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

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2003

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

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

Commission File Number 000-23597

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

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes |X| No |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes |_| No |X|

The number of shares outstanding of the Registrant's Common Stock as of December
31, 2003, was 14,559,421.
================================================================================

EXTENDED SYSTEMS INCORPORATED

FORM 10-Q

FOR THE SIX MONTHS ENDED DECEMBER 31, 2003

TABLE OF CONTENTS

PAGE
----

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
--------------------

Condensed Consolidated Balance Sheets as of
December 31, 2003 and June 30, 2003 (unaudited) 3

Condensed Consolidated Statements of Operations for
the Three and Six Months Ended December 31, 2003 and
2002 (unaudited) 4

Condensed Consolidated Statements of Comprehensive
Loss for the Three and Six Months Ended December 31,
2003 and 2002 (unaudited) 5

Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 2003 and 2002
(unaudited) 6

Notes to Condensed Consolidated Financial Statements 7

Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations 16
-----------------------------------

Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
----------------------------------------------------------

Item 4. Controls and Procedures 36
-----------------------

PART II. OTHER INFORMATION

Item 1. Legal Proceedings 37
-----------------

Item 4. Submission of Matters to a Vote of Security Holders 37
---------------------------------------------------

Item 6. Exhibits and Reports on Form 8-K 39
--------------------------------

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

SIGNATURES

CERTIFICATIONS

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
(unaudited)

DECEMBER 31, JUNE 30,
2003 2003
---------- ----------

ASSETS
Current:
Cash and cash equivalents ................................................. $ 8,849 $ 3,502
Receivables, net of allowances of $866 and $831 ........................... 6,712 5,644
Prepaid and other ......................................................... 666 966
---------- ----------
Total current assets .................................................. 16,227 10,112
Property and equipment, net .................................................... 4,495 5,293
Goodwill ....................................................................... 12,489 12,489
Intangibles, net ............................................................... 854 1,197
Other long-term assets ......................................................... 138 --
---------- ----------
Total assets .......................................................... $ 34,203 $ 29,091
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable .......................................................... $ 2,319 $ 2,314
Accrued expenses .......................................................... 3,212 2,888
Deferred revenue .......................................................... 3,028 2,961
Accrued restructuring ..................................................... 617 722
Current portion of long-term debt ......................................... 434 434
Current portion of capital leases ......................................... 24 22
---------- ----------
Total current liabilities ............................................. 9,634 9,341

Non-current:
Long-term debt ............................................................ 4,908 325
Capital leases ............................................................ 30 42
Other long-term liabilities ............................................... 133 127
---------- ----------
Total non-current liabilities ......................................... 5,071 494
---------- ----------
Total liabilities ..................................................... 14,705 9,835

Commitments and contingencies--Note 10

Stockholders' equity:
Preferred stock; $0.001 par value per share, 5,000 shares
authorized; no shares issued or outstanding .............................. -- --
Common stock; $0.001 par value per share, 75,000 shares authorized;
14,559 and 13,977 shares issued and outstanding........................... 15 14
Additional paid-in capital ................................................ 46,693 44,481
Treasury stock; $0.001 par value per share, -0- and 261 common shares ..... -- --
Accumulated deficit ....................................................... (24,861) (23,884)
Unamortized stock-based compensation ...................................... (634) --
Accumulated other comprehensive loss ...................................... (1,715) (1,355)
---------- ----------
Total stockholders' equity ............................................ 19,498 19,256
---------- ----------
Total liabilities and stockholders' equity ............................ $ 34,203 $ 29,091
========== ==========

The accompanying notes are an integral part of the condensed consolidated financial statements.

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2003 2002 2003 2002
---------------------- ----------------------

Revenue:
License fees and royalties .......................................... $ 7,057 $ 5,327 $ 12,828 $ 10,316
Services and other .................................................. 1,450 1,556 3,234 2,476
-------- -------- -------- --------
Total net revenue ............................................... 8,507 6,883 16,062 12,792

Cost and expenses:
Cost of license fees and royalties .................................. 144 106 226 218
Cost of services and other .......................................... 842 981 1,793 1,526
Research and development ............................................ 1,374 1,896 2,926 3,849
Acquired in-process research and development ........................ -- -- -- 430
Marketing and sales ................................................. 4,041 3,641 7,640 6,930
General and administrative .......................................... 1,220 960 2,264 1,950
Restructuring charges ............................................... 261 -- 1,329 136
Patent litigation fees .............................................. 776 424 1,345 558
Non-cash stock compensation ......................................... 168 -- 168 --
Amortization of purchased technology ................................ 155 189 344 349
-------- -------- -------- --------
Total costs and expenses ......................................... 8,981 8,197 18,035 15,946
Loss from operations ............................................. (474) (1,314) (1,973) (3,154)
Other (expense) income, net ............................................. (18) (72) 42 (100)
Gain on sale of land .................................................... 1,058 -- 1,058 --
Interest expense ........................................................ (145) (70) (179) (199)
-------- -------- -------- --------
Income (loss) before income taxes ............................... 421 (1,456) (1,052) (3,453)
Income tax provision (benefit) .......................................... 9 (50) 13 (54)
-------- -------- -------- --------
Income (loss) from continuing operations ........................ 412 (1,406) (1,065) (3,399)
Income from discontinued operations, net of tax ................. 47 140 88 169
-------- -------- -------- --------
Net income (loss) ............................................... $ 459 $ (1,266) $ (977) $ (3,230)
======== ======== ======== ========

Basic earnings (loss) per share:

Earnings (loss) from continuing operations .......................... $ 0.03 $ (0.10) $ (0.08) $ (0.26)
Earnings from discontinued operations ............................... $ 0.00 $ 0.01 $ 0.01 $ 0.01
-------- -------- -------- --------
Net loss per share ...................................................... $ 0.03 $ (0.09) $ (0.07) $ (0.25)
======== ======== ======== ========

Diluted earnings (loss) per share:

Number of shares used in per share calculations:
Basic ............................................................... 14,083 13,759 14,036 12,927
Diluted ............................................................. 14,597 13,759 14,036 12,927

The accompanying notes are an integral part of the condensed consolidated financial statements.

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2003 2002 2003 2001
---------------------- ----------------------

Net income (loss)....................................................... $ 459 $ (1,266) $ (977) $ (3,230)
Change in currency translation, net..................................... (302) (79) (360) (39)
---------------------- ----------------------
Comprehensive income (loss)......................................... $ 157 $ (1,345) $ (1,337) $ (3,269)
====================== ======================

The accompanying notes are an integral part of the condensed consolidated financial statements.

EXTENDED SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

SIX MONTHS ENDED
DECEMBER 31,
--------------------------
2003 2002
---------- ----------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $ (977) $ (3,230)
Adjustments to reconcile net loss to net cash used by operating activities:
Provision for bad debts ............................................... 29 84
Provision for write-down of inventory ................................. -- 86
Depreciation and amortization ......................................... 845 935
Stock compensation .................................................... 667 --
Acquired in-process research and development .......................... -- 430
Other ................................................................. -- 245
Gain on sale of property and equipment ................................ (998) --
Changes in assets and liabilities, net of effect of acquisitions:
Receivables ........................................................ (388) (648)
Prepaid and other assets ........................................... 75 67
Accounts payable and accrued expenses .............................. (678) (178)
Deferred revenue ................................................... (106) (298)
---------- ----------
Net cash used by operating activities .......................... (1,531) (2,507)
---------- ----------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................................ (235) (71)
Proceeds from sale of property and equipment .............................. 1,561 --
Acquisition - ViaFone, net cash acquired .................................. -- 1,119
Other investing activities ................................................ 19 154
---------- ----------
Net cash provided by investing activities ...................... 1,345 1,202

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale-and-leaseback of building .............................. 4,800
Proceeds from the issuance of common stock ................................ 891 101
Payments on long-term debt ................................................ (229) (204)
---------- ----------
Net cash provided (used) by financing activities ............... 5,462 (103)
Effect of exchange rate changes on cash ................................... 71 5
---------- ----------
Net increase (decrease) in cash and cash equivalents ...................... 5,347 (1,403)
CASH AND CASH EQUIVALENTS:
Beginning of period ....................................................... 3,502 5,439
---------- ----------
End of period ............................................................. $ 8,849 $ 4,036
========== ==========

The accompanying notes are an integral part of the condensed consolidated financial statements.

EXTENDED SYSTEMS INCORPORATED

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

NOTE 1. BASIS OF PRESENTATION

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

We have prepared these condensed consolidated financial statements without audit
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). In the opinion of management, these unaudited condensed
consolidated financial statements include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of our financial
position as of December 31, 2003, and our results of operations and cash flows
for the three and six months ended December 31, 2003 and December 31, 2002. The
results for these interim periods are not necessarily indicative of the expected
results for any other interim period or the year ending June 30, 2004. These
condensed consolidated financial statements should be read in conjunction with
our audited consolidated financial statements and related notes thereto included
in our Annual Report on Form 10-K for the fiscal year ended June 30, 2003. The
condensed consolidated balance sheet at June 30, 2003 was derived from audited
financial statements but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements.

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

As a result of discontinuing our infrared hardware business in the first quarter
of fiscal 2003, we have reclassified our condensed consolidated statement of
operations and other related disclosures for all periods presented to present
the results of these businesses as discontinued operations. We have made other
reclassifications to the condensed consolidated financial statements to conform
the presentations. These reclassifications had no impact on the net loss for the
years presented.

We have a history of incurring losses from operations and have an accumulated
deficit of approximately $24.9 million as of December 31, 2003. For the six
months ended December 31, 2003, we incurred a loss from operations of
approximately $977,000, and negative cash flows from operations of approximately
$1.5 million. At December 31, 2003, we had cash and cash equivalents of $8.8
million. Management believes that our existing working capital and borrowing
capacity will be sufficient to fund our anticipated working capital and capital
expenditure requirements through at least December 31, 2004.

Management cannot be certain, however, that the underlying assumed levels of
revenues and expenses will be accurate. If operating results were to fail to
meet management's expectations, we could be required to seek additional sources
of liquidity. These sources of liquidity could include raising funds through
public or private debt financing, borrowing against our line of credit or
offering additional equity securities. If additional funds are raised through
the issuance of equity securities, substantial dilution to our stockholders
could result. In the event additional funds are required, adequate funds may not
be available when needed or may not be available on favorable terms, which could
have a negative effect on our business and results of operations.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING DEVELOPMENTS. In January 2003, the FASB issued Interpretation No. 46
("FIN 46"), "Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51." FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the equity investors in
the entity do not have the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
FIN 46 is effective for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period ending after December 15, 2003. We believe we have no
investment in or contractual relationship or other business relationship with a
variable interest entity, and therefore, the adoption of this interpretation did
not have any impact on our financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." SFAS No. 150 requires that
certain financial instruments, which under previous guidance were accounted for
as equity, must now be accounted for as liabilities. The financial instruments
affected include mandatorily redeemable stock, certain financial instruments
that require or may require the issuer to buy back some of its shares in
exchange for cash or other assets and certain obligations that can be settled
with shares of stock. SFAS No. 150 was effective for all financial instruments
entered into or modified after May 31, 2003, and otherwise was effective
beginning July 1, 2003. The adoption of this statement did not have any impact
on our financial position or results of operations.

