EXTENDED SYSTEMS INC, POS AM, 1998-03-04

EXTENDED SYSTEMS INC
POS AM, 1998-03-04
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1998

REGISTRATION NO. 333-42709
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

POST-EFFECTIVE

AMENDMENT

NO. 1 TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

EXTENDED SYSTEMS INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 3577 82-0399670
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>

5777 NORTH MEEKER AVENUE
BOISE, IDAHO 83713
(208) 322-7575
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

STEVEN D. SIMPSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EXTENDED SYSTEMS INCORPORATED
5777 NORTH MEEKER AVENUE
BOISE, IDAHO 83713
(208) 322-7575
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

COPIES TO:

<TABLE>
<S> <C>
JEFFREY D. SAPER, ESQ. MICHAEL J. SULLIVAN, ESQ.
PATRICK J. SCHULTHEIS, ESQ. LANA K. HAWKINS, ESQ.
DANIEL F. VAUGHN, ESQ. ALEXIS RONDELL RHORER, ESQ.
SHAWN J. LINDQUIST, ESQ. KATHRYN A. WALKER, ESQ.
WILSON SONSINI GOODRICH & ROSATI COOLEY GODWARD LLP
PROFESSIONAL CORPORATION FIVE PALO ALTO SQUARE
650 PAGE MILL ROAD 3000 EL CAMINO REAL
PALO ALTO, CALIFORNIA 94304 PALO ALTO, CALIFORNIA 94306
(650) 493-9300 (650) 843-5000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------

The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE> 2

1,550,000 SHARES

LOGO
COMMON STOCK
------------------------

Of the 1,550,000 shares of Common Stock offered hereby, 1,300,000 shares
are being offered by Extended Systems Incorporated ("Extended Systems" or the
"Company") and 250,000 shares are being offered by certain selling stockholders
(the "Selling Stockholders"). The Company will not receive any proceeds from the
sale of the shares by the Selling Stockholders. See "Principal and Selling
Stockholders." Prior to this Offering, there has been no public market for the
Common Stock of the Company. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Company's
Common Stock has been approved for listing on the Nasdaq National Market under
the symbol "XTND."

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

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 6 THROUGH 14.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C> <C>
=========================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY (2) STOCKHOLDERS
- -------------------------------------------------------------------------------------------------------------------------
Per Share............................ $8.00 $0.56 $7.44 $7.44
- -------------------------------------------------------------------------------------------------------------------------
Total(3)............................. $12,400,000 $868,000 $9,672,000 $1,860,000
=========================================================================================================================
</TABLE>

(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."

(2) Before deducting expenses payable by the Company, estimated at $730,000.

(3) Certain Selling Stockholders have granted the Underwriters a 45-day option
to purchase up to 232,500 additional shares of Common Stock on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. If the Underwriters exercise this option in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Selling
Stockholders will be $14,260,000, $998,200 and $3,589,800, respectively. See
"Underwriting."

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

The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
certificates for the shares of Common Stock will be available for delivery at
the offices of Volpe Brown Whelan & Company, LLC, One Maritime Plaza, San
Francisco, California on or about March 9, 1998.

VOLPE BROWN WHELAN & COMPANY NEEDHAM & COMPANY, INC.

The date of this Prospectus is March 4, 1998

<PAGE> 3

[GRAPHICS -- SEE APPENDIX A]

Connect with the Beam(R), ExtendHub(R), ExtendNet(R), Extended Systems(R),
JetEye(R), OpenSystems(R), ShareLink(R), ShareSpool(R) and TruePort(R) are
registered United States trademarks of the Company. This Prospectus also
contains additional trademarks and tradenames of the Company and of other
companies.

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Company's consolidated financial
statements and the notes thereto, appearing elsewhere in the Prospectus. In this
Prospectus, the words "expects," "anticipates," "believes," "intends," "will"
and similar expressions identify forward-looking statements, which are based
upon information currently available to the Company, speak only as of the date
hereof and are subject to certain risks and uncertainties. The Company assumes
no obligation to update any forward-looking statements. The Company's actual
results may differ materially from the results discussed in such forward-looking
statements. Factors that may cause such a difference include, but are not
limited to, those discussed in "Risk Factors." Unless otherwise indicated, (i)
the information contained in this Prospectus assumes no exercise of the
Underwriters' over-allotment option and reflects a two-for-three reverse split
of the Company's Common Stock effected in January 1998 and (ii) all share
numbers contained in this Prospectus assume that no stockholder receiving the
Rescission Offer, which Rescission Offer will be made following the closing of
the Offering, exercises such right to rescind its purchase of shares of the
Company's Common Stock. See "Rescission Offer."

THE COMPANY

Extended Systems provides distributed and mobile computing solutions that
address the needs of the virtual enterprise. The Company designs, develops,
markets and sells two product families: distributed connectivity products and
mobile systems products. The Company's distributed connectivity products include
a virtual private networking server, an Internet access server, network print
servers and a database management system with remote access capabilities. The
Company's mobile systems products include wireless connectivity products that
comply with the standards of the Infrared Data Association ("IrDA"), infrared
software and port replicators that connect portable computers to desktop
peripherals and the network.

During the last decade, businesses and other organizations have moved from
centralized computer systems to distributed local and wide area networks based
on client/server architectures. The proliferation of these distributed networks
has enabled the enterprise-wide deployment of mission-critical applications
beyond the traditional on-site facilities of the organization. As a result, both
mobile and local employees have greater access to business-critical information.
The corporation has evolved into a "virtual enterprise" characterized by
resource and information sharing among employees, suppliers, distributors and
customers throughout the world.

As the mobile workforce continues to grow, there is increasing demand to
access business networks from multiple locations, including different locations
within the organization's main office, remote offices and various locations
while traveling, such as hotels and airports. International Data Corporation
("IDC") forecasts that the market for remote access servers will increase from
$1.9 billion in 1996 to $7.6 billion in 2001, and IDC expects the installed base
of remote access server ports to increase from 4.2 million in 1996 to 60.5
million in 2001. Increased demand for mobile connectivity has been driven by
higher demand for access to communication and mission-critical applications
across the network, as well as by the proliferation of notebook computers and
other innovative mobile computing devices. PC manufacturers have introduced
notebook computers with powerful new features and computing power comparable to
desktop computers. IDC reported that 74% of all notebook computers sold in 1997
served as the user's primary computer. In addition, a majority of the notebook
computer models sold today by major PC manufacturers contain an infrared port,
based upon the IrDA standard, that enables wireless connectivity to the network,
other computers, printers and other devices through an infrared connection.

The Company's products provide a number of advantages to the virtual
enterprise. The distributed connectivity products include ExtendNet VPN,
ExtendNet IAS, ExtendNet print servers and Advantage Database Management
Servers. ExtendNet VPN enables a business to extend its network environment
beyond physical connections to the LAN or WAN, permitting seamless, secure
access to the network by mobile users over the Internet and eliminating the need
for multiple modems and telephone lines. ExtendNet IAS provides remote offices
and small businesses with Internet connectivity, allowing multiple users to
easily access a single Internet connection while intelligently managing usage to
reduce costs. The ExtendNet print

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server products enable the effective deployment of complex printing applications
across distributed networks worldwide. The Advantage Database Server is a
scalable, high performance database management system that enables organizations
to extend applications and databases across the distributed network and, when
coupled with the Advantage Internet Server, over the Internet. The mobile
systems products include the JetEye infrared wireless connectivity products,
IrDA connectivity software and port replicators. The JetEye infrared wireless
connectivity products enable mobile users to easily access networks or
peripherals while moving between offices and conference rooms without the need
for bulky cables and wired connections. The QuickBeam, JetBeam and IrLite
software products enable infrared communications in mobile computing devices.
The port replicator products provide notebook computers quick, cost-effective
access to desktop peripherals and the network.

The Company's objective is to be a leading supplier of distributed and
mobile computing solutions that meet the needs of the virtual enterprise. The
Company leverages its expertise in distributed and mobile computing to provide
networking solutions that meet the evolving needs of the virtual enterprise. The
Company is committed to developing, introducing and manufacturing new products
and enhancing existing products by expanding and leveraging its core
technologies. In addition, the Company intends to pursue strategic acquisitions
of, or investments in, companies with complementary products, technologies or
distribution networks in order to broaden its product lines and to provide a
more complete virtual enterprise networking solution.

The Company markets and sells its products worldwide primarily through
distributors, OEMs and resellers. The Company has distribution agreements with
companies located in more than 28 countries, including with key distributors
such as Ingram Micro and Tech Data. The Company intends to establish additional
distribution relationships to strengthen its geographic reach. The Company's
in-house sales and marketing staff actively supports the sales efforts of
distributors and resellers and is largely responsible for generating end user
demand by soliciting prospective customers and providing technical support.

Extended Systems was founded in 1984 and reincorporated in Delaware in
1985. The Company's principal offices are located at 5777 North Meeker Avenue,
Boise, Idaho 83713, and its telephone number at that location is (208) 322-7575.
References in this Prospectus to "Extended Systems" and the "Company" refer to
Extended Systems Incorporated and its subsidiaries.

4
<PAGE> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company..................... 1,300,000 shares
Common Stock offered by the Selling Stockholders........ 250,000 shares
Common Stock to be outstanding after the Offering....... 8,173,855 shares(1)
Use of proceeds......................................... For general corporate purposes, including
working capital and potential
acquisitions.
Proposed Nasdaq National Market symbol.................. XTND
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED(2)
------- ---------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,301 $15,243
Working capital............................................. 14,482 23,424
Total assets................................................ 26,998 35,940
Long-term debt.............................................. 7,489 7,489
Total stockholders' equity.................................. 15,428 24,370
</TABLE>

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

(1) Based upon shares outstanding as of December 31, 1997. Excludes 2,509,066
shares of Common Stock issuable upon exercise of stock options outstanding
as of December 31, 1997 with a weighted-average exercise price of $7.82 per
share, 2,550,000 shares of Common Stock reserved for future issuance under
the Company's stock option, director option and stock purchase plans, and
557,787 shares of Common Stock issuable upon conversion of promissory notes.
See "Capitalization," "Management -- Stock Plans," "Description of Capital
Stock" and Note 8 of Notes to Consolidated Financial Statements.

(2) Adjusted to give effect to the receipt of the estimated net proceeds from
the sale and issuance of 1,300,000 shares of Common Stock offered by the
Company at the initial public offering price of $8.00 per share. See "Use of
Proceeds."

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

The Company's fiscal year ends on June 30 of each year. References herein
to "fiscal 1998" refer to the fiscal year ending June 30, 1998. References
herein to "fiscal 1997," "fiscal 1996" and "fiscal 1995" refer to the fiscal
years ended June 30, 1997, June 30, 1996 and June 30, 1995, respectively.

5
<PAGE> 7

RISK FACTORS

This Prospectus contains forward-looking statements that involve risks and
uncertainties. The cautionary statements made in this Prospectus should be read
as being applicable to all related forward-looking statements wherever they
appear in this Prospectus. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including those set forth in the following risk factors and
elsewhere in this Prospectus. In evaluating the Company's business, prospective
investors should consider carefully the following factors in addition to the
other information set forth in this Prospectus.

Potential Fluctuations in Operating Results. The Company's operating
results have fluctuated significantly in the past and are likely to fluctuate
significantly in the future on a quarterly and an annual basis. Prior growth
rates that the Company has experienced in net revenue and net income should not
be considered indicative of future growth rates. Factors that could cause the
Company's future operating results to fluctuate include the level of demand for
the Company's products, the Company's success in developing new products, the
timing of new product introductions and product enhancements by the Company and
its competitors, market acceptance of the Company's new and enhanced products,
the emergence of new industry standards, the timing of customer orders, the mix
of products sold, competition, the mix of distribution channels through which
the Company's products are sold and general economic conditions. Many of such
factors are beyond the Company's control.

