<PAGE>

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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION


                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                                       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, 1998 was 8,251,125.

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

<PAGE>

                            EXTENDED SYSTEMS INCORPORATED

                                      FORM 10-Q

                     FOR THE THREE MONHS ENDED SEPTEMBER 30, 1998

                                        INDEX


<TABLE>
<CAPTION>

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

                    Consolidated Income Statements
                    for the Three Months Ended September 30, 1998 and 1997          1

                    Consolidated Balance Sheets
                    as of September 30, 1998 and June 30, 1998                      2

                    Consolidated Condensed Statements of Cash Flows
                    for the Three Months Ended September 30, 1998 and 1997          3

                    Notes to Consolidated Financial Statements                      4

          Item 2.   Management's Discussion and Analysis of Financial
                    Condition and Results of Operations                             6

          Item 3.   Quantitative and Qualitative Disclosures about Market          15
                    Risk

PART II.  OTHER INFORMATION

          Item 6.   Exhibits and Reports on Form 8-K                               16

SIGNATURE                                                                          17
</TABLE>
<PAGE>

                           PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED SEPTEMBER 30,
                                                    1998                1997
                                                ------------        ------------
<S>                                             <C>                 <C>
Net revenue                                     $     13,543        $     11,152
Cost of net revenue                                    5,817               4,429
                                                ------------        ------------
Gross profit                                           7,726               6,723
Operating expenses:
  Research and development                             1,537               1,532
  Marketing and sales                                  3,603               3,223
  General and administrative                             888                 755
                                                ------------        ------------
    Income from operations                             1,698               1,213
Other income (expense), net                              106                 (52)
Interest expense                                        (188)               (167)
                                                ------------        ------------
Income before income taxes                             1,616                 994
Provision for income taxes                               566                 353
                                                ------------        ------------
    Net income                                  $      1,050        $        641
                                                ------------        ------------
                                                ------------        ------------
Earnings per share:
    Basic                                       $       0.13        $       0.09
    Diluted                                     $       0.12        $       0.09
Number of shares used in earnings
  per share calculation:
    Basic                                              8,250               6,865
    Diluted                                            8,423               7,129
</TABLE>


The accompanying notes are an integral part of the financial statements


                                          1
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,          JUNE 30,
                                                                   1998                1998
                                                              -------------       -------------
<S>                                                           <C>                 <C>
ASSETS
Current:
  Cash and cash equivalents                                   $      12,630       $      15,006
  Short term investments                                              1,750                   -
  Accounts receivable, net                                           10,578               8,776
  Other receivables                                                   1,442                 419
  Inventories:
    Purchased parts                                                   1,980               1,906
    Finished goods                                                    3,311               4,076
  Prepaids and other                                                    461                 318
                                                              -------------       -------------
    Total current assets                                             32,152              30,501
Property and equipment, net                                           8,640               8,586
Other assets                                                          1,187               1,060
                                                              -------------       -------------
    Total assets                                              $      41,979       $      40,147
                                                              -------------       -------------
                                                              -------------       -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
  Accounts payable and accrued expenses                       $       3,758       $       3,586
  Accrued payroll and related benefits                                1,411               1,478
  Income taxes payable                                                  536                 505
  Current portion of long-term debt                                   7,641                 235
                                                              -------------       -------------
    Total current liabilities                                        13,346               5,804
Long-term debt                                                          321               7,617
Deferred income taxes                                                   139                 134
                                                              -------------       -------------
    Total liabilities                                                13,806              13,555
                                                              -------------       -------------
Shareholders' equity:
  Common stock                                                            9                   8
  Additional paid-in capital                                         10,782              10,847
  Retained earnings                                                  18,038              16,987
  Treasury stock                                                        (43)                  -
  Deferred compensation                                                (803)             (1,074)
  Accumulated other comprehensive income                                190                (176)
                                                              -------------       -------------
    Total shareholders' equity                                       28,173              26,592
                                                              -------------       -------------
    Total liabilities and shareholders' equity                $      41,979       $      40,147
                                                              -------------       -------------
                                                              -------------       -------------
</TABLE>