CURRENCY TRANSLATION. Our international subsidiaries use their local currency as
their functional currency. We translate assets and liabilities of international
subsidiaries into U.S. dollars using exchange rates in effect at the balance
sheet date, and we report gains and losses from this translation process as a
component of comprehensive income or loss. We translate revenue and expenses
into U.S. dollars using the average exchange rate for the period.

From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and the British pound sterling to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in currency exchange rates. While these instruments are
subject to fluctuations in value, these fluctuations are generally offset by
fluctuations in the value of the underlying asset or liability being managed.
These forward contracts do not qualify for hedge accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and, as such, the
contracts are recorded in the consolidated balance sheet at fair value. We
report a net currency gain or loss based on changes in the fair value of forward
contracts combined with the changes in fair value of the underlying asset or
liability being managed. As of December 31, 2003, we had forward contracts with
a nominal value of $8.5 million that matured within 30 days in place against the
Canadian dollar, euro and British pound sterling. We had forward contracts with
a nominal value of $5.9 million in place against the Canadian dollar, euro and
British pound sterling at December 31, 2002, which matured within 30 days. We
recognized a net currency exchange loss of approximately $30,000 and a gain of
approximately $29,000 for the three and six months ended December 31, 2003,
respectively and net currency exchange losses of approximately $63,000 and
$118,000 for the three and six months ended December 31, 2002, respectively.

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 warrants to
the extent that their effect would have been antidilutive.

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

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-----------------------------------------
2003 2002 2003 2002
------------------- -------------------

Stock Options.................. 2,504 3,472 3,504 3,472
Warrants....................... 35 35 35 35

NOTE 3. STOCK-BASED COMPENSATION PLANS

We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and its related interpretations to measure compensation
expense for stock-based compensation plans. If compensation expense for our
stock option plans had been determined under SFAS No. 123, our net loss would
have been equal to the pro-forma amounts indicated below for the three and six
months ended December 31:

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------------------------------
2003 2002 2003 2002
---------------------- ----------------------

Net income (loss) attributed to common shares, as reported ......... $ 459 $ (1,266) $ (977) $ (3,230)
Add:
Stock-based employee compensation expense included in reported
net income (loss), net of tax effects ............................. 119 -- 556 --

Less:
Stock-based employee compensation expense determined under a
fair value based method for all grants, net of tax effects ........ (2,206) (1,243) (3,342) (2,505)
-------- -------- -------- --------
Net loss attributed to common shares, pro-forma .................... $ (1,628) $ (2,509) $ (3,763) $ (5,735)

Basic and diluted loss per share:
Net loss, as reported .............................................. $ 0.03 $ (0.09) $ (0.07) $ (0.25)
Net loss, pro-forma ................................................ $ (0.12) $ (0.18) $ (0.27) $ (0.44)

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 three and six months ended
December 31:

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------------------------------------
2003 2002 2003 2002
----------------------- -------------------------

Risk-free interest rate:
Option plans........................... 3.85% 4.55% 3.85 - 4.04% 4.55%
Purchase plan.......................... 3.84% 3.25% 0 - 3.84% 0 - 3.25%

Expected life in years:
Option plans........................... 7.6 7.6 7.6 7.6
Purchase plan.......................... 0.0 - 0.97 0.0 - 0.5 0.0 - 0.97 0.0 - 0.5

Volatility factor:
Option plans........................... 103.1% 102.7% 101.7 - 103.1% 102.7%
Purchase plan.......................... 103.1% 102.7% 0 - 103.1% 0 - 102.7%

Dividend yield........................... 0.0% 0.0% 0.0% 0.0%

NOTE 4. DISCONTINUED OPERATIONS

In the first quarter of fiscal 2003, we adopted a formal plan to exit our
infrared hardware business as a result of an expected decline in sales of these
products and our desire to increase our focus on our core software businesses.
As a part of that plan, we wrote down our infrared hardware inventory to its
estimated net realizable value. The results of this operation have been
accounted for as discontinued operations for all periods presented in accordance
with SFAS No. 144 and 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 (loss) from
discontinued operations" on the accompanying Condensed Consolidated Statements
of Operations.

The following summarizes the results of discontinued operations:

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------------------------
2003 2002 2003 2002
--------------------- ---------------------

Net revenue............................................... $ 29 $ 303 $ 169 $ 623
Income before taxes....................................... 76 225 140 270
Income tax provision...................................... 29 85 52 101
Income from discontinued operations, net of tax........... 47 140 88 169
Earnings per share from discontinued operations:
Basic and diluted.................................... $0.00 $0.01 $0.01 $0.01

NOTE 5. RESTRUCTURING CHARGES

We recorded $261,000 and $1.3 million in workforce reduction costs for the three
and six months ended December 31, 2003, respectively. The restructuring charges
for the second quarter of fiscal 2004 consist primarily of severance, benefits,
and other costs related to the resignation of Karla Rosa, our former Vice
President of Finance and Chief Financial Officer, and the termination of three
other employees from our administration and marketing and sales groups. Of the
terminated employees, two were located in the United States and one was in
Europe. We recorded $1,073,000 in workforce reduction costs for the three months
ended September 30, 2003, of which $1,068,000 was related to continuing
operations and $5,000 was related to our discontinued operations. The
restructuring charges for the first quarter of fiscal 2004 consist primarily of
severance, benefits, and other costs related to the resignation of Steven
Simpson, our former President and Chief Executive Officer, and the termination
of 10 employees from our marketing and sales, research and development,
administration and operations groups. Of the terminated employees, seven were
located in the United States and three were in Europe. For the three and six
months ended December 31, 2003, the restructuring charge includes $62,000 and
$437,000, respectively, of non-cash compensation resulting from the accelerated
vesting of employee stock options that is not included in the table below.

A summary of accrued restructuring charges is as follows:

Workforce Facilities
Reduction and Other
Costs Costs Total
------------------------------------

Balance at June 30, 2003 ........................ $ 188 $ 534 $ 722
Costs incurred in first quarter of fiscal 2004... 636 -- 636
Cash payments ................................... (255) (146) (401)
-------- -------- --------
Balance at September 30, 2003 ................... $ 569 $ 388 $ 957
Costs incurred in second quarter of fiscal 2004.. 199 -- 199
Other Adjustments (1) ........................... -- (340) (340)
Cash payments ................................... (151) (48) (199)
-------- -------- --------
Balance at December 31, 2003 .................... $ 617 $ -- $ 617
======== ======== ========

(1) As a result of the Brisbane lease termination during the quarter, the
balance as of October 31, 2003 of restructuring charges related to the lease was
reversed. See Note 11.

NOTE 6. GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

Goodwill is reviewed annually for impairment or more frequently if indicators of
impairment arise. We completed our annual impairment assessment in the fourth
quarter of fiscal 2003 and concluded that goodwill was not impaired.

Goodwill and other identified intangible assets relate to our acquisition of
Rand Software Corporation in 1998, Oval (1415) Limited in 1999, and AppReach and
ViaFone Inc. in 2002. Our goodwill and other identifiable intangible assets
consist of the following:

AS OF DECEMBER 31, AS OF JUNE 30,
2003 2003
------------------------------------------------------------------
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ -------- -------- ------------ --------

Goodwill............................... $12,489 $ -- $12,489 $12,489 $ -- $12,489
Intangibles:
Purchased technology................. 3,691 (2,896) 795 3,691 (2,561) 1,130
Customer relationships............... 80 (21) 59 80 (13) 67
Non-compete covenants................ 6 (6) -- 6 (6) --
Other................................ 5 (5) -- 5 (5) --
-------- ------------ -------- -------- ------------ --------
Total intangibles 3,782 (2,928) 854 3,782 (2,585) 1,197
-------- ------------ -------- -------- ------------ --------
Total goodwill and other intangibles $16,271 $ (2,928) $13,343 $16,271 $ (2,585) $13,686
======== ============ ======== ======== ============ ========

Amortization of non-goodwill intangible assets was $155,000 and $189,000 for the
quarters ended December 31, 2003 and 2002, respectively, and was $344,000 and
$349,000 for the six months ended December 31, 2003 and December 31, 2002,
respectively. Based on the identified intangible assets recorded at December 31,
2003, the estimated future amortization expense for the remaining six months of
fiscal 2004, and fiscal 2005, 2006, 2007 and 2008 is $277,000, $204,000,
$172,000, $172,000, and $29,000, respectively.

AS OF AS OF
DECEMBER 31, JUNE 30,
NOTE 7. RECEIVABLES 2003 2003
----------- -----------
Accounts receivable........................ $ 7,440 $ 6,377
Other receivables.......................... 138 98
Allowance for doubtful accounts and
product returns........................... (866) (831)
----------- -----------
$ 6,712 $ 5,644
=========== ===========

AS OF AS OF
DECEMBER 31, JUNE 30,
NOTE 8. PROPERTY AND EQUIPMENT 2003 2003
----------- -----------

Land and land improvements................. $ 533 $ 1,007
Buildings.................................. 5,904 5,798
Computer equipment......................... 5,686 5,702
Furniture and fixtures..................... 2,335 2,308
----------- -----------
14,458 14,815
Less accumulated depreciation.............. (9,963) (9,522)
----------- -----------

$ 4,495 $ 5,293
=========== ===========

AS OF AS OF
DECEMBER 31, JUNE 30,
NOTE 9. ACCRUED EXPENSES 2003 2003
----------- -----------
Accrued payroll and related benefits....... $ 1,054 $ 1,336
Accrued warranty and support costs......... 148 141
Other 2,010 1,411
----------- -----------
$ 3,212 $ 2,888
=========== ===========

NOTE 10. COMMITMENTS AND CONTINGENCIES

COMMITMENTS. We currently lease office space at our locations in Boise, Idaho;
Herrenberg, Germany; Toronto, Canada; Corvallis, Oregon; Paris, France; Bristol,
England; San Diego, California; American Fork, Utah; and `s-Hertogenbosch, the
Netherlands. We also lease certain equipment under non-cancelable operating and
capital leases. Lease expense under operating lease agreements was $179,000 and
$167,000 for the three months ended December 31, 2003 and 2002, respectively.
For the six months ended December 31, 2003 and 2002, operating lease expense was
$406,000 and $323,000, respectively.

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

On October 24, 2003, we entered into a lease termination agreement with
Epinions.com, the lessor of our office space in Brisbane, California. In
exchange for a termination fee of $255,000 to be paid in seven equal monthly
installments from November 2003 to May 2004, our lease was terminated on October
31. As part of the termination agreement, Epinions.com released us from the
$120,000 letter of credit that collateralized our rental payments.

