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

                                  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 DECEMBER 31, 2001

                                       OR

[_]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
            EXCHANGE ACT OF 1934

            FOR THE TRANSITION PERIOD FROM ________________ TO ________________

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

                        Commission File Number 000-23597

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

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

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

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

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


The number of shares outstanding of the registrant's Common Stock as of January
31, 2002 was 11,063,935.

================================================================================
<PAGE>

                          EXTENDED SYSTEMS INCORPORATED

                                    FORM 10-Q

              FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001

                                      INDEX

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

                  Condensed Consolidated Statements of Operations
                  for the Three and Six Months Ended December 31, 2001 and 2000                1

                  Condensed Consolidated Statements of Comprehensive Loss
                  for the Three and Six Months Ended December 31, 2001 and 2000                1

                  Condensed Consolidated Balance Sheets
                  as of December 31, 2001 and June 30, 2001                                    2

                  Condensed Consolidated Statements of Cash Flows
                  for the Six Months Ended December 31, 2001 and 2000                          3

                  Notes to Condensed Consolidated Financial Statements                         4

         Item 2.  Management's Discussion and Analysis of Financial Condition                  8
                  and Results of Operations

         Item 3.  Quantitative and Qualitative Disclosures about Market Risk                  21


PART II.  OTHER INFORMATION

         Item 4.  Submission of Matters to a Vote of Security Holders                         22

         Item 6.  Exhibits and Reports on Form 8-K                                            22

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

SIGNATURE                                                                                     23
</TABLE>
<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE><CAPTION>
                                                                THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                   DECEMBER 31,                DECEMBER 31,
                                                              ----------------------      ----------------------
                                                                2001          2000          2001          2000
                                                              --------      --------      --------      --------
<S>                                                           <C>           <C>           <C>           <C>
Revenue:
    License fees and royalties ..........................     $  5,703      $  5,805      $  9,884      $ 10,366
    Services ............................................          723           583         1,445           998
    Hardware and other ..................................          385         3,455         1,217         7,202
                                                              --------      --------      --------      --------
        Total net revenue ...............................        6,811         9,843        12,546        18,566

Cost of revenue:
    License fees and royalties ..........................          276           475           637           964
    Services ............................................          294           393           568           794
    Hardware and other ..................................          308         2,799           866         5,679
                                                              --------      --------      --------      --------
        Total cost of revenue ...........................          878         3,667         2,071         7,437
                                                              --------      --------      --------      --------
              Gross profit ..............................        5,933         6,176        10,475        11,129
                                                              --------      --------      --------      --------
Operating expenses:
    Research and development ............................        2,996         3,166         5,690         5,997
    Marketing and sales .................................        3,567         4,959         7,069         9,011
    General and administrative ..........................        1,225         1,375         2,192         2,670
    Amortization of intangibles .........................          243           243           486           486
                                                              --------      --------      --------      --------
        Loss from operations ............................       (2,098)       (3,567)       (4,962)       (7,035)
Other income, net .......................................           17            83            83           202
                                                              --------      --------      --------      --------
        Loss before income taxes ........................       (2,081)       (3,484)       (4,879)       (6,833)
Income tax benefit ......................................          (19)       (1,293)         --          (2,536)
                                                              --------      --------      --------      --------
        Loss from continuing operations .................       (2,062)       (2,191)       (4,879)       (4,297)
Income from discontinued operations, net of tax .........           72           596            72         1,122
                                                              --------      --------      --------      --------
        Net loss ........................................     $ (1,990)     $ (1,595)     $ (4,807)     $ (3,175)
                                                              ========      ========      ========      ========

Loss per share from continuing operations:
    Basic and diluted ...................................     $  (0.19)     $  (0.21)     $  (0.45)     $  (0.41)
Net loss per share:
    Basic and diluted ...................................     $  (0.18)     $  (0.15)     $  (0.44)     $  (0.30)
Number of shares used in per share calculation:
    Basic and diluted ...................................       10,985        10,473        10,974        10,416

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED)
                                                                THREE MONTHS ENDED          SIX MONTHS ENDED
                                                                   DECEMBER 31,                DECEMBER 31,
                                                              ----------------------      ----------------------
                                                                2001          2000          2001          2000
                                                              --------      --------      --------      --------

Net loss ................................................     $ (1,990)     $ (1,595)     $ (4,807)     $ (3,175)
Change in currency translation ..........................          (19)          131            21           (48)
                                                              --------      --------      --------      --------
   Comprehensive loss ..................................     $ (2,009)     $ (1,464)     $ (4,786)     $ (3,223)
                                                              ========      ========      ========      ========
</TABLE>
The accompanying notes are an integral part of the financial statements

                                       1
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)
<TABLE><CAPTION>
                                                                                      DECEMBER 31,        JUNE 30,
                                                                                         2001               2001
                                                                                       --------           --------
                                                                                      (UNAUDITED)
<S>                                                                                    <C>                <C>
ASSETS
Current:
    Cash and cash equivalents ...............................................          $  4,132           $  6,585
    Receivables, net ........................................................             6,264              8,490
    Inventories, net ........................................................               172                441
    Prepaid and other .......................................................               485                996
                                                                                       --------           --------
        Total current assets ................................................            11,053             16,512
Property and equipment, net .................................................             6,367              7,002
Intangibles, net ............................................................             3,828              4,629
                                                                                       --------           --------
        Total assets ........................................................          $ 21,248           $ 28,143
                                                                                       ========           ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
    Accounts payable ........................................................          $  1,716           $  3,371
    Accrued expenses ........................................................             3,189              4,492
    Deferred revenue ........................................................             1,695              1,342
                                                                                       --------           --------
        Total current liabilities ...........................................             6,600              9,205
                                                                                       --------           --------
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; 11,056 and 10,971 shares issued and outstanding .........                11                 11
    Additional paid-in capital ..............................................            33,143             32,648
    Accumulated deficit .....................................................           (17,740)           (12,934)
    Accumulated other comprehensive loss ....................................              (766)              (787)
                                                                                       --------           --------
        Total stockholders' equity ..........................................            14,648             18,938
                                                                                       --------           --------
        Total liabilities and stockholders' equity ..........................          $ 21,248           $ 28,143
                                                                                       ========           ========
</TABLE>

