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

                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, 2005

                                       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 offices) (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 [_]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).                 Yes [_]    No [X]

The number of shares outstanding of the Registrant's Common Stock as of March
31, 2005, was 15,576,033
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<PAGE>
                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

               FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2005

                                TABLE OF CONTENTS



                                                                            PAGE
                                                                            ----
PART I.    FINANCIAL INFORMATION

Item 1.    Financial Statements ............................................   3

           Condensed Consolidated Balance Sheets as of
           March 31, 2005 (unaudited) and June 30, 2004 ....................   3

           Condensed Consolidated Statements of Operations
           for the Three and Nine Months Ended March 31, 2005
           and 2004 (unaudited) ............................................   4

           Condensed Consolidated Statements of Comprehensive
           Income (Loss) for the Three and Nine Months Ended
           March 31, 2005 and 2004 (unaudited) .............................   5

           Condensed Consolidated Statements of Cash Flows
           for the Nine Months Ended March 31, 2005 and 2004
           (unaudited) .....................................................   6

           Condensed Consolidated Statement of Stockholders'
           Equity for the Nine Months Ended March 31, 2005
           (unaudited) .....................................................   7

           Notes to Condensed Consolidated Financial
           Statements (unaudited) ..........................................   8

Item 2.    Management's Discussion and Analysis of Financial Condition
           and Results of Operations .......................................  15

Item 3.    Quantitative and Qualitative Disclosures about Market Risk ......  39

Item 4.    Controls and Procedures .........................................  40



PART II.   OTHER INFORMATION

Item 1.    Legal Proceedings ...............................................  41

Item 6.    Exhibits ........................................................  41

           (Items 2, 3, 4, and 5 of Part II are not
           applicable and have been omitted)


           SIGNATURES ......................................................  42


                                        2
<PAGE>
PART I.  FINANCIAL INFORMATON

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
(unaudited)
<TABLE><CAPTION>
                                                                                MARCH 31,       JUNE 30,
                                                                                  2005            2004
                                                                              ------------    ------------
<S>                                                                           <C>             <C>
ASSETS
Current:
      Cash and cash equivalents ............................................. $      9,756    $      7,225
      Receivables, net of allowances of $659 and $446 .......................        7,780           6,772
      Prepaid and other .....................................................        1,170           1,449
                                                                              ------------    ------------
           Total current assets .............................................       18,706          15,446
      Property and equipment, net ...........................................        4,869           4,331
      Construction in progress ..............................................           --             384
      Goodwill ..............................................................       12,489          12,489
      Intangibles, net ......................................................          416             576
      Other long-term assets ................................................          113             130
                                                                              ------------    ------------
           Total assets ..................................................... $     36,593    $     33,356
                                                                              ============    ============


LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
      Accounts payable ...................................................... $      1,331    $      1,639
      Accrued expenses ......................................................        4,268           3,556
      Deferred revenue ......................................................        3,065           3,569
      Accrued restructuring .................................................           --             116
      Current portion of long-term debt .....................................           --             325
      Current portion of capital leases .....................................           15              25
                                                                              ------------    ------------
           Total current liabilities ........................................        8,679           9,230
Non-current:
      Long-term debt ........................................................        4,800           4,800
      Capital leases ........................................................            9              17
      Other long-term liabilities ...........................................          152             153
                                                                              ------------    ------------
           Total non-current liabilities ....................................        4,961           4,970
                                                                              ------------    ------------
      Total liabilities .....................................................       13,640          14,200

Commitments and contingencies - Note 10

Stockholders' equity:
      Preferred stock; $0.001 par value per share; 5,000 shares authorized;
           no shares issued or outstanding ..................................           --              --
      Common Stock; $0.001 par value per share; 75,000 shares authorized;
           15,576 and 15,078 shares issued and outstanding ..................           16              15
      Additional paid-in capital ............................................       49,318          48,005
      Treasury stock; $0.001 par value per share; 4 and 0 common shares .....           --              --
      Accumulated deficit ...................................................      (23,811)        (27,134)
      Unamortized stock-based compensation ..................................         (101)           (231)
      Accumulated other comprehensive loss ..................................       (2,469)         (1,499)
                                                                              ------------    ------------
           Total stockholders' equity .......................................       22,953          19,156
                                                                              ------------    ------------
           Total liabilities and stockholders' equity ....................... $     36,593    $     33,356
                                                                              ============    ============



The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>

                                        3
<PAGE>
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE><CAPTION>

                                                               THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                                               ----------------------------    ----------------------------
                                                                   2005            2004            2005            2004
                                                               ------------    ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>             <C>
Revenue:
      License fees and royalties ............................. $      9,437    $      6,076    $     22,878    $     18,904
      Services and other .....................................        2,135           2,231           6,481           5,465
                                                               ------------    ------------    ------------    ------------
          Total net revenue ..................................       11,572           8,307          29,359          24,369
Costs and expenses:
      Cost of license fees and royalties .....................          102             132             296             358
      Cost of services and other .............................        1,197           1,062           3,144           3,200
      Amortization of identifiable intangibles ...............           43             138             161             482
      Research and development ...............................        2,081           1,824           5,702           4,988
      Marketing and sales ....................................        3,938           3,371          11,145          10,043
      General and administrative .............................        1,642           1,355           4,372           4,004
      Restructuring charges ..................................           --             117              --           1,446
      Patent litigation fees, license and settlement .........           --           2,080              --           3,425
      Non-cash stock-based compensation ......................           38             169             477             337
                                                               ------------    ------------    ------------    ------------
          Total costs and expenses ...........................        9,041          10,248          25,297          28,283
                                                               ------------    ------------    ------------    ------------
          Income (loss) from operations ......................        2,531          (1,941)          4,062          (3,914)
      Other income (expense), net ............................         (106)              4            (194)             46
      Gain on sale of land ...................................           --              --              --           1,058
      Interest expense .......................................         (126)           (139)           (392)           (318)
                                                               ------------    ------------    ------------    ------------
          Income (loss) before income taxes ..................        2,299          (2,076)          3,476          (3,128)
      Income tax provision ...................................          121               9             153              22
                                                               ------------    ------------    ------------    ------------
          Income (loss) from continuing operations ...........        2,178          (2,085)          3,323          (3,150)
      Discontinued operations, net of tax:
          Income from discontinued operations ................           --              --              --              88
                                                               ------------    ------------    ------------    ------------
          Net income (loss) .................................. $      2,178    $     (2,085)   $      3,323    $     (3,062)
                                                               ============    ============    ============    ============

      Basic earnings (loss) per share:
          Earnings (loss) from continuing operations ......... $       0.14    $      (0.14)   $       0.22    $      (0.22)
          Earnings from discontinued operations ..............           --              --              --              --
                                                               ------------    ------------    ------------    ------------
      Net earnings (loss) per share .......................... $       0.14    $      (0.14)   $       0.22    $      (0.22)
                                                               ============    ============    ============    ============

      Diluted earnings (loss) per share:
          Earnings (loss) from continuing operations ......... $       0.14    $      (0.14)   $       0.21    $      (0.22)
          Earnings from discontinued operations ..............           --              --              --              --
                                                               ------------    ------------    ------------    ------------
      Net earnings (loss) per share .......................... $       0.14    $      (0.14)   $       0.21    $      (0.22)
                                                               ============    ============    ============    ============

      Number of shares used in per share calculations:
          Basic ..............................................       15,438          14,601          15,214          14,236
          Diluted ............................................       15,860          14,601          15,461          14,236



The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>

                                        4
<PAGE>
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
<TABLE><CAPTION>

                                                               THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                                               ----------------------------    ----------------------------
                                                                   2005            2004            2005            2004
                                                               ------------    ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>             <C>
      Net income(loss) ....................................... $      2,178    $     (2,085)   $      3,323    $     (3,062)
      Change in currency translation .........................          (71)              1            (970)           (359)
                                                               ------------    ------------    ------------    ------------
          Comprehensive income (loss) ........................ $      2,107    $     (2,084)   $      2,353    $     (3,421)
                                                               ============    ============    ============    ============



The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>






































                                        5
<PAGE>
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE><CAPTION>
                                                                          NINE MONTHS ENDED MARCH 31,
                                                                         ----------------------------
                                                                             2005            2004
                                                                         ------------    ------------
<S>                                                                      <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
      Net income (loss) ................................................ $      3,323    $     (3,062)
      Adjustments to reconcile net income (loss) to net
      cash provided (used) by operating activities:
          Provision for bad debts ......................................          158             123
          Depreciation and amortization ................................          671           1,189
          Stock-based compensation .....................................          477             893
          Gain on sale of property and equipment .......................           --          (1,001)
          Changes in assets and liabilities:
               Receivables .............................................         (985)           (122)
               Prepaid and other assets ................................          297            (283)
               Accounts payable and accrued expenses ...................         (855)           (639)
               Deferred revenue ........................................         (534)            135
                                                                         ------------    ------------
      Net cash provided (used) by operating activities .................        2,552          (2,767)

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures .............................................         (667)           (310)
      Proceeds from sale of property and equipment .....................           --           1,564
      Other investing activities .......................................           --              19
                                                                         ------------    ------------
      Net cash provided (used) by investing activities .................         (667)          1,273

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from sale-and-leaseback of building .....................           --           4,800
      Proceeds from the issuance of common stock .......................          966           1,240
      Payments on long-term debt and capital leases ....................         (343)           (342)
                                                                         ------------    ------------
      Net cash provided by financing activities ........................          623           5,698

Effect of exchange rates on cash .......................................           23              50
                                                                         ------------    ------------
Net increase in cash and cash equivalents ..............................        2,531           4,254

CASH AND CASH EQUIVALENTS:
      Beginning of period ..............................................        7,225           3,502
                                                                         ------------    ------------
      End of period .................................................... $      9,756    $      7,756
                                                                         ============    ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
      Interest paid                                                      $        349    $        270
      Taxes paid                                                         $         97    $         81



The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>

                                        6
<PAGE>
EXTENDED SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NINE MONTHS ENDED MARCH 31, 2005
(in thousands)
(unaudited)




<TABLE><CAPTION>
                                                                                                          ACCUMULATED
                                    COMMON STOCK            ADDITIONAL                   UNAMORTIZED       OTHER           TOTAL
                              --------------------------     PAID-IN      ACCUMULATED    STOCK-BASED   COMPREHENSIVE   STOCKHOLDERS'
                                SHARES         AMOUNT        CAPITAL        DEFICIT      COMPENSATION       LOSS          EQUITY
                              ----------    ------------   ------------   ------------   ------------   ------------   ------------
<S>                           <C>           <C>            <C>            <C>            <C>            <C>            <C>
Balance at July 1, 2004.......    15,078    $         15   $     48,005   $    (27,134)  $       (231)  $     (1,499)  $     19,156

Net Income....................        --              --             --          3,323             --             --          3,323
Translation adjustment........        --              --             --             --             --           (970)          (970)
Stock issued from stock
  option exercises............       446               1            965             --             --             --            966
Compensatory options..........        --              --            214             --             --             --            214
Restricted stock grants.......        56              --            152             --           (152)            --             --
Restricted stock amortization.        --              --             --             --            263             --            263
Restricted stock repurchase...        (4)             --            (18)            --             19             --              1
                              ----------    ------------   ------------   ------------   ------------   ------------   ------------
Balance at March 31, 2005.....    15,576    $         16   $     49,318   $    (23,811)  $       (101)  $     (2,469)  $     22,953
                              ==========    ============   ============   ============   ============   ============   ============


The accompanying notes are an integral part of the condensed consolidated financial statements
</TABLE>

























                                        7
<PAGE>
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
(unaudited)

NOTE 1.    BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include Extended
Systems Incorporated, a Delaware corporation, and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Tabular amounts are in thousands, except years, percentages and
per share amounts.

The accompanying condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States have been condensed or omitted pursuant to such
rules and regulations. These accounting principles were applied on a basis
consistent with those of the consolidated financial statements contained in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2004. We have
prepared these condensed consolidated financial statements without audit
pursuant to the rules and regulations of the SEC. In the opinion of management,
these unaudited condensed consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of our financial position as of March 31, 2005, and our
results of operations and cash flows for the three months and nine months ended
March 31, 2005 and March 31, 2004. The results for these interim periods are not
necessarily indicative of the expected results for any other interim period or
the year ending June 30, 2005. These condensed consolidated financial statements
should be read in conjunction with our audited consolidated financial statements
and related notes included in our Annual Report on Form 10-K for the fiscal year
ended June 30, 2004.

The preparation of financial statements in conformity with generally accepted
accounting principles requires that we make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of our financial statements. It
also requires that we make estimates and assumptions that affect the reported
amounts of our revenue and expenses during the reporting periods. Our actual
results could differ from those estimates.

We have a history of incurring losses from operations and have an accumulated
deficit of approximately $24 million as of March 31, 2005. However, for the nine
months ended March 31, 2005, we recorded income from operations of approximately
$4.1 million and operating activities provided $2.6 million of cash. At March
31, 2005, we had cash and cash equivalents of $9.8 million.

We believe our existing working capital and borrowing capacity will be
sufficient to fund our anticipated working capital and capital expenditure
requirements through at least March 31, 2006. We cannot be certain, however,
that the underlying assumed levels of revenues and expenses will be accurate. If
operating results were to fail to meet our expectations, we could be required to
seek additional sources of liquidity. These sources of liquidity could include
raising funds through public or private debt financing, borrowing against our
line of credit or offering additional equity securities. If additional funds are
raised through the issuance of equity securities, substantial dilution to our
stockholders could result. In the event additional funds are required, adequate
funds may not be available when needed or may not be available on favorable
terms, which could have a negative effect on our business and results of
operations.


NOTE 2.    SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING DEVELOPMENTS. On December 16, 2004, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 123(R), "Share-Based Payment." SFAS No. 123(R) requires companies
to measure all stock-based compensation awards using a fair value method and
record such expense in their consolidated financial statements. In addition, the
adoption of SFAS No. 123(R) will require additional accounting related to the
income tax effects and additional disclosure regarding the cash flow effects
resulting from share-based payment arrangements. SFAS No. 123(R) is effective
beginning the first quarter of our fiscal year ending June 30, 2006. We are
currently assessing the impact of SFAS No. 123(R) on our stock-based
compensation programs. However, we expect that the requirement to expense stock
options and other equity interests that have been or will be granted to
employees will significantly increase our operating expenses and result in lower
earnings per share.

CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency. We translate assets and liabilities of international
subsidiaries into U.S. dollars using exchange rates in effect at the balance
sheet date, and we report gains and losses from this translation process as a
component of comprehensive income or loss. Also included in comprehensive income
or loss are adjustments that result from the translation of U.S. dollar
denominated intercompany loans that are considered to be permanent in nature. We
translate revenue and expenses into U.S. dollars using a weighted average
exchange rate for the period.

From time to time, we enter into foreign currency forward contracts, typically
with respect to the euro, Canadian dollar, and British pound sterling to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting the risk that would otherwise
result from changes in currency exchange rates. Although these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed.
These forward contracts do not qualify for hedge accounting under SFAS No. 133,
"Accounting for Derivative

                                        8
<PAGE>
Instruments and Hedging Activities", and, as such, the contracts are recorded in
the consolidated balance sheet at fair value. We report a net currency gain or
loss based on changes in the fair value of forward contracts combined with the
changes in fair value of the underlying asset or liability being managed. We had
no forward contracts in place as of March 31, 2005. As of March 31, 2004, we had
forward contracts with a nominal value of approximately $9.3 million, each of
which matured within 30 days, in place with respect to the Canadian dollar, euro
and British pound sterling. We recognized net currency exchange losses of
approximately $167 thousand and $380 thousand for the three and nine months
ended March 31, 2005 and net currency exchange losses of approximately $45
thousand and $17 thousand for the three and nine months ended March 31, 2004.

EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued stock options and warrants that could potentially dilute
earnings per share. We exclude stock options and warrants from diluted earnings
or loss per share to the extent that their effect on the computation is
antidilutive.

Our diluted earnings or loss per share computations exclude the following common
stock equivalents, as the affect of their inclusion would have been antidilutive
for the following periods:

                  THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                  ---------------------------     ---------------------------
                      2005           2004             2005           2004
                  ------------   ------------     ------------   ------------
Stock options ....       1,965          3,346            2,037          3,346
Warrants .........          35             35               35             35


RECLASSIFICATIONS. We have reclassified certain prior year amounts to conform to
the current year presentation, including a reclassification between components
of income (loss) from operations, between components of current assets and
between components of current liabilities. These reclassifications had no impact
on net income (loss), income (loss) from operations, total costs and expenses,
total current assets or total current liabilities for the periods presented.

REVENUE RECOGNITION. We apply the provisions of Statement of Position 97-2,
SOFTWARE REVENUE RECOGNITION (SOP 97-2), as amended by SOP 98-9, and recognize
software revenue when all of the following criteria are met: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred, (3) the fee is
fixed or determinable and (4) collection of the resulting receivable is
reasonably assured.

We assess whether the fee associated with a transaction is fixed or determinable
at the time of the transaction, based on the payment terms associated with the
transaction. If payment terms are extended for a significant portion of the fee
or if there is a risk that the customer will expect a concession, we do not
consider the fee fixed or determinable. In these cases, we recognize revenue as
the fee becomes due and payable. If we were to assess the fixed or determinable
criterion differently, the timing and amount of our revenue recognition might
differ materially from that reported.

At the time of the transaction we also assess whether or not collection is
reasonably assured based on a number of factors, including past transaction
history with the customer and credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not reasonably assured, we defer recognition of the fee as revenue and
recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of cash. If we were to assess our ability to collect
differently, the timing and amount of our revenue recognition might differ
materially from that reported.

For arrangements with multiple obligations (for instance, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method. This means that we defer revenue
from the total fees associated with the arrangement equivalent to the
vendor-specific objective evidence of fair value of the elements of the
arrangement that have not yet been delivered. The vendor-specific objective
evidence of fair value of an undelivered element is generally established by
using historical evidence specific to Extended Systems. For example, the
vendor-specific objective evidence of fair value for maintenance and support is
based upon separate sales of renewals to other customers or upon the renewal
rates quoted in the contracts, and the fair value of services, such as training
or consulting, is based upon separate sales by us of these services to other
customers. If we had allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support, patches, bug fixes and other
modifications to ensure that the products comply with their warranty provisions.
Accordingly, we allow for warranty costs for these products at the time the
product revenue is recognized.

When a contractual relationship with one of our customers stipulates the
submission of a royalty report to us, revenue is generally recorded when the
royalty report is received and recognized in the period that the report covers.
If a royalty report is not received by the desired date to facilitate the
closing of the books for a given fiscal period and there exists the basis to
make a fair and reasonable estimate of the revenue related to that royalty
report, this estimate will be recorded as revenue. Estimated royalty fees and
revenues are subsequently adjusted based upon actual amounts realized. If the
actual amount realized differs materially from the recorded estimate and is
reported to us after an estimate has been recorded and before financial results
are announced externally, the recorded amount will be adjusted to reflect the
actual amount realized. If the amount differs and is reported after financial
results are announced externally or does not differ materially, the adjustment
will be made in the subsequent fiscal period.

