---

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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, 2000

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(State or other jurisdiction of
incorporation or organization)

82-0399670(I.R.S. Employer
Identification No.)


5777 North Meeker Avenue, Boise, ID 83713(Address of principal executive office) (Zip Code)

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

---

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, 2000 was 10,700,401.

---

### EXTENDED SYSTEMS INCORPORATED

### FORM 10-Q

#### For the Three and Six Months Ended December 31, 2000

### INDEX

|Part I.  Financial Information                                       | Page
|-------------------------------------------------------------------- | ----
|                                                                     |     
|Item 1.  Financial Statements                                        |     
|                                                                     |     
|Consolidated Statements of Operations                                |     
|for the Three and Six Months Ended December 31, 2000 and 1999        |     
|                                                                     |     
|Consolidated Statements of Comprehensive Loss                        |     
|for the Three and Six Months Ended December 31, 2000 and 1999        |     
|                                                                     |     
|Consolidated Balance Sheets                                          |     
|as of December 31, 2000 and June 30, 2000                            |     
|                                                                     |     
|Consolidated Statements of Cash Flows                                |     
|for the Three and Six Months Ended December 31, 2000 and 1999        |     
|                                                                     |     
|Notes to Consolidated Financial Statements                           |     
|                                                                     |     
|Item 2.  Management's Discussion and Analysis of Financial Condition |     
|and Results of Operations                                            |     
|                                                                     |     
|Item 3.  Quantitative and Qualitative Disclosures about Market Risk  |     
|                                                                     |     
|Part II. Other Information                                           |     
|                                                                     |     
|Item 6.  Exhibits and Reports on Form 8-K                            |     
|                                                                     |     
|Signature                                                            |     

---

#### Part I. Financial Information

Item 1. Financial Statements

EXTENDED SYSTEMS INCORPORATED

Consolidated Statements of Operations(in thousands, except per share amounts)
(unaudited)

|                                                |  | Three Months Ended |   | Six Months ended |  
|----------------------------------------------- |  | ------------------ | - | ---------------- | -
|
|                                                |  |                    |   |                 
|
|                                                |  |                    |   |                 
|Net revenue                                     |  |                    | $ | 13,857           |  
|Cost of net revenue                             |  |                    |   | 5,553            |  
|                                                |  |                    |   |                 
|Gross profit                                    |  |                    |   | 8,304            |  
|Operating expenses:                             |  |                   
|Research and development                        |  |                    |   | 3,371            |  
|Acquired in-process research and development    |  |                    |   |                 |  
|Marketing and sales                             |  |                    |   | 5,920            |  
|General and administrative                      |  |                    |   | 1,383            |  
|Amortization of intangibles                     |  |                    |   | 243              |  
|                                                |  |                    |   |                 
|Loss from operations                            |  |                    |   | (2,613           | )
|Other expense (income), net                     |  |                    |   | (82              | )
|Interest expense                                |  |                    |   | 1                |  
|                                                |  |                    |   |                 
|Loss before income taxes                        |  |                    |   | (2,532           | )
|Income tax benefit                              |  |                    |   | (937             | )
|                                                |  |                    |   |                 
|Net loss                                        |  |                    | $ | (1,595           | )
|                                                |  |                    |   |                 
|Earnings (loss) per share:                      |  |                   
|Basic                                           |  |                    | $ | (0.15            | )
|Diluted                                         |  |                    | $ | (0.15            | )
|Number of shares used in per share calculation: |  |                   
|Basic                                           |  |                    |   | 10,473           |  
|Diluted                                         |  |                    |   | 10,473           |  

Consolidated Statements of Comprehensive Loss(in thousands)
(unaudited)

|                                |  | Three Months Ended |   | Six Months ended |  
|------------------------------- |  | ------------------ | - | ---------------- | -
|
|                                |  |                    |   |                 
|
|                                |  |                    |   |                 
|Net loss                        |  |                    | $ | (1,595           | )
|Change in currency translatuion |  |                    |   | 131              |  
|                                |  |                    |   |                 
|Comprehensive loss              |  |                    | $ | (1,464           | )
|                                |  |                    |   |                 

The accompanying notes are an integral part of the financial statements

1

---

EXTENDED SYSTEMS INCORPORATED

Consolidated Balance Sheets(in thousands, except par value)

|                                                            | December 31, |  | June 30, |       
|----------------------------------------------------------- | ------------ |  | -------- | ------
|
|                                                            |              |  |          |       
|
|ASSETS                                                      |              |  |          |       
|Current:                                                    |              | 
|Cash and cash equivalents                                   |              |  | $        | 4,848 
|Receivables                                                 |              |  |          | 13,977
|Inventories                                                 |              |  |          | 2,849 
|Prepaids and other                                          |  
;      |  |          | 935   
|Deferred income taxes                                       |              |  |          | 691   
|                                                            |              |  |          |       
|Total current assets                                        |              |  |          | 23,300
|Property and equipment, net                                 |              |  |          | 7,687 
|Intangibles, net                                            |              |  |          | 5,431 
|Deferred income taxes                                       |              |  |          | 9,101 
|Other assets                                                |              |  |          | 293   
|                                                            |              |  |          |       
|Total assets                                                |              |  | $        | 45,812
|                                                            |              |  |          |       
|LIABILITIES AND STOCKHOLDERS' EQUITY                        |              | 
|Current:                                                    |              | 
|Current debt                                                |              |  | $        |      
|Accounts payable                                            |              |  |          | 3,974 
|Accrued expenses                                            |              |  |          | 2,719 
|Deferred revenue                                            |              |  |          | 1,143 
|                                                            |              |  |          |       
|Total current liabilities                                   |              |  |          | 7,836 
|                                                            |              |  |          |       
|Stockholders' equity:                                       |              | 
|Preferred Stock; $0.001 par value per share, 5,000 shares   |              | 
|authorized; no shares issued or outstanding                 |              |  |          |      
|Common stock; $0.001 par value per share, 75,000 shares     |              | 
|authorized; 10,700 and 10,309 shares issued and outstanding |              |  |          | 11    
|Additional paid-in capital                                  |              |  |          | 31,327
|Retained earnings                                           |              |  |          | 7,365 
|Accumulated other comprehensive loss                        |              |  |          | (727  
|                                                            |              |  |          |       
|Total stockholders' equity                                  |              |  |          | 37,976
|                                                            |              |  |          |       
|Total liabilities and stockholders' equity                  |              |  | $        | 45,812
|                                                            |              |  |          |       