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with Silicon Valley Bank ("SVB"). We restructured that
debt into a term loan due in 30 equal monthly installments bearing interest at
8%. The term loan is collateralized by certain of our assets, requires us to
maintain certain financial ratios and is scheduled to be paid in full by March
2005. At December 31, 2003, the loan balance was $542,000.

Our minimum future contractual commitments associated with our operational
indebtedness and lease obligations as of December 31, 2003 are as follows (in
thousands):

YEAR ENDING JUNE 30,
---------------------------------------
2004 2005 2006 2007 2008 THEREAFTER TOTAL
------ ------ ------ ------ ------ ---------- -------

SVB debt principal (1)............... $ 217 $ 325 $ -- $ -- $ -- $ -- $ 542
SVB debt interest.................... 18 11 -- -- -- -- 29
Payment pursuant to building
sale-and-leaseback ................. 221 442 442 442 442 2,317 4,306
Brisbane lease termination fee....... 182 -- -- -- -- -- 182
Capital leases (1)................... 14 28 12 7 -- -- 61
Operating leases .................... 226 366 213 177 163 163 1,308
Post-retirement benefits............. 15 15 15 15 15 58 133
------ ------ ------ ------ ------ ---------- -------
Total commitments.................. $ 893 $1,187 $ 682 $ 641 $ 620 $ 2,538 $ 6,561
====== ====== ====== ====== ====== ========== =======

(1) These amounts are reported on the balance sheet as current and non-current
liabilities, depending on the timing of when payments are due.

Non-current capital lease obligations are as follows (in thousands):

AS OF
DECEMBER 31, 2003
-----------------
Gross capital lease obligations.................. $ 61
Less imputed interest............................ (7)
-----------------
Present value of net minimum lease payments...... 54
Less current portion............................. (24)
-----------------
Non-current capital lease obligations............ $ 30
=================

GUARANTEES. We have provided a guarantee that secures our rental payments at our
Bristol, England location. We could be required to perform under this guarantee
if we were to default with respect to any of the terms, provisions, covenants,
or conditions of the lease agreement. This guarantee is valid until the
expiration of our lease on January 13, 2005. The maximum potential amount of
future payments we could be required to make under this letter of credit as of
December 31, 2003 is approximately $25,000.

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

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

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

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

The following table reconciles the changes in our warranty accrual for the six
months ended December 31, 2003:

Balance at June 30, 2003................................................. $ 141
Accrual for sales made during the three months ended September 30, 2003.. 59
Warranty expirations during the three months ended September 30, 2003.... (53)
------
Balance at September 30, 2003............................................ $ 147
Accrual for sales made during the three months ended December 31, 2003... 73
Warranty expirations during the three months ended December 31, 2003..... (72)
------
Balance at December 31, 2003............................................. $ 148
======

LINE OF CREDIT. On January 15, 2002, we entered into a loan and security
agreement with SVB, under which we can access up to $5.0 million of financing in
the form of a demand line of credit. Our borrowing capacity is limited to 75% of
eligible accounts receivable, net of current payments due on our long-term debt.
Certain of our assets collateralize the line of credit. Interest on any
borrowings will be paid at prime plus one percent but not less than 5.5%. The
line of credit agreement requires us to maintain certain financial ratios and
expires in March, 2004. As of December 31, 2003, we had no outstanding
borrowings on the line of credit and we were in compliance with all financial
covenants required under the line of credit.

LITIGATION. On April 22, 2002, Pumatech, Inc. filed a patent infringement action
against us in the U.S. District Court in Northern California. An amended
complaint was filed on May 28, 2002. The action alleges that our XTNDConnect
server and desktop synchronization products infringe on seven of Pumatech's
synchronization-related patents, that our alleged use of the trademark
"Satellite Forms" constitutes trademark infringement, and that other alleged
actions constitute unfair competition and interference with contract. The action
seeks an injunction against further sales of our server and desktop
synchronization products and use of the allegedly infringing trademark, as well
as unspecified damages and attorneys' fees. On June 25, 2002, we filed an answer
and counterclaim in response to Pumatech's complaint in which we deny Pumatech's
charges, raise a number of affirmative defenses and request a declaration from
the court that Pumatech synchronization software patents are invalid and not
infringed by our products. On December 11, 2002, Pumatech filed a second amended
complaint, which adds allegations that unspecified synchronization products
infringe an eighth Pumatech patent. On December 31, 2002, we filed an amended
answer and counterclaim in which we deny all of Pumatech's charges, including
this additional charge, and amended our defenses and counterclaims to include
this additional patent. On August 1, 2003, the Honorable Judge D. Lowell Jensen,
United States District Judge, issued the Claim Construction Ruling on the
interpretation of certain claims terms of the patents in the suit. We believe
that the Court's ruling has significantly narrowed claims in five of the
Pumatech patents. The Court also ruled that it could not correct an error that
appears in all asserted claims of Pumatech's '676 patent. This error can only be
corrected in reissue proceedings in the Patent Office. Until the Patent Office
issues corrected claims, Pumatech will be unable to assert the `676 patent, and
it is unlikely that such a correction would have any retroactive effect. As a
result, if any of our products are ultimately held to be infringing this patent,
it is unlikely that Pumatech would be entitled to damages for any period prior
to the reissue date. We have petitioned the U.S. Patent Office for reexamination
of three of the Pumatech patents. The Patent Office has issued an Office Action
for each of the three patents rejecting all Pumatech patent claims over the
prior art for two of the patents and rejecting all claims on which we requested
reexamination for the other patent. As a result of the reexamination process, we
expect the patents to be significantly narrowed or rejected by the Patent Office
in their entirety. If the patents are amended and reissued, and we are
ultimately held to be infringing one of the reissued patents, it is unlikely
that Pumatech would be entitled to damages for any period preceding the reissue
date. The parties are in the process of completing expert discovery and other
pretrial activities are on going; trial is currently scheduled for April 2004.

We believe that we have numerous meritorious defenses to Pumatech's claims and
we intend to continue to defend the suit vigorously. However, litigation is
inherently uncertain, and we may not prevail in all of our defenses or
counterclaims. If Pumatech prevails in one or more of its claims, we could be
required to pay substantial damages for past sales of infringing products, to
cease selling specific of our server or desktop synchronization products that
are held to infringe a Pumatech patent, to pay royalties on the sales of
specific products that are held to infringe a Pumatech patent, or some
combination of these results. We may also incur significant development costs to
redesign certain of our products to ensure that they are non-infringing. Any of
such outcomes could have a material adverse effect on our business and financial
position. In addition, litigation is frequently expensive and time-consuming,
and management may be required to spend significant time in the defense of the
suit; such costs and the diversion of management time could have a material
adverse effect on our business. The ultimate outcome of any litigation is
uncertain and the range of loss that could occur upon resolution of this matter
is not estimable. We cannot estimate the costs of any potential settlement. Were
an unfavorable outcome to occur, the impact could be material to our financial
position, results of operations, or cash flows.

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

NOTE 11. INCOME TAXES

For the three months ended December 31, 2003, we recorded income tax expense
related primarily to foreign withholding taxes of $38,000. The income tax
expense associated with continuing operations was $9,000 and that associated
with discontinued operations was $29,000. For the three months ended December
31, 2002, we recorded income tax expense related primarily to foreign
withholding taxes of $35,000. The income tax expense associated with
discontinued operations was $85,000. The tax benefit of $50,000 for continuing
operations consists of $35,000 of foreign withholding taxes, offset by a tax
benefit of $85,000.

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

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

At December 31, 2003, we had one operating segment. Our mobile information
management segment includes both mobile data management and wireless
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.

No customers accounted for more than 10% of our net revenue from continuing
operations in the three or six months ended December 31, 2003 and 2002.

NOTE 13. RESTRICTED STOCK

On October 31, 2003, the Company granted 134,941 shares of restricted stock to
employees with a purchase price equal to $0.001. The issuance of the restricted
stock grants to employees resulted in an aggregate of $595,000 of unamortized
stock-based compensation, which is being amortized as a non-cash compensation
charge as the restrictions lapse (the vesting period). The restricted stock
charge was calculated based on the closing price of Extended Systems common
stock on October 31, 2003.

On December 11, 2003, the Company granted 32,681 shares of restricted stock to
directors with a purchase price equal to $0.001. The issuance of the restricted
stock grants to directors resulted in an aggregate of $152,000 of unamortized
stock-based compensation, which is being amortized as a non-cash compensation
charge as the restrictions lapse (the vesting period). The restricted stock
charge was calculated based on the closing price of Extended Systems common
stock on December 11, 2003.

The Company amortizes non-cash stock compensation charges on a straight-line
basis over the vesting period. The restricted stock awards granted to employees
vest 100% on the first anniversary of the grant date. The restricted stock
awards granted to directors vest in the amount of one-third on the first
anniversary of the grant date and one-third in each of the following two years.
The director options will lapse in full on the first anniversary of the grant
date if the director attends the required number of board meetings held during
the year. During the three months ended December 31, 2003 the Company recognized
stock compensation expense of $112,000 related to the above restricted-stock
grants.

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

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

o growth of our business;
o relationships with partners;
o the open nature of our products;
o success of our software products and services;
o levels of software product license fees and royalties;
o levels of international sales;
o levels of service revenue;
o levels of litigation fees;
o levels of original equipment manufacturer sales;
o anticipated gross margin;
o staffing and expense levels;
o future profitability;
o future results of operations;
o anticipated increases in corporate information technology spending;
o future operating cash flows;
o levels of accounts receivable;
o levels of capital expenditures;
o anticipated costs of research and development;
o sufficiency of working capital and borrowing capacity;
o anticipated cash funding needs;
o resolution of claims made by Pumatech, Inc.;
o expected benefits from our acquisition of ViaFone; and
o the benefits of future acquisitions.

We assume no obligation to update any forward-looking statements and our actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that may cause a difference include, but are not limited to,
those discussed under "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Factors That May Affect Future Results and
Market Price of Stock." You should also carefully review the risk factors
described in other documents that we file from time to time with the Securities
and Exchange Commission, including our 2003 Annual Report on Form 10-K and other
Quarterly Reports on Form 10-Q that we will and have filed in fiscal 2004. All
period references are to our second fiscal quarters ended December 31, 2003, and
2002, the six months ended December 31, 2003 and 2002 and our fiscal years ended
June 30, 2003 and 2002, unless otherwise indicated. All tabular amounts are in
thousands, except percentages.

