severance costs that are

                                       7
<PAGE>

associated with a restructuring, discontinued operation, plant closing, or other
exit or disposal activity. Adoption of this statement had no material effect on
our financial position or results of operations.

Effective January 1, 2003, we adopted the disclosure provisions of FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a reconciliation of
changes in the entity's product warranty liabilities. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The adoption of this interpretation did not
have a material effect on our financial position or results of operations.
Disclosure of our guarantees, indemnifications, and warranties is included in
Note 9.

Effective January 1, 2003, we adopted the interim disclosure provisions of SFAS
No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format. The
transition and annual disclosure requirements are effective for our fiscal year
beginning July 1, 2003. We currently plan to continue accounting for stock-based
compensation under Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," and do not anticipate changing to
the fair value method of accounting.

We apply APB No. 25 and its related interpretations to measure compensation
expense for stock-based compensation plans. If compensation expense for
stock-based compensation plans had been determined under SFAS No. 123, our net
loss would have been equal to the pro forma amounts indicated below for the
three and nine months ended March 31, 2003 and 2002:

<TABLE><CAPTION>
                                                                         THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                              MARCH 31,                   MARCH 31,
                                                                       ----------------------      ----------------------
                                                                         2003          2002          2003          2002
                                                                       --------      --------      --------      --------
<S>                                                                    <C>           <C>           <C>           <C>
Net loss attributed to common shares, as reported ................     $   (648)     $   (223)     $ (3,878)     $ (5,030)
Less:
Total stock-based employee compensation expense determined
under a fair value based method for all grants, net of tax effects       (1,291)       (1,444)       (4,275)       (5,151)
                                                                       --------      --------      --------      --------
Net loss attributable to common shares, proforma .................     $ (1,939)     $ (1,667)     $ (8,153)     $(10,181)
                                                                       ========      ========      ========      ========
Basic and diluted loss per share:
         Net loss, as reported ...................................     $  (0.05)     $  (0.02)     $  (0.29)     $  (0.46)
         Net loss, proforma ......................................     $  (0.14)     $  (0.15)     $  (0.62)     $  (0.92)
</TABLE>

We determined the fair value of options at the date of grant using the
Black-Scholes option-pricing model. We assumed no future dividends will be paid.
The other weighted-average assumptions and the weighted-average fair values of
stock options are as follows for the three and nine months ended March 31, 2003
and 2002:

<TABLE><CAPTION>
                                                                         THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                              MARCH 31,                   MARCH 31,
                                                                       ----------------------      ----------------------
                                                                         2003          2002          2003          2002
                                                                       --------      --------      --------      --------
<S>                                                                    <C>           <C>           <C>           <C>
Risk-free interest rate:
     Option plans ................................................          3.6%          4.9%          3.9%          4.6%
     Purchase plan ...............................................          3.7%          3.7%          3.7%          3.7%

Expected life in years:
     Option plans ................................................          7.6           7.6           7.6           7.6
     Purchase plan ...............................................          0.5           0.5           0.5           0.5

Volatility factor ................................................        102.4%        106.6%        102.4%        106.6%
Dividend yield ...................................................            0%            0%            0%            0%
</TABLE>
                                       8
<PAGE>

NOTE 2.  DISCONTINUED OPERATIONS

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

The following summarizes the results of discontinued operations:

<TABLE><CAPTION>
                                                                         THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                              MARCH 31,                   MARCH 31,
                                                                       ----------------------      ----------------------
                                                                         2003          2002          2003          2002
                                                                       --------      --------      --------      --------
<S>                                                                    <C>           <C>           <C>           <C>
 Net revenue .....................................................     $    520      $    563      $  1,143      $  1,961
 Gross profit ....................................................          239           423           480           880
 Income tax provision ............................................           87           172           188           253
 Income from discontinued operations,
      net of taxes ...............................................          147           147           316           152
Earnings per share from discontinued operations:
      Basic and diluted ..........................................     $   0.01      $   0.01      $   0.02      $   0.01
</TABLE>

NOTE 3.  RESTRUCTURING CHARGES

We recorded $361,000 in workforce reduction costs during the third quarter of
fiscal 2003, consisting primarily of severance, benefits, and other costs
related to the termination of 13 employees in research and development and
marketing and sales, of which 9 were located in the United States, 3 in Canada
and 1 in Europe. We paid $143,000 of these charges in the third quarter of
fiscal 2003. We will pay $115,000 of the accrued charges in the fourth quarter
of fiscal 2003 and the remaining balance of $103,000 will be paid out in the
first quarter of fiscal 2004.

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

During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone, Inc. ("ViaFone"). Prior
to our acquisition of the company, ViaFone had implemented a restructuring
program that resulted in charges for workforce reduction costs, costs related to
closing its office in France and excess facilities costs related to lease
commitments for space no longer used in Brisbane, California. At the time we
completed the ViaFone acquisition, there were $993,000 of future lease
commitments that had been accrued but not yet paid, $266,000 of workforce
reduction liabilities and $30,000 of liabilities relating to the closure of
ViaFone's French office.
As of March 31, 2003, the workforce reduction liabilities and liabilities
related to closing ViaFone's French office had been paid in full, and the
balance of future lease commitments assumed was $679,000. We will pay $145,000
in each of the next four quarters and $99,000 in the final quarter of fiscal
2004 for these lease commitments.

A summary of the restructuring costs is outlined as follows:

<TABLE><CAPTION>
                                                                        Workforce
                                                                        Reduction  Facilities and
                                                                         Costs      Other Costs      Total
                                                                        --------      --------      --------
<S>                                                                      <C>           <C>           <C>
Balance at June 30, 2002 ..........................................          $--           $--           $--
Restructuring charges incurred in first quarter of fiscal 2003 ....          136          --             136
Restructuring accrual assumed with ViaFone acquisition ............          266         1,023         1,289
Cash payments .....................................................         (227)          (24)         (251)
                                                                        --------      --------      --------
Balance at September 30, 2002 .....................................          175           999         1,174
</TABLE>
                                       9
<PAGE>

<TABLE><CAPTION>
<S>                                                                      <C>           <C>           <C>
Cash payments .....................................................         (141)         (175)         (316)
                                                                        --------      --------      --------
Balance at December 31, 2002 ......................................           34           824           858
Restructuring charges incurred in third quarter of fiscal 2003 ....          361          --             361
Adjustment to the accrual assumed with ViaFone acquisition ........          (14)         --             (14)
Cash payments .....................................................         (164)         (145)         (309)
                                                                        --------      --------      --------
Balance at March 31, 2003 .........................................     $    217      $    679      $    896
                                                                        ========      ========      ========
</TABLE>

NOTE 4.  GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

We recorded $11 million of goodwill upon closing of the ViaFone acquisition in
the first quarter of fiscal 2003. In the second and third quarters of fiscal
2003, we adjusted the purchase price allocation to reflect a reduction in
accrued acquisition costs and revisions to the fair values of certain assets
acquired and liabilities assumed at the date of acquisition. These adjustments
resulted in a net decrease to goodwill of approximately $198,000 and $346,000,
respectively. No goodwill was impaired or written off in the first nine months
of fiscal 2003. The changes in the carrying amount of goodwill for the nine
months ended March 31, 2003 are as follows:

Balance as of June 30, 2002...........................................  $ 1,941
Reclassification of certain intangibles to goodwill in connection
with SFAS 142.........................................................      138
Acquisitions during the period........................................   10,971
Post-acquisition adjustments in the second quarter of fiscal 2003.....    (198)
Post-acquisition adjustments in the third quarter of fiscal 2003......    (346)
                                                                        -------
Balance as of March 31, 2003..........................................  $12,506
                                                                        =======

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

<TABLE><CAPTION>
                                           AS OF MARCH 31, 2003                          AS OF JUNE 30, 2002
                                -----------------------------------------     -----------------------------------------
                                  Gross                                         Gross
                                 Carrying      Accumulated                     Carrying      Accumulated
                                  Amount       Amortization        Net          Amount       Amortization        Net
                                  ------       ------------        ---          ------       ------------        ---
<S>                             <C>            <C>             <C>            <C>            <C>             <C>
Purchased technology .....      $    3,691     $   (2,376)     $    1,315     $    2,911     $   (1,848)     $    1,063
Assembled workforce (1)               --             --              --              375           (237)            138

Customer relationships                  80             (9)             71           --             --              --
Non-compete covenants ....               6             (6)           --                6             (6)           --

Other ....................               5             (5)           --                5             (4)              1
                                ----------     ----------      ----------     ----------     ----------      ----------
Total ....................      $    3,782     $   (2,396)     $    1,386     $    3,297     $   (2,095)     $    1,202
                                ==========     ==========      ==========     ==========     ==========      ==========
</TABLE>

(1)   As part of our adoption of SFAS No. 142, we reclassified $138,000 of net
      assembled workforce to goodwill as of July 1, 2002.

