<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 MARCH 31, 1999

                                      OR

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

                 FOR THE TRANSITION PERIOD FROM_____ TO _____

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

                       Commission File Number 000-23597

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

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

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

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

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

The number of shares outstanding of the registrant's common stock as of March
31, 1999 was 8,546,389.
================================================================================
<PAGE>

                           EXTENDED SYSTEMS INCORPORATED

                                     FORM 10-Q

                FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 1999

                                       INDEX
<TABLE>
<CAPTION>
                                                                                 PAGE
                                                                                 ----
<S>                                                                              <C>
PART I. FINANCIAL INFORMATION

        Item 1. Financial Statements

                Consolidated Statement of Operations
                for the Three and Nine Months Ended March 31, 1999 and 1998        1

                Consolidated Balance Sheet
                as of March 31, 1999 and June 30, 1998                             2

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

                Notes to Consolidated Financial Statements                         4

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

        Item 3. Quantitative and Qualitative Disclosures about Market Risk        17


PART II.  OTHER INFORMATION

        Item 6. Exhibits and Reports on Form 8-K                                  17

SIGNATURE                                                                         18

</TABLE>

<PAGE>

                            PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

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

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED             NINE MONTHS ENDED
                                                     MARCH 31,                     MARCH 31,
                                             ------------------------     -------------------------
                                                1999          1998           1999           1998
                                             ----------    ----------     ----------    -----------
<S>                                          <C>           <C>            <C>           <C>
Net revenue                                   $ 13,388      $ 13,061       $ 36,190      $ 36,344
Cost of net revenue                              5,871         5,541         17,389        14,933
                                             ----------    ----------     ----------    ----------
Gross profit                                     7,517         7,520         18,801        21,411
Operating expenses:
   Research and development                      1,739         1,614          5,038         4,712
   Acquired research and development                 -             -            758             -
   Marketing and sales                           4,131         3,533         11,851        10,178
   General and administrative                      805           841          2,526         2,347
                                             ----------    ----------     ----------    ----------
      Income (loss) from operations                842         1,532         (1,372)        4,174
Other income (expense), net                        (80)          (60)            32          (195)
Interest expense                                  (182)         (151)          (552)         (497)
                                             ----------    ----------     ----------    ----------
Income (loss) before income taxes                  580         1,321         (1,892)        3,482
Income tax provision (benefit)                     203           469           (377)        1,236
                                             ----------    ----------     ----------    ----------
      Net income (loss)                       $    377      $    852       $ (1,515)     $  2,246
                                             ==========    ==========     ==========    ==========
Earnings (loss) per share:
      Basic                                   $   0.04      $   0.12       $  (0.18)     $   0.32
      Diluted                                 $   0.04      $   0.11       $  (0.18)     $   0.31
Number of shares used in earnings (loss)
  per share calculation:
      Basic                                      8,477         7,278          8,362         7,010
      Diluted                                    8,622         7,571          8,362         7,293
</TABLE>

The accompanying notes are an integral part of the financial statements


                                       1
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
                                                     MARCH 31,       JUNE 30,
                                                       1999            1998
                                                    -----------     ----------
<S>                                                 <C>             <C>
ASSETS
Current:
    Cash and cash equivalents                         $ 6,781         $15,006
    Short term investments                              5,002               -
    Accounts receivable, net                            9,722           8,776
    Other receivables                                   1,729             419
    Inventories:
       Purchased parts                                  2,118           1,906
       Finished goods                                   3,091           4,076
    Income taxes receivable                               886               -
    Prepaids and other                                    968             318
                                                     ---------       ---------
       Total current assets                            30,297          30,501
Property and equipment, net                             8,541           8,586
Other assets                                            1,826           1,060
                                                     ---------       ---------
       Total assets                                   $40,664         $40,147
                                                     =========       =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current:
    Accounts payable and accrued expenses             $ 4,357         $ 3,586
    Accrued payroll and related benefits                1,432           1,478
    Income taxes payable                                    -             505
    Current portion of long-term debt                   7,843             235
                                                     ---------       ---------
       Total current liabilities                       13,632           5,804
Long-term debt                                            321           7,617
Deferred income taxes                                     187             134
                                                     ---------       ---------
       Total liabilities                               14,140          13,555
                                                     ---------       ---------
Shareholders' equity:
    Common stock                                            9               8
    Additional paid-in capital                         11,886          10,847
    Retained earnings                                  15,473          16,987
    Deferred compensation                                (639)         (1,074)
    Accumulated other comprehensive loss                 (205)           (176)
                                                     ---------       ---------
       Total shareholders' equity                      26,524          26,592
                                                     ---------       ---------
       Total liabilities and shareholders' equity     $40,664         $40,147
                                                     =========       =========
</TABLE>