OVERVIEW
- --------

We plan to grow the business through a concentrated focus on our Mobile
Solutions family of products. During the first quarter of fiscal 2004, we
announced the launch of our OneBridge Mobile Groupware solution with our
patent-pending IP-based push technology. We believe this was the first wireless
e-mail solution in the market to proactively send live e-mail to mobile users
using Palm, Pocket PC or Symbian based devices. During the second quarter of
fiscal 2004, we integrated the same push technology into our overall OneBridge
Mobile Solutions Platform that allows our customers to push any type of data to
mobile devices. Utilizing our products, our customers' mission-critical
application data, such as field service requests and inventory availability, can
be sent instantly to field workers with mobile and wireless devices. This
immediate access to corporate data can deliver significant increases in
productivity, reduction of cycle times, improved asset management and faster
response times to customer needs. The latest release of our OneBridge products
adds support for new dual-purpose devices including the Sony Ericsson P900,
palmOne's Handspring Treo 600 and Orange's Smartphone SPV2.

We continue to add and work with partners and others to build our awareness and
influence in the enterprise marketplace. We completed the multi-city Mobile and
Wireless Road Show in North America. In addition, we participated at the CTIA
Wireless event in Las Vegas. These activities have resulted in the initiation of
several mobile pilot projects we will launch with our partners; however, there
can be no certainty that these pilot projects will lead to future sales.

A portion of our revenue comes from selling our mobile e-mail products to large
enterprises. Our plans for continued growth come from delivering additional
mobile applications to these customers and new customers. We will continue to
work closely with our partners to develop and implement the mobile applications
our customers will need to enable them to streamline mission critical business
processes. We expect to increase the amount of business we do together with
partners, however, there can be no assurance that the partners will participate
or that acceptable agreements can be negotiated.

Since introducing our wireless e-mail and data products, wireless carriers have
entered into discussions to partner with us. We believe the open nature of our
products gives us a competitive advantage over other alternatives available in
the marketplace. Information technology and network managers can select the
network provider and service level agreement for their organization and its
requirements and the users can select from a broad choice of mobile devices that
satisfy their unique needs. In North America we are teaming with wireless
carriers to bring integrated offerings to key customer prospects. In December we
teamed with leading United Kingdom-based carriers Orange and O2 to deliver
mobility seminars designed to educate prospective customers on the value of
instant access to corporate data and e-mail. In January we announced a strategic
partnership with Orange to resell our OneBridge mobile e-mail solution to their
customers. There can be no assurance that other wireless carriers will continue
discussions with us or that acceptable economic terms or contractual
arrangements can be negotiated.

REVENUE
- -------

We sell our mobile information management products primarily to enterprises,
original equipment manufacturers ("OEMs"), application developers and resellers
both directly and through e-commerce storefronts on the Internet.

One of our objectives is to increase revenues. Net revenue from continuing
operations for the quarter was $8.5 million, which is a 24% increase over the
revenues recorded for the second quarter of last fiscal year. The Company also
had strong sequential growth with second quarter revenues 13% higher than the
$7.6 million recorded for the first quarter of this fiscal year.

We experienced revenue growth in the second quarter across all our product
lines. We classify our product offerings into one operating segment, our mobile
information management segment, which consists of products and services that
extend enterprise applications and databases to mobile and wireless
environments. In the second quarter and for the first six months of fiscal 2004
our largest product line was our OneBridge Mobile Solutions Product family, our
second largest product group was client/server database management systems with
remote access capabilities and the remainder of our sales came from our wireless
connectivity products. Our growth in the second quarter and for the first half
of our fiscal year 2004 came from the following product lines:

% OF GROWTH % OF GROWTH % OF GROWTH
2Q FY '04 YTD FY '04 2Q FY '04
COMPARED TO COMPARED TO COMPARED TO
PRODUCT REVENUE GROWTH 2Q FY '03 YTD FY '03 1Q FY '04
-----------------------------------------

OneBridge Mobile Solutions
Product Family 14% 18% 9%
Advantage Database Products 2% 1% 4%
Wireless Connectivity Products 8% 7% 0%
-----------------------------------------
Total Growth 24% 26% 13%
=========================================

Our future results of operations will be highly dependent upon the success of
our software products and services, specifically our OneBridge Mobile Solutions
Product family and our Wireless Connectivity Software. We expect the license
fees, royalties and services revenue generated by these products to continue to
constitute the dominant portion of our revenue. We expect both license revenue
and service revenue to increase in the remaining quarters of fiscal 2004,
however revenue has fluctuated in the past and may do so again in the future.
Fluctuations occur because the timing of when customers finalize the agreements
to purchase our software can be difficult to influence or predict. In addition,
sales of our products to OEMs and to companies that license our software to
include in their own software are difficult to predict because they are
dependent upon the timing of customer projects and the effectiveness of our
customers' marketing efforts. Although we expect an overall increase in the
amount of billable hours of our professional services group, service revenue may
fluctuate from quarter to quarter based on the amount of revenue we may be
required to defer under our revenue recognition policy and the timing of
services engagements.

We derive revenue from:

o software license fees and royalties;
o support and maintenance fees; and
o professional services, including non-recurring development fees that we
generate when we adapt products to customers' specifications and consulting
services.

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------------- -------------------------
2003 % CHANGE 2002 2003 % CHANGE 2002
------- -------- ------- ------- -------- -------

License fees and royalties.... $ 7,057 32% $ 5,327 $12,828 24% $10,316
Services and other............ 1,450 (7%) 1,556 3,234 31% 2,476
------- ------- ------- -------
$ 8,507 24% $ 6,883 $16,062 26% $12,792
======= ======= ======= =======

LICENSE FEES AND ROYALTIES. License and royalty revenue consists of fees for
licenses of our software products. The growth in revenue in the second quarter
of fiscal 2004 compared to the second quarter of fiscal 2003 was primarily
attributable to a 32% increase in license and royalty revenue from our OneBridge
Mobile Solutions product family and a 131% increase in license fees and
royalties from our Wireless Connectivity Software products related to an
increase in software development kits sold. The growth in revenue for the first
half of fiscal 2004 compared to the first half of fiscal 2003 was primarily
attributable to a 26% increase in license and royalty revenue from our OneBridge
Mobile Solutions product family and a 76% increase in license fees and royalties
from our Wireless Connectivity Software products.

SERVICES AND OTHER. Services revenue consists primarily of support and
maintenance contracts sold to our customers and fees for professional services.
Our professional services typically consist of standard product installations,
training, significant customization of our software products and non-recurring
engineering ("NRE"). Professional services revenue declined for the second
quarter of fiscal 2004 as compared to the second quarter of fiscal 2003 because
of a lower billings for installation and customization work and NRE. Offsetting
this decline somewhat was a 20% increase in support and maintenance revenue in
the second quarter of fiscal 2004 as compared to the second quarter of fiscal
2003. Professional services revenue increased for the first half of fiscal 2004
as compared to the first half of fiscal 2003 by 53%. We also had a 38% increase
in support and maintenance revenue in the first half of fiscal 2004 as compared
to the first half of fiscal 2003.

We derive a significant amount of our revenue from sales to customers outside of
the United States through our European based sales and support team, overseas
original equipment manufacturers and from a limited number of international
distributors. Based on the region in which the customer resides, net revenue
from continuing operations was as follows for the three and six months ended
December 31:

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------- -----------------
NET REVENUE PERCENTAGES BY REGION 2003 2002 2003 2002
----------------- -----------------
Domestic............................... 36% 44% 39% 49%
International:
Europe............................... 55 48 49 42
Asia................................. 7 4 10 6
Other regions........................ 2 4 2 3
----------------- -----------------
Total international................ 64% 56% 61% 51%
----------------- -----------------
Net revenue from continuing
operations...................... 100% 100% 100% 100%
================= =================

The percentage of revenue from Europe increased in the second quarter of fiscal
2004 as compared to the second quarter of fiscal 2003 as well as on a
year-to-date basis as a result of several factors. We have made a significant
investment in our European based sales and support team, and these investments
have resulted in both obtaining new customers and increasing the amount of
purchases from existing customers. We believe the adoption rate of mobile
devices and wireless infrastructure in Europe is more advanced than that in
North America and the company

is benefiting from its significant presence in this market. European revenue
also increased due to an increase in royalties from a European OEM customer.
Additionally, European revenue increased due to the decrease in the strength of
the US dollar as compared to the euro and British pound sterling. The relative
weakening of the US dollar resulted in sales to our European customers being
greater in U.S. dollars than they would have been had the exchange rate remained
constant for the periods presented.

We expect that international sales will continue to represent a substantial
portion of our net revenue in the foreseeable future and will comprise between
60% and 70% of our net revenue for the remaining quarters of fiscal 2004.

LITIGATION WITH PUMATECH, INC.
- ------------------------------

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2003 CHANGE 2002 2003 CHANGE 2002
---------------------- ----------------------

Patent Litigation Fees........ $776 83% $424 $1,345 141% $558
As a % of net revenue....... 9% 6% 8% 4%

See Part II, Item 1. Legal Proceedings of this 10-Q for further information
related to this litigation.

During the second quarter and first half of fiscal 2004, we incurred $776,000
and $1.3 million, respectively, of expenses related to defending the patent
infringement suit brought against the Company by Pumatech, Inc. The trial date
for this litigation is set for April 12, 2004. We expect costs related to this
litigation and the trial to be between $900,000 and $1,000,000 in the third
quarter of fiscal 2004.

During the second quarter both parties to the litigation completed the discovery
phase and all summary judgment motions by either party were filed by the
deadline of January 23, 2004.

On January 21, 2004, Hon. Judge D. Lowell Jensen, U.S. District Judge, ruled in
favor of Extended Systems in denying Pumatech's motion regarding enforceability
of two of the asserted patents. In the ruling, the court agreed there is
sufficient evidence regarding Pumatech's alleged failure to disclose relevant
prior art to the U.S. Patent and Trademark Office ("PTO") for the court to
consider Extended Systems' inequitable conduct defense during trial scheduled to
commence on April 12, 2004. Extended Systems presented evidence to the court of
the materiality and existence of a prior art product sold by Pumatech
approximately three years before the patent applications for two of its patents
were filed. The Judge also ruled against Extended Systems and denied its motion
to exclude the damages report of Pumatech's expert.

On December 12, 2003, Hon. Judge D. Lowell Jensen of the U.S. District Court for
the Northern District of California granted Extended Systems' motion for summary
judgment of non-infringement of Pumatech's U.S. Patent No. 5,943,676 ("the '676
patent"). During the proceedings, Pumatech implicitly conceded that Extended
Systems products do not infringe the claims of the '676 patent under the Court's
claim construction ruling.