The Company typically operates with a relatively small order backlog. As a
result, quarterly sales and operating results depend in large part on the volume
and timing of orders received within the quarter, which are difficult to
forecast. A significant portion of the Company's expense levels is fixed in
advance, based in large part on the Company's forecasts of future revenue. If
revenue is below expectations in any given quarter, the adverse impact of the
shortfall on the Company's operating results may be magnified by the Company's
inability to adjust spending to compensate for the shortfall. Therefore, a
shortfall in actual revenue as compared to estimated revenue could have a
material adverse effect on the Company's business and results of operations.

A substantial majority of the Company's net revenue results from the sale
of products to distributors and original equipment manufacturers ("OEMs"), which
sales are difficult to predict and may have lower margins than sales through
other channels. Sales through such channels may contribute to increased
fluctuations in operating results. A significant portion of the Company's
revenue in any quarter is typically derived from sales to a limited number of
distributors. Any significant deferral of purchases of the Company's products by
its distributors could have a material adverse effect on the Company's business
and results of operations in any particular period.

The Company has experienced some degree of seasonality of net revenue, and
the Company expects to continue to experience seasonality in the future. Net
revenue in the first fiscal quarter typically is lower than net revenue in the
fourth fiscal quarter, reflecting lower sales in Europe and certain other
regions in the summer months when business activities are reduced.

As a result of the foregoing factors, the Company's operating results may
be subject to significant volatility. It is likely that in a future period the
Company will fail to achieve anticipated operating results. Any shortfall in net
revenue, gross margin or net income from levels expected by securities analysts
in any period could have an immediate and significant adverse effect on the
trading price of the Company's Common Stock.

Dependence on Recently Introduced Products. The Company's future results of
operations will be highly dependent upon the success of recently introduced
products, including the ExtendNet VPN, the ExtendNet IAS, the Advantage Internet
Server and the port replicators. Newly introduced products are subject to a
number of risks, including failure to achieve market acceptance and poor product
performance. The Company is unable to predict with any degree of certainty the
rate of market acceptance of these newly introduced products. No assurance can
be given that any of such products will not require additional development work,
enhancement, testing or refinement before they achieve market acceptance. If
such new and recently introduced products have performance, reliability, quality
or other shortcomings, then such products could fail

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to achieve market acceptance and the Company may experience reduced orders,
higher manufacturing costs, delays in collecting accounts receivable and
additional warranty and service expenses, which in each case could have a
material adverse effect on the Company's business and results of operations.

Risks Associated With New and Evolving Markets. The markets for distributed
and mobile network connectivity products are still emerging, and there can be no
assurance that they will continue to grow or that, even if the markets grow, the
Company's products that address these markets will be successful. The Company's
success in generating significant revenue in these evolving markets will depend
upon, among other things, its ability to demonstrate the benefits of its
technology to potential distributors, OEMs and end users, to maintain and
enhance its relationships with leading distributors and to expand successfully
its distribution channels. The success of the ExtendNet VPN and ExtendNet IAS
products will rely, to a large degree, on the increased use of the Internet by
businesses as replacements for, or enhancements to, their private networks.
There can be no assurance that businesses will develop sufficient confidence in
the Internet to deploy the Company's products to a significant degree. The
inability of the Company to continue to penetrate the existing markets for
distributed and mobile network connectivity products or the failure of current
markets to grow or new markets to develop or be receptive to the Company's
products could have a material adverse effect on the Company's business and
results of operations. The emergence of markets for the Company's products will
be affected by a number of factors beyond the Company's control. For example,
the Company's products are designed to conform to certain standard infrared and
networking specifications. There can be no assurance that these specifications
will be widely adopted or that competing specifications will not emerge which
will be preferred by the Company's customers. In addition, there can be no
assurance that infrared technology itself will be adopted as the standard or
preferred technology for wireless connectivity or that manufacturers of personal
computers will elect to bundle the infrared technology in their products. The
emergence of markets for the Company's products is critically dependent upon
continued expansion of the market for mobile computing devices and the timely
introduction and successful marketing and sale of mobile computing products such
as notebook computers and personal digital assistants, of which there can be no
assurance.

Product Concentration. In fiscal 1997 and the first six months of fiscal
1998, 64% and 54%, respectively, of the Company's net revenue was derived from
sales of ExtendNet print servers. The Company believes that this product line
will continue to account for a significant portion of the Company's net revenue
and gross profit. The Company expects that its gross margin on sales of
ExtendNet print servers will decline as a result of a shift in product mix
toward lower priced print servers and competitive pricing pressures. The
Company's future operating results, particularly in the near term, are dependent
upon the continued market acceptance of ExtendNet print servers. There can be no
assurance that ExtendNet print servers will continue to meet with market
acceptance or that the Company will be successful in developing, introducing or
marketing new or enhanced products. A decline in the demand for ExtendNet print
servers, as a result of competition, technological change or other factors, or
the failure to successfully develop, introduce or market new or enhanced
products could have a material adverse effect on the Company's business and
results of operations. The life cycle of ExtendNet print servers is difficult to
estimate because of, among other factors, the presence of strong competitors in
the market and the likelihood of future competition.

Reliance on Distribution Channels. The Company sells its products,
domestically and internationally, primarily to distributors and resellers, and
to a lesser extent to OEM customers. The Company's success depends on the
continued sales efforts of its network of distributors and resellers. The
Company's key distributors include Ingram Micro Inc. ("Ingram Micro") and Tech
Data Corporation ("Tech Data"). In fiscal 1997, sales to Ingram Micro accounted
for 19% of the Company's net revenue. In the first six months of fiscal 1998,
sales to Ingram Micro accounted for 24% of the Company's net revenue and sales
to Tech Data accounted for 13% of the Company's net revenue. The loss of, or
reduction in sales to, any of the Company's key customers could have a material
adverse affect on the Company's business and results of operations.

The Company provides most of its distributors and resellers with limited
product return rights for stock rotation. There can be no assurance that the
Company will not experience significant returns in the future or that it will
have made adequate allowances to offset such returns. The Company also provides
most of its distributors and resellers with price protection rights. Price
protection rights require that the Company grant retroactive price adjustments
for inventories of the Company's products held by distributors or resellers if
the

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<PAGE> 9

Company lowers its prices for such products. The short life cycles of the
Company's products and the difficulty in predicting future sales increase the
risk that new product introductions, price reductions by the Company or its
competitors or other factors affecting the markets in which the Company competes
could result in significant product returns. In addition, new product
introductions by competitors or other market factors could require the Company
to reduce prices in a manner or at a time which has a material adverse impact
upon the Company's business and results of operations.

The Company intends to continue to enhance and diversify its international
and domestic distribution channels. None of the Company's distributors or OEMs
is obligated to purchase the Company's products except pursuant to current
purchase orders. The Company's ability to achieve future revenue growth will
depend in large part on its success in recruiting and training sufficient sales
personnel, distributors, value added resellers ("VARs") and OEM customers.
Certain of the Company's existing distributors currently distribute, or may in
the future distribute, the product lines of the Company's competitors. There can
be no assurance that the Company will be able to attract, train and retain a
sufficient number of its existing or future third-party distributors or direct
sales personnel, that such third-party distributors will recommend, or continue
to recommend, the Company's products or that the Company's distributors will
devote sufficient resources to market and provide the necessary customer support
for such products. The Company's OEM customers may in the future incorporate
competing products into their systems or internally develop competing solutions.
In the event that the Company's OEM customers reduce their purchases of the
Company's products, the Company's future growth would be adversely affected. All
of these factors could have a material adverse effect on the Company's business
and results of operations.

Competition. The markets for the Company's products are intensely
competitive, and are characterized by frequent new product introductions,
rapidly changing technology and standards, constant price pressure and
competition for distribution channels. The principal competitive factors in the
Company's markets include product performance, reliability, price, breadth of
product line, sales and distribution capability and technical support and
service. Certain of these factors are outside the Company's control. There can
be no assurance that the Company will be able to compete successfully in the
future with respect to these or any other competitive factors or that
competition will not have a material adverse effect on the Company's business
and results of operations.

The Company's principal competitors in the market for print servers include
Hewlett-Packard Company ("Hewlett-Packard"), Intel Corporation, Lexmark
International, Inc. and Emulex Corporation. In the market for infrared mobile
computing products, the Company's competitors include a number of companies
which have hardware or software solutions. As the market for infrared
connectivity matures, the Company may face increased competition from the major
PC manufacturers, who may choose to develop infrared solutions for use with
their own products. The Company currently faces limited direct competition from
major applications and operating systems software vendors who may choose to
incorporate infrared connectivity functionality into their software, thereby
potentially reducing the need for OEMs to include the Company's products in
their notebook and desktop PCs. The Company's ExtendNet IAS product currently
competes with the product offerings of Bay Networks, Inc., as well as those of a
number of smaller companies. The Company's ExtendNet VPN product currently
competes with software-based solutions offered by Microsoft Corporation and
others. As the market for these distributed connectivity products matures, the
Company expects to face direct competition from other large computer networking
companies. The Company's Advantage Database Server product currently competes
with low-end database products from companies such as Microsoft Corporation and
Oracle Corporation, in addition to smaller competitors offering data management
software. The Company faces indirect competition from existing and potential
customers that provide internally developed solutions. As a result, the Company
must demonstrate to prospective customers the advantages of the Company's
products over internally developed solutions.

In addition to direct competition, the Company's products face competition
from alternative technological solutions. For example, the Company's IrDA mobile
computing products face indirect competition from alternatives such as radio
frequency connectivity and non-IrDA infrared solutions. The Company's ExtendNet
VPN products face indirect competition from the major computer networking
companies which provide extended Ethernet solutions for wide area and local area
networks.

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Many of the companies with which the Company competes or may in the future
compete, including the internal development groups of its current and potential
customers, have substantially greater financial, marketing, technical, sales and
support resources and may have more brand name recognition than the Company. The
Company expects that, in order to remain competitive, it may have to decrease
its sales prices on certain products, which could materially and adversely
affect the Company's business and results of operations. There can be no
assurance that the Company will be able to compete effectively in the future.

Risks of International Sales and Operations. The Company derives a
substantial portion of its net revenue from international sales, principally
through its international sales subsidiaries and a limited number of
distributors. In fiscal 1996, fiscal 1997 and the first six months of fiscal
1998, international sales represented 38%, 44% and 41%, respectively, of net
revenue and the Company expects that international sales will continue to
represent a substantial portion of its net revenue for the foreseeable future.
If any significant international distributor were to cease purchasing products
or were to significantly reduce its orders from the Company for any reason, the
Company's business and operating results could be materially and adversely
affected. International sales are subject to a number of risks, including
changes in foreign government regulations, export license requirements, tariffs
and taxes, other trade barriers, fluctuations in currency exchange rates,
difficulty in collecting accounts receivable, difficulty in staffing and
managing foreign operations and political and economic instability.

A substantial portion of the Company's international sales are typically
denominated in U.S. dollars. As a result, fluctuations in currency exchange
rates could cause the Company's products to become relatively more expensive to
customers in a particular country, leading to a reduction in sales or
profitability in that country. The Company operates sales subsidiaries in
France, Germany and the United Kingdom. The sales made through these
subsidiaries are primarily denominated in local currencies. Accordingly, the
Company's international operations impose a risk upon its business as a result
of exchange rate fluctuations. There can be no assurance that exchange rate
fluctuations will not have a material adverse effect on the Company's business
and results of operations. Payment cycles for international customers are
typically longer than those for customers in the United States. There can be no
assurance that foreign markets will continue to develop or that the Company will
receive additional orders to supply its products for use in foreign markets.

