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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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

FOR THE FISCAL YEAR ENDED JUNE 30, 2001

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

FOR THE TRANSITION PERIOD FROM _____ TO _____

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Commission File Number 000-23597

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

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

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

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, PAR VALUE $0.001 PER SHARE
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(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, based upon the closing price of such stock as of September 5, 2001,
as reported by The Nasdaq Stock Market, was approximately $23 million. Shares of
common stock held by each officer and director and by each person who own 5% or
more of the outstanding shares of common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily conclusive.

As of September 5, 2001, there were 10,972,764, shares outstanding of the
Registrant's common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on October 24, 2001, are incorporated by reference in
Part III of this Form 10-K to the extent stated herein.
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EXTENDED SYSTEMS INCORPORATED

FISCAL YEAR 2001 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PAGE
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PART I.

Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16

PART II.

Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 17
Item 6. Selected Financial Data 18
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 19

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36

PART III.

Item 10. Directors and Executive Officers of the Registrant 36
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners and Management 38
Item 13. Certain Relationships and Related Transactions 38

PART IV.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 38

SIGNATURES 59

FORWARD-LOOKING STATEMENTS

IN ADDITION TO HISTORICAL INFORMATION, THIS FORM 10-K CONTAINS FORWARD-LOOKING
STATEMENTS. IN THIS FORM 10-K, 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. 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 SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE 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 QUARTERLY REPORTS ON FORM 10-Q TO BE
FILED IN FISCAL 2002. ALL PERIOD REFERENCES ARE TO OUR FISCAL YEARS ENDED JUNE
30, 2002, 2001 AND 1999, UNLESS OTHERWISE INDICATED.

PART I

ITEM 1. BUSINESS

SIGNIFICANT EVENTS
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On March 6, 2001, we entered into an Agreement and Plan of Reorganization with
Palm, Inc. pursuant to which we would merge into Palm. On May 17, 2001, pursuant
to a Mutual Termination Agreement and Amendment to Agreement and Plan of
Reorganization, Extended Systems and Palm mutually agreed to terminate our
proposed merger agreement without payment of any termination fee.

On May 31, 2001, we sold our printing solutions segment to Troy Group, Inc. for
$1.6 million in cash, net of expenses. 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. Our
printing solutions business included our network print server and non-network
printer sharing products. As a result of the sale to Troy, our printing
solutions segment is accounted for as discontinued operations in accordance with
Accounting Principles Bulletin No. 30. Amounts for all periods in this Annual
Report on Form 10-K, including the financial statements and related notes, have
been reclassified to reflect the discontinued operations.

During our fourth quarter ended June 30, 2001, we implemented a restructuring
plan to reduce costs and improve operating efficiencies and, as a result, we
recorded a restructuring charge to continuing operations of $1.1 million in
fiscal 2001. The restructuring charge consisted primarily of costs related to
the termination of approximately 40 employees in research and development,
marketing and sales, administration and manufacturing. Approximately 70% of the
terminated employees were in the United States and 30% were in Europe and Asia.
Substantially all of the restructuring charge was paid in July 2001. In
addition, throughout fiscal 2001, we consolidated 3 of our offices in the US and
Europe and, as a result, reduced operating expenses and reduced our workforce by
approximately 40 additional employees.

OVERVIEW
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We provide mobile information management products designed to increase the
efficiency of mobile computing and communications. Enterprises and users are
increasingly relying on mobile devices to access time-sensitive and critical
information and enable personal information management, enterprise automation
and mobile workforce management. Our mobile information management products
empower users to access, collect and synchronize information on demand from
various locations and from a variety of devices. These devices include mobile
phones, pagers and personal digital assistants, which operate using the Palm OS,
Windows CE and Symbian EPOC operating systems.

Our mobile information management products feature:

o mobile data synchronization and management software and applications;
o wireless connectivity technology based on Bluetooth and Infrared Data
Association standards; and
o client/server database management systems with remote access capabilities.

We design our products and technologies to provide cost-effective and reliable
mobile computing to enterprises, users, manufacturers of mobile devices,
application developers and telecommunications service providers. Our products
enable:

o enterprises and users to synchronize information between mobile devices
and personal computers or enterprise networks;
o users to access networks or peripherals within enterprise facilities to
extend applications to users beyond the network environment and over the
Internet without physical connections;
o users and enterprises to increase their efficiency and flexibility by
using their mobile devices for a variety of new tasks, thereby increasing
their use of these devices; and
o device manufacturers and application developers to design products to
better meet the needs of enterprises and users, and telecommunications
service providers to enhance their revenue opportunities.

We have relationships with or sell our products to leading mobile communications
and computing companies and corporate enterprises, including 3Com, Agilent,
British Airways, Casio, Compaq, DaimlerChrysler, Enron, Ericsson, Fujitsu,
Hewlett-Packard, IBM, Microsoft, Motorola, NEC, One2One, Orange, Palm, Psion,
Red-M, Sharp, Siemens, Symbol and Toshiba.

INDUSTRY BACKGROUND
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The use of mobile devices has increased tremendously as handheld computers,
mobile phones, pagers and personal digital assistants have achieved popular
acceptance and become more advanced and powerful. Improvements in mobile
technology and wireless infrastructure are facilitating greater bandwidth,
thereby enabling both data and voice transmission. IDC, a leading provider of
technology intelligence and market data, predicts that the United States
population of mobile and remote workers alone will grow to reach 55 million in
calendar 2004.

Meanwhile, competition and deregulation in the wireless communications industry
have resulted in downward pressure on wireless service rates. Consequently,
service providers are attempting to maximize revenue opportunities by developing
new services and encouraging usage, while simultaneously reducing the costs
associated with customer turnover and the deployment of new services. As a
result, mobile device manufacturers and application developers face pressure
from service providers to increase the usability and value of their devices and
applications. Many of these manufacturers and developers seek to utilize data
communications capabilities to do so. However, the absence of common standards
for data communications has historically prevented the widespread adoption and
promotion of data communications across the mobile communications industry. To
address this situation, industry consortia were formed to develop industry-wide
standards and protocols for wireless communication. These consortia have
developed various complementary protocols, including protocols for short-range
radio-frequency communication, known as Bluetooth, infrared communication
protocols created by the Infrared Data Association, known as IrDA, data
synchronization protocols, known as SyncML, and the Wireless Application
Protocol, known as WAP. Service providers, device manufacturers and application
developers are integrating these data

communication capabilities to improve functionality and deliver an array of
mobile communications products and services.

Enterprises seek to increase productivity through the easy, secure and
cost-effective management of information access, collaboration and the use of
mobile devices. Increasingly, users need secure, reliable and efficient access
to critical information on demand. In addition, users need access to enterprise
network information from many locations, both within and outside enterprise'
facilities, and through various mobile devices. As a result, mobile devices are
being used for:

o PERSONAL INFORMATION MANAGEMENT. Users employ mobile devices in
conjunction with their primary computers for tasks such as contact
management, scheduling and e-mail access.
o ENTERPRISE AUTOMATION. Enterprises deploy mobile devices for tasks within
the enterprise such as inventory control and management, quality
assurance, data entry and access.
o MOBILE WORKFORCE MANAGEMENT. Enterprises deploy mobile devices for tasks
outside the enterprise such as sales force automation, real-time
collaboration and data access.

Unfortunately, providing flexible information access has historically been a
cumbersome and expensive proposition and typically required that users make a
wired connection to the network wherever and whenever they required access. In
addition, with the increased use of mobile devices, many users currently must
employ several devices simultaneously. Although they all may require access to
the same information, these devices often run applications on separate
platforms. For example, a mobile worker using a laptop for corporate e-mail may
also use a personal digital assistant with personal contact information, and a
mobile phone with an embedded directory, each of which functions with different
operating systems, platforms and data delivery formats. To facilitate user
productivity, this information must be synchronized and managed across devices
and applications. Thus, users require simple, secure tools to access, collect,
synchronize and print information.

Enterprises, users, device manufacturers, application developers and service
providers require a solution that provides data management and wireless
connectivity between disparate mobile devices, and between mobile devices and
the information and applications which reside on personal computers or the
enterprise network. This type of solution must allow:

o enterprises to provide cost-effective and seamless access to information
regardless of location;
o users to increase their productivity by connecting a variety of mobile
devices to access and manage information;
o device manufacturers and application developers to enhance the value and
usability of their devices and applications, facilitating greater market
acceptance and increased use; and
o telecommunications service providers to take advantage of data
communication capabilities to drive increased usage and user loyalty.

OUR SOLUTION
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We develop and market mobile information management products that enable secure,
reliable and efficient access, collection and synchronization of information on
demand. We have designed our products to:

o ENABLE MOBILE DATA MANAGEMENT. Our mobile data management products enable
enterprises and users to synchronize and manage information between mobile
devices and personal computers or enterprise networks. We believe
enterprises can reduce their initial capital investment in computer
hardware and software and their network administrative costs by using our
technology to deploy applications on mobile devices. Using our products,
users can manage information between their mobile devices and personal
computers, enterprise groupware applications, such as Microsoft Exchange
and Lotus Domino, or ODBC-compliant database applications. In addition,
enterprises can securely and efficiently deploy and manage a variety of
mobile devices, and extend their applications and databases across a
distributed network and over the Internet.

o INCREASE EFFICIENCY AND USABILITY OF MOBILE DEVICES. Our mobile
information management products improve the management of information and
applications and provide convenient, wireless connectivity. These products
enable users to share data and information between their mobile devices
while accessing information from the Internet, personal computers or
enterprise networks on demand. Enterprises can utilize devices to extend
their network applications cost effectively to other applications. We
believe our mobile information management products help mobile users and
enterprises increase their efficiency by using mobile devices for a
variety of new tasks, thereby increasing their use of these devices.
o INCREASE VALUE AND USAGE OF MOBILE DEVICES AND COMMUNICATIONS SERVICES.
Our platforms and technologies provide the tools to enable device
manufacturers and application developers to design and enhance products to
meet the needs of both enterprises and users. Because our technology
enables cost-effective communication and the ability to easily manage many
disparate devices, we believe device manufacturers and application
developers are able to increase the value of the products they sell,
thereby encouraging increased adoption of those products. In addition, we
believe the increased adoption of mobile devices will in turn drive
increased usage of and loyalty to providers of mobile communications
services, thereby increasing service providers' revenue opportunities and
minimizing their costs.
o ENABLE UNIVERSAL MOBILE CONNECTIVITY. Our products facilitate enterprise
automation and effective mobile workforce management by providing wireless
connectivity between disparate mobile devices and between mobile devices
and personal computers or enterprise networks. Our products enable mobile
workers to access networks or peripherals within enterprise facilities and
enable enterprises to extend applications to users beyond the network
environment and over the Internet, without physical connections.

OUR STRATEGY
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Our objective is to become the leading provider of mobile information management
products. To achieve this objective, we have adopted the following strategies:

o FOCUS RESOURCES ON BUILDING CUSTOMER INTIMACY WITH TOP ENTERPRISE
CUSTOMERS. We have invested substantial resources to develop our
international marketing, sales and support infrastructure. Although our
products are appropriate for enterprises of all sizes, we believe large
multi-national enterprises are the most lucrative market for our products.
We intend to continue to focus resources to sell to large enterprises and
to international markets that are adopting the use of mobile
communications most rapidly. In addition, our products are currently
included in or bundled with the mobile devices of industry leaders such as
Ericsson, Motorola and Palm. We believe the integration of our technology
in leading mobile devices provides a significant opportunity to reach the
enterprises and mobile workers who are the primary users of these devices.
o CONTINUE TO DEVELOP AND MAINTAIN A BROAD ARRAY OF MOBILE INFORMATION
MANAGEMENT PRODUCTS AND TECHNOLOGIES THAT DEMONSTRATE OUR TECHNICAL
EXCELLENCE. We are committed to building and maintaining a full range of
mobile information management products and technologies that address the
data management and wireless connectivity needs of enterprises and users
across a broad range of mobile devices. Our products support the current
leading mobile device platforms, including the Palm OS, Windows CE,
Symbian EPOC platforms and we intend to develop additional device support
in the future. Further, we are committed to designing our technology and
products to be compatible with new and emerging protocols, such as GSM,
GPRS, CDPD, CDMA and Mobitex networks. By continuing to provide a broad
range of products, we believe that we can successfully meet the mobile
information needs of users and enterprises, while enhancing the ability of
service providers, device manufacturers, and application developers to
increase the value of their own products and services. We actively work
with industry consortia to develop wireless standards and protocols. These
consortia are comprised of industry leaders, device manufacturers and
software developers, and we actively participate on the leading standards
boards and technical committees of these consortia. For example, we were a
founding member of the Infrared Data Association, which developed the IrDA
protocol. As a result of our efforts in IrDA, we were invited by the
founders of Bluetooth to participate in the Bluetooth early adopter group
and were recently accepted as an associate member of the Bluetooth Special
Interest Group, while contributing on the Bluetooth Architecture review
board. Extended Systems is also a promoting member of the SyncML
Initiative. We believe our leadership in these consortia will continue to
make our mobile information management products and technologies an
integral part of mobile communications solutions.

o DEMONSTRATE INDUSTRY LEADERSHIP BY CONTINUING TO LEVERAGE ALLIANCES WITH
LEADING MOBILE DEVICE MANUFACTURERS AND APPLICATIONS DEVELOPERS. We
believe it is critical to focus on continuing to demonstrate industry
leadership through alliance validation. We maintain relationships with
leading hardware and software vendors, including 3Com, Compaq, Ericsson,
Hewlett-Packard, iAnywhere, IBM, Intel, Lotus, Microsoft, Motorola, NEC,
Palm, Sharp and Toshiba. We believe that these relationships will enable
us to develop leading-edge products and technology and influence the
development of new platforms and protocols. We also believe these
relationships will continue to help us achieve broader distribution of our
products and technologies, making them pervasive in the mobile information
management market. For example, we collaborated with Microsoft on the
development of synchronization products for the Windows CE operating
system and with Palm to provide Bluetooth technology for use in the Palm
OS.
o ACQUIRE COMPLEMENTARY BUSINESSES AND TECHNOLOGIES. In order to broaden our
product offering and extend our distribution channels, we have in the past
and intend in the future to pursue acquisitions of, and investments in,
companies with complementary products, technologies or distribution
networks. For example, in August 1999, we acquired Advance Systems
Limited, a developer of server-based synchronization software for portable
computing devices and high-end mobile phones. Our acquisition of Advance
Systems has further strengthened our relationships with IBM and Microsoft.
In October 1998 and November 1998, we completed acquisitions of Rand
Software, a developer of data synchronization software, and Parallax
Research, a developer of infrared connectivity products. In April 1997, we
acquired Counterpoint Systems Foundry, a developer of connectivity
software. The Counterpoint acquisition formed the basis for our Bluetooth
technology.