The accompanying notes are an integral part of the financial statements

2

---

EXTENDED SYSTEMS INCORPORATED

Consolidated Statements of Cash Flows(in thousands)(unaudited)

|                                                                | Six Months Ended
|--------------------------------------------------------------- | ----------------
|
|                                                                |                 
|
|                                                                |                 
|Cash flows from operating activities:                           |                 
|Net loss                                                        |                 
|Adjustments to reconcile net loss to net cash used by operating |                 
|activities:                                                     |                 
|Acquired in-process research and development                    |                 
|Provision for bad debts                                         |                 
|Provision for write-down of inventory                           |                 
|Depreciation and amortization                                   |                 
|Accretion of discount on long-term debt                         |                 
|Payment of discount on long-term debt                           |                 
|Tax benefit from employee stock transactions                    |                 
|Deferred income taxes                                           |                 
|Stock option compensation                                       |                 
|Other                                                           |                 
|Effects of changes in assets and liabilities, net of effect of  |                 
|acquisitions:                                                   |                 
|Receivables                                                     |                 
|Inventories                                                     |                 
|Prepaids and other assets                                       |                 
|Accounts payable and accrued expenses                           |                 
|Deferred revenue                                                |                 
|                                                                |                 
|Net cash used by operating activities                           |                 
|                                                                |                 
|Cash flows from investing activities:                           |                 
|Purchases of property and equipment                             |                 
|Maturities of available-for-sale securities                     |                 
|Acquisition:                                                    |                 
|Oval (1415) Limited, net of cash acquired                       |                 
|Other investing activities                                      |                 
|                                                                |                 
|Net cash used by investing activities                           |                 
|                                                                |                 
|Cash flows from financing activities:                           |                 
|Proceeds from the issuance of common stock                      |                 
|Payments on long-term debt                                      |                 
|Net borrowings under line of credit agreement                   |                 
|                                                                |                 
|Net cash provided by financing activities                       |                 
|Effect of exchange rate changes on cash                         |                 
|                                                                |                 
|Net decrease in cash and cash equivalents                       |                 
|Cash and cash equivalents:                                      |                 
|Beginning of period                                             |                 
|                                                                |                 
|End of period                                                   |                 
|                                                                |                 

The accompanying notes are an integral part of the financial statements



3

---

EXTENDED SYSTEMS INCORPORATED

Notes to Consolidated Financial Statements(unaudited)

Extended Systems has two primary operating segments. Our mobile
information management segment includes both mobile data management and
universal mobile connectivity products that enable mobile users to access,
collect, synchronize and print information on demand. Our printing solutions
segment provides printer connectivity solutions for network and non-network
computer environments.

Basis of presentation. Our consolidated financial
statements include Extended Systems Incorporated, a Delaware corporation, and
its subsidiaries. We have eliminated all significant intercompany accounts and
transactions. In our opinion, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting solely of normal recurring
adjustments) necessary to present fairly our consolidated financial position and
our consolidated results of operations and cash flows. We have made
reclassifications to the consolidated financial statements to conform the
presentations. Tabular amounts are in thousands.

The information included in this Form 10-Q should be read in
conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and the Financial Statements and Notes
thereto included in our 2000 Annual Report on Form 10-K.

Earnings or loss per share. We compute basic earnings or
loss per share by dividing net income or loss by our weighted average number of
common shares outstanding during the period. We compute diluted earnings or loss
per share by dividing net income or loss by the weighted average number of
common shares outstanding increased by the additional common shares that would
be outstanding if we had issued the potential dilutive common shares. We exclude
from the diluted earnings or loss per share computations stock options and
potential shares for convertible debt to the extent that their effect would have
been antidilutive. Our diluted earnings or loss per share computations exclude
the shares below because to do so would have been antidilutive:

|                             | Three and Six Months Ended
|---------------------------- | --------------------------
|
|                             |                           
|
|                             |                           
|Stock options                |                           
|Shares for convertible notes |                           

Recently Issued Accounting Standards. The Securities and
Exchange Commission issued Staff Accounting Bulletin 101, Revenue
Recognition in Financial Statements, in December 1999. This bulletin
affirms the Securities and Exchange Commissions view in applying generally
accepted accounting principles to revenue recognition in financial statements.
The SEC has recently issued further guidance with respect to adoption of
specific issues addressed by Staff Accounting Bulletin 101. Based on this
guidance from the SEC, we are currently assessing the impact, if any, Staff
Accounting Bulletin 101 may have on our operations. We are required to adopt
this bulletin no later than our fourth quarter of fiscal 2001.

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities.
The statement requires entities to recognize all derivatives as either

4

---

assets or
liabilities in the statement of financial position and measure those instruments
at fair value. We adopted this statement on July 1, 2000 without an impact on
our results of operations.

Receivables

|                                |  | December 31, |   | June 30,
|------------------------------- |  | ------------ | - | --------
|
|                                |  |              |   |         
|Accounts receivable             |  |              | $ | 11,893  
|Income taxes receivable         |  |              |   | 1,716   
|Other receivables               |  |              |   | 746     
|Allowance for doubtful accounts |  |              |   | (378    
|                                |  |              |   |         
|                                |  |              | $ | 13,977  
|                                |  |              |   |         

Inventories

|                |  | December 31, |   | June 30,
|--------------- |  | ------------ | - | --------
|
|                |  |              |   |         
|Purchased parts |  |              | $ | 1,311   
|Work in process |  |              |   | 108     
|Finished goods  |  |              |   | 1,430   
|                |  |              |   |         
|                |  |              | $ | 2,849   
|                |  |              |   |         

Intangible Assets

|                              |  | December 31, |   | June 30,
|----------------------------- |  | ------------ | - | --------
|
|                              |  |              |   |         
|Goodwill                      |  |              | $ | 3,969   
|Purchased technology          |  |              |   | 3,128   
|Other intangibles             |  |              |   | 894     
|                              |  |              |   |         
|                              |  |              |   | 7,991   
|Less accumulated amortization |  |              |   | (2,560  
|                              |  |              |   |         
|                              |  |              | $ | 5,431   
|                              |  |              |   |         

Accrued Expenses

|                                     |  | December 31, |   | June 30,
|------------------------------------ |  | ------------ | - | --------
|
|                                     |  |              |   |         
|Accrued payroll and related benefits |  |              | $ | 1,174   
|Accrued warranty and support costs   |  |              |   | 445     
|Other                                |  |              |   | 1,100   
|                                     |  |              |   |         
|                                     |  |              | $ | 2,719   
|                                     |  |              |   |         

Business Segment, Geographic Area Data and Major Customers

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

Our mobile information management segment includes both mobile
data management and universal mobile connectivity solutions that enable mobile
users to access, collect, synchronize and print information on demand. Our
products in the mobile information management segment include data
synchronization and management software, wireless connectivity products,
client/server database management systems with remote access capabilities and
enterprise Internet appliances. We sell mobile information management products
primarily to original equipment manufacturers, enterprises, application
developers and computer resellers.