Risks Associated With New Product Development. The markets for the
Company's products are characterized by rapidly changing technologies, evolving
industry standards, frequent new product introductions and short product life
cycles. The Company's future success will depend to a substantial degree upon
its ability to enhance its existing products and to develop and introduce, on a
timely and cost-effective basis, new products and features that meet changing
customer requirements and emerging and evolving industry standards. The Company
budgets research and development expenses based on planned product introductions
and enhancements; however, actual expenses may significantly differ from budget.
The product development process involves a number of risks. The development of
new, technologically advanced hardware and software 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 the Company to manage the transition from older
products in order to minimize disruption in customer ordering patterns, to avoid
excessive levels of older product inventories and to ensure that adequate
supplies of new products can be delivered to meet customer demand. There can be
no assurance that the Company will successfully develop, introduce or manage the
transition to new products. The Company has in the past experienced, and is
likely in the future to experience, delays in the introduction of new products,
due to factors internal and external to the Company. Any future delays in the
introduction or shipment of new or enhanced products, the inability of such
products to achieve market acceptance or problems associated with new product
transitions could adversely affect the Company's business and results of
operations.

Risks Associated With Third-Party Manufacturers and Suppliers. The
Company's future success will depend, in significant part, on its ability to
continue to have third parties manufacture its products successfully,
cost-effectively and in sufficient volumes to meet customer demand. The Company
maintains a limited in-house manufacturing capability for performing materials
procurement, final assembly, testing, quality assurance and shipping. The
Company relies primarily on independent subcontractors to manufacture its
products, and the Company intends to increase its reliance upon third-party
manufacturers in the future.

9
<PAGE> 11

Certain of the Company's products are manufactured in their entirety by third
parties. For example, the ExtendNet IAS is manufactured by Apexx Technology,
Inc. In addition, the Company's port replicator and in-air and in-car charger
products are manufactured by Mobility Electronics. The reliance on third-party
manufacturers involves a number of risks, including the potential inability to
obtain an adequate supply of products and reduced control over delivery
schedules, product quality and product cost. In addition, from time to time the
Company has agreed with certain suppliers that the Company will purchase certain
components exclusively from such suppliers. Because the manufacturing of the
Company's products can involve long lead times, in the event of unanticipated
increases in demand for the Company's products, the Company could be unable to
manufacture certain products in a quantity sufficient to meet its customers'
demands. The Company also relies on third party suppliers for components used in
its products. Certain of the components used in the Company's products,
including certain semiconductor components and infrared transmission components,
are currently available from a limited number of suppliers. Any inability to
obtain adequate deliveries or other circumstances that would require the Company
to seek alternative manufacturers could affect the Company's ability to ship its
products on a timely basis, which could damage relationships with current and
prospective customers and end users and could therefore have a material adverse
affect on the Company's business and results of operations.

Dependence on Licensed Technology. The Company licenses technology on a
non-exclusive basis from several companies for use with its products and
anticipates that it will continue to do so in the future. The inability of the
Company to continue to license this technology or to license other necessary
technology for use with its products, or substantial increases in royalty
payments pursuant to third-party licenses, could have a material adverse effect
on the Company's business and results of operations. In addition, the effective
implementation of the Company's products depends upon the successful operation
of this licensed software in conjunction with the Company's products, and
therefore any undetected errors in products resulting from such software may
prevent the implementation or impair the functionality of the Company's
products, delay new product introductions and injure the Company's reputation.
Such problems could have a material adverse effect on the Company's business and
results of operations.

Product Errors; Product Liability. Software and hardware products as
complex as those offered by the Company typically contain undetected errors when
first introduced or as new versions are released. Testing of the Company's
products is particularly challenging because it is difficult to simulate the
wide variety of computing environments in which the Company's customers may
deploy these products. Accordingly, there can be no assurance that, despite
testing by the Company and by current and potential customers, errors will not
be found after commencement of commercial shipments. Any such errors, or "bugs,"
could result in dissatisfied customers and the loss of or delay in market
acceptance of the new product, any of which could have a material adverse effect
upon the Company's business and results of operations. Although to date the
Company has not experienced any product liability claims, there can be no
assurance that the Company will not face product liability claims in the future.
A successful product liability claim brought against the Company could have a
material adverse effect upon the Company's business and results of operations.

Management of Growth. Any future growth experienced by the Company is
likely to place a significant strain on the Company's administrative,
operational and financial resources and to increase demands on the Company's
systems and controls. Future growth may also result in an increase in the scope
of responsibility for management personnel. The Company anticipates that growth
and expansion will require it to recruit, hire, train and retain a substantial
number of new engineering, executive, sales and marketing personnel. As is the
case with many technology companies, in the current employment environment the
Company has experienced difficulty in recruiting qualified personnel, and
continued difficulty in this regard could limit the Company's ability to grow.
In order to manage its growth successfully, the Company will continue to expand
and improve its operational, management and financial systems and controls.
There can be no assurance that the Company will successfully implement such
systems and controls on a timely basis. If the Company's management is unable to
manage growth effectively, the Company's business and results of operations
could be materially adversely affected.

Risks Associated With Acquisitions by the Company. In April 1997, the
Company acquired Counterpoint Systems Foundry, Inc. ("Counterpoint"), a provider
of advanced infrared connectivity software. As part

10
<PAGE> 12

of its growth strategy, the Company intends to pursue the acquisition of other
companies that either complement or expand its existing business. The Company is
continually evaluating potential acquisition opportunities, which may be
material in size and scope. Acquisitions involve a number of risks and
difficulties, including the expansion into new markets and business areas, the
diversion of management's attention to the assimilation of the operations and
personnel of the acquired companies, the integration of the acquired companies'
management information systems with those of the Company, potential adverse
short-term effects on the Company's operating results, the amortization of
acquired intangible assets and the need to present a unified corporate image. In
addition, acquisitions could result in the need to expend substantial amounts of
cash. While the Company believes that the net proceeds of this offering,
together with existing liquidity sources and funds generated from operations,
will provide the Company with sufficient funds to finance its operations for at
least the next twelve months, to the extent that such funds are insufficient to
fund the Company's activities, including any potential acquisitions, the Company
may need to raise additional funds through public or private equity or debt
financing or from other sources. The sale of additional equity or convertible
debt may result in additional dilution to the Company's stockholders and such
securities may have rights, preferences or privileges senior to those of the
Common Stock. There can be no assurance that additional equity or debt financing
will be available or that, if available, it can be obtained on terms favorable
to the Company or its stockholders.

There can be no assurance that the Company will be successful in
identifying acquisition candidates, that the Company will have adequate
resources to consummate any acquisition, that any acquisition by the Company
will or will not occur, that if any acquisition does occur it will not have a
material adverse effect on the Company's business and results of operations or
that any such acquisition will be successful in enhancing the Company's
business.

Proprietary Rights and Risks of Infringement. The Company relies on a
combination of patent, copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
intellectual property rights. The Company seeks to protect its software,
documentation and other written materials under trade secret and copyright laws,
which afford only limited protection. The Company currently has three issued
United States patents that expire in 2006 and beyond and has five patent
applications pending. The Company has registered nine trademarks in the United
States, including "JetEye" and "ExtendNet." The Company's future success is
dependent in part upon its proprietary technology. There can be no assurance
that any patent, trademark or copyright owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder will
provide competitive advantages to the Company or that any of the Company's
pending or future patent applications will be issued with the scope of the
claims sought by the Company, if at all. Further, there can be no assurance that
others will not develop technologies that are similar or superior to the
Company's technology, duplicate the Company's technology or design around the
patents owned by the Company. Effective intellectual property protection may be
unavailable or limited in certain foreign countries. There can be no assurance
that the steps taken by the Company will prevent misappropriation of its
technology by foreign companies.

The Company has entered into source code and design document escrow
agreements with a limited number of its customers requiring release of design
details in certain circumstances. Such agreements generally provide that such
parties will have a limited, non-exclusive right to use such code in the event
that there is a bankruptcy proceeding by or against the Company, if the Company
ceases to do business or if the Company fails to meet its support obligations.
The Company also provides its source code to foreign language translation
service providers and consultants to the Company in limited circumstances. The
provision of source code to third parties may increase the likelihood of
misappropriation.

As is common in its industry, the Company has from time to time received
notification from other companies of intellectual property rights held by those
companies upon which the Company's products may infringe. If the Company were
found to be infringing on the intellectual property rights of any third party,
the Company could be subject to liabilities for such infringement, which could
be material. As a result, the Company could be required to seek licenses from
other companies or to refrain from using, manufacturing or selling certain
products or using certain processes. Although holders of patents and other
intellectual property rights often offer licenses to their patent or other
intellectual property rights, no assurance can be given that

11
<PAGE> 13

licenses would be offered, that the terms of any offered license would be
acceptable to the Company or that the failure to obtain a license would not
adversely affect the Company's business and results of operations.

In order to protect its proprietary rights, the Company may in the future
initiate proceedings against third parties. Any litigation, whether brought by
or against the Company, could result in the incurrence of significant expenses
by the Company. In addition, any such litigation could result in a diversion of
management's time and efforts. A claim by the Company against a third party
could prompt a counterclaim by the third party against the Company, which could
have an adverse effect on the Company's intellectual property rights. Any of the
foregoing could result in a material adverse effect on the Company's business
and results of operations.

Rescission Offer. Approximately thirty days after the effectiveness of this
Offering, the Company intends to commence a rescission offer (the "Rescission
Offer") pursuant to a registration statement filed under the Securities Act of
1933, as amended (the "Securities Act") and pursuant to the securities laws of
the states of Idaho, California, Montana and New York, covering shares of Common
Stock which may have been sold in violation of the registration requirements of
applicable federal and state securities law, which represented an aggregate of
175,531 shares as of December 31, 1997 (the "Rescission Stock"). Because of the
frequency and number of sales, including the number of persons who received
offers and who purchased shares, the private placement exemption under the
Securities Act may not have been available for the Company's prior sales of the
Rescission Stock. The Company will offer to rescind such prior sales by
repurchasing the Rescission Stock at the price per share paid therefor (a range
of $0.15 per share to $8.76 per share) plus interest thereon at various
statutory rates in effect for the applicable states from the date of purchase by
each purchaser to the expiration of the Rescission Offer. The Rescission Offer
will expire approximately thirty days after the effectiveness of the
registration statement with respect to the Rescission Stock. If all offerees
accept the Rescission Offer, the Company would be required to make an aggregate
payment of approximately $388,000 plus interest of $45,000 as of December 31,
1997. Offerees who do not accept the Rescission Offer will, for purposes of
applicable federal and state securities laws, be deemed to hold registered
shares under the Securities Act which will be freely tradeable in the public
market as of the effective date of the registration statement with respect to
the Rescission Stock, subject to any lockup agreements entered into by such
stockholders. The Securities Act does not expressly provide that a Rescission
Offer will terminate a purchaser's right to rescind a sale of stock which was
not registered under the Securities Act as required. However, federal law does
provide that a stockholder may lose any rescission rights under federal
securities laws one year from the date of purchase of such stockholders shares.
Accordingly, should the Rescission Offer be rejected by any or all offerees, the
Company may continue to have contingent liability under the Securities Act for
the purchase price of Rescission Stock up to an aggregate amount of
approximately $128,000.