The accompanying notes are an integral part of the financial statements


                                          2
<PAGE>

EXTENDED SYSTEMS INCORPORATED

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

<TABLE>
<CAPTION>
                                                               THREE MONTHS ENDED SEPTEMBER 30,
                                                                    1998                1997
                                                               ------------        ------------
<S>                                                            <C>                 <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES               $       (366)       $      2,284
                                                               ------------        ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of available-for-sale securities                          (1,750)                  -
  Purchase of property and equipment                                   (341)               (723)
  Other investing activities                                             48                   3
                                                               ------------        ------------
        Net cash used by investing activities                        (2,043)               (720)
                                                               ------------        ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Purchase of treasury stock                                            (43)               (163)
  Payments on debt                                                      (77)                  -
  Other financing activities                                             63                  82
                                                               ------------        ------------
        Net cash used by financing activities                           (57)                (81)

  Effect of exchange rate changes on cash                                90                (153)
                                                               ------------        ------------
  Net increase (decrease) in cash and cash equivalents               (2,376)              1,330
CASH AND CASH EQUIVALENTS:
  Beginning of period                                                15,006               6,621
                                                               ------------        ------------
  End of period                                                $     12,630        $      7,951
                                                               ------------        ------------
                                                               ------------        ------------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Income taxes paid                                            $        544        $         68
  Deferred compensation                                                (175)               (165)
  Interest paid, net of refunds                                          60                  63
  Equipment financed with long-term lease                                 -                 210
</TABLE>

The accompanying notes are an integral part of the financial statements


                                          3
<PAGE>

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


     Extended Systems Incorporated provides distributed and mobile computing
solutions that address the needs of the virtual enterprise.

     BASIS OF PRESENTATION:  The unaudited consolidated financial statements
include Extended Systems Incorporated, a Delaware corporation, 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 1998
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 1998 Annual Report on Form 10-K.

     CURRENCY TRANSLATION.  The Company translates the accounts of its
international subsidiaries using the local currency as the functional currency.
The assets and liabilities of international subsidiaries are translated 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. Revenue and expenses are translated into U.S. dollars
using the average exchange rate for the period. The Company recognized a net
currency exchange gain (loss) of $68,000 and ($15,000) for the three months
ended September 30, 1998 and 1997, respectively.

     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.

     REVENUE on hardware products is recognized when products are shipped to
customers, including when products are shipped to distributors and resellers.
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 twelve months, collectibility is probable
and there are no significant obligations remaining. The Company does not provide
any material post contract customer support.

     COMPREHENSIVE INCOME. The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" during the first
quarter of 1999. This statement requires the Company to disclose accumulative
other comprehensive income (excluding net income) as a separate component of
shareholders' equity. The Company's comprehensive income is comprised of net
income and currency translation adjustments. Comprehensive income for the
three-months ended September 30, 1998 and 1997, was $1,416,000 and $601,000, 
respectively.


                                          4
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

     EARNINGS PER SHARE are calculated pursuant to SFAS No. 128, "Earnings 
Per Share". Basic earnings per share is computed by dividing net income by 
the weighted average number of common shares outstanding during the period. 
Diluted earnings per share is computed by dividing net income by the weighted 
average number of common shares outstanding increased by the additional 
common shares that would be outstanding if the potential dilutive common 
shares had been issued. Diluted earnings per share computations exclude stock 
options and potential shares for convertible debt to the extent their effect 
would have been antidilutive.

