<PAGE>

================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                               ------------------

                                    FORM 10-Q

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

                 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999

                                       OR

             / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  FOR THE TRANSITION PERIOD FROM_____ TO _____

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

                        Commission File Number 000-23597

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

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

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

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

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


The number of shares outstanding of the registrant's Common Stock as of
December 31, 1999 was 9,510,643.

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

                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

              FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999

                                      INDEX

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

                  Consolidated Statement of Operations
                  for the Three and Six Months Ended December 31, 1999 and 1998                        1

                  Consolidated Statement of Comprehensive Loss
                  for the Three and Six Months Ended December 31, 1999 and 1998                        1

                  Consolidated Balance Sheet
                  as of December 31, 1999 and June 30, 1999                                            2

                  Consolidated Condensed Statement of Cash Flows
                  for the Six Months Ended December 31, 1999 and 1998                                  3

                  Notes to Consolidated Financial Statements                                           4

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

         Item 3.  Quantitative and Qualitative Disclosures about Market Risk                          26


PART II.  OTHER INFORMATION

         Item 1.  Legal Proceedings                                                                   26

         Item 6.  Exhibits and Reports on Form 8-K                                                    27


SIGNATURE                                                                                             28

</TABLE>

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

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

<TABLE>
<CAPTION>

                                                               THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                  DECEMBER 31,                   DECEMBER 31,
                                                          ------------------------------  ----------------------------
                                                              1999             1998           1999           1998
                                                          -------------    -------------  -------------  -------------
<S>                                                      <C>                <C>           <C>            <C>
Net revenue                                                   $ 15,272          $ 9,259       $ 28,361       $ 22,803
Cost of net revenue                                              8,041            5,729         15,020         11,548
                                                          -------------    -------------  -------------  -------------
Gross profit                                                     7,231            3,530         13,341         11,255
Operating expenses:
   Research and development                                      2,198            1,729          4,448          3,267
   Acquired in-process research and development                      -              758          2,352            758
   Marketing and sales                                           4,354            4,118          8,518          7,722
   General and administrative                                    1,115              909          2,168          1,955
   Amortization of intangibles                                     237               16            407             16
                                                          -------------    -------------  -------------  -------------
      Loss from operations                                        (673)          (4,000)        (4,552)        (2,463)
Other expense (income), net                                         25              (96)           104           (362)
Interest expense                                                    57              183            235            370
                                                          -------------    -------------  -------------  -------------
Loss before income taxes                                          (755)          (4,087)        (4,891)        (2,471)
Income tax benefit                                                (287)          (1,146)        (1,362)          (580)
                                                          -------------    -------------  -------------  -------------
      Net loss                                                 $  (468)        $ (2,941)      $ (3,529)      $ (1,891)
                                                          =============    =============  =============  =============

Loss per share:
      Basic                                                    $ (0.05)        $  (0.36)      $  (0.39)      $  (0.23)
      Diluted                                                  $ (0.05)        $  (0.36)      $  (0.39)      $  (0.23)
Number of shares used in loss
   per share calculation:
      Basic                                                      9,320            8,282          9,158          8,266
      Diluted                                                    9,320            8,282          9,158          8,266

</TABLE>

CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>

                                                               THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                   DECEMBER 31,                  DECEMBER 31,
                                                          -----------------------------   ----------------------------
                                                              1999             1998           1999           1998
                                                          -------------    -------------  -------------  -------------
<S>                                                         <C>            <C>            <C>             <C>
Net loss                                                        $ (468)        $ (2,941)      $ (3,529)      $ (1,891)
Change in currency translation                                    (116)             (12)          (116)           354
                                                          -------------    -------------  -------------  -------------
Comprehensive loss                                              $ (584)        $ (2,953)      $ (3,645)      $ (1,537)
                                                          =============    =============  =============  =============
</TABLE>


The accompanying notes are an integral part of the financial statements


                                       1
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>

                                                           DECEMBER 31,           JUNE 30,
                                                               1999                 1999
                                                        -------------------   -----------------
<S>                                                        <C>                    <C>
ASSETS
Current:
    Cash and cash equivalents                                     $  3,716            $  9,668
    Short term investments                                               -               3,001
    Accounts receivable, net                                         9,665               9,778
    Income taxes receivable                                          1,763                 664
    Other receivables                                                1,305               1,147
    Inventories:
      Purchased parts                                                1,991               2,060
      Work in process                                                  356                 860
      Finished goods                                                 2,538               2,097
    Prepaids and other                                                 825                 945
    Deferred income taxes                                              374                 584
                                                        -------------------   -----------------
      Total current assets                                          22,533              30,804

Property and equipment, net                                          8,119               8,300
Intangibles, net                                                     7,055               1,402
Deferred income taxes                                                  607                   -
Other assets                                                           345                 293
                                                        -------------------   -----------------
      Total assets                                                $ 38,659            $ 40,799
                                                        ===================   =================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current:
    Accounts payable and accrued expenses                         $  5,941            $  4,609
    Accrued payroll and related benefits                               821               1,297
    Current debt                                                     3,484               8,206
                                                        -------------------   -----------------
      Total current liabilities                                     10,246              14,112
Long-term liabilities                                                    -                  92
                                                        -------------------   -----------------
      Total liabilities                                             10,246              14,204
                                                        -------------------   -----------------

Contingency

Shareholders' equity
    Common stock                                                        10                   9
    Additional paid-in capital                                      17,331              12,015
    Retained earnings                                               11,996              15,525
    Deferred compensation                                             (407)               (553)
    Accumulated other comprehensive loss                              (517)               (401)
                                                        -------------------   -----------------
      Total shareholders' equity                                    28,413              26,595
                                                        -------------------   -----------------
      Total liabilities and shareholders' equity                  $ 38,659            $ 40,799
                                                        ===================   =================
</TABLE>