Amortization of other intangible assets, reported as a component of cost of net
revenue, was $189,000 and $146,000 for the three months ended March 31, 2003 and
2002, respectively. Amortization of other intangible assets, reported as a
component of cost of net revenue, was $537,000 and $437,000 for the nine months
ended March 31, 2003 and 2002, respectively. Based on the identified intangible
assets recorded at March 31, 2003, the estimated future amortization expense for
the remaining three months of fiscal year 2003 and fiscal years 2004, 2005,
2006, 2007 and 2008 is $189,000, $621,000, $204,000, $172,000, $172,000, and
$29,000, respectively.

NOTE 5.  BUSINESS COMBINATIONS

In August 2002, we completed our acquisition of ViaFone. ViaFone was a privately
held, leading provider of real-time, mobile platform and mobile applications
that connect field sales and service employees with critical business systems,
information and processes of their enterprise. As a result of the acquisition,
we expect to benefit from the licensing of ViaFone's software technology and
from the addition of an experienced professional services organization. We also
expect to benefit from the strong cross-selling opportunities present within
each company's customer base and strategic relationships. The adjusted total
purchase price of $10.6 million consisted of $9.9 million of Extended Systems
common stock (2,550,000 shares issued based on the average stock price for the
five trading days

                                       10
<PAGE>

surrounding May 28, 2002) and $0.7 million of direct transaction costs. The
total purchase price decreased by $87,000 in the second quarter of fiscal 2003
due to an $87,000 decrease in direct transaction costs resulting from the
true-up of accrued transaction costs at the time of payment. In exchange for the
Extended Systems common stock issued, all outstanding shares of ViaFone common
and preferred stock were acquired. As part of the acquisition agreement, an
additional 450,000 shares of Extended Systems common stock were issued to
shareholders of ViaFone and placed in an escrow fund for a period of up to one
year to be used as the exclusive source of reimbursement to us for breaches of
certain terms of the agreement, including, among other provisions, failure of
ViaFone to achieve certain revenue and net loss targets for the nine months
ended September 30, 2002. ViaFone did not meet these revenue and net loss
targets, and all 450,000 shares held in escrow were returned to us in December
2002 to satisfy our claims against the escrow. In accordance with the applicable
provisions of the Delaware General Corporation Law, all 450,000 shares
automatically became treasury stock.

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

                                          AMORTIZATION
                                             PERIOD         AMOUNT
                                          ------------     -------
Existing technology.....................      5 yrs.       $   780
In-process research and development.....       n/a             430
Net tangible assets/liabilities (1).....       n/a         (1,058)
Customer relationships..................      5 yrs.            80
Goodwill (2)............................       n/a          10,427
                                                           --------
Purchase price (3)......................                   $10,659
                                                           ========

(1)   This amount reflects a net adjustment of $111,000 in the second quarter
      and a net adjustment of $346,000 in the third quarter to the fair values
      of certain assets acquired and liabilities assumed from ViaFone.

(2)   This amount reflects a reduction in accrued direct acquisition costs of
      $87,000 and net adjustments to the fair values of certain assets acquired
      and liabilities assumed from ViaFone in the second and third quarters of
      fiscal 2003 of $111,000 and $346,000, respectively.

(3)   This amount reflects a reduction in accrued direct acquisition costs of
      $87,000.

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

Current assets...............................   $  4,722
Property and equipment.......................        589
                                                --------
Total assets acquired........................      5,311
Current liabilities..........................     (4,960)
Deferred revenue.............................       (491)
Non-current liabilities......................       (918)
                                                --------
Net tangible assets acquired.................   $ (1,058)
                                                ========

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

The purchased in-process research and development was charged to operations at
the time of acquisition as it had not yet reached technological feasibility and
had no alternative future use. The value assigned to in-process research and
development was determined by estimating the costs to develop the purchased
in-process research and development into a commercially viable product,
estimating the resulting net cash flows from sale of those products once
commercially viable, and discounting the net cash flows back to their present
values using discount rates of either 19% or 21%, depending on the technology.
These rates were based on the industry segment for the technology, the nature of
the products to be developed, the length of time to complete development, and
the overall maturity and history of the development team. The in-process
research and development percentage of completion was estimated to range from
50% to 80%. As of March 31, 2003, the projects in-process at the time of
acquisition had been completed with no material differences in the cost to
complete from that originally estimated.

The results of operations for the three and nine months ended March 31, 2003
include the operations of ViaFone from August 31, 2002. The following unaudited
pro forma consolidated results of continuing operations assume the ViaFone
acquisition occurred at the beginning of each period presented:

                                       11
<PAGE>

<TABLE><CAPTION>
                                                PRO FORMA (UNAUDITED)      PRO FORMA (UNAUDITED)
                                                 THREE MONTHS ENDED          NINE MONTHS ENDED
                                                      MARCH 31,                   MARCH 31,
                                               ----------------------      ----------------------
                                                 2003          2002          2003          2002
                                               --------      --------      --------      --------
<S>                                            <C>           <C>           <C>           <C>
Net revenue from continuing operations ...     $  7,361      $  6,633      $ 20,503      $ 19,772
Loss from continuing operations ..........         (795)       (3,698)       (7,474)      (21,128)

Loss per share from continuing operations:
Basic and diluted ........................     $  (0.06)     $  (0.27)     $  (0.57)     $  (1.56)
</TABLE>

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



NOTE 6.  RECEIVABLES                            AS OF                AS OF
                                               MARCH 31,            JUNE 30,
                                                 2003                 2002
                                              ----------           ----------
Accounts receivable ................          $    6,663           $    5,109
Other receivables ..................                  98                   67
Allowance for doubtful accounts ....                (994)                (892)
                                              ----------           ----------
                                              $    5,767           $    4,284
                                              ==========           ==========

NOTE 7.  PROPERTY AND EQUIPMENT                 AS OF                AS OF
                                               MARCH 31,            JUNE 30,
                                                 2003                 2002
                                              ----------           ----------
Land and land improvements .........          $    1,007           $      897
Buildings ..........................               5,793                5,864
Computer equipment .................               5,699                5,443
Furniture and fixtures .............               2,286                2,302
                                              ----------           ----------
                                                  14,785               14,506
Less accumulated depreciation ......              (9,242)              (8,720)
                                              ----------           ----------
                                              $    5,543           $    5,786
                                              ==========           ==========

                                                AS OF                AS OF
NOTE 8.  ACCRUED EXPENSES                      MARCH 31,            JUNE 30,
                                                 2003                 2002
                                              ----------           ----------
Accrued payroll and related benefits          $    1,519           $    1,211
Other ..............................               1,659                1,528
                                              ----------           ----------
                                              $    3,178           $    2,739
                                              ==========           ==========

NOTE 9.  COMMITMENTS AND CONTINGENCIES

COMMITMENTS. We currently lease office space at our locations in Brisbane,
California; Herrenberg, Germany; Toronto, Canada; Corvallis, Oregon; Paris,
France; Bristol, England; Los Gatos, California; American Fork, Utah;
`s-Hertogenbosch, the Netherlands; and Atlanta, Georgia. We also lease certain
equipment under non-cancelable operating and capital leases. Lease expense under
operating lease agreements was $222,000 and $92,000 for the three months ended
March 31, 2003 and 2002, respectively. Lease expense under operating lease
agreements was $566,000 and $298,000 for the nine months ended March 31, 2003
and 2002, respectively.

                                       12
<PAGE>


Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank ("SVB"). We restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005. At March 31, 2003, the loan balance was $868,000.

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

<TABLE><CAPTION>
                                                            YEAR ENDING JUNE 30,
                                            --------------------------------------------------
                                             2003       2004       2005       2006       2007    THEREAFTER    TOTAL
                                            ------     ------     ------     ------     ------     ------     ------
<S>                                         <C>        <C>        <C>        <C>        <C>           <C>     <C>
Restructuring-related commitments:
   Operating leases (1) ...............     $  145     $  534     $ --       $ --       $ --          $--     $  679
Other commitments:
   SVB debt principal (2) .............        109        434        325       --         --         --          868
   SVB debt interest ..................         16         46         11       --         --         --           73
   Post-retirement benefits ...........         11         14         14         14         14         72        139
   Capital leases (2) .................         10         28         28         12          7       --           85
   Operating leases ...................        192        658        233        162        148        278      1,671
                                            ------     ------     ------     ------     ------     ------     ------
Total other commitments ...............        338      1,180        611        188        169        350      2,836
                                            ------     ------     ------     ------     ------     ------     ------
Total commitments .....................     $  483     $1,714     $  611     $  188     $  169     $  350     $3,515
                                            ======     ======     ======     ======     ======     ======     ======
</TABLE>

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

(2)   The term debt and capital leases are reported on the balance sheet as
      current and non-current liabilities, depending on the timing of when
      payments are due.