<TABLE>
<CAPTION>
                                                              THREE MONTHS ENDED SEPTEMBER 30,
                                                           ---------------------------------------
                                                                   1998                1997
                                                           -----------------    ------------------
                                                           (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
     <S>                                                    <C>                 <C>
     BASIC
       Net income                                           $         1,050     $           641
       Weighted average shares outstanding                            8,250               6,865
                                                            ---------------     ---------------
       Basic earnings per share                             $          0.13     $          0.09
                                                            ---------------     ---------------
                                                            ---------------     ---------------
     DILUTED
       Net income                                           $         1,050     $           641
                                                            ---------------     ---------------
       Weighted average shares outstanding                            8,250               6,865
       Net effect of dilutive stock options                             173                 264
                                                            ---------------     ---------------
         Total shares and dilutive options                            8,423               7,129
                                                            ---------------     ---------------
       Diluted earnings per share                           $          0.12     $          0.09
                                                            ---------------     ---------------
                                                            ---------------     ---------------
</TABLE>


     RECENTLY ISSUED ACCOUNTING STANDARDS. In June 1997, the FASB issued SFAS
No. 131, "Disclosure about Segments of an Enterprise and Related Information,"
which establishes standards for public business enterprises to report
information about operating segments in annual financial statements and requires
those enterprises to report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. This statement requires that a public business enterprise report
financial and descriptive information about its reportable operating segments on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments. This statement is effective for
financial statements for periods beginning after December 15, 1997, and need not
be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application. Management is currently evaluating the effects
of adopting SFAS No. 131.

     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 that an entity 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 fiscal years beginning after
June 15, 1999.

     In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 requires companies to
capitalize certain costs of computer software developed or obtained for internal
use. Adoption is not expected to have a material effect on the Company's results
of operations or financial position. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998.


                                          5
<PAGE>

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. 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, INCLUDING THE 1998 ANNUAL REPORT ON FORM 10-K AND THE
QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE COMPANY IN FISCAL 1999. ALL
PERIOD REFERENCES ARE TO THE COMPANY'S FISCAL YEARS ENDED JUNE 30, 1999, 1998
AND 1997, UNLESS OTHERWISE INDICATED. ALL TABULAR DOLLAR AMOUNTS ARE PRESENTED
IN THOUSANDS.

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                              -----------------------------------
                                              1998       % CHANGE            1997
                                              -----------------------------------
                                              <C>        <C>              <C>
Net Revenue                                   $13,543        21.4%        $11,152

</TABLE>


     The increase in net revenue for the three months ended September 30, 1998
was principally due to increased unit sales of ExtendNet print server products,
increased non-recurring engineering ("NRE") and royalty revenue, increased
Infrared OEM unit sales and, to a lesser degree, increased unit sales of
Advantage Database Server products and increased unit sales of ExtendNet VPN and
Internet Access Server products. The increase in net revenue was offset, in
part, by decreased revenue from Printer Sharing products, which is primarily
due to increased unit sales of lower priced products and decreased unit sales of
port replicator products accompanied by a decline in the average selling price
due to competitive pricing pressures in the port replicator market.

     In the first three months of 1999 and in fiscal 1998, 55% and 58%,
respectively, of the Company's net revenue was derived from sales of ExtendNet
print servers. The Company believes that net revenue from this product line will
continue to grow but will decline as a percentage of the Company's net revenue
as the Company's recently introduced products for distributed and mobile
connectivity achieve market acceptance. While the Company believes that sales of
ExtendNet print servers will continue to account for a significant portion of
the Company's net revenue and gross profit, the Company's future results of
operations will be highly dependent upon the success of its recently introduced
products.

     In its port replicator business, the Company generally faces competition
from the PC manufacturers who develop port replicators for their own PCs. Sales
of the Company's port replicator products are impacted by the availability of
competitive products in the marketplace. To the extent competitive products are
available, decreased demand for the Company's products could have a material
effect on the Company's port replicator business.

     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. In the first three months of 1999 and in
fiscal 1998, international sales represented 47% and 44% of net revenue,
respectively. 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 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, fluctuation in currency exchange rates, difficulty in collecting
accounts receivable, difficulty in staffing and managing international
operations and political and economic instability.

     The Company markets and sells a majority of its products through multiple
indirect channels, primarily distributors and resellers. Certain of the
Company's products, in particular its ExtendNet print servers, JetEye IrDA
products and infrared software, are sold to OEMs, and the Company intends to
increase sales to OEMs in the future.