5

---

Our printing solutions segment includes our maturing network
print server and non-network printer sharing products sold primarily through our
worldwide distribution channel to computer resellers and Fortune 1000 companies
and to original equipment manufacturers.

Our other products primarily consist of our discontinued
mechanical port replicator products.

The accounting policies for our segments are the same as those
described in the Summary of Significant Accounting Policies in our Annual Report
on Form 10-K. We had no intersegment sales. We measure segment operating results
based on income or loss from operations. We do not generally distinguish our
assets by reportable segment. We allocate depreciation expense and other
indirect expenses to reportable segments using various methods such as
percentage of square footage used to total square footage and percentage of
direct expenses to total direct expenses.

|                               |  | Three Months Ended |   | Six Months Ended
|------------------------------ |  | ------------------ | - | ----------------
|
|                               |  |                    |   |                 
|
|                               |  |                    |   |                 
|Net revenue:                   |  |                    |   |                 
|Mobile information management  |  |                    | $ | 9,843           
|Printing solutions             |  |                    |   | 4,014           
|Other products                 |  |                    |   |                
|                               |  |                    |   |                 
|Total                          |  |                    | $ | 13,857          
|                               |  |                    |   |                 
|Income (loss) from operations: |  |                   
|Mobile information management  |  |                    | $ | (2,712          
|Printing solutions             |  |                    |   | 109             
|Other products                 |  |                    |   | (10             
|                               |  |                    |   |                 
|Total                          |  |                    | $ | (2,613          
|                               |  |                    |   |                 

Our mobile information management segment loss from operations
includes an acquired in-process research and development charge of $2.4 million
recorded in the six months ended December 31, 1999.

Sales to a distributor accounted for 10% of net revenue in the
six months ended December 31, 2000 and were primarily in our mobile information
management segment. Sales to an original equipment manufacturer accounted for
24% of net revenue in the six months ended December 31, 1999 and were also
primarily in our mobile information management segment.

6

---

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, which are based upon information currently available
to us, speak only as of the date hereof and are subject to certain risks and
uncertainties. These forward-looking statements include, but are not limited to,
statements regarding:

- levels of mobile information management and printing solutions
product sales;
- levels of international sales;
- levels of original equipment
manufacturer sales;
- gross margin from each segment;
- staffing and expense
levels;
- our ability to realize remaining deferred tax assets;
- levels of
accounts receivable;
- levels of capital expenditures;
- compliance with bank
covenants;
- renewal of the line of credit facility;
- anticipated cash funding
needs; and
- future acquisitions.

We assume no obligation to update any forward-looking
statements. Our actual results may differ materially from the results discussed
in such forward-looking statements. Factors that may cause a difference include,
but are not limited to, those discussed in Item 2 entitled
Managements Discussion and Analysis of Financial Condition and
Results of Operations  Factors That May Affect Future Results and Market
Price of Stock. You should also carefully review the risk factors
described in other documents that we file from time to time with the Securities
and Exchange Commission, including our 2000 Annual Report on Form 10-K and other
Quarterly Reports on Form 10-Q that we will file in fiscal 2001. All period
references are to our second quarters ended December 31, 2000 and 1999 and our
fiscal years ended June 30, 2001 and 2000, unless otherwise indicated. Tabular
amounts are in thousands, except percentages.

Overview

We classify our product offerings into three segments:

- mobile information management;
- printing solutions; and
- other products.

Our mobile information management segment includes both mobile
data management and universal mobile connectivity products that enable users to
access, collect, synchronize and print information on demand. The products in
our mobile information management segment include data synchronization and
management software, wireless connectivity products, client/server database
management systems with remote access capabilities and enterprise Internet
appliances. We sell our mobile information management products primarily to
original equipment manufacturers, enterprises, application developers and
computer resellers both directly and through our e-commerce storefronts on the
Internet. We derive revenue from:

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

7

---

We believe net revenue from mobile information management
products will generate a larger percentage of net revenue as we continue to
focus our research and development and our marketing and sales efforts on our
mobile information management products and as they continue to achieve increased
market acceptance. Our future results of operations will be highly dependent
upon the success of our mobile information management software products,
specifically our XTNDConnect data synchronization and management software and
our XTNDAccess Bluetooth wireless connectivity software, which we expect will
generate a majority of our net revenue in the future.

Our printing solutions segment includes our maturing network
print server and non-network printer sharing products sold primarily through our
worldwide distribution channel to computer resellers and Fortune 1000 companies.
We also sell printing solutions products to a number of original equipment
manufacturers. We derive revenue primarily from sales of hardware products and,
to a lesser extent, from non-recurring development fees and royalties.

We expect net revenue from our printing solutions products to
decline over the next several quarters and to represent a decreasing percentage
of our net revenue as we continue to shift resources to support our mobile
information management products. However, we experienced a sequential increase
in net revenue from printing solutions products in the second quarter of fiscal
2001, which resulted from strong sales of print servers to original equipment
manufacturers.

Our other products segment consists of our discontinued
mechanical port replicator products.

We derive a majority of our net revenue from international
sales, principally from our international sales subsidiaries, original equipment
manufacturers and from a limited number of distributors.

|                    |  | Three Months Ended |  | Six Months Ended
|------------------- |  | ------------------ |  | ----------------
|
|
|                    |  |                    |  |                 
|Domestic            |  |                    |  | 42              
|International:      |  |                   
|Europe              |  |                    |  | 39              
|Asia                |  |                    |  | 17              
|Other regions       |  |                    |  | 2               
|                    |  |                    |  |                 
|Total international |  |                    |  | 58              
|                    |  |                    |  |                 
|Total net revenue   |  |                    |  | 100             
|                    |  |                    |  |                 

The decrease in net revenue from customers in Asia from the
prior year was due primarily to a decrease in sales of XTNDAccess IrDA Printer
Adapters to Hewlett-Packard. This decrease was offset in part by an increase in
sales to other multi-national original equipment manufacturers that incorporate
or bundle our products with their products and sell their products worldwide. We
expect that international sales will continue to represent a substantial portion
of our net revenue in the foreseeable future and will comprise 55% to 65% of net
revenue throughout fiscal 2001.