The accompanying notes are an integral part of the financial statements


                                       2

<PAGE>

EXTENDED SYSTEMS INCORPORATED

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

<TABLE>
<CAPTION>
                                                                                        FOR THE SIX MONTHS ENDED
                                                                                               DECEMBER 31,
                                                                            --------------------------------------------
                                                                                   1999                     1998
                                                                            --------------------     -------------------
<S>                                                                         <C>                      <C>
NET CASH USED BY OPERATING ACTIVITIES                                       $              (247)     $           (2,555)

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition:
       Oval (1415) Limited, net of cash acquired                                         (5,273)                      -
       Rand Software Corporation, net of cash acquired                                        -                    (647)
       Parallax Research Pte                                                                  -                    (333)
    Maturities of available-for-sale securities                                           3,001                       -
    Purchase of available-for-sale securities                                                 -                  (3,750)
    Purchase of property and equipment                                                     (526)                   (622)
    Other investing activities                                                              (82)                   (141)
                                                                            --------------------     -------------------
             Net cash used by investing activities                                       (2,880)                 (5,493)
                                                                            --------------------     -------------------

CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments on long-term debt                                                           (8,413)                   (132)
    Net borrowings under line of credit agreement                                         3,288                       -
    Proceeds from the issuance of common stock                                            2,322                     564
    Other financing activities                                                                -                      23
                                                                            --------------------     -------------------
             Net cash provided by (used by) financing activities                         (2,803)                    455

    Effect of exchange rate changes on cash                                                 (23)                    160
                                                                            --------------------     -------------------
    Net decrease in cash and cash equivalents                                            (5,952)                 (7,433)

CASH AND CASH EQUIVALENTS:
    Beginning of period                                                                   9,668                  15,006
                                                                            --------------------     -------------------
    End of period                                                           $             3,716      $            7,573
                                                                            ====================     ===================
</TABLE>


The accompanying notes are an integral part of the financial statements


                                       3

<PAGE>


EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Extended Systems Incorporated has two primary operating segments. The Mobile
Information Management segment includes both universal mobile connectivity and
mobile data management products that enable mobile users to access, synchronize,
collect, and retrieve information on demand. The Printing Solutions segment
provides printer connectivity solutions in network and non-network computer
environments.

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

The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Notes thereto included in the
Company's 1999 Annual Report on Form 10-K.

LOSS PER SHARE. Diluted loss per share computations exclude stock options and
shares to the extent that their effect would have been antidilitive.

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

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

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

<TABLE>
<S>                                                     <C>
Net working capital                                            $    112
Property and equipment                                               45
Developed technology, goodwill
     and other intangibles                                        5,984
Acquired in-process research and development                      2,352
                                                        ----------------

                                                               $  8,493
                                                        ================
</TABLE>


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                         FOR THE SIX MONTHS ENDED
                                               DECEMBER 31,
                                         ------------------------
                                             1999        1998
                                         -----------  -----------
<S>                                      <C>          <C>
Net revenue                               $  28,580    $  23,309
Net loss                                     (3,487)      (2,005)
Loss per share:
    Basic                                     (0.42)       (0.23)
    Diluted                                   (0.42)       (0.23)
</TABLE>

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

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

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

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

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

The Company will use the remaining acquired in-process research and development
to provide further enhancements to the architecture of its XTNDConnect product
line, which at the time of the acquisition were only approximately 10-15%
complete. The acquired in-process research and development assigned to this
project was valued at $186,000 as of the date of the acquisition. The Company
expects to incur an additional $123,000, from the date of the acquisition, to
develop the in-process technology into a commercially viable


                                       5
<PAGE>

product with the nature of the efforts principally relating to development
and testing that is required to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The primary risk with the completion of this
project is the overall scope and complexity. The Company expects to complete
this project by October 2000.

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

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

The Company's Mobile Information Management ("MIM") segment includes both
universal mobile connectivity and mobile data management solutions that
enable mobile users to access, synchronize, collect and retrieve information
on demand. The Company's products in the MIM segment include wireless
connectivity products, data synchronization and management software, virtual
private network remote access servers, Internet appliances and database
management systems with remote access capabilities. MIM products are sold
primarily to OEM and corporate customers, application developers and computer
resellers.

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

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

The accounting policies of the segments are the same as those described in the
Summary of Significant Accounting Policies in the Company's 1999 Annual Report
on Form 10-K. There are no intersegment sales. Segment operating results are
measured based on income or loss from operations. The Company does not generally
distinguish its assets by reportable segment. Depreciation expense and other
indirect expenses are allocated to reportable segments using various methods
such as percentage of square footage used to total square footage and percent of
direct expense to total direct expenses.

Segment information is as follows:

<TABLE>
<CAPTION>
                                                        THREE MONTHS ENDED                  SIX MONTHS ENDED
                                                           DECEMBER 31,                       DECEMBER 31,
                                                  --------------------------------   -------------------------------
                                                       1999             1998             1999             1998
                                                  ---------------  ---------------   --------------   --------------
<S>                                               <C>              <C>               <C>              <C>
Net revenue:
     Mobile Information Management                      $ 10,071          $ 3,880         $ 18,556         $  8,367
     Printing Solutions                                    5,183            6,319            9,762           14,331
     Other Products                                           18             (940)              43              105
                                                  ---------------  ---------------   --------------   --------------
          Total                                         $ 15,272          $ 9,259         $ 28,361         $ 22,803
                                                  ===============  ===============   ==============   ==============
Income (loss) from operations:
     Mobile Information Management                        $ (768)        $ (1,135)        $ (4,415)        $   (491)
     Printing Solutions                                      109              264             (105)           1,708
     Other Products                                          (14)          (3,129)             (32)          (3,680)
                                                  ---------------  ---------------   --------------   --------------
          Total                                           $ (673)        $ (4,000)        $ (4,552)        $ (2,463)
                                                  ===============  ===============   ==============   ==============
</TABLE>

In the six months ended December 31, 1999, the MIM segment's loss from
operations includes an acquired in-process research and development charge of
$2.4 million. In the three and six months ended December 31, 1999, the MIM
segment's loss from operations includes amortization of goodwill and other
intangibles of $400,000 and

                                       6
<PAGE>

$701,000, respectively. In the three and six months ended December 31, 1998,
the MIM segment's loss from operations includes a $758,000 acquired
in-process research and development charge related to acquisitions completed
in the second quarter of last year.