The accompanying notes are an integral part of the financial statements


                                       2
<PAGE>

EXTENDED SYSTEMS INCORPORATED

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

<TABLE>
<CAPTION>
                                                             NINE MONTHS ENDED MARCH 31,
                                                                1999           1998
                                                              ---------      --------
<S>                                                           <C>            <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES               $(1,459)       $ 2,979
                                                              ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                            (843)        (2,036)
    Sales and maturities of available-for-sale securities          750
    Purchase of available-for-sale securities                   (5,752)            -
    Acquisitions:
       Rand Software Corporation, net of cash acquired            (682)            -
       Parallax Research Pte, net of cash acquired                (346)            -
    Other investing activities                                    (271)            10
                                                              ---------      ---------
             Net cash used by investing activities              (7,144)        (2,026)
                                                              ---------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of common stock                     577         10,097
    Financing costs relating to stock issuance                       -         (1,262)
    Payments on long-term debt                                    (206)          (132)
    Other financing activities                                      18             56
                                                              ---------      ---------
             Net cash provided by financing activities             389          8,759

    Effect of exchange rate changes on cash                        (11)          (115)
                                                              ---------      ---------
    Net increase (decrease) in cash and cash equivalents        (8,225)         9,597
CASH AND CASH EQUIVALENTS:
    Beginning of year                                           15,006          6,621
                                                              ---------      ---------
    End of year                                                $ 6,781        $16,218
                                                              =========      =========

Supplemental disclosures of cash flow information:
    Income taxes paid, net of refunds                          $   698        $ 1,034
    Issuance of common stock in acquisition                        692             -
    Deferred compensation                                          232            543
    Interest paid                                                   77             71

</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 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 1999 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's international subsidiaries use
their local currency as their 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.
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 ($60,000) for the nine months ended March 31, 1999 and 1998,
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.

         SHORT-TERM INVESTMENTS are categorized as available-for-sale
securities, as defined by Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Such securities are reported at fair value which approximates cost.

         INVENTORIES of purchased parts and finished goods are valued at the
lower of cost (principally standard cost, which approximates actual cost on a
first-in, first-out basis) or market. The cost of net revenue for the nine
months ended March 31, 1999, includes a provision for write-down of port
replicator inventory of $1.1 million.

         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. As a result of the announced
exit from the port replicator business in December 1998, net revenue for the
nine months ended March 31, 1999 includes port replicator returns and a
provision for port replicator returns totaling $1.0 million.

         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.