                                          6
<PAGE>

The Company supports its indirect channels with its own sales and marketing
organization. The Company's key distributors include Ingram Micro and Tech Data.
In the first three months of 1999 and in fiscal 1998, sales to Ingram Micro
accounted for 30% and 23% of the Company's net revenue, respectively. Sales to
Tech Data accounted for 11% of the Company's net revenue in fiscal 1998. 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 Company provides price protection rights and limited product return rights
for stock rotation to most of its distributors and resellers.

     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.

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED SEPTEMBER 30
                                            ---------------------------------------
                                              1998      % CHANGE            1997
                                            ---------------------------------------
<S>                                         <C>         <C>               <C>
Gross profit                                $7,726           14.9%        $6,723
Gross margin                                  57.0%                         60.3%
</TABLE>


     The decrease in gross margin for the three months ended September 30, 1998
from the level achieved in the three months ended September 30, 1997 was
principally due to a shift in product mix from higher margin ExtendNet print
server and Printer Sharing products to lower margin ExtendNet print server
products and an increase in the allowance for obsolete port replicator
inventory. The decrease in gross margin was offset in part by increased NRE and
royalty revenue as well as increased Advantage Database Server and ExtendNet VPN
revenue.

     The Company's cost of net revenue consists primarily of costs associated 
with components, outsourced 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 and provisions for obsolete inventory. The Company 
anticipates that its gross margin may decline in the future as a result of 
shifts in the Company's product mix and competitive pricing pressure. In 
particular, the Company expects that its gross margin will decline as a 
result of a continued shift in product mix toward lower priced print servers 
and competitive pricing pressures on port replicators. The Company's gross 
margin may also decline in the future as a result of additional provision for 
obsolete port replicator inventory. The Company seeks to mitigate the effects 
of declining prices by improving product design and reducing costs, primarily 
manufacturing and component costs.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Research and development                    $1,537            0.3%        $1,532
  as a % of net revenue                       11.3%                         13.7%
</TABLE>


     Research and development expense for the three months ended September 30,
1998 was consistent with prior year. Increased Internet and Infrared product
development activities were offset by reduced print server development
activities.

     The Company expects research and development expenses to increase in the
future, although such expenses may vary as a percentage of net revenue. As a
result of the October 1998 acquisition of all of the outstanding stock of Rand
Software Corporation, a provider of data synchronization software for mobile
devices such as Windows CE Handheld PCs and Palm-size computers, the Company
expects that a portion of the $1.4 million purchase price will be allocated to
in-process research and development and charged to expense in the three months
ended December 31, 1998.


                                          7
<PAGE>

However, it is uncertain whether these charges, if any, will have a
material impact on the Company's results of operations or financial position.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Marketing and sales                         $3,603           11.8%        $3,223
  as a % of net revenue                       26.6%                         28.9%
</TABLE>


     The increase in marketing and sales expense for the three months ended
September 30, 1998 was principally due to increased promotional activities
associated with the Advantage Database Server, port replicator, and Internet
Access Server products, as well as increased sales activities both at the
European subsidiaries and in the North American sales groups. The increase in
sales and marketing expense was offset, in part, by decreased promotional
activities associated with ExtendNet Print Server, ExtendNet VPN, and Infrared
products.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
General and administrative                    $888           17.6%          $755
  as a % of net revenue                        6.6%                          6.8%
</TABLE>


     The increase in general and administrative expense for the three months
ended September 30, 1998 was primarily attributable to increased stock option
compensation expense and increased professional services expense, primarily as a
result of being a public company.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Other income (expense), net                   $106          303.8%         $(52)
  as a % of net revenue                        0.8%                        (0.4%)
</TABLE>


     The change in other income (expense) for the three months ended September
30, 1998 was principally due to increased interest income, foreign exchange
gains and reduced amortization expense

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Interest expense                            $(188)           12.6%        $(167)
  as a % of net revenue                      (1.4%)                        (1.5%)
</TABLE>


     The increase in interest expense for the three months ended September 30,
1998 was principally due to an increase in the balance of the Company's debt.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Provision for income taxes                    $566           60.3%          $353
  as a % of income before taxes               35.0%                         35.5%
</TABLE>


     The increase in the provision for income taxes for the three months ended
September 30, 1998 was primarily due to an increase in net income before taxes,
offset in part by a decrease in the effective tax rate.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Net cash provided by (used by)
  operating activities                      $(366)         (116.0%)       $2,284
</TABLE>


     Historically, the Company has funded its operations primarily through cash
generated from operations. The use of net cash in operations was primarily a
result of increased accounts receivable, partially offset by a decrease in
inventory.