Port replicator returns and a provision for port replicator returns totaling
$1.0 are included in net revenue and the loss from operations for Other Products
for the three and six months ended December 31, 1998. Also included in the Other
Products loss from operations in the three and six months ended December 31,
1998 are provisions for write-down of port replicator inventory of $1.1 million

Sales to an OEM customer accounted for 24% and 13% of net revenue in the six
months ended December 31, 1999, and in fiscal year 1999, respectively, and were
primarily in the MIM segment. Sales to a distributor accounted for 10% of the
Company's net revenue in fiscal year 1999 and were primarily in the Printing
Solutions and Other Products segments.

CONTINGENCY. On October 28, 1999, Mobility Electronics, Inc. ("Mobility") filed
suit against the Company and certain other parties in the Superior Court for
Maricopa County, Arizona, seeking unspecified compensatory and punitive damages
relating to an alleged breach of a contract between Mobility and the Company.
The Company believes that Mobility's claims are without merit. However,
litigation is inherently uncertain and there can be no assurance that the
Company will prevail. As a result, the Company believes that there is a
reasonable possibility of an unfavorable outcome. The Company is unable to
estimate the magnitude of its exposure at this time.

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

The Securities and Exchange Commission (the "Commission") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statement" in
December 1999. The SAB summarized the Commission's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
Adoption is required by the Company's first fiscal quarter of 2001. The Company
is currently evaluating the effect, if any, of the SAB on its revenue
recognition practices and results of operations.


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

FORWARD-LOOKING STATEMENTS

IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS. IN THIS FORM 10-Q, THE WORDS "EXPECTS,"
"ANTICIPATES," "BELIEVES," "INTENDS," "WILL" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS, WHICH ARE BASED UPON INFORMATION CURRENTLY
AVAILABLE TO THE COMPANY, SPEAK ONLY AS OF THE DATE HEREOF AND ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, STATEMENTS REGARDING FUTURE LEVELS OF INTERNATIONAL
SALES, FUTURE ORIGINAL EQUIPMENT MANUFACTURER ("OEM") SALES, FUTURE GROSS
MARGIN PERCENTAGES, UNIT SALES AND AVERAGE SELLING PRICES OF PRODUCTS, FUTURE
PRODUCT MIX, FUTURE EXPENSE LEVELS, FUTURE ACQUISITIONS, THE EXPECTED
BENEFITS AND RESULTS OF COMPLETED ACQUISITIONS, THE EFFECT OF THE YEAR 2000
ISSUE AND PENDING LITIGATION. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN THIS SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY
AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK." READERS SHOULD CAREFULLY
REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THAT THE COMPANY FILES
FROM TIME TO TIME WITH THE

                                       7
<PAGE>

COMMISSION, INCLUDING THE 1999 ANNUAL REPORT ON FORM 10-K AND THE QUARTERLY
REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN FISCAL 2000. ALL PERIOD
REFERENCES ARE TO THE COMPANY'S FISCAL YEARS ENDED JUNE 30, 2000, 1999 AND
1998, UNLESS OTHERWISE INDICATED. ALL TABULAR DOLLAR AMOUNTS ARE PRESENTED IN
THOUSANDS.


                                       8

<PAGE>


RESULTS OF OPERATIONS

In December 1998, the Company exited the mechanical port replicator business.
Proforma amounts for total net revenue and total gross profit in the following
two tables exclude the effect of the port replicator business in fiscal 1999.

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
                                                                             PROFORMA                                   PROFORMA
<S>                                                  <C>         <C>            <C>             <C>         <C>            <C>
Net revenue                                          $ 15,272    49.7%          $ 10,201        $ 28,361    24.9%          $ 22,699
</TABLE>

The increases in net revenue in the three and six months ended December 31,
1999 from proforma net revenue in the same periods last year were due
primarily to an increase in revenue from the Company's Mobile Information
Management ("MIM") product lines which grew 160% and 122%, respectively. The
increases were offset, in part, by 18% and 31% decreases, respectively, in
revenue from the Company's Printing Solutions product lines.

The Company derives a substantial portion of its net revenue from
international sales, principally from its international sales subsidiaries, a
limited number of distributors and from OEM customers. Revenue from Asian
customers was 31% of total net revenue for the first six months of 2000,
compared to 21% for fiscal year 1999. The increasing Asian revenue was
primarily related to OEM sales to large multi-national companies that
incorporate the Company's solutions into their products and sell their
products worldwide. In the first six months of 2000 and in fiscal year 1999,
total sales outside of North America represented 76% and 63%, of net revenue,
respectively. The Company expects that international sales will continue to
represent a substantial portion of net revenue in the foreseeable future,
although such sales may vary as a percentage of total net revenue.
International sales are subject to a number of risks, including changes in
foreign government regulations, export license requirements, tariffs and
taxes, other trade barriers, fluctuation in currency exchange rates,
difficulty in collecting accounts receivable, difficulty in staffing and
managing international operations and political and economic instability.