OUR PRODUCTS
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We design, manufacture, sell and service products that enable secure, reliable
and efficient access, collection and synchronization of information on demand.
Our mobile information management segment consists of mobile data management
products and universal mobile connectivity products.

MOBILE DATA MANAGEMENT PRODUCTS
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Our mobile data management products enable information to be transferred
directly between corporate applications and mobile devices through a variety of
connections and provide database applications in distributed environments for
mobile users.

Our mobile data management products consist of mobile data synchronization and
management products and client/server database products. These products provide
individual users and large enterprises with the management tools necessary to
cost effectively use and deploy mobile devices for personal information
management and mobile workforce deployment.

PRODUCT DESCRIPTION TARGET CUSTOMERS/RELATIONSHIPS
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Mobile Synchronization and Data Management Products:
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XTNDConnect Server A software application that: o Enterprises that aredeploying mobile devices
o allows information to be transferred directly or enabling applications for mobile deployment.
between enterprise network applications and o Application developers who design vertical mobile
mobile devices through wired or wireless applications. Examples of vertical markets
connections; include manufacturing, healthcare, finance,
o provides IT staff centralized control, data insurance, legal and transportation.
security and management for mobile devices; o XTNDConnect Server serves as the foundation for
o supports Palm OS, Windows CE, Pocket PC and IBM's Mobile Connect product.
Symbian EPOC devices;
o manages data and applications on mobile devices
with backup/restore, installation, configuration
and reporting capabilities;
o enables users to easily synchronize data with
servers, including Microsoft Exchange and Lotus
Domino and with ODBC-compliant databases such
as DB2, Oracle, Sybase and Advantage Database
Server; and
o assures the secure transfer of corporate data to
and from mobile devices using Certicom encryption.
We added XTNDConnect Server to our product line when
we acquired Advance Systems in fiscal 2000.
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XTNDConnect PC A software application that: o Enterprises and users through electronic
o allows a user to manage and synchronize personal commerce.
information such as contacts, calendar, tasks o Original equipment manufacturers, such as
and email between a mobile device and popular personal digital assistant, mobile phone
personal computer applications; manufacturers.
o supports devices including Palm OS, Windows CE, o Ericsson bundles XTNDConnect PC with select
Pocket PC, Casio PocketViewer, and various mobile WAP-enabled phones.
phones from Ericsson and Siemens; and o Palm uses XTNDConnect PC to allow users to
o supports many popular personal computer update and share data using MyPalm Web-based
applications including Microsoft Outlook, on-line personal information management
Lotus Notes, Lotus Organizer, and Act!2000. service.
We added this product to our product line when we o Siemens bundles XTNDConnect PC with select mobile
acquired Rand Software in Fiscal 1999. phones.
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XTNDConnect View A software application that: o Enterprises that are deploying mobile devices.
o allows a user real-time wireless access to
groupware servers from RIM and Palm VII handheld
devices, Internet-ready and WAP mobile phones
and other mobile devices.
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PRODUCT DESCRIPTION TARGET CUSTOMERS/RELATIONSHIPS
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Client/Server Database Products:
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XTNDConnect RPM An extendable, embedded, remote procedure o Application developers who design vertical mobile
middleware server that: applications.
o simplifies mobile and Windows thin-client o List of customers includes:
application development; o NDC Health
o provides real-time access to enterprise server o Timemasters
processes for mobile and Windows applications; o Food Service Solutions
o by leveraging developers' existing code, can o Auto Star
easily implement business logic at the server
level;
o provides a robust way to execute server-based
processes and receive results remotely;
o is a programmable process oriented middleware
that can scale from stand-alone to enterprise;
o supports Palm OS, Windows 32 clients and Windows
CE devices;
o designed to transfer application processing from
handheld devices to servers in order to enable
more sophisticated applications to be deployed
in mobile environments, and
o provides many benefits over traditional two-tier
database applications, such as centralized
business rules, centralized code maintenance and
database abstraction.
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Advantage Database A high performance client/server database management o Application developers who design vertical mobile
Server system for standalone, networked, mobile and applications.
Internet database applications that:
o provides developers the flexibility to combine
SQL statements and relational data access methods
with the performance and control of navigational
commands;
o includes native SQL support as well as a client
interface, supporting common application
development tools such as Delphi, Visual Objects
and Visual Basic, as well as any applications
with an ODBC interface; and
o works in both Novell NetWare and Windows NT server
environments and improves multi-user performance
by efficiently allocating database operations
between the client and the server.
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Advantage Internet A software product that provides non-HTML-based o Application developers who design vertical mobile
Server data access through the Internet using existing applications.
Advantage Database Server applications. Remote users
can experience the same security, integrity, and
performance on a corporate local area network while
accessing data remotely using the Internet as a
virtual private network.
------------------------ ------------------------------------------------------ ----------------------------------------------------
Advantage Development Software tools used by database application o Application developers who design vertical mobile
Tool Kits developers to develop, debug and deploy reliable applications.
applications running in an Advantage Database Server
environment.
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UNIVERSAL MOBILE CONNECTIVITY PRODUCTS

Our universal mobile connectivity products permit users to wirelessly connect
and exchange data using either Bluetooth short-range radio frequency or IrDA
infrared technology, thereby eliminating cables, connectors and physical
attachments.

Our universal mobile connectivity products consist of:

o Embedded short-range wireless Bluetooth protocol software;
o Embedded IrDA protocol software, test systems and Windows application
software; and
o IrDA wireless connectivity hardware.

PRODUCT DESCRIPTION TARGET CUSTOMERS/RELATIONSHIPS
------------------------------------------------------------------------------------------------------------------------------------
Embedded Short-Range Wireless Bluetooth Protocol Software:
------------------------ ------------------------------------------------------ ----------------------------------------------------

XTNDAccess Blue A Bluetooth software development kit that: o Original equipment manufacturers that integrate
SDK-Embedded o provides an efficient way to add reliable Bluetooth into their products.
Bluetooth Protocol Bluetooth radio communications to any embedded o Licensed by Palm Computing for inclusion in
Software device including personal digital assistants, future releases of Palm OS.
mobile phones, pagers, digital cameras, portable o Licensed by Motorola to implement Bluetooth
office equipment, watches, medical equipment; transport technology in Motorola products.
industrial automation products and more. o Licensed by Hewlett-Packard to implement
o is on the Bluetooth Qualified Product List, Bluetooth technology in various imaging devices.
certified for Object Push, File Transfer, o Ported to run on Fujitsu's picoJava-II based
Dial-up Networking, LAN Access, FAX, Cordless chip.
Telephone, Headset and Intercom profiles; o Licensed by NEC for implementation in a Bluetooth
o provides support for Multi-transport OBEX printer adapter and in a Bluetooth ISDN
and IrMC; and terminal adapter (AtermITX92BT).
o includes source code and complete documentation
for implementing Bluetooth into mobile devices.
------------------------ ------------------------------------------------------ ----------------------------------------------------
Bluetooth Windows A Bluetooth software development kit that: o Original equipment manufacturers who are
Applications o provides a way to implement Bluetooth wireless producing Bluetooth devices and need them to
technology in Windows-based devices. communicate with Windows-based PC's.
o supports leading Bluetooth hardware manufacturers o PC manufacturers and PC card and USB peripheral
including Broadcom, Cambridge Silicon Radio, manufacturers who need to bundle Bluetooth
Ericsson and SiliconWave. software to provide a complete solution.
o includes lower level Windows protocols, support
for Dial-up Networking and LAN profiles, as well
as applications for Object Push, File Transfer and
Synchronization profiles.
o via XTNDConnect PC, enables file synchronization
between a PC and a Palm Windows CE (Pocket PC),
or a Casio Pocket Viewer device.
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PRODUCT DESCRIPTION TARGET CUSTOMERS/RELATIONSHIPS
------------------------------------------------------------------------------------------------------------------------------------
Embedded IrDA Protocol Software, Test Systems and Windows Applications Software:
------------------------ ------------------------------------------------------ ----------------------------------------------------

XTNDAccess IrDA A complete IrDA infrared software development kit o Original equipment manufacturers that integrate
Software that provides an efficient way to add reliable IrDA into their products.
IrDA-compliant communications to any embedded device o Palm has included this software in their Palm OS
including digital cameras and handheld organizers and all devices starting with the Palm III.
such as mobile phones, watches and the Palm Organizer.
------------------------ ------------------------------------------------------ ----------------------------------------------------
IrDA Infrared Test A standalone testing and certification system for o Original equipment manufacturers for the design,
Tools IrDA-enabled devices. We added wireless connectivity development and testing of infrared
tools to our product line in 1999 through the implementation in mobile devices.
acquisition of Genoa's IrDA testing tools.
------------------------------------------------------------------------------------------------------------------------------------
IrDA Wireless Connectivity Hardware:
------------------------ ------------------------------------------------------ ----------------------------------------------------
XTNDAccess hardware XTNDAccess hardware products enable mobile users to o Original equipment manufacturers that incorporate
products link portable and stationary devices together for or bundle our products with personal digital
mobile information management applications such as assistants, mobile phones, pagers, laptop
synchronization, file transfer, access to local area computers, digital cameras, watches and other
networks, intranets and the Internet all without mobile devices.
a single physical connection. We have engineered the o Enterprise customers through our distributors and
hardware, embedded software stacks, Windows drivers through e-commerce to support the use of
and user applications included with each wireless XTNDConnect Server for Palm CE and EPOC-based
connectivity hardware product. mobile devices.
Products include: o Casio bundles our XTNDAccess infrared adapters
o XTNDACCESS IRDA PC ADAPTER: a wireless link with their PC-UNITE Wrist-type Wearable PIM Data
between a mobile device and a desktop personal Viewers and sells our adapters as accessories
computer with a serial port. to Casio wearable camera products.
o XTNDACCESS IRDA NETWORK ADAPTER: a wireless
access point for connection to a local area
network.
o XTNDACCESS IRDA USB ADAPTER: a wireless link
between a mobile device and a desktop personal
computer with a USB port.
o XTNDACCESS IRDA PRINTER ADAPTER: a wireless link
between a mobile device and a printer with a
serial port.
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TECHNOLOGY
----------

We focus our technology development efforts on mobile data management software
and wireless connectivity software. Important technology features of our
products are described below.

MOBILE DATA MANAGEMENT SOFTWARE TECHNOLOGIES:

XTNDCONNECT SERVER. Our technology allows the update and exchange of data with
enterprise server applications such as Microsoft Exchange, Lotus Notes and
ODBC-compliant databases, and helps system administrators manage mobile devices
with IT application deployment, backup, restore, installation, configuration and
reporting. Technological features of XTNDConnect Server meet the following needs
of IT organizations:

o management and configuration of users and mobile devices using our
administration program, which supports Microsoft Management Console
plug-in technology for remote monitoring;
o customized synchronization using enhanced filtering technologies, which is
particularly useful for synchronization using wireless protocols such as
GSM, GPRS, CDMA or CDPD;
o advanced security implementing elliptical curve encryption technologies
that permit highly-secure connections, while consuming minimal bandwidth
and battery power on the mobile device;
o enhanced application access using a built-in VBScript Engine, enabling the
server to enforce business rules, launch server-based applications and
establish new communications sessions on-the-fly;
o broad communications options enabling any wired, wireless or cellular
connection, including physical or wireless TCP/IP, GSM, CDMA, iDEN,
Internet, PPP, cradle, IrDA or Bluetooth; and
o support for Microsoft Exchange, Lotus Domino or any ODBC-compliant data
storage format, custom plug-ins to support proprietary applications and
our proprietary replication wizard for synchronization of database
records.

XTNDCONNECT PC. Our technology incorporates a single engine to synchronize
information between mobile devices and personal computer applications, and
supports Palm OS, Windows CE, Pocket PC and Casio Pocket Viewer devices, Siemens
S40 mobile phone and Ericsson R520m R300d and T39m mobile phones. In addition,
we have extended our synchronization technology through our Internet alliances
to online personal information managers such as MyPalm (formerly Anyday.com).
Data record translation capabilities synchronize many disparate device formats
and application data types, for example, allowing joint synchronization with
Palm OS, Microsoft Windows CE and Pocket PC devices. Auto-Connect technology
permits the automatic synchronization of devices upon connection and can be
supported on Bluetooth and IrDA, as well as cable and cradle connections.

REMOTE PROCEDURE MIDDLEWARE (RPM) SERVER. Our software reduces bandwidth needs
across slow remote connections, such as cellular GSM or CDPD, while easing the
processing burden on the mobile device itself. We have also designed the RPM
Server to process business rules and data on the mid-tier applications level,
speeding up end-user application performance and saving server-processing
cycles.

ADVANTAGE DATABASE SERVER. We have developed algorithms for burst-mode
transmission of data records across the LAN or WAN, including transaction
processing, filter optimization, enhanced locking algorithms and support for a
wide variety of communications protocols.

WIRELESS CONNECTIVITY SOFTWARE TECHNOLOGIES:

MULTI-TRANSPORT OBEX. Multi-transport OBEX, or Object Exchange, allows disparate
mobile devices to exchange abstract information types (objects) without
pre-existing configuration of drivers, file type or protocols between the two
devices. Our Multi-transport OBEX is agnostic to the type of physical
connection, isolating the communications media from the applications using the
connection and allowing synchronization through a wireless connection such as
Bluetooth or IrDA or through a physical connection such as USB or serial.

IRMC MOBILE COMMUNICATIONS. IrMC mobile communications form the basis for
universal data exchange synchronization among devices such as laptop and
handheld computers, mobile phones and pagers and personal digital assistants. We
have ported this software to the Bluetooth protocol stacks, implementing several
of the key Bluetooth profile identifiers for original equipment manufacturers.
The IrMC Level 4 Sync Server is a required profile for mobile devices and was
adapted from our work with the Infrared Data Association.

XTNDACCESS BLUE SDK. Bluetooth radio communications technology allows high-speed
interconnection, over distances of up to 10 meters, of personal digital
assistants, personal computers and mobile phones, without the use of cables,
connectors or docking cradles. With its small memory footprint, we believe
XTNDAccess Blue SDK is one of the market's first embedded implementations of
Bluetooth stacks for small, inexpensive mobile devices such as personal digital
assistants, pagers, cameras and mobile phones. XTNDAccess Blue SDK includes an
embedded operating system application of all modules from Hardware Control
Interface to the OS abstraction layer. Within this protocol set is software for
functions such as a Hardware Control Interface Driver, Service Discovery
Protocol, RFCOMM, OBEX API and TCS Binary.