The accompanying notes are an integral part of the financial statements

                                       3
<PAGE>

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE><CAPTION>
                                                                                  SIX MONTHS ENDED
                                                                                     DECEMBER 31,
                                                                               -------------------------
                                                                                2001              2000
                                                                               -------           -------
<S>                                                                            <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net loss ........................................................          $(4,807)          $(3,175)
    Adjustments to reconcile net loss to net cash used by
        operating activities:
        Provision for bad debts .....................................               89               185
        Provision for write-down of inventory .......................               60               485
        Depreciation and amortization ...............................            1,490             1,539
        Tax benefit from employee stock options .....................             --               1,307
        Deferred income taxes .......................................             --              (3,292)
        Other .......................................................                3                87
        Changes in assets and liabilities, net of effect of
           acquisitions:
           Receivables ..............................................            2,152            (1,704)
           Inventories ..............................................              209               138
           Prepaid and other assets .................................              513               259
           Accounts payable and accrued expenses ....................           (2,962)            1,062
           Deferred revenue .........................................              353               372
                                                                               -------           -------
               Net cash used by operating activities ................           (2,900)           (2,737)
                                                                               -------           -------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment ..............................              (61)             (611)
    Other investing activities ......................................               60                40
                                                                               -------           -------
               Net cash used by investing activities ................               (1)             (571)
                                                                               -------           -------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Proceeds from the issuance of common stock ......................              439             2,051
    Payments on long-term debt ......................................             --                 (67)
                                                                               -------           -------
               Net cash provided by financing activities ............              439             1,984
    Effect of exchange rate changes on cash .........................                9               (19)
                                                                               -------           -------
    Net decrease in cash and cash equivalents .......................           (2,453)           (1,343)
CASH AND CASH EQUIVALENTS:
    Beginning of period .............................................            6,585             6,191
                                                                               -------           -------
    End of period ...................................................          $ 4,132           $ 4,848
                                                                               =======           =======
</TABLE>

The accompanying notes are an integral part of the financial statements


                                       4
<PAGE>

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Extended Systems provides mobile information management products, including both
mobile data management and universal mobile connectivity products, that extend
enterprise applications to mobile and wireless environments.

BASIS OF PRESENTATION. The accompanying condensed financial statements include
Extended Systems Incorporated, a Delaware corporation, and its subsidiaries. We
have eliminated all significant intercompany accounts and transactions. Tabular
amounts are in thousands, except percentages and per share amounts.

We have prepared the unaudited interim condensed consolidated financial
statements on the same basis as the annual consolidated financial statements
which, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly our financial
position, as of December 31, 2001, the results of operations for the three and
six months ended December 31, 2001 and 2000, and cash flows for the three and
six months ended December 31, 2001 and 2000. These condensed consolidated
financial statements and notes thereto should be read in conjunction with our
audited consolidated financial statements and related notes included in our
Annual Report on Form 10-K as filed with the Securities and Exchange Commission
on September 17, 2001 for the year ended June 30, 2001. The condensed
consolidated balance sheet as of June 30, 2001 was derived from audited
financial statements but does not include all disclosures required by generally
accepted accounting principles, primarily disclosures in the notes to the
consolidated financial statements. The results for interim periods are not
necessarily indicative of the expected results for any other interim period or
the year ending June 30, 2002.

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.

As a result of the disposition of our printing solutions business in our fourth
quarter of fiscal 2001, we have reclassified our consolidated statements of
operations and other related disclosures for all periods presented to present
the results of the printing solutions segment as discontinued operations. We
have made other reclassifications to the consolidated financial statements to
conform the presentations.

CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency except for our Singapore subsidiary, which uses the
United States dollar as its functional currency. We translate assets and
liabilities of international subsidiaries (except Singapore) into U.S. dollars
using exchange rates in effect at the balance sheet date, and we reflect gains
and losses from this translation process as a component of comprehensive income
or loss. We translate revenue and expenses into United States dollars using the
average exchange rate for the period.

From time to time, we enter into foreign currency forward contracts, typically
against the euro and the British pound sterling to manage fluctuations in the
value of foreign currencies on transactions with our international subsidiaries,
thereby limiting our risk that would otherwise result from changes in currency
exchange rates. While these instruments are subject to fluctuations in value,
these fluctuations are generally offset by fluctuations in the value of the
underlying asset or liability being managed. We had $2.4 million and $2.8
million in forward contracts in place, which approximated fair value, against
the euro and British pound sterling at December 31 and June 30, 2001,
respectively, which matured within 30 days. We recognized a net currency
exchange loss of $8,000 and a gain of $64,000 in the three months ended December
31, 2001 and 2000, respectively. We recognized net currency exchange losses of
$41,000 and $26,000 in the six months ended December 31, 2001 and 2000,
respectively.

                                       5
<PAGE>

EARNINGS OR LOSS PER SHARE. We compute basic earnings or loss per share by
dividing net income or loss by our weighted-average number of common shares
outstanding during the period. We compute diluted earnings or loss per share by
dividing net income or loss by the weighted-average number of common shares
outstanding increased by the additional common shares that would be outstanding
if we had issued the potential dilutive common shares. We exclude from the
diluted earnings or loss per share computations stock options and potential
shares for convertible debt to the extent that their effect would have been
antidilutive. Our diluted earnings or loss per share computations exclude
options to purchase 1.6 million and 2.7 million shares of common stock as of
December 31, 2001 and 2000, respectively, because to include such shares would
have been antidilutive.

RECENTLY ISSUED ACCOUNTING STANDARDS. In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 141,
"Business Combinations," which requires that we account for all business
combinations by the purchase method. This statement applies to all business
combinations for which the date of acquisition is July 1, 2001, or later.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
which addresses the accounting for intangible assets that are acquired
individually or with a group of other assets, other than those acquired in a
business combination, upon their acquisition. This statement also addresses the
accounting for goodwill and other intangible assets after they have been
initially recognized in the financial statements. We are currently evaluating
the impact that this statement may have on our operations. We are required to
adopt this statement in our first quarter of fiscal 2003 ending September 30,
2002.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets," which supersedes various existing standards on accounting
for long-lived assets. This new standard establishes a single accounting model
for long-lived assets to be disposed of by sale and is based on the framework of
Statement of Financial Accounting Standard No. 121. We are required to adopt
this statement in our first quarter of fiscal 2003 ending September 30, 2002.

