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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

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

FOR THE TRANSITION PERIOD FROM_____ TO _____

Commission File Number 000-23597

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

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

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

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

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

The number of shares outstanding of the registrant's Common Stock as of March
31, 2001 was 10,767,713.

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EXTENDED SYSTEMS INCORPORATED

FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2001

INDEX

PART I. FINANCIAL INFORMATION PAGE

Item 1. Financial Statements

Consolidated Statements of Operations
for the Three and Nine Months Ended
March 31, 2001 and 2000 1

Consolidated Statements of Comprehensive
Loss for the Three and Nine Months Ended
March 31, 2001 and 2000 1

Consolidated Balance Sheets as of March 31,
2001 and June 30, 2000 2

Consolidated Statements of Cash Flows for
the Three and Nine Months Ended March
31, 2001 and 2000 3

Notes to Consolidated Financial Statements 4

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

Item 3. Quantitative and Qualitative Disclosures
about Market Risk 23

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 24

SIGNATURE 25

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------

Net revenue ................................... $ 11,351 $ 14,896 $ 37,437 $ 43,257
Cost of net revenue ........................... 4,069 7,150 14,871 22,170
-------- -------- -------- --------
Gross profit ............................ 7,282 7,746 22,566 21,087
Operating expenses:
Research and development ................... 3,357 2,434 9,818 6,882
Acquired in-process research and development -- -- -- 2,352
Marketing and sales ........................ 5,662 4,621 16,552 13,139
General and administrative ................. 1,292 985 3,980 3,153
Amortization of intangibles ................ 243 241 729 648
-------- -------- -------- --------
Loss from operations .................... (3,272) (535) (8,513) (5,087)
Other expense (income), net ................... (269) (32) (471) 72
Interest expense .............................. 1 20 1 255
-------- -------- -------- --------
Loss before income taxes ................ (3,004) (523) (8,043) (5,414)
Income tax benefit ............................ (1,112) (199) (2,976) (1,561)
-------- -------- -------- --------
Net loss ................................ $ (1,892) $ (324) $ (5,067) $ (3,853)
======== ======== ======== ========
Loss per share:
Basic ...................................... $ (0.18) $ (0.03) $ (0.48) $ (0.41)
Diluted .................................... $ (0.18) $ (0.03) $ (0.48) $ (0.41)
Number of shares used in per share calculation:
Basic ...................................... 10,736 9,812 10,521 9,374
Diluted .................................... 10,736 9,812 10,521 9,374

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
(UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net loss ...................................... $ (1,892) $ (324) $ (5,067) $ (3,853)
Change in currency translation (69) (36) (117) (152)
-------- -------- -------- --------
Comprehensive loss ......................... $ (1,961) $ (360) $ (5,184) $ (4,005)
======== ======== ======== ========

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PAR VALUE)

MARCH 31, JUNE 30,
2001 2000
-------- --------
(UNAUDITED)

ASSETS
Current:
Cash and cash equivalents ......................................... $ 4,498 $ 6,191
Receivables ....................................................... 12,979 12,499
Inventories ....................................................... 2,460 3,484
Prepaids and other ................................................ 1,323 1,200
Deferred income taxes ............................................. 679 715
-------- --------
Total current assets ........................................... 21,939 24,089
Property and equipment, net .......................................... 7,342 7,817
Intangibles, net ..................................................... 5,029 6,237
Deferred income taxes ................................................ 10,260 5,785
Other assets ......................................................... 293 293
-------- --------
Total assets ................................................... $ 44,863 $ 44,221
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Current debt ...................................................... $ -- $ 67
Accounts payable .................................................. 4,327 3,026
Accrued expenses .................................................. 2,729 2,643
Deferred revenue .................................................. 1,361 770
-------- --------
Total current liabilities ...................................... 8,417 6,506
-------- --------

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;
10,768 and 10,309 shares issued and outstanding
11 10
Additional paid-in capital ........................................ 31,886 28,108
Retained earnings ................................................. 5,473 10,540
Deferred compensation ............................................. (128) (264)
Accumulated other comprehensive loss .............................. (796) (679)
-------- --------
Total stockholders' equity ..................................... 36,446 37,715
-------- --------
Total liabilities and stockholders' equity ..................... $ 44,863 $ 44,221
======== ========

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

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

NINE MONTHS ENDED
MARCH 31,
---------------------
2001 2000
-------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................. $ (5,067) $ (3,853)
Adjustments to reconcile net loss to net cash used by
operating activities:
Acquired in-process research and development ....... -- 2,352
Deferred income taxes .............................. (4,438) 68
Tax benefit from employee stock transactions ....... 1,308 976
Provision for bad debts ............................ 218 44
Provision for write-down of inventory .............. 605 367
Gain on sale of assets ............................. (173) --
Depreciation and amortization ...................... 2,337 2,183
Accretion of discount on long-term debt ............ -- 174
Payment of discount on long-term debt .............. -- (3,675)
Stock option compensation .......................... 135 211
Other .............................................. (253) (9)
Effects of changes in assets and liabilities, net of
effect of acquisitions:
Receivables ...................................... (97) (2,158)
Inventories ...................................... 388 80
Prepaids and other assets ........................ (126) 159
Accounts payable and accrued expenses ............ 591 142
Deferred revenue ................................. 1,408 173
-------- --------
Net cash used by operating activities ......... (3,164) (2,766)
-------- --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................... (915) (788)
Maturities of available-for-sale securities ........... -- 3,001
Acquisition:
Oval (1415) Limited, net of cash acquired .......... -- (5,273)
Other investing activities ............................ 18 (1,563)
-------- --------
Net cash used by investing activities ......... (897) (3,223)
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock ............ 2,466 6,257
Payments on long-term debt ............................ (67) (4,803)
-------- --------
Net cash provided by financing activities ..... 2,399 1,454
Effect of exchange rate changes on cash ............... (31) (36)
-------- --------
Net decrease in cash and cash equivalents ............. (1,693) (4,571)

CASH AND CASH EQUIVALENTS:
Beginning of period ................................... 6,191 9,668
-------- --------
End of period ......................................... $ 4,498 $ 5,097
======== ========

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Extended Systems has two primary operating segments. Our mobile information
management segment includes both mobile data management and universal mobile
connectivity products that enable mobile users to access, collect, synchronize
and print information on demand. Our printing solutions segment provides printer
connectivity solutions for network and non-network computer environments.