XTNDCONNECT BLUE SDK FOR WINDOWS. XTNDConnect Blue SDK for Windows is a software
development kit that enables PC and mobile device manufacturers, PC hardware
manufacturers and application developers to quickly develop Bluetooth solutions
for Windows-based products. The SDK provides a full set of tools for developing
wireless communication applications for Windows 2000, Windows 98SE and Windows
ME operating systems. Components of the software development kit include a:

o wireless toolkit including APIs and sample development applications;
o Bluetooth protocol stack for Windows 2000, 98SE and ME;
o driver development kit including sample drivers for USB, PCMCIA and UART
radios; and
o developer's guide.

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

As of June 30, 2001, we had 118 full-time equivalent employees devoted to our
research and development activities, primarily at our facilities in Boise,
Idaho; Bristol, England; Corvallis, Oregon and Singapore. We believe our success
depends upon our ability to develop, introduce and manufacture new products and
enhance existing products, allowing us to offer our customers products that
achieve increasing levels of capability, performance and reliability. Our
research and development efforts are currently focused on:

o data synchronization and management;
o information transfer;
o new mobile connectivity platforms;
o short-range wireless technologies;
o thin-client/server data access; and
o communications applications.

During fiscal 2001, 2000 and 1999, research and development expenses from
continuing operations were $12.7 million, $8.5 million and $5.6 million,
respectively, representing 37%, 22% and 22%, respectively, of our net revenue
from continuing operations. In connection with our acquisition of Advance
Systems in August 1999, we incurred an in-process research and development
charge of $2.4 million in fiscal 2000. We also recorded $758,000 in acquired
in-process research and development charges in fiscal 1999 as a result of our
acquisitions of Rand Software and Parallax Research. We anticipate that we will
commit substantial resources to research and development in the future. We will
continue to add development expertise through our recruiting and hiring efforts,
as well as through continued acquisitions of engineering-oriented technology
companies.

MARKETING AND SALES
-------------------

As of June 30, 2001, we had an in-house marketing and sales staff of 113
full-time equivalent employees, who are largely responsible for generating
end-user demand for our products by soliciting prospective customers, providing
technical advice with respect to our products and working with distributors and
original equipment manufacturers to sell our products. We conduct our marketing
and sales activities primarily from our offices in Boise, Idaho and our
international offices in France, Germany, Italy, the Netherlands, Singapore and
the United Kingdom. In addition, we have significant distributor relationships
in Japan, Sweden, Germany, Brazil, Spain, France, Korea and Taiwan. Our
marketing and sales staff actively participates with distributors and resellers
in the selling process, which provides users with the level of support needed
for the successful integration of solutions in enterprise networks.

SERVICE AND SUPPORT
-------------------

As of June 30, 2001, we had 24 full-time equivalent service and support
personnel at our facility in Boise, Idaho and at our international offices. In
addition, our independent distributors provide some service and support to
customers. We believe that service and support are critical components of
customer satisfaction and the success of our business. Our commitment to service
and support enables us to interact regularly with our customers' network
administrators and to identify and respond to their needs on an ongoing basis.
We offer a wide range of customer support services under our ExtendAssist
Program. This program includes a technical support hotline to provide a range of
telephone support to our customers through a toll-free number. In addition, we
maintain a technical support group comprised of engineers and technicians,
24-hour automated support, and an on-line bulletin board, which contains
in-depth technical information. Through ExtendAssist, our engineering staff
provides technical support through e-mail. We also provide on-line services to
distribute technical advice and software updates.

MANUFACTURING
-------------

As of June 30, 2001, we had 23 full-time equivalent employees in our
manufacturing operations, primarily at our Boise, Idaho facility. Our
manufacturing operations consist mainly of materials procurement, final
assembly, testing, quality assurance and shipping. We rely on third-party
suppliers for components used in our products. We subcontract other
manufacturing functions, including the production of our printed circuit boards
and some final product assembly and testing. We intend to continue to
subcontract a majority of our manufacturing functions. With our acquisition of
Parallax Research in fiscal 1999, we added the local ability to manage our
manufacturing relationships with our subcontractor in Asia. We perform quality
assurance and some testing of our products, primarily at our Boise, Idaho
facility.

COMPETITION
-----------

The markets for our products are rapidly evolving and intensely competitive.
Furthermore, the markets for our mobile data management and universal mobile
connectivity products are relatively new and characterized by frequent product
introductions, changing protocols and rapidly developing technology. As mobile
devices continue to grow in power and usage and become a major component of
enterprise information management, we expect new competitors to enter these
markets and existing competitors to expend increasing resources to develop
mobile data management and universal mobile connectivity products. As a result,
we expect competition in these markets to intensify.

MOBILE SYNCHRONIZATION AND DATA MANAGEMENT
------------------------------------------

Our mobile synchronization and data management products compete primarily with
products offered by Synchrologic, Aether Software, Pumatech, and AvantGo. We
believe that the primary competitive factors for these products are:

o the ability to support a broad range of mobile device platforms and
synchronize information with a broad range of databases and applications;
and
o speed and security of synchronization.

CLIENT/SERVER DATABASE
----------------------

Our client/server database products compete primarily with products offered by
Microsoft, through its SQL Server product, Interbase, Pervasive Software and
Oracle, through its Oracle Lite server product. We believe that the primary
competitive factors for these products are:

o ease of integration into developers' applications;
o speed;
o reliability; and
o scalability, or the ability to increase the number of client users.

UNIVERSAL MOBILE CONNECTIVITY
-----------------------------

Our universal mobile connectivity products compete primarily with products
offered by Widcomm, Digianswer (a subsidiary of Motorola), Open Interface and
IVT Corporation. We believe that the primary competitive factors for these
products are:

o the ability to support a broad range of user profiles and mobile device
platforms; and
o interoperability between mobile devices.

INTELLECTUAL PROPERTY
---------------------

To protect our proprietary rights, we rely generally on patent, copyright,
trademark and trade secret laws, confidentiality agreements with many of our
employees and consultants and licensing agreements. Despite these protections,
third parties might obtain and use our technologies without authorization or
develop similar technologies independently. The steps we have taken may not
prevent misappropriation of our intellectual property, particularly in countries
other than the United States where laws or law enforcement practices may not
protect our proprietary rights as fully as in the United States.

We have entered into source code and design document escrow agreements with a
limited number of our customers requiring release of design details in some
circumstances. These agreements generally provide that these parties will have a
limited, non-exclusive right to use the code in the event that there is a
bankruptcy proceeding by or against us, if we cease to do business or if we fail
to meet our support obligations. We also provide our source code to foreign
language translation service providers and consultants to use in limited
circumstances.

We own 19 registered trademarks. We cannot assure you that any of our current or
future trademark applications will be approved. Even if these applications are
approved, any trademarks may be successfully challenged by others or
invalidated. There may be third parties using names similar to ours of which we
are unaware. If our trademark applications are not approved or if our trademarks
are invalidated because of prior third-party registrations, our use of these
marks could be restricted unless we enter into arrangements with these third
parties, which might not be available on commercially reasonable terms, if at
all.

We have been issued seven patents that expire in 2010 and beyond. We cannot
assure you that any of our current or future patent applications will be
granted. Any patent of ours may be challenged, invalidated or circumvented and
the rights granted under any patent of ours may not provide competitive
advantages to us. If a blocking patent is issued in the future to a third party,
and we are not able to distinguish our technologies, processes or methods from
those covered under the patent, we may need to either obtain a license or
develop noninfringing technologies, processes or methods with respect to that
patent. We may not be able to obtain a license on commercially reasonable terms,
if at all, or design around the patent, which could impair our ability to sell
our products. Any proprietary rights with respect to our technologies may not be
viable or of value in the future since the validity, enforceability and scope of
protection of proprietary rights in Internet-related industries are uncertain
and still evolving.

Other persons may claim that our technologies, processes or methods infringe
their patents. These claims may cause us to incur significant expenses and, if
successfully asserted against us, may cause us to pay substantial damages and
prevent us from selling some of our products, which would substantially harm our
business.

EMPLOYEES
---------

As of June 30, 2001, we had 352 employees and 334 full-time equivalent
employees, including approximately 40 employees that were terminated in July
2001 as part of the restructuring that we initiated in June 2001. The terminated
employees were primarily in research and development, marketing and sales,
administration and manufacturing, and approximately 70% were in the United
States and 30% were in Europe and Asia. Our employee count also decreased in
July 2001 by an additional 36 employees that were terminated and hired by Troy
Group subsequent to the sale of our printing solutions business to Troy Group.

None of our employees is represented by a labor union or is subject to a
collective bargaining agreement with respect to his or her employment with us.
We believe that our relations with our employees are good.

ITEM 2. PROPERTIES

We own our corporate headquarters in Boise, Idaho, which consists of
approximately 100,000 square feet of space located on 24 acres of land. We use
our headquarters facility for research and development, marketing and sales,
customer support, manufacturing and administration. In March 2001, we sold our
facility in Bozeman, Montana. We lease sales, support and development offices
throughout the United States, Europe and Asia. We believe that our existing
facilities are adequate to meet our current requirements and that suitable
additional or substitute space will be available as needed to accommodate
expansion of our operations.

ITEM 3. LEGAL PROCEEDINGS

Not applicable.

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

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is listed on the Nasdaq National Market System under the symbol
"XTND". The following table sets forth the high and low sales prices of our
common stock:

HIGH LOW
-------- --------
FISCAL YEAR 2001
Fourth Quarter, ended June 30, 2001.................... $ 13.20 $ 5.57
Third Quarter, ended March 31, 2001.................... 29.81 10.25
Second Quarter, ended December 31, 2000................ 56.19 10.13
First Quarter, ended September 30, 2000................ 101.00 39.25

FISCAL YEAR 2000
Fourth Quarter, ended June 30, 2000.................... 112.94 25.50
Third Quarter, ended March 31, 2000.................... 150.00 37.50
Second Quarter, ended December 31, 1999................ 48.00 6.00
First Quarter, ended September 30, 1999................ 6.88 4.25

On September 5, 2001, the last reported per share sale price of our common stock
on the Nasdaq National Market was $3.30 per share. The market for our common
stock is highly volatile. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results and
Market Price of Stock."

According to our transfer agent's records, we had 181 stockholders of record as
of September 5, 2001. Because many of our shares of common stock are held by
brokers and other institutions on behalf of stockholders, we are unable to
estimate the total number of stockholders represented by these stockholders of
record.

We have not declared or paid any dividends on our common stock since September
1994. We currently anticipate that we will retain all future earnings for use in
the operation and expansion of our business and do not anticipate paying any
dividends in the foreseeable future.

ITEM 6. SELECTED FINANCIAL DATA

You should read the following consolidated selected financial data in
conjunction with our Consolidated Financial Statements and related Notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Annual Report on Form 10-K. Amounts are
in thousands, except per share amounts. As a result of the sale of certain
assets and liabilities to Troy Group, our printing solutions segment is
accounted for as discontinued operations in accordance with Accounting
Principles Bulletin No. 30. Amounts for all periods in this Annual Report on
Form 10-K, including the financial statements and related notes, have been
reclassified to reflect the discontinued operations.

FOR THE YEARS ENDED JUNE 30, 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------

Net revenue...................................... $ 34,746 $ 39,002 $ 25,275 $ 18,760 $ 8,507
Gross profit..................................... 21,605 18,301 10,948 10,093 5,282
Research and development......................... 12,740 8,516 5,574 5,020 3,576
Acquired in-process research and development..... - 2,352 758 - -
Marketing and sales.............................. 18,414 11,586 9,197 7,513 4,744
Amortization of intangibles...................... 972 891 61 - -
Restructuring charge............................. 1,096 - - - -
Loss from operations............................. (18,923) (9,423) (8,314) (5,735) (5,869)
Income tax provision (benefit)................... 7,456 (3,069) (2,992) (2,210) (2,548)
Loss from continuing operations.................. (25,875) (6,670) (5,696) (4,177) (4,444)
Income from discontinued operations.............. 2,401 1,685 4,234 7,475 7,120
Net income (loss) ............................... (23,474) (4,985) (1,462) 3,298 2,676

Loss per share from continuing operations:
Basic and diluted............................ (2.44) (0.70) (0.68) (0.57) (0.65)
Earnings per share from discontinued operations:
Basic and diluted............................ 0.22 0.18 0.51 1.02 1.04
Earnings (loss) per share:
Basic and diluted............................ (2.22) (0.52) (0.17) 0.45 0.39

AS OF JUNE 30, 2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------

Cash and cash equivalents................ $ 6,585 $ 6,191 $ 9,668 $ 15,006 $ 6,621
Total assets............................. 28,143 44,221 40,799 40,147 25,677
Long-term debt........................... - - 67 7,617 7,210
Total stockholders' equity............... 18,938 37,715 26,595 26,592 14,025

Our income tax provision and loss from continuing operations for fiscal 2001
includes a $14.0 million valuation allowance recorded against our deferred tax
assets. Our loss from continuing operations in fiscal 2001 also includes $1.4
million in charges associated with the terminated Palm merger and $1.1 million
in employee termination benefits resulting from our restructuring. Our loss from
continuing operations for fiscal 2000 includes charges associated with our
acquisition of Advance Systems. Our loss from continuing operations for fiscal
1999 includes charges related to our exit from our port replicator business and
charges associated with our acquisitions of Rand Software and Parallax Research.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This discussion and other parts of this Annual Report on Form 10-K contain
forward-looking statements that involve risks, uncertainties and assumptions.
These forward-looking statements include, but are not limited to, statements
regarding:

o levels of mobile information management software product sales;
o levels of international sales;
o levels of original equipment manufacturer sales;
o gross margin;
o staffing and expense levels;
o levels of accounts receivable;
o levels of capital expenditures;
o renewal of the line of credit facility;
o anticipated cash funding needs;
o future acquisitions, and
o effect of our transition to the Euro.

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 under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results and
Market Price of Stock" and elsewhere in this Annual Report on Form 10-K. 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 Quarterly Reports on Form 10-Q that we will file in fiscal 2002. All yearly
references are to our fiscal years ended June 30, 2002, 2001, 2000 and 1999,
unless otherwise indicated. All tabular amounts are in thousands, except
percentages.