                                       4
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

         EARNINGS (LOSS) PER SHARE is calculated pursuant to SFAS No. 128,
"Earnings Per Share." Basic earnings (loss) per share is computed by dividing
net income (loss) by the weighted average number of common shares outstanding
during the period. Diluted earnings (loss) per share is computed by dividing net
income (loss) 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 (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>
                                                THREE MONTHS ENDED            NINE MONTHS ENDED
                                                     MARCH 31,                    MARCH 31,
                                             ------------------------     ------------------------
                                                1999          1998           1999          1998
                                             ----------    ----------     ----------    ----------
                                                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                          <C>           <C>            <C>           <C>
BASIC
   Net income (loss)                          $   377       $   852        $(1,515)      $ 2,246
   Weighted average shares outstanding          8,477         7,278          8,362         7,010
                                             ----------    ----------     ----------    ----------
   Basic earnings (loss) per share            $  0.04       $  0.12        $ (0.18)      $  0.32
                                             ==========    ==========     ==========    ==========
DILUTED
   Net income (loss)                          $   377       $   852        $(1,515)      $ 2,246
                                             ----------    ----------     ----------    ----------
   Weighted average shares outstanding          8,477         7,278          8,362         7,010
   Net effect of dilutive stock options           145           293             -            283
                                             ----------    ----------     ----------    ----------
      Total shares and dilutive options         8,622         7,571          8,362         7,293
                                             ----------    ----------     ----------    ----------
   Diluted earnings (loss) per share          $  0.04       $  0.11        $ (0.18)      $  0.31
                                             ==========    ==========     ==========    ==========
</TABLE>

         BUSINESS COMBINATIONS. 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. Both 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. Pro forma
results of operations have not been presented since the effects of these
acquisitions were not material for the periods presented.

         Rand is a provider of data synchronization software for mobile devices
such as Windows CE Handheld PCs and Palm-size computers. The synchronization
technology allows these mobile devices to update and exchange data with
enterprise applications such as Microsoft Exchange, Microsoft Outlook, Lotus
Notes and Symantec Act!. Parallax develops infrared technology products
primarily for sale to Original Equipment Manufacturers ("OEMs"). Research and
development projects in-process at the time of the acquisitions are
complimentary to Rand and Parallax's existing technologies or are next
generation products.

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

<TABLE>

               <S>                                     <C>
               Net working capital                     $  (146)
               Property and equipment                      114
               Developed technology, goodwill
                  and other intangibles                  1,441
               Acquired research and development           758
                                                       --------
                                                       $ 2,167
                                                       ========
</TABLE>

         Valuation of the intangible assets acquired from Rand and Parallax,
including acquired research and development, developed technology and goodwill
were determined by independent appraisers. Such appraisers determined the value
assigned to acquired research and development by projecting net cash flows
related to future products expected to result from commercialization of the
acquired research and development, adjusting the net cash


                                       5
<PAGE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)

flows for the stage of completion of the projects and discounting the adjusted 
cash flows to their present values based on risk adjusted discount rates of 25% 
to 35%. 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. Management, based upon such independent appraisals, 
estimated that, in aggregate, the fair value of acquired research and 
development that had not yet reached technological feasibility and has no 
alternative future use was $758,000. The amount allocated to acquired research 
and development was expensed as a non-recurring, non-tax deductible charge to 
operations for the nine months ended March 31, 1999.

         COMPREHENSIVE INCOME (LOSS). The Company adopted 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.
Comprehensive income (loss) was as follows:

<TABLE>
<CAPTION>
                                      THREE MONTHS ENDED        NINE MONTHS ENDED
                                           MARCH 31,                MARCH 31,
                                     --------------------     --------------------
                                       1999        1998         1999        1998
                                     --------    --------     --------    --------
                                       (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
   <S>                               <C>         <C>          <C>         <C>
   Net income (loss)                 $   377     $   852      $(1,515)    $ 2,246
   Change in currency translation       (383)        (67)         (29)       (208)
                                     --------    --------     --------    --------
   Comprehensive income (loss)       $    (6)    $   785      $(1,544)    $ 2,038
                                     ========    ========     ========    ========
</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 publicly traded 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 publicly
traded 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.


                                       6
<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. 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, EXPENSE 
LEVELS, FUTURE ACQUISITIONS AND THE EFFECT OF THE YEAR 2000 ISSUE. 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 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 MARCH 31,     NINE MONTHS ENDED MARCH 31,
                  ------------------------------   -----------------------------
                   1999     % CHANGE      1998      1999    % CHANGE      1998
                  ------------------------------   -----------------------------
<S>               <C>       <C>         <C>        <C>      <C>         <C>
Net revenue       $13,388     2.5%      $13,061    $36,190    (0.4)%    $36,344
</TABLE>


         The increase in net revenue for the three months ended March 31, 1999
from the same period last year was principally due to increased unit sales of
Infrared OEM hardware products and increased unit sales of Internet and
Advantage Database Server products. The increase in net revenue was offset, in
part, by a decrease in the average selling price per unit for OEM and ExtendNet
print servers and a decrease in the number of print server units sold, as well
as decreased unit sales of port replicator and printer sharing products.