As of the date hereof, the Company is not aware of any claims for
rescission against the Company. While the Company will offer to rescind the
sales of the Rescission Stock, there can be no assurance that the Company will
not otherwise be subject to possible penalties or fines relating to these
issuances. The Company believes that the Rescission Offer will provide it with
additional meritorious defenses to any such future claims. See "Rescission
Offer," "Shares Eligible for Future Sale" and Note 13 of Notes to Consolidated
Financial Statements.

Shares Eligible For Future Sale. Sales of substantial amounts of Common
Stock in the public market after the Offering could adversely affect the
prevailing market price of the Common Stock. In addition to the 1,550,000 shares
of Common Stock offered hereby (assuming no exercise of the Underwriters'
over-allotment option), as of the date of this Prospectus (the "Effective
Date"), there will be approximately 6,623,855 shares of Common Stock
outstanding, all of which are "restricted" shares (the "Restricted Shares")
under the Securities Act. Of the Restricted Shares, the holders of 5,735,053
shares have agreed that they will not, directly or indirectly, sell such shares
for a period of 180 days following the date of this Prospectus. Approximately
467,338 Restricted Shares are immediately available for sale in the public
market upon the date of this Prospectus without restriction. Beginning 90 days
after the Effective Date, 53,467 Restricted Shares will be available for sale in
the public market, subject to certain volume and other resale restrictions
pursuant to Rule 144. Beginning 180 days after the Effective Date, approximately
5,306,144 shares will first become eligible for sale in the public market
pursuant to Rule 144 promulgated under the Securities Act.

12
<PAGE> 14

Approximately 515,635 of the remaining Restricted Shares will become eligible
for sale at various times after 180 days after the Effective Date pursuant to
Rule 144. In addition, an aggregate of approximately 1,546,915 shares issuable
upon the exercise of stock options will first become eligible for sale in the
public market upon the expiration of lock-up agreements with the Company 180
days following the Effective Date and pursuant to a registration statement on
Form S-8, which the Company intends to file with the Securities and Exchange
Commission following the Effective Date. See "Shares Eligible for Future Sale."

Year 2000 Compliance. Many currently installed computer systems and
software products are coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements. Although the Company
believes that its products and internal systems are Year 2000 compliant, the
Company believes that the purchasing patterns of customers and potential
customers may be affected by Year 2000 issues as companies expend significant
resources to upgrade their current software systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
such as those offered by the Company, which could have a material adverse effect
on the Company's business and results of operations.

Dependence on Key Personnel. The Company's future success will depend to a
significant degree upon the continuing contributions of its key management,
engineering, sales and marketing personnel. The Company does not maintain any
key person life insurance policies. The loss of key management or technical
personnel could adversely affect the Company. The Company believes that its
future success will depend in large part upon its ability to attract and retain
highly-skilled management, engineering, sales and marketing personnel. In
particular, the Company is currently attempting to recruit new engineering
personnel; however, there can be no assurance that the Company will be
successful at hiring or retaining these personnel. Failure to recruit, hire,
train and retain key personnel would limit future growth and could have a
material adverse effect on the Company's business and results of operations. See
"Business -- Employees" and "Management."

Control by Officers, Directors and Principal Stockholders. Upon completion
of this Offering, the Company's executive officers, directors and principal
stockholders will beneficially own in the aggregate approximately 32.3% of the
issued and outstanding shares of Common Stock. Accordingly, such stockholders
will have sufficient voting power to substantially affect the outcome of all
matters (including the election of directors and any merger, consolidation or
sale of all or substantially all of the Company's assets) submitted to the
stockholders for approval. This may have the effect of making certain
transactions more difficult or impossible, absent the support of such
stockholders. Such transactions could include a proxy contest, mergers involving
the Company, tender offers and open market purchase programs involving Common
Stock that could give stockholders of the Company the opportunity to realize a
premium over the then prevailing market price for their shares of Common Stock.
See "Principal and Selling Stockholders" and "Description of Capital Stock."

Anti-Takeover Effects of Charter Provisions and Delaware Law. The Company's
Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock, $0.001 par value per share (the "Preferred Stock") and to
determine the price, rights, preferences and privileges of those shares without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. While the Company has no present intention to issue shares of Preferred
Stock, such issuance, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. In addition, the Company is subject to
the anti-takeover provisions of Section 203 of the Delaware General Corporation
Law, which prohibits the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. The Company's Restated Certificate of Incorporation (the
"Certificate of Incorporation") divides the Company's Board of Directors into
three classes, each serving a staggered three-year term, and does not permit
action by written consent of the stockholders or cumulative voting. These
provisions and other

13
<PAGE> 15

provisions of the Certificate of Incorporation and the Company's Restated Bylaws
(the "Bylaws") may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then current market prices.

No Prior Market; Liquidity; Stock Price Volatility. Prior to the Offering,
there has been no public market for the Company's Common Stock. Consequently,
the initial public offering price was determined by negotiations between the
Company, the Selling Stockholders and the representatives of the Underwriters.
There can be no assurance that an active public market for the Common Stock will
develop or be sustained after the Offering, that the market price of the Common
Stock will develop or be sustained after the Offering or that the market price
of Common Stock will not decline below the initial public offering price. The
trading price of the Company's Common Stock could be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
announcements of technological innovations or new products by the Company or its
competitors, general conditions in the computer industry, changes in earnings
estimates or recommendations by analysts, or other events or factors. In
addition, the public stock markets have experienced extreme price and trading
volume volatility in recent months. This volatility has significantly affected
the market prices of securities of many technology companies for reasons that
may be unrelated to the operating performance of the specific companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Underwriting."

Benefits of the Offering to Current Stockholders. The Offering is expected
to create a public market for the Company's Common Stock which may result in a
substantial increase in the market value of the initial investments of certain
of the Company's management and existing stockholders. The existing stockholders
of the Company hold 6,873,855 shares of the Company's Common Stock. Based on the
initial public offering price of $8.00 per share, the value of the shares held
by the existing stockholders following the Offering will be approximately $55.0
million, representing an aggregate increase of approximately $44.1 million over
the amount paid for such shares by the existing stockholders. The Company's
officers, directors and persons or entities known by the Company to own
beneficially 5% or more of the Company's outstanding Common Stock collectively
own 5,113,303 shares of the Company's Common Stock prior to the offering. Based
upon the initial public offering price of $8.00 per share, the value of the
shares held by these stockholders will be approximately $40.9 million. Certain
of the Company's officers and directors are Selling Stockholders in the
Offering. The Company's Vice President of Corporate Research and Development and
Business Development is selling 6,273 shares in the offering and the Chief
Engineer is selling 13,593 shares in the offering. See "Principal and Selling
Stockholders."

Management Discretion Over Proceeds of the Offering. The Company currently
has no specific plan for a significant portion of the net proceeds of the
Offering. As a consequence, the Company's management will have broad discretion
to allocate a large percentage of the Offering to uses which potential investors
may not deem desirable. There can be no assurance that the net proceeds can or
will be invested to yield significant return. See "Use of Proceeds."

Dilution. Purchasers of the Common Stock offered hereby will suffer
immediate and substantial dilution in the net tangible book value of the Common
Stock from the initial public offering price. To the extent that outstanding
options to purchase the Company's Common Stock are exercised or promissory notes
are converted into Common Stock, there could be further dilution. See
"Dilution."

14
<PAGE> 16

USE OF PROCEEDS

The net proceeds from the sale of the 1,300,000 shares of Common Stock
offered by the Company hereby are estimated to be $8.9 million, based upon the
public offering price of $8.00 per share and after deducting the underwriting
discount and estimated offering expenses. The Company will not receive any
proceeds from the sale of the shares by the Selling Stockholders.

The principal purposes of this offering are to create a public market for
the Company's Common Stock and to facilitate the Company's future access to
public equity markets. The Company expects to use the net proceeds of this
offering for working capital and general corporate purposes. A portion of the
net proceeds of the offering may also be used to acquire or invest in companies
with complementary products, technologies or distribution capability. However,
there are no current agreements or negotiations with respect to any acquisition,
investment or other transaction. See "Risk Factors -- Management Discretion Over
Proceeds of the Offering."

DIVIDEND POLICY

The Company has not declared or paid cash dividends on its stock since
September 30, 1994. The Company currently anticipates that it will retain all
future earnings for use in the operation and expansion of its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's outstanding convertible promissory notes limit the Company's
ability to pay cash dividends.

15
<PAGE> 17

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
December 31, 1997, (i) on an actual basis, (ii) on a pro forma basis after
giving effect to the amendment of the Company's Certificate of Incorporation to
increase the authorized Common Stock to 75,000,000 shares, to change the par
value of the Common Stock to $0.001 per share and to authorize an undesignated
Preferred Stock and (iii) on an adjusted basis to reflect the sale of 1,300,000
shares of Common Stock offered by the Company hereby (at the initial public
offering price of $8.00 per share and after deducting the underwriting discount
and estimated offering expenses) and the application of the estimated net
proceeds therefrom. The information set forth below should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------
AS
ACTUAL PRO FORMA ADJUSTED
------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt.............................................. $ 7,489 $ 7,489 $ 7,489
------- ------- -------
Stockholders' equity:
Preferred Stock, par value $0.001 per share:
Authorized: no shares actual and 5,000,000 shares pro
forma and as adjusted; issued and outstanding: no
shares actual, pro forma or as adjusted................ -- -- --
Common Stock, par value $0.10 per share actual, $0.001 per
share pro forma and as adjusted:
Authorized: 13,333,333 shares actual and 75,000,000 shares
pro forma and as adjusted; issued: 6,874,872 shares
actual, 6,874,872 shares pro forma and 8,174,872 shares
as adjusted............................................ 687 7 8
Additional paid-in capital.................................. 1,335 2,015 10,956
Retained earnings........................................... 15,084 15,084 15,084
Treasury stock, 1,017 shares, at cost, actual, pro forma and
as adjusted............................................... (12) (12) (12)
Deferred compensation....................................... (1,374) (1,374) (1,374)
Cumulative translation adjustment........................... (264) (264) (264)
Incentive stock option plan receivables..................... (28) (28) (28)
------- ------- -------
Total stockholders' equity................................ 15,428 15,428 24,370
------- ------- -------
Total capitalization................................... $22,917 $22,917 $41,859
======= ======= =======
</TABLE>

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

(1) Excludes 2,509,066 shares issuable upon exercise of stock options
outstanding as of December 31, 1997 with a weighted average exercise price
of $7.82 per share, 2,550,000 shares of Common Stock reserved for future
issuance under the Company's stock option, director option and stock
purchase plans and 557,787 shares of Common Stock issuable upon conversion
of promissory notes. See "Management -- Stock Plans," "Description of
Capital Stock" and Note 8 of Notes to Consolidated Financial Statements.

16
<PAGE> 18

DILUTION

The net tangible book value of the Company as of December 31, 1997 was
approximately $15.4 million, or $2.23 per share of Common Stock. The net
tangible book value per share represents the amount of total tangible assets of
the Company less total liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to the sale and issuance of 1,300,000
shares offered by the Company hereby and after deducting the underwriting
discount and estimated offering expenses payable by the Company, the Company's
pro forma net tangible book value as of December 31, 1997 would have been
approximately $24.3 million, or $2.97 per share of Common Stock. This represents
an immediate and substantial dilution to new investors purchasing shares in this
Offering.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $ 8.00
Net tangible book value per share before this offering.... $2.23
Increase in net tangible value attributable to new
investors.............................................. 0.74
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.97
------
Dilution per share to new investors......................... $ 5.03
======
</TABLE>

The following table summarizes, on a pro forma basis as of December 31,
1997, the differences in the total consideration paid and the average price per
share paid by the Company's existing stockholders and the new investors with
respect to the 1,300,000 shares of Common Stock to be sold by the Company. The
calculations in this table with respect to shares of Common Stock to be
purchased by new investors in this offering reflect the initial public offering
price of $8.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................ 6,873,855 84.1% $10,887,220 51.1% $ 1.58
New investors........................ 1,300,000 15.9 10,400,000 48.9 $ 8.00
---------- ------ ----------- ------
Total.............................. 8,173,855 100.0% $21,287,220 100.0%
========== ====== =========== ======
</TABLE>

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

(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 6,623,855, or 81.0%, (6,391,355, or
78.2% if the Underwriters' over-allotment is exercised in full), and will
increase the number of shares held by new investors to 1,550,000, or 19.0%
(1,782,500, or 21.8% if the Underwriters' overallotment is exercised in
full), of the total number of shares of Common Stock outstanding after this
offering. See "Principal and Selling Stockholders."