SIGNIFICANT EVENTS
------------------

On May 31, 2001, we sold our printing solutions segment to Troy Group, Inc. for
$1.6 million in cash, net of expenses. 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. Our
printing solutions business included our network print server and non-network
printer sharing products. Subsequent to the sale of our printing solutions
segment to Troy Group, it hired approximately 40 of our employees. As a result
of the sale to Troy, our printing solutions segment is accounted for as
discontinued operations in accordance with Accounting Principles Bulletin No.
30. Amounts for all periods in this Annual Report on Form 10-K, including the
financial statements and related notes, have been reclassified to reflect the
discontinued operations.

During our fourth quarter ended June 30, 2001, we implemented a restructuring
plan to reduce costs and improve operating efficiencies and, as a result
recorded a restructuring charge to continuing operations of $1.1 million in
fiscal 2001. The restructuring charge consisted primarily of costs related to
the termination of approximately 40 employees in research and development,
marketing and sales, administration and manufacturing. Approximately 70% of the
terminated employees were in the United States and 30% were in Europe and Asia.
Substantially all of the restructuring charge was paid in July 2001. In
addition, throughout fiscal 2001, we consolidated 3 of our offices in the US and
Europe and, as a result, reduced operating expenses and reduced our workforce by
approximately 40 additional employees.

OVERVIEW
--------

Prior to the sale of our printing solutions segment in May 2001, we classified
our product offerings in 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
and synchronize 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. Until April 2001, we also marketed and sold
enterprise Internet appliances.

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 continue
to increase 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 infrared and
Bluetooth wireless connectivity software. We expect these products to continue
to generate a majority of our net revenue.

Our other products segment consists of our mechanical port replicator products,
which were discontinued in fiscal 1999.

We derive a majority of our net revenue from sales to customers outside of the
United States, principally from our international sales subsidiaries, original
equipment manufacturers and from a limited number of distributors. Based on the
region in which the customer resides, net revenue for continuing operations is
as follows for the years ended June 30:

2001 2000 1999
---------- ---------- ----------

Domestic..................................... 38% 26% 33%
International:
Europe...................................... 38 30 28
Asia........................................ 22 42 36
Other regions............................... 2 2 3
---------- ---------- ----------
Total international........................ 62 74 67
---------- ---------- ----------
Net revenue from continuing operations.... 100% 100% 100%
========== ========== ==========

The decrease in net revenue from customers in Asia in fiscal 2001 from the prior
year was due primarily to a decrease in sales to Hewlett-Packard. This decrease
was 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. In fiscal 2000 and 1999, sales of
mobile information management products and services to Hewlett-Packard accounted
for 33% and 27% of our net revenue from continuing

operations, respectively, 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 in fiscal 2001.

We expect that international sales will continue to represent a substantial
portion of our net revenue in the foreseeable future and will comprise between
55% and 65% of our net revenue in fiscal 2002.

Revenue from original equipment manufacturer sales has fluctuated in the past
and we expect it will fluctuate in future quarters 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 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 significant impact
on our results of operations.

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

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

Mobile information management segment.. $34,746 (11)% $39,053 60% $24,400
Other products segment................. - 100 (51) (106) 875
---------- ---------- ----------
Net revenue....................... $34,746 (11)% $39,002 54% $25,275
========== ========== ==========

The decrease in net revenue in fiscal 2001 from fiscal 2000 was due primarily to
a significant decrease in unit sales of mobile information management hardware
products, including XTNDAccess IrDA Printer Adapters and our enterprise Internet
products. These decreases were offset, in part, by increased net revenue from
increased licenses of our mobile information management software products,
including our XTNDConnect data synchronization and management software and our
XTNDAccess and XTNDConnect infrared and Bluetooth wireless connectivity software
products. We expect unit sales of our mobile information management hardware
products to continue to decline in fiscal 2002 as we focus our marketing and
sales resources on our mobile information management software products.

The increase in net revenue in fiscal 2000 from fiscal 1999 was primarily the
result of increased unit sales of XTNDAccess hardware products to original
equipment manufacturers, primarily Hewlett Packard, increased license fees from
our XTNDAccess data synchronization and management software and enterprise
Internet appliance products and increased license revenue from our XTNDAccess
wireless connectivity software products and our Advantage Database Server
products. We also experienced a decrease in net revenue from our other products
segment in fiscal 2000 from fiscal 1999 because of the exit from our port
replicator business in fiscal 1999.

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

Gross profit........................... $21,605 18% $18,301 67% $10,948
Gross margin........................... 62% 47% 43%

Our cost of net revenue consists primarily of personnel costs associated with
post-sales technical support of our software products, royalties for the use of
third-party software, amortization of purchased technology and components,
out-sourced manufacturing and in-house labor costs associated with the
manufacturing of our hardware products. The significant increase in gross margin
in fiscal 2001 from fiscal 2000 was primarily the result of increased sales of
mobile information management software products and decreased shipments of lower
margin mobile information management hardware products.

The increase in gross margin for fiscal 2000 from fiscal 1999 was the result of
increased sales of mobile information management software products, partially
offset by decreased sales of lower margin mobile information management hardware
products to original equipment manufacturers. The gross profit in fiscal 1999
includes charges associated with the exit from our port replicator business,
including returns and a provision for returns of $1.0 million and a provision
for writedown of inventory of $1.4 million.

We expect that increased sales of our mobile information management software
products will continue to have a positive impact on our overall gross margin and
we expect our gross margin to be in the range of 77% to 85% throughout fiscal
2002.

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

Research and development............... $12,740 50% $8,516 53% $5,574
as a % of net revenue................ 37% 22% 22%

Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, facilities costs and
travel expenses. The increase in research and development expenses in fiscal
2001 from fiscal 2000 and fiscal 1999 was primarily the result of an increase in
the number of engineers dedicated to mobile information management software
projects. The increase in fiscal 2000 from fiscal 1999 is also the result of
additional personnel costs in our mobile information management segment as a
result of our acquisition of Advance Systems in August 1999.

We expect research and development expenses to decrease in fiscal 2002 as a
result of decreased staffing, although these expenses may vary as a percentage
of net revenue.

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

Marketing and sales.................... $18,414 59% $11,586 26% $9,197
as a % of net revenue................ 53% 30% 36%

Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our marketing and sales personnel, promotional expenses
and pre-sales support costs. The increases in marketing and sales expenses for
fiscal 2001 from fiscal 2000 and fiscal 1999 were primarily due to increased
personnel costs and promotional activities for the mobile information management
segment both domestically and at our European subsidiaries. The increase in
fiscal 2000 from fiscal 1999 was partially offset by decreased promotional
activities within our other products segment as a result of the exit from our
port replicator business.

We expect marketing and sales expenses to decrease in fiscal 2002 as a result of
decreased staffing, although these expenses may vary as a percentage of net
revenue.

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

General and administrative............. $7,306 67% $4,379 19% $3,672
as a % of net revenue................ 21% 11% 15%

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
increase in general and administrative expenses in fiscal 2001 from fiscal 2000
was primarily the result of expenses associated with the terminated Palm merger,
an increase in bad debt expense due to the impact of the decline in the
worldwide economy on certain of our customers and an increase in the cost of our
directors' and officers' insurance.

The increase in general and administrative expenses in fiscal 2000 from fiscal
1999 was primarily attributable to increased costs subsequent to our acquisition
of Advance Systems and an increase in professional services expenses. The
increase was also attributable to an increase in our premiums for directors' and
officers' insurance as a result of an increase in our coverage limit and the
market environment for directors' and officers' insurance.

We expect general and administrative expenses to decrease in fiscal 2002 as a
result of decreased staffing and other cost reduction efforts, although these
expenses may vary as a percentage of net revenue.

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

Amortization of intangibles............ $972 9% $891 1,361% $61
as a % of net revenue................ 3% 2% - %

Amortization of intangibles in all periods presented is the result of goodwill
and other intangibles, which arose from our acquisitions of Advance Systems,
Rand Software and Parallax Research in our mobile information management
segment.

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

Income tax provision (benefit)......... $7,456 343% $(3,069) (3)% $(2,992)
as a % of income (loss) before taxes. 22% 8% 12%

The change in the income tax provision or benefit for fiscal 2001 from fiscal
2000 was primarily the result of a $14.0 million valuation allowance recorded in
the fourth quarter of fiscal 2001 against our deferred tax assets, which
consisted primarily of net operating loss carryforwards. 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 us
generating taxable income during periods in which the temporary differences
reverse and net operating loss and tax credit carryforwards expire. As a result
of several factors arising in the fourth quarter of fiscal 2001, including the
disposition of our printing solutions segment and the continued decline of the
worldwide economy, we believe that sufficient evidence did not exist under
generally accepted accounting principles to support a conclusion that it is more
likely than not that the future income tax assets will be realized, therefore,
we recorded a total valuation allowance of $19.2 million against our net
deferred tax assets in the year ended June 30, 2001.

Approximately, $11.4 million of the valuation allowance for deferred tax assets
is attributable to employee stock option deductions, of which we will allocate
approximately $5.0 million to additional paid-in capital rather than current
income when subsequently recognized. Approximately $363,000 of the valuation
allowance relates to research and experimentation credits, of which we will
allocate approximately $151,000 to additional paid-in capital rather than
current income when subsequently recognized.

The change in the income tax benefit for fiscal 2000 from fiscal 1999 was
attributable to an increase in the loss before income taxes. The change in the
effective tax rate for fiscal 2000 from the prior year was primarily the result
of valuation allowances on deferred tax assets arising from our acquisition of
Advance Systems and on foreign tax credit carryforwards.

BUSINESS COMBINATIONS
---------------------

OVAL
----

In August 1999, we acquired all of the outstanding stock of Oval (1415) Limited
for $5.5 million in cash, including acquisition expenses, and 625,000 shares of
our common stock valued at $3.0 million. We accounted for this transaction by
the purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations," and, accordingly, Oval's results of
operations have been included in our consolidated statement of operations since
the acquisition date.

Oval, based in Bristol, England, was the parent company of Advance Systems
Limited and Zebedee Software Limited. Advance Systems was the developer of
XTNDConnect Server, formerly ASL-Connect, a server-based data synchronization
and management software for portable computing devices and high-end mobile
phones that allows the update and exchange of data with enterprise applications
such as Microsoft Exchange, Lotus Notes and corporate databases. Zebedee
Software was a software consulting company. Substantially all of the net assets
owned by, and operations of, the Oval consolidated group

were attributable to Advance Systems, therefore, we will refer to Advance
Systems herein when referring to the acquisition.

Net working capital.............................................. $ 112
Property and equipment........................................... 45
Developed technology, goodwill and other intangibles............. 5,984
Acquired in-process research and development..................... 2,352
---------
Net assets acquired as of date of acquisition............... $ 8,493
=========

Valuation of the intangible assets acquired from Advance Systems, including
acquired in-process research and development, developed technology and goodwill
was determined by independent appraisers. Based upon such independent
appraisals, we estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $2.4 million. We expensed the
amount allocated to acquired in-process research and development as a charge to
operations in the first quarter of fiscal 2000.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based on our estimates
and excluded amounts expected to result from existing products and technologies.
Projected net revenue included the expected evolution of the technology and the
reliance of future technologies on the in-process technologies over time, but
excluded amounts expected to result from existing products and technologies. We
based the estimated cost of net revenue and estimated operating expenses on our
cost structure and that of comparable companies.

The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 50%
to 65%. The discount rates were based on various factors such as:

o the stage of completion at the acquisition date;
o the complexity of the work completed as of the acquisition date;
o costs incurred as of the valuation date;
o difficulties of completing the remaining development in a reasonable time;
o technical uncertainties of the remaining tasks; and
o the costs remaining to complete the projects.

We used a portion of the acquired in-process research and development to further
enhance Advance Systems' existing server-based synchronization technology by
implementing a plug-in architecture. This type of design allows users and
third-party software providers to develop small software components that plug
into our XTNDConnect Server product and extend the range of applications
supported by XTNDConnect Server. In September 1999, we implemented the first
phase of this architecture with the release of XTNDConnect Server Version 2.2,
which supports IBM's DB2 Everywhere 1.1 (DB2E) handheld relational database and
Microsoft's ActiveX Data Object (ADO) interface, and provides other enhanced
management tools. The acquired in-process research and development assigned to
this project was valued at $943,000 as of the date of the acquisition. We
incurred an estimated $69,000 to complete Version 2.2.

In November and December of 1999, we released versions of XTNDConnect Server
that support encryption, Lotus Notes/Domino R5 and Symbian's EPOC operating
system. The acquired in-process research and development assigned to this
project was valued at $1.2 million at the date of the acquisition. This project
was approximately 60% complete at the time of the acquisition and required an
estimated $41,000 to complete.

We used the remaining acquired in-process research and development to provide
further enhancements to the architecture of our XTNDConnect Server products,
which at the time of the acquisition were only approximately 10-15% complete.
The acquired in-process research and development assigned to this project was
valued at $186,000 as of the date of the acquisition. We incurred an estimated
$123,000, from the date of the acquisition, to develop the in-process technology
into a commercially viable product.

RAND SOFTWARE AND PARALLAX RESEARCH
-----------------------------------

In October 1998, we acquired all of the outstanding stock of Rand Software for
$710,000 in cash and 104,998 shares of our common stock valued at $735,000. In
November 1998, we acquired a controlling interest in Parallax Research for
$347,000 in cash and by assuming $375,000 in debt. In May 1999, we acquired the
remaining outstanding stock of Parallax Research for $91,000 in cash. These
transactions were accounted for by the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations," and, accordingly, the results of operations of both companies
have been included in our consolidated statement of operations since the
acquisition dates.

Rand Software was the developer of XTNDConnect PC, formerly known as Harmony, a
data synchronization and management software providing support for mobile
devices such as Windows CE handheld personal computers. This synchronization
technology allows mobile devices to update and exchange data with enterprise
applications such as Microsoft Exchange, Microsoft Outlook, Lotus Notes and
Symantec Act!. Parallax Research develops infrared connectivity products
primarily for sale to original equipment manufacturers and manages our
relationships with our manufacturers in Asia.