                                          8
<PAGE>

     Accounts receivable increased to $10.6 million at the end of September 1998
from $8.8 million at the end of June 1998. The increase in accounts receivable
was primarily due to increased levels of business, timing of business within the
quarter, and an increase in balances for international distributors and OEM
customers who typically have longer terms than North American distributors.
Calculated based on pattern of business within the quarter, days sales
outstanding ("DSO") were 55.5 days as of the end of September 1998 compared to
53.0 at June 30, 1998. The increase in DSO is reflective of seasonality in the
Company's first fiscal quarter, which results in increased business during
September versus the first two months of the quarter, and to an increase in the
amount of sales with credit terms. The Company expects that accounts receivable
will increase as revenue increases and as revenue from international and OEM
customers represent a higher percentage of the Company's total revenue.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Net cash used by investing activities     $(2,043)          183.8%        $(720)
</TABLE>


     Net cash used by investing activities in the three months ended September
1998 consisted largely of the purchase of available-for-sale securities, and
purchase of property and equipment.

<TABLE>
<CAPTION>
                                              THREE MONTHS ENDED SEPTEMBER 30,
                                            ------------------------------------
                                              1998       % CHANGE           1997
                                            ------------------------------------
<S>                                         <C>          <C>              <C>
Net cash used by financing activities        $(57)          (29.6%)        $(81)
</TABLE>


     Net cash used by financing activities for the three months ended September
1998 consisted primarily of payments on the Company's debt.

     The Company has a $5 million uncollateralized bank revolving line of credit
that expires on October 31, 2000. Interest on borrowings is at the bank's prime
rate. The line of credit requires the Company to maintain certain financial
ratios. There were no borrowings under this line as of September 30, 1998.

     The Company issued zero coupon promissory notes to certain investors on
September 30, 1992 for $4,000,000. The notes have a maturity value in September
1999 of $7,625,000 and may be converted at any time at the option of the holder
into a total of 495,810 shares of Common Stock. If held to maturity, the notes
would yield 9.25%. The Company also issued 10% promissory notes in the principal
amount of $500,000 to the same investors on September 30, 1992 that may be
converted at any time prior to maturity in September 1999 at the option of the
holders into a total of 61,977 shares of Common Stock. Interest on the 10%
promissory notes is paid annually in arrears.

     Both the zero coupon and the 10% promissory notes (the "Notes") are
subordinated in right of payment to future senior indebtedness of the Company.
In the event of a change in control, as defined in the Notes, or the sale of
substantially all of the assets of the Company, the holders may require
redemption of the Notes at the issue price plus accrued original issue discount.
The Company has a right of first refusal to purchase the Notes or, if converted,
the stock.

     The Company believes that its existing working capital and borrowing
capacity, coupled with the funds generated from the Company's operations, will
be sufficient to fund its anticipated working capital, capital expenditures and
debt payment requirements through 1999. 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 the
normal course of business, the Company evaluates acquisitions of businesses,
products and technologies that complement the Company's business.

     In addition to acquiring all of the outstanding stock of Rand Software
Corporation in October 1998, the Company acquired Genoa Technology, Inc.'s IrDA
test tools product line which includes products that are used extensively in the
testing and development of infrared products such as printers, notebooks, cell
phones, PDAs, digital cameras and medical equipment. In addition, in November
1998, the Company acquired a controlling interest in Parallax Research, Pte., a
Singapore-based developer and manufacturer of infrared connectivity products.
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 a


                                          9
<PAGE>

more complete virtual enterprise network solution. The Company has no present
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.