The foregoing computations exclude (i) 2,509,066 shares of Common Stock
issuable upon the exercise of stock options outstanding as of December 31, 1997
with a weighted-average exercise price of $7.82 per share, (ii) 1,600,000 shares
of Common Stock reserved for future issuance under the 1998 Stock Plan, (iii)
250,000 shares of Common Stock reserved for future issuance pursuant to the 1998
Director Option Plan, (iv) 700,000 shares of Common Stock reserved for future
issuance pursuant to the 1998 Employee Stock Purchase Plan and (v) 557,787
shares of Common Stock issuable upon the conversion of promissory notes. See
"Management -- Director Compensation," "Management -- Stock Plans," "Principal
and Selling Stockholders" and "Description of Capital Stock."

17
<PAGE> 19

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and related
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this Prospectus. The
consolidated statement of operations data for each of the three years in the
period ended June 30, 1997 and the consolidated balance sheet data as of June
30, 1997 and 1996 are derived from consolidated financial statements of the
Company that have been audited by Coopers & Lybrand L.L.P., independent
accountants, and are included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended June 30, 1993 and 1994 and the
consolidated balance sheet data as of June 30, 1993, 1994 and 1995 are derived
from audited consolidated financial statements not included herein. The
consolidated statements of operations data for the six months ended December 31,
1996 and 1997 and the consolidated balance sheet data as of December 31, 1997
are derived from unaudited consolidated financial statements of the Company that
include all adjustments consisting of normal recurring accruals, which the
Company considers necessary for a fair presentation of the results of operations
for the period. Operating results for the six months ended December 31, 1997 are
not necessarily indicative of the results that may be expected for the year
ending June 30, 1998 or any future period.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenue............................... $23,104 $29,607 $28,588 $34,670 $39,535 $18,558 $23,283
Cost of net revenue....................... 8,795 11,798 11,901 14,829 15,287 7,247 9,391
------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 14,309 17,809 16,687 19,841 24,248 11,311 13,892
Operating expenses:
Research and development................ 3,773 3,392 3,701 4,362 5,259 2,395 3,096
Marketing and sales..................... 4,393 4,571 7,114 9,007 10,802 4,938 6,647
General and administrative.............. 1,491 2,446 2,416 2,273 2,879 1,362 1,506
------- ------- ------- ------- ------- ------- -------
Income from operations................ 4,652 7,400 3,456 4,199 5,308 2,616 2,643
Other expense, net........................ 599 88 90 198 494 212 136
Interest expense.......................... 365 502 535 558 629 305 345
------- ------- ------- ------- ------- ------- -------
Income before income taxes................ 3,688 6,810 2,831 3,443 4,185 2,099 2,162
Provision for income taxes................ 1,494 2,520 1,033 1,164 1,509 757 768
------- ------- ------- ------- ------- ------- -------
Net income............................ $ 2,194 $ 4,290 $ 1,798 $ 2,279 $ 2,676 $ 1,342 $ 1,394
======= ======= ======= ======= ======= ======= =======
Earnings per share:
Basic................................... $ 0.34 $ 0.67 $ 0.28 $ 0.33 $ 0.39 $ 0.20 $ 0.20
Diluted................................. 0.30 0.61 0.26 0.32 0.38 0.19 0.19
Number of shares used in earnings per
share calculation(1):
Basic................................... 6,472 6,433 6,368 6,826 6,870 6,869 6,864
Diluted................................. 7,399 7,464 6,867 7,029 7,133 7,099 7,156
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
----------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 2,210 $ 3,490 $ 2,854 $ 5,729 $ 6,621 $ 6,301
Working capital............................ 5,845 8,845 8,571 11,433 13,627 14,482
Total assets............................... 14,144 17,370 17,527 21,338 25,677 26,998
Long-term debt............................. 4,786 5,200 5,654 6,151 7,210 7,489
Total stockholders' equity................. 6,516 8,932 9,222 11,522 14,025 15,428
</TABLE>

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

(1) See Notes 1 and 9 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of shares used to compute
earnings per share.

18
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of a
number of factors, including those set forth in "Risk Factors" and elsewhere in
this Prospectus.

OVERVIEW

The Company provides distributed and mobile computing solutions that
address the needs of the virtual enterprise. The Company's distributed
connectivity products include a virtual private networking server, an Internet
access server, network print servers and a database management system with
remote access capabilities. The Company's mobile systems products include
IrDA-compliant wireless connectivity products, infrared software and port
replicators that connect portable computers to desktop peripherals and the
network.

The Company was founded in 1984. Its initial products consisted of
intelligent printer sharing devices that allowed PC users to share printers
before local area networks were widely used. In 1991, the Company began
introducing a series of products that addressed the distributed and mobile
computing needs of businesses. These products included the ExtendNet line of
print servers and the JetEye infrared wireless connectivity adapter. In 1993,
the Company further expanded its product offerings by introducing the Advantage
Database Server database management system. From 1993 to 1997, the Company
introduced enhanced versions of its existing products, adding to their
functionality and management capabilities and enabling their operation in
different network environments. In addition, the Company began the development
of a number of new products to address the distributed and mobile computing
needs of the emerging virtual enterprise. In 1997, the Company introduced three
new product lines: the ExtendNet VPN (Virtual Private Network), the ExtendNet
IAS (Internet Access Server) and a line of port replicator products.

In fiscal 1997 and the first six months of fiscal 1998, 64% and 54%,
respectively, of the Company's net revenue was derived from sales of ExtendNet
print servers. The Company believes that this product line will continue to
decline as a percentage of the Company's net revenue as the Company's recently
introduced products for distributed and mobile connectivity achieve market
acceptance. While the Company believes that sales of ExtendNet print servers
will continue to account for a significant portion of the Company's net revenue
and gross profit, the Company's future results of operations will be highly
dependent upon the success of its recently introduced products. See "Risk
Factors -- Product Concentration" and "Risk Factors -- Dependence on Recently
Introduced Products."

The Company markets and sells its products worldwide through multiple
indirect channels, primarily distributors and resellers, and a substantial
majority of net revenue in fiscal 1997 and the first six months of fiscal 1998
was derived from sales to distributors and resellers. Certain of the Company's
products, in particular its ExtendNet print servers, JetEye IrDA products and
infrared software, are sold to OEMs, and the Company intends to increase its
sales to OEMs in the future. The Company supports its indirect channels with its
own sales and marketing organization. The Company's key distributors include
Ingram Micro and Tech Data. In fiscal 1997, sales to Ingram Micro accounted for
19% of the Company's net revenue. In the first six months of fiscal 1998, sales
to Ingram Micro accounted for 24% of the Company's net revenue and sales to Tech
Data accounted for 13% of the Company's net revenue. The loss of, or reduction
in sales to, any of the Company's key customers could have a material adverse
affect on the Company's business and results of operations. The Company provides
price protection rights and limited product return rights for stock rotation to
most of its distributors and resellers. See "Risk Factors -- Reliance on
Distribution Channels."

The Company recognizes revenue when products are shipped to customers.
Certain OEM and software licensing revenue is recognized when the product has
been delivered and there are no significant obligations remaining.

19
<PAGE> 21

The Company's cost of net revenue consists primarily of costs associated
with components, outsourced manufacturing of certain subassemblies, and in-house
labor associated with assembly, testing, shipping and quality assurance. The
Company's gross margin is affected by a number of factors, including product
mix, competitive product pricing pressures, manufacturing costs and component
costs. The Company anticipates that its gross margin may decline in the future
as a result of shifts in the Company's product mix and competitive pricing
pressure. In particular, the Company expects that its gross margin on sales of
ExtendNet print servers will decline as a result of a shift in product mix
toward lower priced print servers and competitive pricing pressures. The Company
seeks to mitigate the effects of declining prices by improving product design
and reducing costs, primarily manufacturing and component costs. See "Risk
Factors -- Potential Fluctuations in Operating Results" and "Risk
Factors -- Competition."

In April 1997, the Company acquired Counterpoint, a provider of advanced
infrared connectivity, by issuing 400,000 shares of the Company's Common Stock
in exchange for all of the outstanding common shares of Counterpoint. The
acquisition of Counterpoint enables the Company to offer vertically integrated
solutions for OEM customers. The merger was accounted for as a pooling of
interests. Accordingly, the Company's financial statements include Counterpoint
in 1996. Counterpoint had no material effect on the Company's 1995 financial
results. The Company intends to pursue additional strategic acquisitions of, or
strategic investments in, companies with complementary products, technologies or
distribution networks in order to broaden its product lines and to provide a
more complete virtual enterprise network solution.

The Company's operating results have fluctuated significantly in the past
and are likely to fluctuate significantly in the future on a quarterly and an
annual basis. Prior growth rates that the Company has experienced in net revenue
and net income should not be considered indicative of future growth rates.
Factors that could cause the Company's future operating results to fluctuate
include the level of demand for the Company's products, the Company's success in
developing new products, the timing of new product introductions and product
enhancements by the Company and its competitors, market acceptance of the
Company's new and enhanced products, the emergence of new industry standards,
the timing of customer orders, the mix of products sold, competition, the mix of
distribution channels through which the Company's products are sold and general
economic conditions. Many of such factors are beyond the Company's control. See
"Risk Factors -- Potential Fluctuations in Operating Results."

The markets for the Company's products are characterized by rapidly
changing technologies, evolving industry standards, frequent new product
introductions and short product life cycles. The Company's future success will
depend to a substantial degree upon its ability to enhance its existing products
and to develop and introduce, on a timely and cost-effective basis, new products
and features that meet changing customer requirements and emerging and evolving
industry standards. The introduction of new or enhanced products also requires
the Company to manage the transition from older products in order to minimize
disruption in customer ordering patterns, to avoid excessive levels of older
product inventories and to ensure that adequate supplies of new products can be
delivered to meet customer demand. There can be no assurance that the Company
will successfully develop, introduce or manage the transition to new products.
See "Risk Factors -- Risks Associated with New Product Development."

In December 1997, the Company granted to employees options to purchase
330,421 shares of Common Stock with an exercise price of $8.00 per share.
Deferred compensation expense resulting therefrom of $991,000 at December 31,
1997 will be amortized to expense over the four year vesting period of the
options on a quarterly basis.