Net working capital.............................................. $ (146)
Property and equipment........................................... 114
Developed technology, goodwill and other intangibles............. 1,532
Acquired in-process research and development..................... 758
---------
Net assets acquired as of date of acquisition............... $ 2,258
=========

The valuation of the intangible assets acquired from Rand Software and Parallax
Research, including the acquired in-process research and development, developed
technology and goodwill, was determined by independent appraisers. Based upon
these independent appraisals, we estimated that, in aggregate, the fair value of
acquired in-process research and development that had not yet reached
technological feasibility and had no alternative future use was $758,000. The
amount allocated to acquired in-process research and development was expensed as
a charge to operations in the second quarter of fiscal 1999.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from these projects were based on estimates we
made. Projected net revenue included the expected evolution of the technology
and the reliance of future technologies on the in-process technologies over
time, but excluded amounts expected to result from existing products and
technologies. We based the estimated cost of sales and estimated operating
expenses on our cost structure and that of comparable companies.

The net cash flows were adjusted for the stage of completion of the projects and
discounted to their present values based on risk adjusted discount rates of 25%
to 35%. The discount rates were based on various factors such as:

o lack of operating history;
o aggressive projections for some products;
o reliance on original equipment manufacturers;
o management depth; and
o product diversification.

Rand Software's research and development in-process on the date of the
acquisition related to a server-based data synchronization software product that
was estimated to be approximately 14% complete and would require an estimated
$464,000 and 38 man-months of time to complete. Development in process at the
time of the acquisition of Rand Software was subsequently utilized to develop a
web-based synchronization product and will continue to be incorporated into
additional mobile information management products, including products
complementary to the server-based product acquired with Advance Systems in
August 1999.

We used acquired in-process research and development from Parallax Research to
develop new products using the developing fast infrared technology standard. A
product being developed for an original equipment manufacturer, to be used in a
printer-based product, accounted for a substantial majority of the acquired
in-process research and development from Parallax Research. All projects in
process at the time of the acquisition were completed in fiscal 1999 at an
estimated cost of $58,000.

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

The printing solutions segment included 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.

As a result of the reclassification of our printing solutions segment as
discontinued operations, operating results for our printing solutions segment
are reported, net of tax, under "Income from discontinued operations" on our
Statements of Operations.

FISCAL YEAR ENDED JUNE 30,
2001 % CHANGE 2000 % CHANGE 1999
---------- ---------- ---------- ---------- ----------

Net revenue............................ $13,293 (24)% $17,509 (31)% $25,415
Income from discontinued operations,
net of taxes......................... 2,331 38 1,685 (60) 4,234
Gain on sale of discontinued operations,
net of taxes......................... 70 100 - - -

The decrease in net revenue for fiscal 2001 from fiscal 2000 and fiscal 1999 was
principally due to decreased unit sales of both network print server products
and non-network printer sharing products worldwide.

Income from our discontinued printing solutions operations increased in fiscal
2001 from fiscal 2000 as a result of a decrease in operating expenses as we
continued our shift in focus from our printing solutions products to our mobile
information management products. This decrease in expenses was partially offset
by a decrease in gross profit resulting from a decrease in unit sales of our
printing solutions products.

Income from our discontinued printing solutions operations decreased in fiscal
2000 from fiscal 1999 primarily due to decreased gross profit from both network
print server and non-network printer sharing products, which was partially
offset by a decrease in operating expenses as we shifted resources to support
our mobile information management products.

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

Net cash used by operating activities in fiscal 2001 was $4.1 million and was
primarily a result of our net loss, adjusted for such items as the change in
deferred taxes and to our depreciation and amortization, provision for bad debts
and provision for write-down of inventory. This cash use was partially offset by
a decrease in receivables, an increase in payables and a decrease in inventory.
Net cash used by operating activities in fiscal 2000 was $2.6 million and was
primarily a result of the payment of the discount upon maturity of our long-term
debt and an increase in receivables, principally income taxes receivable. These
cash uses were partially offset by our net loss, adjusted for such items as
depreciation and amortization and acquired in-process research and development,
and a decrease in inventory. The net cash used by operating activities in fiscal
1999 of $197,000 was primarily a result of an increase in receivables,
inventories and prepaids and other assets and a decrease in payables. These cash
uses were partially offset by our net loss, adjusted for such items as the
provision for write-down of inventory, depreciation and amortization and
acquired in-process research and development.

Accounts receivable, net of our allowance for bad debts, was $8.0 million and
$10.1 million at June 30, 2001 and 2000, respectively. We expect that our
accounts receivable will decrease over the next quarter as receivables from our
discontinued printing solutions segment are collected. In the longer term, our
accounts receivable may increase 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.

Net cash provided by investing activities in fiscal 2001 was $1.2 million and
was primarily the result of proceeds from the sale of our discontinued
operations, which consisted of our printing solutions segment, and proceeds from
the sale of our facility in Bozeman, Montana. These proceeds were offset, in
part, by purchases of property and equipment. Net cash used by investing
activities in fiscal 2000 was $3.4 million, which consisted primarily of cash
payments for the acquisition of Oval, the parent company of Advance Systems. Net
cash used by investing activities in fiscal 1999 was $5.5 million, which
reflected the net purchases of available-for-sale securities, the purchase of
property and equipment and the net cash paid in our acquisitions of Rand
Software and Parallax Research.

We plan to incur aggregate capital expenditures of approximately $500,000 during
fiscal 2002, primarily for software, system improvements and personal computers.

Net cash provided by financing activities in fiscal 2001 was $3.2 million and
consisted primarily of proceeds from the issuance of common stock under our
stock plans. Net cash provided by financing activities in fiscal 2000 was $2.7
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. Net
cash provided by financing activities in fiscal 1999 was $413,000, which
resulted primarily from the issuance of common stock under our stock plans.

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. We had no borrowings under this line at June 30, 2001 or 2000. The
line of credit agreement has restrictive covenants that require us to maintain
particular financial ratios. We expect to renew or replace this credit 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
through fiscal 2002. 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 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.

We have not experienced significant costs as a result of the introduction of a
European single currency, the Euro, introduced on January 1, 1999. Prior to
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 expect the transition to the Euro to significantly affect our 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
this transition 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 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 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 $2.8 million and $4.5
million in forward contracts in place, which approximated fair value, against
the Euro and British pound sterling at June 30, 2001 and 2000, respectively,
which matured within 30 days. We recognized net currency exchange losses of
$1,000, $134,000 and $97,000 for the years ended June 30, 2001, 2000, and 1999,
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 how intangible assets that are acquired individually or with a
group of other assets, other than those acquired in a business combination,
should be accounted for in financial statements upon their acquisition. This
statement also addresses how goodwill and other intangible assets should be
accounted for 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 may adopt this statement in our first quarter of fiscal
2002, however, we are required to adopt this statement no later than our first
quarter of fiscal 2003.

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 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
had operating losses. We intend to continue to devote significant financial
resources on product development and sales and marketing and, as a result, we
expect to continue to incur operating losses and negative cash flow from
operations for the first three quarters of fiscal 2002. We do currently expect
to return to profitability in our fourth quarter of fiscal 2002. Our ability to
do so, and our future success, will depend in large part upon our ability to
generate sufficient revenue from these investments and otherwise control
expenses. If we do achieve profitability, in our fourth quarter of fiscal 2002,
we may be unable to maintain profitability in subsequent periods.

WE ARE EXPOSED TO RECENT UNFAVORABLE ECONOMIC CONDITIONS, WHICH HAS AND MAY
CONTINUE TO HARM OUR BUSINESS.

We have seen a rapid and increasingly 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. We believe that these conditions have
led our current and potential customers to reduce their spending on and use of
our products, which has reduced our revenue. If the economic conditions continue
or worsen, demand for our products and services may be further reduced as a
result of enterprises reducing IT spending on products and services such as
ours. These economic slowdowns may also adversely affect our customers' ability
to pay for our products and services. Accordingly, these economic slowdowns may
harm our business.

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 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 pressure, seasonal trends or general economic conditions; and
o a shift in the mix of products sold, resulting in fluctuations in gross
margin.

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 July 1, 2000, to June 30, 2001, the price of our common stock ranged
from $5.57 to $101.00 per share. 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 IT 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.

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, 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
potential relationships.

WE RELY HEAVILY ON THE SUCCESS OF OUR MOBILE INFORMATION MANAGEMENT PRODUCTS. IF
THE MARKETS FOR THESE 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 mobile data management and universal mobile connectivity markets are still
emerging and may not continue to grow or grow at expected rates. We generate
substantially all of our net revenue from continuing operations from sales of
our products in these markets. 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. Even if the
markets grow, our products that address these markets 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 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 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 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 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.

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 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, our
existing stockholders' investments may be diluted, which could affect the market
price of our stock.

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 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 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.

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. 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 technologies 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.

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 British Pound and the 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.

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 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 mobile data management products 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.

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 part on the volume and
timing of orders for hardware products 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, 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 on our hardware products is below expectations in any given
quarter, the adverse impact of the shortfall on our operating results may be
magnified by our inability to adjust 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.

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.

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 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 fiscal 2001, we implemented a restructuring plan and reduced our workforce by
approximately 40 employees. Despite this reduction in workforce, we will
continue to recruit personnel, particularly engineering personnel, with the
specific technical skills that are critical to our business.

IF OUR THIRD-PARTY MANUFACTURER FAILS 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 on a third-party manufacturer to manufacture our hardware products.
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.

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 7A. 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
June 30, 2000, 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 and
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 $2.8 million and $4.5 million in
forward contracts in place, which approximated fair value, against the Euro and
British pound sterling at June 30, 2001 and 2000, respectively, which matured
within 30 days.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this item is submitted in Item 14 of this Annual Report on Form
10-K.

ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE REGISTRANT

The information required by this item is incorporated by reference to our
definitive Proxy Statement for our 2001 Annual Meeting of Stockholders to be
held on October 24, 2001.

The following table sets forth information regarding our executive officers,
directors and key employees as of September 1, 2001.

NAME AGE POSITION

Steven D. Simpson....... 54 President, Chief Executive Officer and Director
Holmes T. Lundt......... 44 Vice President of Corporate Research and
Development and Business Development
Karla K. Rosa........... 38 Vice President of Finance and Chief Financial
Officer
Bradley J. Surkamer..... 47 Vice President of Worldwide Sales and Service
Donald J. Baumgartner... 34 Director of Worldwide Marketing
Raymond A. Smelek....... 66 Chairman of the Board of Directors
John J. Katsaros........ 50 Director
John M. Russell......... 59 Director
S. Scott Wald........... 46 Director
Douglas B. Winterrowd... 50 Chief Engineer and Director

STEVEN D. SIMPSON has served as our President and Chief Executive Officer and as
a director since January 1996. From January 1995 to January 1996, Mr. Simpson
served as Executive Vice President of Sales and Marketing. Prior to joining us,
Mr. Simpson was employed by Hewlett-Packard in various marketing and management
positions from 1978 to 1994. From 1991 to 1994, Mr. Simpson was General Manager
of the Boise LaserJet Printer Division. Mr. Simpson received a B.S. in Marketing
from the University of Utah and an M.B.A. from the University of Wyoming.

HOLMES T. LUNDT has served as Vice President of Corporate Research and
Development and Business Development since January 1996. From December 1994 to
January 1996, Mr. Lundt was Vice President of Research and Development. Since
joining us in 1984, Mr. Lundt has held various other positions including Vice
President of Marketing and Business Unit Manager of Network Printing. Mr. Lundt
received a B.S. in Electrical Engineering from Iowa State University and a M.S.
in Electrical Engineering from Stanford University.

KARLA K. ROSA has served as Vice President of Finance since December 1997 and as
Chief Financial Officer since April 1996. From January 1996 to April 1996, Ms.
Rosa was Assistant Controller, from April 1992 to January 1996, Ms. Rosa was
Treasury Manager and from December 1991 to April 1996, Ms. Rosa was Tax
Director. Prior to joining us, Ms. Rosa was a manager in the Los Angeles and
Boise offices of Arthur Andersen & Co. Ms. Rosa is a Certified Public
Accountant. Ms. Rosa received her B.S. in accounting from Utah State University.

BRADLEY J. SURKAMER has served as Vice President of Worldwide Sales and Service
since July 2001. From March 2000 to July 2001, he served as Vice President of
International Sales and Marketing. From January 1999 to March 2000, Mr. Surkamer
was the Vice President of Technical Support and our Internet Business Unit
Manager. From January 1996 to January 1999 he served as Vice President of
Technical Support and Third-Party Marketing. Mr. Surkamer has held various other
positions since he joined us in November 1988 including Manager of Technical and
Third-party Marketing and Manager of Sales and Marketing. Mr. Surkamer received
a B.S. in Mathematics from the University of Montana and an M.B.A. from Northern
Arizona University.

DONALD J. BAUMGARTNER was appointed our Director of Worldwide Marketing in July
2001. Since joining Extended Systems in 1990, Mr. Baumgartner has held various
other positions including Business Unit Manager for Universal Mobile
Connectivity Products, Sales Manager and Project Manager. Mr. Baumgartner holds
a B.S. in Electrical Engineering from the University of Idaho.

RAYMOND A. SMELEK has served as Chairman of our Board of Directors since June
1995 and he has been a director since June 1994. From June 1994 to January 1996,
Mr. Smelek was our President and Chief Executive Officer. Prior to joining us,
Mr. Smelek was employed by Hewlett-Packard and held a number of positions, most
recently as Vice President and General Manager of the Mass Storage Group. Mr.
Smelek is also the President and Chief Executive Officer of the Network Group
and a director of Inference Corporation. Mr. Smelek received a B.S. in
Electrical Engineering from San Jose State University.

JOHN J. KATSAROS was appointed to our board of directors in July 2000. He is the
President of NetsEdge Research Group, a marketing and strategy consulting firm.
Prior to his position at NetsEdge, Mr. Katsaros was a Vice President at Jupiter
Communications, a global Internet commerce research and consulting company. Mr.
Katsaros was also the President of Internet Research Group (formerly
Collaborative Marketing), an Internet research and consulting firm, which was
acquired by Jupiter in March 2000. Mr. Katsaros holds a B.S. and M.S. in
Electrical Engineering from Lehigh University, as well as an M.B.A. from Santa
Clara University.

JOHN M. RUSSELL has been a director since April 1998. From December 1991 to
March 1994, Mr. Russell served as Vice President of Finance and Administration,
Chief Financial Officer and Secretary of Cisco. Mr. Russell received a B.A. from
the University of California, Berkeley. He is currently retired.

S. SCOTT WALD has been a director since July 1994. He was currently the
President of Romar Services, L.L.C. He was the founder of ASAP Software Express
and served as President and Chief Executive Officer of ASAP Software Express
from September 1985 to June 1998. Mr. Wald received a B.S. in Business
Administration and an M.B.A. from Arizona State University.