                                        9
<PAGE>
In cases where the arrangement with our customer provides for a prepaid
nonrefundable royalty, we recognize revenue when persuasive evidence of an
arrangement exits, delivery has occurred, the fee is fixed or determinable and
collection of the resulting receivable is reasonably assured.

We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we recognize revenue from
training services as these services are performed. For professional services
that involve significant implementation, customization, or modification of our
software that is essential to the functionality of the software, we generally
recognize both the service and related software license revenue over the period
of the engagement, using the percentage-of-completion method. We recognize no
more than 90% of the total contract amount until project acceptance is obtained.
In cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, or where
significant uncertainty about the project completion or customer acceptance
exists, we defer the contract revenue under the completed contract method of
accounting until the uncertainty is sufficiently resolved or the contract is
complete and accepted by the customer. If we were to make different judgments or
use different estimates of the total amount of work we expect to be required to
complete an engagement, the timing of our revenue recognition from period to
period, as well as the related margins, might differ materially from that
reported.


NOTE 3.    STOCK-BASED COMPENSATION PLANS

We apply Accounting Principles Board Opinion No. 25 ("APB No. 25"), "Accounting
for Stock Issued to Employees" and its related interpretations to measure
compensation expense for stock-based compensation plans. Under APB No. 25, we
generally recognize no compensation expense with respect to stock option grants
and shares issued under our employee stock purchase plan. Our stock option plans
allow for the issuance of restricted stock awards, under which shares of our
common stock are issued at par value to employees or directors, subject to
vesting restrictions, and for which compensation expense equal to the fair
market value on the date of grant less par value paid is amortized over the
vesting period.

Had we elected to recognize stock-based employee compensation expense based on
the grant date fair value as prescribed by SFAS No. 123, our net income (loss)
would have been equal to the pro forma amounts indicated below for the following
periods:
<TABLE><CAPTION>
                                             THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                             ----------------------------    ----------------------------
                                                 2005            2004            2005            2004
                                             ------------    ------------    ------------    ------------
<S>                                          <C>             <C>             <C>             <C>
Net income (loss), as reported ............. $      2,178    $     (2,085)   $      3,323    $     (3,062)
Add:  Stock-based compensation included in
      reported net income (loss)(1)(2) .....           38             224             477             893
Less: Stock-based compensation determined
      under SFAS No. 123 ...................         (480)           (928)         (2,288)         (4,383)
                                             ------------    ------------    ------------    ------------
Pro forma net income (loss) ................ $      1,736    $     (2,789)   $      1,512    $     (6,552)
                                             ============    ============    ============    ============

Basic earnings (loss) per share:
      As reported .......................... $       0.14    $      (0.14)   $       0.22    $      (0.22)
      Pro forma ............................ $       0.11    $      (0.19)   $       0.10    $      (0.46)

Diluted earnings (loss) per share:
      As reported .......................... $       0.14    $      (0.14)   $       0.21    $      (0.22)
      Pro forma ............................ $       0.11    $      (0.19)   $       0.10    $      (0.46)
</TABLE>

(1)   The amount for the three months ended March 31, 2004 includes $169
      thousand of non-cash stock-based compensation expense related to the
      amortization of restricted stock and $55 thousand of restructuring charges
      related to the accelerated vesting of employee stock options and
      restricted stock.

(2)   The amount for the nine months ended March 31, 2004 includes $337 thousand
      of non-cash stock-based compensation expense related to the amortization
      of restricted stock and a change in the terms of our 1998 Director Option
      Plan and $556 thousand of restructuring charges related to the accelerated
      vesting of employee stock options and restricted stock.

We estimated the fair value of shares and options issued pursuant to our
stock-based compensation plans at the date of grant using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value
of traded options that have no vesting restrictions and are fully transferable.
Option valuation models require the input of assumptions, including the expected
stock price volatility. Our options have characteristics significantly different
from those of traded options, and changes in the input assumptions can
materially affect the fair value estimates. The following weighted-average
assumptions and weighted-average fair values were used in determining our
stock-based compensation under SFAS No. 123 for the options granted during the
following periods:
                                       10
<PAGE>
<TABLE><CAPTION>
                                 THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                 ----------------------------    ----------------------------
                                     2005            2004            2005            2004
                                 ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>
Risk-free interest rate:
      Option plans ..............       3.88%           3.75%   3.88% to 4.13%  3.75% to 4.04%
      Purchase plan .............         N/A             --%             N/A     --% to 3.84%

Expected life in years:
      Option plans ..............         7.1             7.6         2.8-7.6             7.6
      Purchase plan .............         N/A             --              N/A      -- to 0.5

Volatility factor:
      Option plans ..............       96.9%          101.4%   96.9% to 99.1%  101.4% to 103.1%
      Purchase plan .............         N/A             --%             N/A      --% to 103.1%

Dividend yield ..................         --%             --%              --%             --%

Weighted average fair value:
      Option plans ..............$       4.00    $       4.24    $       2.51    $       3.40
      Purchase plan .............$         --    $         --    $         --    $         --
</TABLE>

On December 31, 2004 our Employee Stock Purchase Plan (the "Plan") was
terminated. No purchase of stock was made under the Plan for the six-month
purchase period ended December 31, 2004. In order to replace the number of
shares of stock and the discounted purchase price employees were expecting to
receive under the Plan, the Board of Directors granted non-qualified stock
options with an exercise price below the fair market value on the date of grant
to employees that were participants in the Plan. This grant resulted in a
non-cash stock-based compensation expense of $214 thousand for the three months
ended December 31, 2004.


NOTE 4.    DISCONTINUED OPERATIONS

We exited our infrared hardware business in the quarter ended September 30,
2002, we sold our wholly owned subsidiary, Extended Systems Singapore Pte
Limited, in the quarter ended June 30, 2002 and we sold the assets of our
printing solutions segment in the quarter ended June 30, 2001. The results of
these operations have been accounted for as discontinued operations for all
periods presented in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," and Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions." Operating results for the
discontinued operations are reported, net of tax, under "Income from
discontinued operations" on our Statements of Operations.

The following summarizes the results of discontinued operations for the
following periods:
<TABLE><CAPTION>
                                 THREE MONTHS ENDED MARCH 31,     NINE MONTHS ENDED MARCH 31,
                                 ----------------------------    ----------------------------
                                     2005            2004            2005            2004
                                 ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>
Net revenue .................... $         --    $         --    $         --    $        169
Gross profit ...................           --              --              --             145
Income tax provision ...........           --              --              --              52
Income, net of tax .............           --              --              --              88

Earnings per share:
  Basic and diluted ............ $         --    $         --    $         --    $         --
</TABLE>


NOTE 5.    RESTRUCTURING CHARGES

We did not incur restructuring charges for the three and nine months ended March
31, 2005. We recorded approximately $117 thousand and $1.4 million in workforce
reduction costs during the three and nine months ended March 31, 2004 that
consisted primarily of severance, benefits, and other costs related to the
resignation of Steven Simpson, our former President and Chief Executive Officer,
and Karla Rosa, our former Vice President of Finance and Chief Financial
Officer, and the termination of 18 employees from our marketing and sales,
research and development, administration and operations groups. Of the
terminated employees, 14 were located in the United States and four were in
Europe. The restructuring charge included $55 thousand and

                                       11
<PAGE>
$556 thousand of non-cash stock-based compensation resulting from the
accelerated vesting of employee stock options and restricted stock during the
three and nine months ended March 31, 2004, respectively.

A summary of changes in the accrued restructuring balance for the nine months
ended March 31, 2005 is as follows:
                                                                   WORKFORCE
                                                                REDUCTION COSTS
                                                                 ------------
Balance at July 1, 2004 .......................................  $        116
Costs incurred in the nine months ended March 31, 2005 ........            --
Cash payments in the nine months ended March 31, 2005 .........          (116)
                                                                 ------------
Balance at March 31, 2005 .....................................  $         --
                                                                 ============

NOTE 6.    GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

Goodwill and other identifiable intangible assets relate to our acquisitions of
Rand Software Corporation in 1998, Oval (1415) Limited in 1999, and AppReach and
ViaFone Inc. in 2002.

Goodwill is reviewed annually for impairment or more frequently if indicators of
impairment arise. We completed our annual impairment assessment in the quarter
ended June 30, 2004 and concluded that goodwill was not impaired. The carrying
amount of goodwill as of March 31, 2005 and June 30, 2004 was approximately
$12.5 million.

Other identifiable intangible assets consist of the following:
<TABLE><CAPTION>
                                  AS OF MARCH 31, 2005                      AS OF JUNE 30, 2004
                         --------------------------------------    --------------------------------------
                            GROSS                                    GROSS
                          CARRYING     ACCUMULATED                  CARRYING     ACCUMULATED
                           AMOUNT     AMORTIZATION       NET         AMOUNT     AMORTIZATION       NET
                         ----------    ----------    ----------    ----------    ----------    ----------
<S>                      <C>           <C>           <C>           <C>           <C>           <C>
Purchased technology.....$    3,691    $   (3,314)   $      377    $    3,691    $   (3,165)   $      526
Customer relationships...        80           (41)           39            80           (30)           50
Non-compete covenants....         6            (6)           --             6            (6)           --
Other....................         5            (5)           --             5            (5)           --
                         ----------    ----------    ----------    ----------    ----------    ----------
                         $    3,782    $   (3,366)   $      416    $    3,782    $   (3,206)   $      576
                         ==========    ==========    ==========    ==========    ==========    ==========
</TABLE>
Amortization of identifiable intangible assets was $43 thousand and $161
thousand for the three and nine months ended March 31, 2005 and was $138
thousand and $482 thousand for the three and nine months ended March 31, 2004.
The purchased technology and customer relationship assets are being amortized
over five years. Based on the identifiable intangible assets recorded at March
31, 2005, the estimated future amortization expense for the remainder of fiscal
2005 and fiscal 2006, 2007, and 2008 is $43 thousand, $172 thousand, $172
thousand, and $29 thousand, respectively.


NOTE 7.    RECEIVABLES
<TABLE><CAPTION>
                                                           AS OF MARCH 31,     AS OF JUNE 30,
                                                                2005                2004
                                                            ------------        ------------
<S>                                                         <C>                 <C>
Accounts receivable ....................................... $      8,439        $      7,218
Allowance for doubtful accounts and product returns .......         (659)               (446)
                                                            ------------        ------------
                                                            $      7,780        $      6,772
                                                            ============        ============
</TABLE>

NOTE 8.    PROPERTY AND EQUIPMENT
<TABLE><CAPTION>
                                                           AS OF MARCH 31,     AS OF JUNE 30,
                                                                2005                2004
                                                            ------------        ------------
<S>                                                         <C>                 <C>
Land and land improvements................................. $        533        $        533
Buildings..................................................        5,927               5,927
Computer equipment.........................................        5,492               4,480
Furniture and fixtures.....................................        1,869               1,835
                                                            ------------        ------------
                                                                  13,821              12,775
Less accumulated depreciation..............................       (8,952)             (8,444)
                                                            ------------        ------------
                                                            $      4,869        $      4,331
                                                            ============        ============
</TABLE>

                                       12
<PAGE>

NOTE 9. ACCRUED EXPENSES

                                                As of March 31,   As of June 30,
                                                      2005             2004
                                                  -----------       ----------
Accrued payroll and related benefits............. $     1,840       $    1,623
Accrued warranty and support costs...............         161              156
Other............................................       2,267            1,777
                                                  -----------       ----------
                                                  $     4,268       $    3,556
                                                  ===========       ==========


NOTE 10. COMMITMENTS AND CONTINGENCIES

COMMITMENTS. We currently lease office space at our locations in Boise, Idaho;
Herrenberg, Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol,
England; San Diego, California; American Fork, Utah; and `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $167 thousand
and $153 thousand for the three months ended March 31, 2005 and 2004,
respectively. For the nine months ended March 31, 2005 and 2004, operating lease
expense was $467 thousand and $559 thousand, respectively.

On September 26, 2003, we completed a transaction with Hopkins Financial
Services for the sale-and-leaseback of our headquarters building and land in
Boise, Idaho. Because we have a 10-year option to repurchase the building and
land at a price of $5.1 million and we sublet more than a small portion of the
building space, the sale-and-leaseback was recorded as a financing transaction
and is shown as $4.8 million of long-term debt on our balance sheet at March 31,
2005. As part of the agreement, we entered into a 10-year master lease for the
building with annual lease payments equal to 9.2% of the sale price. We are also
obligated to pay all expenses associated with the building during our lease,
including the costs of property taxes, insurance, operating expenses and
repairs.

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank ("SVB"). We restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan had been fully repaid at March 31, 2005.

Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations as of March 31, 2005 are as
follows:
<TABLE><CAPTION>
                                                          Year Ending June 30,
                                    ---------------------------------------------------------
                                     2005      2006     2007     2008     2009    Thereafter     Total
                                    -------------------------------------------------------------------
<S>                                <C>      <C>       <C>      <C>      <C>       <C>         <C>
Monthly payments pursuant to
  building sale-and-leaseback...... $  110   $   442   $  442   $  442   $  442    $ 1,875     $ 3,753
Capital leases(1)..................      7        11        6      --       --         --           24
Operating leases...................    161       566      443      328      276        470       2,244
Post-retirement benefits(1)(2).....     34        17       17       17       17         67         169
                                    -------------------------------------------------------------------
                                    $  312   $ 1,036   $  908   $  787   $  735    $ 2,412     $ 6,190
                                    ===================================================================
</TABLE>
(1)  These amounts are reported on the balance sheet as liabilities.
(2)  Fiscal 2005 includes $17 thousand of current commitments included in
     accrued expenses on the balance sheet.


Capital lease obligations are as follows:

                                                            As of
                                                        March 31, 2005
                                                        --------------
Gross capital lease obligations........................     $  26
Less:  Imputed interest................................        (2)
                                                            -----
Present value of net minimum lease payments............        24
Less:  Current portion.................................       (15)
                                                            -----
Non-current capital lease obligations..................     $   9
                                                            =====

GUARANTEES. Until January 13, 2005, we provided a guarantee for lease payments
at our Bristol, England location. We were not required to provide such a
guarantee under the terms of the new lease agreement we entered into for this
location.

                                       13
<PAGE>

INDEMNIFICATIONS. The software license agreements we enter into in our ordinary
course of business contain indemnification provisions for losses suffered or
incurred by the indemnified party in connection with any U.S. patent, copyright
or other intellectual property infringement claim by third parties with respect
to our products. The term of our indemnification obligations is generally
perpetual any time after execution of the agreement. The maximum potential
amount of future payments we could be required to make under these
indemnification agreements is unlimited. To date, we have not incurred costs to
defend lawsuits or settle claims related to these indemnification agreements.

As permitted under Delaware law, we have agreements to indemnify our officers
and directors for certain events or occurrences while the officer or director
is, or was, serving at our request in such capacity. The term of the
indemnification period is for the officer's or director's lifetime. The maximum
potential amount of future payments we could be required to make under these
indemnification agreements is unlimited; however, we have a director and officer
insurance policy that limits our exposure and may enable us to recover a portion
of any future amounts paid. We have not incurred costs to defend lawsuits or
settle claims related to these indemnification agreements.

From time to time we enter into indemnification agreements in our ordinary
course of business with certain service providers, such as financial
consultants, under which we agree to indemnify the service providers from
claims, losses, damages, liabilities, or other costs or expenses arising out of
or related to their services. The maximum potential amount of future payments we
could be required to make under these indemnification agreements is unlimited.
To date, we have not incurred costs to defend lawsuits or settle claims related
to these indemnity obligations.

WARRANTIES. We offer warranties on both our software products and discontinued
hardware products. We record an accrual for the estimated future costs
associated with warranty claims based upon our historical experience and our
estimate of future costs. We also include in the warranty reserve an accrual for
the estimated future costs associated with free support that we provide on
certain products. The adequacy of our warranty reserve is reviewed at least
quarterly and if necessary, adjustments are made.

The following table reconciles the changes in our warranty reserve for the nine
months ended March 31, 2005:

Balance at July 1, 2004.............................................  $   156
Net changes in warranty accrual for the three months
  ended September 30, 2004..........................................      --
                                                                      -------
Balance at September 30, 2004.......................................      156
Net changes in warranty accrual for the three months
  ended December 31, 2004...........................................      (29)
                                                                      -------
Balance at December 31, 2004........................................      127
Net changes in warranty accrual for the three months
  ended March 31, 2005..............................................       34
                                                                      -------
Balance at March 31, 2005                                             $   161
                                                                      =======

LINE OF CREDIT. We have a demand line of credit with SVB under which we can
borrow up to $2.5 million. Our borrowing capacity is limited to 80% of eligible
accounts receivable. Interest on any borrowings is payable at prime and certain
of our assets secure the line of credit. We are required to maintain certain
financial ratios under the terms of the agreement, which will expire on August
30, 2006. As of March 31, 2005, we had no outstanding borrowings on the line of
credit, and we were in compliance with all financial covenants required under
the line of credit.

LITIGATION. On June 29, 2004 AppForge, Inc. ("AppForge") filed a complaint
against us in the United States District Court for the District of Delaware (the
"Court"). An amended complaint was filed on August 12, 2004 joining Extended
Systems of Idaho, Inc. ("ESI-Idaho") and four of our European subsidiaries.
ESI-Idaho and AppForge had entered into a reseller agreement and incorporation
license agreement related to certain AppForge software. AppForge alleges that
the defendant Extended Systems companies have used AppForge's technology,
copyrighted material, and trademarks in a manner not authorized by the parties'
agreements. We believe that our use and distribution of AppForge's software,
copyrighted material, and trademarks has been within the scope of the parties'
agreements.

The Extended Systems defendants filed a motion with the Court seeking to compel
arbitration and to dismiss or stay the case pending the outcome of arbitration.
On March 28, 2005 the Court ordered the parties to arbitrate, stayed the case
pending arbitration, and ordered that our four European subsidiaries be bound by
any factual adjudications in the arbitration. ESI-Idaho had filed a demand for
arbitration with the American Arbitration Association on July 29, 2004 seeking a
declaration of the parties' respective rights and obligations. AppForge has
filed counterclaims reasserting the charges first made in its court complaint
and also asserting breach of contract. The hearing in the arbitration is
scheduled for September 2005. We believe that we have meritorious defenses
against AppForge's counterclaims, and we will continue to vigorously defend
against them.

We are also, from time to time, a party to legal disputes and proceedings
arising in the ordinary course of general business activities. After taking into
consideration legal counsel's evaluation of such disputes, we do not believe
their outcome will have a material effect on our financial position or results
of operations.