BASIS OF PRESENTATION. Our consolidated financial statements include Extended
Systems Incorporated, a Delaware corporation, and its subsidiaries. We have
eliminated all significant intercompany accounts and transactions. In our
opinion, the accompanying unaudited consolidated financial statements contain
all adjustments (consisting solely of normal recurring adjustments) necessary to
present fairly our consolidated financial position and our consolidated results
of operations and cash flows. We have made reclassifications to the consolidated
statements of cash flows to conform the presentations. Tabular amounts are in
thousands.

The information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Notes thereto included in our 2000
Annual Report on Form 10-K.

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 2.6
million and 2.4 million in stock options as of March 31, 2001 and 2000,
respectively, because to include such shares would have been antidilutive.

RECENTLY ISSUED ACCOUNTING STANDARDS. In December 1999, the Securities and
Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition
in Financial Statements." This bulletin affirms the Securities and Exchange
Commission's view in applying generally accepted accounting principles to
revenue recognition in financial statements. We are required to adopt this
bulletin in our fourth quarter of fiscal 2001. Adoption is not expected to have
a material effect on our results of operations or financial position.

MARCH 31, JUNE 30,
RECEIVABLES 2001 2000
------- -------
Accounts receivable................... $10,002 $10,332
Income taxes receivable............... 1,726 1,520
Other receivables..................... 1,656 848
Allowance for doubtful accounts....... (405) (201)
------- -------
$12,979 $12,499
======= =======

MARCH 31, JUNE 30,
INVENTORIES 2001 2000
------- -------
Purchased parts....................... $ 1,361 $ 1,417
Work in process....................... 103 308
Finished goods........................ 996 1,759
------- -------
$ 2,460 $ 3,484
======= =======

MARCH 31, JUNE 30,
INTANGIBLE ASSETS 2001 2000
------- -------
Goodwill.............................. $ 3,967 $ 4,065
Purchased technology.................. 3,128 3,128
Other intangibles..................... 894 894
------- -------
7,989 8,087
Accumulated amortization.............. (2,960) (1,850)
------- -------
$ 5,029 $ 6,237
======= =======

MARCH 31, JUNE 30,
ACCRUED EXPENSES 2001 2000
------- -------
Accrued payroll and related benefits.. $ 1,497 $ 1,145
Accrued warranty and support costs.... 445 435
Other 787 1,063
------- -------
$ 2,729 $ 2,643
======= =======

INCOME TAXES

As of March 31, 2001, we had a valuation allowance of $5.7 million to reduce our
deferred tax assets to estimated realizable value. The valuation allowance
primarily relates to net operating loss carryforwards resulting from the tax
benefit from employee stock transactions, deferred tax assets arising from our
acquisition of Advance Systems and foreign tax credit carryforwards. Based
primarily upon tax planning strategies and, to a certain extent, projections for
future taxable income over the periods in which the temporary differences are
anticipated to reverse, we believe it is more likely than not that the remaining
net deferred tax assets will be realized.

BUSINESS SEGMENT, GEOGRAPHIC AREA DATA AND MAJOR CUSTOMERS

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

Our mobile information management segment includes both mobile data management
and universal mobile connectivity solutions that enable mobile users to access,
collect, synchronize and print information on demand. Our products in the mobile
information management segment include data synchronization and management
software, wireless connectivity products and client/server database management
systems with remote access capabilities. We sell mobile information management
products primarily to original equipment manufacturers, enterprises, application
developers and resellers.

Our printing solutions segment includes our maturing network print server and
non-network printer sharing products sold primarily through our worldwide
distribution channel to computer resellers and Fortune 1000 companies and to
original equipment manufacturers.

Our other products primarily consist of our discontinued mechanical port
replicator products.

The accounting policies for our segments are the same as those described in the
Summary of Significant Accounting Policies in our Annual Report on Form 10-K. We
had no intersegment sales. We measure segment operating results based on income
or loss from operations. We do not generally distinguish our assets by
reportable segment. We allocate depreciation expense and other indirect expenses
to reportable segments using various methods such as percentage of square
footage used to total square footage and percentage of direct expenses to total
direct expenses.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------

Net revenue:
Mobile information management. $ 8,270 $ 10,577 $ 26,835 $ 29,133
Printing solutions ........... 3,082 4,348 10,602 14,110
Other products ............... (1) (29) -- 14
-------- -------- -------- --------
Total ..................... $ 11,351 $ 14,896 $ 37,437 $ 43,257
======== ======== ======== ========

Income (loss) from operations:
Mobile information management. $ (3,522) $ (216) $ (8,757) $ (4,631)
Printing solutions ........... 254 (280) 274 (385)
Other products ............... (4) (39) (30) (71)
-------- -------- -------- --------
Total ..................... $ (3,272) $ (535) $ (8,513) $ (5,087)
======== ======== ======== ========

Our mobile information management segment loss from operations includes an
acquired in-process research and development charge of $2.4 million recorded in
the nine months ended March 31, 2000.

Sales to an original equipment manufacturer accounted for 24% of net revenue in
the nine months ended March 31, 2000 and were primarily in our mobile
information management segment.

PROPOSED MERGER WITH PALM, INC.

On March 6, 2001, Palm, Inc. and Extended Systems announced the signing of a
definitive agreement under which Palm will acquire Extended Systems in a
stock-for-stock exchange. Under the terms of the definitive agreement, Extended
Systems stockholders will receive a number of Palm shares based on the average
closing price for Palm common stock for the 10 trading days ending two business
days prior to the Extended Systems stockholders' meeting to approve the merger.
If the average closing price of Palm stock is between $16.60 and $22.00 per
share, for each Extended System share, Extended Systems stockholders will
receive a number of Palm shares equal to $22.00 divided by the Palm average per
share closing price. If the Palm average closing price is at or above $22.00 per
share, Extended Systems stockholders will receive one Palm share for each
Extended Systems share; if the Palm average closing price is at or below $16.60,
Extended Systems stockholders will receive 1.325 Palm shares for each Extended
Systems share.