RESEARCH AND DEVELOPMENT
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2003 CHANGE 2002 2003 CHANGE 2002
---------------------- ----------------------

Research and development....... $1,374 (28%) $1,896 $2,926 (24%) $3,849
As a % of net revenue........ 16% 28% 18% 30%

The company has had an objective of reducing its overall R&D spending level
while simultaneously increasing productivity. The productivity improvements have
been achieved through a combination of improved processes, elimination of
unnecessary functions, clear ownership and focus. In the second quarter of
fiscal 2004, we announced a number of product enhancements or new product
releases including:

o We completed development of our second-generation e-mail push solution
in our OneBridge server synchronization product in release 4.1. This
solution enables our product to push e-mail, calendar and contact
information and data to the newest integrated devices available in the
market including the Treo 600, Sony P800/900 and Microsoft Smartphone.
The product was released for sale in the marketplace on January 20,
2004.

o We developed an updated release of our desktop synchronization
product, XTNDConnectPC Version 5.1. This release incorporated
enhancements such as support for new releases of Lotus Notes and
selected mobile phones.

o We released Advantage .NET Data Provider. Advantage .NET Data Provider
creates a native interface for developers using Advantage Database
Server and any .NET development language, including Visual Studio .NET
and Borland C#Builder. With the addition of native access to .NET,
Advantage Database Server now provides a cost effective RDBMS solution
for a broad variety of application development environments on the
market.

o We released XTNDAccess Car SDK, a software development kit that
enables the telematics industry to integrate Bluetooth wireless
technology into the head unit of an automobile.

Research and development expenses generally consist of salaries and other
personnel costs of our research and development teams, consulting costs and
facility expenses. The decrease in research and development expenses in the
three and six months ending December 31, 2003 as compared to the same periods in
fiscal 2003 were primarily the result of reductions in personnel costs of
$430,000 and $789,000, respectively, through layoffs, attrition and temporary
transfers to support and maintenance activities. At December 31, 2003 we had 54
full-time equivalent research and development personnel, a decrease from the 66
full-time equivalent personnel at the same time last year.

We believe we have achieved many of the productivity goals we set. In the
remaining quarters of fiscal 2004, we do not expect further reductions in R&D
spending and we expect our research and development costs to increase.

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

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2003 CHANGE 2002 2003 CHANGE 2002
---------------------- ----------------------

Marketing and sales............ $4,041 11% $3,641 $7,640 10% $6,930
As a % of net revenue........ 48% 53% 48% 54%

We have an objective to increase the efficiency of the sales and marketing
organization by reducing marketing and sales expense as a percentage of sales.
Marketing and sales expenses consist primarily of salaries, commissions and
other personnel costs of our sales, marketing, and pre-sales support staff. In
the second quarter of fiscal 2004 we paid $247,000 more in commissions than in
the second quarter of the prior year. Commissions paid to third parties also
increased $197,000 in the same comparison. We reduced the number of personnel in
our marketing and communications department by 7 people and these reductions
resulted in $228,000 less compensation expense in the second quarter of fiscal
2004 as compared to the prior year quarter. The increase in sales and marketing
expenses for the first half of fiscal 2004 as compared to the first half of
fiscal 2003 was primarily related to an increase of $418,000 in commissions paid
to our sales employees, $328,000 in commissions paid to third parties and
$124,000 in travel

costs. These increases were offset in part by a $399,000 reduction in
compensation costs for our marketing and communications department related to
the reduction in personnel described above. At December 31, 2003, we had 100
full-time equivalent marketing, sales, and support personnel and contractors, as
compared to 113 full-time equivalent personnel and contractors at the same time
last year.

A portion of the sales and marketing expenses are focused on developing market
awareness of the company and its products through industry media and analyst
relations, trade shows and other promotional activities. During the second
quarter, market analysts reviewed our mobile product capabilities and features
with coverage in CIO Magazine, Network Computing, Network World, Mobile
Enterprise Magazine and PC Magazine. Also during the second quarter we were
awarded the Pocket PC Magazine Enterprise Mobility award and the QUALCOMM CDMA
A-List Award. Spending on these and other promotional activities, primarily in
Europe, increased in the second quarter of 2004 as compared to the prior years'
second quarter by approximately $86,000.

We expect marketing and sales expenses to increase in absolute dollars in the
remaining quarters of fiscal 2004 as a result of an expected increase in
revenue, although we expect these expenses to decrease as a percentage of net
revenue. We expect that the increase in marketing and sales expenses in fiscal
2004 will be primarily attributable to increased sales compensation.

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

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
---------------------- ----------------------
2003 CHANGE 2002 2003 CHANGE 2002
---------------------- ----------------------

General and administrative..... $1,220 27% $960 $2,264 16% $1,950
As a % of net revenue........ 14% 14% 14% 15%

We have an objective to control our general and administrative spending and to
reduce the cost of G&A as a percentage of revenue. Although spending increased
$260,000 and $314,000 in the second quarter and first half of fiscal 2004,
respectively, as compared to the same periods in fiscal 2003, it remained
essentially flat as a percentage of sales.

General and administrative expenses primarily consist of salaries and other
personnel costs for our finance, management information systems, human resources
and other administrative groups, as well as professional fees and directors' and
officers' insurance costs. The increase in general and administrative expenses
in the second quarter of fiscal 2004 as compared to the second quarter of fiscal
2003 was primarily attributable to an increase of $234,000 in professional
services costs for our general legal services, accounting and audit fees, and
costs associated with our annual meeting. The increase in general and
administrative expenses in the first half of fiscal 2004 as compared to the same
period in fiscal 2003 was primarily attributable to an increase of $320,000 in
professional services costs related to general legal services and accounting and
audit fees. Included in this increase is an expense in the first quarter of
fiscal 2004 of approximately $575,000 of legal and other professional services
costs related to failed acquisition activities and the reversal in the first
quarter of fiscal 2004 of approximately $513,000 of accrued professional
services costs related to the failed merger with Palm, Inc. in 2001.

We expect general and administrative expenses as a percentage of net revenue to
remain constant in the remaining quarters of fiscal 2004. We expect decreases in
professional services costs relative to the second quarter; however, expenses
incurred for legal and regulatory compliance costs associated with being a
public company may offset these decreases. At December 31, 2003, we had 22
full-time equivalent employees in administration, as compared to 30 full-time
equivalent personnel at the same time last year.

OTHER EXPENSES
- --------------

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

THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------------------------- -------------------------------
GROSS GROSS GROSS GROSS
2003 MARGIN 2002 MARGIN 2003 MARGIN 2002 MARGIN
------------------------------- -------------------------------

License fees and royalties.... $144 98% $106 98% $ 226 98% $ 218 98%
Services and other............ $842 42% $981 37% $1,793 45% $1,526 38%

LICENSE FEES AND ROYALTIES. The cost of license and royalty revenue consists
primarily of royalties for the use of third-party software. We expect the cost
of license fees and royalties to increase in absolute dollars in the remaining
quarters of fiscal 2004 as a result of an expected increase in revenue from
license fees and royalties. We expect gross margin on license fees and royalties
to be in a range of 98 to 97 percent in the remaining quarters of fiscal 2004.

SERVICES AND OTHER. The cost of services and other consists primarily of
compensation and benefits for our professional services and post-sales support
personnel. The cost of services decreased in the second quarter of fiscal 2004
compared to the second quarter of fiscal 2003 primarily due to the reduced
number of personnel performing such services. For the first half of fiscal 2004,
the increase in the cost of services is the result of the costs related to the
addition of a dedicated professional services organization in the first quarter
of fiscal 2003 in conjunction with our acquisition of ViaFone.

Gross margin on services revenue increased in the second quarter and first half
of fiscal 2004 as compared to the second quarter and first half of fiscal 2003.
The increase is primarily the result of a higher percentage of support and
maintenance revenue, which typically generates higher margins, relative to
professional services revenue in the second quarter and first half of fiscal
2004.

We expect the cost of services in absolute dollars to increase in the remaining
quarters of fiscal 2004 as a result of an expected increase in professional
services revenue. We expect gross margin on services and other revenue to be in
the range of 35 to 55 percent. This range is driven by the mix between
professional services and support and maintenance revenue and the utilization
rate of our professional services personnel. Given the high level of fixed costs
associated with the professional services group, an inability to generate
sufficient services revenue to absorb these fixed costs could lead to lower or
negative gross margins.

Restructuring Charges
- ---------------------

We recorded $261,000 in workforce reduction costs during the three months ended
December 31, 2003. The restructuring charges consist primarily of severance,
benefits, and other costs related to the resignation of Karla Rosa, our former
Chief Financial Officer, and the termination of three employees from our
marketing, sales and general and administration groups. Of the terminated
employees, two were located in the United States and one was in Europe. The
restructuring charge includes $62,000 of non-cash compensation resulting from
the accelerated vesting of employee stock options.

We recorded $1,073,000 in workforce reduction costs for the three months ended
September 30, 2003, of which $1,068,000 was related to continuing operations and
$5,000 was related to our discontinued operations. The restructuring charges for
the first quarter of fiscal 2004 consist primarily of severance, benefits, and
other costs related to the resignation of Steven Simpson, our former President
and Chief Executive Officer, and the termination of 10 employees from our
marketing and sales, research and development, administration and operations
groups. Of the terminated employees, seven were located in the United States and
three were in Europe. The restructuring charge includes $437,000 of non-cash
compensation resulting from the accelerated vesting of employee stock options.

We continue the process of streamlining our business and eliminating unnecessary
functions or redundant positions and locations. We expect restructuring charges
will continue in the third and fourth quarter of this fiscal year.

Non-cash Stock Compensation
- ---------------------------

In the second quarter of fiscal 2004, we incurred $168,000 of non-cash
compensation charges related primarily to grants of restricted stock to the
members of our board of directors and to employees. We expect charges of
$190,000 in both the third and fourth quarter of fiscal 2004 for non-cash stock
compensation.

Amortization of Purchased Technology
- ------------------------------------

We recorded $155,000 of amortization of non-goodwill intangibles, primarily
consisting of purchased technology, in the second quarter of fiscal 2004 as
compared to $189,000 in the second quarter of fiscal 2003. The decline in
amortization is a result of a portion of our purchased technology becoming fully
amortized during the second quarter. In the first quarter of fiscal 2004
compared to the first quarter of fiscal 2003, amortization increased because of
the addition of non-goodwill intangibles in connection with our August 2003
acquisition of ViaFone.

GAIN ON SALE OF LAND
- --------------------

In the second quarter of 2004, we closed the sale of approximately 16 acres of
excess land adjacent to our headquarters building in Boise, Idaho and recorded a
gain of $1,058,000. We received approximately $1.5 million in net cash proceeds
after deducting fees related to the transaction.

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

OVERVIEW

During the first and second quarter of fiscal 2004, the company's liquidity
improved as cash and cash equivalents increased from $3.5 million at June 30,
2003 to $8.8 million at December 30, 2004. This improvement was achieved through
the sale or sale-and-leaseback of non-strategic assets during the first and
second quarter. On September 26, 2003, we closed the sale-and-leaseback of our
headquarters building and land and received approximately $4.6 million in net
cash proceeds after deducting transaction costs. As part of the agreement, we
entered into a 10-year master lease for the building with annual payments equal
to approximately $442,000. In fiscal 2004, we will make payments of
approximately $331,000. On October 15, 2003, we closed the sale of excess land
adjacent to our headquarters building in Boise, Idaho. We received approximately
$1.5 million in net cash proceeds after deducting fees related to the
transaction.