A portion of net revenue for several of our products, in
particular our XTNDAccess wireless connectivity products, ExtendNet print
servers and XTNDConnect data synchronization and management software, is
generated from sales to original equipment manufacturers. We intend to continue
to increase sales to original equipment manufacturers in the future,
particularly with our mobile information management products. In the six months
ended December 31, 1999, sales of mobile information management products and
services to Hewlett-Packard accounted for 23% of our net revenue, respectively.
In the prior year, substantially all of our net revenue derived from
Hewlett-Packard was generated by sales of our XTNDAccess IrDA Printer Adapter
for bundling with one of its mid-range printers. Hewlett-Packard also licenses
and purchases other mobile information management products. In April 2000,
Hewlett-Packard notified us that it would no longer bundle our XTNDAccess IrDA
Printer Adapter with Hewlett-Packard printers sold in North America, but that it
would offer our product as a free accessory to its customers with the purchase
of the Hewlett-Packard printer. As a result, sales to Hewlett-Packard were less
than 4% of our net revenue in the six months ended December 31, 2000.

8

---

In the six months ended December 31, 2000, sales to CF Company,
a distributor of our mobile information management products and the account
manager for a number of our other original equipment manufacturer customers,
accounted for 10% of our net revenue.

Revenue from original equipment manufacturer sales has
fluctuated in the past and we expect it will fluctuate in the future on a
quarterly basis, as demand in the original equipment manufacturer market is
difficult to predict and dependent on the timing of original equipment
manufacturer projects and the effectiveness of their marketing efforts.

We market and sell some of our products, primarily our printing
solution products, through multiple indirect channels, primarily distributors
and resellers. We support our indirect channels with our own marketing and sales
organization. We provide most of our distributors and resellers with price
protection rights and limited product return rights for stock rotation. Stock
rotation rights permit distributors to return products to us for credit against
an offsetting purchase order, but are limited based upon amounts purchased by a
given distributor during the preceding quarter. Price protection rights require
that we grant retroactive price adjustments for inventories of our products held
by distributors or resellers if we lower our prices for those products.
Distributor product returns and price protection adjustments have not
historically had a significant impact on our results of operations.

Results of Operations

|            | Three Months Ended | Six Months Ended
|----------- | ------------------ | ----------------
|
|            |                    |                 
|
|            |                    |                 
|Net revenue |                    |                 

The decreases in net revenue in the three and six months ended
December 31, 2000 from the same periods last year were due primarily to 45% and
39% decreases, respectively, in net revenue from sales of our mobile information
management hardware products, primarily sales of XTNDAccess Infrared Printer
Adapters to Hewlett-Packard. The decreases in net revenue were also due, in
part, to 23% decreases in net revenue from sales of our printing solutions
products. The weakening of the Euro also contributed to the decreases in net
revenue as a result of translating the net revenue of our international
subsidiaries, which is generally denominated in their local currencies, into
U.S. dollars. These decreases were offset, in part, by 69% and 67% increases,
respectively, in net revenue from sales of our mobile information management
software products, principally our XTNDAccess Blue SDK and XTNDConnect data
synchronization and management software.

|             | Three Months Ended | Six Months Ended
|------------ | ------------------ | ----------------
|
|             |                    |                 
|
|             |                    |                 
|Gross profit |                    |                 
|Gross margin |                    |                 

Our cost of net revenue consists primarily of costs associated
with raw materials, out-sourced manufacturing of particular subassemblies,
in-house labor associated with assembly, testing, procurement, shipping and
quality assurance, freight, amortization of purchased technology, facility costs
and royalties for the use of third-party software. The increases in gross margin
in the three and six months ended December 31, 2000 from the same periods last
year were the result of increased sales of mobile information management
software products and decreased shipments of lower margin mobile information
management hardware products.

We expect increased sales of our mobile information management
software products, and decreased sales of lower-margin mobile information
management hardware products, to continue to have a positive impact on our
overall gross margin. We also expect that positive impact may be partially
offset by the potential continuing decline in the gross margin in our printing
solutions segment as a result of a continued shift in product mix toward lower
margin products.

9

---

|                         | Three Months Ended | Six Months Ended
|------------------------ | ------------------ | ----------------
|
|                         |                    |                 
|
|                         |                    |                 
|Research and development |                    |                 
|As a % of net revenue    |                    |                 

Research and development expenses primarily consist of salaries
and other personnel costs of our research and development teams, consulting
costs, facility costs and travel expenses. The increases in research and
development expenses in the three and six months ended December 31, 2000 from
the same periods last year were primarily due to an increase in the number of
engineers dedicated to mobile information management software projects. This
increase in expenses is partially offset by a decrease in expenses in our
printing solutions segment as we continued to refocus our development efforts to
new mobile information management products.

We expect research and development expenses to continue to
increase throughout fiscal 2001, primarily as a result of continued increased
staffing in our mobile information management segment.

|                      | Three Months Ended | Six Months Ended
|--------------------- | ------------------ | ----------------
|
|                      |                    |                 
|
|                      |                    |                 
|Marketing and sales   |                    |                 
|As a % of net revenue |                    |                 

Marketing and sales expenses consist primarily of salaries,
commissions and other personnel costs of our marketing, sales and support
personnel and promotional expenses. The increases in marketing and sales
expenses in the three and six months ended December 31, 2000 from the same
periods last year were primarily due to increased personnel costs and
promotional activities for mobile information management software products, both
domestically and at our European subsidiaries. These increases were partially
offset by decreased promotional activities in our printing solutions segment.

We expect marketing and sales expenses to continue to increase
in the future, primarily in our mobile information management segment.

|                           | Three Months Ended | Six Months Ended
|-------------------------- | ------------------ | ----------------
|
|                           |                    |                 
|
|                           |                    |                 
|General and administrative |                    |                 
|As a % of net revenue      |                    |                 

General and administrative expenses primarily consist of
salaries and other personnel costs of our finance, management information
systems, human resources and other administrative employees and professional
service expenses. The increases in general and administrative expenses in the
three and six months ended December 31, 2000 from the same periods last year
were primarily attributable to an increase in the cost of our directors and
officers insurance. Our insurance premiums increased as a result of an increase
in coverage limit and the market environment for directors and officers
insurance.