Several of the Company's products, in particular its ExtendNet print servers,
XTNDAccess wireless connectivity products, infrared software and XTNDConnect
data synchronization and management software are sold to OEM customers, and
the Company intends to continue to increase sales to OEM customers in the
future, particularly with the MIM product lines. In the first six months of
2000 and in fiscal year 1999, OEM sales of MIM products and services to
Hewlett-Packard Company accounted for 24% and 13% of the Company's total net
revenue, respectively. Revenue from OEM sales is expected to fluctuate on a
quarterly basis, as demand in the OEM market is difficult to predict and
dependent on the timing of OEM projects and the effectiveness of the
marketing efforts of OEM customers.

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

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

The markets for the Company's products are characterized by rapidly changing
technologies, evolving industry standards, frequent new product introductions
and short product life cycles. The Company's future success will depend, to a
substantial degree, upon its ability to enhance its existing products and to
develop and introduce, on a timely and cost-effective basis, new products and
features that meet changing customer requirements and emerging and evolving
industry standards. The introduction of new or enhanced products also requires
the Company to manage the transition from older products in order to minimize
disruption in


                                       9

<PAGE>

customer ordering patterns, to avoid excessive levels of older product
inventories, to minimize ongoing support costs for older products and to
ensure that adequate supplies of new products can be delivered to meet
customer demand. There can be no assurance that the Company will successfully
develop, introduce or manage the transition to new products. The Company
seeks to mitigate the effects of declining prices on hardware products by
improving product design and reducing costs, primarily manufacturing and
component costs.

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
                                                                             PROFORMA                                   PROFORMA
<S>                                                  <C>         <C>             <C>            <C>         <C>            <C>
Gross profit                                          $ 7,231    22.0%           $ 5,927        $ 13,341    -2.4%          $ 13,673
Gross margin                                            47.3%                      58.1%           47.0%                      60.2%
</TABLE>


The decreases in gross margin for the three and six months ended December 31,
1999 from the pro forma amounts in the same periods last year were the result of
higher shipments of lower margin MIM hardware products to OEM customers and a
shift in product mix within the Printing Solutions segment to lower priced and
lower margin products.

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

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                   <C>        <C>             <C>             <C>        <C>             <C>
Research and development                              $ 2,198    27.1%           $ 1,729         $ 4,448    36.1%           $ 3,267
      as a % of net revenue                             14.4%                      18.7%           15.7%                      14.3%
</TABLE>

The increases in research and development in the three and six
months ended December 31, 1999 from the same periods last year were the result
of additional personnel costs in the MIM segment as a result of the acquisitions
of Oval (1415) Limited ("Oval") in August 1999, Rand Software Limited ("Rand")
in October 1998 and Parallax Research, Pte. ("Parallax") in November 1998.

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

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                   <C>         <C>            <C>             <C>        <C>             <C>
Marketing and sales                                   $ 4,354     5.7%           $ 4,118         $ 8,518    10.3%           $ 7,722
      as a % of net revenue                             28.5%                      44.5%           30.0%                      33.9%
</TABLE>

The increases in marketing and sales expenses for the three and
six months ended December 31, 1999 from the same periods last year were
primarily due to increased personnel costs and promotional activities for the
MIM segment both domestically and at the Company's European subsidiaries. The
increases were partially offset by decreased promotional activities within the
Printing Solutions segment and the Other Products segment.

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


                                      10

<PAGE>

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                   <C>        <C>               <C>           <C>        <C>             <C>
General and administrative                            $ 1,115    22.7%             $ 909         $ 2,168    10.9%           $ 1,955
      as a % of net revenue                              7.3%                       9.8%            7.6%                       8.6%
</TABLE>

The increase in general and administrative expense in the three months ended
December 31, 1999 from the same period last year was primarily attributable to
increased personnel costs subsequent to the acquisition of Oval and, to a lesser
extent, Parallax.

The increase in general and administrative expense in the six months ended
December 31, 1999 from the same period last year was primarily the result of
increased administrative expenses in the MIM segment subsequent to the
acquisition of Oval and Parallax, offset by a decrease in the bad debt expense.

The Company expects general and administrative expense to continue to increase
in the future, although such expense may vary as a percentage of net revenue.
<TABLE>
<CAPTION>
                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                   <C>        <C>               <C>           <C>        <C>             <C>
Amortization of intangibles                            $  237    1381.3%           $  16         $  407      2443.8%         $ 16
      as a % of net revenue                              1.6%                       0.1%           1.4%                        0.1%
</TABLE>

The increases in both periods presented is the result of purchased technology
and other intangibles, which arose from the acquisitions of Rand, Parallax and
Oval, and are being amortized over periods of five years.

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                    <C>       <C>            <C>             <C>         <C>              <C>
Income tax benefit                                     $ (287)   -75.0%         $ (1,146)       $ (1,362)   134.8%           $ (580)
      as a % of income before taxes                     38.0%                      28.0%           27.8%                      23.5%
</TABLE>


The change in the income tax benefit for the three and six months ended December
31, 1999 from the same period in 1999 was attributable to a change in the net
loss before income taxes. The change in the estimated effective tax rate for
both periods from the prior year is primarily the result of non-deductible
expenses in the prior year associated with the Rand and Parallax acquisitions.
This increase in the estimated effective tax rate was offset, in part, by a
valuation allowance to reflect the estimated amount of deferred tax assets
arising from the Oval acquisition that may not be realized. Although realization
is not assured, management believes it is more likely than not that the
remaining net deferred tax asset will be realized

RESULTS OF OPERATIONS BY SEGMENT

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

MOBILE INFORMATION MANAGEMENT SEGMENT

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

                                      11

<PAGE>

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                  <C>              <C>        <C>            <C>              <C>        <C>
Net revenue                                          $ 10,071         160%       $ 3,880        $ 18,556         122%       $ 8,367
Loss from operations                                     (768)        -32%        (1,135)         (4,415)        799%          (491)
</TABLE>

Net revenue from the MIM product lines grew to 66% of the Company's total net
revenue for the three months ended December 31, 1999, up from 42% in the same
period last year. For the six months ended December 31, 1999, net revenue from
MIM product lines grew to 65% of the Company's total net revenue up from 37% in
the same period last year.