The company continued to incur losses from operations, which have required cash
and cash equivalents to fund these losses. The company has made progress in
reducing the amount of loss from operations and the amount of cash required to
fund these losses. The loss from operations was reduced to $2.0 million in the
first six months of fiscal 2004 as compared to $3.2 million in the first six
months of fiscal 2003. We continue to execute our plans for revenue growth and
expense control to reduce the loss from operations and return the company to
profitable operations; however, we cannot be certain that our underlying assumed
levels of revenue and expenses will be accurate.

A significant expense and use of cash is the continued spending related to our
defense of the patent infringement lawsuit by Pumatech, Inc. In the first and
second quarter of fiscal 2004, $569,000 of cash was used to pay liabilities
related to these costs. As of December 31, 2003, an additional $776,000 was
included in accounts payable and will be paid in the third quarter of fiscal
2004. We estimate we will incur approximately $900,000 to $1,000,000 of expenses
related to the April 12, 2004 trial and other defense activities in the third
quarter, which will be paid in the fourth quarter of 2004. We believe we have
numerous meritorious defenses to Pumatech's claims and we intend to continue to
defend the suit vigorously. However, if the Pumatech litigation were to have an
unfavorable result for us, we could be required to pay damages or royalties, or
to discontinue sales of certain products, any of which could result in a greater
use of cash than is currently anticipated. This could also require us to seek
additional sources of liquidity. These sources of liquidity could include
raising funds through public or private debt financing or offering additional
equity securities. In the event additional funds are required, we cannot assure
you that financing, if needed, will be available on favorable terms, if at all.
If additional funds are raised through the issuance of equity securities,
substantial dilution to our stockholders could result, and any debt financing
may contain restrictive covenants.

For detailed information on our minimum future contractual commitments which
will require a use of cash, see Note 10 of our Notes to Consolidated Financial
Statements in this Form 10-Q.

Our liquidity is affected by many factors, some of which are based on normal
ongoing operations of our business and some of which arise from uncertainties
related to global economics. In light of the improving economic conditions and
our anticipation of the upswing in corporate spending on information technology
infrastructure, we may now anticipate

reaching the point at which we generate cash in excess of our operating expenses
in the third or fourth quarter of fiscal 2004. We believe that our existing cash
and cash equivalents, together with our borrowing capacity and the funds we
expect to generate from our operations will be sufficient to fund our
anticipated working capital, capital expenditure, debt maturities and operating
expense requirements for the next 12 months. If our operating results were to
fail to meet our expectations or if accounts receivable, or other assets were to
require a greater use of cash than is currently anticipated, we could be
required to seek additional sources of liquidity. See also our risk factor on
page 30 for further discussion.

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

NET CASH USED BY OPERATING ACTIVITIES

SIX MONTHS ENDED DECEMBER 31,
------------------------------
2003 2002
------------------------------

Net cash used by operating activities....... $(1,531) $(2,507)

Net cash used by operating activities in the first six months of fiscal 2004 was
primarily the result of our net loss of $977,000 in the first six months of
fiscal 2004. Included in this loss was a gain of $998,000 primarily from the
sale of non-strategic land assets. Also included in net loss from operations
were non-cash charges of $499,000 for stock compensation related to the
severance of the company's former CEO and CFO. In the second quarter of fiscal
2004, $112,000 of non-cash charges were recorded for restricted stock grants
made to members of the company's Board of Directors and employees. We anticipate
charges of $190,000 per quarter in the third and fourth quarter of fiscal 2004
related to these restricted stock grants.

The timeliness in the collection of accounts receivable impacts the amount of
cash and cash equivalents. Accounts receivable, net of allowances, were $6.7
million and $5.6 million at December 31, 2003 and June 30, 2003, respectively.
Days sales outstanding (DSO), which is calculated based on the pattern of
business method was 60 and 59 for the quarters ended December 31, 2003 and June
30, 2003. The increase in accounts receivable from the end of the fiscal 2003
was due primarily to an increase in total net revenue. We expect that our
accounts receivable will increase in the remainder of fiscal 2004 as a result of
an expected increase in net revenues. Accounts receivable may also increase in
the future if net revenue from international customers becomes a higher
percentage of our net revenue. Generally, these customers have longer payment
cycles.

NET CASH PROVIDED BY INVESTING ACTIVITIES

SIX MONTHS ENDED DECEMBER 31,
------------------------------
2003 2002
------------------------------

Net cash provided by investing activities... $ 1,345 $ 1,202

Net cash from investing activities in the first six months fiscal 2004 was
primarily the result of receiving $1.5 million net cash from the sale of
non-strategic land. Cash was used in the first six months of fiscal 2004 for
tenant improvements we made to the subleased portion of the unused space at our
headquarters building pursuant to our lease agreement for the space. Net cash
provided by investing activities in the first half of fiscal 2003 was primarily
the result of completing the acquisition of ViaFone from which we acquired cash
upon close of the transaction.

We plan to incur aggregate capital expenditures of approximately $150,000 during
the remainder of fiscal 2004, primarily for tenant improvements, software,
system improvements and personal computers.

NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES

SIX MONTHS ENDED DECEMBER 31,
-----------------------------
2003 2002
-----------------------------

Net cash provided (used) by financing activities $ 5,462 $ (103)

Net cash provided by financing activities in the first half of fiscal 2004
consisted primarily of $4.8 million in cash proceeds we received from the
sale-and-leaseback of our headquarters building in Boise, Idaho. In addition,
$891,000 of cash was provided by the exercise of employee stock options during
the first six months of fiscal 2004. Net cash used by financing activities in
the first half of fiscal 2003 resulted from payments on term debt assumed as
part of our acquisition of ViaFone.

On January 15, 2002, we entered into a loan and security agreement with Silicon
Valley Bank, under which we can currently access up to $5.0 million of financing
in the form of a demand line of credit, subject to the balance of domestic
current accounts receivable balances. The line of credit is collateralized by
certain of our assets. Interest on any borrowings will be paid at prime plus one
percent but not less than 5.5%. The line of credit agreement requires us to
maintain certain financial ratios and expires on March 15, 2004. We are in
compliance with all covenants and there are no outstanding draws on this
facility.

Upon completion of our acquisition of ViaFone on August 30, 2002, we assumed
$1.1 million of term debt with SVB. This debt has been restructured into a term
loan due in 30 equal monthly installments bearing interest at 8%. The term loan
is collateralized by certain of our assets, requires us to maintain certain
financial ratios and is scheduled to be paid in installments totaling $217,000
in the remainder of fiscal 2004 and $325,000 in fiscal 2005.

CRITICAL ACCOUNTING POLICIES
- ----------------------------

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

LEGAL CONTINGENCIES

We are currently involved in a patent infringement suit with Pumatech, Inc. and
from time-to-time may be involved in various other minor legal proceedings and
claims. Periodically, but not less than quarterly, we review the status of each
significant matter and assess our potential financial exposure. If the potential
loss from any legal proceeding or claim is considered probable and the amount
can be reasonably estimated, we accrue a liability for the estimated loss.
Significant judgment is required in both the determination of probability and
the determination as to whether an exposure is reasonably estimable. Due to the
uncertainties related to these matters, accruals are based only on the best
information available at the time. As additional information becomes available,
we reassess the potential liability related to our pending litigation and claims
and may revise our estimates. Such revisions could have a material impact on our
results of operations and financial condition. Refer to Part II, Item 1. "Legal
Proceedings" of this Form 10-Q for a description of our patent litigation with
Pumatech.

REVENUE RECOGNITION

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

At the time of the transaction, we assess whether the fee associated with our
revenue transactions is fixed or determinable, based on the payment terms
associated with the transaction. If a significant portion of a fee is due after
the shorter of our normal payment terms or 90 days, we account for the fee as
not being fixed or determinable. In

these cases, we recognize revenue as the fees become due and payable. If we had
assessed the fixed or determinable criterion differently, the timing and amount
of our revenue recognition may have differed materially from that reported.

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

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

When we license our software to OEMs or to companies that include our software
in their software offering, royalty revenue is generally recognized when
customers report to us the sale of software to their end user customer. In cases
where the arrangement with our customer provides for a prepaid nonrefundable
royalty, we generally recognize revenue when persuasive evidence of an
arrangement exits, delivery has occurred, the fee is fixed or determinable and
collection of the resulting receivable is reasonably assured.

We recognize revenue for support and maintenance services ratably over the
contract term, which is usually 12 months, and we generally, recognize revenue
from training services as these services are performed. For professional
services that involve significant implementation, customization, or modification
of our software that is essential to the functionality of the software, we
generally recognize both the service and related software license revenue over
the period of the engagement, using the percentage-of-completion method. In
cases where our professional services involve customizations for which the
amount of customization effort cannot be reasonably estimated, where significant
uncertainty about the project completion exists, or where an arrangement
provides for customer acceptance, we defer the contract revenue under the
completed contract method of accounting until the uncertainty is sufficiently
resolved or the contract is complete. If we were to make different judgments or
utilize different estimates of the total amount of work we expect to be required
to complete an engagement, the timing of our revenue recognition from period to
period, as well as the related margins, might differ materially from that
previously reported.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS

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

INCOME TAXES

On a quarterly basis we evaluate our deferred tax asset balance for
realizability. To the extent we believe it is more likely than not that some or
all of our deferred tax assets will not be realized, we establish a valuation
allowance against the deferred tax assets. As of December 31, 2003, we had
recorded a valuation allowance against 100 percent of our net deferred tax
assets due to uncertainties related to our ability to utilize our deferred tax
assets, primarily consisting of certain net operating losses carried forward and
foreign tax credits, before they expire. This valuation allowance was recorded
based on our estimates of future U.S. and foreign jurisdiction taxable income
and our judgments regarding the periods over which our deferred tax assets will
be recoverable. If we made different judgments or utilized different estimates,
the amount or timing of the valuation allowance recorded may have differed
materially from that reported. In the event that actual results differ from
these estimates or we adjust these estimates in future periods, we may need to
reduce the valuation allowance, potentially resulting in an income tax benefit
in the period of reduction, which could materially impact our financial position
and results of operations.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

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

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES
- ------------------------------------------

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

We do not hold or issue financial instruments for speculative purposes. From
time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro and British pound sterling, 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. These forward contracts do not qualify for hedge accounting
under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, and, as such, the contracts are recorded in the consolidated balance
sheet at fair value. We report a net currency gain or loss based on changes in
the fair value of forward contracts combined with changes in fair value of the
underlying asset or liability being managed. The success of these currency
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, we could experience
unanticipated currency gains or losses. When determining whether to enter into
foreign currency forward contracts, we also consider the impact that the
settlement of such forward contracts may have on our cash position. To eliminate
a potential cash settlement of a forward position we may, from time to time,
decide not to use foreign currency forward contracts to manage fluctuations in
the value of foreign currencies on transactions with our international
subsidiaries. In a period where we do not enter into foreign currency forward
contracts, we could experience significant non-cash currency gains or losses if
the value of the U.S. dollar strengthens or weakens significantly in relation to
the value of the foreign currencies. As of December 31, 2003, we had forward
contracts with a nominal value of $8.5 million that matured within 30 days in
place against the Canadian dollar, euro and British pound sterling. We had
forward contracts with a nominal value of $5.9 million in place against the
Canadian dollar, euro and British pound sterling at December 31, 2002, which
matured within 30 days. We recognized a net currency exchange loss of
approximately $30,000 and a gain of approximately $29,000 for the three and six
months ended December 31, 2003, respectively and net currency exchange losses of
approximately $63,000 and $118,000 for the three and six months ended December
31, 2002, respectively. We are entering into foreign currency forward contracts
in the third quarter of fiscal 2004.