In March 2000, the Emerging Issues Task Force reached a consensus on EITF Issue
No. 00-14, "Accounting for Certain Sales Incentives." This consensus provides
guidance on the recognition, measurement and income statement classification of
sales incentives which are offered voluntarily by a vendor without charge to
customers that can be used in, or that are exercisable by a customer as a result
of, a single exchange transaction. Our accounting policies conform to the
guidance in this consensus; therefore, we effectively adopted Issue No. 00-14
upon its issuance.

In September 2000, the Emerging Issues Task Force issued EITF Issue No. 00-25,
Accounting for Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products." This issue addresses when
consideration from a vendor to a retailer in connection with the retailer's
purchase of the vendor's products or to promote sales of the vendor's products
by the retailer should be classified in the vendor's income statement as a
reduction of revenue. Our accounting policies conform to the guidance in this
consensus, therefore, we effectively adopted Issue No. 00-25 upon its issuance.

                                                   AS OF               AS OF
                                                DECEMBER 31,          JUNE 30,
                                                    2001                2001
                                                 ---------           ---------
RECEIVABLES
-----------
Accounts receivable .....................        $   7,154           $   8,835
Other receivables .......................                2                 442
Allowance for doubtful accounts .........             (892)               (787)
                                                 ---------           ---------
                                                 $   6,264           $   8,490
                                                 =========           =========

                                       6
<PAGE>

INVENTORIES
-----------
Purchased parts .........................        $      94           $      93
Work in process .........................               22                  48
Finished goods ..........................               56                 300
                                                 ---------           ---------
                                                 $     172           $     441
                                                 =========           =========

PROPERTY AND EQUIPMENT
----------------------
Land and land improvements ..............        $     897           $     897
Buildings ...............................            5,891               5,891
Computer equipment ......................            5,612               5,621
Furniture and fixtures ..................            2,492               2,259
                                                 ---------           ---------
                                                    14,892              14,668
Less accumulated depreciation ...........           (8,525)             (7,666)
                                                 ---------           ---------
                                                 $   6,367           $   7,002
                                                 =========           =========
INTANGIBLE ASSETS
-----------------
Goodwill ................................        $   4,415           $   4,415
Purchased technology ....................            3,128               3,128
Other intangibles .......................              447                 447
                                                 ---------           ---------
                                                     7,990               7,990
Less accumulated amortization ...........           (4,162)             (3,361)
                                                 ---------           ---------
                                                 $   3,828           $   4,629
                                                 =========           =========
ACCRUED EXPENSES
----------------
Accrued payroll and related benefits ....        $   1,592           $   2,600
Accrued warranty and support costs ......              263                 317
Other ...................................            1,334               1,575
                                                 ---------           ---------
                                                 $   3,189           $   4,492
                                                 =========           =========

DISCONTINUED OPERATIONS
-----------------------
We entered into an Asset Purchase Agreement, dated May 30, 2001, pursuant to
which we agreed to sell various assets, including all assets primarily used in
our printing solutions segment, to Troy Group, Inc for an aggregate purchase
price of $1.6 million, net of expenses. In accordance with the Asset Purchase
Agreement, on May 31, 2001, we transferred to Troy certain inventory, equipment,
patents, trademarks and other intellectual property rights, customer and
supplier lists and rights under certain contracts that existed as of the close
of business on May 30, 2001. Troy also assumed certain of our contractual and
warranty obligations and purchase commitments.

As a result of this disposition in our fourth quarter of fiscal 2001, our
printing solutions segment was accounted for as discontinued operations in
accordance with Accounting Principles Bulletin No. 30. Amounts in the financial
statements and related notes for all prior periods shown have been reclassified
to reflect the discontinued operations. Operating results for the discontinued
operations are reported, net of tax, under "Income from discontinued operations"
on the accompanying Condensed Consolidated Statements of Operations.

                                       7
<PAGE>

<TABLE><CAPTION>
                                                              THREE MONTHS ENDED                SIX MONTHS ENDED
                                                                 DECEMBER 31,                      DECEMBER 31,
                                                           -----------------------           -----------------------
                                                            2001             2000             2001             2000
                                                           ------           ------           ------           ------
<S>                                                       <C>              <C>              <C>              <C>
Net revenue ....................................          $    15          $ 4,014          $   183          $ 7,520
Gross profit ...................................              108            1,683              141            3,236
Income tax provision ...........................               36              356               65              670
Income from discontinued operations,
    net of taxes ...............................               72              596               72            1,122
Earnings per share from discontinued operations:
     Basic and diluted .........................             0.01             0.06             0.01             0.11
Number of shares used in per share calculation:
     Basic and diluted .........................           10,985           10,473           10,974           10,416
</TABLE>

INCOME TAXES
------------
For the three and six months ended December 31, 2001, we did not record a
benefit for our deferred tax assets of $671,000 and $1.6 million, respectively.
As of December 31, 2001, we had a valuation allowance of $21.4 million to reduce
our deferred tax assets to estimated realizable value. The valuation allowance
primarily relates to net operating loss carryforwards resulting from tax
benefits from employee stock transactions and from our operating losses,
deferred tax assets arising from our acquisition of Advance Systems and foreign
tax credit carryforwards.

BUSINESS SEGMENTS
-----------------
We determine our reportable segments by evaluating our internal organizational
structure, the manner in which these operations are managed and their
performance as evaluated by management, the availability of separate financial
information and overall materiality. At December 31, 2001, we operated in a
single operating segment.

SUBSEQUENT EVENT
----------------
On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank, under which we can currently access up to $5.0 million of financing
in the form of a demand line of credit, subject to current accounts receivable
balances. The line of credit is collateralized by certain of our assets.
Interest on any borrowings will be paid at prime plus one percent but not less
than 5.5%. The line of credit agreement requires us to maintain certain
financial ratios and expires on January 15, 2004.