20
<PAGE> 22

RESULTS OF OPERATIONS

The following table sets forth certain items from the Company's
consolidated statement of operations expressed as a percentage of net revenue
for the periods indicated.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
YEAR ENDED JUNE 30, (UNAUDITED)
--------------------------- ----------------
1995 1996 1997 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue........................ 41.6 42.8 38.7 39.1 40.3
----- ----- ----- ----- -----
Gross margin............................... 58.4 57.2 61.3 60.9 59.7
Operating expenses:
Research and development................. 12.9 12.6 13.3 13.0 13.3
Marketing and sales...................... 24.9 26.0 27.3 26.6 28.5
General and administrative............... 8.5 6.6 7.3 7.3 6.5
----- ----- ----- ----- -----
Income from operations................ 12.1 12.0 13.4 14.1 11.4
Other expense, net......................... 0.3 0.6 1.2 1.1 0.6
Interest expense........................... 1.9 1.6 1.6 1.6 1.5
----- ----- ----- ----- -----
Income before income taxes................. 9.9 9.9 10.6 11.3 9.3
Provision for income taxes................. 3.6 3.4 3.8 4.1 3.3
----- ----- ----- ----- -----
Net income............................ 6.3% 6.6% 6.8% 7.2% 6.0%
===== ===== ===== ===== =====
</TABLE>

Comparison of the Six Months Ended December 31, 1997 and December 31, 1996

Net Revenue. Net revenue in the six months ended December 31, 1997
increased by $4.7 million, or 25.5%, to $23.3 million from $18.6 million in the
six months ended December 31, 1996. The increased revenue in the six months
ended December 31, 1997 was primarily attributable to revenue from the Company's
line of port replicator products, which were first introduced in February 1997,
increased OEM and licence revenues from the Company's infrared products,
increased sales of ExtendNet print servers and revenues from the newly
introduced ExtendNet VPN and ExtendNet IAS products. Unit sales of ExtendNet
print servers increased in the six months ended December 31, 1997, which was
offset in part by a decline in the average selling price of these products due
to higher sales of lower priced print servers as a percentage of sales.

Gross Profit. Gross profit for the six months ended December 31, 1997
increased by $2.6 million, or 22.8%, to $13.9 million from $11.3 million for the
six months ended December 31, 1996. Gross margin was 59.7% for the six months
ended December 31, 1997 compared to 60.9% for the six months ended December 31,
1996. The decrease in gross margin was primarily attributable to the lower gross
margin associated with the newly introduced ExtendNet IAS and port replicator
products. This was offset in part by strong royalty, license and non-recurring
engineering ("NRE") revenue in the six months ended December 31, 1997.

Research and Development. Research and development expenses generally
consist of salaries and other personnel costs of the Company's research and
development teams, facilities costs and travel expenses. Research and
development expenses in the six months ended December 31, 1997 increased by
$701,000, or 29.3%, to $3.1 million from $2.4 million in the six months ended
December 31, 1996. As a percentage of net revenue, research and development
expenses increased to 13.3% in the six months ended December 31, 1997 compared
to 12.9% in the comparable period in fiscal 1996. The increase was primarily
attributable to increased staffing for the ExtendNet VPN and the Counterpoint
infrared development groups. The Company expects research and development
expenses to increase in the future, although such expenses may vary as a
percentage of net revenue.

Marketing and Sales. Marketing and sales expenses generally consist of
salaries, commissions and other personnel costs of the Company's sales,
marketing and support personnel, advertising, promotions and travel.

21
<PAGE> 23

Marketing and sales expenses in the six months ended December 31, 1997 increased
by $1.7 million, or 34.6%, to $6.6 million from $4.9 million in the six months
ended December 31, 1996. As a percentage of net revenue, marketing and sales
expenses increased to 28.5% in the six months ended December 31, 1997 compared
to 26.6% in the six months ended December 31, 1996. The increase was primarily
attributable to promotional costs associated with the introduction of ExtendNet
VPN, increased staffing in the Bozeman customer service organization and in OEM
sales, and increased staffing and general activity at Counterpoint. The Company
expects marketing and sales expenses to increase in the future, although such
expenses may vary as a percentage of net revenue.

General and Administrative. General and administrative expenses primarily
consist of salaries and other personnel costs of the Company's finance, MIS,
human resources and other administrative employees. General and administrative
expenses in the six months ended December 31, 1997 increased by $144,000, or
10.6%, to $1.5 million from $1.4 million in the six months ended December 31,
1996. However, such expenses declined as a percentage of net revenue to 6.5% in
the six months ended December 31, 1997 from 7.3% in the six months ended
December 31, 1996. The increase in absolute dollars was primarily attributable
to increased administrative expenses at the Company's subsidiaries. The decrease
as a percentage of net revenue reflected increased net revenue. The Company
expects general and administrative expenses to increase in the future,
particularly as it incurs higher legal, accounting and other expenses associated
with being a public company, although such expenses may vary as a percentage of
net revenue.

Other Expense, Net. Other expense, net in the six months ended December 31,
1997 decreased by $76,000, or 35.8%, to $136,000 from $212,000 in the six months
ended December 31, 1996. The decrease in other expenses was attributable to a
$180,000 non-recurring write down of a minority investment in the six months
ended December 31, 1996, as well as by increased interest income and decreased
amortization in the six months ended December 31, 1997.

Interest Expense. Interest expense in the six months ended December 31,
1997 increased by $40,000, or 13.1%, to $345,000 from $305,000 in the six months
ended December 31, 1996 as a result of an increase in the balance of the
Company's long-term debt.

Provision for Income Taxes. The provision for income taxes in the six
months ended December 31, 1997 increased by $11,000 to approximately $768,000
from $757,000 in the six months ended December 31, 1996. This increase was due
to higher net income before taxes, offset by a decrease in the effective tax
rate from 36.1% to 35.5%.

Comparison of Fiscal 1997 and Fiscal 1996

Net Revenue. Net revenue in fiscal 1997 increased by $4.9 million, or
14.0%, to $39.5 million from $34.7 million in fiscal 1996. The increased net
revenue was primarily attributable to higher unit sales of ExtendNet print
servers, Advantage Database Servers and infrared connectivity devices, as well
as the introduction of the Company's port replicators in February 1997. The
Company also experienced increased royalty, license and NRE revenues in fiscal
1997. The higher unit sales of ExtendNet print servers were offset in part by a
decline in the average selling price of these products due to relatively higher
sales of lower priced print servers, as well as by declining unit sales in the
Company's printer sharing business.

Gross Profit. Gross profit in fiscal 1997 increased by $4.4 million, or
22.2%, to $24.3 million from $19.8 million in fiscal 1996. Gross margin was
61.3% in fiscal 1997 compared to 57.2% in fiscal 1996. The increase in gross
margin was primarily attributable to increased sales of higher margin products,
in particular, the Advantage Database Server, as well as higher royalty, license
and NRE revenue in fiscal 1997.

Research and Development. Research and development expenses in fiscal 1997
increased by $897,000, or 20.6%, to $5.3 million from $4.4 million in fiscal
1996. As a percentage of net revenue, research and development expenses
increased to 13.3% in fiscal 1997 from 12.6% in fiscal 1996. The increase was
primarily attributable to increased staffing for the ExtendNet VPN and
Counterpoint infrared software development groups.

22
<PAGE> 24

Marketing and Sales. Marketing and sales expenses in fiscal 1997 increased
by $1.8 million, or 19.9%, to $10.8 million from $9.0 million in fiscal 1996. As
a percentage of net revenue, marketing and sales expenses increased to 27.3% in
fiscal 1997 from 26.0% in fiscal 1996. The increase was primarily attributable
to promotional costs associated with the introduction of ExtendNet VPN and
increased staffing in marketing and sales.

General and Administrative. General and administrative expenses in fiscal
1997 increased by $606,000, or 26.7%, to $2.9 million from $2.3 million in
fiscal 1996. As a percentage of net revenue, general and administrative expenses
increased to 7.3% in fiscal 1997 from 6.6% in fiscal 1996. The increase was
primarily attributable to increased administrative staffing and expenses
associated with the Company's subsidiaries.

Other Expense, Net. Other expense, net in fiscal 1997 increased by $296,000
to $494,000 from $198,000 in fiscal 1996. The increased other expenses were
primarily attributable to a $180,000 non-recurring write down of a minority
investment in fiscal 1997, as well as foreign currency losses experienced by the
Company's international sales subsidiaries in fiscal 1997.

Interest Expense. Interest expense in fiscal 1997 increased by $71,000, or
12.7%, to $629,000 from $558,000 in fiscal 1996 as a result of an increase in
the balance of the Company's long-term debt.

Provision for Income Taxes. The provision for income taxes in fiscal 1997
increased by $345,000, or 29.6%, to $1.5 million from $1.2 million in fiscal
1996 because of an increase in taxable income in fiscal 1997 and an increase in
the Company's effective tax rate in fiscal 1997 to 36.1% from 33.8% in fiscal
1996.

Comparison of Fiscal 1996 and Fiscal 1995

Net Revenue. Net revenue in fiscal 1996 increased by $6.1 million, or
21.3%, to $34.7 million from $28.6 million in fiscal 1995. The increase in net
revenue was primarily attributable to increased unit sales of ExtendNet print
servers, Advantage Database Servers and JetEye infrared connectivity devices.
The Company also recognized significant OEM royalty, license and NRE revenues.
This was partially offset by a decrease in unit sales of the Company's printer
sharing products.

Gross Profit. Gross profit in fiscal 1996 increased by $3.2 million, or
18.9%, to $19.8 million from $16.7 million in fiscal 1995. Gross margin was
57.2% in fiscal 1996 compared to 58.4% in fiscal 1995. The decrease in gross
margin was primarily the result of a lower gross margin on sales of the
Company's ExtendNet print server and JetEye infrared products, which was
partially offset by increased sales of higher margin products, in particular,
the Advantage Database Server and increased OEM royalty, license and NRE
revenues.

Research and Development. Research and development expenses in fiscal 1996
increased by $661,000, or 17.9%, to $4.4 million from $3.7 million in fiscal
1995. As a percentage of net revenue, research and development expenses
decreased to 12.6% in fiscal 1996 from 12.9% in fiscal 1995. The increase in
absolute dollars was primarily attributable to increased staffing for infrared
development activities. The decrease as a percentage of net revenue reflected
increased net revenue.

Marketing and Sales. Marketing and sales expenses in fiscal 1996 increased
by $1.9 million, or 26.6%, to $9.0 million from $7.1 million in fiscal 1995. As
a percentage of net revenue, marketing and sales expenses increased to 26.0% in
fiscal 1996 from 24.9% in fiscal 1995. The increase was primarily attributable
to increased staffing at the Company's subsidiaries and promotional expenses
related to the launch of the JetEye Net product.

General and Administrative. General and administrative expenses in fiscal
1996 decreased by $143,000, or 5.9%, to $2.3 million from $2.4 million in fiscal
1995. As a percentage of net revenue, general and administrative expenses
decreased to 6.6% in fiscal 1996 from 8.5% in fiscal 1995. The decrease was
primarily attributable to expenses incurred by the Company in fiscal 1995
related to the resignation of an officer and expenses incurred in recruiting
other key management employees.

Other Expense, Net. Other expense, net in fiscal 1996 increased by $108,000
to $198,000 from $90,000 in fiscal 1995 due to an increase in amortization
expense of intangible assets.

23
<PAGE> 25

Interest Expense. Interest expense in fiscal 1996 increased by $23,000, or
4.3%, to $558,000 from $535,000 in fiscal 1995 as a result of an increase in the
balance of the Company's long term debt.

Provision for Income Taxes. The provision for income taxes in fiscal 1996
increased by $131,000, or 12.7%, to approximately $1.1 million from $1.0 million
in fiscal 1995, due to an increase in taxable income in fiscal 1996.