                                       14
<PAGE>

NOTE 11.  INCOME TAXES

We recorded income tax expense from continuing operations of $121 thousand and
$153 thousand for the three and nine months ended March 31, 2005, respectively,
and $9 thousand and $22 thousand for the three and nine months ended March 31,
2004, respectively. The expense related primarily to foreign withholding taxes.
For the three months ended March 31, 2004 we recorded no income tax expense
related to discontinued operations and for the nine months ended March 31, 2004
we recorded $ 52 thousand of income tax expense for discontinued operations.

NOTE 12.  BUSINESS SEGMENT, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS

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

We classify our product offerings into one operating segment, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions that we sell to enterprises, original
equipment manufacturers, application developers, distributors and valued-added
resellers.

Our headquarters is located in the United States. We have research and
development facilities in the United States, United Kingdom and Canada. We
conduct sales, marketing and customer service activities throughout the world,
and we have sales offices in North America and Western Europe. The following
table presents our geographic revenue information based on the location of the
selling entity.

                                          Three Months Ended  Nine Months Ended
                                               March 31,           March 31,
                                          ------------------  ------------------
                                            2005      2004      2005      2004
                                          --------  --------  --------  --------
Net revenue from Continuing Operations:
North  America........................... $  7,994  $  4,130  $ 17,557  $ 13,030
Germany..................................    1,933     2,080     6,727     5,421
Other countries..........................    1,645     2,097     5,075     5,918
                                          --------  --------  --------  --------
      Total net revenue.................. $ 11,572  $  8,307  $ 29,359  $ 24,369
                                          ========  ========  ========  ========


Substantially all of our long-lived assets are in the United States.

In the three months ended March 31, 2005, one customer, Texas Instruments,
accounted for more than 10% of our net revenue from continuing operations. No
customer accounted for greater than 10% of our net revenue from continuing
operations in the nine months ended March 31, 2005 or the three and nine months
ended March 31, 2004.

NOTE 13. RESTRICTED STOCK

In our fiscal year ended June 30, 2004, we granted shares of restricted stock
with a purchase price equal to $.001 per share to certain employees. Annually,
we grant shares of restricted stock with a purchase price equal to $.001 per
share to directors on the date of the annual stockholders' meeting. The issuance
of restricted stock grants results in unamortized stock-based compensation based
on the closing price of Extended Systems common stock on the date of the stock
grants. This compensation is amortized as a stock-based compensation charge as
the restrictions lapse.

We amortize non-cash stock-based compensation charges on a straight-line basis
over the vesting period. The restricted stock awards granted to employees in our
fiscal year ended June 30, 2004 vested in full on October 31, 2004, the first
anniversary of the grant date. The restricted stock awards granted to directors
vest in the amount of one-third on the first anniversary of the grant date and
one-third in each of the following two years. If the director attends the
required number of board meetings held during the year, the restrictions on his
awards will lapse in full on the first anniversary of the grant date. If an
employee or director terminates service before vesting is complete, the
restricted stock is repurchased from the individual and any compensation expense
previously recognized is reversed, thereby reducing the amount of stock-based
compensation amortization during the period.

During the three and nine months ended March 31, 2005, we recognized stock-based
compensation expense of $38 thousand and $263 thousand related to the above
restricted stock grants. Compensation expense related to restricted stock grants
was $169 thousand and $282 thousand for the three and nine months ended March
31, 2004.

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

INTRODUCTION
------------

We begin Management's Discussion and Analysis of Financial Condition and Results
of Operations with an overview to give the reader management's perspective on
our results for the third quarter of fiscal 2005 and our general outlook for the
remainder of the current fiscal year. This is followed by a discussion of the
critical accounting policies we believe are important to understanding the
assumptions and judgments incorporated in our reported financial results. In the
next section, we discuss our Results of

                                       15
<PAGE>

Operations for the third quarter and first nine months of fiscal 2005 compared
to the third quarter and first nine months of fiscal 2004. We then provide an
analysis of our liquidity and capital resources.

This discussion and other parts of this Quarterly Report on Form 10-Q contain
forward-looking statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended). These statements are based upon current
expectations that involve risks, uncertainties and assumptions, and we undertake
no obligation to update the forward-looking statements or reflect events or
circumstances after the date of this report. Any statements contained in this
Quarterly Report on Form 10-Q that are not statements of historical fact may be
deemed to be forward-looking statements. These forward-looking statements
include words such as "may," "will," "should," "estimates," "predicts,"
"potential," "continue," "strategy," "believes," "anticipates," "plans,"
"expects," "intends," "outlook," "could," "estimate," "project," "forecast," or
similar expressions that are intended to identify forward-looking statements.

Our actual results may differ materially from the results discussed in these
forward-looking statements. Factors that may cause a difference include, but are
not limited to, those discussed under the sections titled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Factors That May Affect Future Results and the Market Price of Our
Stock" and "Liquidity, Capital Resources and Financial Condition." The following
discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and notes thereto appearing elsewhere in this Quarterly
Report on Form 10-Q. All yearly references are to our fiscal years ended June
30, 2005 and 2004, unless otherwise indicated. All tabular amounts are in
thousands, except percentages.

OVERVIEW
--------

We are a leading provider of software and services that delivers solutions to
help companies streamline their business processes and improve workforce
productivity through mobilizing corporate applications and data. The users of
our products are enterprise employees that complete their jobs or portions of
their jobs outside of the company-owned facilities where they have traditionally
accessed, viewed and updated information through wired networks. We also provide
software and expertise that enables our mobile device manufacturer customers to
accelerate their product development cycles and enhance the functionality of new
products they bring to market. The users of our device manufacturer products are
companies that design and sell products that need short-range wireless
communication protocols, such as handset manufacturers and automotive telematics
providers. As the supply chain for these products consolidates, our customer
base is increasingly becoming the chipset manufacturers and original design
manufacturers that supply these industries. Additionally, we provide database
software to customers that develop applications, including mobile applications
that need a reliable, stable and easy to administer database to support their
application needs.

We believe a full understanding of our operating results for the third quarter
of fiscal 2005 requires an understanding of how the mobility solutions market is
evolving and how this evolution influences our financial performance. Although
the mobility solutions market is still in the early phases of development,
organizations are increasingly developing a mobile computing strategy as part of
their plans to increase productivity, improve competitiveness and enhance
customer relationships. Advancing the adoption of enterprise mobility solutions
is the increased availability and capability of powerful mobile devices, such as
PDAs, mobile phones, converged devices and smartphones. Enterprises are
increasingly realizing they can improve their competitiveness by mobilizing
corporate information. However, the tight oversight of capital spending
continues to restrain spending on information technology infrastructure projects
and has caused enterprises to focus spending on mobile technology investments
that can achieve a 12 to 18 month payback. Many companies launch their mobile
strategy with a mobile contacts, calendar, task and e-mail application. Our
mobile solution that meets this need, OneBridge Mobile Groupware, comprises the
dominant portion of our enterprise mobility software revenue. We have
experienced increased competition and the related pricing pressure for our
Groupware products in the marketplace and we expect this trend to continue. Our
plans to grow our enterprise mobility product revenue include an emphasis on
increasing the number of seats deployed to our existing customer base,
increasing the sales of our enhanced security product, OneBridge Mobile Secure,
and increasing the sales of enterprise mobile applications such as mobile field
service.

Device manufacturers are also evolving their products to address this growing
enterprise mobility market. Notebooks, mobile phones and standard PDAs have been
the dominant mobile infrastructure devices. However, as mobile device designers
and marketers have launched campaigns to communicate the added value of
smartphones and converged devices, adoption rates for these devices have
increased. Additionally, other industries such as automotive parts suppliers and
medical device manufacturers have included wireless communication functionality
to enhance the capability of their products to meet customer needs. To address
the growth in this market, the rapid product development cycles, and the demand
for a robust feature set, device manufacturers have increasingly turned to third
party providers like us to provide the technology for short-range wireless
connectivity products.

We believe Europe has been the global leader in the deployment of wireless
infrastructure. The coverage and data capacity of wireless networks developed
more rapidly in Europe than in other global markets, and the market for mobility
solutions has grown most rapidly in Europe. We have a long operating history in
Europe with offices in four countries. We have gained market awareness in Europe
and developed long-standing customer relationships. A significant portion of our
revenue in the third fiscal quarter of 2005 and for the nine months ended March
31, 2005 was derived from European customers purchasing our enterprise mobility
solutions and European device manufacturers introducing successful converged
devices that contained our mobile device solutions products. Our revenue from
our European customers that purchase our products in either British pounds
sterling

                                       16
<PAGE>

or euros is affected by changes in the exchange rate between these currencies
and the U.S. dollar. In the first nine months of fiscal 2005 the weakening of
the U.S. dollar positively affected our reported revenue.

In 1993, we introduced our first enterprise database products. We continue to
market and sell these products to application developers and enterprises to
support the data requirements of both mobile and traditional enterprise
applications. Application developers that purchase our enterprise database
products have required a solution that is stable, priced competitively, and does
not require a significant amount of database administration support. We have
developed an extensive network of resellers that market these products globally.
Because these products do not require heavy research and development investment
or significant sales and marketing support, they have been an important and
significant source of positive cash flow for us. Revenue from these products has
declined 2% in the first nine months of fiscal 2005 compared to the first nine
months of fiscal 2004. We expect this product line to continue the trend of flat
to slightly declining revenue for the remainder of fiscal 2005.

In the remaining quarter of fiscal 2005 we plan to continue to direct our
resources at achieving revenue growth by generating more sales of our solutions
to enterprise customers and companies in the mobile device manufacturer supply
chain. We believe enterprise customers will continue investing first in mobile
mail and messaging software and later move toward purchasing mobile applications
that can have an immediate financial impact. Examples of these applications are
field service, supply chain and logistics, healthcare and field sales. We
believe enterprises will choose vendors with knowledge of workflows and business
processes and those that can provide a business case for investment. We expect
to compete directly with both larger companies that have significant resources
and experience and smaller companies that focus on a particular mobile vertical.
We also expect to experience longer sales cycles, which is typical for sales of
larger, essential business applications.

Revenue increased $3.3 million in the third quarter of fiscal 2005 compared to
the third quarter of fiscal 2004. This revenue growth was due to a combination
of royalties and prepaid license fees from a sale of our Bluetooth wireless
technology software to Texas Instruments and revenue from a $1.0 million partial
payment received toward claims asserted in a lawsuit against Agilent
Technologies Singapore Pte. Ltd. ("Agilent"), a subsidiary of U.S.-based Agilent
Technologies, Inc., Korea-based Samsung Electronics Co., Ltd., and two Samsung
U.S. affiliates. Our operating expenses declined in the third fiscal quarter of
2005 compared to the third quarter of last year by $1.2 million. Included in
this decline was a $117 thousand decrease in restructuring charges and a $2.0
million decrease in patent litigation fees, license and settlement expense. We
experienced both income from operations of $2.5 million and net income of $2.2
million in the third quarter of fiscal 2005.

USE OF ESTIMATES AND CRITICAL ACCOUNTING POLICIES
-------------------------------------------------

In preparing our consolidated financial statements in conformity with accounting
principles generally accepted in the United States, we make estimates,
assumptions and judgments that can have a material impact on our net revenue,
operating income and net income (loss), as well as on the value of certain
assets on our consolidated balance sheet. We believe that the estimates,
assumptions and judgments involved in the accounting policies described below
have the greatest potential impact on our consolidated financial statements, so
we consider these to be our critical accounting policies. The policies described
below are not intended to be a comprehensive list of all our accounting
policies. In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles, with no need
for management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result. The audited consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the year ended June
30, 2004 contain our significant accounting policies and other disclosures
required by generally accepted accounting principles. The accounting policies we
consider critical to an understanding of the consolidated financial statements
are highlighted below.

REVENUE RECOGNITION
-------------------

Revenue recognition rules for software companies are very complex. We follow
specific and detailed guidelines in determining the proper amount of revenue to
be recorded; however, certain judgments must be made by management in
interpreting the rules and in applying our revenue recognition policy. Revenue
results are difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly.

We apply the provisions of Statement of Position 97-2, SOFTWARE REVENUE
RECOGNITION (SOP 97-2), as amended by SOP 98-9, and recognize software revenue
when all of the following criteria are met: (1) persuasive evidence of an
arrangement exists, (2) delivery has occurred, (3) the fee is fixed or
determinable and (4) collection of the resulting receivable is reasonably
assured.

We assess whether the fee associated with a transaction is fixed or determinable
at the time of the transaction, based on the payment terms associated with the
transaction. If payment terms are extended for a significant portion of the fee
or if there is a risk that the customer will expect a concession, we do not
consider the fee fixed or determinable. In these cases, we recognize revenue as
the fee becomes due and payable. If we were to assess the fixed or determinable
criterion differently, the timing and amount of our revenue recognition might
differ materially from that reported.

At the time of the transaction we also assess whether or not collection is
reasonably assured based on a number of factors, including past transaction
history with the customer and credit-worthiness of the customer. We do not
request collateral from our customers. If we determine that collection of a fee
is not reasonably assured, we defer recognition of the fee as revenue and

                                       17
<PAGE>

recognize revenue at the time collection becomes reasonably assured, which is
generally upon receipt of cash. If we were to assess our ability to collect
differently, the timing and amount of our revenue recognition might differ
materially from that reported.

For arrangements with multiple obligations (for instance, undelivered
maintenance and support), we allocate revenue to each component of the
arrangement using the residual value method. This means that we defer revenue
from the total fees associated with the arrangement equivalent to the
vendor-specific objective evidence of fair value of the elements of the
arrangement that have not yet been delivered. The vendor-specific objective
evidence of fair value of an undelivered element is generally established by
using historical evidence specific to Extended Systems. For example, the
vendor-specific objective evidence of fair value for maintenance and support is
based upon separate sales of renewals to other customers or upon the renewal
rates quoted in the contracts, and the fair value of services, such as training
or consulting, is based upon separate sales by us of these services to other
customers. If we allocated the respective fair values of the elements
differently, the timing of our revenue recognition may have differed materially
from that reported. For certain of our products, we do not sell maintenance
separately but do provide minimal support, patches, bug fixes and other
modifications to ensure that the products comply with their warranty provisions.
Accordingly, we allow for warranty costs for these products at the time the
product revenue is recognized.

When a contractual relationship with one of our customers stipulates the
submission of a royalty report to us, revenue is generally recorded when the
royalty report is received and recognized in the period that the report covers.
If a royalty report is not received by the desired date to facilitate the
closing of the books for a given fiscal period and there exists the basis to
make a fair and reasonable estimate of the revenue related to that royalty
report, this estimate will be recorded as revenue. Estimated royalty fees and
revenues are subsequently adjusted based upon actual amounts realized. If the
actual amount realized differs materially from the recorded estimate and is
reported to us after an estimate has been recorded and before financial results
are announced externally, the recorded amount will be adjusted to reflect the
actual amount realized. If the amount differs and is reported after financial
results are announced externally or does not differ materially, the adjustment
will be made in the subsequent fiscal period. In cases where the arrangement
with our customer provides for a prepaid nonrefundable royalty, we recognize
revenue when persuasive evidence of an arrangement exits, delivery has occurred,
the fee is fixed or determinable and collection of the resulting receivable is
reasonably assured.

We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we recognize revenue from
training services as these services are performed. For professional services
that involve significant implementation, customization, or modification of our
software that is essential to the functionality of the software, we generally
recognize both the service and related software license revenue over the period
of the engagement, using the percentage-of-completion method. We recognize no
more than 90% of the total contract amount until project acceptance is obtained.
In cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, or where
significant uncertainty about the project completion or customer acceptance
exists, we defer the contract revenue under the completed contract method of
accounting until the uncertainty is sufficiently resolved or the contract is
complete and accepted by the customer. If we were to make different judgments or
use different estimates of the total amount of work we expect to be required to
complete an engagement, the timing of our revenue recognition from period to
period, as well as the related margins, might differ materially from that
reported.

BUSINESS COMBINATIONS AND ACQUIRED INTANGIBLE ASSETS
----------------------------------------------------

We account for our purchases of acquired companies in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
account for the related acquired intangible assets in accordance with SFAS No.
142, "Goodwill and Other Intangible Assets." In accordance with SFAS No. 141, we
allocate the cost of the acquired companies to the identifiable tangible and
intangible assets acquired and liabilities assumed, with the remaining amount
being classified as goodwill. Certain intangible assets, such as "developed
technologies," are amortized to expense over time, while in-process research and
development costs ("IPR&D"), if any, are immediately expensed in the period the
acquisition is completed. Identifiable intangible assets are currently amortized
over a five-year period using the straight-line method.

The majority of entities we acquire do not have significant tangible assets and,
as a result, a significant portion of the purchase price is typically allocated
to intangible assets and goodwill. Our future operating performance will be
affected by the future amortization of intangible assets, potential charges
related to IPR&D for future acquisitions, and potential impairment charges
related to goodwill. Accordingly, the allocation of the purchase price to
intangible assets and goodwill has a significant effect on our future operating
results. The allocation of the purchase price of the acquired companies to
intangible assets and goodwill requires us to make significant estimates and
assumptions, including estimates of future cash flows expected to be generated
by the acquired assets and the appropriate discount rate for these cash flows.
Should different conditions prevail, material write-downs of intangible assets
and/or goodwill could occur.

Under SFAS No. 142, goodwill is no longer subject to amortization. Rather, we
evaluate goodwill for impairment at least annually, during the fourth quarter of
each fiscal year, or more frequently if events and changes in circumstances
suggest that the carrying amount may not be recoverable. Impairment of goodwill
is tested at the reporting unit level by comparing the reporting unit's carrying
value, including goodwill, to the fair value of the reporting unit. The fair
values of the reporting units are estimated using a combination of the income,
or discounted cash flows, approach and the market approach, which utilizes
comparable companies' data. If the carrying amount of the reporting unit exceeds
its fair value, goodwill is considered impaired and we then compare the "implied
fair value" of the goodwill to its carrying amount to determine the impairment
loss, if any.

                                       18
<PAGE>

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS
---------------------------------------------

We assess the impairment of identifiable intangibles, fixed assets and goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Goodwill is reviewed for impairment annually in accordance
with SFAS No. 142. Factors we consider important that could trigger an
impairment review include, but are not limited to, (1) significant
under-performance relative to historical or projected future operating results,
(2) significant changes in the manner of our use of the acquired assets or the
strategy for our overall business, (3) significant negative industry or economic
trends, (4) a significant decline in our stock price for a sustained period, and
(5) our market capitalization relative to net book value. When we determine that
the carrying value of long-lived assets may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a market capitalization approach when the information is
readily available. When the information is not readily available, we use a
projected discounted cash flow method using a discount rate commensurate with
the risk inherent in our current business model to measure any impairment. If we
were to make different judgments or use different estimates our measurement of
any impairment might differ materially from that reported.