                                       8
<PAGE>

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

FORWARD-LOOKING STATEMENTS
--------------------------

In addition to historical information, this Form 10-Q contains forward-looking
statements. In this Form 10-Q, the words "expects," "anticipates," "believes,"
"intends," "will" and similar expressions identify forward-looking statements,
which are based upon information currently available to us, speak only as of the
date hereof and are subject to certain risks and uncertainties. These
forward-looking statements include, but are not limited to, statements
regarding:

o    levels of international sales;
o    levels of software product sales;
o    levels of service revenue;
o    levels of original equipment manufacturer sales;
o    anticipated gross margin;
o    staffing and expense levels;
o    levels of accounts receivable;
o    levels of capital expenditures;
o    anticipated cash funding needs;
o    future acquisitions; and
o    future profitability.

We assume no obligation to update any forward-looking statements. Our actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that may cause a difference include, but are not limited to,
those discussed in this section entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Factors That May Affect Future
Results and Market Price of Stock." You should carefully review the risk factors
described in other documents that we file from time to time with the Securities
and Exchange Commission, including our 2001 Annual Report on Form 10-K and other
Quarterly Reports on Form 10-Q that we will file in fiscal 2002.

All period references are to our second fiscal quarters ended December 31, 2001
and 2000 and our fiscal years ended June 30, 2002 and 2001, unless otherwise
indicated. Tabular amounts are in thousands, except percentages.

OVERVIEW

We classify our product offerings into one operating segment, our mobile
information management segment, which includes both mobile data management and
universal mobile connectivity products that extend enterprise applications to
mobile and wireless environments. The products in our mobile information
management segment include data synchronization and management software,
wireless connectivity products and client/server database management systems
with remote access capabilities. Until April 2001, we also marketed and sold
enterprise Internet appliances.

We sell our mobile information management products primarily to enterprises,
original equipment manufacturers, application developers and resellers both
directly and through our e-commerce storefronts on the Internet. We derive
revenue from:

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


                                       9
<PAGE>

Our future results of operations will be highly dependent upon the success of
our software products, specifically our XTNDConnect data synchronization and
management software and our XTNDAccess and XTNDConnect infrared and Bluetooth
wireless connectivity software. We expect these license fees and royalties of
these products to continue to generate a majority of our revenue.

We derive a significant amount of our revenue from sales to customers outside of
the United States, principally from our international sales subsidiaries,
overseas original equipment manufacturers and from a limited number of
international distributors.

Based on the region in which the customer resides, net revenue from continuing
operations is as follows:

<TABLE><CAPTION>
                                                  THREE MONTHS ENDED               SIX MONTHS ENDED
                                                     DECEMBER 31,                     DECEMBER 31,
                                               -----------------------           -----------------------
NET REVENUE PERCENTAGES BY REGION
---------------------------------               2001             2000             2001             2000
                                               ------           ------           ------           ------
<S>                                               <C>              <C>              <C>              <C>
Domestic ............................              55%              37%              50%              38%
International:
   Europe ...........................              35               38               37               34
   Comprehensive loss
   Asia .............................               7               23               10               26
    Other regions ...................               3                2                3                2
                                               ------           ------           ------           ------
       Total international ..........              45               63               50               62
                                               ------           ------           ------           ------
          Total net revenue .........             100%             100%             100%             100%
                                               ======           ======           ======           ======
</TABLE>

In the six months ended December 31, 2000, sales to an international distributor
of our software products and the account manager for a number of our Asian
original equipment manufacturer customers, accounted for 14% of our net revenue
from continuing operations and consisted primarily of sales of our infrared
hardware products.

We expect that international sales will continue to represent a substantial
portion of our net revenue in the foreseeable future and will comprise between
45% and 55% of our net revenue throughout fiscal 2002.

We market and sell most of our products through multiple indirect channels,
primarily distributors and resellers. We support our indirect channels with our
own marketing and sales organization. We provide some of our distributors and
resellers with price protection rights, which have not had a material impact on
our results of operations.

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

<TABLE><CAPTION>
                                               THREE MONTHS ENDED                             SIX MONTHS ENDED
                                                   DECEMBER 31,                                  DECEMBER 31,
                                      ---------------------------------------        ---------------------------------------
                                        2001         CHANGE            2000            2001         CHANGE            2000
                                      -------        -------          -------        -------        -------          -------
<S>                                   <C>                 <C>         <C>            <C>                 <C>         <C>
Revenue:
License fees and royalties ...        $ 5,703             (2)%        $ 5,811        $ 9,884             (5)%        $10,366
Services .....................            723             24              583          1,445             45              998
Hardware and other ...........            385           (889)           3,455          1,217            (83)           7,202
                                      -------        -------          -------        -------        -------          -------
     Total net revenue .......        $ 6,811            (31)%        $ 9,843        $12,546            (32)%        $18,566
</TABLE>

License fee and royalty revenue decreased in the three months ended December 31,
2001 from the same periods in the prior year as a result of a decrease in
revenue from our Bluetooth and infrared software development kits due to the
timing of original equipment manufacturer's development projects and the result
of a decrease in royalty buyouts, primarily of our Bluetooth software. These
decreases were partially offset by an increase in the number of XTNDConnect
Server and Advantage software licenses sold. Service revenue increased in the
three and six months ended December 31, 2001 from the same periods in fiscal
2001 primarily due to an increase in revenue from support and maintenance
contracts, partially offset by a decrease in revenue from non-recurring
engineering and other consulting products, which fluctuates as a result of the
timing of customer projects. The decrease in revenue from hardware products was
due primarily to an

                                       10
<PAGE>

expected decrease in unit sales of our infrared products sold to original
equipment manufacturers and our Internet products.

We expect license fee and royalty revenue from our mobile information software
products to continue to increase and revenue from our mobile information
management hardware products to continue to decrease throughout fiscal 2002. We
also expect service revenue to fluctuate based primarily on the timing of
non-recurring engineering fees earned.

Throughout fiscal 2001, we consolidated three of our offices in the US and
Europe and, as a result, reduced operating expenses and reduced our workforce by
approximately 40 employees. During our first quarter of fiscal 2002 ended
September 30, 2001, we also completed the restructuring plan that we announced
in our fourth quarter of fiscal 2001 to further reduce costs and improve
operating efficiencies. This restructuring included the termination of
approximately 40 employees in research and development, marketing and sales,
administration and manufacturing. The effect of these and other cost-saving
measures are reflected in our cost of goods sold and our operating expenses for
fiscal 2002 as compared to the same period last year.