         The decrease in net revenue for the nine months ended March 31, 1999
from the same period last year was principally due to decreased net unit sales
of port replicators and printer sharing products coupled with a decrease in the
average selling price of printer sharing products due to a change in product mix
and an increase in the allowance for port replicator returns as a result of the
exit from the port replicator business in the current year. The decrease was
offset by increased unit sales of Infrared, Internet and Advantage Database
products.

         In the first nine months of 1999 and in fiscal 1998, 53% and 54%,
respectively, of the Company's net revenue was derived from sales of print
servers. The Company believes that unit sales of print servers will continue to
grow but net revenue may decline as average selling prices continue to decrease.
Net revenue from this product line is expected to decline as a percentage of the
Company's net revenue as the Company's other products for distributed and mobile
connectivity achieve market acceptance. While the Company believes that sales of
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 more recently
introduced products.

         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 nine months of 1999 and in
fiscal 1998, international sales represented 60% 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.
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, political and economic instability and military actions such as the
NATO intervention in Kosovo.

         The Company markets and sells a majority of its products through
multiple indirect channels, primarily distributors and resellers. The Company
supports its indirect channels with its own sales and marketing organization.


                                       7
<PAGE>

The Company's key distributors include Ingram Micro, Inc. ("Ingram Micro") and
Tech Data Corporation ("Tech Data"). In the first nine months of 1999 and in
fiscal 1998, sales to Ingram Micro accounted for 14% and 24% 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, results of operations and cash flows. The Company provides price
protection rights and limited product return rights for stock rotation to most
of its distributors and resellers.

         Certain of the Company's products, in particular its ExtendNet print
servers, JetEye IrDA products, infrared software, and data synchronization
software are sold to OEMs, and the Company intends to increase sales to OEMs in
the future. Revenue from OEM sales is expected to fluctuate on a quarterly and
annual basis as demand in the OEM market is difficult to predict.

         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 MARCH 31,     NINE MONTHS ENDED MARCH 31,
                           ------------------------------   -----------------------------
                            1999     % CHANGE      1998      1999     % CHANGE     1998
                           ------------------------------   -----------------------------
<S>                        <C>       <C>         <C>        <C>       <C>        <C>
Gross profit               $7,517      0.0%      $7,520     $18,801    (12.2)%   $21,411
Gross margin                 56.1%                 57.6%       52.0%                58.9%
</TABLE>

         The decrease in gross margin for the three months ended March 31, 1999
from the same period last year was principally due to a shift in the Company's
product mix to lower gross margin products, including Infrared OEM hardware
products and lower-priced print server products with corresponding lower
margins. The decrease was offset in part by increased sales of higher margin
Advantage Database Server products.

         The decrease in gross margin for the nine months ended March 31, 1999
from the same period last was principally due to the impact of the increase in
the allowance for port replicator returns and the inventory valuation allowance
for port replicators and a shift in product mix from higher margin ExtendNet
print server and printer sharing products to lower margin ExtendNet print server
products. The decrease in gross margin was partially offset by increased
non-recurring engineering ("NRE") and royalty revenue as well as increased
Advantage Database Server sales.