If the merger agreement terminates under limited circumstances, Extended Systems
could be required to pay Palm a termination fee of $11 million. The proposed
merger remains subject to various customary closing conditions, including
Extended Systems stockholder approval, and is expected to close in June 2001.

In conjunction with the merger agreement, Extended Systems granted Palm an
option to acquire shares of Extended Systems common stock up to a number of
shares equal to 19.9% of the issued and outstanding shares of Extended Systems
capital stock at an exercise price of $22.00 per share. The option is not
currently exercisable and Palm may only exercise the option upon the occurrence
of certain events similar to those upon which the termination fee is payable.

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, 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 the proposed merger with Palm, Inc.
o levels of mobile information management and printing solutions product sales;
o levels of international sales;
o levels of original equipment manufacturer sales;
o gross margin from each segment;
o staffing and expense levels;
o our ability to realize remaining deferred tax assets;
o the development of a plan to exit our printing solutions business;
o levels of accounts receivable;
o levels of capital expenditures;
o compliance with bank covenants;
o renewal of the line of credit facility;
o anticipated cash funding needs; and
o future acquisitions.

We assume no obligation to update any forward-looking statements and 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 Item 2 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 also carefully review the risk
factors described in other documents that we file from time to time with the
Securities and Exchange Commission, including our 2000 Annual Report on Form
10-K and other Quarterly Reports on Form 10-Q that we have filed in fiscal 2001.
All period references are to our third quarters ended March 31, 2001 and 2000
and our fiscal years ended June 30, 2001 and 2000, unless otherwise indicated.
Tabular amounts are in thousands, except percentages.

OVERVIEW
- --------
On March 6, 2001, Palm, Inc. and Extended Systems announced the signing of a
definitive agreement under which Palm will acquire Extended Systems in a
stock-for-stock exchange. The proposed merger remains subject to various
customary closing conditions, including Extended Systems stockholder approval.
See a further description of the terms of the proposed merger and related
agreements in the Notes to Consolidated Financial Statements. You should also
review documents that we and Palm file from time to time with the Securities and
Exchange Commission, including Palm's Registration Statement on Form S-4, filed
on April 6, 2001, and documents filed pursuant to Rule 425 of the Securities Act
of 1933.

We classify our product offerings into three segments:

o mobile information management;
o printing solutions; and
o other products.

Our mobile information management segment includes both mobile data management
and universal mobile connectivity products that enable users to access, collect,
synchronize and print information on demand. 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. We sell our mobile information
management products primarily to original equipment manufacturers, enterprises,

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

We believe net revenue from mobile information management products will generate
a larger percentage of net revenue as we continue to focus our research and
development and our marketing and sales efforts on our mobile information
management products and as they continue to achieve increased market acceptance.
Our future results of operations will be highly dependent upon the success of
our mobile information management software products, specifically our
XTNDConnect data synchronization and management software and our XTNDAccess and
XTNDConnect Bluetooth wireless connectivity software, which we expect will
generate a majority of our net revenue in the future.

Our printing solutions segment includes our mature network print server and
non-network printer sharing products. In conjunction with the merger agreement
with Palm, we agreed to develop a plan to exit our printing solutions business.
As a result, net revenue from our printing solutions products may decline at an
accelerated rate in coming quarters and will likely represent a decreasing
percentage of our net revenue.

Our other products segment consists of our discontinued mechanical port
replicator products.

We derive a majority of our net revenue from international sales, principally
from our international sales subsidiaries, original equipment manufacturers and
from a limited number of distributors.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------- -----------------
NET REVENUE PERCENTAGES BY REGION 2001 2000 2001 2000
- --------------------------------- ------ ------ ------ ------
Domestic ......................... 44% 38% 42% 29%
International:
Europe ........................ 44 32 39 39
Asia .......................... 11 28 17 30
Other regions ................. 1 2 2 2
------ ------ ------ ------
Total international ....... 56 62 58 71
------ ------ ------ ------
Total net revenue ....... 100% 100% 100% 100%
====== ====== ====== ======

The decrease from the prior year in net revenue from customers in Asia was due
primarily to a decrease in sales of XTNDAccess IrDA Printer Adapters to
Hewlett-Packard, offset in part by an increase in sales to other multi-national
original equipment manufacturers that incorporate or bundle our products with
their products and sell their products worldwide. We expect that international
sales will continue to represent a substantial portion of our net revenue in the
foreseeable future and will comprise 55% to 65% of net revenue throughout fiscal
2001.

A portion of net revenue for several of our products, in particular our
XTNDAccess and XTNDConnect wireless connectivity products, XTNDConnect data
synchronization and management software and our printing solutions products, is
generated from sales to original equipment manufacturers and we intend to
continue to increase sales to original equipment manufacturers in the future. In
the nine months ended March 31, 2000, sales of mobile information management
products and services to Hewlett-Packard accounted for 24% of our net revenue,
which resulted almost entirely from sales of our XTNDAccess IrDA Printer Adapter
for bundling with one of Hewlett-Packard's mid-range printers. As of April 2000,
Hewlett-Packard no longer bundled our XTNDAccess IrDA Printer Adapter with
Hewlett-Packard printers sold in North America, but offered our product as a
free accessory to its customers with the purchase of the

Hewlett-Packard printer. As a result, sales of printer adapters to
Hewlett-Packard have decreased significantly.

Revenue from original equipment manufacturer sales has fluctuated in the past
and we expect it will fluctuate in the future on a quarterly basis, as demand in
the original equipment manufacturer market is difficult to predict and is
dependent upon the timing of original equipment manufacturer projects and the
effectiveness of their marketing efforts.