We expect general and administrative expenses to continue to
increase in the future as our operations continue to expand.

|                             | Three Months Ended | Six Months Ended
|---------------------------- | ------------------ | ----------------
|
|                             |                    |                 
|
|                             |                    |                 
|Income tax benefit           |                    |                 
|As a % of loss before income |                    |                 
|taxes                        |                    |                 

10

---

The increase in the income tax benefits for the three months ended
December 31, 2000 from the same periods last year was primarily due to an
increase in our loss before income taxes. The increase in the income tax benefit
for the six months ended December 31, 2000 from the same period last year was
primarily the result of valuation allowances recorded in the prior year on
deferred tax assets arising from our acquisition of Advance Systems and on
foreign tax credit carryforwards. Although realization is not assured, we
believe it is more likely than not that the remaining net deferred tax assets
will be realized. The net deferred tax asset of $9.1 million at December 31,
2001 consisted primarily of net operating loss carryforwards, including loss
carryforwards of $5.8 million resulting from the tax benefit from employee stock
transactions.

Results of Operations by Segment

The discussion below addresses the operating results
attributable to our two primary segments. Our segment operating results are not
necessarily indicative of operating results that would result if each segment
were a stand-alone business as a result of fixed corporate costs such as
administration and facilities, which are allocated across all of our segments.

Mobile Information Management Segment

Our mobile information management segment includes both mobile
data management and universal mobile connectivity products that enable users to
access, collect, synchronize and print information on demand. Our products in
our mobile information management segment include data synchronization and
management software, wireless connectivity products, client/server database
management systems with remote access capabilities and enterprise Internet
solutions.

|                     | Three Months Ended | Six Months Ended
|-------------------- | ------------------ | ----------------
|
|                     |                    |                 
|
|                     |                    |                 
|Net revenue          |                    |                 
|Loss from operations |                    |                 

Net revenue from sales of mobile information management products
grew to 71% of our net revenue for the second quarter of fiscal 2001, up from
66% in the same period last year.

Net revenue decreased in the second quarter of fiscal 2001 from
the same period last year as a result of a decrease in unit sales of our
XTNDAccess infrared hardware products to original equipment manufacturers,
specifically Hewlett-Packard. This decrease was offset in part by a volume
driven increase in license revenue, royalties and support and maintenance fees
from our mobile information management software products and an increase in
average selling price of XTNDAccess hardware products. Net revenue from our
mobile information management software products, including our XTNDAccess
Bluetooth and XTNDConnect data synchronization and management software products,
was $6.4 million in the second quarter of fiscal 2001, an increase of 69% from
$3.8 million of net revenue in the same period last year.

A volume driven increase in net revenue from our mobile
information management software products and an increase in average selling
price of XTNDAccess hardware products offset the impact of a decrease in unit
sales of our XTNDAccess infrared hardware products in the six months ended
December 31, 2000. Net revenue from mobile information management software
products was $11.3 million, an increase of 67% from $6.8 million of net revenue
in the same period last year.

We expect that net revenue from mobile information management
software products will continue to expand and will represent the majority of our
net revenue and will continue to have a positive impact on our gross margin.
While we have experienced some renewed interest in our XTNDAccess infrared
hardware products from original equipment manufacturers in the first and second
quarters of fiscal 2001, we expect net revenue from our mobile information
management hardware products, which include our enterprise Internet solutions,
to continue to decline in the coming quarters.

The increased losses from operations for our mobile information
management segment in both periods presented from the same periods last year
were primarily the result of an increase in spending for research

11

---

and development projects for mobile information management software
products and increased spending in marketing and sales for all mobile information
management products worldwide.

Printing Solutions Segment

The printing solutions segment includes our maturing network
print server and non-network printer sharing products, sold primarily through
our worldwide distribution channel to computer resellers and Fortune 1000
companies and to original equipment manufacturers.

|                              | Three Months Ended | Six Months Ended
|----------------------------- | ------------------ | ----------------
|
|                              |                    |                 
|
|                              |                    |                 
|Net revenue                   |                    |                 
|Income (loss) from operations |                    |                 

In the second quarter of fiscal 2001,  29% of our net revenue was derived from sales of our printing  solutions  products,  as compared
to 34% in the same period last year.

The decreases in net revenue in both periods  presented  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  worldwide.  These decreases in unit sales were coupled
with decreases in the average selling price of print server products sold as a result of changes in product mix.

We expect that net revenue from sales of printing solutions  products will continue to decline in coming quarters.  Gross margin in our
printing  solutions  segment  may  continue  to decline as a result of a decrease  in units sold and a  continued  shift in product mix
toward lower margin products.

Income from  operations in the second quarter of fiscal 2001 was consistent  with income from  operations in the same quarter last year
as a result of a decrease  in gross  profit  caused by a decrease  in unit  sales,  offset by a decrease  in  operating  expenses as we
shifted resources to support our mobile  information  management  products.  In the six months ended December 31, 2000, the decrease in
loss from  operations  from the prior year  resulted  from a decrease  in  operating  expenses,  which was only  partially  offset by a
decrease in gross profit.

Liquidity, Capital Resources and Financial Condition

Net cash used by operating activities in the six months ended December 31, 2000 was $2.7 million and was comprised primarily of an
increase in receivables and our net loss, adjusted for such non-cash items as deferred income taxes, depreciation and amortization
and a provision for write-down of inventory. These cash uses were partially offset by an increase in accounts payable and accrued
expenses. Net cash used by operating activities in the six months ended December 31, 1999 was $3.4 million and was primarily the
result of the payment of a discount on long-term debt and an increase in accounts receivable, partially offset by an increase in
accounts payable and accrued expenses.

Accounts  receivable  was $11.5 million at December 31, 2000 as compared to $10.1 million at June 30, 2000. We expect that our accounts
receivable will increase if net revenue  increases.  Further,  accounts  receivable may increase if net revenue from original equipment
manufacturers  and  international  customers  becomes a higher  percentage of our net revenue as these customers  generally have longer
payment cycles.

Net cash used by investing  activities in the six months ended December 31, 2000 was $571,000,  which consisted  primarily of purchases
of property  and  equipment.  Net cash used by  investing  activities  in the six months  ended  December 31, 1999 was $2.9 million and
consisted  primarily of cash payments for the  acquisition  of Oval, the parent company of Advance  Systems,  partially  offset by cash
provided from maturities and sales of available-for-sale securities.

We currently plan to incur aggregate capital  expenditures of approximately  $1.4 million  during fiscal 2001,  primarily for software,
system improvements and personal computers.

12

---

Net cash provided by financing  activities in the six months ended  December 31, 2000 was $2.0 million,  which  consisted  primarily of
proceeds  from the issuance of common stock under our stock plans.  Net cash  provided by financing  activities in the six months ended
December 31, 1999 was $385,000,  which consisted  primarily of net borrowing  under our line of credit  agreement and proceeds from the
issuance of common stock under our stock plans partially offset by payments on our long-term debt.