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 three 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. In the current phase, the Company successfully completed testing
of current products and does not believe there is significant risk of
noncompliance. In addition, the Company replaced or upgraded its core financial,
manufacturing and sales systems in the prior two years which were certified as
Year 2000 compliant prior to installation. To date, the Company has not incurred
significant costs related to Year 2000 compliance. The Company's assessment of
the readiness of third-party business partners, including significant vendors
and customers, for Year 2000 compliance is scheduled for completion in December
1998. The Company has not completed a detailed analysis of the cost which may be
incurred to address Year 2000 issues. At this time, the Company cannot
reasonably estimate the potential impact on its financial position and results
of operations 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
and results of operations.

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,
the emergence of new industry standards, the timing of customer orders, the mix
of products sold, 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.

     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. A significant portion of the Company's expense levels is fixed in
advance, based in large part on the Company's forecasts 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 and results of operations.

     A substantial majority of the Company's net revenue results from the sale
of products to distributors and original equipment manufacturers ("OEMs"), 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


                                          10
<PAGE>

number of distributors. Any significant deferral of purchases of the Company's
products by its distributors could have a material adverse effect on the
Company's business and results of operations in any particular period.

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

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

     DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS. The Company's future results of
operations will be highly dependent upon the success of recently introduced
products, including the ExtendNet VPN, ExtendNet IAS, Advantage Database Server
Version 5.0, and certain models of port replicator and ExtendNet print servers.
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 and results of
operations.

     RISKS ASSOCIATED WITH NEW AND EVOLVING MARKETS. The markets for mobile
connectivity and distributed computing 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, OEMs and end users, to maintain and
enhance its relationships with leading distributors and to expand successfully
its distribution channels. The success of the ExtendNet VPN and ExtendNet IAS
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 mobile connectivity and distributed computing 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 and results of operations. 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 which will 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.

     PRODUCT CONCENTRATION. In the first three months of 1999 and in fiscal
1998, 55% and 58%, respectively, of the Company's net revenue was derived from
sales of ExtendNet print servers. The Company believes that this product line
will continue to account for a significant portion of the Company's net revenue
and gross profit. The Company expects that its gross margin on sales of
ExtendNet print servers will continue to decline as a result of a shift in
product mix toward lower priced print servers and competitive pricing pressures.
The Company's future operating results, particularly in the near term, are
dependent upon the continued market acceptance of ExtendNet print servers. There
can be no assurance that ExtendNet print servers will continue to meet with
market acceptance or that the Company will be successful in developing,
introducing or marketing new or enhanced products. A decline in the demand for
ExtendNet print servers, as a result of competition, technological change or
other factors, or the failure to successfully develop, introduce or market new
or enhanced products could have a material adverse effect


                                          11
<PAGE>

on the Company's business and results of operations. The life cycle of ExtendNet
print servers is difficult to estimate because of, among other factors, the
presence of strong competitors in the market and the likelihood of future
competition.

     RELIANCE ON DISTRIBUTION CHANNELS. The Company sells its 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 and results of operations.

     The Company provides most of its distributors and resellers with limited
product return rights for stock rotation. There can be no assurance that the
Company will not experience significant returns in the future or that it will
have made adequate allowances to offset such returns. The Company also provides
most of its distributors and resellers with price protection rights. Price
protection rights require that the Company grant retroactive price adjustments
for inventories of the Company's products held by distributors or resellers if
the Company lowers its prices for such products. The short life cycles of the
Company's products and the difficulty in predicting future sales increase the
risk that new product introductions, price reductions by the Company or its
competitors or other factors affecting the markets in which the Company competes
could result in significant product returns. In addition, new product
introductions by competitors or other market factors could require the Company
to reduce prices in a manner or at a time which has a material adverse impact
upon 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 OEMs
is obligated to purchase the Company's products except pursuant to current
purchase orders. The Company's ability to achieve future revenue growth will
depend in large part on its success in recruiting and training sufficient sales
personnel, distributors, value added resellers ("VARs") and OEM customers. Sales
to OEMs involve a number of potential risks, including lengthy sales cycles and
potential competition from 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. 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 and results of operations.