The increase in net revenue for the three and six months ended December 31,
1999 from the same periods last year was due primarily to increased unit
sales of OEM hardware and XTNDConnect data synchronization and management
products and, to a lesser extent, to increased unit sales of Internet
appliance products and license revenue from Advantage Database Server
products. The increases were offset by a decrease in the average selling
price of OEM hardware products sold as a result of a shift in product mix.

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

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

The decreased loss from operations for the MIM segment in the three months
ended December 31, 1999 from the same period last year was primarily the
result of increased gross profit within the MIM segment as a result of
increased net revenue from MIM products. The increased gross profit was
partially offset by increases in the Company's spending for MIM research and
development projects for both mobile data management and universal mobile
connectivity products, increased spending in marketing and sales for all MIM
products both domestically and internationally and increased amortization
expense related to the acquisitions of Rand and Parallax in the second
quarter of last year and Oval in the first quarter of 2000. The MIM segment
recorded an acquired in-process research and development charge of $758,000
in the prior year related to the acquisitions.

The increased loss from operations for the MIM segment in the six months
ended December 31, 1999 from the same period last year was primarily the
result of the acquired in-process research and development charge of $2.4
million from the Company's August 1999 acquisition of Oval and increased
amortization of goodwill and other intangibles as a result of this
acquisition. The loss was also attributed to increases in the Company's
spending for MIM research and development projects for both mobile data
management and universal mobile connectivity products and increased spending
in marketing and sales for all MIM products worldwide.

PRINTING SOLUTIONS SEGMENT

The Printing Solutions segment includes the Company's maturing network print
server and non-network printer sharing product lines, sold primarily through the
Company's worldwide distribution channel to computer resellers and Fortune 1000
companies.


                                      12

<PAGE>

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                   <C>             <C>        <C>             <C>             <C>       <C>
Net revenue                                           $ 5,183         -18%       $ 6,319         $ 9,762         -32%      $ 14,331
Income (loss) from operations                             109         -59%           264            (105)       -106%         1,708
</TABLE>

The decreases in net revenue for the three and six months ended December 31,
1999 from the same periods last year were principally due to decreased unit
sales of both network print server products and non-network printer sharing
products.

Income from operations from the Printing Solutions segment decreased in the
three and six months ended December 31, 1999 from the same periods last year
primarily due to decreased gross profit offset by a decrease in operating
expenses as the Company shifted resources to support the MIM product lines.

The Company expects net revenue from Printing Solutions product lines will
continue to decline over the next several quarters and will continue to become a
smaller percentage of the Company's total net revenue. Although the Printing
Solutions business is not the Company's primary focus for the future, the
Company will continue to update the product line, adding emerging technologies
such as fiber and mobile connectivity options.

OTHER PRODUCTS SEGMENT

The primary component of the Company's Other Products segment has been the
Company's mechanical port replicator product line. In December 1998, the Company
announced its decision to exit the mechanical port replicator business. The
Company's decision was based on two primary factors. The Company saw a decrease
in demand for third-party port replicator products as laptop vendors became more
successful in providing similar products in a more timely manner. In addition,
the Company was experiencing quality-related problems with its supplier and,
consequently, faced a lack of a reliable source for port replicators to support
future releases of laptop PC models in the increasingly competitive environment.

<TABLE>
<CAPTION>

                                                     THREE MONTHS ENDED DECEMBER 31,             SIX MONTHS ENDED DECEMBER 31,
                                                 ----------------------------------------   ----------------------------------------
                                                     1999       % CHANGE       1998             1999       % CHANGE       1998
                                                 ----------------------------------------   ----------------------------------------
<S>                                                      <C>         <C>          <C>               <C>          <C>         <C>
Net revenue                                              $ 18        -102%        $ (940)           $ 43         -59%         $ 105
Loss from operations                                      (14)       -100%        (3,129)            (32)        -99%        (3,680)
</TABLE>


BUSINESS COMBINATIONS

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

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


                                      13

<PAGE>

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

<TABLE>
<S>                                                     <C>
Net working capital                                             $   112
Property and equipment                                               45
Developed technology, goodwill
     and other intangibles                                        5,984
Acquired in-process research and development                      2,352
                                                        ----------------

                                                                $ 8,493
                                                        ================
</TABLE>

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

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

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

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

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

The Company will use the remaining acquired in-process research and development
to provide further enhancements to the architecture of its XTNDConnect product
line, which at the time of the acquisition were only approximately 10-15%
complete. The acquired in-process research and development assigned to this
project was valued at $186,000 as of the date of the acquisition. The Company
expects to incur an additional $123,000, from the date of the acquisition, to
develop the in-process technology into a commercially viable product with the
nature of the efforts principally relating to development and testing that is
required to

                                       14
<PAGE>

establish that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements. The
primary risk with the completion of this project is the overall scope and
complexity. The Company expects to complete this project by October 2000.