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

                                                            AS OF
                                                          MARCH 31,
                                                            2003
                                                          --------
Gross capital lease obligations ................          $     85
Less imputed interest ..........................               (12)
                                                          --------
Present value of net minimum lease payments ....                73
Less current portion ...........................               (25)
                                                          --------
Non-current capital lease obligations ..........          $     48
                                                          ========

GUARANTEES. We have provided a letter of credit that secures our rental payments
at our Brisbane, California location. We could be required to perform under this
guarantee if we were to default with respect to any of the terms, provisions,
covenants, or conditions of the lease agreement. This guarantee is renewed
annually for successive one-year terms until the expiration of our lease on May
31, 2004. The maximum potential amount of future payments we could be required
to make under this letter of credit as of March 31, 2003 is $120,000.

We have also provided a guarantee that secures our rental payments at our
Bristol, England location. We could be required to perform under this guarantee
if we were to default with respect to any of the terms, provisions, covenants,
or conditions of the lease agreement. This guarantee is valid until the
expiration of our lease on January 13, 2005. The maximum potential amount of
future payments we could be required to make under this letter of credit as of
March 31, 2003 is approximately $25,000.

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

As permitted under Delaware law, we have agreements whereby we indemnify our
officers and directors for certain events or occurrences while the officer or
director is, or was, serving at our request in such capacity. The term of the

                                       13
<PAGE>

indemnification period is for the officer's or director's lifetime. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have a director and officer
insurance policy that limits our exposure and enables us to recover a portion of
any future amounts paid. We have not incurred costs to defend lawsuits or settle
claims related to these indemnification agreements.


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

WARRANTIES. We offer warranties on both our software products and discontinued
hardware products as explained below:

         Software Products
         -----------------
         We warrant that certain of our software products will perform
         substantially in conformance with our standard published specifications
         in effect at the time of delivery of those products for a period of
         time, generally 30 to 90 days depending on the product. Under new
         requirements issued by the European Commission, as of January 1, 2002
         we generally warrant our products sold to businesses in the European
         Union for a one-year period. If there is a failure of the product to
         conform to specifications, we generally use reasonable commercial
         efforts to promptly correct any non-conforming product or replace it
         with a functionally equivalent product. If we are unable to correct or
         replace a non-conforming product, we may choose to accept return of the
         product and refund the license fees paid.

         If our licensed product is not delivered or downloaded electronically,
         we also warrant that the media (diskette or CD-ROM) on which such
         product is delivered shall be free from defects in materials and
         workmanship under normal use for a period of 90 days from the date of
         shipment. If there is a media failure, we replace the media. If we are
         unable to do so within a reasonable amount of time, the customer may
         return the product and request a refund.

         Additionally, we warrant that we will use commercially reasonable
         efforts to provide the maintenance services as set forth in our annual
         support and maintenance agreement in a professional and workmanlike
         manner.

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

         Discontinued Hardware Products
         ------------------------------
         For our discontinued hardware products we offer warranties for a period
         of time, generally ranging from one to three years. We record an
         accrual for the estimated future costs associated with warranty claims
         based upon our historical experience and our estimate of the level of
         future costs. We assess the adequacy of our warranty reserve on a
         quarterly basis and make adjustments, if needed.

The following table reconciles the changes in our warranty reserve for the three
months ended March 31, 2003:

Balance at December 31, 2002.........................................   $   125
Accrual for warranty reserve for sales made during the quarter
ended March 31, 2003.................................................        63
Warranty expirations during the quarter ended March 31, 2003.........       (55)
                                                                        -------
Balance at March 31, 2003............................................   $   133
                                                                        =======

LINE OF CREDIT. On January 15, 2002, we entered into a loan and security
agreement with Silicon Valley Bank, under which we can access up to $5.0 million
of financing in the form of a demand line of credit. Our borrowing capacity is
limited to 75% of eligible accounts receivable, net of current payments due on
our long-term debt. Certain of our assets collateralize the line of credit.
Interest on any borrowings will be paid at prime plus one percent but not less
than 5.5%. The line of credit agreement requires us to maintain certain
financial ratios and expires on January 15, 2004. As of March 31, 2003, we had
borrowed $290,000 on this line of credit and were in compliance with all
financial covenants required under the line of credit. We repaid the balance in
full in April of 2003.

                                       14
<PAGE>

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

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

NOTE 10.  INCOME TAXES

For the three and nine months ended March 31, 2003, we recorded income tax
expense related primarily to foreign withholding taxes of $8,000 and $55,000,
respectively. For the three months ended March 31, 2003, the income tax expense
associated with discontinued operations was $87,000. The tax benefit of $79,000
for continuing operations consists of $8,000 of foreign withholding taxes,
offset by a tax benefit of $87,000. For the nine months ended March 31, 2003,
the income tax expense associated with discontinued operations was $188,000. The
tax benefit of $133,000 for continuing operations consists of $55,000 of foreign
withholding taxes, offset by a tax benefit of $188,000. The income tax benefit
for the three and nine months ended March 31, 2002 includes the benefit of an
income tax refund of $1.6 million.

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

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

At March 31, 2003, we had one operating segment. Our mobile information
management segment provides the expertise, strategy and solutions to help
enterprise organizations realize their business goals through mobile technology.
Our software and services portfolio includes data synchronization and device
management solutions; mobile applications for sales, service and pharmaceutical
professionals; mobile application development tools and services; embedded
client/server database management systems; and Bluetooth and IrDA wireless
connectivity software. We sell our mobile information management solutions
primarily to enterprises, application developers, resellers and original
equipment manufacturers.

In the three and nine months ended March 31, 2003 and 2002, no customer
accounted for more than 10% of our net revenue from continuing operations.

                                       15
<PAGE>

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

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

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

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

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

                                       16
<PAGE>

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

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

REVENUE RECOGNITION

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

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

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

For arrangements with multiple obligations (for instance, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method. This means that we defer revenue
from the total fees associated with the arrangement equivalent to the
vendor-specific objective evidence of fair value of the elements of the
arrangement that have not yet been delivered. The vendor-specific objective
evidence of fair value of any undelivered element is established by using
historical evidence specific to Extended Systems. For example, the
vendor-specific objective evidence of fair value for maintenance and support is
based upon separate sales of renewals to other customers or upon the renewal
rates quoted in the contracts, and the fair value of services, such as training
or consulting, is based upon separate sales by us of these services to other
customers. If we had allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support and bug fixes and, from time to time,
minor enhancements to ensure that the products comply with their warranty
provisions. Accordingly, we accrue for warranty costs at the time the product
revenue is recognized.

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

We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we generally recognize revenue
from training services as these services are performed. For professional
services that involve significant implementation, customization, or modification
of our software that is essential to the functionality of the software, we
generally recognize both the service and related software license revenue over
the period of the engagement, using the percentage-of-completion method. In
cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, where significant
uncertainty about the project completion exists, or where an arrangement
provides for customer acceptance, we defer the contract revenue under the
completed contract method of accounting until the

                                       17
<PAGE>

uncertainty is sufficiently resolved or the contract is complete. If we were to
make different judgments or utilize different estimates of the total amount of
work we expect to be required to complete an engagement, the timing of our
revenue recognition from period to period, as well as the related margins, might
differ materially from that previously reported.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS

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

We assess the impairment of our goodwill balance on at least an annual basis.
This impairment review involves a two-step process as follows:

     o   Step 1 -we compare the fair value of our reporting units to the
         carrying value, including goodwill, of each of those units. For each
         reporting unit where the carrying value, including goodwill, exceeds
         the unit's fair value, we move on to step 2. If a unit's fair value
         exceeds the carrying value, no further work is performed and no
         impairment charge is necessary.

     o   Step 2 - we perform an allocation of the fair value of the reporting
         unit to its identifiable tangible and non-goodwill intangible assets
         and liabilities. This will derive an implied fair value for the
         reporting unit's goodwill. We then compare the implied fair value of
         the reporting unit's goodwill with the carrying amount of the reporting
         unit's goodwill. If the carrying amount of the reporting unit's
         goodwill is greater than the implied fair value of its goodwill, an
         impairment charge is recognized for the excess.

If we were to make different judgments or utilize different estimates of fair
value, our measurement of any impairment may have differed materially from that
reported.

INCOME TAXES

On a quarterly basis we evaluate our deferred tax asset balance for
realizability. To the extent we believe it is more likely than not that some or
all of our deferred tax assets will not be realized, we establish a valuation
allowance against the deferred tax assets. As of March 31, 2003, we had recorded
a valuation allowance against 100 percent of our net deferred tax assets due to
uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses and foreign tax credits,
before they expire. This valuation allowance was recorded based on our recent
losses, estimates of future U.S. and foreign jurisdiction taxable income and our
judgments regarding the periods over which our deferred tax assets will be
recoverable. If we had made different judgments or utilized different estimates,
the amount or timing of the valuation allowance recorded may have differed
materially from that reported. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to
reduce the valuation allowance, potentially resulting in an income tax benefit
in the period of reduction, which could materially impact our financial position
and results of operations.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

                                       18
<PAGE>

OVERVIEW
--------

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

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

o    software license fees and royalties;

o    support and maintenance fees; and

o    professional services, including consulting services, training, and
     non-recurring development fees that we generate when we adapt products to
     customers' specifications.