     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
and results of operations.

     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 and political and economic instability, including
instability caused by the European monetary union. 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. The Company operates sales subsidiaries in
France, Germany, Italy and the United Kingdom. The sales made through these
subsidiaries are primarily denominated in local currencies. Accordingly, the
Company's international operations


                                          12
<PAGE>

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 and results of
operations. Payment cycles for international customers are typically longer than
those 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. 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 and results of
operations.

     RISKS ASSOCIATED WITH THIRD-PARTY MANUFACTURERS AND SUPPLIERS. The
Company's future success will depend, in significant 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, the ExtendNet IAS is manufactured by Apexx
Technology, Inc. In addition, the Company's port replicator and in-air and
in-car charger products are manufactured by Mobility Electronics. 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 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
and results of operations.

     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. Any inability to obtain adequate deliveries or other circumstances
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 and end users and could
therefore have a material adverse affect on the Company's business and results
of operations.

     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 and results of operations. 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


                                          13
<PAGE>

the Company's reputation. Such problems could have a material adverse effect on
the Company's business and results of operations.

     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 and results of operations. 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 and results of
operations.

     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, in the current employment environment 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 and results of operations
could be materially adversely affected.

     RISKS ASSOCIATED WITH ACQUISITIONS BY THE COMPANY. In October 1998, the
Company acquired all of the outstanding stock of Rand Software Corporation, a
provider of industry-leading data synchronization software for mobile devices
such as Windows CE Handheld PCs and Palm-size computers. Also in October 1998,
the Company acquired Genoa Technology, Inc.'s IrDA test tools product line which
includes products that are used extensively in the testing and development of
infrared products such as printers, notebooks, cell phones, PDAs, digital
cameras and medical equipment. In November 1998, the Company acquired a
controlling interest in Parallax Research, Pte., a Singapore-based developer and
manufacturer of infrared connectivity products. As part of its growth strategy,
the Company intends to pursue the acquisition of other companies that either
complement or expand its existing business. The Company is continually
evaluating potential acquisition opportunities, which may be material in size
and scope. Acquisitions involve a number of risks and difficulties, including
the expansion into new markets and business areas, the diversion of management's
attention to the assimilation of the operations and personnel of the acquired
companies, the integration of the acquired companies' management information
systems with those of the Company, potential adverse short-term effects on the
Company's operating results, the amortization of acquired intangible assets and
the need to present a unified corporate image. In addition, acquisitions could
result in the need to expend substantial amounts of cash. While the Company
believes that it has sufficient funds to finance its operations for at least the
next 12 months, to the extent that such funds are insufficient to fund the
Company's activities, including any potential acquisitions, the Company may need
to raise additional funds through public or private equity or debt financing or
from other sources. The sale of additional equity or convertible debt may result
in additional dilution to the Company's shareholders and such securities may
have rights, preferences or privileges senior to those of the Company's Common
Stock. There can be no assurance that additional equity or debt financing will
be available or that, if available, it can be obtained on terms favorable to the
Company or its shareholders.

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


                                          14
<PAGE>

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 and results of operations.

     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
and results of operations.

     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 and results of operations.

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     All of the Company's long-term debt is at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. The Company believes that the market risk arising from its
holdings of financial instruments is minimal.

     The Company derives a substantial portion of its revenue from international
sales, principally through its international subsidiaries in Germany, France,
Italy and the United Kingdom and through a limited number of independent
distributors. Sales made by the Company's international subsidiaries are
generally denominated in the country's local currency. Fluctuations in exchange
rates between the U.S. dollar and other currencies could materially affect the
Company's financial condition and results of operations. To the extent that the
Company implements hedging activities in the future with respect to currency
transactions, there can be no assurance that the Company will be successful in
such hedging activities.


                                          15
<PAGE>

PART II.  OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(A)  EXHIBITS

     27.1 Financial Data Schedule

(A)  REPORTS ON FORM 8-K

     The Company filed no reports on Form 8-K during the three months ended
     September 30, 1998.


ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.




                                          16
<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)