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

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

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

A summary of the total net assets acquired at the date of the acquisitions, as
determined in accordance with APB 16 is as follows:
<TABLE>
<S>                                                     <C>
Net working capital                                             $  (146)
Property and equipment                                              114
Developed technology, goodwill
     and other intangibles                                        1,532
Acquired in-process research and development                        758
                                                        ----------------

                                                                $ 2,258
                                                        ================
</TABLE>

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

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

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

Rand's research and development in process on the date of the acquisition
related to a server-based data synchronization software product that was
estimated to be approximately 14% complete and would require

                                       15
<PAGE>

an estimated $464,000 and 38 man-months of time to complete. Development in
process at the time of the acquisition of Rand was subsequently utilized to
develop a web-based synchronization product and will continue to be
incorporated into additional MIM products, including products complementary
to the server-based product acquired with ASL in August 1999.

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

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED DECEMBER 31,
                                                                      ----------------------------------------
                                                                          1999       % CHANGE       1998
                                                                      ----------------------------------------
<S>                                                                   <C>            <C>            <C>
Net cash used by operating activities                                    $ (247)      -90.3%         $ (2,555)
</TABLE>

The net cash used by operations for the six months ended December 31, 1999 was
primarily a result of the net loss incurred and an increase in receivables,
offset in part by an increase in payables. The net cash used by operations for
the six months ended December 31, 1998 was primarily due to the net loss
incurred, a decrease in payables and an increase in inventory and other assets.

Accounts receivable decreased to $9.7 million at December 31, 1999 from $9.8
million at June 30, 1999. Days sales outstanding ("DSO") in receivables were 51
days at December 31, 1999 and 61 days at June 30, 1999. The Company expects that
accounts receivable may increase in the event that net revenue increases and as
net revenue from OEM and international customers represent a higher percentage
of the Company's total revenue.
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED DECEMBER 31,
                                                                       ----------------------------------------
                                                                           1999       % CHANGE       1998
                                                                       ----------------------------------------
<S>                                                                    <S>            <C>            <C>
Net cash used by investing activities                                      $ (2,880)   -47.6%         $ (5,493)
</TABLE>


The net cash used by investing activities in six months ended December 31, 1999
consisted largely of cash payments for the acquisition of Oval. The net cash
used by investing activities in the six months ended December 31, 1998 reflects
the purchase of available-for-sale securities and the net cash paid in the
acquisitions of Rand and Parallax.

The Company currently plans to incur aggregate capital expenditures of
approximately $1.5 million during 2000, primarily for system improvements,
leasehold improvements, software and personal computers.
<TABLE>
<CAPTION>
                                                                              Six Months Ended December 31,
                                                                         ----------------------------------------
                                                                             1999       % Change       1998
                                                                         ----------------------------------------
<S>                                                                      <C>            <C>            <C>
Net cash provided by (used by)  financing activities                          $ (2,803)  -716.0%            $ 455
</TABLE>

The net cash provided by (used by) financing activities in the six months ended
December 31, 1999 consisted primarily of payments on long-term debt, offset by
net borrowings under the Company's line of credit agreement and proceeds from
the issuance of common stock. The net cash provided by financing activities in
the six months ended December 31, 1998 resulted primarily from the issuance of
common stock under the Company's stock plans.

The Company has an uncollateralized bank revolving line of credit of $10 million
that expires on October 31, 2000. Interest on borrowings is at the lender's
prime rate minus 1%. There were borrowings under this line at December 31, 1999
of $3.3 million. There were no borrowings under this line at June 30, 1999. The
line of credit agreement and a lease agreement have restrictive covenants that
require the Company to maintain

                                       16
<PAGE>

certain financial ratios. Although the Company was not in compliance with one
of the covenants for the three months ended December 31, 1999, the Company
obtained a waiver of the covenant through the term of the agreement.

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

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

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES

The Company derives a substantial portion of its revenue from international
sales, principally through its international subsidiaries and through a limited
number of independent distributors. Sales made by the Company's international
subsidiaries, excluding the Company's Singapore subsidiary, are generally
denominated in foreign currency. Fluctuations in exchange rates between the U.S.
dollar and other currencies could materially affect the Company's financial
condition, results of operations and cash flows.

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

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

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The

                                       17
<PAGE>

statement requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Under current operations, adoption of SFAS No. 133 is not
expected to have a material impact on the Company's results of operations and
financial position. SFAS No. 133 is effective for the Company's fiscal year
ending June 30, 2001.

The Securities and Exchange Commission (the "Commission") issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statement" in
December 1999. The SAB summarized the Commission's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
Adoption is required by the Company's first fiscal quarter of 2001. The Company
is currently evaluating the effect, if any, of the SAB on its revenue
recognition practices and results of operations.


YEAR 2000 COMPLIANCE

The Company did not experience significant problems with the date change from
December 31, 1999 to January 1, 2000. The Company cannot, however, conclude that
any failure of third parties to achieve Year 2000 compliance will not adversely
affect the Company.

To address "Year 2000" issues, the Company established a Year 2000 Project Team
that identified three key areas critical to successful Year 2000 compliance:
products, financial and information systems and third-party relationships.

The Company successfully completed testing of current products and products
under development and does not believe there is significant risk of
noncompliance. There can be no assurance that certain previous releases of the
Company's products, which are no longer under support, will prove to be Year
2000 compliant.

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

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

Contingency plans were developed where risk existed that the Company or its key
suppliers would not be Year 2000 compliant and where such noncompliance was
expected to have a material adverse impact on the Company's operations.

The Company's total cost to address the Year 2000 problem for its systems and
products approximated $60,000. At this time, the Company cannot reasonably
estimate the potential impact on its financial position, results of operations
and cash flows if key suppliers, customers and other business partners are not
Year 2000 compliant on a timely basis.