INCOME TAXES
------------

On a quarterly basis we evaluate our deferred tax asset balance for
realizability. To the extent we believe it is more likely than not that some or
all of our deferred tax assets will not be realized, we establish a valuation
allowance against the deferred tax assets. As of March 31, 2005 we had recorded
a valuation allowance against 100 percent of our net deferred tax assets due to
uncertainties related to our ability to utilize our deferred tax assets,
primarily consisting of certain net operating losses carried forward and foreign
tax credits, before they expire. This valuation allowance was recorded based on
our estimates of future U.S. and foreign jurisdiction taxable income and our
judgments regarding the periods over which our deferred tax assets will be
recoverable. If we were to make different judgments or used different estimates,
the amount or timing of the valuation allowance recorded might differ materially
from that reported. If actual results differ from these estimates or if we
adjust these estimates in future periods, we may need to reduce the valuation
allowance, potentially resulting in an income tax benefit in the period of
reduction, which could materially affect our financial position and results of
operations.

ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
-------------------------------------------------

We maintain an allowance for doubtful accounts based on a continuous review of
customer accounts, payment patterns and specific collection issues. Where
specific collection issues are identified, we record a specific allowance based
on the amount that we believe will not be collected. For accounts where specific
collection issues are not identified, we record a reserve based on the age of
the receivable and historical collection patterns. If we were to make different
judgments or used different estimates, the timing and amount of our reserve
might differ materially from that reported.

RESTRUCTURING
-------------

We report costs associated with employee terminations and other exit activity in
accordance with SFAS No. 112, "Employers' Accounting for Postemployment Benefits
- an amendment of FASB Statements No. 5 and 43," and SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities." We record employee
termination benefits as an operating expense when the benefit arrangement is
communicated to the employee and no significant future services are required. We
recognize facility lease termination obligations, net of estimated sublease
income, and other exit costs when we have future payment with no future economic
benefit or a commitment to pay the termination costs of a prior commitment.
These termination and other exit costs are reported at fair value.

DETERMINING FUNCTIONAL CURRENCIES FOR THE PURPOSE OF CONSOLIDATION
------------------------------------------------------------------

In preparing our consolidated financial statements, we are required to translate
the financial statements of our international subsidiaries from their functional
currencies, generally the local currency, into U.S. dollars. This process
results in exchange gains and losses, or cumulative translation adjustments,
which are included as a separate part of our net equity under the caption
"Accumulated other comprehensive loss."

Under the relevant accounting guidance, the computation method and treatment of
these translation gains or losses is dependent upon management's determination
of the functional currency of each subsidiary. The functional currency is
determined based on management's judgment and involves consideration of all
relevant economic facts and circumstances affecting the subsidiary. Generally,
the currency in which the subsidiary transacts a majority of its transactions,
including billings, financing, payroll and other expenditures is considered the
functional currency, but any dependency upon the parent and the nature of the
subsidiary's operations is also considered.

Cumulative translation adjustments include any gain or loss associated with the
translation of that subsidiary's financial statements when the functional
currency of any subsidiary is the local currency. However, if the functional
currency were deemed to be the U.S. dollar then any gain or loss associated with
the remeasurement of these financial statements would be included within our
statement of operations. If we dispose of any of our subsidiaries, any
cumulative translation gains or losses would be realized and

                                       19
<PAGE>

recorded within our statement of operations in the period during which the
disposal occurs. If we determine that there has been a change in the functional
currency of a subsidiary to the U.S. dollar, any translation gains or losses
arising after the date of change would be included within our statement of
operations.

Based on our assessment of the factors discussed above, we consider the relevant
subsidiary's local currency to be the functional currency for each of our
international subsidiaries. Accordingly, for the quarters ended March 31, 2005
and 2004 a translation loss of $71 thousand and a translation gain of $1
thousand, respectively, were recorded as adjustments to our accumulated other
comprehensive loss. At March 31, 2005 and June 30, 2004, cumulative translation
losses of approximately $2.5 million and $1.5 million were included as part of
accumulated other comprehensive loss within our balance sheet. These translation
losses have accumulated since we formed our first non-U.S. subsidiary in 1991.
Had we determined that the functional currency of our subsidiaries was the U.S.
dollar, we would have computed a remeasurement gain or loss using a different
method and such gain or loss would have been included in our results of
operations for each of the periods presented.

The magnitude of these gains or losses is dependent upon movements in the
exchange rates of the foreign currencies in which we transact business against
the U.S. dollar and the significance of the assets, liabilities, revenue and
expenses denominated in foreign currencies. These currencies include the euro,
the British pound sterling and Canadian dollar. Any future translation gains or
losses could be significantly higher than those noted in each of the periods
presented. In addition, if we determine that a change in the functional currency
of one of our subsidiaries has occurred at any point in time or we sell or
liquidate one of our subsidiaries, we would be required to include any
translation gains or losses from the date of change in our statement of
operations.

LEGAL CONTINGENCIES
-------------------

From time to time we may be involved in various legal proceedings and claims.
Periodically, but not less than quarterly, we review the status of each
significant matter and assess our potential financial exposure. If the potential
loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated, we accrue a liability for the estimated loss.
Significant judgment is required in both the determination of probability and
the determination as to whether an exposure is reasonably estimable. Due to the
uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending litigation and claims
and may revise our estimates. Any revisions could have a material impact on our
results of operations and financial condition.

RESULTS OF OPERATIONS
---------------------

CONTINUING OPERATIONS
---------------------

The following table sets forth the selected condensed consolidated financial
data, expressed as a percentage of total revenue, for the three and nine months
ended March 31, 2005 and 2004:

                                       20
<PAGE>


                                         Three Months Ended   Nine Months Ended
                                              March 31,            March 31,
                                           --------------       --------------
                                           2005      2004       2005      2004
                                           ----      ----       ----      ----
Revenue:
  License fees and royalties..............   82%       73%        78%       78%
  Services and other......................   18        27         22        22
                                           ----      ----       ----      ----
     Total net revenue                      100       100        100       100
Costs and expenses:
  Cost of license fees and royalties......    1         1          1         2
  Cost of services and other..............   10        13         11        13
  Amortization of identifiable intangibles    1         2        --          2
  Research and development................   18        22         19        21
  Marketing and sales.....................   34        41         38        41
  General and administrative..............   14        16         15        16
  Restructuring charges...................  --          1        --          6
  Patent litigation fees, license and
    settlement............................  --         25        --         14
  Non-cash stock compensation.............  --          2          2         1
                                           ----      ----       ----      ----
     Total costs and expenses.............   78       123         86       116
                                           ----      ----       ----      ----
     Income (loss) from operations........   22       (23)        14       (16)
  Other income (expense), net.............   (1)      --          (1)      --
  Gain on sale of land....................  --        --         --          4
  Interest expense........................   (1)       (2)        (1)       (1)
                                           ----      ----       ----      ----
     Income (loss) before income taxes....   20       (25)        12       (13)
  Income tax provision....................   (1)      --          (1)      --
                                           ----      ----       ----      ----
     Income (loss) from continuing
       operations.........................   19       (25)        11       (13)
  Discontinued operations, net of tax:
     Income from discontinued operations..  --        --         --        --
                                           ----      ----       ----      ----
     Net income (loss)....................   19%      (25)%       11%      (13)%
                                           ====      ====       ====      ====


COMPARISON OF THE THREE AND NINE MONTHS ENDED MARCH 31, 2005 AND 2004

Revenue
-------

The following table presents our license, support and maintenance, and
professional services revenue for the three and nine months ended March 31, 2005
and 2004, and the percentage changes from the prior year.
<TABLE><CAPTION>

                                           Three Months Ended             Nine Months Ended
                                                March 31,                      March 31,
                                     ----------------------------   -----------------------------
                                        2005   % Change     2004       2005   % Change     2004
                                     ----------------------------   -----------------------------
<S>                                 <C>           <C>    <C>       <C>           <C>    <C>
Revenue:
  License fees and royalties.......  $  9,437      55%    $ 6,076   $ 22,878      21%    $ 18,904
  Support and maintenance..........     1,318       9       1,208      3,953      24        3,200
  Professional services and other..       817     (20)      1,023      2,528      12        2,265
                                     --------             -------   --------             --------
  Total net revenue................  $ 11,572      39%    $ 8,307   $ 29,359      20%    $ 24,369
                                     ========             =======   ========             ========
</TABLE>


We sell our adaptive mobility products to enterprises, original equipment
manufacturers, application developers, distributors and valued-added resellers.
No customer accounted for greater than 10% of revenue from continuing operations
for the first nine months of fiscal 2005 or 2004 or for the third quarter of
fiscal 2004. In the third quarter of fiscal 2005, we licensed our Bluetooth
protocol stack and profiles suite to Texas Instruments and more than 10% of our
third quarter revenue was from this single customer. The sale to Texas
Instruments included both license fees and prepaid royalties and we do not
expect revenues from this customer to exceed 10% of total revenue for the
remaining quarter of fiscal 2005 or for any quarter in fiscal 2006.

LICENSE FEES AND ROYALTIES. The majority of our product license revenue consists
of fees related to products licensed to customers on a perpetual basis. Product
license fees can be associated with a customer's licensing of a given software
product for the first time or with a customer's purchase of the right to run a
previously licensed product on additional computing capacity or by additional
users. Our royalty revenue primarily consists of fees related to our device
solutions products customers prepaying or

                                       21
<PAGE>

periodically increasing the number of units they are authorized to use of a
licensed software product and are normally paid on a quarterly basis.

We classify our product offerings into one operating segment, the adaptive
mobility segment, which consists of products and services that extend enterprise
applications to mobile and wireless environments. Our products in the adaptive
mobility segment include enterprise mobility solutions, mobile device solutions
and enterprise database solutions.

The table below presents total net license fees and royalty revenue by product
line and each product line's percentage of license fee and royalty revenue for
the three and nine months ended March 31, 2005 and 2004.
<TABLE><CAPTION>

                                                     Three Months Ended             Nine Months Ended
                                                          March 31,                      March 31,
                                               ----------------------------   ----------------------------
                                                  2005   % Change     2004       2005   % Change     2004
                                               ----------------------------   ----------------------------
<S>                                           <C>          <C>     <C>       <C>           <C>   <C>
License fees and royalties:
Enterprise Mobility Solutions................  $  2,450      (7)%   $ 2,626   $  8,901      11%    $  8,052
      % of license fees and royalty revenue..       26%                 43%        39%                  43%
Mobile Device Solutions......................     5,101     253       1,447      8,524      61        5,281
      % of license fees and royalty revenue..       54%                 24%        37%                  28%
Enterprise Database Solutions................     1,886      (6)      2,003      5,453      (2)       5,571
      % of license fees and royalty revenue..       20%                 33%        24%                  29%
                                               --------             -------   --------             --------
Total net revenue............................  $  9,437      55%    $ 6,076   $ 22,878      21%    $ 18,904
                                               ========             =======   ========             ========
</TABLE>

We sell our enterprise mobility products to corporate customers either directly
or through distributors, valued-added resellers and other channel partners. A
significant portion of our license fee revenue for these products is a result of
our installed customer base deploying additional licenses of OneBridge Mobile
Groupware and sales of this product to new enterprise customers in both Europe
and North America. We believe these customers purchase OneBridge Mobile
Groupware because of its competitive total cost of ownership combined with the
OneBridge platform design, which enables customers to roll out future mobile
applications, such as mobile field service applications on the same devices that
receive e-mail. License fee revenue from our enterprise mobility products
decreased $176 thousand in the third quarter of fiscal 2005 compared to the
third quarter of fiscal 2004 and increased $849 thousand for the nine months
ended March 31, 2005 compared to the nine months ended March 31, 2004. The
decline in license fee revenue for the third quarter was the result of increased
competition in the marketplace and pricing pressure for our OneBridge Mobile
Groupware products. Sales of our security product, OneBridge Mobile Secure, and
our mobile applications were not sufficient to offset this decline. Also during
the third quarter of fiscal 2005, we believe customers delayed their purchase
and deployment of additional seats of our OneBridge Mobile Groupware products,
which contributed to the license fee revenue decline. For the first nine months
of fiscal 2005, the increase in the enterprise mobility product license fee
revenue was the result of several factors, including an OEM sale of our
enterprise XTNDConnect PC product. Additionally, the weakening of the U.S.
dollar compared to the British pound sterling and the euro increased reported
revenue. See "International Revenue" below for further discussion.

We sell our mobile device products either directly or through distributors,
primarily to original equipment manufacturers, original design manufacturers and
semiconductor companies that supply the mobile handset, telematics and other
industries. License fees and royalty revenue from our mobile device products
increased $3.7 million in the third quarter of fiscal 2005 compared to the third
quarter of fiscal 2004 and increased $3.2 million for the first nine months of
fiscal 2005 compared to the first nine months of fiscal 2004. The increase in
revenue for the third quarter of fiscal 2005 was due primarily to a license and
prepaid royalty transaction with Texas Instruments. Additionally, during the
third quarter of fiscal 2005 we reported $1.0 million of revenue for a partial
royalty payment received in March in connection with our lawsuit against Agilent
Technologies Singapore Pte. Ltd. ("Agilent"), a subsidiary of U.S.-based Agilent
Technologies, Inc. and Korea-based Samsung Electronics Co., Ltd. and two Samsung
U.S. affiliates ("Samsung"). In the lawsuit, we sought, among other things, to
recover damages or unpaid royalties due as a result of Samsung's use of our
XTNDAccess(TM) IrDA Software Development Kit (SDK) and XTNDAccess(TM) IrFM SDK
solutions ("Ir Software") in combination with Agilent transceiver products. On
April 27, 2005 we entered into a Binding Memorandum of Understanding that
resolved the litigation with Agilent and Samsung. Under the terms of the
agreement we entered into a royalty-bearing license with Samsung for future use
of Ir Software. In addition to the $1.0 million paid to us in March and a second
payment of $500 thousand received in April 2005, the agreement also provides
that Samsung and Agilent will pay us $1.25 million in May 2005, $2.0 million in
August 2005 and a final installment of $1.0 million in December 2005. We record
revenue resulting from this agreement in our fiscal quarter in which the
payments are received. As a result, we expect to record $1.75 million due in
April and May in the fourth quarter of fiscal 2005, $2.0 million due in August
in the first quarter of fiscal 2006 and $1.0 million due in December in the
second quarter of fiscal 2006. As part of the agreement we also granted Samsung
an option to purchase for a lump sum a two-year license to use our Ir Software
and our XTNDConnect PC software in Samsung cell phones. At the conclusion of the
two-year paid up licenses, Samsung would have the option to continue to license
the software at royalty rates not greater than those set out in the agreement.
On May 6, 2005, Samsung notified us they would not exercise their option for the
two year license. Partially offsetting the increase in revenue resulting from
the sale to Texas Instruments and the Agilent and Samsung agreement was a lower
level of royalties from a European handset manufacturer. Although our products
continue to be licensed by the manufacturer, volumes and unit pricing for the
first three quarters of fiscal 2005 were lower than the amounts for the previous
year's comparable periods. We do not expect revenue from this handset
manufacturer to increase significantly in the final quarter of fiscal 2005.

                                       22
<PAGE>

Royalty revenue generated from sales of our mobile device manufacturer products
has historically fluctuated from quarter to quarter. We expect it will continue
to fluctuate because demand is dependent upon the timing of customer projects,
which fluctuate, and the effectiveness of our customers marketing efforts.
Additionally, fluctuations can occur due to the nature of the arrangements with
customers, which can vary between quarterly royalty payments that become due as
devices are shipped by the manufacturer and initial one-time payments that allow
the customer either unlimited or a capped number of licenses. Finally, we have
experienced late royalty reporting from some of our customers and despite
efforts to coordinate more closely with customers, we anticipate late reporting
could recur in future quarters.

We sell our database products to enterprise customers and software developers
who write applications utilizing our product's data management capabilities.
License revenue from our enterprise database product lines in the third quarter
of fiscal 2005 declined $117 thousand compared to the third quarter of fiscal
2004. The decline is the result of a reduced number of seats purchased by our
developer and reseller customers to support the sales of their applications.
Revenue for the first nine months of fiscal 2005 was $118 thousand lower than
the revenue recorded in the first nine months of fiscal 2004. We anticipate that
fourth quarter revenue for fiscal 2005 will be lower than the revenue for the
fourth quarter of fiscal 2004 for these products because we offered aggressive
price incentives to our customers in last year's fourth quarter that will not be
repeated in the fourth quarter of fiscal 2005.

SUPPORT AND MAINTENANCE. Support and maintenance revenue is derived
predominantly from our enterprise mobility products and represents the ratable
recognition of fees to enroll customers in our software maintenance and support
programs. Enrollment in these programs generally entitles customers to product
enhancements, technical support services and ongoing updates for compatibility
with new mobile devices and mobile device operating systems. These fees are
generally charged annually, and, for software products sold directly to
enterprises, have been in the range of 15% to 20% of the discounted price of the
product. For software products sold through resellers that provide support
directly to their customers, this range has been 11% to 14%.

Support and maintenance revenue increased $110 thousand in the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004 and $753 thousand for
the nine months ended March 31, 2005 compared to the nine months ended March 31,
2004. The increases were the result of customers renewing their support and
maintenance contracts combined with the ratable recognition of revenue from new
support and maintenance contracts sold to customers purchasing our products for
the first time in the third quarter of fiscal 2005. Our support and maintenance
revenue depends on both sales of software licenses and renewals of maintenance
agreements by our existing customers. We expect that our support and maintenance
revenue will increase or decrease as our license revenue increases or decreases.

PROFESSIONAL SERVICES. Professional services revenue is derived primarily from
our work related to our enterprise mobility products and consists of fees for
consulting, product installations, training, and developing custom applications
that utilize our middleware products such as OneBridge Mobile Data Suite.
Professional services revenue is driven by our customers purchasing services to
aid them in developing software solutions for their mobile workforce in both
Europe and North America. Additionally, we derive professional services revenue
as we perform custom modifications or porting of our device manufacturer
solutions for OEM customers.

Professional services revenue declined $206 thousand in the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004 and increased $263
thousand for the nine months ended March 31, 2005 compared to the nine months
ended March 31, 2004. The decline in revenue in the third quarter of fiscal 2005
was the result of customer delays or customer decisions not to proceed with
mobile application projects. The overall higher professional services revenue
for the first three quarters of fiscal 2005 was due to increased customer demand
for services from our enterprise mobility group to build custom applications and
assist with Groupware deployments. Based on the current projects scheduled for
the fourth quarter of fiscal 2005, we expect professional services revenue in
the fourth quarter of fiscal 2005 to be approximately the same as the revenue in
the fourth quarter of fiscal 2004. Revenue from professional services may
fluctuate from quarter to quarter based on customer acceptance criteria included
in contracts, the timing of services engagements and the variability of customer
demand for custom mobile application development.

International Revenue
---------------------

We derive a significant amount of our revenue from sales to customers outside of
the United States, principally from our European-based direct-to-enterprise
sales force and channel partners, overseas original design manufacturers and a
number of international distributors. Based on the region in which the customer
resides, the table below presents total net revenue by region and each region's
percentage of total net revenue for the three and nine months ended March 31,
2005 and 2004.