<TABLE><CAPTION>
                                          THREE MONTHS ENDED                                SIX MONTHS ENDED
                                              DECEMBER 31,                                     DECEMBER 31,
                              ----------------------------------------         ----------------------------------------
                                2001             CHANGE          2000            2001             CHANGE         2000
                              ----------------------------------------         ----------------------------------------
<S>                           <C>                  <C>         <C>             <C>                  <C>         <C>
Gross profit .........        $ 5,933              (4)%        $ 6,176         $10,475              (6)%        $11,129
Gross margin .........             87%                              63%             84%                              60%
</TABLE>

Our cost of net revenue consists primarily of costs associated with:

o    post-sales support;
o    component, labor and overhead costs of our hardware products;
o    amortization of purchased technology;
o    royalties for the use of third-party software; and
o    other production-related activities.

The increase in gross margin in the three and six months of fiscal 2002 from the
same periods last year was the result of an increase in revenue from sales of
software products sold, which have higher gross margins than our hardware
products. Our higher-margin mobile information management software products
represented 94% and 90% of our net revenue from continuing operations in the
three and six months ended December 31, 2001, respectively, compared to 65% and
61%, respectively, in the same periods last year. The increase was also due, to
a much lessor extent, to the cost reductions implemented throughout fiscal 2001
and in the first quarter of fiscal 2002, as described above.

We expect that increased sales of our mobile information management software
products will continue to have a positive impact on our gross margin. We expect
our gross margin to be in the range of 87% to 89% throughout the remainder of
fiscal 2002.

<TABLE><CAPTION>
                                                       THREE MONTHS ENDED                           SIX MONTHS ENDED
                                                          DECEMBER 31,                                 DECEMBER 31,
                                            -------------------------------------         -------------------------------------
                                             2001             CHANGE        2000           2001           CHANGE          2000
                                            -------------------------------------         -------------------------------------
<S>                                         <C>                <C>         <C>            <C>                <C>         <C>
Research and development ...........        $2,996             (5)%        $3,166         $5,690             (5)%        $5,997
     As a % of net revenue .........            44%                            32%            45%                            32%
</TABLE>

Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, consulting costs and
facility costs. The decrease in research and development expenses in the three
and six months ended December 31, 2001 from the same periods last year was
primarily the result of a reduction in personnel subsequent to our
restructuring. At December 31, 2001, we had 105 full-time equivalent research
and development personnel and contractors, a 6% decrease from the 112 full-time
equivalent personnel at the same time last year.

                                       11
<PAGE>

We expect research and development expenses to remain relatively flat throughout
the remainder of fiscal 2002.

<TABLE><CAPTION>
                                                      THREE MONTHS ENDED                           SIX MONTHS ENDED
                                                          DECEMBER 31,                                DECEMBER 31,
                                            -------------------------------------         -------------------------------------
                                             2001            CHANGE         2000            2001          CHANGE         2000
                                            -------------------------------------         -------------------------------------
<S>                                         <C>               <C>          <C>            <C>               <C>          <C>
Marketing and sales ................        $3,567            (28)%        $4,959         $7,069            (22)%        $9,011
     As a % of net revenue .........            52%                            50%            56%                            49%
</TABLE>

Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing and sales personnel, promotional
expenses, pre-sales support costs and travel costs. The decrease in marketing
and sales expenses for the three and six months ended December 31, 2001 from the
same periods last year was primarily due to a reduction in promotional expenses
of approximately $900,000 and a 35% reduction in marketing and sales personnel
subsequent to our restructuring. At December 31, 2001, we had 109 full-time
equivalent marketing and sales personnel and contractors, as compared to 168
full-time equivalent personnel at the same time last year.

We expect marketing and sales expenses, specifically expenses associated with
our mobile information software products, to continue to increase throughout
fiscal 2002 as our revenue increases, but decrease as a percentage of net
revenue.

<TABLE><CAPTION>
                                                       THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                           DECEMBER 31,                                DECEMBER 31,
                                            -------------------------------------         -------------------------------------
                                              2001           CHANGE         2000           2001            CHANGE        2000
                                            -------------------------------------         -------------------------------------
<S>                                         <C>               <C>          <C>            <C>               <C>          <C>
General and administrative .........        $1,225            (11)%        $1,375         $2,192            (18)%        $2,670
     As a % of net revenue .........            18%                            14%            17%                            14%
</TABLE>

General and administrative expenses generally consist of salaries and other
personnel costs of our finance, management information systems, human resources
and other administrative employees, and professional service and insurance
costs. The decrease in general and administrative expenses in the three and six
months ended December 31, 2001 from the same periods last year was primarily
attributable to a decrease in personnel subsequent to our restructuring in our
quarter ended September 31, 2001. At December 31, 2001, we had 46 full-time
equivalent general and administrative personnel, as compared to 64 full-time
equivalent personnel at the same time last year.

We expect general and administrative expenses to remain relatively flat
throughout the remainder of fiscal 2002.

<TABLE><CAPTION>
                                                           THREE MONTHS ENDED                          SIX MONTHS ENDED
                                                               DECEMBER 31,                               DECEMBER 31,
                                               ----------------------------------------   ----------------------------------------
                                                  2001             CHANGE         2000         2001          CHANGE         2000
                                               ----------------------------------------   ----------------------------------------
<S>                                            <C>                   <C>        <C>             <C>            <C>         <C>
Income tax benefit ....................        $   (19)              99%        $(1,293)        $--            100%        $(2,536)
     As a % of loss before income
       taxes ..........................              1%                              37%         --%                            37%
</TABLE>

The changes in the income tax benefit for the three and six months ended
December 31, 2001 from the same periods last year were attributable to us not
recognizing the benefit of our deferred tax assets in fiscal 2002 against our
income tax benefit. For the three and six months ended December 31, 2001, we did
not recognize the benefit of $671,000 and $1.6 million, respectively, in
deferred tax assets.