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

WE HAVE A RECENT HISTORY OF LOSSES AND MAY CONTINUE TO GENERATE LOSSES IN FISCAL
2004.

Since the third quarter of fiscal 1999, we have devoted significant financial
resources to the research and development of, and marketing and sales for, our
mobile information management software products and, as a result, we have
generated operating losses. We intend to continue to devote significant
financial resources to product development, to marketing and sales, and to the
defense of Pumatech's claims against us. Our ability to reach break-even from
operations and our ability to reach profitability and positive cash flow from
operations in subsequent periods, will depend on a number of factors, including:

o our ability to generate sufficient revenue and control expenses;
o buying patterns of our enterprise, application developer and OEM customers;
o changes in customer demand for our products;
o the timing of customer orders, which can be influenced by fiscal year-end
buying patterns, seasonal trends or general economic conditions;
o announcements or introductions of new products or services by our
competitors;
o the outcome of our litigation with Pumatech, Inc. and the impact of any
litigation on our financial and management resources;
o delays in our development and introduction of new products and services;
o changes in our pricing policies as a result of increased competition;
o the mix of distribution channels through which we sell our products;
o the market acceptance of our new and enhanced products and the products of
our customers that are application developers and OEMs;
o the market adoption rate of Bluetooth or other technologies on which a
number of our products are based;
o the emergence of new technologies or industry standards;
o normal seasonality that we typically experience in the first quarter of our
fiscal year; and
o a shift in the mix of professional services and licensing revenue, which
may result in fluctuations in our gross margin.

OUR BUSINESS RELIES ON ENTERPRISES IMPLEMENTING MOBILE APPLICATIONS AND DEVICES
AND MAY BE HARMED BY DECLINES IN INFORMATION TECHNOLOGY SPENDING.

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

While we believe we have adequately factored these conditions into our current
revenue forecasts, if these conditions worsen or continue longer than expected,
demand for our products may be reduced as a result of enterprises reducing
information technology spending on our products and OEMs reducing their use of
our products in their own products. As a result, our revenue may fail to grow or
could decline, which would harm our operating results. If the current economic
slowdown persists or worsens, we also may be forced to reduce our operating
expenses, which could result in additional charges incurred in connection with
restructuring or other cost-cutting measures we may implement. For example, in
both the first and third quarters of fiscal 2003 and the first and second
quarters of fiscal 2004, we announced restructuring plans to reduce costs and
improve operating efficiencies and, as a result, incurred restructuring costs,
primarily for severance payments to terminated employees.

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

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

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

Our quarterly revenue and operating results currently depend in large part on
the volume and timing of orders received within the quarter and on the number of
software seats licensed, which are difficult to forecast. Significant portions
of our expenses are related to personnel and, therefore, are fixed in advance,
based in large part on our forecast of future revenue. If revenue is below
expectations in any given quarter, the adverse impact of the shortfall on our
operating results may be magnified by our inability to adjust personnel and
other expenditures to compensate for the shortfall.

OUR BUSINESS MAY BE HARMED IF PUMATECH PREVAILS IN THE PATENT LITIGATION WITH US
AND THEY ARE AWARDED SIGNIFICANT DAMAGES OR BECOME ENTITLED TO SIGNIFICANT
ROYALTIES, OR IF WE ARE REQUIRED TO CEASE SELLING ANY OF OUR CURRENT PRODUCTS OR
WE IF ARE REQUIRED TO INCUR ADDITIONAL DEVELOPMENT COSTS.

On April 22, 2002, Pumatech, Inc. filed a patent infringement action against us
in the U.S. District Court in Northern California. An amended complaint was
filed on May 28, 2002. The action alleges that our XTNDConnect server and
desktop synchronization products infringe on seven of Pumatech's
synchronization-related patents, that our alleged use of the trademark
"Satellite Forms" constitutes trademark infringement, and that other alleged
actions constitute unfair competition and interference with contract. The action
seeks an injunction against further sales of our server and desktop
synchronization products and use of the allegedly infringing trademark, as well
as unspecified damages and attorneys' fees. On June 25, 2002, we filed an answer
and counterclaim in response to Pumatech's complaint in which we deny Pumatech's
charges, raise a number of affirmative defenses and request a declaration from
the court that Pumatech synchronization software patents are invalid and not
infringed by our products. On December 11, 2002, Pumatech filed a second amended
complaint, which adds allegations that unspecified synchronization products
infringe an eighth Pumatech patent. On December 31, 2002, we filed an amended
answer and counterclaim in which we deny all of Pumatech's charges, including
this additional charge, and amended our defenses and counterclaims to include
this additional patent. On August 1, 2003, the Honorable Judge D. Lowell Jensen,
United States District Judge, issued the Claim Construction Ruling on the
interpretation of certain claims terms of the patents in the suit. We believe
that the Court's ruling has significantly narrowed claims in five of the
Pumatech patents. The Court also ruled that it could not correct an error that
appears in all asserted claims of Pumatech's '676 patent. This error can only be
corrected in reissue proceedings in the Patent Office. Until the Patent Office
issues corrected claims, Pumatech will be unable to assert the `676 patent, and
it is unlikely that such a correction would have any retroactive effect. As a
result, if any of our products are ultimately held to be infringing this patent,
it is unlikely that Pumatech would be entitled to damages for any period prior
to the reissue date. We have petitioned the U.S. Patent Office for reexamination
of three of the Pumatech patents. The Patent Office has issued an Office Action
for each of the three patents rejecting all Pumatech patent claims over the
prior art for two of the patents and rejecting all claims on which we requested
reexamination for the other patent. As a result of the reexamination process, we
expect the patents to be significantly narrowed or rejected by the Patent Office
in their entirety. If the patents are amended and reissued, and we are
ultimately held to be infringing one of the reissued patents, it is unlikely
that Pumatech would be entitled to damages for any period preceding the reissue
date. The parties are in the process of completing expert discovery and other
pretrial activities are on going; trial is currently scheduled for April 2004.

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

We believe that our existing working capital, our borrowing capacity and the
funds we expect to generate from our operations will be sufficient to fund our
anticipated working capital and capital expenditure requirements for the next 12
months. We cannot be certain, however, that our underlying assumed levels of
revenue and expenses will be accurate. If our operating results were to fail to
meet our expectations or if Pumatech litigation fees, accounts receivable, or
other assets were to require a greater use of cash than is currently
anticipated, we could be required to seek additional sources of liquidity. In
addition, if the Pumatech litigation were to have an unfavorable result for us,
we could be required to pay damages or royalties, or to discontinue sales, of
certain products, any of which could result in a greater use of cash than is
currently anticipated. This could also require us to seek additional sources of
liquidity. These sources of liquidity could include raising funds through public
or private debt financing, borrowing against our line of credit or offering
additional equity securities. If additional funds are raised through the
issuance of equity securities, substantial dilution to our stockholders could
result. In the event additional funds are required, adequate funds may not be
available when needed or may not be available on favorable terms, which could
have a negative effect on our business and results of operations.

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

The success of our products currently will rely to a large degree on the
increased use by individuals and enterprises of mobile devices, including
personal digital assistants, cell phones, pagers and laptop and handheld
computers, and on increased use of technologies such as SyncML and Bluetooth.
Even if markets for our products grow, our products may not be successful.
Enterprises and OEMs 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 wireless
connectivity product solutions, the failure of current markets to grow, new
markets to develop or these markets to be receptive to our products and
technologies on which our products are based, could harm our business. The
emergence of these markets will be affected by a number of factors beyond our
control.

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

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

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

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

As of December 31, 2003, the amount of goodwill and other identifiable
intangibles recorded on our books, net of accumulated amortization, was $13.3
million. We ceased amortizing goodwill upon our adoption of SFAS No. 142 as of
the beginning of fiscal 2003, and we expect to amortize $854,000 of net
identifiable intangibles in the remainder of fiscal 2004 and fiscal years 2005
through 2008. However, to the extent that our goodwill or other identifiable
intangibles are considered to be impaired because circumstances indicate their
carrying value may not be recoverable, all or a portion of these assets may be
subject to write-off in the quarter of impairment. Such impairment and any
resulting write-off could have a negative impact on our results of operations in
the period of the write- off.

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

We may not compete successfully against current or future competitors, some of
whom have longer operating histories, greater name recognition, more employees
and significantly greater financial, technical, marketing, public relations and
distribution resources. Increased competition may result in price reductions,
reduced margins, loss of market share and a change in our business and marketing
strategies, any of which could harm our business. The competitive environment
may require us to make changes in our products, pricing, licensing, services or
marketing to maintain and extend the market acceptance of our products. Price
concessions or the emergence of other pricing or distribution strategies by our
competitors or us may diminish our revenue.

We compete with:

o mobile data management companies, including Aether Systems, IBM, iAnywhere
(a division of Sybase), Infowave; JP Mobile, Microsoft, Pumatech, and RIM;
o application mobilization companies, including Everypath, iAnywhere,
Microsoft, and Oracle;
o mobile enterprise solutions companies, including Aether Systems, Dexterra,
and Telispark;
o client/server database providers, including Interbase, Microsoft, Oracle
and Pervasive Software;
o mobile connectivity companies, including IVT Corporation, Open Interface
and Widcomm; and
o internal research and development departments of OEMs, many of whom are our
current customers.

As the markets for mobile information management products grow, we
expect competition from existing competitors to intensify, and we expect new
competitors, including OEMs to which we sell our products, to introduce products
that compete with ours. Additionally, if existing or new competitors were to
merge or form strategic alliances, our market share may be reduced or pressure
may be put on us to reduce prices resulting in reduced revenue and margins.

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

The markets for our products are characterized by:

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

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

IF SPECIFIC INDUSTRY-WIDE STANDARDS AND PROTOCOLS 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.

If our customers do not adopt wireless technologies, demand for our products
would be reduced and our business would be harmed.