                                       23
<PAGE>
<TABLE><CAPTION>

                                           Three Months Ended             Nine Months Ended
                                                March 31,                      March 31,
                                     ----------------------------   ----------------------------
                                        2005   % Change     2004       2005   % Change     2004
                                     ----------------------------   ----------------------------
<S>                                 <C>          <C>     <C>       <C>           <C>   <C>
North America....................... $  5,660     57%     $ 3,604   $ 12,326      25%   $  9,894
      % of total net revenue........      49%                 43%        42%                 41%
Europe..............................    3,990     (5)       4,214     13,003       7      12,118
      % of total net revenue........      34%                 51%        44%                 50%
Asia Pacific and Rest of World......    1,922    293          489      4,030      71       2,357
      % of total net revenue........      17%                  6%        14%                  9%
                                     --------             -------   --------            --------
Total net revenue................... $ 11,572     39%     $ 8,307   $ 29,359      20%   $ 24,369
                                     ========             =======   ========            ========
</TABLE>

Sales to North American customers increased $2.1 million in the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004 and increased $2.4
million in the nine months ended March 31, 2005 compared to the nine months
ended March 31, 2004. The sales increase in the third quarter was a result of
the license and prepaid royalty revenue recorded in connection with a sale of
our Bluetooth protocol stack and profile suite to Texas Instruments. Offsetting
this increase somewhat were declines in our North American professional services
revenue and license revenue for both our enterprise mobility and device
manufacturer products. The increase for the nine months of fiscal 2005 was a
result of the revenue from the Texas Instruments sale and revenue in the first
and second quarter of fiscal 2005 from a significant OEM sale of our enterprise
XTNDConnect PC product. This increase was offset somewhat by declines in revenue
from our North American device manufacturer products due to a shift in our
customer base to original design manufacturers located in Asia.

Sales to customers in Europe declined $224 thousand in the third quarter of
fiscal 2005 compared to third quarter fiscal 2004. The decline in sales in the
third quarter was a result of lower revenue for our mobile device solutions
products sold to a major European handset manufacturer. Revenue from our
European customers increased $885 thousand for the first nine months of fiscal
2005 compared to the first nine months of fiscal 2004 and was primarily the
result of the decrease in the strength of the U.S. dollar compared to the euro
and British pound sterling. The declines in the strength of the U.S. dollar
resulted in sales to our European customers invoiced in local currencies being
greater in U.S. dollars than they would have been had the exchange rate remained
constant. Total reported revenue, including revenue from our European customers
invoiced in local currency, grew 39% between the third quarter of fiscal 2005
and the third quarter of fiscal 2004, but had the exchange rate for the U.S.
dollar remained constant between those years, revenue would have increased 36%.
For the nine months ended March 31, 2005 total reported revenue, including
revenue from our European customers invoiced in local currency, grew 20%
compared to the nine months ended March 31, 2004, but had the exchange rate for
the U.S. dollar remained constant between those years, revenue would have
increased only 16%.

Our revenue from Asia Pacific and the rest of the world is primarily from our
sales to original equipment manufacturer and original design manufacturer
customers of our mobile device solution products. We also sell our enterprise
mobility products in these regions through distributors and value-added
resellers. We sell our products in these regions in U.S. dollars and do not have
significant revenue derived from sales in foreign currencies from this region.
In the third quarter of fiscal 2005 revenue from these regions increased $1.4
million compared to the third quarter of fiscal 2004 and increased $1.7 million
for the nine months ended March 31, 2005 compared to the nine months ended March
31, 2004. The increase in the third quarter is the result of the $1.0 million
partial royalty payment for our software products that have been included with
handsets shipped by Samsung Electronics Co., Ltd. Additionally the increase for
the both the third quarter and the first nine months of fiscal 2005 reflect the
continued transition from domestic customers purchasing our device manufacturer
products to Asian-based original design manufacturers and Asian-based handset
manufacturers purchasing these products.

We expect that international sales will continue to represent a substantial
portion of our net revenue in the foreseeable future. We expect the Asian-based
companies in the supply chain for mobile handsets and other mobile devices to
purchase our short range wireless communications products. Additionally, over
the past several years we have made significant investments in our
European-based pre-sales, sales, and technical support teams for our enterprise
mobility products, and for the first nine months of fiscal 2005 these
investments have resulted in both obtaining new customers and deploying
additional licenses to existing customers. We believe the adoption rate of
mobile devices and wireless infrastructure in Europe is more advanced than in
North America and we are benefiting from our significant presence in the
European market. We have also developed an extensive network of resellers in
Europe that market our products, particularly our OneBridge Mobile Groupware
products, to a wide range of companies.

Cost of Revenue
---------------

The following table sets forth our costs of license fees and the royalties,
technical support and professional services for the three and nine months ended
March 31, 2005 and 2004, and dollar and percentage change from the prior year.

                                       24
<PAGE>
<TABLE><CAPTION>

                                                         Three Months Ended             Nine Months Ended
                                                              March 31,                      March 31,
                                                   ----------------------------   ----------------------------
                                                      2005   % Change     2004       2005   % Change     2004
                                                   ----------------------------   ----------------------------
<S>                                               <C>          <C>     <C>       <C>           <C>    <C>
Cost of revenue:
Cost of license fees and royalties...............  $   102      (23)%   $   132   $   296      (17)%   $   358
  % of license fees and royalty revenue..........       1%                   2%        1%                   2%
Cost of technical support services...............      455       (9)        501     1,362      (10)      1,518
  % of support and maintenance revenue...........      35%                  41%       34%                  47%
Cost of professional services and other..........      742       32         561     1,782        6       1,682
  % of professional services and other revenue...      91%                  55%       70%                  74%
                                                   -------              -------   -------              -------
Total cost of revenue............................  $ 1,299        9%    $ 1,194   $ 3,440       (3)%   $ 3,558
                                                   =======              =======   =======              =======
</TABLE>

COST OF LICENSE FEES AND ROYALTIES. The cost of license fees and royalty revenue
consists primarily of royalties for the use of third-party software. The cost of
license fees and royalties remained relatively constant due to the fixed-cost
nature of the licensing agreements we have arranged with third parties. As we
introduce new products into the marketplace such as OneBridge Mobile Secure and
OneBridge Mobile Sales, which incorporate technology from third parties, we
expect the cost of license fees and royalties to increase as we increase the
number of licenses we sell for these new products.

COST OF TECHNICAL SUPPORT SERVICES. The cost of technical support services
consists primarily of compensation and benefits, third-party contractor costs
and related expenses incurred in providing customer support. The increase in
gross margin during the third quarter of fiscal 2005 compared to the prior
year's third quarter was due to an increase in support revenue resulting from
new support and maintenance contracts and renewals of previous contracts. The
gross margin for the third quarter was also improved through cost reductions
achieved by transferring a portion of the technical support service work to
lower cost outsourced contract providers. The same factors resulted in the
improved margins reported for the first nine months of fiscal 2005 compared to
the first nine months of fiscal 2004. We expect increases in our cost of
technical support services as we add staff to our technical services group to
support the deployment of enterprise mobility software solutions to additional
new customers.

COST OF PROFESSIONAL SERVICES. The cost of professional services consists
primarily of compensation and benefits incurred in providing services for
building custom applications, training, consulting, installations and assisting
with customer deployments. Professional services gross margin was 9% for the
third quarter of fiscal 2005 compared to 45% in the third quarter of fiscal
2004. The lower gross margin was due to lower professional services revenue
caused by customer delays or customer decisions not to proceed with expected
projects combined with the increased staffing of the professional services
organization in anticipation of higher demand for our services. The decline in
margin for the first nine months of fiscal 2005 compared to the first nine
months of fiscal 2004 was the result of the low margin achieved in the third
quarter of fiscal 2005. In the previous two quarters the gross margin had
improved through increased professional services revenues. Additionally, in the
first quarter of fiscal 2005 we substantially completed a significant
professional services engagement for a field services application that
effectively optimized the resources of our European professional services
organization and was completed at a gross margin higher than we have
historically experienced.

We expect to report professional services revenue in the fourth quarter of
fiscal 2005 of approximately the same amount as we achieved in the third quarter
of fiscal 2005. However, given the high level of fixed costs associated with the
professional services group, an inability to generate sufficient services
revenue to absorb these fixed costs could lead to lower or negative gross
margins. We have also experienced fluctuations in our professional services
revenue on a quarterly basis due to the timing of revenue recognition, which may
be delayed due to specific contract terms. We expect our professional services
revenue will continue to experience these fluctuations in the future.

AMORTIZATION OF IDENTIFIABLE INTANGIBLES
----------------------------------------

The following table presents our amortization of identifiable intangibles for
the three and nine months ended March 31, 2005 and 2004 and the percentage
change from the prior year.
<TABLE><CAPTION>

                                                         Three Months Ended             Nine Months Ended
                                                              March 31,                      March 31,
                                                   ----------------------------   ----------------------------
                                                      2005   % Change     2004       2005   % Change     2004
                                                   ----------------------------   ----------------------------
<S>                                               <C>          <C>      <C>       <C>           <C>    <C>
Amortization of identifiable intangibles........   $   43      (69)%     $ 138     $  161       (67)%   $ 482
      as a % of net revenue.....................       1%                   2%       -- %                  2%
</TABLE>


Amortization decreased in the third quarter and the first nine months of fiscal
2005 compared to the third quarter and the first nine months of fiscal 2004 as a
result of the intangibles related to our acquisition of Rand Software
Corporation and Oval (1415) Limited becoming fully amortized in the second
quarter of fiscal 2004 and the first quarter of fiscal 2005, respectively.

For the remaining quarter of fiscal 2005, we expect amortization of identifiable
intangibles to remain consistent with the amount incurred in the third quarter.

                                       25
<PAGE>

RESEARCH AND DEVELOPMENT EXPENSES
---------------------------------

The following table presents our research and development expenses for the three
and nine months ended March 31, 2005 and 2004 and the percentage change from the
prior year.
<TABLE><CAPTION>

                                         Three Months Ended             Nine Months Ended
                                              March 31,                      March 31,
                                   ----------------------------   ----------------------------
                                      2005   % Change     2004       2005   % Change     2004
                                   ----------------------------   ----------------------------
<S>                                <C>         <C>     <C>        <C>          <C>    <C>
Research and development.........   $ 2,081     14%     $ 1,824    $ 5,702      14%    $ 4,988
      as a % of net revenue......       18%                 22%        19%                 21%
</TABLE>


Research and development ("R&D") expenses consist of compensation and benefits
for our software developers and development support personnel, including
software programmers, testing and quality assurance personnel, product managers
and writers of technical documentation, such as product manuals and installation
guides. These expenses also include consulting costs, facility and
communications costs, costs for software development tools and equipment, and
the cost of training our outsourced quality assurance and technical support
service provider. During the periods presented above, all software development
costs have been expensed.

R&D expenses increased $257 thousand in the third quarter of fiscal 2005
compared to the third quarter of fiscal 2004. The spending increases were the
result of $149 thousand of employee compensation increases incurred to retain
our current R&D team as well as replace and recruit new R&D team members. We
also incurred $98 thousand in higher costs related to retaining additional
contract R&D services to assist with quality assurance work and to advance
product development. R&D expenses increased $714 thousand for the nine months
ended March 31, 2005 compared to the nine months ended March 31, 2004. This
increase was a result of the higher second and third quarter spending for the
reasons outlined above as spending in the first quarter was relatively unchanged
from the previous year's first quarter. We expect research and development costs
to increase in the remaining quarter of fiscal 2005 as we add additional
resources to complete our planned new features and functionality and enhanced
usability and stability of our existing products. We expect to incur these
expenses through the recruiting and hiring of additional employees in our
engineering, quality assurance and technical support departments.

MARKETING AND SALES EXPENSES

The following table presents our marketing and sales expenses for the three and
nine months ended March 31, 2005 and 2004 and the percentage change from the
prior year.
<TABLE><CAPTION>

                                         Three Months Ended             Nine Months Ended
                                              March 31,                      March 31,
                                   ----------------------------   ----------------------------
                                      2005   % Change     2004       2005   % Change     2004
                                   ----------------------------   ----------------------------
<S>                                <C>         <C>     <C>        <C>          <C>    <C>
Marketing and sales.............    $ 3,938     17%     $ 3,371    $11,145      11%    $10,043
  as a % of net revenue.........        34%                 41%        38%                 41%
</TABLE>


Marketing and sales expenses consist primarily of salaries for our sales, inside
sales, marketing and technical sales staff, sales-related commissions and
bonuses paid to our direct sales force, commissions to third-party distributors
and other marketing-related expenses including trade shows, promotional
materials, public relations and advertising.

Marketing and sales expenses increased $567 thousand in the third quarter of
fiscal 2005 compared to the third quarter of fiscal 2004. The increased spending
was primarily the result of $551 thousand of higher third-party commissions we
accrued for sales support provided by our agents for sales of our IrDA and
Bluetooth products. Additionally, we incurred $86 thousand of severance costs
related to the termination of our former Chief Marketing Officer. These
increases were offset somewhat by approximately $130 thousand of reductions to
our promotional expenses. Marketing and sales expenses increased $1.1 million
for the nine months ended March 31, 2005 compared to the nine months ended March
31, 2004. The increased spending was primarily the result of $657 thousand in
increased third party commissions. Additionally, we incurred $220 thousand of
higher salaries, commissions and related benefits for our sales and marketing
organization. These higher costs were the result of higher levels of sales as
well as retaining more experienced sales leadership and increasing the
experience level of the people who are accountable for the sales of our
enterprise mobility solutions. We also incurred $85 thousand of costs associated
with the termination of the Vice President of North American Sales in the first
quarter of fiscal 2005, $177 thousand of increased bad debt expense and $112
thousand of travel and entertainment expenses in the first nine months of fiscal
2005 compared to the first nine months of fiscal 2004. Offsetting these spending
increases somewhat was approximately $380 thousand of reduced spending on
promotional expenses for the first nine months of fiscal 2005 compared to the
first nine months of fiscal 2004.

We expect marketing and sales expenses to increase in the remaining quarter of
fiscal 2005 as a result of an expected increase in third party commissions and
commissions to our sales force caused by both an expected increase in revenue
and changes to our sales commission plans that increase the commission rates as
sales representatives increase cumulative sales totals in subsequent quarters
and approach annual quota targets.

                                       26
<PAGE>

GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------

The following table presents our general and administrative expenses for the
three and nine months ended March 31, 2005 and 2004 and the percentage change
from the prior year.
<TABLE><CAPTION>

                                         Three Months Ended             Nine Months Ended
                                              March 31,                      March 31,
                                   ----------------------------   ----------------------------
                                      2005   % Change     2004       2005   % Change     2004
                                   ----------------------------   ----------------------------
<S>                                <C>         <C>     <C>        <C>          <C>    <C>
General and administrative.......   $ 1,642     21%     $ 1,355    $ 4,372      9%     $ 4,004
  as a % of net revenue..........       14%                 16%        15%                 16%
</TABLE>


General and administrative expenses primarily consist of salaries and other
personnel costs for our executive management, finance and accounting, management
information systems, human resources and other administrative groups. Other
expenses included in general and administrative expenses are fees paid for
outside legal and accounting services, directors' and officers' insurance costs
and SEC compliance and NASDAQ listing fees.

General and administrative expenses increased by $287 thousand in the third
quarter of fiscal 2005 compared to the third quarter of fiscal 2004. The
increase was a result of $113 thousand higher legal expenses and professional
fees in the third quarter of fiscal 2005 compared to fiscal 2004. In addition,
we recorded $75 thousand for a management bonus program implemented in fiscal
2005 based on achieving targeted profitability levels. General and
administrative expenses increased $368 thousand in the first nine months of
fiscal 2005 compared to the first nine months of fiscal 2004 primarily due to
the accrual of $268 thousand of expenses for our management bonus program in the
first nine months of fiscal 2005.

RESTRUCTURING CHARGES

The following table presents our restructuring charges for the three and nine
months ended March 31, 2005 and 2004 and the percentage change from the prior
year.
<TABLE><CAPTION>

                                         Three Months Ended             Nine Months Ended
                                              March 31,                      March 31,
                                   ----------------------------   ----------------------------
                                      2005   % Change     2004       2005   % Change     2004
                                   ----------------------------   ----------------------------
<S>                                <C>         <C>     <C>        <C>          <C>    <C>
Restructuring charges............   $   --      NM*%    $  117     $   --       NM*%   $ 1,446
  as a % of net revenue..........       -- %                1%         -- %                 6%
</TABLE>
      *  percentage change not meaningful

We did not incur restructuring charges in the third quarter of fiscal 2005 or
the nine months ended March 31, 2005. The restructuring costs incurred in the
first nine months of fiscal 2004 consisted primarily of severance, benefits, and
other costs related to the resignation of Steven Simpson, our former President
and Chief Executive Officer, the resignation of Karla Rosa, our former Chief
Financial Officer, and the termination of eighteen employees from our marketing
and sales, research and development, administration and operations groups. Of
the terminated employees, fourteen were located in the United States and four
were in Europe. The restructuring charge for the three and nine months ended
March 31, 2004 included $55 thousand and $556 thousand of non-cash stock-based
compensation resulting from the accelerated vesting of employee stock options.
As of March 31, 2005 all restructuring charges had been paid.

PATENT LITIGATION FEES, LICENSE AND SETTLEMENT

The following table presents our patent litigation fees, license and settlement
expense for the three and nine months ended March 31, 2005 and 2004 and the
percentage change from the prior year.
<TABLE><CAPTION>

                                             Three Months Ended             Nine Months Ended
                                                  March 31,                      March 31,
                                       ----------------------------   ----------------------------
                                          2005   % Change     2004       2005   % Change     2004
                                       ----------------------------   ----------------------------
<S>                                    <C>         <C>     <C>        <C>          <C>    <C>
Patent litigation fees, license and
settlement...........................   $   --      NM*%    $ 2,080    $   --       NM*%   $ 3,425
  as a % of net revenue..............       -- %                25%        -- %                14%
</TABLE>
      *  percentage change not meaningful

In April 2002, Intellisync Corporation ("Intellisync"), formerly known as
Pumatech, Inc., filed a patent infringement action against us in the U.S.
District Court in Northern California. The action alleged that our XTNDConnect
server and desktop synchronization products infringed on seven of Intellisync's
synchronization-related patents. We incurred legal fees and other related costs
in connection with defending this action. On March 4, 2004, we mutually agreed
with Intellisync to settle the patent infringement lawsuit. In connection with
the settlement, we made a one-time payment to Intellisync in the third quarter
of fiscal 2004 of $2.0 million and received a license to certain Intellisync
patents. This payment covers estimated past and future royalties on revenue

                                       27
<PAGE>

related to our products shipped and covered under Intellisync's licensed
patents. Both companies have agreed there will be no further patent litigation
actions for a period of five years and that Intellisync will release all of our
customers from any claims of infringement relating to their purchase and future
use of our products. The expenses incurred during the third quarter of fiscal
2004 and the nine months ended March 31, 2004 were for legal and other costs to
defend against the lawsuit.

