<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION


                             WASHINGTON, D.C. 20549

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

                                   FORM 10-Q/A

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

                 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

                                       OR

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

                  FOR THE TRANSITION PERIOD FROM _____ TO _____

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

                        Commission File Number 000-23597


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


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


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


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


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


The number of shares outstanding of the registrant's Common Stock as of
September 30, 1999 was 9,228,065.

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

                                       1

<PAGE>

                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

                  FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999

                                      INDEX


<TABLE>
<CAPTION>

                                                                                                      PAGE
                                                                                                      ----
<S>                                                                                                   <C>
PART I.  FINANCIAL INFORMATION

         Item 1.  Financial Statements

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

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

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

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

                  Notes to Consolidated Financial Statements                                           4

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

SIGNATURE                                                                                             24

</TABLE>


                                PORTIONS AMENDED

We restated our Consolidated Condensed Statement of Cash Flows for the three
months ended September 30, 1999 to reflect a reclassification of a $3.7
million payment of a discount on long-term debt from a financing activity to
an operating activity. We have also restated the "Liquidity, Capital Resources
and Financial Condition" section of "Management's Discussion and Analysis of
Financial Condition and Results of Operations" to reflect this
reclassification.

We restated the unaudited proforma consolidated results of operations for the
three months ended September 30, 2000 related to our acquisition of Oval.













                                       2

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

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


<TABLE>
<CAPTION>

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

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

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

Earnings (loss) per share:
      Basic                                                                 $       (0.34)      $       0.13
      Diluted                                                               $       (0.34)      $       0.12

Number of shares used in earnings (loss)
 per share calculation:
      Basic                                                                         8,995              8,250
      Diluted                                                                       8,995              8,423


</TABLE>


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


<TABLE>
<CAPTION>

                                                                                    THREE MONTHS ENDED
                                                                                       SEPTEMBER 30,
                                                                           -----------------------------------
                                                                                 1999                1998
                                                                           ---------------     ---------------
<S>                                                                        <C>                 <C>
Net income (loss)                                                           $     (3,061)       $      1,050
Change in currency translation                                                         -                (366)
                                                                           ---------------     ---------------
Comprehensive income (loss)                                                 $     (3,061)       $      1,416
                                                                           ===============     ===============

</TABLE>



The accompanying notes are an integral part of the financial statements

                                                 3

<PAGE>

<TABLE>
<CAPTION>

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)

                                                                              SEPTEMBER 30,             JUNE 30,
                                                                                   1999                   1999
                                                                            -------------------    -------------------
<S>                                                                          <C>                    <C>
ASSETS
Current:
    Cash and cash equivalents                                                $           2,304      $           9,668
    Short-term investments                                                                   -                  3,001
    Accounts receivable, net                                                             9,423                  9,778
    Income taxes receivable                                                                932                    664
    Other receivables                                                                    1,062                  1,147
    Inventories:
      Purchased parts                                                                    1,994                  2,060
      Work in process                                                                      340                    860
      Finished goods                                                                     2,088                  2,097
    Prepaids and other                                                                     951                    945
    Deferred income taxes                                                                  416                    584
                                                                            -------------------    -------------------
      Total current assets                                                              19,510                 30,804
Property and equipment, net                                                              8,132                  8,300
Intangibles, net                                                                         7,462                  1,402
Deferred income taxes                                                                      602                      -
Other assets                                                                               350                    293
                                                                            -------------------    -------------------
      Total assets                                                           $          36,056      $          40,799
                                                                            ===================    ===================