As of December 31, 2001, we had recorded a full valuation allowance of $21.4
million against our deferred tax assets. In assessing our ability to realize
deferred income tax assets, we consider whether it is more likely than not that
some or all of the deferred tax assets will be realized. The ultimate
realization of the deferred tax assets is dependent on whether we generate
taxable income during periods in which the temporary differences reverse and net
operating loss and tax credit carryforwards expire.

                                       12
<PAGE>

We recorded a valuation allowance equal to 100 percent of our remaining deferred
tax assets at June 30, 2001, as a result of several factors that arose in our
fourth quarter of fiscal 2001. Such factors were:

o    the sale of our profitable printing solutions segment in May 2001;
o    the decline in the overall economy and the impact it had on us and our
     customers in our fourth quarter;
o    changes in our sales force that occurred in our fourth quarter; and
o    the operating losses in our mobile information segment.

Based on these factors, and because our remaining operating segment has not been
profitable, we determined that, under generally accepted accounting principles,
sufficient evidence no longer existed to enable us to determine that it was more
likely than not that we would be able to generate taxable income during periods
in which our temporary differences reverse and net operating loss and tax credit
carryforwards expire.

RESULTS OF DISCONTINUED OPERATIONS
----------------------------------
On May 31, 2001, we sold our printing solutions segment, which included our
network print server and non-network printer sharing products, to Troy Group,
Inc. for $1.6 million in cash, net of expenses. We sold our printing solutions
segment to Troy because the segment was not consistent with our core business
strategy, which focuses on mobile information management solutions.

Pursuant to the terms of the Asset Purchase Agreement between the parties, on
May 31, 2001, we transferred to Troy certain inventory, equipment, patents,
trademarks and other intellectual property rights, customer and supplier lists
and rights under certain contracts that existed as of the close of business on
May 30, 2001. Troy also assumed from us certain contractual and warranty
obligations and purchase commitments. Subsequent to the sale of our printing
solutions segment, Troy hired approximately 40 of our employees.

As a result of this disposition in our fourth quarter of fiscal 2001, our
printing solutions segment has been accounted for as discontinued operations in
accordance with Accounting Principles Bulletin No. 30. Amounts in this Quarterly
Report on Form 10-Q for our printing solutions segment, including the financial
statements and related notes, have been reclassified in the prior year to
reflect the discontinued operations.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
----------------------------------------------------

                                                   SIX MONTHS ENDED DECEMBER 31
                                                      ----------------------
                                                        2001           2000
                                                      -------        -------
Net cash used by operating activities..........       $(2,900)       $(2,737)

Net cash used by operating activities in the first six months of fiscal 2002 was
primarily the result of our net loss, adjusted for such non-cash items as
depreciation and amortization, and the result of a decrease in accounts payable
and accrued expenses. These cash uses were partially offset by a decrease in
receivables, prepaid expenses and other assets, and inventories, and an increase
in deferred revenue.

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

Accounts receivable, net of allowances, was $6.3 million at December 31, 2001
and $8.5 million at June 30, 2001. We expect that accounts receivable may
increase in the future if our net revenue increases and if net revenue from
original equipment manufacturers and international customers becomes a higher
percentage of our net revenue, as such customers generally have longer payment
cycles.

                                       13
<PAGE>

                                                   SIX MONTHS ENDED DECEMBER 31
                                                      ----------------------
                                                        2001           2000
                                                      -------        -------
Net cash used by investing activities..........       $    (1)       $  (571)

As part of our effort to control cash and expenses, we did not make a
significant investment in property and equipment in the six months ended
December 31, 2001. Net cash used by investing activities in the six months ended
December 31, 2000 consisted primarily of purchases of property and equipment.

We currently plan to incur aggregate capital expenditures of approximately
$200,000 during fiscal 2002, primarily for software, system improvements and
personal computers.

                                                   SIX MONTHS ENDED DECEMBER 31
                                                      ----------------------
                                                        2001           2000
                                                      -------        -------

Net cash provided by financing activities......       $   439        $ 1,984

Net cash provided by financing activities in the six months ended December 31,
2001 and 2000 consisted primarily of proceeds from the issuance of common stock
under our stock plans.

On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank, under which we can currently access up to $5.0 million of financing
in the form of a demand line of credit, subject to current accounts receivable
balances. The line of credit is collateralized by certain of our assets.
Interest on any borrowings will be paid at prime plus one percent but not less
than 5.5%. The line of credit agreement requires us to maintain certain
financial ratios and expires on January 15, 2004.

We believe that our existing working capital and the funds we expect to generate
from our operations will be sufficient to fund our anticipated working capital
and capital expenditure requirements through fiscal 2002. In the longer term, we
may require additional sources of liquidity to fund future growth. These sources
of liquidity may include borrowing against our line of credit or offering
additional equity securities, which could result in dilution to our
stockholders, or additional debt financing.

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

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

In participating countries, we have completed the transition of our product
prices to the European single currency, the euro, and have converted financial
systems from local denominations to the euro. We did not experience significant
costs to make the transition and all such costs were expensed to operations as
they were incurred.

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the euro and the British pound sterling, to

                                       14
<PAGE>

manage fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. While these instruments are subject to fluctuations
in value, these fluctuations are generally offset by fluctuations in the value
of the underlying asset or liability being managed, resulting in minimal net
exposure for us. The success of these currency activities depends upon
estimation of intercompany balances denominated in various foreign currencies.
To the extent that these forecasts are overstated or understated during periods
of currency volatility, we could experience unanticipated currency gains or
losses. We had $2.4 million and $2.8 million in forward contracts in place,
which approximated fair value, against the euro and British pound sterling at
December 31 and June 30, 2001, respectively, which matured within 30 days. We
recognized net currency exchange loss of $8,000 and a gain of $37,000 in the
three months ended December 31, 2001 and 2000, respectively. We recognized net
currency exchange losses of $41,000 and $26,000 in the six months ended December
31, 2001 and 2000, respectively.

RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 141, "Business Combinations," which requires
that we account for all business combinations by the purchase method. This
statement applies to all business combinations for which the date of acquisition
is July 1, 2001, or later.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets,"
which addresses the accounting for intangible assets that are acquired
individually or with a group of other assets, other than those acquired in a
business combination, upon their acquisition. This statement also addresses the
accounting for goodwill and other intangible assets after they have been
initially recognized in the financial statements. We are currently evaluating
the impact that this statement may have on our operations. We are required to
adopt this statement in our first quarter of fiscal 2003 ending September 30,
2002.