NON-CASH STOCK-BASED COMPENSATION

The following table presents our non-cash stock-based compensation expense for
the three and nine months ended March 31, 2005 and 2004 and the percentage
change from the prior year.
<TABLE><CAPTION>

                                             Three Months Ended             Nine Months Ended
                                                  March 31,                      March 31,
                                       ----------------------------   ----------------------------
                                          2005   % Change     2004       2005   % Change     2004
                                       ----------------------------   ----------------------------
<S>                                    <C>         <C>     <C>        <C>          <C>    <C>
Non-cash stock-based compensation....   $   38     (78)%    $  169     $  477       42%    $   337
      as a % of net revenue..........      -- %                 2%         2%                   1%
</TABLE>

In fiscal 2004, we changed the compensation for members of our Board of
Directors to include annual grants of restricted stock. Additionally, we made
restricted stock grants to some of our employees in October 2003. Stock-based
compensation expense for fiscal 2005 reflects the charges related to amortizing
the related compensation expense for these grants over the period the stock
vests. Also included for the nine months ended March 31, 2005 is $214 thousand
of compensation expense for the issuance of stock options to employees with an
exercise price below the fair market value of our stock on the date of grant. In
the second quarter of fiscal 2005, our Employee Stock Purchase Plan was
terminated. The Board of Directors approved a grant of options to employees that
had been participating in the plan to replace the number of shares and the
purchase price the employees expected under the terms of the terminated plan.
Stock-based compensation expense for fiscal 2004 consists of compensation
amortization related to the restricted stock grants described above and for the
nine months ended March 31, 2004 also includes $55 thousand of expense related
to a change in the terms of our 1998 Director Option Plan.

Stock-based compensation decreased in the third quarter of fiscal 2005 compared
to the same quarter of fiscal 2004 because the restricted stock grants to
employees fully vested in the second quarter of fiscal 2005. In the first nine
months of fiscal 2005 stock-based compensation expense increased compared to the
same period of fiscal 2004 due primarily to the expense related to issuing the
below fair market value stock options to employees in fiscal 2005. This increase
was partially offset by a decrease in expense related to the employee restricted
stock grants becoming fully vested in the second quarter of fiscal 2005.

The initial grants made to directors vested in the second quarter of fiscal
2005; however, amortization expense related to additional annual grants of
restricted stock made to our directors will be recorded in future quarters. We
expect these costs to be approximately $38 thousand for the remaining quarter of
fiscal 2005. We do not expect any future grants of options to employees with
exercise prices below fair market value on the date of grant.

OTHER INCOME (EXPENSE), NET
---------------------------

The following table presents our other income and expense for the three and nine
months ended March 31, 2005 and 2004 and the percentage change from the prior
year.
<TABLE><CAPTION>

                                                Three Months Ended             Nine Months Ended
                                                     March 31,                      March 31,
                                          ----------------------------   ----------------------------
                                             2005   % Change     2004       2005   % Change     2004
                                          ----------------------------   ----------------------------
<S>                                       <C>         <C>     <C>        <C>          <C>    <C>
Foreign currency exchange gain (loss)...   $ (167)     271%    $  (45)    $ (380)       *%    $  (17)
Interest income.........................        5      (64)        14         16      (60)        40
Net rental income.......................       94      100         47        223       59        140
Other net income (expense), net.........      (38)     217        (12)       (53)     (55)      (117)
                                           ------              ------     ------              ------
   Total other income (expense), net....   $ (106)       *%    $    4     $ (194)    (522)%   $   46
                                           ======              ======     ======              ======
</TABLE>
   *  percentage change not meaningful


Other income (expense) consists primarily of foreign currency exchange gains or
losses related to the mark-to-market of intercompany payables denominated in
non-U.S. currencies in periods of currency volatility, rental income generated
from subleasing the excess space at our headquarters facility and interest
income earned on cash, cash equivalents and short-term investment balances.

We recognized a foreign currency exchange loss in the third quarter of fiscal
2005 as a result of changes in the exchange rate for the euro, Canadian dollar
and the British pound sterling as we translate temporary intercompany payables
from our foreign subsidiaries denominated in non-U.S currencies to our
functional currency of US dollars. This loss increased in the third quarter of
fiscal 2005 compared to the same period in fiscal 2004 because we did not enter
into foreign currency forward contracts to manage the fluctuations in currency
values during the third quarter of fiscal 2005. In the first and second quarters
of fiscal 2005 we entered

                                       28
<PAGE>

into foreign currency contracts and the foreign currency losses recorded were
primarily due to our intercompany balance forecasts differing from our
projections in periods of high currency volatility. Our foreign currency
exchange loss increased in the nine months ended March 31, 2005 compared to the
same period in the prior year because we recognized a foreign currency gain in
the first quarter of fiscal 2004 as a result of the decrease in the strength of
the U.S. dollar at a time when we were not entering into foreign currency
contracts. For additional information on our foreign currency exposure see Item
3 of this Form 10-Q,"Quantitative and Qualitative Disclosure About Market Risk."
The amount of any foreign currency exchange gain or loss for the remaining
quarter of fiscal 2005 will depend upon currency volatility, our decisions to
purchase foreign currency forward contracts, the amount of our intercompany
balances and our ability to accurately predict such balances.

Interest income decreased in the third quarter and the first nine months of
fiscal 2005 compared to the same periods in fiscal 2004 as a result of lower
average cash balances in fiscal 2005 compared to fiscal 2004. We expect interest
income to increase slightly in the fourth quarter of fiscal 2005 due to an
increase in our cash balance.

The increase in net rental income in the third quarter of fiscal 2005 and for
the nine months ended March 31, 2005 compared to the same three and nine month
periods ended March 31, 2004 was due primarily to an increase in rent received
as a result of our leasing additional unused space at our headquarters facility
in Boise, Idaho.

The decrease in other expense in the first three quarters of fiscal 2005
compared to the same period last year was due primarily to a decrease in sales
and use tax expense that was recorded in the first quarter of fiscal 2004 in
connection with a sales tax audit.

INTEREST EXPENSE
----------------

The following table presents our interest expense for the three and nine months
ended March 31, 2005 and 2004 and the percentage change from the prior year.
<TABLE><CAPTION>

                                                Three Months Ended             Nine Months Ended
                                                     March 31,                      March 31,
                                          ----------------------------   ----------------------------
                                             2005   % Change     2004       2005   % Change     2004
                                          ----------------------------   ----------------------------
<S>                                       <C>         <C>     <C>        <C>          <C>    <C>
Interest expense........................   $  126      (9)%    $  139     $  392       23%    $  318
  as a % of net revenue.................       1%                  2%         1%                  1%
</TABLE>

Interest expense consists primarily of interest associated with the
sale-and-leaseback of our headquarters land and building, which is accounted for
as a financing transaction, and interest paid on the term debt that we assumed
in connection with our acquisition of ViaFone in August 2002. Interest expense
decreased slightly in the third quarter of fiscal 2005 compared to the same
quarter in the prior year because we made the final payment on our term debt in
February 2005. Interest expense increased in the first nine months of fiscal
2005 compared to the first nine months of fiscal 2004 primarily as a result of
entering into the sale-and-leaseback agreement at the end of the first quarter
of fiscal 2004.

INCOME TAX PROVISION
--------------------

The following table presents our income tax provision for the three and nine
months ended March 31, 2005 and 2004 and the percentage change from the prior
year.
<TABLE><CAPTION>

                                                Three Months Ended             Nine Months Ended
                                                     March 31,                      March 31,
                                          ----------------------------   ----------------------------
                                             2005   % Change     2004       2005   % Change     2004
                                          ----------------------------   ----------------------------
<S>                                       <C>         <C>     <C>        <C>          <C>    <C>
Income tax provision...................    $  121     1244%    $    9     $  153       595%   $   22
  as a % of income (loss) before
  income taxes.........................        5%                   -- %         4%                (1)%
</TABLE>

We recorded an income tax provision in the third quarter and first three
quarters of fiscal 2005 and 2004 consisting primarily of foreign withholding
taxes for which no credit is currently available against U.S. taxes due to our
cumulative net loss position. We expect to record an income tax provision in the
remaining quarter of fiscal 2005 related primarily to payments of foreign
withholding taxes.

                                       29
<PAGE>

DISCONTINUED OPERATIONS
-----------------------

The following summarizes the results of discontinued operations:
<TABLE><CAPTION>

                                                Three Months Ended             Nine Months Ended
                                                     March 31,                      March 31,
                                          ----------------------------   ----------------------------
                                             2005   % Change     2004       2005   % Change     2004
                                          ----------------------------   ----------------------------
<S>                                       <C>         <C>     <C>        <C>          <C>    <C>
Net revenue............................    $  --       NM*%    $   --     $  --        NM*%   $  169
Income from discontinued operations,
  net of tax...........................    $  --       NM*%    $   --     $  --        NM*%   $   88
</TABLE>
      *  percentage change not meaningful


Our revenue from discontinued operations for the nine months ended March 31,
2004 consisted of revenue from our discontinued infrared hardware business, for
which we adopted a formal exit plan in the first quarter of fiscal 2003.
Although our infrared hardware business was discontinued in the first quarter of
fiscal 2003, we continued to report revenue throughout fiscal 2003 as customers
continued to place last-time orders and we reported revenue in the first and
second quarters of fiscal 2004 as we shipped final orders.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES

                                                     Nine Months Ended March 31,
                                                     ---------------------------
                                                        2005             2004
                                                     ---------------------------
Net cash provided (used) by
  operating activities............................    $ 2,552          $(2,767)



Net cash provided by operating activities in the first nine months of fiscal
2005 was primarily the result of our net income plus the adjustments to net
income for non-cash expenses offset by cash invested in accounts receivable of
$985 thousand and cash used to pay accounts payable and accrued expenses of $855
thousand. Included in net income were non-cash charges for depreciation and
amortization of $671 thousand, which declined from the prior year primarily as a
result of assets becoming fully depreciated without replacement purchases. Also
included were $477 thousand of non-cash charges for stock-based compensation
related to the amortization of restricted stock grants and grants of stock
options with exercise prices below the then current fair market value.

Net cash used by operating activities in the first nine months of fiscal 2004
was primarily the result of our net loss of $3.1 million. Included in the net
loss was a non-cash gain on the sale of land of approximately $1.1 million.
Other non-cash charges included depreciation and amortization of $1.2 million
and non-cash charges for stock-based compensation of $893 thousand related to
the termination of employees, including the former Chief Executive Officer and
Chief Financial Officer. In addition to these non-cash charges, $639 thousand
was used to pay accounts payable and accrued expenses.

Accounts receivable, net of allowances, increased from $6.8 million at June 30,
2004 to $7.8 million at March 31, 2005. The increase in accounts receivable was
a result of the higher level of sales we experienced in the first three quarters
of fiscal 2005 offset by a decrease in the average number of days an invoice is
outstanding before receipt of payment, which we refer to as "days sales
outstanding." Our days sales outstanding for the quarter ended March 31, 2005
was approximately 61 days, compared to 80 days for the quarter ended June 30,
2004. The decrease in days sales outstanding during the third quarter was
primarily due to the invoicing and collection of the Texas Instruments account
receivable during the quarter. We expect our days sales outstanding to return to
more historical levels in the range of 65 to 75 days. We expect that our
accounts receivable will increase in the final quarter of fiscal 2005 as we will
return to our historical pattern where a significant portion of our revenue is
invoiced in the last month of the quarter and we do not receive payment until
the following quarter. Accounts receivable may also increase in the future if
net revenue from international customers becomes a higher percentage of our net
revenue as these customers have historically been slower in paying invoiced
amounts.

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES

                                                     Nine Months Ended March 31,
                                                     ---------------------------
                                                        2005             2004
                                                     ---------------------------
Net cash provided (used) by investing activities...   $ (667)          $ 1,273


Net cash used by investing activities in the first nine months of fiscal 2005
was primarily related to expenditures for software and other expenses related to
a project to upgrade our accounting and transactional infrastructure. We plan to
incur aggregate capital expenditures of approximately $100 thousand during the
fourth quarter of fiscal 2005, primarily for software, system improvements and
personal computers.

Net cash provided by investing activities in the first nine months of fiscal
2004 was primarily the result of the proceeds from the sale of land adjacent to
our Boise headquarters building. Partially offsetting these proceeds was cash
used for tenant improvements we were required to make to the subleased portion
of the unused space at our headquarters building pursuant to the sublease
agreements.

                                       30
<PAGE>

NET CASH PROVIDED BY FINANCING ACTIVITIES

                                                     Nine Months Ended March 31,
                                                     ---------------------------
                                                        2005             2004
                                                     ---------------------------
Net cash provided by financing activities..........   $   623          $ 5,698


Net cash provided by financing activities in the first nine months of fiscal
2005 was primarily the result of $966 thousand we received from the issuance of
common stock under our employee stock plans. These cash proceeds were partially
offset by $343 thousand of payments made on term debt and capital leases assumed
as part of our acquisition of ViaFone in 2002.

Net cash provided by financing activities in the first nine months of fiscal
2004 was generated primarily from the cash received in the sale-and-leaseback of
our headquarters facility. On September 26, 2003, we closed the
sale-and-leaseback transaction and received proceeds of $4.8 million, netting
$4.6 million after deducting transaction costs. As part of the agreement, we
entered into a 10-year master lease for the building with annual payments of
approximately $442 thousand.

On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank ("SVB") and renewed and restructured this agreement effective as of
August 31, 2004. Under this agreement we can borrow up to $2.5 million in the
form of a demand line of credit. Our borrowing capacity is limited to 80% of
eligible accounts receivable balances and is secured by certain of our assets.
Interest on any borrowings will be paid at prime. The line of credit agreement
requires us to maintain certain financial ratios and expires in August 2006. We
are in compliance with all financial covenants. There is no outstanding balance
on this facility at March 31, 2005.

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with SVB. We restructured that debt into a term loan
due in 30 equal monthly installments bearing interest at 8%. The term loan was
fully repaid at March 31, 2005.

We believe that our existing working capital, our borrowing capacity and the
funds we expect to generate from our operations will be sufficient to fund our
anticipated working capital and capital expenditure requirements for the next
twelve months. We cannot be certain, however, that our underlying assumed levels
of revenue and expenses will be accurate. If our operating results were to fail
to meet our expectations or if accounts receivable, or other assets were to
require a greater use of cash than is currently anticipated, we could be
required to seek additional sources of liquidity. If we were required to obtain
additional financing to fund future operations, sources of capital may not be
available on terms favorable to us, if at all.

We intend to continue to pursue strategic acquisitions of, or strategic
investments in, companies with complementary products, technologies or
distribution networks in order to broaden our adaptive mobility product
offerings. We currently have no commitments or agreements regarding any material
transaction of this kind. At some point in the future we may require additional
funds for either operating or strategic purposes and may seek to raise
additional funds. These sources of liquidity could include raising funds through
public or private debt financing, borrowing against our line of credit or
offering additional equity securities. If additional funds are raised through
the issuance of equity securities, substantial dilution to our stockholders
could result. In the event additional funds are required, adequate funds may not
be available when needed or may not be available on favorable terms, which could
have a negative effect on our business and results of operations.

OFF-BALANCE SHEET ARRANGEMENTS
------------------------------

As part of our on-going business, we do not participate in transactions that
generate relationships with unconsolidated entities or financial partnerships,
such as entities often referred to as structured finance or special purpose
entities ("SPEs"), which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited proposes. As of March 31, 2005, we were not involved in any
unconsolidated SPE transactions.


COMMITMENTS AND CONTRACTUAL OBLIGATIONS
---------------------------------------

We currently lease office space at our locations in Boise, Idaho; Herrenberg,
Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol, England;
San Diego, California; American Fork, Utah; and `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $167 thousand
and $153 thousand for the three months ended March 31, 2005 and 2004,
respectively. For the nine months ended March 31, 2005 and 2004, operating lease
expense was $467 thousand and $559 thousand, respectively.

On September 26, 2003, we completed a transaction with Hopkins Financial
Services for the sale-and-leaseback of our headquarters building and land in
Boise, Idaho. Because we have a 10-year option to repurchase the building and
land at a price of $5.1 million and we sublet more than a small portion of the
building space, the sale-and-leaseback was recorded as a financing transaction
and is shown as $4.8 million of long-term debt on our balance sheet at March 31,
2005. As part of the agreement, we entered into a 10-year master lease for the
building with annual lease payments equal to 9.2% of the sale price, or
approximately $442 thousand. We are also obligated to pay all expenses
associated with the building during our lease, including the costs of property
taxes, insurance, operating expenses and repairs.

                                       31
<PAGE>

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with SVB. We restructured that debt into a term loan
due in 30 equal monthly installments bearing interest at 8%. The term loan had
been fully repaid at March 31, 2005.

Our minimum future contractual commitments associated with our operational
restructuring, indebtedness and lease obligations as of March 31, 2005 are as
follows:

<TABLE><CAPTION>
                                                                 Year Ending June 30,
                                             ------------------------------------------------------------
                                              2005     2006     2007     2008     2009 Thereafter  Total
                                             ------------------------------------------------------------
<S>                                          <C>      <C>      <C>      <C>      <C>      <C>      <C>
Monthly payments pursuant to building
      sale-and-leaseback .................   $  110   $  442   $  442   $  442   $  442   $1,875   $3,753
Capital leases (1) .......................        7       11        6     --       --       --         24
Operating leases .........................      161      566      443      328      276      470    2,244
Post-retirement benefits (1) (2) .........       34       17       17       17       17       67      169
                                             ------------------------------------------------------------
                                             $  312   $1,036   $  908   $  787   $  735   $2,412   $6,190
                                             ============================================================
</TABLE>

(1)   These amounts are reported on the balance sheet as liabilities.
(2)   Fiscal 2005 includes $17 thousand of current commitments included in
      accrued expenses on the balance sheet.