We market and sell some of our products, primarily our printing solution
products, through multiple indirect channels, primarily distributors and
resellers. We support our indirect channels with our own marketing and sales
organization. We provide most of our distributors and resellers with price
protection rights and limited product return rights for stock rotation. Stock
rotation rights permit distributors to return products to us for credit against
an offsetting purchase order, but are limited based upon amounts purchased by a
given distributor during the preceding quarter. Price protection rights require
that we grant retroactive price adjustments for inventories of our products held
by distributors or resellers if we lower our prices for those products.
Distributor product returns and price protection adjustments have not
historically had a significant impact on our results of operations.

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

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
Net revenue .... $ 11,351 (24)% $ 14,896 $ 37,437 (13)% $ 43,257

The decreases in net revenue in the three and nine months ended March 31, 2001
from the same periods last year were due primarily to 52% and 43% decreases,
respectively, in net revenue from sales of our mobile information management
hardware products, primarily sales of XTNDAccess Infrared Printer Adapters to
Hewlett-Packard. The decreases in net revenue were also due, in part, to 29% and
25% decreases in net revenue from sales of our printing solutions products. The
weakening of the Euro also contributed to the decreases in net revenue as a
result of translating the net revenue of our international subsidiaries, which
is generally denominated in their local currencies, into U.S. dollars. These
decreases were offset, in part, by 17% and 47% increases, respectively, in net
revenue from sales of our mobile information management software products,
principally our Bluetooth software development kits and XTNDConnect data
synchronization and management software.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
Gross profit.... $ 7,282 (6)% $ 7,746 $22,566 7% $21,087
Gross margin.... 64% 52% 60% 49%

Our cost of net revenue consists primarily of costs associated with raw
materials, out-sourced manufacturing of particular subassemblies, in-house labor
associated with assembly, testing, procurement, shipping and quality assurance,
freight, amortization of purchased technology, facility costs and royalties for
the use of third-party software. The increases in gross margin in the three and
nine months ended March 31, 2001 from the same periods last year were the result
of increased sales of mobile information management software products and
decreased shipments of lower margin mobile information management hardware and
printing solutions products.

We expect increased sales of our mobile information management software
products, and decreased sales of lower-margin mobile information management
hardware products, to continue to have a positive impact on our overall gross
margin. The positive impact may be partially offset by the potential continuing
decline in the gross margin in our printing solutions segment as a result of a
continued shift in product mix toward lower margin products.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
Research and
development......$ 3,357 38% $ 2,434 $ 9,818 43% $ 6,882
As a % of
net revenue ..... 30% 16% 26% 16%

Research and development expenses primarily consist of salaries and other
personnel costs of our research and development teams, consulting costs,
facility costs and travel expenses. The increases in research and development
expenses in the three and nine months ended March 31, 2001 from the same periods
last year were primarily due to an increase in the number of engineers dedicated
to mobile information management software projects. This increase was partially
offset by a decrease in expenses in our printing solutions segment as we
continued to refocus our development efforts to new mobile information
management products.

We expect research and development expenses to continue to increase throughout
fiscal 2001, primarily as a result of continued increased staffing in our mobile
information management segment.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
Marketing and
sales............$ 5,662 23% $ 4,621 $16,552 26% $13,139
As a % of net
revenue ......... 50% 31% 44% 30%

Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing, sales and support personnel and
promotional expenses. The increases in marketing and sales expenses in the three
and nine months ended March 31, 2001 from the same periods last year were
primarily due to increased personnel costs and promotional activities for mobile
information management software products, both domestically and at our European
subsidiaries. These increases were partially offset by decreased promotional
activities in our printing solutions segment.

We expect marketing and sales expenses to continue to increase in the future,
primarily in our mobile information management segment.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
General and
administrative...$ 1,292 31% $ 985 $ 3,980 26% $ 3,153
As a % of net
revenue .........11% 7% 11% 7%

General and administrative expenses primarily consist of salaries and other
personnel costs of our finance, management information systems, human resources
and other administrative employees and professional service expenses. The
increases in general and administrative expenses in the three and nine months
ended March 31, 2001 from the same periods last year were primarily attributable
to an increase in the cost of our directors and officers insurance. Our
insurance premiums increased as a result of an increase in insurance coverage
limit and the market environment for directors and officers insurance.

We expect general and administrative expenses to continue to increase in the
future as our operations continue to expand. We also expect to incur employee
severance costs over the next several quarters as a result of integrating our
administrative functions into Palm.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
Income tax benefit. $ 1,112 459% $ 199 $ 2,976 91% $ 1,561
As a % of loss
before income
taxes.............. 37% 38% 37% 29%

The increases in the income tax benefits in the three and nine months ended
March 31, 2001 from the same periods last year were primarily due to increases
in our loss before income taxes. The increase in the effective income tax
benefit in the nine months ended March 31, 2001 from the same period last year
was primarily the result of valuation allowances recorded in the prior year on
deferred tax assets arising from our acquisition of Advance Systems and on
foreign tax credit carryforwards.

RESULTS OF OPERATIONS BY SEGMENT
- --------------------------------
The discussion below addresses the operating results attributable to our two
primary segments. Our segment operating results are not necessarily indicative
of operating results that would result if each segment were a stand-alone
business as a result of fixed corporate costs such as administration and
facilities, which are allocated across all of our segments.

Mobile Information Management Segment
- -------------------------------------
Our mobile information management segment includes both mobile data management
and universal mobile connectivity products that enable users to access, collect,
synchronize and print information on demand. Our 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.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
Net revenue........$ 8,270 (22)% $10,577 $26,835 (8)% $29,133
Loss from
operations......... (3,522) 1,531 (216) (8,757) 89 (4,631)

Net revenue from sales of mobile information management products grew to 73% of
our net revenue for the third quarter of fiscal 2001, up from 71% in the same
period last year.