We have an uncollateralized bank revolving line of credit of $10.0 million,  which expires on October 31,  2001. Interest on borrowings
is at the lender's  prime rate.  There were no  borrowings  under this line at December  31, 2000 or June 30, 2000.  The line of credit
agreement has  restrictive  covenants  that require us to maintain  particular  financial  ratios.  We do not foresee any difficulty in
complying with these covenants and expect to renew or replace the facility on or before October 31, 2001.

We  believe  that our  existing  working  capital  and  borrowing  capacity,  coupled  with the funds we expect  to  generate  from our
operations,  will be sufficient to fund our anticipated  working capital,  capital  expenditure and debt payment  requirements over the
next 12 months. In the longer term, we may require  additional  sources of liquidity to fund future growth.  These sources of liquidity
may include additional equity offerings, which could result in dilution to our stockholders, or additional debt financing.

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

Effects of Foreign Currency Exchange Rates

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

We have 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  time before December 31, 2001, the end of the transition  period,  product prices in participating
countries will be denominated in the Euro and converted to local  denominations.  During the transition  period,  our financial systems
located in the  participating  countries  will be  converted  from local  denominations  to the Euro.  We do not  presently  expect the
transition to the Euro to significantly  affect our foreign currency exchange  activities.  Further, we do not expect the transition to
the Euro to  result in any  significant  increase  in costs to us and all  costs  associated  with the  transition  to the Euro will be
expensed to operations as incurred.  While we will  continue to evaluate the impact of the  transition to the Euro,  based on currently
available information, we do not believe that the transition to the Euro will harm our business.

We do not hold or issue financial  instruments  for speculative  purposes.  From time to time, we enter into foreign  currency  forward
contracts,  typically  against the  British  Pound and Euro,  to manage  currency  fluctuations  on  payments  and  receipts of foreign
currencies on transactions  with  international  subsidiaries.  While these  instruments  are subject to  fluctuations in value,  these
fluctuations  are  generally  offset by  fluctuations  in the value of the  underlying  asset or  liability,  resulting  in minimal net
exposure for us. The success of these currency  activities  depends upon  estimation of  intercompany  balances  denominated in various
foreign currencies.  To

13

---

the extent that these forecasts are overstated or understated during periods of currency  volatility,  we could
experience unanticipated currency gains or losses.

Recently Issued Accounting Standards

The Securities and Exchange  Commission  issued Staff  Accounting  Bulletin 101,  "Revenue  Recognition  in Financial  Statements,"  in
December 1999.  This bulletin  summarizes  the Securities and Exchange  Commission's  view in applying  generally  accepted  accounting
principles to revenue  recognition in financial  statements.  The SEC has recently issued further  guidance with respect to adoption of
specific  issues  addressed by Staff  Accounting  Bulletin 101.  Based on this  guidance  from the SEC, we are currently  assessing the
impact,  if any, Staff  Accounting  Bulletin 101 may have on our  operations.  We are required to adopt this bulletin no later than our
fourth quarter of fiscal 2001.

In March 2000 the Financial  Accounting Standards Board issued  Interpretation No. 44, "Accounting for Certain  Transactions  Involving
Stock  Compensation  - an  Interpretation  of  Accounting  Principles  Board  Opinion No. 25."  Financial  Accounting  Standards  Board
Interpretation  No. 44 clarifies the  application of Accounting  Principles  Board Opinion No. 25.. We adopted this  interpretation  on
July 1, 2000 without an impact to our results of operations.

In June 1998, the Financial  Accounting  Standards Board issued  Statement of Financial  Accounting  Standard No. 133,  "Accounting for
Derivative  Instruments and Hedging  Activities,"  which  establishes  accounting and reporting  standards for derivative  instruments,
including certain derivative  instruments  embedded in other contracts and for hedging  activities.  The statement requires entities to
recognize all  derivatives  as either assets or  liabilities  in the statement of financial  position and measure those  instruments at
fair value. We adopted this statement on July 1, 2000 without an impact to our results of operations.

Factors That May Affect Future Results and Market Price of Stock

Our quarterly and annual operating results may fluctuate significantly and fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline.

Our  operating  results have  fluctuated in the past and may continue to do so in the future.  If our operating  results fall below the
expectations of securities  analysts or investors,  the price of our stock may fall. Some of the factors that may cause fluctuations in
our operating results include, but are not limited to:

- changes in the buying patterns of corporate information technology or our original equipment manufacturer customers;
- changes in customer demand for our products;
- the market adoption rate of Bluetooth or other technologies on which a number of our products are based;
- announcements or introductions of new products or services by our competitors;
- delays in developing and introducing new products and services;
- changes in our pricing policies as a result of increased competition;
- the mix of distribution channels through which we sell our products;
- the market acceptance of our new and enhanced products and the products of our original equipment manufacturers;
- the emergence of new technologies or industry standards;
- the timing of customer orders, which can be influenced by fiscal year-end buying pressure and seasonal trends;
- a shift in the mix of products sold, resulting in increased sales of lower-margin products;
- the  discontinuation  of any of our product  offerings or segments,  which could result in product returns and inventory write
     downs; and
- changes in accounting  standards,  including standards relating to revenue recognition,  business combinations and stock-based
     compensation.

14

---

Our stock price may be volatile and could drop significantly, resulting in the
partial or total loss of a stockholder's investment.

The trading price of our common stock may fluctuate significantly, which may
cause a stockholder's investment to decrease in value. For example, during the
period from January 1 to December 31, 2000, the price of our common stock ranged
from $10.13 to $150.00 per share. The following factors may have a significant
impact on the market price of our common stock:

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

We depend on a number of key business relationships and, if we fail to maintain
these relationships or are unable to develop new relationships, our business
would suffer.

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

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

If specific industry-wide standards and protocols, such as Bluetooth, WAP,
SyncML and IrDA, upon which our products are or will be based, do not achieve
widespread acceptance, our business would be harmed.

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

- Bluetooth, a short-range radio communication protocol;
- WAP, or the Wireless Application Protocol;
- SyncML, a data synchronization protocol; and
- IrDA, a wireless communication protocol created by the Infrared Data Association.

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

The mobile data management and universal mobile connectivity markets are new and
evolving and may not continue to grow or grow at expected rates, which would
reduce demand for our products and harm our business.

15

---

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

If original equipment manufacturers reduce their purchases of our products, our
operating results and future growth could be harmed.