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

<TABLE><CAPTION>
                                                                         THREE MONTHS ENDED          NINE MONTHS ENDED
                                                                              MARCH 31,                   MARCH 31,
                                                                       ----------------------      ----------------------
      NET REVENUE PERCENTAGES BY REGION                                  2003          2002          2003          2002
                                                                       --------      --------      --------      --------
<S>                                                                         <C>           <C>           <C>           <C>
North America ....................................................           55%           48%           51%           52%
International:
   Europe
     Comprehensive loss ..........................................           40            38            41            36
   Asia ..........................................................            4            11             5             9
   Other regions .................................................            1             3             3             3
                                                                       --------      --------      --------      --------
        Total international ......................................           45%           52%           49%           48%
                                                                       --------      --------      --------      --------
                   Net revenue from continuing operations ........          100%          100%          100%          100%
                                                                       ========      ========      ========      ========
</TABLE>

In the third quarter of fiscal 2003, the percentage of our net revenue generated
from North American sales increased from the same period in fiscal 2002
primarily due to an increase in sales of our XTNDConnect and Advantage software
products sold in North America, sales of our OneBridge products in North America
and increased professional services customers in North America. The percentage
of our net revenue derived from international customers varies from quarter to
quarter as a result of customer buying patterns.

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

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

We sell our products directly to end-user customers and also market and sell
many of our products through multiple indirect channels, primarily distributors
and resellers. In the three and nine months ended March 31, 2003 and 2002, no
customer accounted for more than 10% of our net revenue from continuing
operations.

NET REVENUE
-----------
<TABLE><CAPTION>
                                           THREE MONTHS ENDED                       NINE MONTHS ENDED
                                                 MARCH 31,                               MARCH 31,
                                    -----------------------------------     -----------------------------------
                                      2003        CHANGE         2002         2003        CHANGE         2002
                                    --------     --------      --------     --------     --------      --------
<S>                                 <C>              <C>       <C>          <C>               <C>      <C>
Revenue:
License fees and royalties ....     $  5,696           14%     $  5,011     $ 16,012            8%     $ 14,787
Services and other ............        1,665          104           816        4,141           75         2,372
                                    --------     --------      --------     --------     --------      --------
     Total net revenue ........     $  7,361           26%     $  5,827     $ 20,153           17%     $ 17,159
                                    ========     ========      ========     ========     ========      ========
</TABLE>
                                       19
<PAGE>

LICENSE FEES AND ROYALTIES. License and royalty revenue consists of fees for
licenses of our software products. Growth in revenue in the third quarter of
fiscal 2003 from the same period in fiscal 2002 was due primarily to the
addition of revenue from sales of our OneBridge mobile solutions that were added
with our acquisition of ViaFone on August 30, 2002 and an increase in license
revenue of 13% from our Advantage Database Server and 7% from our XTNDConnect
products.

The increase in license fees and royalty revenue for the nine months ended March
31, 2003 from the same period in fiscal 2002 was primarily due to the addition
of revenue from our OneBridge mobile solutions, and an 11% increase in revenue
from our XTNDConnect products. These increases were partially offset by a 15%
decrease in our Bluetooth and infrared software revenue resulting from a
decrease in the number of software development kits sold and from a reduction in
prepaid nonrefundable Bluetooth royalties.

We expect revenue from license fees and royalties to increase moderately in the
final quarter of fiscal 2003. This increase is expected to result primarily from
increased license and royalty revenue from our XTNDConnect products. Although we
are beginning to see shipment of Bluetooth products by some of our customers, we
do not currently anticipate that Bluetooth royalty revenue will be a material
component of our net revenue in the fourth quarter of fiscal 2003.

SERVICES AND OTHER. Services and other revenue consists primarily of support and
maintenance contracts sold to our customers and fees for professional services.
Our professional services typically consist of standard product installations,
training, significant customization of our standard license product, or
non-recurring engineering ("NRE"). The primary drivers of the increase in
service revenue for the three months ended March 31, 2003 from the same period
in fiscal 2002 were the increase in professional services we saw as a result of
adding our OneBridge mobile solutions in the first quarter of fiscal 2003 and a
92% increase in support and maintenance and professional services revenue
associated with our XTNDConnect products.

The increase in service revenue for the nine months ended March 31, 2003 from
the same period in fiscal 2002 was primarily due to the addition of professional
services associated with our OneBridge mobile solutions and a 104% increase in
support and maintenance and professional services revenue associated with our
XTNDConnect products. These increases were partially offset by a 49% decline in
service revenue associated with our Bluetooth and infrared software products.

We expect services revenue in the fourth quarter of fiscal 2003 to remain
relatively flat or increase slightly compared to third quarter levels. Although
we expect the amount of billable hours in our professional services group to
increase, all or a portion of the revenue related to such an increase may be
required to be deferred under our revenue recognition policy.

DEFERRED REVENUE. Deferred revenue consists of amounts invoiced to or received
from customers for which revenue has not been recognized. Deferred revenue
generally results from maintenance and support agreements, consulting or
training services not yet rendered, and license revenue deferred until the
requirements of our revenue recognition policy are met. We generally recognize
deferred revenue over the term of the maintenance and support agreements, as
consulting and training services are rendered, and as the requirements of our
revenue recognition policy are met. Deferred revenue was $2.3 million at March
31, 2003 compared to $2.2 million at June 30, 2002. We expect deferred revenue
to increase in future periods as service revenue becomes a larger percentage of
our overall net revenue.

GROSS MARGIN
------------
<TABLE><CAPTION>
                                                THREE MONTHS ENDED                       NINE MONTHS ENDED
                                                      MARCH 31,                               MARCH 31,
                                         -----------------------------------     -----------------------------------
                                           2003        CHANGE         2002         2003        CHANGE         2002
                                         --------     --------      --------     --------     --------      --------
<S>                                      <C>              <C>       <C>          <C>               <C>      <C>
Gross profit:
     License fees and royalties ....     $  5,409           16%     $  4,660     $ 15,158           10%     $ 13,791
     Services and other ............          880           84           478        1,830           22         1,506
                                         --------     --------      --------     --------     --------      --------
     Total gross profit ............     $  6,289           22%     $  5,138     $ 16,988           11%     $ 15,297
                                         ========     ========      ========     ========     ========      ========
</TABLE>
                                       20
<PAGE>

<TABLE><CAPTION>
                                                     THREE MONTHS ENDED                NINE MONTHS ENDED
                                                           MARCH 31,                        MARCH 31,
                                                  ---------------------------      ---------------------------
                                                           CHANGE IN                        CHANGE IN
                                                   2003     MARGIN %     2002       2003     MARGIN %     2002
                                                  -----      -----      -----      -----      -----      -----
<S>                                                  <C>         <C>       <C>        <C>         <C>       <C>
Gross margin as a percentage of revenue:
       License fees and royalties ...........        95%         2         93%        95%         2         93%
       Services and other ...................        53         (6)        59         44        (20)        64
                                                  -----      -----      -----      -----      -----      -----
       Total gross margin ...................        85%        (3)        88%        84%        (5)        89%
                                                  =====      =====      =====      =====      =====      =====
</TABLE>

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

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

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

LICENSE FEES AND ROYALTIES. The increase in gross profit from license fees and
royalties for the three and nine months ended March 31, 2003 from the same
periods of fiscal 2002 is primarily due to the increase in net revenue. The
modest increase in gross margin for these same periods was primarily driven by a
decrease in operations-related overhead resulting from our restructurings,
offset partially by an increase in amortization of purchased technology from our
acquisition of ViaFone.

SERVICES AND OTHER. The growth in gross profit from services and other net
revenue in the three and nine months ended March 31, 2003 as compared to the
same periods in fiscal 2002 is primarily attributable to revenue generated by
the addition of a dedicated professional services organization in the first
quarter of fiscal 2003 in conjunction with our acquisition of ViaFone and an
increase in support and maintenance revenue from our XTNDConnect products. In
both periods, these increases were partially offset by a decline in NRE fees.
The decline in gross margin from services and other revenue in the three and
nine months ended March 31, 2003 as compared to the same periods in fiscal 2002
is primarily the result of a higher mix of professional services revenue in both
periods, which typically generates lower margins than support and maintenance or
NRE revenue. The utilization rate for professional services personnel increased
in the third quarter of fiscal 2003 as compared to the prior two quarters.
Because the costs of professional services personnel are generally fixed, the
increased utilization rate contributed to an increase in gross margin for the
third quarter.

We expect our overall gross margin will be in a range of 82% to 85% for the
fourth quarter of fiscal 2003. This range is primarily driven by an expected
increase in license fees and royalties net revenue and an expected increase in
services net revenue, as well as the expected mix between license fees and
services.