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

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

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


The accompanying notes are an integral part of the financial statements

                                                           4
<PAGE>

<TABLE>
<CAPTION>

EXTENDED SYSTEMS INCORPORATED

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




                                                                             FOR THE THREE MONTHS ENDED SEPTEMBER 30,
                                                                                 1999                        1998
                                                                       -------------------------- --------------------------
<S>                                                                     <C>                        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss)                                                   $                (3,061)   $                  1,050
    Adjustments to reconcile net income to net cash
       provided by operating activities:
       Acquired research and development                                                   2,365                           -
       Provision for bad debts                                                                39                         161
       Provision for obsolete inventory                                                       60                         358
       Depreciation and amortization                                                         662                         302
       Accretion of discount on long-term debt                                               174                         160
       Payment of discount on long-term debt                                              (3,675)                           -
       Stock option compensation                                                              47                          96
       Other                                                                                   -                           5
       Changes in assets and liabilities, net of:
             effect of acquisitions:
          Receivables                                                                       (335)                     (2,824)
          Inventories                                                                        536                         448
          Prepaids and other assets                                                           (7)                         66
          Payables                                                                           319                          91
                                                                       --------------------------  --------------------------
             Net cash used by operating activities                                        (2,876)                        (87)
                                                                       --------------------------  --------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
    Acquisition:
       Oval (1415) Limited, net of cash acquired                                          (5,286)                          -
    Purchase of property and equipment                                                      (188)                       (341)
    Maturities of available-for-sale securities                                            3,001                           -
    Purchase of available-for-sale securities                                                  -                      (1,750)
    Issuance of note receivable                                                                -                        (279)
    Other investing activities                                                               (38)                         48
                                                                       --------------------------  --------------------------
             Net cash used by investing activities                                        (2,511)                     (2,322)
                                                                       --------------------------  --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Payments on long-term debt                                                            (4,552)                        (77)
    Net borrowings under line of credit agreement                                          2,575
    Purchase of treasury stock                                                                 -                         (43)
    Other financing activities                                                                 -                          63
                                                                       --------------------------  --------------------------
             Net cash used by financing activities                                        (1,977)                        (57)

    Effect of exchange rate changes on cash                                                    -                          90
                                                                       --------------------------  --------------------------
    Net increase (decrease) in cash and cash equivalents                                  (7,364)                     (2,376)
CASH AND CASH EQUIVALENTS:
    Beginning of period                                                                    9,668                      15,006
                                                                       --------------------------  --------------------------
    End of period                                                       $                  2,304    $                 12,630
                                                                       ==========================  ==========================
</TABLE>

The accompanying notes are an integral part of the financial statements

                                                             5
<PAGE>

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


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

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

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

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

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

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

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

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


                                       6

<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

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

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

                                       7

<PAGE>

<TABLE>
<CAPTION>

                                                 THREE MONTHS ENDED
                                                    SEPTEMBER 30,
                                          ---------------------------------
                                              1999                 1998
                                          ------------         ------------
<S>                                       <C>                  <C>
Net revenue                               $     13,317         $     13,816
Net income (loss)                               (3,058)                 950
Earnings (loss) per share:
      Basic                                      (0.33)                0.11
      Diluted                                    (0.33)                0.11
</TABLE>

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

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

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

The Company used a portion of the acquired in-process research and
development to further enhance ASL's existing server-based synchronization
technology by implementing a plug-in architecture. This type of design allows
users and third party software providers to develop small software components
that plug into the Company's XTNDConnect product and extends the range of
applications supported by XTNDConnect. In September 1999, the Company
implemented the first phase of this architecture with the release of
XTNDConnect Version 2.2, which supports IBM's DB2 Everywhere 1.1 (DB2E)
handheld relational database and Microsoft's ActiveX Data Object (ADO)
interface, and provides other enhanced management tools. The acquired
in-process research and development assigned to this project was valued at
$943,000 as of the date of the acquisition. The Company incurred an estimated
$69,000 to complete Version 2.2.

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

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

                                       8

<PAGE>

technical performance requirements. The primary risk with the completion of
this project is the overall scope and complexity. The Company expects to
complete this project by May 2000.