A significant portion of our net revenue in any quarter is typically derived
from sales to a limited number of original equipment manufacturers. For example,
in fiscal 2000, sales of mobile information management products and services to
Hewlett-Packard accounted for 23% of our net revenue. In April 2000,
Hewlett-Packard notified us that it is no longer bundling our XTNDAccess IrDA
Printer Adapter with Hewlett-Packard printers sold in North America, but that it
is offering our product as a free accessory to its customers with the purchase
of the Hewlett-Packard printer. As a result, sales to Hewlett-Packard were less
than 4% of our net revenue in the six months ended December 31, 2000.

In the event that other original equipment manufacturers reduce their purchases
of our products, our operating results and future growth could be harmed. In
addition, any significant deferral of purchases of our products by original
equipment manufacturers could harm our quarterly operating results.

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

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

We intend to pursue additional acquisitions, and any acquisitions could prove
difficult to integrate, disrupt our business, dilute stockholder value or
adversely affect our operating results.

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

- expansion into new markets and business areas;
- the integration of acquired technologies with our existing products and technologies;
- diversion of management's  attention and other  resources to the  assimilation of the operations and personnel of the acquired
     companies;
- availability of equity or debt financing on terms favorable to us and our stockholders;
- integration  of  management  information  systems,  personnel,  research  and  development  and  marketing,  sales and support
     operations; and

16

---

- potential adverse short-term effects on our operating results.

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

We forecast certain component inventory purchases based on forecasted sales
volume of hardware units, which are difficult to predict. If we fail to
accurately predict sales volume in a particular period, we may be unable to
adjust our component inventory purchasing in that period and our operating
results could be harmed.

Our quarterly net revenue and operating results depend in large part on the
volume and timing of orders received within the quarter, which are difficult to
forecast. We typically operate with a relatively small order backlog and
significant component inventory purchases are fixed in advance, based in large
part on our forecast of future sales volume. In addition, a significant portion
of our net revenue results from the sale of products to a number of original
equipment manufacturers and distributors, which are difficult to predict.

None of our distributors or original equipment manufacturers are obligated to
purchase our products or certain component inventory that is used in the
manufacturing of our products except pursuant to current purchase orders or
purchase agreements. If sales volume is below expectations in any given quarter,
the adverse impact of the shortfall on our operating results may be magnified by
our inability to adjust component inventory purchasing to compensate for the
shortfall.

Also, we may be required to record an increase in our provision for obsolete
inventory if certain component inventory that we purchase in anticipation of a
higher level of product sales cannot be returned to vendors and the inventory
cannot be used in the manufacturer of our other products.

We forecast many of our expenses on forecasted net revenue and gross profit,
which is difficult to predict. If we fail to accurately predict net revenue and
gross profit in a particular period, we may be unable to adjust our expenditures
in that period and our operating results would be harmed.

Our quarterly net revenue and operating results depend in large part on the
volume and timing of orders received within the quarter and on average selling
prices, which are difficult to forecast. Significant portions of our expenses
are fixed in advance, based in large part on our forecast of future net revenue.
In addition, a majority of our net revenue results from the sale of products to
a number of original equipment manufacturers and distributors, which are
difficult to predict.

If net revenue and gross profit are below expectations in any given quarter, the
adverse impact of the shortfall on our operating results may be magnified by our
inability to adjust our expenditures to compensate for the shortfall.

We have experienced seasonality in our net revenue, which may cause our
operating results to fail to meet the expectations of securities analysts or
investors, which could cause our stock price to decline.

We have experienced some seasonality in our net revenue and we expect to
continue to experience seasonality in the future. Net revenue in our first
fiscal quarter is typically lower than net revenue in the prior fourth fiscal
quarter, reflecting lower sales in Europe and other regions in the summer months
when business activities are reduced.

Markets for our products are becoming increasingly competitive, which could
result in lower prices for our products or a loss of market share.

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

17

---

services or marketing to maintain and extend the market acceptance of our
products. Price concessions or the emergence of other pricing or distribution
strategies by our competitors or us may diminish our net revenue.

We compete with:

- mobile data management  companies,  including  Aether Software,  Pumatech,  fusionOne and Starfish  Software,  a subsidiary of
     Motorola;
- client/server database providers, including Microsoft, Interbase, Pervasive Software and Oracle;
- mobile connectivity companies, including Widcomm, Digianswer (a subsidiary of Motorola) and ACTiSYS;
- internet  solutions  providers,  including IBM, Cobalt Networks (a division of Sun  Microsystems),  eSoft and Ramp Networks (a
     subsidiary of Nokia);
- print server manufacturers, including Hewlett-Packard, Intel and Lexmark; and
- internal research and development departments of original equipment manufacturers, many of whom are our current customers.

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

We may not be able to successfully develop or introduce new products.

The markets for our products are characterized by:

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

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

If our third-party manufacturers fail to provide us with quality, cost-effective
products in a timely manner or in sufficient volumes to meet customer demand,
our business and operating results may be harmed.

We maintain a limited in-house manufacturing capability for performing materials
procurement, final assembly, testing, quality assurance and shipping. We rely
primarily on independent subcontractors to manufacture our products and we
intend to continue our reliance upon third-party manufacturers in the future.
Some of our products are manufactured in their entirety by third parties. Our
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.

18

---

If our third-party suppliers fail to make deliveries that meet our manufacturing
schedules, our business may be harmed.

We rely on third-party suppliers for components used in our products. Because
the manufacturing of our products can involve long lead times, in the event of
unanticipated increases in demand for our products, we could be unable to obtain
product components quickly enough to manufacture particular products in a
quantity sufficient to meet customer demand. As a result, our business may be
harmed. Some of the components used in our products, including particular
semiconductor components and infrared transmission components, are currently
available from a limited number of suppliers. From time to time, we have
experienced difficulty in obtaining components from suppliers due to increased
industry demand and a lack of available supply. We are currently experiencing
some difficulty in obtaining an adequate supply of flash memory for our printing
solutions products and some components commonly used in the manufacture of
mobile phones, such as resistors and capacitors, for our wireless connectivity
products. Any inability to obtain adequate deliveries, increased costs or other
circumstances that would require us to seek alternative suppliers could impair
our ability to ship our products on a timely basis. This could damage
relationships with current and prospective customers and increase the
manufacturing cost of our products, either of which would harm our business.

We rely upon third-party distributors and resellers, who may not devote
resources to adequately support our products.