Net revenue decreased in the three and nine months ended March 31, 2001, from
the same periods last year as a result of decreases in unit sales of our
XTNDAccess infrared hardware products to original equipment manufacturers,
specifically Hewlett-Packard. These decreases were offset in part by volume
driven increases in license revenue, royalties and support and maintenance fees
from our mobile information management software products and increases in
average selling price of XTNDAccess hardware products. Net revenue from our
mobile information management software products, including our Bluetooth and
XTNDConnect data synchronization and management software products, was $5.4
million in the third quarter of fiscal 2001, an increase of 17% from $4.6
million of net revenue in the same period last year. For the nine months ended
March 31, 2001, net revenue from mobile information management software products
was $16.7 million, an increase of 47% from $11.4 million of net revenue in the
same period last year.

We expect that net revenue from mobile information management software products
will continue to expand and will represent the majority of our net revenue and
will continue to have a positive impact on our gross margin. We also expect net
revenue from our mobile information management hardware products to continue to
decline in the coming quarters.

The increased losses from operations in both periods presented from the same
periods last year were primarily the result of an increase in spending for
research and development projects for mobile information management software
products and increased spending in marketing and sales for all mobile
information management products worldwide. These increases in operating expenses
were offset in part by increased gross profit from software licenses sold.

Printing Solutions Segment
- --------------------------
The printing solutions segment includes our maturing network print server and
non-network printer sharing products, sold primarily through our worldwide
distribution channel to computer resellers and Fortune 1000 companies and to
original equipment manufacturers.

THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
2001 CHANGE 2000 2001 CHANGE 2000
----------------------------- -----------------------------
Net revenue.........$ 3,082 (29)% $ 4,348 $10,602 (25)% $14,110
Income (loss) from
operations.......... 254 191 (280) 274 171 (385)

In the third quarter of fiscal 2001, 27% of our net revenue was derived from
sales of our printing solutions products, as compared to 29% in the same period
last year.

The decrease in net revenue in the third quarter of fiscal 2001 from the same
quarter last year is principally due to a decrease in the average selling price
of print server products sold as a result of a change in product mix.

The decrease in net revenue in the nine months ended March 31, 2001 from the
same period last year is due to both a decrease in units sold and a decrease in
the average selling price of units sold. The decrease in the average selling
price is primarily due to a change in product mix.

In conjunction with our proposed merger with Palm, we agreed to develop a plan
for exiting the printing solutions business. As a result, net revenue from sales
of printing solutions products may decline at an accelerated rate in coming
quarters. Gross margin in our printing solutions segment may continue to decline
as a result of reductions in average selling prices and a continued shift in
product mix toward lower margin products.

The increases in income from operations in both periods presented over the same
periods last year resulted from decreases in operating expenses, the impact of
which was partially offset by decreases in gross profit. The decreases in gross
profit resulted from decreases in average selling prices and, to a lesser
extent, a decrease in units sold.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
- ----------------------------------------------------
Net cash used by operating activities in the nine months ended March 31, 2001
was $3.2 million and was comprised primarily of our net loss, adjusted for such
non-cash items as deferred income taxes, depreciation and amortization and a
provision for write-down of inventory. This cash use was partially offset by an
increase in accounts payable and accrued expenses and an increase in deferred
revenue. Net cash used by operating activities in the nine months ended March
31, 2000 was $2.8 million and was primarily the result of the payment of a
discount on long-term debt and an increase in receivables, partially offset by
the net loss incurred adjusted for non-cash charges such as the acquired
in-process research and development charge related to the acquisition of Advance
Systems and depreciation and amortization.

Accounts receivable, net of our allowance for bad debts, was $9.6 million at
March 31, 2001 as compared to $10.1 million at June 30, 2000. We expect that our
accounts receivable will increase if net revenue increases. Further, accounts
receivable may increase if net revenue from original

equipment manufacturers and international customers becomes a higher percentage
of our net revenue as these customers generally have longer payment cycles.

Net cash used by investing activities in the nine months ended March 31, 2001
was $897,000, which consisted primarily of purchases of property and equipment.
Net cash used by investing activities in the nine months ended March 31, 2000
was $3.2 million and consisted primarily of cash payments for the acquisition of
Oval, the parent company of Advance Systems, partially offset by cash provided
from maturities and sales of available-for-sale securities.

We currently plan to incur aggregate capital expenditures of approximately $1.4
million during fiscal 2001 primarily for software, system improvements and
personal computers. We incurred $915,000 of capital expenditures in the first
nine months of fiscal 2001.

Net cash provided by financing activities in the nine months ended March 31,
2001 was $2.4 million, which consisted primarily of proceeds from the issuance
of common stock under our stock plans. Net cash provided by financing activities
in the nine months ended March 31, 2000 was $1.5 million, which consisted
primarily of proceeds from the issuance of common stock under our stock plans
partially offset by payments on our long-term debt.

We have an uncollateralized bank revolving line of credit of $10.0 million,
which expires on October 31, 2001. Interest on borrowings is at the lender's
prime rate. There were no borrowings under this line at March 31, 2001 or June
30, 2000. The line of credit agreement has restrictive covenants that require us
to maintain particular financial ratios. We do not foresee any difficulty in
complying with these covenants and expect to renew or replace the facility on or
before October 31, 2001.

We believe that our existing working capital and borrowing capacity, coupled
with the funds we expect to generate from our operations, will be sufficient to
fund our anticipated working capital and capital expenditure requirements over
the next 12 months. In the longer term, we may require additional sources of
liquidity to fund future growth. These sources of liquidity may include
additional equity offerings, 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 offering. We currently have no commitments or agreements regarding any
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 original equipment manufacturers and independent distributors. 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 U.S. dollars. Fluctuations in exchange
rates also may make our products more expensive to original equipment
manufacturers and independent distributors who purchase our products in U.S.
dollars.

We have not experienced significant costs as a result of the introduction of a
European single currency, the Euro, introduced on January 1, 1999. At an
appropriate time before December 31, 2001, the end of the transition period,
product prices in participating countries will be denominated in the Euro and
converted to local denominations. During the transition period, our financial
systems located in the participating countries will be converted from local
denominations to the Euro. We do not presently expect the transition to the Euro
to significantly affect our foreign currency exchange activities. Further, we do
not expect the transition to the Euro to result in any significant increase in
costs to us and all costs associated with the transition to the Euro will be
expensed to operations as incurred. While we will continue to evaluate the
impact of the transition to the Euro, based on

currently available information, we do not believe that the transition to the
Euro will harm our business.