In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets," which supersedes various existing standards on accounting
for long-lived assets. This new standard establishes a single accounting model
for long-lived assets to be disposed of by sale and is based on the framework of
Statement of Financial Accounting Standard No. 121. We are required to adopt
this statement in our first quarter of fiscal 2003 ending September 30, 2002.

In March 2000, the Emerging Issues Task Force reached a consensus on EITF Issue
No. 00-14, "Accounting for Certain Sales Incentives." This consensus provides
guidance on the recognition, measurement and income statement classification of
sales incentives which are offered voluntarily by a vendor without charge to
customers that can be used in, or that are exercisable by a customer as a result
of, a single exchange transaction. Our accounting policies conform to the
guidance in this consensus; therefore, we effectively adopted Issue No. 00-14
upon its issuance.

In September 2000, the Emerging Issues Task Force issued EITF Issue No. 00-25,
Accounting for Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products." This issue addresses when
consideration from a vendor to a retailer in connection with the retailer's
purchase of the vendor's products or to promote sales of the vendor's products
by the retailer should be classified in the vendor's income statement as a
reduction of revenue. Our accounting policies conform to the guidance in this
consensus, therefore, we effectively adopted Issue No. 00-25 upon its issuance.


                                       15
<PAGE>

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

WE HAVE A RECENT HISTORY OF LOSSES AND ANTICIPATE CONTINUED LOSSES AND NEGATIVE
CASH FLOW AT LEAST THROUGH OUR FIRST THREE QUARTERS OF FISCAL 2002.

Since the third quarter of our fiscal 1999, we have devoted significant
financial resources to the research and development and marketing and sales for
our mobile information management software products and, as a result, we have
generated operating losses. We intend to continue to devote significant
financial resources to product development and marketing and sales and, as a
result, we expect to continue to incur operating losses and negative cash flow
from operations for at least the first three quarters of fiscal 2002. We
currently believe that we will be profitable and will generate positive cash
flow from operations for our fourth quarter of fiscal 2002. Our ability to do
so, and our ability to maintain profitability in subsequent periods, will depend
on a number of factors, including:

o    our ability to generate sufficient revenue and control expenses;
o    changes in the buying patterns of corporate information technology and our
     original equipment manufacturer customers;
o    changes in customer demand for our products;
o    normal seasonality that we experience in the first quarter of our fiscal
     year;
o    the market adoption rate of Bluetooth or other technologies on which a
     number of our products are based;
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 original equipment manufacturers;
o    the emergence of new technologies or industry standards;
o    the timing of customer orders, which can be influenced by fiscal year-end
     buying patterns, seasonal trends or general economic conditions; and
o    a shift in the mix of our products sold, which may result in fluctuations
     in our gross margin.

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

Our operating results have fluctuated in the past and may continue to do so in
the future. Our revenue and operating results will vary from quarter to quarter
for many reasons beyond our control, including those described in this section.
If our operating results fall below the expectations of securities analysts or
investors, the price of our stock may fall. In addition, quarter-to-quarter
variations in our revenue and operating results could create uncertainty about
the direction or progress of our business, which could result in a decline in
the price of our stock.

OUR BUSINESS MAY BE HARMED BY DECLINES IN INFORMATION TECHNOLOGY SPENDING.

The market for our products depends on economic conditions affecting the broader
economic climate and spending on information technology, including mobile
applications and devices. Downturns in the overall economy 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. We have seen a severe downturn in the worldwide
economy in the past year. We expect this downturn to continue and are uncertain
as to the severity and duration of the downturn, in part because of the
uncertainty regarding the potential long-term impact of terrorist attacks, such
as the attacks on the United States on September 11, 2001, and the resulting
military actions. In particular, capital spending in the information technology
sector generally has decreased in the past 12 months and many of our customers
and potential customers have experienced declines in their revenue and
operations. In this environment, customers may experience financial difficulty
or cease operations.

                                       16
<PAGE>

While we believe we have adequately factored these conditions into our current
revenue forecasts, if these conditions worsen, demand for our products may be
further 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 decline, which would harm our operating results. If the current economic
slowdown persists or worsens, we also may be forced to reduce our operating
expenses, which could result in one-time charges incurred in connection with
restructuring or other cost-cutting measures we may take.

WE FORECAST MANY OF OUR OPERATING EXPENSES BASED ON FORECASTED REVENUE AND GROSS
PROFIT, WHICH IS DIFFICULT TO PREDICT. IF WE FAIL TO ACCURATELY PREDICT REVENUE
AND GROSS PROFIT IN A PARTICULAR PERIOD, WE MAY BE UNABLE TO ADJUST OUR
EXPENDITURES IN THAT PERIOD AND OUR OPERATING RESULTS WOULD BE HARMED.

Our quarterly revenue and operating results depend in large part on the volume
and timing of orders received within the quarter and on the number of software
seats licensed, which are difficult to forecast. In addition, a significant
portion of our revenue results from the sale of products to a number of original
equipment manufacturers and distributors, which are difficult to predict.
Significant portions of our expenses are fixed in advance, based in large part
on our forecast of future revenue. If revenue and gross profit are below
expectations in any given quarter, the adverse impact of the shortfall on our
operating results may be magnified by our inability to adjust our expenditures
to compensate for the shortfall.

IF THE MARKETS FOR OUR PRODUCTS DO NOT CONTINUE TO GROW OR GROW AT EXPECTED
RATES, DEMAND FOR OUR PRODUCTS WOULD BE REDUCED AND OUR BUSINESS WOULD BE
HARMED.

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

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

An important element of our strategy 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.

                                       17
<PAGE>

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. 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.

We compete with:

o    mobile data management companies, including Synchrologic, Aether Software,
     Pumatech and AvantGo;
o    client/server database providers, including Microsoft, Interbase, Pervasive
     Software and Oracle;
o    mobile connectivity companies, including Widcomm, Digianswer (a subsidiary
     of Motorola), Open Interface and IVT Corporation; and
o    internal research and development departments of original equipment
     manufacturers, many of whom are our current customers.