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

The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain

                                       18
<PAGE>

resources, third party modification plans and other factors. There can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, the nature and amount of programming required to
upgrade or replace each of the affected programs, the rate and magnitude of
related labor and consulting costs and the success of the Company's external
customers and suppliers in addressing the Year 2000 issue. The Company's
evaluation is ongoing and it expects different information will become
available as that evaluation continues. Consequently, there is no guarantee
that all material elements are Year 2000 compliant.

                                       19
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

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

POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results
have fluctuated significantly in the past and are likely to fluctuate
significantly in the future on a quarterly and an annual basis. Prior growth
rates that the Company has experienced in net revenue and net income or loss
should not be considered indicative of future growth rates. Factors that could
cause the Company's future operating results to fluctuate include the level of
demand for the Company's products, the Company's success in developing new
products, the timing of new product introductions and product enhancements by
the Company and its competitors, market acceptance of the Company's new and
enhanced products and OEM customers' products, the emergence of new industry
standards, the timing of customer orders, the mix of products sold,
discontinuation of product offerings by the Company or its suppliers,
competition, the mix of distribution channels through which the Company's
products are sold and general economic conditions. Many of such factors are
beyond the Company's control. In this regard, in the second quarter ending
December 31, 1998, the Company discontinued its mechanical port replicator
product line and, as a result, recorded $2.1 million in total charges for
product returns, an allowance for product returns and an increase in the
inventory valuation allowance for port replicators.

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

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

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

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

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

                                       20
<PAGE>

they achieve market acceptance. If such new and recently introduced products
have feature, performance, reliability, quality or other shortcomings, then
such products could fail to achieve market acceptance and the Company may
experience reduced orders, higher manufacturing costs, delays in collecting
accounts receivable and additional warranty and service expenses, which in
each case could have a material adverse effect on the Company's business,
results of operations and cash flows.

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

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

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

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

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

                                       21

<PAGE>

The Company intends to continue to enhance and diversify its international and
domestic distribution channels. None of the Company's distributors or OEM
customers is obligated to purchase the Company's products except pursuant to
current purchase orders. The Company's ability to achieve future revenue growth
will depend in large part on its success in recruiting and training sufficient
sales personnel, distributors, value-added resellers and OEM customers. Certain
of the Company's existing distributors currently distribute, or may in the
future distribute, the product lines of the Company's competitors. There can be
no assurance that the Company will be able to attract, train and retain a
sufficient number of its existing or future third-party distributors or direct
sales personnel, that such third-party distributors will recommend, or continue
to recommend, the Company's products or that the Company's distributors will
devote sufficient resources to market and provide the necessary customer support
for such products.

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

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

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

A substantial portion of the Company's international sales are typically
denominated in U.S. dollars. As a result, fluctuations in currency exchange
rates could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. Transactions made through the Company's
subsidiary in Singapore are primarily denominated in U.S. dollars. The
transactions made through the Company's subsidiaries in France, Germany, Italy,
the United Kingdom and the Netherlands are primarily denominated in local
currencies and, accordingly, the Company's international operations impose a
risk upon its business as a result of currency exchange rate fluctuations. There
can be no assurance that exchange rate fluctuations will not have a material
adverse effect on the Company's business, results of operations and cash flows.
From time to time, the Company enters into foreign currency forward contracts,
typically against the Euro and British Pound to hedge payments and receipts of
foreign currencies related to the purchase and sale of goods to international
subsidiaries. While these hedging instruments are subject to fluctuations in
value, such fluctuations are generally offset by the value of the underlying
exposures being hedged. The success of these hedging activities depends upon
estimation of intercompany balances denominated in various foreign currencies.
To the extent that these forecasts are overstated or understated during periods
of currency volatility, the Company could experience unanticipated currency
gains or losses.


                                      22

<PAGE>

Payment cycles for international customers are typically longer than payment
cycles for customers in the United States. There can be no assurance that
foreign markets will continue to develop or that the Company will receive
additional orders to supply its products for use in foreign markets.

RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT. The markets for the Company's
products are characterized by rapidly changing technologies, evolving industry
standards, frequent new product introductions and short product life cycles. The
Company's future success will depend to a substantial degree upon its ability to
enhance its existing products and to develop and introduce, on a timely and
cost-effective basis, new products and features that meet changing customer
requirements and emerging and evolving industry standards. The Company budgets
research and development expenses based on planned product introductions and
enhancements; however, actual expenses may differ significantly from budget. The
product development process involves a number of risks. The development of new,
technologically advanced hardware and software products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. The introduction of new or
enhanced products also requires the Company to manage the transition from older
products in order to minimize disruption in customer ordering patterns, to avoid
excessive levels of older product inventories, minimize future support and
potential upgrade costs associated with older products, and to ensure that
adequate supplies of new products can be delivered to meet customer demand.
There can be no assurance that the Company will successfully develop, introduce
or manage the transition to new products. The Company has in the past
experienced, and is likely in the future to experience, delays in the
introduction of new products, due to factors internal and external to the
Company. Any future delays in the introduction or shipment of new or enhanced
products, the inability of such products to achieve market acceptance or
problems associated with new product transitions could adversely affect the
Company's business, results of operations and cash flows.

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

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

The Company also relies on third party suppliers for components used in its
products. From time to time the Company has agreed with certain suppliers
that the Company will purchase certain components exclusively from such
suppliers. Because the manufacturing of the Company's products can involve
long lead times, in the event of unanticipated increases in demand for the
Company's products, the Company could be unable to manufacture certain
products in a quantity sufficient to meet its customers' demands.  Certain of
the components used in the Company's products, including certain
semiconductor components and infrared transmission components, are currently
available from a limited number of suppliers. From time to time, the Company
experiences difficulty in obtaining components from suppliers due to
increased industry demand and a lack of available supply. The Company is
currently experiencing some difficulty in obtaining an adequate supply of
flash memory and certain other components commonly used in the manufacture of
cellular phones, such as resistors and capacitors, to supply the demand for
the Company's printing solutions and wireless connectivity products. Any
inability to obtain adequate deliveries or any increased cost or other
circumstance that would require the Company to seek alternative manufacturers
could affect the Company's

                                      23

<PAGE>



ability to ship its products on a timely basis, which could damage
relationships with current and prospective customers, could affect the
manufacturing cost of the Company's products and could therefore have a
material adverse affect on the Company's business, results of operations and
cash flows.