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 British Pound and Euro, to manage currency fluctuations on payments
and receipts of foreign currencies on transactions with 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, 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.

RECENTLY ISSUED ACCOUNTING STANDARDS
- ------------------------------------
The Securities and Exchange Commission issued Staff Accounting Bulletin 101,
"Revenue Recognition in Financial Statements," in December 1999. This bulletin
summarizes the Securities and Exchange Commission's view in applying generally
accepted accounting principles to revenue recognition in financial statements.
We are required to adopt this bulletin no later than our fourth quarter of
fiscal 2001. Adoption is not expected to have a material effect on our results
of operations or financial position.

FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK
- ----------------------------------------------------------------
OUR EFFORTS TO CLOSE THE PROPOSED MERGER WITH PALM MAY HARM OUR BUSINESS AS A
RESULT OF DELAYS IN EXECUTING OUR SEPARATE BUSINESS STRATEGY AND UNCERTAINTIES
CAUSED BY THE PROPOSED MERGER.

Our efforts to complete the proposed merger and plan our integration with Palm
have been and will continue to be complex and time consuming, and may disrupt
our business. The attention and effort devoted to the proposed merger may
significantly divert management's attention from our other important business
objectives, such as growing our mobile information management business.

Completion of the proposed merger is not certain, and this uncertainty may harm
our business by disrupting relationships with employees, customers, suppliers
and other strategic relationships.

As a result of these uncertainties and the efforts related to the proposed
merger with Palm, our business could be harmed as a result of:

o a potential loss of key management, development or other personnel;
o a decline in employee morale;
o difficulties in hiring qualified development and other personnel to fill
open positions;
o cancellations, reductions or delays in orders for our products or services;
o the reluctance of new or old customers and vendors to enter into or expand
relationships or agreements with us; and
o an inability to pursue or complete acquisitions of other companies that may
be strategic to our business.

IF WE ARE UNABLE TO COMPLETE THE PROPOSED MERGER WITH PALM, OUR BUSINESS MAY BE
HARMED.

The proposed merger is subject to approval by our stockholders, clearance under
German antitrust laws, and other customary closing conditions. We cannot assure
you that the proposed merger will be successfully completed. In the event that
the merger with Palm is not successfully completed, our business may be harmed
as a result of:

o legal, accounting and other costs that we have incurred in conjunction with
the proposed merger;
o a potential loss of key management, development or other personnel;
o a decline in employee morale;
o damage to customer relationships, including cancellations, reductions or
delays in orders for our products or services;
o a loss of key strategic relationships, joint marketing arrangements or key
business partners; and
o delays in product development or development of new service capabilities.

Our inability to complete the merger with Palm may lower our value or reduce our
ability to merge with other companies that may have been interested in acquiring
us. In addiiton, we could be required to pay a termination fee to Palm upon the
occurrence of certain events.

IF THE PROPOSED MERGER WITH PALM IS CONSUMMATED, OUR STOCKHOLDERS' WILL RECEIVE
SHARES OF PALM STOCK AND WILL BE SUBJECT TO PALM'S RISKS AND UNCERTAINTIES AND
THOSE OF THE COMBINED COMPANY.

Since the announcement of the proposed merger with Palm, our stock price has
been trading in proportion to shares of stock of Palm and, if the merger is
completed, our stockholders will receive shares of Palm stock in exchange for
our stock. You should carefully review the factors that may affect Palm's and
the combined company's future results and the trading price of Palm's common
stock. These factors are described in documents that Palm files from time to
time with the Securities and Exchange Commission.

IF WE ARE UNABLE TO EFFECTIVELY MANAGE THE DECLINE IN OR DEVELOP A SUCCESSFUL
PLAN TO EXIT OUR PRINTING SOLUTIONS BUSINESS, OUR BUSINESS WILL BE HARMED.

Our operating results are still dependent upon net revenue from sales of our
printing solutions products, primarily our network print server products. In the
nine months ended March 31, 2001, net revenue from sales of printing solutions
products represented 28% of our net revenue. However, in conjunction with our
proposed merger with Palm, we agreed to develop a plan to exit our printing
solutions business. As a result, net revenue from our printing solutions
products may decline at an accelerated rate in coming quarters and will likely
represent a decreasing percentage of our net revenue. Customers may choose to
purchase printing solutions products from our competitors due to the uncertainly
in their ability to purchase future printing solutions products from us. In
addition, we may be required to lower sales prices in an attempt to sell our
inventory of printing solutions products.

If we fail to develop a successful plan to exit the printing solutions business,
our operating results may also be harmed as a result of:

o a decline in liquidity;
o an increase in our provision for write-down of inventory; and
o an increase in employee severance costs.
15

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. If our operating results fall below the expectations of securities
analysts or investors, the price of our stock may fall. Some of the factors that
may cause fluctuations in our operating results include, but are not limited to:

o changes in the buying patterns of corporate information technology or our
original equipment manufacturer customers;
o changes in customer demand for our products;
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 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 pressure, seasonal trends or general economic conditions;
o a shift in the mix of products sold, resulting in fluctuations in gross
margin;
o the discontinuation of any of our product offerings or segments, which could
result in product returns and inventory write downs; and
o changes in accounting standards, including standards relating to revenue
recognition, business combinations and stock-based compensation.

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. For example, during the
period from April 1, 2000, to March 31, 2001, the price of our common stock
ranged from $10.13 to $112.94 per share. The following factors may have a
significant impact on the market price of our common stock:

o changes in the trading price of Palm's common stock, which may be affected by
announcements that Palm may make and other factors related to Palm;
o quarter-to-quarter variations in 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 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.

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 involves entering into key business
relationships with other companies that relate to product development, joint
marketing and the development of protocols for mobile communications. 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.
16

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 potential relationships.

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.