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

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

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

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

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

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

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

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

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

                                       9

<PAGE>

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

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

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

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

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

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

Segment information is as follows:


<TABLE>
<CAPTION>

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

</TABLE>

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

                                      10

<PAGE>

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

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

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

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

FORWARD-LOOKING STATEMENTS

         IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-Q CONTAINS
FORWARD-LOOKING STATEMENTS. IN THIS FORM 10-Q, THE WORDS "EXPECTS,"
"ANTICIPATES," "BELIEVES," "INTENDS," "WILL" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS, WHICH ARE BASED UPON INFORMATION CURRENTLY
AVAILABLE TO THE COMPANY, SPEAK ONLY AS OF THE DATE HEREOF AND ARE SUBJECT TO
CERTAIN RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, BUT
ARE NOT LIMITED TO, STATEMENTS REGARDING FUTURE UNIT SALES AND AVERAGE SELLING
PRICES OF PRINT SERVER PRODUCTS, FUTURE PRODUCT MIX, FUTURE OEM SALES, FUTURE
EXPENSE LEVELS, FUTURE ACQUISITIONS, THE EFFECT OF THE YEAR 2000 ISSUE AND
PENDING LITIGATION. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN SUCH FORWARD-LOOKING STATEMENTS. FACTORS THAT
MAY CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THIS SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS
AND MARKET PRICE OF STOCK." READERS SHOULD CAREFULLY REVIEW THE RISK FACTORS
DESCRIBED IN OTHER DOCUMENTS THAT THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), INCLUDING THE 1999
ANNUAL REPORT ON FORM 10-K AND THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED
BY THE COMPANY IN FISCAL 2000. ALL PERIOD REFERENCES ARE TO THE COMPANY'S
FISCAL YEARS ENDED JUNE 30, 2000, 1999 AND 1998, UNLESS OTHERWISE INDICATED.
ALL TABULAR DOLLAR AMOUNTS ARE PRESENTED IN THOUSANDS.

RESULTS OF OPERATIONS


<TABLE>
<CAPTION>

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

</TABLE>

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

                                      11

<PAGE>

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

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

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

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

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


<TABLE>
<CAPTION>

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

</TABLE>

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

                                      12

<PAGE>

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


<TABLE>
<CAPTION>

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

</TABLE>

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

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


<TABLE>
<CAPTION>

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

</TABLE>

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

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


<TABLE>
<CAPTION>

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

</TABLE>

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

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


<TABLE>
<CAPTION>

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

</TABLE>



                                      13

<PAGE>

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

RESULTS OF OPERATIONS BY SEGMENT

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

MOBILE INFORMATION MANAGEMENT SEGMENT

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
























                                      14

<PAGE>


<TABLE>
<CAPTION>

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


</TABLE>

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

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

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

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

PRINTING SOLUTIONS SEGMENT

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

<TABLE>
<CAPTION>

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


</TABLE>

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

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

                                      15

<PAGE>

OTHER PRODUCTS SEGMENT

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

<TABLE>
<CAPTION>

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


</TABLE>

BUSINESS COMBINATIONS

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

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

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


<TABLE>

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

</TABLE>

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

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

                                      16

<PAGE>

existing products and technologies. Management based the estimated cost of net
revenue and estimated operating expenses on the Company's cost structure and
that of comparable companies.

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

The Company used a portion of the acquired in-process research and development
to further enhance ASL's existing server-based synchronization technology by
implementing a plug-in architecture. This type of design allows users and
third party software providers to develop small software components that plug
into the Company's XTNDConnect product and extends the range of applications
supported by XTNDConnect. In September 1999, the Company implemented the first
phase of this architecture with the release of XTNDConnect Version 2.2, which
supports IBM's DB2 Everywhere 1.1 (DB2E) handheld relational database and
Microsoft's ActiveX Data Object (ADO) interface, and provides other enhanced
management tools. The acquired in-process research and development assigned to
this project was valued at $943,000 as of the date of the acquisition. The
Company incurred an estimated $69,000 to complete Version 2.2.