QUARTERLY RESULTS OF OPERATIONS

The following table sets forth certain unaudited consolidated quarterly
statement of operations data for the six quarters ended December 31, 1997. The
unaudited data has been prepared on the same basis as the audited consolidated
financial statements appearing elsewhere in this Prospectus, and includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such information for the periods presented. Such data
should be read in conjunction with the Consolidated Financial Statements of the
Company and related Notes thereto appearing elsewhere in this Prospectus. The
operating results for any quarter are not indicative of the operating results
that may be achieved in any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenue................. $8,943 $9,615 $9,465 $11,512 $11,152 $12,131
Cost of net revenue......... 3,513 3,734 3,528 4,512 4,429 4,962
------ ------ ------ ------- ------- -------
Gross profit................ 5,430 5,881 5,937 7,000 6,723 7,169
Operating Expenses:
Research and
development............ 1,167 1,228 1,200 1,664 1,532 1,564
Marketing and sales....... 2,281 2,657 2,720 3,144 3,223 3,424
General and
administrative......... 668 694 692 825 755 751
------ ------ ------ ------- ------- -------
Income from
operations........... 1,314 1,302 1,325 1,367 1,213 1,430
Other expense, net.......... 173 39 193 89 52 84
Interest expense............ 152 153 157 167 167 178
------ ------ ------ ------- ------- -------
Income before income
taxes..................... 989 1,110 975 1,111 994 1,168
Provision for income
taxes..................... 357 400 352 400 353 415
------ ------ ------ ------- ------- -------
Net income............. $ 632 $ 710 $ 623 $ 711 $ 641 $ 753
====== ====== ====== ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET REVENUE
----------------------------------------------------------------------------------
QUARTER ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenue.................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of net revenue.......... 39.3 38.8 37.3 39.2 39.7 40.9
----- ----- ----- ----- ----- -----
Gross margin................. 60.7 61.2 62.7 60.8 60.3 59.1
Operating Expenses:
Research and development... 13.0 12.8 12.7 14.4 13.7 12.9
Marketing and sales........ 25.5 27.6 28.7 27.3 28.9 28.2
General and
administrative.......... 7.5 7.2 7.3 7.2 6.8 6.2
----- ----- ----- ----- ----- -----
Income from
operations............ 14.7 13.5 14.0 11.9 10.9 11.8
Other expense, net........... 1.9 0.4 2.0 0.7 0.5 0.7
Interest expense............. 1.7 1.6 1.7 1.5 1.5 1.5
----- ----- ----- ----- ----- -----
Income before income taxes... 11.1 11.5 10.3 9.7 8.9 9.6
Provision for income taxes... 4.0 4.2 3.7 3.5 3.2 3.4
----- ----- ----- ----- ----- -----
Net income.............. 7.1% 7.4% 6.6% 6.2% 5.7% 6.2%
===== ===== ===== ===== ===== =====
</TABLE>

24
<PAGE> 26

The decline in net revenue from the quarter ended June 30, 1997 to the
quarter ended September 30, 1997 was primarily due to seasonal factors. The
Company's net revenue has experienced some degree of seasonality and the Company
expects to continue to experience seasonality in the future. Net revenue in the
first fiscal quarter typically is lower than net revenue in the fourth fiscal
quarter, reflecting lower sales in Europe and certain other regions in the
summer months when business activities are reduced. See "Risk
Factors -- Potential Fluctuations in Operating Results."

The decrease in gross margin from the quarter ended December 31, 1996 to
the quarter ended March 31, 1997 and the quarter ended June 30, 1997 was
primarily due to a lower gross margin on sales of the ExtendNet print servers
and increased sales of lower gross margin products such as port replicators. The
increase in gross margin from the quarter ended September 30, 1996 to the
quarter ended December 31, 1996 was primarily due to increased sales of higher
margin products, including the Advantage Database Server, and increased OEM
royalty, license and NRE revenue. The increase was partially offset by a lower
gross margin on sales of the ExtendNet print server and JetEye infrared
products.

The increase in research and development expenses for the quarter ended
June 30, 1997 was primarily due to increased staffing for the ExtendNet VPN and
Counterpoint infrared software development groups, as well as tooling costs
associated with development of ExtendNet VPN.

The increase in other expense from the quarter ended March 31, 1997 to the
quarter ended June 30, 1997 was primarily due to foreign currency losses
experienced by the Company's international sales subsidiaries. The decrease in
other expense from the quarter ended September 30, 1996 to the quarter ended
December 31, 1996 was primarily due to a $180,000 non-recurring write down of a
minority investment.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has funded its operations primarily through cash
generated from operations. Net cash provided by operating activities was
approximately $1.3 million in the six months ended December 31, 1997. Net cash
provided by operating activities was $2.6 million in fiscal 1997. In fiscal
1997, decreased net cash provided by operating activities reflected increases in
accounts receivable and prepaid expenses, which were offset in part by increases
in accounts payable and deferred taxes and decreases in inventories.

Accounts receivable increased by $2.3 million, or 60%, to $6.9 million at
June 30, 1997 from $4.3 million at June 30, 1996 as a result of increased sales
activity in the fourth quarter of fiscal 1997 over the fourth quarter of 1996
and an increase in sales to customers to which the Company has extended credit.
The allowance for doubtful accounts has not increased in proportion to the
increase in sales and accounts receivable because sales increases have been
achieved without increased credit losses or delinquencies. While to date the
Company has not experienced significant losses related to accounts receivable,
there can be no assurance that the Company will not experience losses related to
accounts receivable in the future.

Cash used in investing activities, which largely consisted of capital
expenditures, totaled $1.5 million in the six months ended December 31, 1997.
Cash used in investing activities totaled $1.4 million in fiscal 1997. In the
three months ended June 30, 1997, the Company made significant investments in
the expansion of its Boise facilities and the replacement of internal
information systems. In addition, the Company made capital expenditures for
equipment and related software associated with increased staffing.

The Company currently plans to incur capital expenditures of an aggregate
of approximately $2.8 million in fiscal 1998, primarily for building
improvements, system improvements, personal computers, technology equipment,
software and office furnishings.

Net cash used in financing activities was $15,000 in the six months ended
December 31, 1997. Net cash used by financing activities was $281,000 in fiscal
1997.

The Company has a $5.0 million uncollateralized bank revolving line of
credit that expires on March 31, 1999. Interest on borrowings is at the bank's
prime rate. There were no borrowings under this line as of December 31, 1997.

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<PAGE> 27

The Company issued zero coupon promissory notes to certain investors on
September 30, 1992 for $4,000,000. The notes have a maturity value in September
1999 of $7,625,000 and may be converted at any time at the option of the holder
into a total of 495,810 shares of Common Stock. If held to maturity, the notes
would yield 9.25%. The Company also issued 10% promissory notes in the principal
amount of $500,000 to the same investors on September 30, 1992 that may be
converted at any time prior to maturity in September 1999 at the option of the
holders into a total of 61,977 shares of Common Stock. Interest on the 10%
promissory notes is paid annually in arrears.

Both the zero coupon and the 10% promissory notes (the "Notes") are
subordinated in right of payment to future senior indebtedness of the Company.
In the event of a change in control, as defined in the Notes, or the sale of
substantially all of the assets of the Company, the holders may require
redemption of the Notes at the issue price plus accrued original issue discount.
The Company has a right of first refusal to purchase the Notes or, if converted,
the stock.

The Company believes that its existing working capital and borrowing
capacity, coupled with the funds generated from the Company's operations and the
net proceeds from the Offering, will be sufficient to fund its anticipated
working capital, capital expenditures and debt payment requirements for at least
the next 12 months. In the longer term, the Company may require additional
sources of liquidity to fund future growth. Such sources of liquidity may
include additional equity offerings or debt financings. In the normal course of
business, the Company evaluates acquisitions of businesses, products and
technologies that complement the Company's business. The Company has no present
commitments or agreements with respect to any such transaction. However, the
Company may acquire businesses, products or technologies in the future. In
addition, the Company may be obligated to repurchase shares tendered in
connection with the Recission Offer for a maximum liability of approximately
$388,000 plus interest of $45,000 as of December 31, 1997. See "Recission Offer"
and Note 13 of Notes to Consolidated Financial Statements. There can be no
assurance that the Company will not require additional financing in the future
or, if the Company were required to obtain additional financing in the future,
that sources of capital will be available on terms favorable to the Company, if
at all.

EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES

The Company derives a substantial portion of its revenue from international
sales, principally through its international subsidiaries in France, Germany and
the United Kingdom, and to a limited number of independent distributors. Sales
made by the Company's foreign subsidiaries are denominated in the foreign
country's currency. Fluctuations in exchange rates between the U.S. dollar and
other foreign currencies could materially affect the Company's results of
operations. The Company recognized foreign exchange losses of $55,000 in the six
months ended December 31, 1997, $275,000 in fiscal 1997 and $37,000 in fiscal
1996. The Company has not engaged in significant exchange rate hedging
activities. To the extent that the Company implements hedging activities in the
future with respect to foreign currency transactions there can be no assurance
that the Company will be successful in such hedging activities. "Risk
Factors -- Risks of International Sales and Operations."

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<PAGE> 28

BUSINESS

OVERVIEW

Extended Systems provides distributed and mobile computing solutions that
address the needs of the virtual enterprise. The Company designs, develops,
markets and sells two product families: distributed connectivity products and
mobile systems products. The Company's distributed connectivity products include
a virtual private networking server, an Internet access server, network print
servers and a database management system with remote access capabilities. The
Company's mobile systems products include wireless connectivity products that
comply with IrDA standards, infrared software and port replicators that connect
portable computers to desktop peripherals and the network.

INDUSTRY BACKGROUND

As the mobile workforce continues to grow, there is increasing demand to
access business networks from multiple locations, including different locations
within the organization's main office, remote offices and various locations
while traveling, such as hotels and airports. International Data Corporation
("IDC") forecasts that the market for remote access servers will increase from
$1.9 billion in 1996 to $7.6 billion in 2001, and IDC expects the installed base
of remote access server ports to increase from 4.2 million in 1996 to 60.5
million in 2001. Increased demand for mobile connectivity has been driven by
higher demand for access to communication and mission-critical applications
across the network, as well as by the proliferation of innovative mobile
computing devices. As PC manufacturers have introduced notebook computers with
powerful new features and computing power comparable to desktop computers, many
organizations have replaced desktop systems with notebook computers as the
primary computer for employees. IDC reported that 74% of all notebook computers
sold in 1997 served as the user's primary computer. In addition, small devices
such as personal digital assistants ("PDAs"), pagers and organizers with
advanced communications capabilities are becoming commonplace among today's
workforce.

As the number of mobile computing devices has increased, the speed and
reliability of network connections for such devices have significantly improved.
Infrared technology has emerged as a cost-effective method of providing wireless
network connectivity for notebook computers without the need for bulky cables
and wired connections. The Infrared Data Association ("IrDA"), a consortium of
more than 160 companies that includes most computer industry leaders, has
developed a single, international standard for infrared connectivity. A majority
of the notebook computer models sold today by major PC manufacturers contains an
infrared port, based upon the IrDA standard, that enables the wireless
connectivity of the computer to the network, other computers, printers and other
devices through an infrared connection.

The emergence of mobile computing presents a number of challenges for
businesses. Mobile users wish to connect to the network from many locations,
including those within an organization's facilities such as conference rooms,
shared offices and warehouses. Providing flexible network access for mobile
users in these locations typically requires that users physically connect their
mobile computer to the network in every location at which they desire network
access, which is cumbersome and error-prone. Providing network access to remote
users who dial in to the network may also be very expensive, as businesses must
maintain large numbers of dedicated modems and telephone lines and often incur
substantial long distance and other telephone toll charges. In addition, the
quality and speed of the telephone lines used by remote users are often

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<PAGE> 29

inconsistent, particularly when connecting across international boundaries.
Finally, as organizations permit mobile access to their networks, network
security becomes critically important.