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES

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

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically with
respect to the Canadian dollar, euro and British pound sterling, to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. Although these instruments are subject to
fluctuations in value, these fluctuations are generally offset by fluctuations
in the value of the underlying asset or liability being managed, resulting in
minimal net exposure for us. These forward contracts do not qualify for hedge
accounting under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", and, as such, the contracts are recorded in the
consolidated balance sheet at fair value. We report a net currency gain or loss
based on changes in the fair value of forward contracts combined with changes in
fair value of the underlying asset or liability being managed. The success of
these currency activities depends upon estimation of intercompany balances
denominated in various foreign currencies. To the extent that these forecasts
are overstated or understated during periods of currency volatility, we could
experience unanticipated currency gains or losses. When determining whether to
enter into foreign currency forward contracts, we also consider the impact that
the settlement of such forward contracts may have on our cash position. To
eliminate a potential cash settlement of a forward position we may, from time to
time, decide not to use foreign currency forward contracts to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. In a period where we do not enter into foreign
currency forward contracts, we could experience significant non-cash currency
gains or losses if the value of the U.S. dollar strengthens or weakens
significantly in relation to the value of the foreign currencies. We had no
forward contracts in place as of March 31, 2005. As of March 31, 2004, we had
forward contracts with a nominal value of $9.35 million in place with respect to
the euro, Canadian dollar and British pound sterling, each of which matured
within 30 days. We recognized net currency exchange losses of approximately $167
thousand and $380 thousand for the three and nine months ended March 31, 2005
and net currency exchange losses of approximately $45 thousand and $17 thousand
for the three and nine months ended March 31, 2004.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND THE MARKET PRICE OF OUR STOCK
------------------------------------------------------------------------

WE HAVE A RECENT HISTORY OF OPERATING PROFITS, BUT A PRIOR HISTORY OF OPERATING
LOSSES. DECLINES IN OUR QUARTERLY REVENUE OR OTHER FACTORS COULD RETURN THE
COMPANY TO REPORTING OPERATING LOSSES IN FUTURE QUARTERS.

For the past few quarters, we have reported income from operations; however, for
the period from the third quarter of our fiscal year 1999 through our third
quarter of fiscal year 2004, we have reported operating losses. These losses
have been the result of devoting significant financial resources to defense of a
patent infringement suit, restructuring costs, and research and development and
marketing and sales cost for our adaptive mobility software products. We intend
to continue to devote significant financial resources to product development and
to marketing and sales activities. Our ability to maintain income from
operations and our ability to reach positive cash flow from operations in
subsequent periods will depend on a number of factors, including:

o   our ability to generate sufficient revenue and control expenses;
o   buying patterns of our enterprise, application developer and original
    equipment manufacturer customers;
o   changes in customer demand for our products;

                                       32
<PAGE>

o   the timing of customer orders, which can be influenced by fiscal year-end
    buying patterns, seasonal trends or general economic conditions;
o   announcements or introductions of new products or services by our
    competitors;
o   delays in our development and introduction of new products and services;
o   changes in our pricing policies as a result of increased competition;
o   the mix of distribution channels through which we sell our products;
o   the market acceptance of our new and enhanced products and the products of
    our customers that are application developers and original equipment
    manufacturers;
o   the emergence of new technologies or industry standards;
o   normal seasonality that we typically experience in the first quarter of our
    fiscal year; and
o   a shift in the mix of professional services and licensing revenue, which may
    result in fluctuations in our gross margin.

WE ARE ADVANCING OUR ENTERPRISE MOBILITY SOLUTIONS PRODUCT LINE, WHICH CURRENTLY
DERIVES ITS REVENUE PRIMARILY FROM PERSONAL INFORMATION MANAGEMENT AND E-MAIL
APPLICATIONS, BY INCREASING THE EMPHASIS ON MOBILE APPLICATIONS, INCLUDING LINE
OF BUSINESS APPLICATIONS FOR FIELD SERVICE, SALES FORCE AUTOMATION AND OTHER
CUSTOM APPLICATIONS. IF WE ARE UNABLE TO COMPLETE THIS PROGRESSION, OUR
OPERATING RESULTS COULD BE HARMED.

    o   CHANGES IN OUR PARTNERING AND GO-TO-MARKET STRATEGY. To effectively
        compete in mobile line of business applications we need to partner with
        independent software vendors and system integrators that have knowledge
        of the specific industries and workflows for the targeted vertical
        applications. One of our core capabilities is our knowledge of how
        mobile access to corporate information can impact and improve the
        productivity of mobile workers. To achieve a successful partnering
        arrangement we must attract the business interests of these prospective
        partners and coordinate the efforts of our marketing, sales and
        professional services organizations. These tasks are complicated and
        involve many people and processes. If we fail to attract these partners
        or effectively coordinate these efforts we will not be able to broaden
        the acceptance of our mobile middleware platform into other applications
        and would remain dependent on revenue from PIM and e-mail applications,
        which we believe could be subject to price erosion in the marketplace.

    o   CHANGES IN THE MAKE-UP OF OUR EXECUTIVE TEAM. We believe we have taken
        steps to strengthen our management team and have added people with the
        skills and experience to lead the Company through the progression
        described above. Several members of our executive team, including our
        Chief Financial Officer, Vice President of Human Resources,, Vice
        President of Mobile Device Solutions and our Vice President of Research
        and Development have joined the company within the past twenty-four
        months. Additionally, several members of the management team have
        resigned, including the Vice President of North American Sales, Vice
        President of Marketing and the former Vice President of Research and
        Development. As a result, the executive team has a relatively short
        history of working together, and we cannot be certain whether they will
        be able to manage the transition of the Company. If they are unable to
        work together effectively or do not execute the business plan
        efficiently, our business will suffer.

    o   CHANGES IN THE SALES ORGANIZATION. We have many new sales
        representatives in our enterprise mobility solutions sales force that
        may take time to reach productivity. Late in fiscal 2003 and into fiscal
        2004 we began to reorganize our sales force and replace the previous
        sales team with people that have more tenure and experience selling to
        large enterprises. We also established a new focus on large strategic
        accounts, re-allocated territories and terminated a number of
        representatives. As a result of these changes many of our account
        representatives operated under new leadership, began working with new
        customers or were relatively new to our Company. We have a number of
        sales representatives that are working toward achieving acceptable
        productivity. If the new members of our sales team are unable to become
        fully productive in a reasonable time frame or we are unable to retain
        these new sales representatives, we may lose sales opportunities and
        market share, take longer to close anticipated sales and experience a
        shortfall in revenue.

MARKETS FOR OUR PRODUCTS ARE BECOMING INCREASINGLY COMPETITIVE, WHICH COULD
RESULT IN LOWER PRICES FOR OUR PRODUCTS OR A LOSS OF MARKET SHARE.

We may not compete successfully against current or future competitors, some of
whom have longer operating histories, greater name recognition, more employees
and significantly greater financial, technical, marketing, public relations and
distribution resources. We expect increasing price pressure for several of our
products, including our mobile PIM and e-mail applications and IrDA and
Bluetooth products as these technologies become more commodity oriented and less
differentiated in the marketplace. Increased competition may result in price
reductions, reduced margins, loss of market share and a change in our business
and marketing strategies, any of which could harm our business. The competitive
environment may require us to make changes in our products, pricing, licensing,
services or marketing to maintain and extend the market acceptance of our
products. Price concessions or the emergence of other pricing or distribution
strategies by our competitors or us may diminish our revenue.

DEFECTS IN OUR SOFTWARE PRODUCTS, INCLUDING OUR UPGRADED ONEBRIDGE PRODUCTS,
COULD RESULT IN A LOSS OF REVENUE, DECREASED MARKET ACCEPTANCE, INJURY TO OUR
REPUTATION AND PRODUCT LIABILITY CLAIMS.

The software products we offer, particularly our enterprise mobility software,
are inherently complex. Significant technical challenges arise with our products
because our customers purchase and deploy our products across a wide variety of
mobile device hardware types and operating systems, operate over various carrier
networks and interface into a wide variety of enterprise scale applications and
data configurations. This risk increases when we release new products or make
significant enhancements

                                       33
<PAGE>

to our existing products or where we have limited experience with new or complex
customer environments. We have not experienced substantial, unresolved problems
to date; however, customers have in the past and may in the future experience
delays and difficulties when deploying our products into large, complex and
variable environments. Product deployment issues can arise from a customer's
configuration of their load balancing, clustering, authentication profiles or
the data structures of their IBM Lotus Domino or Microsoft Exchange Server
systems and may require professional services to resolve these issues. Despite
quality control processes and testing by our current and potential customers and
us, we cannot be sure that errors will not be found in current versions, new
products or enhancements of our products after commencement of commercial
shipments.

In the course of customer implementation activities for recently released
versions of our software, we have encountered what we believe to be errors of
the type and volume generally associated with a release of major software
programs. However, there is no assurance that significant defects will not be
detected as customers deploy the product in larger volumes into even more
complex environments. Software errors, if significant, or market perception that
our software is not fully ready for production use - whether accurate or not -
could result in:

    o   failure to achieve market acceptance;
    o   loss of customers;
    o   loss or delay in revenue;
    o   loss of market share;
    o   diversion of development resources;
    o   damage to our reputation;
    o   increased service and warranty costs; and
    o   claims or litigation for breach of contract or warranty.

OUR INCREASING FOCUS ON ENTERPRISE CUSTOMERS MAY LENGTHEN OUR SALES CYCLES AND
INCREASE FLUCTUATIONS IN OUR FINANCIAL RESULTS.

As we have sought to license our software to large enterprises and increase the
average value of each sales transaction through our varied channel approach, we
have experienced sales cycles that can be substantially more lengthy and
uncertain than sales to smaller organizations of less complex product offerings.
As we focus on large mobile application solutions that involve essential
business applications, our enterprise customers generally require us to expend
substantial time, effort and money in establishing the relationship and
educating them about our solutions and how our solutions can provide benefits to
their business. Also, sales to enterprise customers generally require an
extensive sales effort throughout the customer's organization and often require
final approval by the customer's chief information officer or other senior
executive employee. These factors substantially extend the sales cycle and
increase the uncertainty of whether a sale will be made in any particular
quarter, or at all. We have experienced and expect to continue to experience
delays and uncertainty in our sales cycle as well as increased up-front expenses
in connection with our enterprise sales efforts. The timing of the execution of
the enterprise volume licenses or the length of the contract negotiation process
could cause our revenue and results of operations to vary significantly from
quarter to quarter.

WE MAY INCUR SUBSTANTIAL COSTS TO COMPLY WITH THE REQUIREMENTS OF THE
SARBANES-OXLEY ACT OF 2002.

The Sarbanes-Oxley Act of 2002 (the "Act") introduced new requirements
applicable to us regarding corporate governance and financial reporting. Among
many other requirements is the requirement under Section 404 of the Act for
management to report on our internal controls over financial reporting and for
our registered public accountant to attest to this report. We expect to dedicate
significant time and resources during fiscal 2005 to ensure compliance. There is
no assurance that we will be successful in our efforts to comply with Section
404 of the Act. Failure to do so could result in penalties and additional
expenditures to meet the requirements, which could affect the ability of our
auditors to issue an unqualified report.

OUR QUARTERLY OPERATING RESULTS FLUCTUATE AND ARE DIFFICULT TO PREDICT. THE
TIMING OF LARGE ORDERS IS MORE UNPREDICTABLE. OUR EXPENSES ARE RELATIVELY FIXED
IN THE SHORT-TERM AND UNPREDICTABLE REVENUE SHORTFALLS COULD DISPROPORTIONATELY
AND ADVERSELY AFFECT OPERATING RESULTS.

Our quarterly operating results have fluctuated in the past and may continue to
do so in the future. As we increase our focus on sales to large enterprises and
increase our sales through independent software vendors, the lack of
predictability of our sales cycle will increase. The time required to close
orders remains difficult to accurately predict as a result of the overall
economic conditions, cautious capital spending by businesses and the
complexities of selling to large enterprises. In contrast, our expense levels
are relatively fixed in the near term and based, in part, on our revenue
expectations. If revenue is below expectations in any given quarter, the adverse
impact of the shortfall on our operating results may be magnified by our
inability to adjust personnel and other expenditures to compensate for the
shortfall on a rapid basis.

OUR STOCK PRICE IS VOLATILE. OUR QUARTERLY AND ANNUAL OPERATING RESULTS MAY
FLUCTUATE SIGNIFICANTLY AND FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS
OR INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

Our stock price has been and is highly volatile. Our stock price is highly
influenced by current expectations of our future revenue, earnings and cash
flows from operations. If our operating results fall below the expectations of
securities analysts, prospective investors or current stockholders, the price of
our stock may fall. In addition, quarter-to-quarter variations in our revenue
and

                                       34
<PAGE>

operating results could create uncertainty about the direction or progress of
our business or create a negative change in our perceived long-term growth
prospects, which could result in a decline in the price of our stock.

Other factors that may have a significant impact on the market price of our
common stock include:

o   announcements of acquisitions by us or our competitors;
o   changes in our management team;
o   our ability to obtain financing when needed;
o   sales of significant numbers of shares within a short period of time;
o   announcements of technological innovations or new products by us or our
    competitors;
o   general conditions in the computer and mobile device industry;
o   general economic conditions and their impact on corporate information
    technology spending;
o   price and trading volume volatility in the public stock markets in general;
o   announcements and updates of our business outlook; and
o   changes in security analysts' earnings estimates or recommendations
    regarding our competitors or our customers.

CONSOLIDATION IN OUR INDUSTRY MAY IMPEDE OUR ABILITY TO COMPETE EFFECTIVELY.

Consolidation continues to occur among companies that compete in our markets as
firms seek to offer more extensive suites of mobility software products and to
take advantage of efficiencies and economies of scale. Our competitors completed
acquisitions including, but not limited to, the following examples: Intellisync
Corporation acquired Synchrologic, Sybase, Inc. acquired XcelleNet, Inc., SEVEN
acquired Smartner, Broadcom Corporation acquired Widcomm, Inc. and Infowave
Software Inc. acquired Telispark Inc. Changes resulting from these and other
consolidations may harm our competitive position. In addition, as the trend
toward consolidation continues, we may encounter increased competition for
attractive acquisition targets and may have to pay higher prices for those
businesses or technologies we seek to acquire.

THE LOSS OF KEY PERSONNEL, OR OUR INABILITY TO ATTRACT AND RETAIN ADDITIONAL
PERSONNEL, MAY HARM OUR BUSINESS.

Our future success will depend on our ability to attract and retain experienced,
qualified employees, particularly highly skilled software engineers, effective
enterprise sales representatives and management personnel. Our plans include
adding a number of new employees, most significantly in our research and
development group. Competition for qualified personnel in the computer software
industry is growing as the software industry rebounds from the technology
downturn experienced in the past several years. We are not certain that our
efforts to retain our key employees will succeed or that we will be successful
in recruiting new qualified employees. If we lose the services of one or more
key employees, or if one or more of them decide to join a competitor or
otherwise compete directly or indirectly with us, our business could be harmed.
Searching for replacements for our key employees could divert management's time
and result in increased operating expenses that may not be offset by either
improved productivity or higher prices. New employees generally require
substantial training, which may require significant resources and management
attention.

OUR BUSINESS RELIES ON ENTERPRISES IMPLEMENTING MOBILE APPLICATIONS AND DEVICES.
THE MARKET FOR THESE PRODUCTS IS DEVELOPING AND MAY BE HARMED IF CUSTOMERS ARE
SLOW, OR DO NOT ADOPT OUR PRODUCTS OR BY DECLINES IN OVERALL INFORMATION
TECHNOLOGY SPENDING.

The enterprise mobile application market is still developing and enterprises are
exploring the benefits of mobilizing corporate information including their
essential applications. Mobile contacts, calendar and e-mail are becoming more
generally accepted mobile applications, however, our customers and potential
customers have not traditionally mobilized their other enterprise applications.
Because this is a relatively new market, we cannot be certain that this market
will develop and grow. We expect that we will continue to need to pursue
intensive marketing and selling efforts to educate prospective customers about
the benefits to their operations through use of our products. This could cause
our sales and marketing expenses to increase without a corresponding increase in
revenue.

The market for our products also depends on the broader economic climate and
spending on information technology, including mobile applications and devices.
The global economic downturn and the slower growth in the geographies
experiencing economic recovery may cause enterprises to delay implementation of
mobile device and application rollouts, reduce their overall information
technology budgets or reduce or cancel orders for our products. Our original
equipment manufacturer customers may also limit development of new products that
incorporate our products or reduce their level of purchases of our products in
the face of slower information technology spending by their customers. A general
weakening of the global economy and weakening of business conditions,
particularly in the information technology, telecommunications, financial
services and manufacturing industry sectors, could result in potential customers
experiencing declines in their revenue and operations. In such an environment,
customers may experience financial difficulty or cease operations.

Although we believe we have adequately factored the current economic conditions
into our revenue forecasts, if the global economy experiences another downturn,
demand for our products may be reduced as a result of enterprises reducing
information technology spending on our products and original equipment
manufacturers reducing their use of our products in their own products. As a
result, our revenue may fail to grow or could decline, which would harm our
operating results. If there is another global economic downturn, we also may be
forced to reduce our operating expenses, which could result in our incurring
additional

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<PAGE>

charges in connection with restructuring or other cost-cutting measures we may
implement. For example, in both fiscal 2003 and fiscal 2004, we announced
restructuring plans to replace or reduce personnel, reduce costs, and improve
operating efficiencies and, as a result, incurred restructuring costs, primarily
for severance payments to terminated employees.

WE MAY NOT BE ABLE TO SUCCESSFULLY COMPETE AGAINST CURRENT AND POTENTIAL
COMPETITORS.

Our markets are increasingly competitive and our competitors are some of the
largest software providers in the world. As the markets for adaptive mobility
products grow, we expect competition from both existing and new competitors to
intensify. We compete with:

o   mobile solutions companies, including CommonTime, Good Technology, IBM,
    iAnywhere (a Sybase company), Infowave, JP Mobile, Microsoft, Intellisync,
    RIM, SEVEN, and Visto;
o   mobile application companies, including Dexterra, Everypath, iAnywhere, IBM,
    Infowave, Microsoft, Oracle, SAP, TCS, and Wavelink;
o   client/server database providers, including Borland, Microsoft, MySQL,
    Oracle and Pervasive Software;
o   mobile device solutions companies, including IVT Corporation, Agilent,
    EMBEDnet, CSR, Broadcom, Stonestreet One, Link Evolution and Open Interface
    North America; and
o   internal research and development departments of original equipment
    manufacturers, many of whom are our current customers.

To date, our solutions have been differentiated from our competitors based on
total cost of ownership, interoperability, performance and reliability. We may
not be able to maintain our competitive position against current and potential
competition, particularly competitors that have longer operating histories and
significantly greater financial, technical, marketing, sales and other resources
than we do and therefore may be able to respond more quickly than us to new or
changing opportunities, technologies and customer requirements. Also, many
current and potential competitors have greater name recognition and more
extensive customer bases that could be leveraged to gain market share to our
detriment. These competitors may be able to undertake more extensive promotions
activities, adopt more aggressive pricing policies, and offer more attractive
terms to purchasers than we can. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their products. Additionally, if existing or new
competitors were to merge or form strategic alliances, our market share may be
reduced or pressure may be put on us to reduce prices resulting in reduced
revenue and margins. These and other competitive factors could result in price
reductions, reduced revenue and gross margins and lost market share and an
inability to expand into new markets and industries, any one of which could
materially affect our results of operations.

CURRENCY EXCHANGE RATE FLUCTUATIONS COULD CAUSE OUR OPERATING RESULTS TO
FLUCTUATE.