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

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

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

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

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

                                      17

<PAGE>

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


<TABLE>

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

</TABLE>

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

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

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

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

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

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

Net cash used by operating activities in the first quarter of fiscal 2000 was
$2.9 million and was primarily the result of the payment of a discount on
long-term debt, partially offset by a decrease in inventory. Net cash used by
operating activities in the first quarter of 1999 was $87,000 and consisted
primarily of an increase in receivables, partially offset by net income
adjusted for non-cash items such as the provision for obsolete inventory and
depreciation and amortization.

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

                                      18

<PAGE>

Net cash used by investing activities in the first quarter of 2000 was $2.5
million and consisted primarily of cash payments for the acquisition of Oval,
partially offset by cash from the maturity of available-for-sale securities.
Net cash used by investing activities in the first quarter of 1999 was $2.3
million and primarily related to the purchase of available-for-sale securities.

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

Net cash used by financing activities in the first quarter of 2000 was $2.0
million and consisted primarily of payments on our long-term debt, partially
offset by net borrowings under our line of credit agreement. Net cash used by
financing activities in the first quarter of 1999 was $57,000 and consisted
primarily of payments on our long-term debt.

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

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

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

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES

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

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

The Company has not experienced significant costs as a result of the
introduction of a European single currency (the "Euro") introduced on January
1, 1999. At an appropriate point before the end of the transition period,
December 31, 2001, product prices in participating countries will be
denominated in the Euro and

                                      19

<PAGE>

converted to local denominations. During the transition period, the Company's
financial systems located in the participating countries will be converted
from local denominations to the Euro. The Company does not presently expect
that the transition to the Euro will materially affect the Company's foreign
currency exchange and hedging activities. Further, the Company does not expect
that the transition to the Euro will result in any material increase in costs
to the Company and all costs associated with the transition to the Euro will
be expensed to operations as incurred. While the Company will continue to
evaluate the impact of the transition of the Euro, based on currently
available information, the Company does not believe that the introduction of
the Euro will have a material adverse impact on the Company's financial
condition, results of operations and cash flows.

YEAR 2000 COMPLIANCE

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

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

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

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

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

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

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






                                      20

<PAGE>


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

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

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

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

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

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

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

                                       22
<PAGE>


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

DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS. The Company's future results of
operations will be highly dependent upon the success of recently introduced
products, including newer versions of the XTNDConnect data synchronization
software, the ExtendNet 4000 Internet Appliance, Advantage Database Server
Version 5.5 with STREAMLINE SQL, and recently released ExtendNet print server
products. Newly introduced products are subject to a number of risks,
including failure to achieve market acceptance and poor product performance.
The Company is unable to predict with any degree of certainty the rate of
market acceptance of these newly introduced products. No assurance can be
given that any of such products will not require additional development work,
enhancement, testing or refinement before they achieve market acceptance. If
such new and recently introduced products have performance, reliability,
quality or other shortcomings, then such products could fail to achieve
market acceptance and the Company may experience reduced orders, higher
manufacturing costs, delays in collecting accounts receivable and additional
warranty and service expenses, which in each case could have a material
adverse effect on the Company's business, results of operations and cash
flows.

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

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

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

The Company provides most of its distributors and resellers with limited
product return rights for stock rotation. There can be no assurance that the
Company will not experience significant returns in the future or that it will
have made adequate allowances to offset such returns. The Company also
provides most of its distributors and resellers with price protection rights.
Price protection rights require that the Company grant

                                       23
<PAGE>


retroactive price adjustments for inventories of the Company's products held
by distributors or resellers if the Company lowers its prices for such
products. The short life cycles of the Company's products and the difficulty
in predicting future sales increase the risk that new product introductions,
price reductions by the Company or its competitors or other factors affecting
the markets in which the Company competes could result in significant product
returns. In addition, new product introductions by competitors or other
market factors could require the Company to reduce prices in a manner or at a
time which has a material adverse impact on the Company's business, results
of operations and cash flows.