THE MOBILE DATA MANAGEMENT AND UNIVERSAL MOBILE CONNECTIVITY MARKETS ARE NEW AND
EVOLVING AND MAY NOT CONTINUE TO GROW OR GROW AT EXPECTED RATES, WHICH WOULD
REDUCE DEMAND FOR OUR PRODUCTS AND HARM OUR BUSINESS.

The mobile data management and universal mobile connectivity markets are still
emerging and may not continue to grow or grow at expected rates. Even if the
markets grow, our products that address these markets may not be successful. The
success of these products will rely to a large degree on the increased use of
mobile devices, including personal digital assistants, cell phones, pagers,
laptop and handheld computers and digital cameras, and on increased use of
technologies such as Bluetooth. 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.

IF ORIGINAL EQUIPMENT MANUFACTURERS REDUCE THEIR PURCHASES OF OUR PRODUCTS, OUR
OPERATING RESULTS AND FUTURE GROWTH COULD BE HARMED.

A significant portion of our net revenue in any quarter is typically derived
from sales to a limited number of original equipment manufacturers. For example,
in fiscal 2000, sales of mobile information management products and services to
Hewlett-Packard accounted for 23% of our net revenue. As of April 2000,
Hewlett-Packard no longer bundled our XTNDAccess IrDA Printer Adapter with
Hewlett-Packard printers sold in North America, but offered our product as a
free accessory to its customers with the purchase of the Hewlett-Packard
printer. As a result, sales of printer adapters to Hewlett-Packard have
decreased significantly.

In the event that other original equipment manufacturers reduce their purchases
of our products, our operating results and future growth could be harmed. This
risk may be increased due to the uncertainly surrounding our proposed merger
with Palm. In addition, any significant deferral of purchases of our products by
original equipment manufacturers could harm our quarterly operating results.

Sales to original equipment manufacturers frequently involve lengthy sales
cycles, typically nine to 12 months, and may be subject to a number of
significant risks over which we have little or no control, including:

o competing products or technology that original equipment manufacturers may
incorporate into their systems or internally develop;
o original equipment manufacturers' budgetary constraints and internal
acceptance review procedures;
o the timing of original equipment manufacturers' budget cycles;
o the timing of original equipment manufacturers' competitive product
evaluation processes; and
o the effectiveness of original equipment manufacturers' marketing efforts for
their own products.

WE INTEND TO PURSUE ADDITIONAL ACQUISITIONS, AND ANY ACQUISITIONS COULD PROVE
DIFFICULT TO INTEGRATE, 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 expansion into new markets and business areas;
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; and
o potential adverse short-term effects on our operating results.

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

WE FORECAST CERTAIN COMPONENT INVENTORY PURCHASES BASED ON FORECASTED SALES
VOLUME OF HARDWARE UNITS, WHICH ARE DIFFICULT TO PREDICT. IF WE FAIL TO
ACCURATELY PREDICT SALES VOLUME IN A PARTICULAR PERIOD, WE MAY BE UNABLE TO
ADJUST OUR COMPONENT INVENTORY PURCHASING IN THAT PERIOD AND OUR OPERATING
RESULTS COULD BE HARMED.

Our quarterly net revenue and operating results depend in large part on the
volume and timing of orders received within the quarter, which are difficult to
forecast. We typically operate with a relatively small order backlog and
significant component inventory purchases are fixed in advance, based in large
part on our forecast of future sales volume. In addition, a significant portion
of our net revenue results from the sale of products to a number of original
equipment manufacturers and distributors, which are difficult to predict. None
of our distributors or original equipment manufacturers are obligated to
purchase our products or certain component inventory that is used in the
manufacturing of our products except pursuant to current purchase orders or
purchase agreements.

If sales volume is below expectations in any given quarter, particularly sales
volumes of printing solutions products, the adverse impact of the shortfall on
our operating results may be magnified by our inability to adjust component
inventory purchasing to compensate for the shortfall. Also, we may be required
to record an increase in our provision for write-down of inventory if certain
component inventory that we purchase in anticipation of a higher level of
product sales cannot be returned to vendors and the inventory cannot be used in
the manufacture of our other products.

WE FORECAST MANY OF OUR EXPENSES ON FORECASTED NET REVENUE AND GROSS PROFIT,
WHICH IS DIFFICULT TO PREDICT. IF WE FAIL TO ACCURATELY PREDICT NET 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 net revenue and operating results depend in large part on the
volume and timing of orders received within the quarter and on average selling
prices, which are difficult to forecast. Significant portions of our expenses
are fixed in advance, based in large part on our forecast of future net revenue.
In addition, a majority of our net revenue results from the sale of products to
a number of original equipment manufacturers and distributors, which are
difficult to predict.

If net 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.

WE HAVE EXPERIENCED SEASONALITY IN OUR NET REVENUE, WHICH MAY CAUSE OUR
OPERATING RESULTS TO FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.

We have experienced some seasonality in our net revenue and we expect to
continue to experience seasonality in the future. Net revenue in our first
fiscal quarter is typically lower than net revenue in the prior fourth fiscal
quarter, reflecting lower sales in Europe and other regions in the summer months
when business activities are reduced.

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, many 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 net revenue.

We compete with:

o mobile data management companies, including Aether Software, Pumatech,
fusionOne and Starfish Software, a subsidiary of Motorola;
o client/server database providers, including Microsoft, Interbase, Pervasive
Software and Oracle;
o mobile connectivity companies, including Widcomm, Digianswer (a subsidiary of
Motorola) and ACTiSYS;
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. The 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 in order to minimize disruption in customer
ordering patterns, avoid excessive levels of older product inventories and
ensure that adequate supplies of new products can be delivered to meet customer
demand.

IF OUR THIRD-PARTY MANUFACTURERS FAIL TO PROVIDE US WITH QUALITY, COST-EFFECTIVE
PRODUCTS IN A TIMELY MANNER OR IN SUFFICIENT VOLUMES TO MEET CUSTOMER DEMAND,
OUR BUSINESS AND OPERATING RESULTS MAY BE HARMED.