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

RESEARCH AND DEVELOPMENT EXPENSES

<TABLE><CAPTION>
                                              THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                    MARCH 31,                           MARCH 31,
                                       -------------------------------      -------------------------------
                                        2003         CHANGE      2002        2003         CHANGE      2002
                                       ------        ------     ------      ------        ------     ------
<S>                                    <C>            <C>       <C>         <C>            <C>       <C>
Research and development .........     $1,709         (29)%     $2,406      $5,558         (30)%     $7,950
As a % of net revenue ............         23%                      41%         28%                      46%
</TABLE>
                                       21
<PAGE>

Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, consulting costs and
facility expenses. The decrease in research and development expenses in the
three months ended March 31, 2003 from the same period in fiscal 2002 was
primarily the result of a reduction of approximately $945,000 in personnel costs
subsequent to our restructurings and the termination on December 31, 2002 of a
bonus plan in place for two former employees, offset in part by an increase of
approximately $233,000 in personnel costs related to the engineering personnel
added with the completion of the ViaFone acquisition. The decrease in research
and development expenses for the nine months ended March 31,2003 from the same
period in fiscal 2002 was primarily the result a reduction of approximately $2.9
million in personnel costs subsequent to our restructurings and the termination
of a bonus plan in place for two former employees, offset in part by an increase
of approximately $566,000 for the addition of ViaFone engineering personnel. At
March 31, 2003 we had 66 full-time equivalent research and development personnel
and contractors, including 11 added with the ViaFone acquisition, a decrease
from the 98 full-time equivalent personnel at the same time last year.

For the fourth quarter of fiscal 2003, we expect our research and development
costs to be consistent with the level we saw in the third quarter of fiscal
2003.

MARKETING AND SALES EXPENSES

<TABLE><CAPTION>
                                             THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                  MARCH 31,                           MARCH 31,
                                       ------------------------------      ------------------------------
                                        2003       CHANGE       2002        2003       CHANGE       2002
                                       ------      ------      ------      ------      ------      ------
<S>                                    <C>             <C>     <C>         <C>              <C>    <C>
Marketing and sales ..............     $3,830          14%     $3,360      $10,761          4%     $10,314
As a % of net revenue ............         52%                     58%          53%                     60%
</TABLE>

Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing and sales staff, promotional expenses,
pre-sales support costs, and facilities costs. The increase in marketing and
sales expenses in the three months ended March 31, 2003 from the same period in
fiscal 2002 was primarily due to an increase of approximately $642,000 in
personnel and facilities costs, including an increase related to the ViaFone
acquisition and in commissions paid to the sales force. This was offset, in
part, by a decrease of approximately $122,000 in company-wide promotional
expenses. For the nine months ended March 31, 2003, the increase in marketing
and sales expenses was primarily due to an increase of approximately $799,000 in
personnel and facilities costs, offset, in part, by a decrease of approximately
$404,000 in company-wide promotional expenses. At March 31, 2003, we had 109
full-time equivalent marketing, sales, and support personnel and contractors,
including 7 added with the ViaFone acquisition, as compared to 117 full-time
equivalent personnel and contractors at the same time last year.

We expect marketing and sales expenses to decrease slightly in the last quarter
of fiscal 2003 as a result of the workforce reduction completed in the third
quarter of fiscal 2003 and other reductions in discretionary spending.

GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE><CAPTION>
                                             THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                  MARCH 31,                           MARCH 31,
                                       ------------------------------      ------------------------------
                                        2003       CHANGE       2002        2003       CHANGE       2002
                                       ------      ------      ------      ------      ------      ------
<S>                                    <C>             <C>     <C>         <C>              <C>    <C>
General and administrative .......     $1,240           8%     $1,143      $3,747          14%     $3,273
As a % of net revenue ............         17%                     20%         19%                     19%
</TABLE>

General and administrative expenses primarily consist of salaries and other
personnel costs for our finance, management information systems, human resources
and other administrative groups, as well as professional service fees and
directors' and officers' insurance costs. The increase in general and
administrative expenses for the three months ended March 31, 2003 from the same
period in fiscal 2002 was primarily attributable to an increase in legal fees of
approximately $350,000, due largely to the Pumatech lawsuit. This increase was
partially offset by a decrease of approximately $97,000 in personnel costs
resulting from our restructuring in prior quarters and a decrease of
approximately $123,000 in our bad debt expense. The increase in general and
administrative expenses for the nine months ended March 31, 2003 as compared to
the same period in fiscal 2002 was primarily attributable to an increase in
legal fees of approximately $906,000, due largely to the Pumatech lawsuit,
offset in part by a decrease of

                                       22
<PAGE>

approximately $296,000 in personnel costs resulting from our restructuring in
prior quarters and a decrease of approximately $168,000 in our bad debt expense.

We expect general and administrative expenses in the fourth quarter of fiscal
2003 to be consistent with the level we saw in the third quarter of fiscal 2003.
At March 31, 2003, we had 31 full-time equivalent employees in administration,
as compared to 39 full-time equivalent personnel at the same time last year. No
general and administrative personnel were added with our acquisition of ViaFone.

AMORTIZATION OF INTANGIBLES

We report amortization of non-goodwill intangibles, primarily consisting of
purchased technology, as a component of our cost of net revenue. Amortization of
non-goodwill intangibles was $189,000 and $146,000 for the three months ended
March 31, 2003 and 2002, respectively. Amortization of non-goodwill intangibles
was $537,000 and $437,000 for the nine months ended March 31, 2003 and 2002,
respectively. The net increase in amortization of non-goodwill intangibles is a
result of the addition of non-goodwill intangibles from our acquisition of
ViaFone. This increase was partially offset by a decrease in amortization
resulting from our adoption of SFAS No. 142, which resulted in $138,000 of
intangible assets, comprised of assembled workforce intangibles, being
reclassified as goodwill in the first quarter of fiscal 2003.

 As a result of our adoption of SFAS No. 142, which requires that goodwill no
longer be amortized, we did not record amortization of goodwill for the nine
months ended March 31, 2003. Amortization of goodwill was $231,000 and $694,000
for the three months and nine months ended March 31, 2002, respectively. This
amount was reflected in our statement of operations as an operating expense.

RESTRUCTURING CHARGES

For the three months ended March 31, 2003, we recorded a restructuring charge of
approximately $361,000 relating to severance and benefits for 13 terminated
employees in research and development and marketing and sales, of which 9 were
located in the United States, 3 in Canada and 1 in Europe. We paid $143,000 of
these charges in the third quarter of fiscal 2003. In the fourth quarter of
fiscal 2003, we will pay $115,000 of the accrued charges and the remaining
balance of $103,000 will be paid out in the first quarter of fiscal 2004. We
expect that operating costs will be reduced by approximately $200,000 each
quarter as a result of this restructuring.

During our first quarter ended September 30, 2002, we continued our efforts to
streamline operations and completed a restructuring plan to further reduce costs
and improve operating efficiencies. As a result, we recorded $136,000 in
workforce reduction costs during the quarter. The restructuring charge consisted
primarily of severance, benefits, and other costs related to the termination of
16 employees in research and development, marketing and sales, manufacturing,
and administration, of which 14 were located in the United States and 2 in
Europe. All of these charges were paid in the first quarter of fiscal 2003. We
expect that operating costs will be reduced by approximately $300,000 each
quarter as a result of this workforce reduction.

During the first quarter of fiscal 2003 we also assumed a restructuring
liability in connection with our acquisition of ViaFone. Prior to our
acquisition of the company, ViaFone had implemented a restructuring program that
resulted in charges for workforce reduction costs, costs related to closing its
office in France and excess facilities costs related to lease commitments for
space no longer used in Brisbane, California. At the time we completed the
ViaFone acquisition, there were $993,000 of future lease payments that had been
accrued but not yet paid, $266,000 of workforce reduction liabilities and
$30,000 of French office liabilities. As of March 31, 2003, the workforce
reduction liabilities and liabilities related to the closing ViaFone's French
office had been paid in full, and the balance of the future lease commitments
was $679,000. We will pay $145,000 in each of the next four quarters and $99,000
in the final quarter of fiscal 2004 for these lease commitments.

                                       23
<PAGE>

A summary of the restructuring costs is outlined as follows:

<TABLE><CAPTION>
                                                                       Workforce
                                                                       Reduction  Facilities and
                                                                          Costs     Other Costs       Total
                                                                        --------      --------      --------
<S>                                                                      <C>           <C>           <C>
Balance at June 30, 2002 ..........................................          $--           $--           $--
Restructuring charges incurred in first quarter of fiscal 2003 ....          136          --             136
Restructuring accrual assumed with ViaFone acquisition ............          266         1,023         1,289
Cash payments .....................................................         (227)          (24)         (251)
                                                                        --------      --------      --------
Balance at September 30, 2002 .....................................          175           999         1,174
Cash payments .....................................................         (141)         (175)         (316)
                                                                        --------      --------      --------
Balance at December 31, 2002 ......................................           34           824           858
Restructuring charges incurred in third quarter of fiscal 2003 ....          361          --             361
Adjustment to the accrual assumed with ViaFone acquisition ........          (14)         --             (14)
Cash payments .....................................................         (164)         (145)         (309)
                                                                        --------      --------      --------
Balance at March 31, 2003 .........................................     $    217      $    679      $    896
                                                                        ========      ========      ========
</TABLE>

In order to meet our objective to reach profitability, we may incur additional
restructuring charges in future quarters.