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

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

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

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

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

A substantial portion of the Company's international sales are typically
denominated in U.S. dollars. As a result, fluctuations in currency exchange
rates could cause the Company's products to become relatively more expensive
to customers in a particular country, leading to a reduction in sales or
profitability in that country. Transactions made through the Company's
subsidiary in Singapore are primarily denominated in U.S. dollars. The
transactions made through the Company's subsidiaries in France, Germany,
Italy, the United Kingdom and the Netherlands are primarily denominated in
local currencies and, accordingly, the

                                       24
<PAGE>


Company's international operations impose a risk upon its business as a
result of currency exchange rate fluctuations. There can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's business, results of operations and cash flows. Payment cycles for
international customers are typically longer than payment cycles for
customers in the United States. There can be no assurance that foreign
markets will continue to develop or that the Company will receive additional
orders to supply its products for use in foreign markets.

RISKS ASSOCIATED WITH NEW PRODUCT DEVELOPMENT. The markets for the Company's
products are characterized by rapidly changing technologies, evolving
industry standards, frequent new product introductions and short product life
cycles. The Company's future success will depend to a substantial degree upon
its ability to enhance its existing products and to develop and introduce, on
a timely and cost-effective basis, new products and features that meet
changing customer requirements and emerging and evolving industry standards.
The Company budgets research and development expenses based on planned
product introductions and enhancements; however, actual expenses may differ
significantly from budget. The product development process involves a number
of risks. The development of new, technologically advanced hardware and
software products is a complex and uncertain process requiring high levels of
innovation, as well as the accurate anticipation of technological and market
trends. The introduction of new or enhanced products also requires the
Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, to avoid excessive levels of older
product inventories and to ensure that adequate supplies of new products can
be delivered to meet customer demand. For example, in August 1999 the Company
released the ExtendNet 4000, its next generation Internet appliance product,
which replaces the ExtendNet IAS product. As a result, the Company may be
required to reduce the carrying value of ExtendNet IAS product currently in
inventory if the market adopts the ExtendNet 4000 faster than the Company
anticipates. There can be no assurance that the Company will successfully
develop, introduce or manage the transition to new products. The Company has
in the past experienced, and is likely in the future to experience, delays in
the introduction of new products, due to factors internal and external to the
Company. Any future delays in the introduction or shipment of new or enhanced
products, the inability of such products to achieve market acceptance or
problems associated with new product transitions could adversely affect the
Company's business, results of operations and cash flows.

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

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

From time to time the Company has agreed with certain suppliers that the
Company will purchase certain components exclusively from such suppliers.
Because the manufacturing of the Company's products can involve long lead
times, in the event of unanticipated increases in demand for the Company's
products, the Company could be unable to manufacture certain products in a
quantity sufficient to meet its customers' demands. The Company also relies
on third party suppliers for components used in its products. Certain of the
components used in the Company's products, including certain semiconductor
components and infrared transmission components, are currently available from
a limited number of suppliers. From time to time, the

                                       25
<PAGE>


Company experiences difficulty is obtaining components from suppliers due to
increased industry demand and a lack of available supply. The Company is
currently experiencing some difficulty in obtaining an adequate supply of
flash memory to supply the demand for the Company's printing solutions
products. Any inability to obtain adequate deliveries or any increased cost
or other circumstance that would require the Company to seek alternative
manufacturers could affect the Company's ability to ship its products on a
timely basis, which could damage relationships with current and prospective
customers, could affect the manufacturing cost of the Company's products and
could therefore have a material adverse affect on the Company's business,
results of operations and cash flows.

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

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

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

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

                                       26
<PAGE>


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

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

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

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

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

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

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

                                       27
<PAGE>


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





                                       28
<PAGE>


                                   SIGNATURE

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


                            Extended Systems Incorporated



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

                                 (Principal Financial and Accounting Officer
                                 and Duly Authorized Officer)


                                       29