We maintain a limited in-house manufacturing capability for performing materials
procurement, final assembly, testing, quality assurance and shipping. We rely
primarily third-party manufacturers to manufacture our products and we intend to
continue our reliance upon third-party manufacturers in the future. Our reliance
on third-party manufacturers involves a number of risks, including:

o the potential inability to obtain an adequate supply of existing and new
products and reduced control over delivery schedules;
o product quality; and
o product cost.

IF OUR THIRD-PARTY SUPPLIERS FAIL TO MAKE DELIVERIES THAT MEET OUR MANUFACTURING
SCHEDULES, OUR BUSINESS MAY BE HARMED.

We rely on third-party suppliers for components used in our products. Because
the manufacturing of our products can involve long lead times, in the event of
unanticipated increases in demand for our products, we could be unable to obtain
product components quickly enough to manufacture particular products in a
quantity sufficient to meet customer demand. As a result, our business may be
harmed. Some of the components used in our products, including particular
semiconductor components and infrared transmission components, are currently
available from a limited number of suppliers. From time to time, we have
experienced difficulty in obtaining components from suppliers due to increased
industry demand and a lack of available supply. For example, we have experienced
some difficulty at times in obtaining an adequate supply certain components
commonly used in the manufacture of mobile phones, such as resistors and
capacitors, for our wireless connectivity products. Any inability to obtain
adequate deliveries, increased costs or other circumstances that would require
us to seek alternative suppliers could impair our ability to ship our products
on a timely basis. This could damage relationships with current and prospective
customers and increase the manufacturing cost of our products, either of which
would harm our business.

WE RELY UPON THIRD-PARTY DISTRIBUTORS AND RESELLERS, WHO MAY NOT DEVOTE
RESOURCES TO ADEQUATELY SUPPORT OUR PRODUCTS.

We sell some of our products, mainly our printing solutions products, primarily
through distributors and resellers. Our success depends on the continued sales
efforts of our network of distributors and resellers. Some of our existing
distributors currently distribute, or may in the future distribute, the products
of our competitors. These third-party distributors may not recommend our
products or may not devote sufficient resources to market or adequately support
our products.

Our distributors maintain inventory of the products they purchase from us. We
provide many of our distributors and resellers with limited product return
rights for stock rotation and with some price protection rights. We may
experience significant returns in the future and we may not make adequate
allowances to offset these returns. Price protection rights require that we
grant retroactive price adjustments for inventories of our products held by
distributors or resellers if we lower our prices for these products. The short
life cycles of our products and the difficulty in predicting future sales
increase the risk that new product introductions, price reductions by us or our
competitors or other factors affecting the markets in which we compete could
result in significant product returns. In

addition, changes in inventory management policies at any of our key
distributors could harm our business.

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 necessary technology
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.

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

We derive a substantial portion of our net revenue from international sales. We
expect that international sales will continue to represent a substantial portion
of our net 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 instability caused by the
European monetary union and military actions.

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 U.S. dollars.

From time to time, we enter into foreign currency forward contracts, typically
against the British Pound and Euro, to manage currency fluctuations on payments
and receipts of foreign currencies on transactions with 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.

IF ENTERPRISES AND INDIVIDUALS ARE RELUCTANT TO USE THE INTERNET TO MANAGE
INFORMATION, IT WILL HARM SALES OF SOME OF OUR PRODUCTS.

Sales of some of our products, including our mobile data management products,
largely depend upon on the increased use of the Internet by enterprises as
replacements for, or enhancements to, their private networks. However,
enterprises may be reluctant to use Internet services or applications for
functions that are important for their operations. If enterprises determine that
our mobile data management products do not provide adequate security for
dissemination of information over the Internet, or if for any other reason
customers fail to accept our applications and services for use over the
Internet, our business could be harmed.

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.

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 growth and expansion will require us to recruit, hire, train
and retain a substantial number of new engineering, executive, sales and
marketing personnel. In the current employment environment we have experienced
difficulty in recruiting qualified personnel, and continued difficulty in this
regard 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.

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.

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. The loss of key
personnel could harm our business. We do not maintain any key-person life
insurance policies. We believe that our success will also depend upon our
ability to attract and retain highly skilled management, engineering, sales and
marketing and finance personnel. In particular, we are currently attempting to
recruit new engineering personnel; however, we may not be successful at hiring
or retaining these personnel.

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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We derive a substantial portion of our revenue from international sales,
principally through our international subsidiaries in France, Germany, Italy,
Singapore, the Netherlands and the United Kingdom, and through a limited number
of original equipment manufacturers and independent distributors. Therefore, we
face exposure to adverse movements in foreign currency exchange rates. Sales
made by our international subsidiaries are generally denominated in the
country's local currency with the exception of our subsidiary in Singapore.
Fluctuations in exchange rates between the U.S. dollar and other foreign
currencies could cause our results to fluctuate when we translate revenue and
expenses denominated in other currencies into U.S. dollars. Fluctuations in
exchange rates also may make our products more expensive to original equipment
manufacturers and independent distributors who purchase our products in U.S.
dollars.

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the British Pound and Euro, to manage currency fluctuations on payments
and receipts of foreign currencies on transactions with international
subsidiaries. At March 31, 2001, we had contracts in place totaling $5.5 million
that matured within 30 days. 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, 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.

PART II. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------ -----------
2.1 Agreement and Plan of Reorganization by and between Palm, Inc.
and Extended Systems Incorporated, dated March 6, 2001. (1)
2.2 Stock Option Agreement by and between Extended Systems
Incorporated and Palm, Inc., dated as of March 6, 2001. (1)
3.1 Restated Certificate of Incorporation. (2)
3.2 Restated Bylaws. (3)

- ------------
(1) Incorporated by reference from filing pursuant to Rule 425 , filed with the
Securities and Exchange Commission March 16, 2001.

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

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

(b) REPORTS ON FORM 8-K

We filed no reports on Form 8-K during the three months ended March 31,
2001.

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

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

Dated: May 4, 2001 By: /s/ Karla K. Rosa
-----------------------------------
Karla K. Rosa
Vice President, Finance
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)