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

From time to time, we may enter into foreign currency forward contracts,
typically against the Canadian dollar, euro, and British pound sterling, to
manage currency fluctuations on payments and receipts of foreign currencies on
transactions with our international subsidiaries. The success of these currency
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, we could experience
unanticipated currency gains or losses. When determining whether to enter into
foreign currency forward contracts, we also consider the impact that the
settlement of such forward contracts may have on our cash position. To eliminate
a potential cash settlement of a forward position we may, from time to time,
decide not to use foreign currency forward contracts to manage fluctuations in
the value of foreign currencies on transactions with our international
subsidiaries. In a period where we do not enter into foreign currency forward
contracts, we could experience significant non-cash currency gains or losses if
the value of the U.S. dollar strengthens or weakens significantly in relation to
the value of the foreign currencies

THE SUCCESS OF OUR BUSINESS MAY DEPEND ON US IDENTIFYING AND SECURING ADDITIONAL
SOURCES OF FINANCING, WHICH SOURCES MAY NOT BE AVAILABLE WHEN NEEDED OR MAY NOT
BE AVAILABLE ON FAVORABLE TERMS.

We believe our existing working capital, our borrowing capacity and the funds we
expect to generate from our operations will be sufficient to fund our
anticipated working capital and capital expenditure requirements for the next
twelve months. We cannot be certain, however, that our underlying assumed levels
of revenue and expenses will be accurate. If our operating results were to fail
to meet our expectations, or if accounts receivable, or other assets were to
require a greater use of cash than is currently anticipated, we could be
required to seek additional sources of liquidity. These sources of liquidity
could include raising funds through public or private debt financing, borrowing
against our line of credit or offering additional equity securities. If
additional funds are raised through the issuance of equity securities,
substantial dilution to our stockholders could result. In the event additional
funds are required, adequate funds may not be available when needed or may not
be available on favorable terms, which could have a negative effect on our
business and results of operations.

WE DEPEND ON A NUMBER OF KEY BUSINESS RELATIONSHIPS AND IF WE FAIL TO MAINTAIN
THESE RELATIONSHIPS, OR ARE UNABLE TO DEVELOP NEW RELATIONSHIPS, OUR BUSINESS
WOULD SUFFER.

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<PAGE>

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

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

OUR INVESTMENT IN GOODWILL AND INTANGIBLES RESULTING FROM OUR ACQUISITIONS COULD
BECOME IMPAIRED.

As of March 31, 2005, the amount of goodwill and other identifiable intangibles
recorded on our books, net of accumulated amortization, was $13 million. We
ceased amortizing goodwill upon our adoption of SFAS No. 142 as of the beginning
of fiscal 2003, and we expect to amortize approximately $416 thousand of net
identifiable intangibles in the remainder of fiscal 2005 and fiscal 2006 through
2009. However, to the extent that our goodwill or other identifiable intangibles
are considered to be impaired because circumstances indicate their carrying
value may not be recoverable, all or a portion of these assets may be subject to
write-off in the quarter of impairment. Any impairment and resulting write-off
could have a negative impact on our results of operations in the period goodwill
or other identifiable intangibles are written off.

WE MAY NOT BE ABLE TO SUCCESSFULLY DEVELOP OR INTRODUCE NEW PRODUCTS.

The markets for our products are characterized by:

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

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

WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OUR PATENT, TRADEMARK, COPYRIGHT OR
OTHER INTELLECTUAL PROPERTY RIGHTS FROM COMPETITORS, AND WE MAY BE REQUIRED TO
USE A SIGNIFICANT AMOUNT OF OUR RESOURCES TO DEFEND OURSELVES FROM INFRINGEMENT
CLAIMS MADE BY OTHERS.

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

Companies in the software industry often resort to litigation over intellectual
property rights and there has been a substantial amount of litigation in the
software industry regarding intellectual property rights. During fiscal 2004 we
settled an intellectual property dispute that required a significant amount of
Company resources. It is possible in the future that third parties may claim
that our current or potential future products infringe on their intellectual
property. If a court finds that we infringe on the intellectual property rights
of any third party, we could be subject to liabilities, which could harm our
business. As a result, we might be required to seek licenses from other
companies or to refrain from using, manufacturing or selling specific products
or using specific processes. Holders of patents and other intellectual property
rights may not offer licenses to use their patents or other intellectual
property rights on acceptable terms, or at all. Failure to obtain these licenses
on commercially reasonable terms or at all could harm our business.

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

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<PAGE>

OUR BUSINESS MAY BE HARMED DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS, WHICH REPRESENT A SIGNIFICANT PORTION OF OUR REVENUE.

In the third quarter of fiscal 2005, based on the region where the customer
resides, approximately 51% of our revenue was generated from international
sales. We expect that international sales will continue to represent a
significant portion of our revenue for the foreseeable future. International
sales are subject to a number of risks, including:

o   changes in regulatory requirements and resulting costs;
o   export license requirements;
o   export restrictions, tariffs, taxes and other trade barriers;
o   potentially reduced or less certain protection for intellectual property
    rights than is available under the laws of the United States;
o   longer collection and payment cycles than those in the United States;
o   difficulty in staffing and managing international operations;
o   restrictive labor laws in the European Union that restrict working hours and
    constrain our ability to react quickly in certain situations; and
o   political and economic instability, including the threat or occurrence of
    military and terrorist actions and enhanced national security measures.

One or more of these risks could harm our future overseas research operations
and international sales and support. If we are unable to manage these risks of
doing business internationally, our results could suffer.

OUR BUSINESS MAY BE HARMED IF OUR PROFESSIONAL SERVICES ORGANIZATION DOES NOT
GENERATE AN ACCEPTABLE PROFIT LEVEL, INCURS COSTS IN EXCESS OF AMOUNTS BILLABLE
TO CUSTOMERS OR IF OUR PROFESSIONAL SERVICES REVENUE INCREASES AS A PERCENTAGE
OF TOTAL REVENUE.

Our professional services business is subject to a variety of risks including:

o   we may be unable to accurately predict staffing requirements and therefore
    the expense of fulfilling our service contracts may be greater than we
    anticipate;
o   we may have an inappropriate level of resources dedicated to the
    professional services business in relation to the number of projects we are
    able to sell, resulting in a low utilization rate of resources;
o   we may enter into professional services engagements that are complex and for
    which it is difficult to estimate resource requirements and costs due to the
    nature and scope of the engagement and the need to integrate our work
    product with the products of other contractors retained by our customers;
    and
o   we have and may in the future enter into contractual arrangements with our
    professional services customers that subject us to damages and other
    liabilities if our work product does not conform to the agreed
    specifications.

If we are unable to operate the professional services organization effectively,
the profitability of this business could decline, or even result in a loss,
which could harm our business. In addition, we may enter into professional
services projects that charge customers a fixed fee for a defined deliverable.
We have at times in the past underestimated and may in the future underestimate
the amount of time or resources required to complete this work and receive
customer acceptance. If we do not correctly estimate the amount of time or
resources required for a large project or a significant number of projects, our
gross margins could decline, adversely affecting our operating results.

We realize lower margins on our professional services revenue than on license
revenue. As a result, if professional services revenue increases as a percentage
of total revenue our gross margins may decline and our operating results may be
adversely affected.

WHEN WE ARE REQUIRED TO ACCOUNT FOR EMPLOYEE STOCK OPTION AND EMPLOYEE STOCK
PURCHASE PLANS USING A FAIR-VALUE METHOD, OUR NET INCOME AND EARNINGS PER SHARE
COULD BE REDUCED SIGNIFICANTLY.

The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment." SFAS No. 123(R)
requires companies to measure all stock-based compensation awards using a
fair-value method and record such expense in their consolidated financial
statements. SFAS No. 123(R) is effective beginning the first quarter of our
fiscal year 2006. We are currently assessing the impact of SFAS No. 123(R) on
our stock-based compensation programs; however, we expect to have significant
accounting charges that will reduce our net income and earnings per share. For
example, in the first nine of fiscal 2005, had we accounted for stock-based
compensation plans using the fair-value method prescribed in SFAS No. 123(R), we
would have recorded an additional operating expense of approximately $2.3
million. See Note 3 of "Notes to Condensed Consolidated Financial Statements"
for a more detailed presentation of accounting for stock-based compensation
plans. When we are required to treat all stock-based compensation as an expense,
we may change both our cash and stock-based compensation practices.

WE DEPEND ON NON-EXCLUSIVE LICENSES FOR SOME OF THE TECHNOLOGY WE USE WITH OUR
PRODUCTS.

We license technology on a non-exclusive basis from several companies for use
with our products and anticipate that we will continue to do so in the future.
For example, we license encryption technology that we include in our OneBridge
Mobile

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<PAGE>

Groupware products. Our inability to continue to license this technology, or to
license other technology necessary for use with our products, could result in
the loss of, or delays in the inclusion of, important features of our products
or result in substantial increases in royalty payments that we would have to pay
pursuant to alternative third-party licenses, any of which could harm our
business. In addition, the effective implementation of our products depends upon
the successful operation of licensed software in conjunction with our products.
Any undetected errors in products resulting from this licensed software may
prevent the implementation or impair the functionality of our products, delay
new product introductions and injure our reputation.

SOME ANTI-TAKEOVER PROVISIONS CONTAINED IN OUR CERTIFICATE OF INCORPORATION,
BYLAWS AND RIGHTS PLAN, AS WELL AS PROVISIONS OF DELAWARE LAW, COULD IMPAIR A
TAKEOVER ATTEMPT.

We have provisions in our certificate of incorporation and bylaws that could
have the effect of rendering more difficult or discouraging an acquisition
deemed undesirable by our Board of Directors. These include provisions:

o   dividing our board of directors into three classes, each serving a staggered
    three-year term;
o   authorizing blank check preferred stock, which could be issued with voting,
    liquidation, dividend and other rights superior to our common stock;
o   granting dividend and other rights superior to our common stock;
o   limiting the liability of, and providing indemnification to, directors and
    officers;
o   requiring advance notice of stockholder proposals for business to be
    conducted at meetings of stockholders and for nominations of candidates for
    election to our Board of Directors;
o   specifying that stockholders may take action only at a duly called annual or
    special meeting of shareholders.

These provisions, alone or together, could deter or delay hostile takeovers,
proxy contests and changes in control or management of Extended Systems. As a
Delaware corporation, we also are subject to provisions of Delaware law,
including Section 203 of the Delaware General Corporation Law, which prevents
some stockholders from engaging in certain business combinations without
approval of the holders of substantially all of our outstanding common stock.

In June 2003, pursuant to a Preferred Stock Rights Agreement, our Board of
Directors issued certain Preferred Share Purchase Rights. The Rights were not
intended to prevent a takeover of Extended Systems. However, the Rights may have
the effect of rendering more difficult or discouraging an acquisition of
Extended Systems deemed undesirable by our Board of Directors. The Rights would
cause substantial dilution to a person or group that attempted to acquire
Extended Systems on terms or in a manner not approved by our Board of Directors,
except pursuant to an offer conditioned upon redemption of the Rights.

Any provision of our certificate of incorporation or bylaws or Delaware law that
has the effect of delaying or deterring a change in control could limit the
opportunity for our stockholders to receive a premium for their shares of common
stock and also could affect the price that some investors are willing to pay for
our common stock.

WE INTEND TO PURSUE ADDITIONAL ACQUISITIONS, AND ANY ACQUISITIONS COULD PROVE
DIFFICULT TO INTEGRATE WITH OUR BUSINESS, DISRUPT OUR BUSINESS, DILUTE
STOCKHOLDER VALUE OR ADVERSELY AFFECT OUR OPERATING RESULTS.

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

o   integration of acquired technologies with our existing products and
    technologies;
o   diversion of management's attention and other resources to the assimilation
    of the operations and employees of the acquired companies;
o   availability of equity or debt financing on terms favorable to us and our
    stockholders;
o   integration of management information systems, employees, research and
    development, and marketing, sales and support operations;
o   expansion into new markets and business areas;
o   potential adverse short-term effects on our operating results; and
o   retention of customers and employees post-acquisition.

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

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Sales made by our international subsidiaries are generally denominated in the
foreign country's currency. Fluctuations in exchange rates between the U.S.
dollar and other currencies could materially harm our business. From time to
time, we enter into foreign currency forward contracts, typically with respect
to the Canadian dollar, euro, and British pound sterling, to manage fluctuations
in the value of foreign currencies on transactions with our international
subsidiaries, thereby limiting the risk that would otherwise result from changes
in exchange rates. We report a net currency gain or loss based on changes in the
fair value of forward contracts combined with changes in fair value of the
underlying asset or liability being managed. The success of these currency
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent

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<PAGE>

that these forecasts are overstated or understated during periods of currency
volatility, we could experience unanticipated currency gains or losses. When
determining whether to enter into foreign currency forward contracts, we also
consider the impact that the settlement of such forward contracts may have on
our cash position. To eliminate a potential cash settlement of a forward
position we may, from time to time, decide not to use foreign currency forward
contracts to manage fluctuations in the value of foreign currencies on
transactions with our international subsidiaries. In a period where we do not
enter into foreign currency forward contracts, we could experience significant
non-cash currency gains or losses if the value of the U.S. dollar strengthens or
weakens significantly in relation to the value of the foreign currencies. We had
no forward contracts in place as of March 31, 2005. As of March 31, 2004, we had
forward contracts with a nominal value of approximately $9.3 million, each of
which matured within 30 days, in place with respect to the Canadian dollar, euro
and British pound sterling. We recognized net currency exchange losses of
approximately $167 thousand and $380 thousand for the three and nine months
ended March 31, 2005 and net currency exchange losses of approximately $45
thousand and $17 thousand for the three and nine months ended March 31, 2004.


ITEM 4.  CONTROLS AND PROCEDURES

We maintain "disclosure controls and procedures" as defined in Rules 13a -15(e)
and 15d -15(e) of the Securities Exchange Act of 1934 ("Disclosure Controls and
Procedures"). Our Disclosure Controls and Procedures are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms. Our Disclosure Controls and Procedures are also designed
to ensure that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. It
should be noted, however, that controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

Based on an evaluation of the Company's Disclosure Controls and Procedures
performed by our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, as of the end of the period covered by this
Quarterly Report on Form 10-Q, these officers have concluded that the Disclosure
Controls and Procedures are effective.

There has been no change in our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.




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                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On December 2, 2004, Extended Systems of Idaho, Incorporated ("ESI"), a wholly
owned subsidiary of the Company, filed a complaint in the United States District
Court for the District of Idaho against Agilent Technologies Singapore Pte.,
Ltd. ("Agilent") for failure to pay royalties due under a license agreement and
for contributing to infringement of ESI's registered copyrights in ESI's IrDA
software. Subsequently, based on factual representations from Agilent concerning
the alleged conduct of Samsung Electronics Co., Ltd. ("Samsung"), on February 3,
2005, ESI filed an Amended Complaint joining Samsung, Samsung Electronics
America, Inc. and Samsung Telecommunication America, L.P. (collectively, the
"Samsung Defendants") on copyright infringement claims alleging, based on
Agilent's representations, that the Samsung Defendants have infringed certain of
ESI's registered copyrights in IrDA software by knowingly copying the software
into Samsung phones with non-royalty bearing Agilent transceivers and importing
and selling those cell phones in the United States without the permission of
ESI.

The claims in the lawsuit related to a business arrangement entered into by ESI
with Agilent and Samsung in 2002 whereby Agilent agreed to sell certain
royalty-bearing transceivers to Samsung for use by Samsung with ESI software in
Samsung cell phones. Agilent agreed to pay ESI royalties based on Samsung's use
of the ESI software with royalty-bearing Agilent transceivers and Samsung was
licensed to use ESI Software only with Agilent royalty-bearing transceivers. ESI
alleged that Samsung knowingly used ESI software with non-royalty bearing
Agilent transceivers outside the scope of its license from ESI and that Agilent
aided and abetted Samsung's conduct and has failed and refused to pay royalties
to ESI for Samsung's use of ESI software with Agilent transceivers.

ESI sought payments in accordance with the agreed contractual royalty rates for
all uncompensated use of its software by Samsung and sought a full accounting
from Agilent and Samsung as to the number of Agilent transceivers shipped to
Samsung that were compatible with ESI software and as to the number of Samsung
cell phones in which ESI software has been copied.

ESI also filed a motion for preliminary injunction asking the Court to restrain
Agilent from shipping transceivers to Samsung for use with ESI software without
payment of agreed royalties and to restrain Samsung from selling or importing in
the United States any cell phones incorporating unauthorized copies of ESI
software.

Shortly after joining Samsung as a party to the lawsuit, the parties entered
into a Standstill Agreement (and an amendment to the Standstill Agreement) under
which ESI agreed to temporarily set over the scheduled hearing on its
preliminary injunction. Under the Standstill Agreement, ESI was paid $1.5
million toward ESI's claims against Agilent and Samsung. Shortly prior to the
expiration of the Standstill Agreement, as amended, the parties entered into a
Binding Memorandum of Understanding (the "Resolution Agreement"), effective
April 27, 2005 that resolved the lawsuit. Under the terms of the Resolution
Agreement, ESI entered into a royalty-bearing license with Samsung for Samsung's
future use of ESI's Ir Software. ESI also granted Samsung an option to purchase
for a lump sum a two-year license to use ESI's Ir Software and its XTNDConnect
PC software in Samsung cell phones. At the conclusion of the two-year paid up
licenses, Samsung would have the option to continue to license the software at
royalty rates not greater than those set out in the Resolution Agreement. On May
6, 2005, Samsung notified ESI they would not exercise their option for the two
year license. In addition to the $1.5 million in payments received by ESI under
the Standstill Agreement in March and April 2005, the Resolution Agreement
provides that Samsung and Agilent will pay ESI an additional $1.25 million by
May 27, 2005, $2.0 million by August 31, 2005 and a final installment of $1.0
million by December 1, 2005.

ITEM 6.    EXHIBITS

  EXHIBIT NUMBER   DESCRIPTION

        3.1        Restated Certificate of Incorporation. (1)
        3.2        Restated Bylaws. (2)
       10.58       Separation Agreement between the Company and Jeffrey Siegel.*
        31         Certifications of Chief Executive Officer and Chief Financial
                   Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
                   2002. *
        32         Certifications of Chief Executive Officer and Chief Financial
                   Officer pursuant to 18 U.S.C. Section 1350, as adopted
                   pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

(1)     Incorporated by reference from the Registrant's Registration Statement
        on Form S-1 (File No. 333-42709) filed with the Securities and Exchange
        Commission on March 4, 1998.

(2)     Incorporated by reference from our Quarterly Report on Form 10-Q filed
        with the Securities and Exchange Commission on May 14, 1998.

*           Filed herewith.


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                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Boise, Idaho, on May 16, 2005.

                                       EXTENDED SYSTEMS INCORPORATED

                                       By: /s/ CHARLES W. JEPSON
                                           -------------------------------------
                                           CHARLES W. JEPSON
                                           PRESIDENT AND CHIEF EXECUTIVE OFFICER






































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