We sell some of our products, mainly our printing solutions products, primarily
through distributors and resellers. Our success depends on the continued sales
efforts of our network of distributors and resellers. Some of our existing
distributors currently distribute, or may in the future distribute, the products
of our competitors. These third-party distributors may not recommend our
products or may not devote sufficient resources to market or adequately support
our products.

Our distributors maintain inventory of the products they purchase from us. We
provide most of our distributors and resellers with limited product return
rights for stock rotation and with some price protection rights. We may
experience significant returns in the future and we may not make adequate
allowances to offset these returns. Price protection rights require that we
grant retroactive price adjustments for inventories of our products held by
distributors or resellers if we lower our prices for these products. The short
life cycles of our products and the difficulty in predicting future sales
increase the risk that new product introductions, price reductions by us or our
competitors or other factors affecting the markets in which we compete could
result in significant product returns. In addition, changes in inventory
management policies at any of our key distributors could harm our business.

We depend on non-exclusive licenses for some of the technology we use with our
products.

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

19

---

International sales and operations represent a substantial portion of our net
revenue. Our business may be harmed due to risks associated with international
sales and operations.

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

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

Currency exchange rate fluctuations could cause our operating results to
fluctuate.

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

From time to time, we enter into foreign currency forward contracts, typically
against the British Pound and Euro, to manage currency fluctuations on payments
and receipts of foreign currencies on transactions with international
subsidiaries. The success of these currency activities depends upon estimation
of intercompany balances denominated in various foreign currencies. To the
extent that these forecasts are overstated or understated during periods of
currency volatility, we could experience unanticipated currency gains or losses.

If enterprises and individuals are reluctant to use the Internet to manage
information, it will harm sales of some of our products.

Sales of some of our products, including our mobile data management and our
enterprise Internet products in particular, largely depend upon on the increased
use of the Internet by enterprises as replacements for, or enhancements to,
their private networks. However, enterprises may be reluctant to use Internet
services or applications for functions that are important for their operations.
If enterprises determine that our mobile data management and enterprise Internet
products do not provide adequate security for dissemination of information over
the Internet, or if for any other reason customers fail to accept our
applications and services for use over the Internet, our business could be
harmed.

The complex computer software and hardware products that we produce may contain
defects for which we may be liable.

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

20

---

If we are unable to effectively manage our growth, our business will suffer.

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

We anticipate that growth and expansion will require us to recruit, hire, train
and retain a substantial number of new engineering, executive, sales and
marketing personnel. In the current employment environment we have experienced
difficulty in recruiting qualified personnel, and continued difficulty in this
regard could require us to incur significant costs to recruit personnel or could
limit our ability to grow. In addition, in order to manage our growth
successfully, we will need to continue to expand and improve our operational,
management and financial systems and controls. The failure to do so could harm
our business.

If we are unable to effectively manage the decline in our printing solutions
segment, our business will be harmed.

We have shifted the focus of our business strategy from our maturing printing
solutions segment by shifting engineering and marketing and sales resources to
our mobile information management segment. However, our operating results are
still dependent upon net revenue from sales of our printing solutions products,
primarily our network print server products. In the six months ended December
31, 2000, net revenue from sales of printing solutions products represented 29%
of our net revenue. We believe net revenue from printing solutions products will
continue to decline to become a smaller percentage of our net revenue, however,
if the maturation of printing solutions products occurs faster than we
anticipate our net revenue and operating results would be harmed. In addition,
we may incur additional expenses in terminating the printing solutions business
such as employee severance costs and a provision for write-down of inventory,
which would adversely affect our operating results.

We may not be able to adequately protect our patent, trademark, copyright or
other intellectual property rights from competitors, and we may be required to
use a significant amount of our resources to defend ourselves from infringement
claims made by others.

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

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

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

21

---

The loss of key personnel, or our inability to attract and retain additional
personnel, may harm our business.

Our success depends upon the continuing contributions of our key management,
engineering, sales and marketing and finance personnel. The loss of key
personnel could harm our business. We do not maintain any key-person life
insurance policies. We believe that our success will also depend upon our
ability to attract and retain highly skilled management, engineering, sales and
marketing and finance personnel. In particular, we are currently attempting to
recruit new engineering personnel; however, we may not be successful at hiring
or retaining these personnel.

It may be difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We derive a substantial portion of our revenue from international sales,
principally through our international subsidiaries in France, Germany, Italy,
Singapore, the Netherlands and the United Kingdom, and through a limited number
of original equipment manufacturers and independent distributors. Therefore, we
face exposure to adverse movements in foreign currency exchange rates. Sales
made by our international subsidiaries are generally denominated in the
country's local currency with the exception of our subsidiary in Singapore.
Fluctuations in exchange rates between the U.S. dollar and other foreign
currencies could cause our results to fluctuate when we translate revenue and
expenses denominated in other currencies into U.S. dollars. Fluctuations in
exchange rates also may make our products more expensive to original equipment
manufacturers and independent distributors who purchase our products in U.S.
dollars.

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the British Pound and Euro, to manage currency fluctuations on payments
and receipts of foreign currencies on transactions with international
subsidiaries. At December 31, 2000, we had contracts in place totaling $6.1
million that matured within 30 days. While these instruments are subject to
fluctuations in value, these fluctuations are generally offset by fluctuations
in the value of the underlying asset or liability, resulting in minimal net
exposure for us. The success of these currency activities depends upon
estimation of intercompany balances denominated in various foreign currencies.
To the extent that these forecasts are overstated or understated during periods
of currency volatility, we could experience unanticipated currency gains or
losses.

22

---

Part II. Other Information

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

Our 2000 Annual Meeting of Stockholders was held on October 25, 2000. At the
meeting, the following matters were submitted to a vote of the stockholders:

| |                  |  | Votes With
| | ---------------- |  | ----------
|
| |                  |  |           
| | John J. Katsaros |  |           
| | John M. Russell  |  |           

- 9,171,570 votes in favor;
- 4,923 votes against; and
- 11,890 abstentions.

- 7,434,492 votes in favor;
- 1,744,142 votes against;
- 21,342 abstentions; and
- 11,593 broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

(a)  EXHIBITS

|10.25 |  | Employment Agreement between Extended Systems and Scott J. Ritchie, as amended on October 16, 2000.
|----- |  | ---------------------------------------------------------------------------------------------------

(b)  REPORTS ON FORM 8-K

We filed no reports on Form 8-K during the three months ended
December 31, 2000.

Items 1, 2, 3 and 5 of Part II are not applicable and have been
omitted.

23

---

Signature

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

| |  | Extended Systems Incorporated
| |  | -----------------------------
| |  | By:                          
| |  |                              

24

---