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

PRODUCT ERRORS; PRODUCT LIABILITY. Software and hardware products as complex
as those offered by the Company typically contain undetected errors when
first introduced or as new versions are released. Testing of the Company's
products is particularly challenging because it is difficult to simulate the
wide variety of computing environments in which the Company's customers may
deploy these products. For example, the Company's Internet products are
deployed into a wide variety of telecommunications environments. Changes in
technology standards and an increase in the number of telecommunications
technologies used in the marketplace may create compatibility issues with
the Company's products and customer's environments. Accordingly, there can be
no assurance that, despite testing by the Company and by current and
potential customers, errors will not be found after commencement of
commercial shipments. Any such errors, or "bugs," could result in
dissatisfied customers and the loss of or delay in market acceptance of the
new product, any of which could have a material adverse effect upon the
Company's business, results of operations and cash flows. Although to date
the Company has not experienced any material product liability claims, there
can be no assurance that the Company will not face material product liability
claims in the future. A successful product liability claim brought against
the Company could have a material adverse effect upon the Company's business,
results of operations and cash flows.

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

RISKS ASSOCIATED WITH ACQUISITIONS BY THE COMPANY. As part of its growth
strategy, the Company intends to continue to pursue the acquisition of companies
that either complement or expand its existing business, as the Company did with
its acquisitions of Rand, in October 1998; Parallax, in November 1998; and Oval,
in August 1999. The Company is continually evaluating potential acquisition
opportunities, which may be material in size and scope. Acquisitions involve a
number of risks and difficulties, including the expansion into new markets and
business areas, the diversion of management's attention to the assimilation of
the operations and personnel of the acquired companies, the integration of the
acquired companies' management information systems with those of the Company,
potential adverse short-term effects on the Company's operating results, the
amortization of acquired intangible assets and the need to present a unified
corporate image. In addition, acquisitions could result in the need to expend
substantial amounts of cash. While the Company believes that it has sufficient
funds to finance its operations for at least the next 12


                                      24

<PAGE>

months, to the extent that such funds are insufficient to fund the Company's
activities, including any potential acquisitions, the Company may need to
raise additional funds through public or private equity or debt financing or
from other sources. The sale of additional equity or convertible debt may
result in additional dilution to the Company's shareholders and such
securities may have rights, preferences or privileges senior to those of the
Company's Common Stock. There can be no assurance that additional equity or
debt financing will be available or that, if available, it can be obtained on
terms favorable to the Company or its shareholders.

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

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

If the Company were found to be infringing on the intellectual property rights
of any third party, the Company could be subject to liabilities for such
infringement, which could be material. As a result, the Company could be
required to seek licenses from other companies or to refrain from using,
manufacturing or selling certain products or using certain processes. Although
holders of patents and other intellectual property rights often offer licenses
to their patent or other intellectual property rights, no assurance can be given
that licenses would be offered, that the terms of any offered license would be
acceptable to the Company or that the failure to obtain a license would not
adversely affect the Company's business, results of operations and cash flows.

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

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

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

                                      25

<PAGE>

that may be unrelated to the operating performance of the specific companies.
These broad market fluctuations may adversely affect the market price of the
Company's Common Stock.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

The Company does not hold or issue financial instruments for speculative
purposes. From time to time, the Company enters into foreign currency forward
contracts, typically against the Euro and British Pound to hedge payments and
receipts of foreign currencies related to the purchase and sale of goods to
international subsidiaries. At December 31, 1999, the Company had contracts in
place totaling $4.7 million that matured within 30 days. While these hedging
instruments are subject to fluctuations in value, such fluctuations are
generally offset by the value of the underlying exposures being hedged. The
success of these hedging activities depends upon estimation of intercompany
balances denominated in various foreign currencies. To the extent that these
forecasts are overstated or understated during periods of currency volatility,
the Company could experience unanticipated currency gains or losses.


PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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


                                      26

<PAGE>

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

The Company's 1999 Annual Meeting of Shareholders was held on October 27, 1999.
At the meeting, the following matters were submitted to a vote of the
shareholders:

(a)      The following nominees for Class I Directors were elected. Each person
         elected as a Class I Director will serve for a three-year term that
         expires upon the 2002 Annual Meeting of Shareholders or until their
         successors are duly elected and qualified.

<TABLE>
<CAPTION>

                                                                                  VOTES WITH
                         NAME OF NOMINEE                   VOTES FOR          AUTHORITY WITHHELD
              --------------------------------------     --------------     ------------------------
<S>                                                        <C>                       <C>
              Steven D. Simpson                            7,185,967                  35,577
              Douglas B. Winterrowd                        7,004,007                 217,537
</TABLE>

(a)      The ratification and appointment of PricewaterhouseCoopers LLP as
         independent public accountants of the Company for the year ended June
         30, 2000 was approved: 7,200,131 votes in favor; 14,814 votes against;
         6,599 abstentions; and no broker non-votes.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

27.1     Financial Data Schedule

(b) REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the three months ended December
31, 1999.


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


                                      27

<PAGE>

                                    SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1923, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                  Extended Systems Incorporated



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

                                         (Principal Financial and Accounting
                                         Officer and Duly Authorized Officer)


                                      28