DOUGLAS B. WINTERROWD is a founder of Extended Systems and has been a director
since October 1995. Previously, he served as director from 1984 to 1992. Mr.
Winterrowd has served as Chief Engineer since February 1994 and, prior to this
time, held various positions with Extended Systems, including Program Manager,
Quality Assurance Manager, Technical Support Manager, Project Manager and Senior
Engineer. Mr. Winterrowd holds a B.S. and an M.S. in Electrical Engineering from
Montana State University.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to our 2001
Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated by reference to our 2001
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is incorporated by reference to our 2001
Proxy Statement.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A) 1. FINANCIAL STATEMENTS

The following financial statements are filed as a part of this report:

Consolidated financial statements as of June 30, 2001 and 2000 and for
each of the three years in the period ended June 30, 2001:

Report of Independent Accountants................................. 40
Consolidated Statements of Operations............................. 41
Consolidated Statements of Comprehensive Loss..................... 41
Consolidated Balance Sheets....................................... 42
Consolidated Statements of Stockholders' Equity................... 43
Consolidated Statements of Cash Flows............................. 44
Notes to Consolidated Financial Statements........................ 45

2. FINANCIAL STATEMENT SCHEDULES

Schedule II - Valuation and Qualifying Accounts................... 58

All other schedules are omitted because they are not applicable or the
required information is shown in our consolidated financial statements or
the notes to our consolidated financial statements.

3. EXHIBITS

EXHIBIT NUMBER DESCRIPTION
-------------- -----------

2.3 Mutual Termination Agreement and Amendment to Agreement and
Plan of Reorganization between Extended Systems
Incorporated and Palm, Inc. dated May 17, 2001. (5)

3.1 Restated Certificate of Incorporation. (1)

3.2 Restated Bylaws. (2)

10.1 Form of Indemnification Agreement for directors and
officers. (1)

10.2.1 1998 Stock Plan and form of agreement thereunder. (1)

10.2.2 Amendment 1 to the 1998 Stock Plan. *

10.3.1 1998 Employee Stock Purchase Plan and forms of
participation agreements thereunder. (1)

10.3.2 Amendment 1 to the Employee Stock Purchase Plan. *

10.4.1 1998 Directors Stock Option Plan and form of agreement
thereunder. (1)

10.4.2 Amendment 1 to the 1998 Directors Stock Option Plan *

10.5 1994 Incentive Stock Option Plan. (1)

10.6 1987 Restricted Stock Option Plan, as amended. (1)

10.7 1984 Incentive Stock Option Plan, as amended. (1)

10.8 Extended Systems Incorporated 2001 Approved Share Option
Scheme. *

10.9 Extended Systems Incorporated 401(k) Plan. (1)..

10.21 Employment Agreement between the Company and Steven D.
Simpson. (1)

10.22 Employment Agreement between the Company and Raymond A.
Smelek. (1)

10.24 Employment Agreement between the Company and Holmes T.
Lundt. (3)

10.25 Employment Agreement between the Company and Scott J.
Ritchie. (3)

10.26 Employment Agreement between the Company and Bradley J.
Surkamer (4)

10.27 Employment Agreement between the Company and Karla K. Rosa
(4)

21.1 List of Subsidiaries of the Registrant. *

23.1 Consent of Independent Accountants. *
----------

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

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

(3) Incorporated by reference from our Quarterly Report on Form 10-Q filed
with the Securities and Exchange Commission on February 16, 1999.

(4) Incorporated by reference from our Annual Report on Form 10-K filed
with the Securities and Exchange Commission on September 28, 1999.

(5) Incorporated by reference from our Report on Form 8-K filed with the
Commission on June 11, 2001.

* Filed herewith.

(B) REPORTS ON FORM 8-K

Not applicable.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Extended Systems Incorporated:

In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 38 present fairly, in all material
respects, the financial position of Extended Systems Incorporated and its
subsidiaries at June 30, 2001 and 2000, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 2001
in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 14(a)(2) on page 38 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of Extended Systems
Incorporated's management; our responsibility is to express an opinion on these
financial statements and the financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

Boise, Idaho
July 31, 2001

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2001 2000 1999
-------- -------- --------

Net revenue ..................................... $ 34,746 $ 39,002 $ 25,275
Cost of net revenue ............................. 13,141 20,701 14,327
-------- -------- --------
Gross profit ............................ 21,605 18,301 10,948

Operating expenses:
Research and development .................... 12,740 8,516 5,574
Acquired in-process research and development -- 2,352 758
Marketing and sales ......................... 18,414 11,586 9,197
General and administrative .................. 7,306 4,379 3,672
Amortization of intangibles ................. 972 891 61
Restructuring charge ........................ 1,096 -- --
-------- -------- --------
Loss from operations .................... (18,923) (9,423) (8,314)
Other expense (income), net ..................... (504) 57 (339)
Interest expense ................................ -- 259 713
-------- -------- --------
Loss before income taxes ................ (18,419) (9,739) (8,688)
Income tax provision (benefit) .................. 7,456 (3,069) (2,992)
-------- -------- --------
Loss from continuing operations ......... (25,875) (6,670) (5,696)

Discontinued operations, net of tax:
Income from discontinued operations ..... 2,331 1,685 4,234
Gain from sale of discontinued operations 70 -- --
-------- -------- --------
Net loss ................................ $(23,474) $ (4,985) $ (1,462)
======== ======== ========

Loss per share from continuing operations:
Basic and diluted ........................... $ (2.44) $ (0.70) $ (0.68)

Loss per share:
Basic and diluted ........................... $ (2.22) $ (0.52) $ (0.17)

Number of shares used in per share calculations:
Basic and diluted ........................... 10,587 9,552 8,409

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEARS ENDED JUNE 30,
(IN THOUSANDS)
2001 2000 1999
-------- -------- --------

Net loss ........................................ $(23,474) $ (4,985) $ (1,462)
Change in currency translation .................. (108) (278) (225)
-------- -------- --------

Comprehensive loss ...................... $(23,582) $ (5,263) $ (1,687)
======== ======== ========

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30,
(IN THOUSANDS, EXCEPT PAR VALUE)

2001 2000
-------- --------

ASSETS
Current:
Cash and cash equivalents .............................................. $ 6,585 $ 6,191
Receivables, net ....................................................... 8,490 12,499
Inventories ............................................................ 441 3,484
Prepaids and other ..................................................... 996 1,200
Deferred income taxes .................................................. -- 715
-------- --------
Total current assets ............................................... 16,512 24,089
Property and equipment, net ................................................ 7,002 7,817
Intangibles, net ........................................................... 4,629 6,237
Deferred income taxes ...................................................... -- 5,785
Other assets ............................................................... -- 293
-------- --------
Total assets ....................................................... $ 28,143 $ 44,221
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable ....................................................... $ 3,371 $ 3,026
Accrued expenses ....................................................... 4,492 2,710
Deferred revenue ....................................................... 1,342 770
-------- --------
Total current liabilities .......................................... 9,205 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;
10,971 and 10,309 shares issued and outstanding ...................... 11 10
Additional paid-in capital ............................................. 32,725 28,108
Retained earnings (accumulated deficit) ................................ (12,934) 10,540
Deferred compensation .................................................. (77) (264)
Accumulated other comprehensive loss ................................... (787) (679)
-------- --------
Total stockholders' equity ......................................... 18,938 37,715
-------- --------
Total liabilities and stockholders' equity ......................... $ 28,143 $ 44,221
======== ========

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER
------------------- PAID-IN (ACCUMULATED TREASURY STOCK DEFERRED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT COMPENSATION LOSS
-------- -------- -------- -------- -------- -------- -------- --------

BALANCE AT JULY 1, 1998 ............. 8,252 $ 8 $ 10,847 $ 16,987 -- $ -- $ (1,074) $ (176)

Net loss ........................ -- -- -- (1,462) -- -- -- --
Translation adjustment .......... -- -- -- -- -- -- -- (225)
Stock issued .................... 105 1 734 -- -- -- -- --
Treasury stock purchased, at cost
-- -- -- -- (5) (43) -- --
Employee stock plans ............ 243 -- 744 -- 5 43 -- --
Compensatory options ............ -- -- (310) -- -- -- 521 --
-------- -------- -------- -------- -------- -------- -------- --------

BALANCE AT JUNE 30, 1999 ............ 8,600 9 12,015 15,525 -- -- (553) (401)

Net loss ........................ -- -- -- (4,985) -- -- -- --
Translation adjustment .......... -- -- -- -- -- -- -- (278)
Stock issued .................... 625 -- 2,991 -- -- -- -- --
Employee stock plans ............ 1,084 1 13,132 -- -- -- -- --
Compensatory options ............ -- -- (30) -- -- -- 289 --
-------- -------- -------- -------- -------- -------- -------- --------

BALANCE AT JUNE 30, 2000 ............ 10,309 10 28,108 10,540 -- -- (264) (679)

Net loss ........................ -- -- -- (23,474) -- -- -- --
Translation adjustment .......... -- -- -- -- -- -- -- (108)
Employee stock plans ............ 662 1 4,629 -- -- -- -- --
Compensatory options ............ -- -- (12) -- -- -- 187 --
-------- -------- -------- -------- -------- -------- -------- --------

BALANCE AT JUNE 30, 2001 ............ 10,971 $ 11 $ 32,725 $(12,934) -- $ -- $ (77) $ (787)
======== ======== ======== ======== ======== ======== ======== ========

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30,
(IN THOUSANDS)

2001 2000 1999
-------- -------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................... $(23,474) $ (4,985) $ (1,462)
Adjustments to reconcile net loss to net cash used by
operating activities:
Acquired in-process research and development ............. -- 2,352 758
Provision for bad debts .................................. 793 7 341
Provision for write-down of inventory .................... 785 409 1,653
Depreciation and amortization ............................ 3,134 3,014 1,617
Accretion of discount on long-term debt .................. -- 174 656
Payment of discount on long-term debt .................... -- (3,675) --
Tax benefit from employee stock options .................. 1,308 5,683 --
Deferred income taxes .................................... 6,500 (5,941) (694)
Stock option compensation ................................ 175 259 211
Other operating activities ............................... (237) 10 103
Changes in assets and liabilities, net of effect of
acquisitions and dispositions:
Receivables ........................................... 3,173 (1,121) (1,752)
Inventories ........................................... 878 1,064 (531)
Prepaids and other assets ............................. 203 (274) (544)
Deferred revenue ...................................... 572 466 (281)
Accounts payable and accrued expenses ................. 2,139 (82) (272)
-------- -------- --------
Net cash used by operating activities ............. (4,051) (2,640) (197)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................... (1,095) (1,061) (1,055)
Proceeds from the sale of property and equipment ............. 671 -- --
Proceeds from the sale of discontinued operations ............ 1,601 -- --
Sales of available-for-sale securities ....................... -- 1,000 5,979
Maturities of available-for-sale securities .................. -- 2,001 750
Purchases of available-for-sale securities ................... -- -- (9,730)
Acquisitions:
Oval (1415) Limited, net of cash acquired ................ -- (5,273) --
Rand Software Corporation, net of cash acquired .......... -- -- (686)
Parallax Research Pte., net of cash acquired ............. -- -- (437)
Other investing activities ................................... 42 (99) (279)
-------- -------- --------
Net cash provided by (used by) investing activities 1,219 (3,432) (5,458)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock ................... 3,297 7,604 636
Payments on long-term debt ................................... (67) (4,867) (262)
Other financing activities ................................... -- -- 39
-------- -------- --------
Net cash provided by financing activities ......... 3,230 2,737 413
-------- -------- --------
Effect of exchange rate changes on cash ...................... (4) (142) (96)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......... 394 (3,477) (5,338)

CASH AND CASH EQUIVALENTS:
Beginning of year ............................................ 6,191 9,668 15,006
-------- -------- --------
End of year .................................................. $ 6,585 $ 6,191 $ 9,668
======== ======== ========

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------

Through May 2001, Extended Systems had two primary operating segments. Our
mobile information management segment, which includes both mobile data
management and universal mobile connectivity products that enable mobile users
to access, collect, synchronize and print information on demand, and our
printing solutions segment, which provided printer connectivity solutions for
network and non-network computer environments. On May 31, 2001, we sold our
printing solutions segment to Troy Group, Inc.

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. Tabular
amounts are in thousands, except years, percentages and per share amounts.

As a result of the disposition of our printing solutions business in fiscal
2001, we have reclassified our consolidated statement of operations and other
related disclosures for all years 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 that uses the
United States dollar as its functional currency. We translate assets and
liabilities of international subsidiaries into U.S. dollars using exchange rates
in effect at the balance sheet date, and we 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 British Pound and 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 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 $2.8 million and $4.5 million in
forward contracts in place, which approximated fair value, against the Euro and
British pound sterling at June 30, 2001 and 2000, respectively, which matured
within 30 days. We recognized net currency exchange losses of $1,000, $134,000
and $97,000 for the years ended June 30, 2001, 2000, and 1999, respectively.

USE OF ESTIMATES. 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 our estimates.

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 the shares below
because to do so would have been antidilutive:

2001 2000 1999
----- ----- -----

Stock options .............. 2,819 2,332 2,799
Shares for convertible notes -- -- 558

REVENUE on hardware products is generally recognized when products are shipped
to customers, including when products are shipped to distributors and resellers,
net of an allowance for estimated product returns. As a result of the exit from
the mechanical port replicator business in December 1998, our net revenue for
the year ended June 30, 1999 includes port replicator returns and a provision
for port replicator returns totaling $1.0 million.

We recognize revenue earned under software license agreements when persuasive
evidence of a contract exists, software has been delivered and accepted, the fee
is fixed or determinable and collectibility is probable. For contracts with
multiple elements we allocate revenue to each element based on vendor specific
objective evidence of its fair value, which is based on the price when each
element is sold separately, or when not yet sold separately, the price
established by our management. We defer revenue for maintenance and support,
which is amortized over the support period, generally 12 months.

RESEARCH AND DEVELOPMENT COSTS are expensed as incurred.

ADVERTISING COSTS are expensed as incurred.

FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK. Our cash equivalents are
highly liquid investments with original maturities of three months or less,
readily convertible to known amounts of cash. We consider the amounts we report
as cash equivalents and receivables as reasonable approximations of their fair
values. We made these estimates of fair value in accordance with the
requirements of Statement of Financial Accounting Standard No. 107, "Disclosure
about Fair Value of Financial Instrument." We based the fair value estimates on
market information available to us as of June 30, 2001. The use of different
market assumptions and estimation methodologies could have a material effect on
our estimated fair value amounts.