INCOME TAX BENEFIT

<TABLE><CAPTION>
                                             THREE MONTHS ENDED                   NINE MONTHS ENDED
                                                  MARCH 31,                           MARCH 31,
                                       ------------------------------      ------------------------------
                                        2003       CHANGE       2002        2003       CHANGE       2002
                                       ------      ------      ------      ------      ------      ------
<S>                                    <C>             <C>     <C>         <C>              <C>    <C>
Income tax benefit ...............     $  (79)        (95)%    $(1,700)    $ (133)        (92)%    $(1,746)
As a % of income (loss) before taxes        9%                      82%         3%                      25%
</TABLE>

During the three and nine months ended March 31, 2003 and 2002, we recorded
income tax expense for foreign withholding taxes and foreign taxes payable by
our international subsidiaries. In all periods we allocated income tax expense
to income from discontinued operations, which resulted in our allocating a tax
benefit to continuing operations. We recorded a valuation allowance against
additional income tax benefits associated with our loss from continuing
operations. The change in the income tax benefit from continuing operations for
the third quarter and the first nine months of fiscal 2003 from the same periods
in fiscal 2002 resulted primarily from an income tax refund of approximately
$1.6 million recorded in the third quarter of fiscal 2002.

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

In August 2002, we completed our acquisition of ViaFone. ViaFone was a privately
held, leading provider of real-time, mobile platform and mobile applications
that connect field sales and service employees with critical business systems,
information and processes of their enterprise. As a result of the acquisition,
we expect to benefit from the licensing of ViaFone's software technology and
from the addition of an experienced professional services organization. We also
expect to benefit from the strong cross-selling opportunities present within
each company's customer base and strategic relationships. The adjusted total
purchase price of $10.6 million consisted of $9.9 million of Extended Systems
common stock (2,550,000 shares issued based on the average stock price for the
five trading days surrounding May 28, 2002) and $0.7 million of direct
transaction costs. The total purchase price decreased by $87,000 in the second
quarter of fiscal 2003 due to an $87,000 decrease in direct transaction costs
resulting from the true-up of accrued transaction costs at the time of payment.
In exchange for the Extended Systems common stock issued, all outstanding shares
of ViaFone common and preferred stock were acquired. As part of the acquisition
agreement, an additional 450,000 shares of Extended Systems common stock were
issued to shareholders of ViaFone and placed in an escrow fund for a period of
up to one year to be used as the exclusive source of reimbursement to us for
breaches of certain terms of the agreement, including, among other provisions,
failure of ViaFone to achieve certain revenue and net loss targets for the nine
months ended September 30, 2002. ViaFone did not meet these revenue and net loss
targets, and all 450,000 shares held in escrow were returned to us in December
2002 to satisfy our claims against the escrow. In accordance with the applicable
provisions of Delaware General Corporation Law, all 450,000 shares automatically
became treasury stock.

                                       24
<PAGE>

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

                                            AMORTIZATION
                                               PERIOD          AMOUNT
                                            ------------      --------
Existing technology.......................     5 yrs.         $   780
In-process research and development.......       n/a              430
Net tangible assets/liabilities (1).......       n/a          (1,058)
Customer relationships....................     5 yrs.              80
Goodwill (2)..............................       n/a           10,427
                                                              --------
Purchase price (3)........................                    $10,659
                                                              ========

(1)  This amount reflects a net adjustment of $111,000 in the second quarter and
     a net adjustment of $346,000 in the third quarter to the fair values of
     certain assets acquired and liabilities assumed from ViaFone.

(2)  This amount reflects a reduction in accrued direct acquisition costs of
     $87,000 and net adjustments to the fair values of certain assets acquired
     and liabilities assumed from ViaFone in the second and third quarters of
     fiscal 2003 of $111,000 and $346,000, respectively.

(3)  This amount reflects a reduction in accrued direct acquisition costs of
     $87,000.

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

Current assets...........................................     $  4,722
Property and equipment...................................          589
                                                              ---------
Total assets acquired....................................        5,311
Current liabilities......................................      (4,960)
Deferred revenue.........................................        (491)
Non-current liabilities..................................        (918)
                                                              ---------
Net tangible assets acquired.............................     $(1,058)
                                                              =========

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

The purchased in-process research and development was charged to operations at
the time of acquisition as it had not yet reached technological feasibility and
had no alternative future use. The value assigned to in-process research and
development was determined by estimating the costs to develop the purchased
in-process research and development into a commercially viable product,
estimating the resulting net cash flows from sale of those products once
commercially viable, and discounting the net cash flows back to their present
values using discount rates of either 19% or 21%, depending on the technology.
These rates were based on the industry segment for the technology, the nature of
the products to be developed, the length of time to complete development, and
the overall maturity and history of the development team. The in-process
research and development percentage of completion was estimated to range from
50% to 80%. As of March 31, 2003, the projects in-process at the time of
acquisition had been completed with no material differences in the cost to
complete from that originally estimated.

The results of operations for the three months and nine months ended March 31,
2003 include the operations of ViaFone from August 31, 2002. The following
unaudited pro forma consolidated results of continuing operations assume the
ViaFone acquisition occurred at the beginning of each period presented:

<TABLE><CAPTION>
                                                     PRO FORMA (UNAUDITED)       PRO FORMA (UNAUDITED)
                                                      THREE MONTHS ENDED           NINE MONTHS ENDED
                                                           MARCH 31,                   MARCH 31,
                                                    ----------------------      ----------------------
                                                      2003          2002          2003          2002
                                                    --------      --------      --------      --------
<S>                                                 <C>           <C>           <C>           <C>
Net revenue from continuing operations ........     $  7,361      $  6,633      $ 20,503      $ 19,772
Loss from continuing operations ...............         (795)       (3,698)       (7,474)      (21,128)

Loss per share from continuing operations:
Basic and diluted .............................     $  (0.06)     $  (0.27)     $  (0.57)     $  (1.56)
</TABLE>
                                       25
<PAGE>

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

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

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

The following summarizes the results of discontinued operations:

<TABLE><CAPTION>
                                                                  THREE MONTHS ENDED                      NINE MONTHS ENDED
                                                                       MARCH 31,                              MARCH 31,
                                                         ------------------------------------   ------------------------------------
                                                           2003         CHANGE         2002       2003         CHANGE         2002
                                                         --------      --------      --------   --------      --------      --------
<S>                                                      <C>              <C>        <C>        <C>               <C>       <C>
Net revenue ..........................................   $    520         (8)%       $    563   $  1,143          (42)%     $  1,961
Income from discontinued operations, net of taxes ....   $    147          0 %       $    147   $    316          108%      $    152
</TABLE>

In the three months and nine months ended March 31, 2003, our revenue from
discontinued operations consisted primarily of revenue from our discontinued
infrared hardware business. Although our infrared hardware business was
discontinued in the first quarter of fiscal 2003, we continued to see revenue
from this business in the second and third quarters as customers continued to
place orders. The decrease in net revenue from discontinued operations for the
three months and nine months ended March 31, 2003 from the same periods of
fiscal 2002 was primarily a result of there being no revenue from our former
Singapore subsidiary and no material revenue from our discontinued printing
solutions segment in fiscal 2003. Net income from discontinued operations
remained flat compared to the third quarter of fiscal 2002 primarily because the
decrease in combined net income from our Singapore and printing solutions
businesses in fiscal 2003 was offset by an increase in net income from our
infrared hardware business. Income from discontinued operations was higher in
the nine months ended March 31, 2003 compared to the same period in the prior
year due to an increase in net income from our infrared hardware operations in
fiscal 2003, as a result of minimizing expenses related to these operations, and
because in the same periods of fiscal 2002 the Singapore and printing solutions
businesses generated a combined net loss.

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

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

NET CASH USED BY OPERATING ACTIVITIES

                                                  NINE MONTHS ENDED MARCH 31,
                                                  ---------------------------
                                                    2003                2002
                                                  -------             -------
Net cash used by operating activities.........    $(2,974)            $(2,590)


Net cash used by operating activities in the nine months ended March 31, 2003
was primarily the result of our net loss, an increase in receivables, and a
decrease in deferred revenue and accounts payable and accrued expenses, adjusted
for such non-cash items as depreciation, amortization and acquired in-process
research and development. Net cash used by operating activities in the nine
months ended March 31, 2002 was primarily the result of our net loss, adjusted
for such non-cash items as depreciation and amortization, and the result of a
decrease in accounts payable, accrued expenses and accrued payroll. These cash
outflows were partially offset by a decrease in receivables, prepaid expenses
and other assets, and inventories, and an increase in deferred revenue.