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

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

The markets for our products are characterized by:

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.

IF SPECIFIC INDUSTRY-WIDE STANDARDS AND PROTOCOLS, SUCH AS BLUETOOTH, SYNCML AND
IRDA, UPON WHICH OUR PRODUCTS ARE OR WILL BE BASED, DO NOT ACHIEVE WIDESPREAD
ACCEPTANCE, OUR BUSINESS WOULD BE HARMED.

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

o    Bluetooth, a short-range radio communication protocol;
o    SyncML, a data synchronization protocol; and
o    IrDA, a wireless communication protocol created by the Infrared Data
     Association.

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

                                       18
<PAGE>

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    the 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 personnel 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, personnel, research and
     development and marketing, sales and support operations;
o    expansion into new markets and business areas; and
o    potential adverse short-term effects on our operating results.

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.

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

For our quarter ended December 31, 2001, 45% of our revenue was generated from
international sales. We expect that international sales will continue to
represent a substantial portion of our revenue for the foreseeable future.
International sales are subject to a number of risks, including:

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

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

We license technology on a non-exclusive basis from several companies for use
with our products and anticipate that we will continue to do so in the future.
For example, we license authentication and encryption technology from Certicom
Corporation, which we include in our XTNDConnect Server products. Our inability
to continue to license this technology, or to license other 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.

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<PAGE>

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

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

From time to time, we enter into foreign currency forward contracts, typically
against the 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.

THE COMPLEX COMPUTER SOFTWARE AND HARDWARE PRODUCTS THAT WE PRODUCE MAY CONTAIN
DEFECTS FOR WHICH WE MAY BE LIABLE.

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

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

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

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

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

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<PAGE>

OUR STOCK PRICE MAY BE VOLATILE AND COULD DROP SIGNIFICANTLY, RESULTING IN THE
PARTIAL OR TOTAL LOSS OF A STOCKHOLDER'S INVESTMENT.

The trading price of our common stock may fluctuate significantly, which may
cause a stockholder's investment to decrease in value. The following factors may
have a significant impact on the market price of our common stock:

o    quarter-to-quarter variations in our operating results;
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, our customers or us.

IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, OUR BUSINESS WILL SUFFER.

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

We anticipate that our growth and expansion will require that we recruit, hire,
train and retain new engineering, executive, sales and marketing personnel.
Difficulty in recruiting qualified personnel could require us to incur
significant costs to recruit personnel or could limit our ability to grow. In
addition, in order to manage our growth successfully, we will need to continue
to expand and improve our operational, management and financial systems and
controls. The failure to do so could harm our business.

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

Our success depends upon the continuing contributions of our key management,
engineering, sales and marketing and finance personnel and our ability to
attract and retain key personnel. We do not maintain any key-person life
insurance policies. The loss of key personnel could harm our business. In our
first quarter of fiscal 2002, we completed a restructuring plan and reduced our
workforce by approximately 40 employees. Despite this reduction in workforce, we
will continue to recruit personnel, particularly sales, with the specific
technical skills that are critical to our business.

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO WOULD BE
BENEFICIAL TO OUR STOCKHOLDERS.

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

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<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Substantially all of our liquid investments are at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. All of our liquid investments mature within 90 days or less of
December 31, 2001, therefore, we believe that the market risk arising from our
holdings of liquid investments is minimal.

Sales made by our international subsidiaries are generally denominated in the
foreign country's currency, with the exception of our Singapore subsidiary.
Fluctuations in exchange rates between the United States dollar and other
currencies could materially harm our business. From time to time, we enter into
foreign currency forward contracts, typically against the British pound sterling
and the euro, to manage fluctuations in the value of foreign currencies on
transactions with our international subsidiaries, thereby limiting our risk that
would otherwise result from changes in exchange rates. While these instruments
are subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed,
resulting in minimal net exposure for us. The success of these hedging
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. We had $2.4 million and $2.8 million in
forward contracts in place at December 31 and June 30, 2001, respectively, which
matured within 30 days and which approximated fair value.












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<PAGE>

PART II.  OTHER INFORMATION

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At our 2001 Annual Meeting of Stockholders, which was held on October 24, 2001,
there were 10,972,764 shares of common stock entitled to vote at the meeting and
a total of 8,380,170 shares were represented at the meeting. The following
proposals were submitted to a vote of the stockholders:

(a)  The following nominees for Class III Directors were elected. Each person
     elected as a Class III Director will serve for a three-year term that
     expires upon the 2004 Annual Meeting of Stockholders or until their
     successors are elected and qualified.

                                                               VOTES WITH
            NAME OF NOMINEE             VOTES FOR          AUTHORITY WITHHELD
     ----------------------------    --------------     ------------------------

     Charles W. Jepson                  8,112,451             267,275
     Raymond A. Smelek                  8,104,414             275,312
     S. Scott Wald                      8,119,223             260,503

(b)  The ratification of the appointment of PricewaterhouseCoopers LLP as our
     independent public accountants for the year ended June 30, 2002 was
     approved:

o    8,325,096 votes in favor;
o    44,850 votes against; and
o    9,780 abstentions.

(c)  An increase in the number of shares of common stock reserved for issuance
     under the Extended Systems Incorporated 1998 Stock Plan was approved:

o    7,952,615 votes in favor;
o    413,482 votes against; and
o    9,780 abstentions.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

     10.3.2       Amendment 2 to the 1998 Employee Stock Purchase Plan
     10.26        Employment Agreement between Extended Systems and Bradley J.
                  Surkamer
     10.27        Employment Agreement between Extended Systems and Karla K.
                  Rosa
     10.28        Employment Agreement between Extended Systems and Donald J.
                  Baumgartner
     10.29        Employment Agreement between Extended Systems and Kerrin Pease

(b)  REPORTS ON FORM 8-K

We filed no reports on Form 8-K in our quarter ended December 31, 2001.

ITEMS 1, 2, 3, AND 5 OF PART II ARE NOT APPLICABLE AND HAVE BEEN OMITTED.




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<PAGE>

                                    SIGNATURE

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


                                 Extended Systems Incorporated



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

                                     (Principal Financial and Accounting Officer
                                     and Duly Authorized Officer)

























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