Our products support the exchange of data with mobile devices via wired and
wireless connections. Our future growth will depend, in part, on the adoption of
wireless solutions by our customers. The adoption of wireless solutions is
dependent upon the development of 2.5 generation or 3rd generation ("2.5G" or
"3G") networks that are intended to support more complex applications and to
provide end users with a more satisfying user experience than

today's networks. If communication service providers delay their deployment of
2.5G or 3G networks or fail to roll such networks out successfully, our
customers may not adopt wireless technologies, there could be less demand for
our products and services and our business could be harmed. In addition, if
communication service providers fail to continue to make investments in their
networks or invest at a slower pace in the future, there may be less demand for
our products and services and our business could suffer.

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

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

Companies in the software industry frequently resort to litigation over
intellectual property rights. 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.

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

In the second quarter of fiscal 2004, based on the region where the customer
resides, 64% of our revenue was generated from sales outside the United States.
We expect that international sales will continue to represent a substantial
portion of our revenue for the foreseeable future. International sales are
subject to a number of risks, including:

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

OUR BUSINESS MAY BE HARMED IF OUR PROFESSIONAL SERVICES ORGANIZATION DOES NOT
GENERATE AN ACCEPTABLE PROFIT LEVEL.

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

|X| we may be unable to accurately predict staffing requirements and,
therefore, the expense of fulfilling our service contracts may be greater
than we anticipate; and

|X| we may have an inappropriate level of resources dedicated to the
professional services business in relation to the number of projects we are
able to sell, resulting in a low utilization rate of resources.

If we are unable to operate the professional services organization effectively,
the profitability of this business could decline, or even result in a loss,
which could harm our business.

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

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

From time to time, we enter into foreign currency forward contracts, typically
against the Canadian dollar, euro, and British pound sterling, to manage
currency fluctuations on payments and receipts of foreign currencies on
transactions with our international subsidiaries. The success of these currency
activities depends upon estimation of intercompany balances denominated in
various foreign currencies. To the extent that these forecasts are overstated or
understated during periods of currency volatility, we could experience
unanticipated currency gains or losses. When determining whether to enter into
foreign currency forward contracts, we also consider the impact that the
settlement of such forward contracts may have on our cash position. To eliminate
a potential cash settlement of a forward position we may, from time to time,
decide not to use foreign currency forward contracts to manage fluctuations in
the value of foreign currencies on transactions with our international
subsidiaries. In a period where we do not enter into foreign currency forward
contracts, we could experience significant non-cash currency gains or losses if
the value of the U.S. dollar strengthens or weakens significantly in relation to
the value of the foreign currencies. For example, we recognized foreign currency
exchange gains in the fourth quarter of fiscal 2003 and the first quarter of
fiscal 2004 as a result of the dollar weakening at a time when we were not
entering into foreign currency forward contracts.

IF WE ACCOUNT FOR EMPLOYEE STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS USING
THE FAIR VALUE METHOD, IT COULD SIGNIFICANTLY REDUCE OUR NET INCOME AND EARNINGS
PER SHARE.

There has been ongoing public debate whether employee stock option and employee
stock purchase plans shares should be treated as a compensation expense and, if
so, how to properly value such charges. If we elected or were required to record
an expense for our stock-based compensation plans using the fair value method,
we could have significant accounting charges. For example, in the second quarter
of fiscal 2004, had we accounted for stock-based compensation plans using the
fair-value method prescribed in FASB Statement No. 123 as amended by Statement
148, our net income would have been reduced by approximately $2.1 million.
Although we are not currently required to record any compensation expense using
the fair value method in connection with option grants that have an exercise
price at or above fair market value at the grant date and for shares issued
under our employee stock purchase plan, it is possible that future laws or
regulations will require us to treat all stock-based compensation as an expense
using the fair value method. See Note 3 of Notes to Condensed Consolidated
Financial Statements for a more detailed presentation of accounting for
stock-based compensation plans.

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

We license technology on a non-exclusive basis from several companies for use
with our products and anticipate that we will continue to do so in the future.
For example, we license encryption technology that we include in our OneBridge
Mobile Groupware (formerly XTNDConnect Server) products. Our inability to
continue to license this technology, or to license other technology necessary
for use with our products, could result in the loss of, or delays in the
inclusion of, important features of our products or result in substantial
increases in royalty payments that we would have to pay pursuant to alternative
third-party licenses, any of which could harm our business. In addition, the
effective implementation of our products depends upon the successful operation
of licensed software in conjunction with our products. Any undetected errors in
products resulting from this licensed software may prevent the implementation or
impair the functionality of our products, delay new product introductions and
injure our reputation.

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

The complex software 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.

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

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

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

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

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

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

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

Our future success will depend on our ability to attract and retain experienced,
highly qualified management, technical, research and development, and sales and
marketing personnel. Competition for qualified personnel in the computer
software industry is intense, and there is a risk that we will have difficulty
recruiting and retaining key employees. In addition, new employees generally
require substantial training, which may require substantial resources and
management attention. If we lose the services of one or more key employees, or
if one or more of them decide to join a competitor or otherwise compete directly
or indirectly with us, our business could be harmed. Searching for replacements
for our key employees could divert management's time and result in increased
operating expenses that may not be offset by either improved productivity or
higher prices. Over the past two years, a number of our senior management
employees have left Extended Systems, including most recently, Steven Simpson,
our former President and Chief Executive Officer, and Karla Rosa, our former
Vice President Finance and Chief Financial Officer, and we cannot assure you
that there will not be additional departures. Any changes in management can be
disruptive to our operations. Uncertainty created by turnover of key employees
could result in reduced confidence in our financial performance, which could
cause fluctuations in our stock price.

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

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

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

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

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

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

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

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

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Substantially all of our liquid investments are at fixed interest rates and,
therefore, the fair value of these instruments is affected by changes in market
interest rates. All of our liquid investments mature within 90 days or less of
December 31, 2003, therefore, we believe that the market risk arising from our
holdings of liquid investments is minimal.

Sales made by our subsidiaries outside the United States are generally
denominated in the foreign country's currency. 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 Canadian dollar, euro, and British pound sterling, to
manage fluctuations in the value of foreign currencies on transactions with our
international subsidiaries, thereby limiting our risk that would otherwise
result from changes in exchange rates. We report a net currency gain or loss
based on changes in the fair value of forward contracts combined with changes in
fair value of the underlying asset or liability being managed. The success of
these currency activities depends upon estimation of intercompany balances
denominated in various foreign currencies. To the extent that these forecasts
are overstated or understated during periods of currency volatility, we could
experience unanticipated currency gains or losses. When determining whether to
enter into foreign currency forward contracts, we also consider the impact that
the settlement of such forward contracts may have on our cash position. To
eliminate a potential cash settlement of a forward position we may, from time to
time, decide not to use foreign currency forward contracts to manage
fluctuations in the value of foreign currencies on transactions with our
international subsidiaries. In a period where we do not enter into foreign
currency forward contracts, we could experience significant non-cash currency
gains or losses if the value of the U.S. dollar strengthens or weakens
significantly in relation to the value of the foreign currencies. As of December
31, 2003, we had forward contracts with a nominal value of $8.5 million that

matured within 30 days in place against the Canadian dollar, euro and British
pound sterling. We had forward contracts with a nominal value of $5.9 million in
place against the Canadian dollar, euro and British pound sterling at December
31, 2002, which matured within 30 days. We recognized a net currency exchange
loss of approximately $30,000 and a gain of approximately $29,000 for the three
and six months ended December 31, 2003, respectively and net currency exchange
losses of approximately $63,000 and $118,000 for the three and six months ended
December 31, 2002, respectively. We intend to enter into foreign currency
forward contracts in the third quarter of fiscal 2004.

ITEM 4. CONTROLS AND PROCEDURES

We have carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of the end of the period covered by this Quarterly Report. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective to ensure that
material information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms. It should be noted, however, that the design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of
how remote.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

At our 2003 Annual Meeting of Stockholders, which was held on December 11, 2003,
there were 14,055,580 shares of common stock entitled to vote at the meeting and
a total of 12,013,209 shares were represented at the meeting. The following
proposals were submitted to a vote of the stockholders:

(a) The following nominees for Class II Directors were elected. Each person
elected as a Class II Director will serve for a three-year term that
expires upon the 2006 Annual Meeting of Stockholders or until their
successors are elected and qualified.

Name of Nominee Votes For Votes Against
------------------------ --------------- ----------------

John M. Russell 11,884,076 129,133
Robert Frankenberg 11,844,761 168,448
Ralph Godfrey 11,849,761 163,448

(b) The following nominees for Class I Director were elected. The Class I
Directors will serve for a two-year term that expires upon the 2005 Annual
Meeting of Stockholders or until his successor is elected and qualified.

Name of Nominee Votes For Votes Against
------------------------ --------------- ----------------

James R. Bean 11,907,859 105,350
Jody B. Olson 11,911,001 102,208

(c) The following nominee for Class III Director was elected. The Class III
Director will serve for a one-year term that expires upon the 2004 Annual
Meeting of Stockholders or until his successor is elected and qualified.

Name of Nominee Votes For Votes Against
------------------------ --------------- ----------------

Archie Clemins 11,848,660 164,549

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

o 4,385,114 votes in favor;
o 404,619 votes against; and
o 47,600 abstentions.

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

o 4,371,728 votes in favor;
o 380,849 votes against; and
o 84,756 abstentions.

(f) An increase in the number of shares of common stock reserved for issuance
under the Extended Systems Incorporated 2001 Approved Share Option Scheme
was approved:

o 4,133,435 votes in favor;
o 382,998 votes against; and
o 320,900 abstentions.

(g) The ratification of the appointment of PricewaterhouseCoopers LLP as our
independent public accountants for the year ended June 30, 2004 was
approved:

o 11,929,254 votes in favor;
o 43,446 votes against; and
o 40,509 abstentions.

Following the election of the Class I, Class II and Class III directors
described above, our Board of Directors consists of the following members: (1)
Raymond A. Smelek, (2) James R. Bean, (3) Archie Clemins, (4) Robert
Frankenberg, (5) Ralph Godfrey, (6) Jody B. Olson and (7) John M. Russell.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

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

10.4.1 1998 Directors Stock Option Plan (Restated 10/21/03)
10.34 Employment Agreement between the Company and David Willis
10.35 Employment Agreement between the Company and Valerie A.
Heusinkveld
10.55 Separation Agreement between the Company and Karla K. Rosa
31 Certification of Executive Officers pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32 Certification of Executive Officers pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

(B) REPORTS ON FORM 8-K

On October 22, 2003, we furnished a current report on Form 8-K in connection
with the issuance of a press release dated October 22, 2003 announcing our
financial results for our first fiscal quarter ended September 30, 2003.

On November 25, 2003, we filed a current report on Form 8-K in connection with
the issuance of a press release dated November 11, 2003 announcing that we had
named Valerie A. Heusinkveld Chief Financial Officer and Vice President of
Finance and that former Chief Financial Officer and Vice President of Finance
Karla K. Rosa had resigned.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Boise, Idaho, on February 17, 2004.

EXTENDED SYSTEMS INCORPORATED

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