Accounts receivable, net of allowance, were $5.8 million and $4.3 million at
March 31, 2003 and June 30, 2002 respectively. The increase in accounts
receivable at March 31, 2003 is due primarily to an increase in net revenue.

                                       26
<PAGE>

We expect that our accounts receivable will continue to increase in the fourth
quarter of fiscal 2003 as a result of an expected increase in net revenues.
Accounts receivable may also increase in the future if net revenue from original
equipment manufacturers and international customers becomes a higher percentage
of our net revenue. Generally, these customers have longer payment cycles than
our customers in North America.

NET CASH PROVIDED BY INVESTING ACTIVITIES


                                                  NINE MONTHS ENDED MARCH 31,
                                                  ---------------------------
                                                    2003                2002
                                                  -------             -------

Net cash provided by investing activities......   $1,193              $   11

Net cash provided by investing activities in the nine months ended March 31,
2003 was primarily the result of completing the acquisition of ViaFone. As part
of our effort to control cash and expenses, we did not make a significant
investment in property and equipment in the nine months ended March 31, 2003 and
March 31, 2002.

We plan to incur aggregate capital expenditures of approximately $225,000 in the
fourth quarter of fiscal 2003, primarily for tenant improvements, and
approximately $250,000 throughout fiscal 2004, primarily for software, system
improvements and personal computers.

NET CASH PROVIDED BY FINANCING ACTIVITIES

                                                  NINE MONTHS ENDED MARCH 31,
                                                  ---------------------------
                                                    2003                2002
                                                  -------             -------

Net cash provided by financing activities......   $   49              $  614

Net cash provided by financing activities in the nine months ended March 31,
2003 was primarily the result of borrowing $290,000 on our line of credit and
proceeds from the issuance of common stock under our stock plans, offset
partially by the payments on term debt assumed as part of our acquisition of
ViaFone. Net cash provided by financing activities in the nine months ended
March 31, 2002 consisted of proceeds from the issuance of common stock under our
stock plans.

On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank, under which we can access up to $5.0 million of financing in the
form of a demand line of credit. Our borrowings under this facility are limited
to 75% of eligible accounts receivable, net of current payments due on our
long-term debt. Certain of our assets collateralize the line of credit. Interest
on any borrowings will be paid at prime plus one percent but not less than 5.5%.
The line of credit agreement requires us to maintain certain financial ratios
and expires on January 15, 2004. We are in compliance with all covenants. As of
March 31, 2003, we had borrowed $290,000 on this line-of-credit. We paid the
balance in full in April 2003.

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank. We restructured that debt
into a term loan due in 30 equal monthly installments bearing interest at 8%.
The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005. We are in compliance with all covenants related to this debt. At March31,
2003, the loan balance was $868,000.

We believe that our existing working capital and borrowing capacity and the
funds we expect to generate from our operations will be sufficient to fund our
anticipated working capital and capital expenditure requirements for the next
twelve months. We cannot be certain, however, that our underlying assumed levels
of revenues and expenses will be accurate. If our operating results were to fail
to meet our expectations or if Pumatech litigation fees, accounts receivable, or
other assets were to require a greater use of cash than is currently
anticipated, we could be required to seek additional sources of liquidity. These
sources of liquidity could include borrowing against our line of credit or
offering additional equity securities. Additionally, we currently own our
facility in Boise, Idaho, debt free. We have leased approximately 13,000 square
feet of excess office space in this facility and will continue to look for
tenants for the remaining excess space. We may consider a sale/leaseback or
mortgage on this facility as an additional source of working capital and
liquidity. If additional funds are raised through the issuance of equity
securities, substantial dilution to our stockholders could result. In the event
additional funds are required, adequate funds may not be available when needed
or may not be available on favorable terms, which could have a negative effect
on our business and results of operations.

                                       27
<PAGE>

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

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

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

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and British pound sterling, to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. While these instruments are subject to fluctuations
in value, these fluctuations are generally offset by fluctuations in the value
of the underlying asset or liability being managed, resulting in minimal net
exposure for us. These forward contracts do not qualify for hedge accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and, as such, the contracts are recorded in the consolidated balance
sheet at fair value. We report a net currency gain or loss based on changes in
the fair value of forward contracts combined with changes in fair value of the
underlying asset or liability being managed. The success of these currency
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, we could experience
unanticipated currency gains or losses. When determining whether to enter into
foreign currency forward contracts, we also consider the impact that the
settlement of such forward contracts may have on our cash position. To eliminate
a potential cash settlement of a forward position we may, from time to time,
decide not to use foreign currency forward contracts to manage fluctuations in
the value of foreign currencies on transactions with our international
subsidiaries. In a period where we do not enter into foreign currency forward
contracts, we could experience significant non-cash currency gains or losses if
the value of the U.S. dollar strengthens or weakens significantly in relation to
the value of the foreign currencies. We had no forward contracts in place as of
March 31, 2003. As of June 30, 2002, we had forward contracts with a nominal
value of $1.9 million in place against the euro and British pound sterling,
which matured within 30 days. We recognized a net currency exchange gain of
$36,000 for the three months ended March 31, 2003 and a net currency exchange
loss of $26,000 for the three months ended March 31, 2002. We recognized net
currency exchange losses of $82,000 and $67,000 for the nine months ended March
31, 2003 and 2002, respectively.

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

Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which supersedes Emerging Issues
Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). This new standard requires companies to
recognize costs associated with exit or disposal activities when the costs are
incurred rather than at the date of a commitment to an exit or disposal plan.
Costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Adoption of this
statement had no material effect on our financial position or results of
operations.

Effective January 1, 2003, we adopted the disclosure provisions of FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others." FIN 45 requires that a liability be recorded in the guarantor's balance
sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures
about the guarantees that an entity has issued, including a reconciliation of
changes in the entity's product warranty liabilities. The initial recognition
and initial measurement provisions of FIN 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002, irrespective of
the guarantor's fiscal year-end. The adoption of this interpretation did not
have a material effect on our financial position or results of operations.
Disclosure of our guarantees, indemnifications, and warranties is included in
Note 9 of our financial statements.

                                       28
<PAGE>

Effective January 1, 2003, we adopted the interim disclosure provisions of SFAS
No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure."
SFAS No. 148 provides alternative methods of transition for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format. The
transition and annual disclosure requirements are effective for our fiscal year
beginning July 1, 2003. We currently plan to continue accounting for stock-based
compensation under Accounting Principles Board Opinion No. 25 ("APB No. 25"),
"Accounting for Stock Issued to Employees," and do not anticipate changing to
the fair value method of accounting.


FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

WE HAVE A RECENT HISTORY OF LOSSES AND MAY CONTINUE TO GENERATE LOSSES IN THE
FOURTH QUARTER OF FISCAL 2003 AND IN FISCAL 2004.

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

o    our ability to generate sufficient revenue and control expenses;
o    buying patterns of our corporate information technology and original
     equipment manufacturer customers;
o    our ability to realize the benefits of the acquisition of ViaFone while
     minimizing the costs of integrating our business operations and products;
o    changes in customer demand for our products;
o    the timing of customer orders, which can be influenced by fiscal year-end
     buying patterns, seasonal trends or general economic conditions;
o    announcements or introductions of new products or services by our
     competitors;
o    the outcome of our dispute with Pumatech, Inc. and the impact of any
     litigation on our financial and management resources;
o    delays in our development and introduction of new products and services;
o    changes in our pricing policies as a result of increased competition;
o    the mix of distribution channels through which we sell our products;
o    the market acceptance of our new and enhanced products and the products of
     our original equipment manufacturers;
o    the market adoption rate of Bluetooth or other technologies on which a
     number of our products are based; o the emergence of new technologies or
     industry standards;
o    normal seasonality that we typically experience in the first quarter of our
     fiscal year; and
o    a shift in the mix of professional services and licensing revenue, which
     may result in fluctuations in our gross margin.

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

The market for our products depends on economic conditions affecting the broader
economic climate and spending on information technology, including mobile
applications and devices. Downturns in the overall economy may cause enterprises
to delay implementation of mobile device and application rollouts, reduce their
overall information technology budgets or reduce or cancel orders for our
products. Our original equipment manufacturer customers may also limit
development of new products that incorporate our products or reduce their level
of purchases of our products in the face of slower information technology
spending by their customers. We have seen a severe downturn in the worldwide
economy, beginning with the events surrounding September 11, 2001. We expect
this downturn to continue and are uncertain as to the severity and duration of
the downturn. In particular, capital spending in the information technology
sector generally has decreased in the past 18 months and many of our customers
and potential customers have experienced declines in their revenue and
operations. In this environment, customers may experience financial difficulty
or cease operations.