         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 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. 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 MARCH 31,     NINE MONTHS ENDED MARCH 31,
                           ------------------------------   -----------------------------
                            1999     % CHANGE      1998      1999     % CHANGE     1998
                           ------------------------------   -----------------------------
<S>                        <C>       <C>         <C>         <C>      <C>         <C>
Research and development   $1,739      7.7%      $1,614      $5,038      6.9%     $4,712
  as a % of net revenue      13.0%                 12.4%       13.9%                13.0%
</TABLE>

         The increases in research and development expenses for the three months
and nine months ended March 31, 1999 from the same periods last year were
principally due to increased personnel costs in the data synchronization and
infrared product development groups as a result of the Company's acquisition of
Rand Software Corporation ("Rand") in


                                       8
<PAGE>

October 1998 and Parallax Research, Pte, ("Parallax") in November 1998 and due 
to an increase in personnel costs in the Internet business. The increases were 
partially offset by reduced personnel costs in the port replicator business.

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

         During the second fiscal quarter of 1999, ended December 31, 1999, 
the Company acquired Rand and Parallax for an aggregate of $2.2 million in 
cash, stock and assumed debt. Of the aggregate purchase price, $758,000 has 
been allocated to acquired in-process research and development. For the nine 
months ended March 31, 1999, the cost of acquired research and development was 
2.1% of net revenue.

<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                  ------------------------------   -----------------------------
                                   1999     % CHANGE      1998      1999     % CHANGE    1998
                                  ------------------------------   -----------------------------
<S>                               <C>       <C>         <C>        <C>       <C>        <C>
Marketing and sales               $4,131      16.9%     $3,533     $11,851     16.4%    $10,178
  as a % of net revenue             30.9%                 27.0%       32.7%                28.0%
</TABLE>

         The increases in marketing and sales expenses for the three and nine
months ended March 31, 1999 from the same periods last year were due primarily
to increased personnel costs and promotional activities in the European and
North American sales groups and increased marketing and sales activity for
Internet and infrared products. The increases were partially offset by decreased
promotional activities associated with port replicator and ExtendNet print
server products.

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

<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                  ------------------------------   -----------------------------
                                   1999     % CHANGE      1998      1999     % CHANGE     1998
                                  ------------------------------   -----------------------------
<S>                               <C>       <C>         <C>        <C>       <C>         <C>
General and administrative         $ 805      (4.3)%     $ 841      $2,526     7.6%      $2,347
       as a % of net revenue         6.0%                  6.4%        7.0%                 6.5%
</TABLE>

         The decrease in general and administrative expense for the three months
ended March 31, 1999 from the same period last year was primarily due to
decreased compensation expense.

         The increase in general and administrative expense for the nine 
months ended March 31, 1999 from the same period last year was primarily 
attributable to increased professional services expense, primarily as a 
result of being a publicly traded company, and administrative expenses of 
Parallax subsequent to the acquisition. The increase was partially offset by 
decreased compensation expense.

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

<TABLE>
<CAPTION>
                                   THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                  ------------------------------   -----------------------------
                                   1999     % CHANGE      1998      1999     % CHANGE     1998
                                  ------------------------------   -----------------------------
<S>                               <C>       <C>         <C>        <C>       <C>         <C>
Income tax provision (benefit)    $ 203      (56.7)%     $ 469     $ (377)    (130.5)%   $1,236
  as a % of income before taxes    35.0%                  35.5%      19.9%                 35.5%
</TABLE>

         The decrease in the provision for income taxes for the three months
March 31, 1999 from the same period last year was due to a decrease in net
income before taxes and due to a slight decrease in the estimated effective tax
rate.

         The change in the income tax provision (benefit) for the nine months
ended March 31, 1999 from the same period last year was primarily due to a net
loss before taxes. The change in the estimated effective tax rate is primarily
the result of non-deductible expenses associated with the Rand and Parallax
acquisitions, primarily acquired research and development expenses and
amortization of intangibles.


                                       9
<PAGE>

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED MARCH 31,
                                                         -----------------------------
                                                          1999     % CHANGE     1998
                                                         -----------------------------
<S>                                                      <C>       <C>         <C>
   Net cash provided by (used by) operating activities   $(1,459)   (149.0)%   $2,979
</TABLE>

         Historically, the Company has funded its operations primarily through
cash generated from operations. The net cash used in operations in the current
period was primarily a result of an increase in receivables, prepaid and other
assets and a decrease in payables.