We do not hold or issue financial instruments for speculative purposes.

Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash, short-term investments and trade accounts
receivable. Our cash balances held in financial institutions may exceed
federally insured amounts. We deposit cash in high-credit-quality financial
institutions and, by policy, limit the concentration of credit exposure by
restricting investments with any single obligor. A concentration of credit risk
may exist with respect to trade accounts receivable, as a majority of our
customers are North American, European and Asian manufacturers of computer
equipment and distributors. We perform ongoing credit evaluations on customers
and generally do not require collateral.

INVENTORIES are valued at the lower of cost (principally standard cost, which
approximates actual cost on a first-in, first-out basis) or market. Our cost of
net revenue for the year ended June 30, 1999, includes a provision for
write-down of port replicator inventory of $1.4 million.

PROPERTY AND EQUIPMENT is stated at cost and depreciated using the straight-line
method over estimated useful lives of 7 to 15 years for land improvements, 7 to
40 years for buildings, 3 to 5 years for computer equipment and 5 to 10 years
for furniture and fixtures. Our depreciation and amortization of property and
equipment was $1.5 million in fiscal 2001, $1.5 million in fiscal 2000 and $1.4
million in fiscal 1999. We remove the net book value of property and equipment
retired or otherwise disposed of from our books and we include the net gain or
loss in the determination of our results of operations.

INTANGIBLE ASSETS consist primarily of purchased technology and the cost in
excess of fair value of the net assets of companies that we acquired in purchase
transactions and are carried at cost less accumulated amortization. We amortize
intangible assets over useful lives of 5 years using the straight-line method.

IMPAIRMENT OF LONG-LIVED ASSETS. We review the carrying value of long-lived
assets, comprised mainly of property and equipment and intangible assets, for
impairment whenever events and circumstances indicate that we may not recover
the carrying value of an asset from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where expected future
cash flows are less than the carrying value, we recognize an impairment loss
equal to an amount by which the carrying value exceeds the fair value of assets.
No assets were considered impaired at June 30, 2001 or 2000.

PRODUCT WARRANTY AND SUPPORT. We offer warranties and free support on certain
products and record an accrual for the estimated future costs associated with
warranty claims and support, which is based upon historical experience and our
estimate of the level of future costs.

INCOME TAXES. We recognize deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the financial statement
carrying amounts and the tax basis of assets and liabilities. We record a
valuation allowance against deferred tax assets when it is more likely than not
that such assets will not be realized.

Our consolidated income tax provision or benefit is allocated to continuing and
discontinued operations based principally on the taxable income or loss and tax
credits directly attributable to each operation, as if each operation were a
stand-alone entity. Such allocations reflect each operation's contribution to
our consolidated federal taxable income or loss and the consolidated federal tax
asset or liability and tax credit position. We credited tax benefits that cannot
be used by the operation generating those benefits but can be used on a
consolidated basis to the operation that generated such benefits. Accordingly,
the amounts of taxes payable or refundable allocated to each operation may not
necessarily be the same as that which would have been payable or refundable had
each operation filed a separate income tax return.

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.

SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------

Selected cash payments and noncash activities were as follows for the years
ended June 30:

2001 2000 1999
-------- -------- -------

Income taxes paid (refunded), net ... $(1,393) $ (653) $ 1,085
Stock issued in business combinations -- 2,991 735
Deferred compensation ............... (12) (30) (310)
Interest paid ....................... -- 3,764 83

Interest paid for the year ended June 30, 2000 includes $3.7 million of accreted
discount on the zero coupon promissory notes paid in September 1999.

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 ("Troy") 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 the sale, our printing solutions segment is accounted for as
discontinued operations in accordance with Accounting Principles Bulletin No.
30. Amounts in the financial statements and related notes for all 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 Statements of Operations. In
addition, a gain on the sale of our discontinued operations was recorded in our
fourth quarter ended June 30, 2001.

FOR THE YEARS ENDED JUNE 30,
2001 2000 1999
------- ------- -------

Net revenue ......................................... $13,293 $17,509 $25,415
Gross profit ........................................ 6,122 8,504 13,260
Income tax provision ................................ 1,434 1,068 2,300
Income from discontinued operations, net of taxes ... 2,331 1,685 4,234
Gain on sale of discontinued operations, net of taxes 70 -- --
Earnings per share from discontinued operations:
Basic and diluted ............................ 0.22 0.18 0.51

RESTRUCTURING CHARGES
---------------------

During our fourth quarter ended June 30, 2001, we implemented a restructuring
plan to reduce costs and improve operating efficiencies and, as a result,
recorded a restructuring charge to continuing operations of $1.1 million in
fiscal 2001. The restructuring charge consisted primarily of costs related to
the termination of approximately 40 employees in research and development,
marketing and sales, administration and manufacturing. Approximately 70% were in
the United States and 30% were in Europe and Asia. Substantially all of the
restructuring charge was paid in July 2001.

BUSINESS COMBINATIONS
---------------------

OVAL (1415) LIMITED. In August 1999, we acquired all of the outstanding stock of
Oval (1415) Limited for $5.5 million in cash, including acquisition expenses,
and 625,000 shares of our common stock valued at $3.0 million. This transaction
was accounted for by the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations," and,
accordingly, Oval's results of operations have been included in our consolidated
statement of operations since the acquisition date.

Net working capital .................................. $ 112
Property and equipment ............................... 45
Developed technology, goodwill and other intangibles.. 5,984
Acquired in-process research and development ......... 2,352
------
Net assets acquired as of date of acquisition ... $8,493
======

The following unaudited pro forma consolidated results of continuing operations
assume the Oval acquisition occurred at the beginning of the year ended June 30
(unaudited):

2000 1999
-------- --------

Net revenue from continuing operations ... $ 39,221 $ 26,579
Loss from continuing operations .......... (6,669) (6,155)
Loss per share from continuing operations:
Basic and diluted .................... (0.69) (0.68)

Valuation of the intangible assets we acquired from Advance Systems, including
acquired in-process research and development, developed technology and goodwill
was determined by independent appraisers. Based upon these independent
appraisals, we estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $2.4 million. The amount we
allocated to acquired in-process research and development was expensed as a
charge to operations in our first quarter of fiscal 2000.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from these projects were based on estimates we
made and excluded amounts expected to result from existing products and
technologies. Projected net revenue included the expected evolution of the
technology and the reliance of future technologies on the in-process
technologies over time, but excluded amounts expected to result from existing
products and technologies. We based the estimated cost of net revenue and
estimated operating expenses on our cost structure and that of comparable
companies.

RAND SOFTWARE AND PARALLAX RESEARCH. In October 1998, we acquired all of the
outstanding stock of Rand Software Corporation for $710,000 in cash and 104,998
shares of our common stock valued at $735,000. In November 1998, we acquired a
controlling interest in Parallax Research, Pte. for $347,000 in cash and by
assuming $375,000 in debt and, in May 1999, acquired the remaining outstanding
stock of Parallax for $91,000 in cash. We accounted for these transactions by
the purchase method of accounting in accordance with Accounting Principles Board
Opinion No. 16, "Business Combinations," and, accordingly, we have included the
results of operations of both companies in our consolidated statement of
operations since the acquisition dates. We have not presented pro forma results
of operations since the effects of these acquisitions were not material for the
periods presented.

Rand was the developer of Harmony, data synchronization software for mobile
devices such as Windows CE Handheld PCs and Palm-size computers. This
synchronization technology allows mobile devices to update and exchange data
with enterprise applications such as Microsoft Exchange, Microsoft Outlook,
Lotus Notes and Symantec Act!. Parallax develops infrared connectivity products
primarily for sale to original equipment manufacturers and manages our
relationship with our manufacturer in Asia.

Net working capital ................................... $ (146)
Property and equipment ................................ 114
Developed technology, goodwill and other intangibles .. 1,532
Acquired in-process research and development .......... 758
-------
Net assets acquired as of date of acquisition .... $ 2,258
=======

Valuation of the intangible assets we acquired from Rand and Parallax, including
acquired in-process research and development, developed technology and goodwill
was determined by independent appraisers. Based upon such independent
appraisals, we estimated that, in aggregate, the fair value of acquired
in-process research and development that had not yet reached technological
feasibility and had no alternative future use was $758,000. We expensed the
amount allocated to acquired in-process research and development as a charge to
operations in our second quarter of fiscal 1999.

The appraisers determined the value assigned to acquired in-process research and
development by projecting net cash flows related to future products expected to
result from commercialization of the acquired in-process research and
development. The net cash flows from such projects were based on estimates we
made and excluded amounts expected to result from existing products and
technologies. Projected net revenue included the expected evolution of the
technology and the reliance of future technologies on the in-process
technologies over time, but excluded amounts expected to result from existing
products and technologies. We based the estimated cost of net revenue and
estimated operating expenses on our cost structure and that of comparable
companies.

o lack of operating history;
o aggressive projections for certain products;
o reliance on original equipment manufacturers;
o management depth; and
o product diversification.

We used acquired in-process research and development from Parallax to develop
new products using developing Fast IR technology standard. A product being
developed for an original equipment manufacturer, used in a printer-based
product, accounted for a substantial majority of the acquired in-process
research and development from Parallax. We completed all projects in process at
the time of the acquisition in fiscal 1999 at an estimated cost of $58,000.

Rand's research and development in-process on the date of the acquisition
related to a server-based data synchronization software product that was
estimated to be approximately 14% complete and would require an estimated
$464,000 and 38 man-months of time to complete. Development in-process at the
time of the acquisition of Rand was subsequently utilized to develop a web-based
synchronization product and will continue to be incorporated into additional
mobile information management products, including products complementary to the
server-based product acquired with Advance Systems in August 1999.

RECEIVABLES
----------- AS OF JUNE 30,
2001 2000
-------- --------

Accounts receivable .............. $ 8,835 $ 10,332
Income taxes receivable .......... -- 1,520
Other receivables ................ 442 848
Allowance for doubtful accounts .. (787) (201)
-------- --------

$ 8,490 $ 12,499
======== ========

INVENTORIES
----------- AS OF JUNE 30,
2001 2000
------ ------

Purchased parts ................... $ 93 $1,417
Work in process ................... 48 308
Finished goods .................... 300 1,759
------ ------
$ 441 $3,484
====== ======

PROPERTY AND EQUIPMENT
---------------------- AS OF JUNE 30,
2001 2000
-------- --------

Land and land improvements ........ $ 897 $ 949
Buildings ......................... 5,891 6,416
Computer equipment ................ 5,621 5,304
Furniture and fixtures ............ 2,259 2,277
-------- --------
14,668 14,946
Less accumulated depreciation ..... (7,666) (7,129)
-------- --------
$ 7,002 $ 7,817
======== ========

INTANGIBLE ASSETS
----------------- AS OF JUNE 30,
2001 2000
------- -------

Goodwill .......................... $ 4,415 $ 4,512
Purchased technology .............. 3,128 3,128
Other intangibles ................. 447 447
------- -------
7,990 8,087
Less accumulated amortization ..... (3,361) (1,850)
------- -------
$ 4,629 $ 6,237
======= =======

ACCRUED EXPENSES
---------------- AS OF JUNE 30,
2001 2000
------ ------

Accrued payroll and related benefits ......... $2,600 $1,145
Accrued warranty and support costs ........... 317 435
Other ........................................ 1,575 1,130
------ ------
$4,492 $2,710
====== ======

LEASES
------

We lease certain office space and equipment. Total lease expense from continuing
operations was $531,000 in fiscal 2001, $377,000 in fiscal 2000 and $226,000 in
fiscal 1999. Our minimum future lease commitments for all operating leases are
$316,000 in fiscal 2002, $287,000 in fiscal 2003, $253,000 in fiscal 2004,
$170,000 in fiscal 2005, $127,000 in fiscal 2006 and $349,000 thereafter.

STOCKHOLDERS' EQUITY
--------------------

We have four incentive stock option plans, adopted in 1984, 1994, 1998 and 2001.
Our employees, directors and consultants are eligible for options under these
plans. Options granted before December 24, 1997 generally vest 20 percent per
year over a period of five years from the date of grant. Options granted
December 24, 1997 and after generally vest over a period of four years, vesting
25 percent on the first anniversary of the option and 1/48 per month thereafter.
The exercise price generally is equal to the fair market value of our common
stock on the date of grant or at a price determined by our directors. For the
1984 and 1994 plans, unexercised options generally lapse ten years after
issuance or upon the date the option holder ceases to be an employee. Options
granted under the 1998 and 2001 plan generally lapse ten years after issuance or
three months after the option holder ceases to be an employee. Shares available
for grant under these plans totaled 159,309 at June 30, 2001.

We also had a restricted stock option plan, adopted in 1987. Our regular,
full-time employees and directors were eligible for options under this plan.
Terms of the options were determined at the date of grant. Unexercised options
generally lapse ten years after issuance or upon the date the option holder
ceases to be an employee or director. We recorded unearned compensation related
to these options at the date of the award based on the market value of the
shares and amortize unearned compensation over the periods during which the
restrictions lapse. The plan terminated in September 1997.

We adopted a director stock plan in 1998. Our directors are eligible for options
under this plan. Options are granted at the fair market value of our common
stock on the grant date. An initial grant of 15,000 shares per director will
vest over a period of three years vesting one-third on the first anniversary of
the option and 1/36 per month thereafter. Subsequent grants of 7,500 shares will
be automatically granted to directors each year provided that such directors
have served on the Board for at least six months. These subsequent options will
vest in full on the first anniversary of the date of grant. Unexercised options
lapse ten years after issuance or three months after the date the option holder
ceases to be a director. Shares available for grant under this plan totaled
152,083 at June 30, 2001.

We adopted an employee stock purchase plan in 1998. The plan is generally
implemented by 24-month offering periods beginning on June 30 and December 31
each year. Each offering period contains up to four purchase periods of six
months duration. The purchase plan generally permits eligible employees to
purchase our common stock through payroll deductions of up to 15% of an
employee's compensation, except that no participant's right to purchase shares
may accrue at a rate that exceeds $25,000 each calendar year. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of our common stock on the first day of an offering period or the last day of
each six-month purchase period. Employees may end their participation at any
time during a purchase period, and they will be paid their payroll deduction
withheld within that purchase period. Shares available for purchase under this
plan totaled 524,567 at June 30, 2001.