While we believe we have adequately factored these conditions into our current
revenue forecasts, if these conditions worsen or continue longer than expected,
demand for our products may be reduced as a result of enterprises

                                       29
<PAGE>

reducing information technology spending on our products and original equipment
manufacturers reducing their use of our products in their own products. As a
result, our revenue may fail to grow or decline, which would harm our operating
results. If the current economic slowdown persists or worsens, we also may be
forced to reduce our operating expenses, which could result in additional
charges incurred in connection with restructuring or other cost-cutting measures
we may implement. For example, in both the first and third quarters of fiscal
2003, we announced restructuring plans to reduce costs and improve operating
efficiencies and, as a result, incurred restructuring costs, primarily for
severance payments to terminated employees.

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

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

o   we may be unable to combine our product offerings and product lines with
    those of ViaFone quickly and smoothly, resulting in our having to spend
    additional time or money on integration of products and technology;
o   we may be unable to successfully demonstrate the benefits of the combined
    company's product line to our customers, resulting in delay or deferral of
    purchasing decisions by our customers;
o
o   we may be unable to retain and motivate key employees, resulting in delays
    and disruptions in integrating ViaFone's operations, products and technology
    and additional costs associated with recruiting and training replacement
    employees;
o   we may be unable to retain key alliances, resulting in an impairment of our
    ability to achieve our product development and marketing objectives;
o   If we do not successfully integrate ViaFone in a timely, efficient and
    effective manner, our business, financial condition and results of
    operations could be adversely affected.

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

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

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

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

                                       30
<PAGE>

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

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

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

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

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

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

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

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

As of March 31, 2003, the amount of goodwill and other identifiable intangibles
recorded on our books, net of accumulated amortization, was $13.9 million. We
ceased to amortize our existing goodwill upon our adoption of SFAS No. 142 as of
the beginning of fiscal 2003, and we expect to amortize $1.4 million of
identifiable intangibles over the next six fiscal years. However, to the extent
that our goodwill or other identifiable intangibles are considered to be
impaired because circumstances indicate their carrying value may not be
recoverable, all or a portion of these assets may be subject to write-off in the
quarter of impairment. Such impairment and any resulting write-off could have a
negative impact on our results of operations in the period goodwill or other
identifiable intangibles are written off.

                                       31
<PAGE>

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

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

We compete with:

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

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

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

The markets for our products are characterized by: o rapidly changing
technologies; o evolving industry standards; o frequent new product
introductions; and o short product life cycles.

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

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

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

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

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

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

Our products support the exchange of data with mobile devices via wired and
wireless connections. Our future growth will depend, in part, on the adoption of
wireless solutions by our customers. The adoption of wireless solutions is
dependent upon the development of 2.5 generation or 3rd generation ("2.5G" or
"3G") networks that are intended to support more complex applications and to
provide end users with a more satisfying user experience than today's

                                       32
<PAGE>

networks. If communication service providers delay their deployment of 2.5G or
3G networks or fail to roll such networks out successfully, our customers may
not adopt wireless technologies, there could be less demand for our products and
services and our business could be harmed. In addition, if communication service
providers fail to continue to make investments in their networks or invest at a
slower pace in the future, there may be less demand for our products and
services and our business could suffer.

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

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

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

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

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

                                       33
<PAGE>

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

In the third quarter of fiscal 2003, based on the region where the customer
resides, 45% of our revenue was generated from international sales. We expect
that international sales will continue to represent a substantial portion of our
revenue for the foreseeable future. International sales are subject to a number
of risks, including:

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

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

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

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

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

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

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

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

                                       34
<PAGE>

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

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

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

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

A substantially large number of shares of our common stock may be sold into the
public market within short time periods at various dates following the close of
the merger on August 30, 2002. As a result, our stock price could fall. Of the
approximately 2,550,000 shares of Extended Systems common stock issued in
connection with this merger (3,000,000 shares less the 450,000 escrow shares
returned to us in December 2002), approximately 459,087 shares were immediately
available for resale by the former stockholders of ViaFone and 2,090,786 shares
of Extended Systems common stock were subject to "lock-up" agreements that
restrict the timing of the resale of these shares. Under the lock-up agreements,
819,922 shares were released and available for sale in the public market on
February 28, 2003, six months after the closing date of the merger, an
additional 819,922 shares will be released and available for sale in the public
market on May 31, 2003, nine months after the closing date of the merger and an
additional 450,942 shares will be available for sale in the public market on
August 31, 2003, 12 months after the closing date of the merger and at anytime
thereafter. In comparison, the average daily trading volume of our common stock
for the five-day period ending on April 30, 2003 was 132,084. While Rule 145
under the Securities Act may impose some limitations on the amount of shares
certain ViaFone stockholders may sell, sales of a large number of newly released
shares of Extended Systems common stock could occur that could result in a sharp
decline in our stock price.

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

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

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

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

Our success depends upon the continuing contributions of our key management,
engineering, sales and marketing, and administrative personnel and our ability
to attract and retain key personnel. In four of the past seven quarters, we
completed restructuring plans that reduced our workforce by a total of
approximately 90 employees. Despite these reductions in workforce, we plan to
continue to recruit personnel with the specific technical skills that are
critical to our business. For example, throughout the remainder of fiscal 2003,
we expect to hire additional sales personnel as needed in order to capitalize on
market opportunities. However, we might be unable to attract the personnel we
need, and we may fail to retain other key personnel. We do not maintain any
key-person life insurance policies. The loss of key personnel, or our inability
to attract and retain additional personnel, could harm our business.

                                       35
<PAGE>

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

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

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

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

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

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

                                       36
<PAGE>



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

Substantially all of our liquid investments are at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. All of our liquid investments mature within 90 days or less of
March31, 2003, therefore, we believe that the market risk arising from our
holdings of liquid investments is minimal.

Sales made by our international subsidiaries are generally denominated in the
foreign country's currency. Fluctuations in exchange rates between the United
States dollar and other currencies could materially harm our business. From time
to time, we enter into foreign currency forward contracts, typically against the
Canadian dollar, euro and British pound sterling, to manage fluctuations in the
value of foreign currencies on transactions with our international subsidiaries,
thereby limiting our risk that would otherwise result from changes in exchange
rates. While these instruments are subject to fluctuations in value, these
fluctuations are generally offset by fluctuations in the value of the underlying
asset or liability being managed, resulting in minimal net exposure for us. The
success of these hedging activities depends upon estimation of intercompany
balances denominated in various foreign currencies. To the extent that these
forecasts are overstated or understated during periods of currency volatility,
we could experience unanticipated currency gains or losses. When determining
whether to enter into foreign currency forward contracts, we also consider the
impact that the settlement of such forward contracts may have on our cash
position. To eliminate a potential cash settlement of a forward position we may,
from time to time, decide not to use foreign currency forward contracts to
manage fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. In a period where we do not enter into foreign
currency forward contracts, we could experience significant non-cash currency
gains or losses if the value of the U.S. dollar strengthens or weakens
significantly in relation to the value of the foreign currencies. We had no
forward contracts in place as of March 31, 2003. As of June 30, 2002, we had
forward contracts with a nominal value of $1.9 million in place against the
euro, and British pound sterling that matured within 30 days.

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

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

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

                                       37
<PAGE>

                           PART II. OTHER INFORMATION

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

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


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

During our third quarter of fiscal 2003, Charles Jepson was appointed our Vice
President of Worldwide Sales and Marketing. In addition, our restructuring of
the sales and marketing organization has resulted in the departures of Brad
Surkamer, our Vice President of Sales, and Fernando Ruarte, our Vice President
of Products. Mr. Jepson has assumed the duties of both Mr. Surkamer and Don
Baumgartner, our former Vice President of Worldwide Marketing, who resigned
effective January 31, 2003. We have begun a search for Mr. Ruarte's replacement.


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

(A)  EXHIBITS

     EXHIBIT
     NUMBER    DESCRIPTION

     10.31     Employment Agreement between the Company and Charles W. Jepson
     99.1      Certification of Executive Officers pursuant to 18 U.S.C. Section
               1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
               Act of 2002


(B)  REPORTS ON FORM 8-K

     Not applicable.

ITEMS 2, 3, AND 4 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.


                                       38
<PAGE>

                                   SIGNATURES

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


                               EXTENDED SYSTEMS INCORPORATED

Dated: May 15, 2003
                               By:             /s/ KARLA K. ROSA
                                   ------------------------------------------
                                                 KARLA K. ROSA
                                   VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
                                  (PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)










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<PAGE>

                                 CERTIFICATIONS

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

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

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

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

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

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

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

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

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

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

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

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


Date: May 15, 2003                     By: /s/ STEVEN D. SIMPSON
                                           ----------------------------
                                           Steven D. Simpson
                                           President and Chief Executive Officer


                                       40
<PAGE>

                                 CERTIFICATIONS

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

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

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

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

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

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

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

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

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

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

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

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


Date: May 15, 2003                     By:  /s/ KARLA K. ROSA
                                            --------------------------
                                            Karla K. Rosa
                                            Vice President and Chief Financial
                                            Officer

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