         Accounts receivable was $9.7 million at March 31, 1999, compared to the
$8.8 million recorded at June 30, 1998. Days sales outstanding ("DSO") were 51
days at March 31, 1999 compared to 53 at June 30, 1998. DSO decreased from the
83 at December 31, 1998 as a result of the Company's efforts to improve the
timing of payments from its third party distributors. The Company expects that
accounts receivable will increase as net revenue increases and as net revenue
from international and OEM customers represent a higher percentage of the
Company's total revenue.

<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED MARCH 31,
                                                         -----------------------------
                                                          1999     % CHANGE     1998
                                                         -----------------------------
<S>                                                      <C>       <C>        <C>

   Net cash used by investing activities                 $(7,144)   252.6%    $(2,026)
</TABLE>

         Net cash used by investing activities in the nine months ended March
31, 1999 reflects the net purchase of available-for-sale securities and the
acquisitions of Rand and Parallax.

<TABLE>
<CAPTION>
                                                          NINE MONTHS ENDED MARCH 31,
                                                         -----------------------------
                                                          1999     % CHANGE     1998
                                                         -----------------------------
<S>                                                      <C>       <C>         <C>
   Net cash provided by financing activities             $ 389      (95.6)%    $8,759
</TABLE>

         Net cash provided by financing activities for the nine months ended
March 31, 1999 reflects proceeds from the issuance of Common Stock under the
employee stock plans, offset by 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
lender's prime rate. There were no borrowings under this line as of March 31,
1999, however, the line of credit requires the Company to maintain certain
financial ratios and other covenants.

         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 the Rand and Parallax acquisitions, the Company intends
to continue to pursue strategic acquisitions of, or strategic investments in,
companies with complementary products, technologies or distribution


                                      10
<PAGE>

networks in order to broaden its product lines and to provide a 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 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 website.

         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 1999. 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-party business partners, including significant vendors and customers. The
assessment of the compliance of third party business partners is on-going and is
also expected to continue throughout 1999. 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 such noncompliance is
expected to have a material adverse impact on the Company's operations.

         Based on the work done to date, the Company has not incurred material
costs and does not expect to incur future material costs in the work to address
the Year 2000 problem for its systems and products. 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
noncompliant 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.

         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.


                                      11
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK

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

         POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating
results have fluctuated significantly in the past and are likely to fluctuate
significantly in the future on a quarterly and an annual basis. Prior growth
rates that the Company has experienced in net revenue and net income 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, 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.

         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 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 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 number of
distributors and OEMs. 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.

         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 Enterprise Harmony '99 data synchronization
software, Counterpoint test tools, ExtendNet VPN, ExtendNet IAS, Advantage
Database Server Version 5.0, and certain models of 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, results of
operations and cash flows.

         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


                                      12
<PAGE>

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 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 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, 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 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. The Company believes that the ExtendNet print
server 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 on the
Company's business, results of operations and cash flows. 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 certain of 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,
results of operations and cash flows.

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

         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. 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


                                      13
<PAGE>

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 OEMs involve a number of potential risks, 
including lengthy sales cycles and potential competition from 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 such as
the NATO intervention in Kosovo. 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 subsidiaries in France,
Germany, Italy, the United Kingdom and Singapore. The transactions made through
these subsidiaries are primarily denominated in local currencies. Accordingly,
the Company's international operations impose a risk upon its business as a
result of currency exchange rate fluctuations. There can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's business, results of operations and cash flows. 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, results of operations
and cash flows.


                                      14
<PAGE>

         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. 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. This decision was
based, in part, on 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 with other suppliers in the future. 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. 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, 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, 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


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<PAGE>

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 and Parallax. 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, 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.


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<PAGE>

         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, the United Kingdom and Singapore 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, results of operations
and cash flows. 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.

PART II.  OTHER INFORMATION

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

     27.1   Financial Data Schedule

(b)  REPORTS ON FORM 8-K

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

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


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<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)


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