WEIGHTED-
AVERAGE
STOCK OPTION ACTIVITY EXERCISE PRICE OUTSTANDING EXERCISABLE
--------------------------------------------------------------------------------

AS OF JULY 1, 1998 ...... $ 8.09 2,335 1,475

Granted ............. 5.07 806 --
Became exercisable .. -- 311
Exercised ........... 2.33 (145) (145)
Canceled/expired .... 6.47 (197) (114)
------ ------
AS OF JUNE 30, 1999 ..... 7.64 2,799 1,527

Granted ............. 18.60 600 --
Became exercisable .. -- 486
Exercised ........... 7.98 (808) (808)
Canceled/expired .... 7.18 (259) (75)
------ ------
AS OF JUNE 30, 2000 ..... 10.39 2,332 1,130

Granted ............. 26.07 894 --
Became exercisable .. -- 549
Exercised ........... 33.03 (278) (278)
Canceled/expired .... 16.45 (129) (10)
------ ------
AS OF JUNE 30, 2001 ..... 15.52 2,819 1,391
====== ======

The weighted-average remaining contractual life of options outstanding at June
30, 2001 was 7.11 years. The weighted-average per share exercise price of
options exercisable at June 30, 2001, 2000 and 1999 was $9.81, $8.47 and $8.95,
respectively.

WEIGHTED-
RANGE OF WEIGHTED- AVERAGE WEIGHTED-
STOCK OPTION NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE CONTRACTUAL LIFE SHARES EXERCISE PRICE
--------------- -------------------------------------------------------------- -------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- -------------------------------------

$0.15 - $0.15 8 $ 0.15 5.8 years 8 $ 0.15
4.13 - 6.19 663 4.72 7.3 380 4.85
6.25 - 8.88 855 7.38 7.5 429 7.69
9.41 - 15.75 547 11.38 3.6 483 11.01
18.00 - 35.50 570 34.44 9.0 82 33.87
37.13 - 59.75 171 47.49 9.1 8 41.42
63.69 - 96.00 5 69.13 8.9 1 67.57
------------- -------------
2,819 1,391
============= =============

We have adopted the disclosure-only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation." Had we
determined compensation expense for our stock option plans based on the fair
value at the grant date as prescribed by Statement of Financial Accounting
Standard No. 123, net income or loss would have changed to the pro forma amounts
indicated below for the years ended June 30:

2001 2000 1999
---------- --------- ---------

As reported:
Net loss ...................... $ (23,474) $ (4,985) $ (1,462)
Loss per share:
Basic and diluted ......... (2.22) (0.52) (0.17)
Pro forma:
Net loss ...................... (31,545) (8,240) (2,952)
Loss per share:
Basic and diluted ......... (2.98) (0.86) (0.35)

We determined the fair value of options at the date of grant using the
Black-Scholes option-pricing model. We assumed no future dividends would be
paid. The other weighted-average assumptions and the weighted-average fair
values of stock options are as follows for the years ended June 30:

2001 2000 1999
------- ------- -------

Risk-free interest rate:
Option plans .................................. 5.6% 6.2% 4.8%
Purchase plan ................................. 4.7% 5.1% 4.8%

Volatility factor ................................. 99% 92% 69%

Expected life in years:
Option plans .................................. 7.6 7.0 7.4
Purchase plan ................................. 1.6 0.8 0.5

Fair value at grant date:
Exercise price equal to market price .......... $ 26.07 $ 19.24 $ 5.08
Exercise price less than market price ......... $ -- $ 6.81 $ --

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

FOR THE YEARS ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
-------- -------- --------

Domestic .................................. $ (8,544) $ (8,144) $ (1,478)
Foreign Discontinued operations ........... (6,040) 1,158 (676)
-------- -------- --------
Loss before income taxes .............. $(14,584) $ (6,986) $ (2,154)
======== ======== ========

FOR THE YEARS ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal ............................... $ -- $ (1,398) $ (104)
State ................................. 66 (71) (27)
Foreign ............................... 400 523 132
Deferred:
Federal ............................... 6,089 (611) (409)
State ................................. 1,252 (212) 9
Foreign ............................... 1,083 (232) (293)
-------- -------- --------
Income tax provision (benefit) .... $ 8,890 $ (2,001) $ (692)
======== ======== ========

FOR THE YEARS ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
-------- -------- --------
Continuing operations ..................... $ 7,456 $ (3,069) $ (2,992)
Discontinued operations ................... 1,434 1,068 2,300
-------- -------- --------
Income tax provision (benefit) ..... $ 8,890 $ (2,001) $ (692)
======== ======== ========

The tax effects of temporary differences and carryforwards that give rise to
deferred tax assets (liabilities) are as follows as of June 30:

2001 2000
-------- --------

Intangible asset amortization ................ $ 1,358 $ 1,101
Federal and state loss carryforwards ......... 16,258 5,374
Foreign loss carryforwards ................... 1,313 1,083
Other ........................................ 901 (341)
Valuation allowance .......................... (19,830) (717)
-------- --------
Net deferred tax asset ............... $ -- $ 6,500
======== ========

We have not provided United States income taxes on the undistributed earnings of
our international subsidiaries, as such earnings are considered permanently
reinvested in these operations. While these earnings could become subject to
additional tax if repatriated, we do not anticipate repatriation.

At June 30, 2001, we had available federal, state, and foreign net operating
loss carryforwards of approximately $40.1 million, $30.9 million, and $3.4
million, respectively. We also had unused research credits and foreign tax
credit carryforwards of approximately $363,000 and $339,000 respectively. If not
utilized, the federal net operating loss and research credit carryforwards will
expire in fiscal years 2020 and 2021 and the state net operating loss
carryforwards will expire between fiscal 2004 and fiscal 2021. Of the $3.4
million of foreign net operating loss carryforwards, approximately $666,000 will
expire between fiscal 2002 and 2005 and the balance can be utilized
indefinitely. The available foreign tax credits expire between fiscal 2004 and
fiscal 2006. If certain substantial changes in our ownership should occur, as
defined by Section 382 of the Internal Revenue Code, there may be an annual
limitation on the amount of carryforwards that we can utilize.

In assessing the 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 us generating taxable income during periods in which the temporary
differences reverse and net operating loss and tax credit carryforwards expire.
As a result of several factors arising in the fourth quarter of fiscal 2001,
including the disposition of our printing solutions segment and continued

decline of the worldwide economy, we believed that sufficient evidence did not
exist under generally accepted accounting principles to support a conclusion
that it is more likely than not that the future income tax assets will be
realized, therefore, we recorded a valuation allowance of $19.2 million against
our net deferred tax assets in the year ended June 30, 2001.

Our effective income tax rate varies from the federal statutory rate as follows
for the years ended June 30:

2001 2000 1999
---- ---- ----

Federal tax rate ..................................... (34.0)% (34.0)% (34.0)%
States taxes, net of federal benefit ................. (3.2) (3.2) (3.5)
Research and experimental tax credit ................. (1.4) -- (2.3)
Amortization of intangible assets .................... 0.3 0.8 3.4
Stock option compensation ............................ 0.3 0.5 3.5
Foreign sales corporation ............................ -- (3.4) (8.8)
Acquired in-process research and development ......... -- -- 12.0
Valuation allowance .................................. 96.0 10.3 --
Other, net ........................................... 2.9 0.4 (2.3)
---- ---- ----
Effective income tax rate ........................ 60.9% (28.6)% (32.0)%
==== ==== ====

LINE OF CREDIT
--------------

We have an uncollateralized bank revolving line of credit for $10 million that
expires on October 31, 2001. Interest on borrowings is at the lender's prime
rate. We had no borrowings under this line as of June 30, 2001 or 2000. The line
of credit requires us to maintain certain financial ratios.

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.

At June 30, 2001, we had only one remaining operating segment. 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 include
wireless connectivity products, data synchronization and management software and
client/server database management systems with remote access capabilities. We
sell mobile information management products primarily to original equipment
manufacturers, application developers, enterprises and computer resellers.

Our other products segment primarily included 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. 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 expense to total direct expenses.

FOR THE YEARS ENDED JUNE 30,
----------------------------------------------
2001 2000 1999
-------- -------- --------

Mobile information management segment ......... $ 34,746 $ 39,053 $ 24,400
Other products segment ........................ -- (51) 875
-------- -------- --------
Net revenue ............................... $ 34,746 $ 39,002 $ 25,275
======== ======== ========

Mobile information management segment ......... $(18,923) $ (9,329) $ (4,391)
Other products segment ........................ -- (94) (3,923)
-------- -------- --------
Loss from continuing operations ........... $(18,923) $ (9,423) $ (8,314)
======== ======== ========

Mobile information management segment ......... $ 1,426 $ 1,379 $ 1,124
Other products segment ........................ -- 8 164
-------- -------- --------
Depreciation expense ...................... $ 1,426 $ 1,387 $ 1,288
======== ======== ========

Port replicator product returns and a provision for port replicator product
returns totaling $1.0 million are included in net revenue and the loss from
operations in our other products segment for our second quarter of fiscal 1999.
Also included in our other products loss from operations in our first and second
quarters of fiscal 1999 are provisions for write-down of port replicator product
inventory of $300,000 and $1.1 million, respectively.

Sales to an original equipment manufacturer accounted for 33% and 27% of net
revenue from continuing operations in fiscal 2000 and 1999, respectively. No
customers accounted for more than 10% of our net revenue from continuing
operations in fiscal 2001.

We based our geographic revenue information on the location of the selling
entity. Long-lived assets consist primarily of property and equipment and
intangible assets.

AS OF JUNE 30,
-----------------------------------------
2001 2000 1999
------- ------- -------

Long-lived assets:
United States ............................... $10,996 $13,455 $ 9,336
Germany ..................................... 267 323 233
Other countries ............................. 368 320 178
------- ------- -------
Total ................................... $11,631 $14,098 $ 9,747
======= ======= =======

FOR THE YEARS ENDED JUNE 30,
-----------------------------------------
2001 2000 1999
------- ------- -------
Net revenue from continuing operations:
United States ............................... $20,238 $15,206 $13,430
Germany ..................................... 6,580 5,823 4,231
Singapore ................................... 3,810 13,782 6,149
Other countries ............................. 4,118 4,191 1,465
------- ------- -------
Total ................................... $34,746 $39,002 $25,275
======= ======= =======

DEFINED CONTRIBUTION PLAN
-------------------------

We established the Extended Systems Incorporated 401(k) Investment Plan, a
defined contribution benefit plan, effective January 1991. All regular United
States employees are eligible to participate. For all participants having
completed six months of service, we make dollar-for-dollar matching
contributions to the participants' accounts up to a maximum of three percent of
each participant's annual pretax compensation. Our contributions to the plan
were $355,000 in fiscal 2001, $309,000 in fiscal 2000 and $285,000 in fiscal
1999.

QUARTERLY FINANCIAL DATA (UNAUDITED)
------------------------------------

FIRST SECOND THIRD FOURTH
-------- -------- -------- --------

FOR THE YEAR ENDED JUNE 30, 2001:
Net revenue from continuing operations ............ $ 8,723 $ 9,843 $ 8,268 $ 7,912
Gross profit ...................................... 4,953 6,176 5,310 5,166
Loss from continuing operations ................... (2,106) (2,191) (2,505) (19,073)
Income from discontinued operations, net of tax ... 526 597 613 665
Net loss .......................................... (1,580) (1,595) (1,891) (18,408)
Loss per share from continuing operations:
Basic and diluted ............................. (0.20) (0.21) (0.23) (1.77)
Earnings per share from discontinued operations:
Basic and diluted ............................. 0.05 0.06 0.06 0.06
Loss per share::
Basic and diluted ............................. (0.15) (0.15) (0.18) (1.71)

FOR THE YEAR ENDED JUNE 30, 2000:
Net revenue from continuing operations ............ 8,510 10,089 10,548 9,855
Gross profit ...................................... 3,507 4,204 5,208 5,382
Loss from continuing operations ................... (3,439) (1,159) (716) (1,356)
Income from discontinued operations, net of tax ... 378 692 392 224
Net loss .......................................... (3,061) (468) (324) (1,132)
Loss per share from continuing operations:
Basic and diluted ............................. (0.38) (0.12) (0.07) (0.13)
Earnings per share from discontinued operations:
Basic and diluted ............................. 0.04 0.07 0.04 0.02
Loss per share:
Basic and diluted ............................. (0.34) (0.05) (0.03) (0.11)

Our loss from continuing operations and net loss for the fourth quarter ended
June 30, 2001 includes a $14.0 million valuation allowance recorded against our
deferred tax assets.

SCHEDULE II

EXTENDED SYSTEMS INCORPORATED

VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

BALANCE AT CHARGED DEDUCTIONS
BEGINNING TO PROFIT FROM BALANCE AT
OF PERIOD AND LOSS ACCRUALS END OF PERIOD
--------------------------------------------------------------

Amount deducted in balance sheet from the asset to which it applies:

Year ended June 30, 2001:

Allowance for doubtful accounts .......... $ 201 $ 793 $ (207) $ 787
Allowance for product returns ............ 97 401 (474) 24
Allowance for obsolete inventory ......... 719 785 (1,156) 348

Year ended June 30, 2000:

Allowance for doubtful accounts .......... 218 7 (24) 201
Allowance for product returns ............ 101 1,531 (1,535) 97
Allowance for obsolete inventory ......... 824 409 (514) 719

Year ended June 30, 1999:

Allowance for doubtful accounts .......... 319 341 (442) 218
Allowance for product returns ............ 62 2,313 (2,274) 101
Allowance for obsolete inventory ......... 278 1,653 (1,107) 824

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, in Boise, Idaho, on
September 17, 2001.

Extended Systems Incorporated

By: /s/ Steven D. Simpson
-------------------------------------
Steven D. Simpson
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on September 17, 2001.

SIGNATURE TITLE

/s/ Steven D. Simpson President, Chief Executive Officer
----------------------------------------- and Director
Steven D. Simpson (Principal Executive Officer)

/s/ Karla K. Rosa Vice President, Finance, and Chief
----------------------------------------- Financial Officer
Karla K. Rosa (Principal Financial and Accounting
Officer)

/s/ Raymond A. Smelek Director
-----------------------------------------
Raymond A. Smelek

Director
-----------------------------------------
Charles W. Jepson

/s/ John J. Katsaros Director
-----------------------------------------
John J. Katsaros

/s/ John M. Russell Director
-----------------------------------------
John M. Russell

/s/ S. Scott Wald Director
-----------------------------------------
S. Scott Wald

/s/ Douglas B. Winterrowd Director
-----------------------------------------
Douglas B. Winterrowd