In recent years, the Internet has significantly affected the way in which
organizations communicate, both externally with other organizations and
internally within organizations. Numerous Internet service providers ("ISPs")
have made access to the Internet by businesses and individuals easy and
cost-effective throughout the world. Large enterprises are increasingly
incorporating "intranets" that employ Internet data formats and communications
protocols into their private networks to connect geographically dispersed
networks or users. Businesses have begun to use the Internet as a "virtual"
private network ("VPN") to link remote locations and as a substitute for
expensive wide area networks that use private, leased telephone lines. The use
of VPNs is expected to grow significantly in the future. Infonetics Research
forecasts that the market for VPN products and services will grow from $205
million in 1997 to $11.9 billion in 2001. The security issues initially faced by
organizations when enabling remote network access become more acute when the
Internet serves as a gateway for the organization's network.

As the dependence on networks to provide access to mission-critical
applications increases and the scale and complexity of networks grow, effective
network management becomes an increasingly difficult, yet crucial, task. The
organization must effectively coordinate the various hardware and software
components to effectively manage devices such as PCs, notebook computers,
printers, servers and personal digital assistants that communicate within the
network. Organizations seek hardware and software solutions that provide a high
degree of functionality, conform to standard industry specifications and
integrate easily into the network environment. In addition, mobile connectivity
provides an added degree of complexity which the organization must effectively
manage to ensure the success of the "virtual enterprise."

THE EXTENDED SYSTEMS SOLUTION

Extended Systems provides distributed and mobile computing solutions that
address the needs of the virtual enterprise. The Company's distributed
connectivity products include a virtual private networking server, an Internet
access server, print servers and a database management system with remote access
capabilities. The Company's mobile systems products include IrDA-compliant
wireless connectivity products, infrared software and port replicators that
connect portable computers to desktop peripherals and the network.

The Company's solution provides the following advantages to the virtual
enterprise:

- Enable Mobile Computing Within an Organization. The Company's JetEye
infrared wireless connectivity products enable mobile users to easily
access networks or peripherals while moving between offices and
conference rooms without the need for bulky cables and wired connections.
The Company's port replicator products provide portable computers quick,
cost-effective access to desktop peripherals and the network.

- Enable Mobile Connectivity Outside the Organization. The Company's
ExtendNet VPN product enables a business to extend its network
environment beyond physical connections to the LAN or WAN, permitting
seamless, secure access to the network by mobile users over the Internet.
ExtendNet IAS provides remote offices and small businesses with Internet
connectivity, allowing multiple users to easily access a single Internet
connection while intelligently managing usage to reduce costs. These
products are designed to address users' needs for mobile access and
access to the Internet and result in cost savings to businesses by
significantly reducing remote access toll charges and by reducing the
number of modems and telephone lines and the level of administration
needed to support remote access and Internet access.

- Enable Distributed Applications. The Advantage Database Server is a
scalable, high performance database management system that enables
organizations to extend applications and databases across the distributed
network and, when coupled with the Advantage Internet Server, over the
Internet. The ExtendNet print server products enable the effective
deployment of complex printing applications across distributed networks
worldwide.

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<PAGE> 30

- Enable Effective Network Integration. The Company's network products
permit effective management of devices locally and across the virtual
enterprise. The Company's products share a common industry standard
Simple Network Management Protocol ("SNMP") architecture that enables
network administrators to effectively manage the Company's products
within the network environment to address the evolving needs of today's
virtual enterprises.

LOGO

STRATEGY

The Company's objective is to be a leading supplier of distributed and
mobile computing solutions for the virtual enterprise. To achieve this
objective, the Company has adopted the following key strategies:

Meet the Emerging Needs of the Virtual Enterprise. The Company is at the
forefront in addressing the distributed and mobile computing needs of the
virtual enterprise. The Company's understanding of the virtual enterprise has
enabled it to develop a range of products, including the JetEye products, the
ExtendNet VPN, the ExtendNet IAS and the Advantage Database Server. The Company
intends to continue to capitalize on its core competencies in distributed and
mobile connectivity to continue to meet the emerging needs of the virtual

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<PAGE> 31

enterprise. The Company believes that product areas in which there are
significant market opportunities include internetworking, small office/home
office connectivity and wireless and digital data communications.

Expand and Leverage Core Technologies. The Company is committed to
developing, introducing and manufacturing new products and enhancing existing
products by expanding and leveraging its core technologies. The Company has
developed a high degree of expertise in the development of distributed and
mobile computing solutions. The Company works with other industry leaders to
develop industry standards in such areas as infrared technology and network
protocols. As a founding member of the IrDA, the Company led the development of
the worldwide standards that govern infrared connectivity. The Company intends
to invest substantial resources to build upon its expertise in order to continue
to develop innovative distributed and mobile connectivity products.

Expand Distribution Channels. The Company has established an international
distribution network which allows the Company to market its products throughout
the world. The Company has placed particular focus on North American and
European markets through sales subsidiaries in France, Germany and the United
Kingdom and by forming strong relationships with key distributors in the United
States and Europe. The Company intends to form additional distribution
relationships in order to strengthen its geographic reach and to provide greater
access to additional end users within its current markets.

Increase Sales to Existing End Users. The Company has established a
reputation for providing high-quality, cost-effective products, which has
enabled it to develop a strong base of end users. The Company is devoting
substantial resources to actively maintain its relationships with end users in
order to cross-market its current products to this established end user base. In
addition, the Company intends to develop and acquire new products and it will
leverage its established end user base to market these products.

Acquire Complementary Businesses, Products and Technologies. In April 1997,
the Company acquired Counterpoint, a provider of infrared connectivity software.
In addition, the Company has created a sales and marketing presence in France,
Germany and the United Kingdom by acquiring distributors in those countries. The
Company intends to pursue additional strategic acquisitions of, or investments
in, companies with complementary products, technologies or distribution networks
in order to broaden its product lines and to provide a more complete virtual
enterprise networking solution.

PRODUCTS

The Company meets the needs of virtual enterprises with two product
families: Distributed Connectivity products and Mobile Systems products.

Distributed Connectivity

The Distributed Connectivity product family consists of four product lines:
ExtendNet Virtual Private Network Servers, ExtendNet Internet Access Servers,
Advantage Database Management Servers and network print servers. The following
table sets forth selected information regarding the Company's principal
Distributed Connectivity products:

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<PAGE> 32

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
INITIAL
PRODUCT DESCRIPTION INTRODUCTION PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
EXTENDNET VIRTUAL PRIVATE NETWORK
SERVERS
ExtendNet VPN PC-to-LAN VPN Solution 1997 $2,999-$9,999
- -------------------------------------------------------------------------------------------------------
EXTENDNET INTERNET ACCESS SERVERS
ExtendNet IAS Shared Internet access for 1997 $2,199-$2,799
workgroups and branch offices
- -------------------------------------------------------------------------------------------------------
ADVANTAGE DATABASE MANAGEMENT
SERVERS
Advantage Database Server Client/server database 1993 $615-$8,995*
management system
Advantage Internet Server Remote application access via 1997 $595-$715*
the Internet
Advantage Development Tool Kits Windows development tools for 1993 $99-$299*
Advantage
- -------------------------------------------------------------------------------------------------------
NETWORK PRINT SERVERS
ExtendNet Print Servers Single and multi-protocol print 1991 $299-$1,195
servers for Ethernet, Fast
Ethernet and Token Ring
networks
PrintTRAK Print management and reporting 1997 $399-$2,999**
software
- -------------------------------------------------------------------------------------------------------
</TABLE>

* Varies based upon authorized number of users.

** Varies based upon authorized number of servers.

ExtendNet VPN provides corporate MIS groups with a more cost-effective,
scalable means to connect mobile workers to LAN applications. VPN technology
enables a corporation to use the Internet to communicate securely between mobile
users and the LAN. For companies with multiple locations, telecommuters, mobile
workers or the need to exchange information with corporate partners, the VPN
provides a secure alternative to traditional remote access solutions such as
X.25, leased lines, frame relay, 800 numbers and long distance modem dial-in.
ExtendNet VPN also addresses the issues involved in scaling mobile users to
higher-speed communications such as 56K modems, ISDN, frame relay and T-1
communications.

ExtendNet IAS allows multiple users to share one connection to the Internet
via an ISP, providing an easy, cost-effective and secure way for remote and
branch offices to connect to the Internet. ExtendNet IAS includes firewall
security, e-mail and intelligent Internet connection management. ExtendNet IAS
also provides a number of communications options, enabling the user to scale the
device's capacity to the environment, such as ISDN, analog and frame relay
connections.

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<PAGE> 33

Advantage Database Server ("ADS") is a high performance database management
system that brings client/server functionality to PC database applications. ADS
allows developers to work with easy to use development tools and methodology,
but replaces the traditional PC database model with a client/server
architecture. ADS works in both Novell Netware and Windows NT server
environments and improves multi-user performance by intelligently allocating
database operations between the client and the server. ADS protects database
files against network failure and user error through a centralized storage
management system and provides data security through encryption and file hiding.
ADS includes a client interface, supporting common application development tools
such as Delphi, Visual Objects and Visual Basic, as well as any applications
with an ODBC interface.

Advantage Internet Server provides a secure, seamless and reliable method
for running Advantage Database applications across the Internet. Advantage
Database applications can easily be migrated to remote users without recoding to
HTML.

Advantage Development Tool Kits provide database application developers and
VARs with a set of software tools to develop, debug and deploy reliable
applications running in an ADS environment.

ExtendNet print servers consist of five core products: (i) PrintTRAK, (ii)
ExtendNet for 100 Base-T, (iii) ExtendNet stand-alone, (iv) ExtendNet for
LaserJets and (v) PocketPrintServer. The ExtendNet print servers enable the
deployment of complex printing applications across global networks, while
permitting comprehensive management of network printers from any location on the
network.

PrintTRAK enables the user to monitor the activity of one or more printers
in the Windows NT network. PrintTRAK provides tools to track and report printer,
paper and consumable usage via the network. The rapid deployment of color, laser
and high-quality printers in many organizations has been accompanied by a sharp
increase in related costs of consumables and supplies. With PrintTRAK, these
costs can now be tracked accurately, reported and, if desired, billed to the
department or end user. Professional organizations, such as law firms and
consulting firms, can also use PrintTRAK's project-based accounting capabilities
to bill specific printing costs to the relevant client or project.

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<PAGE> 34

LOGO

33
<PAGE> 35

Mobile Systems

The Mobile Systems product family consists of three product lines: infrared
wireless connectivity products, IrDA connectivity software and mobile
connectivity products. The following table sets forth selected information
regarding the Company's principal Mobile Systems products:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
INITIAL
PRODUCT DESCRIPTION INTRODUCTION PRICE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
JETEYE WIRELESS CONNECTIVITY
PRODUCTS
JetEye Net Ethernet infrared network adapter 1996 $345-$579
JetEye Printer IrDA printer interface adapter 1991 $179
JetEye PC IrDA infrared serial PC adapter 1993 $135
- -------------------------------------------------------------------------------------------------------
IRDA CONNECTIVITY SOFTWARE
QuickBeam Infrared file transfer application 1997 OEM
JetBeam Infrared communications package for 1997 OEM
Windows
IrLite Development Kit Embedded software for infrared 1996 OEM
communications in mobile products
- -------------------------------------------------------------------------------------------------------
MOBILE CONNECTIVITY PRODUCTS
Port Replicators Connects notebook computers to 1997 $159-$315
peripherals
Port Replicators with Ethernet Connects notebook computers to 1997 $359-$579
peripherals and networks
- -------------------------------------------------------------------------------------------------------
</TABLE>

The infrared wireless connectivity product line was introduced in 1991 and
today consists of three core products: (i) JetEye Net, (ii) JetEye Printer and
(iii) JetEye PC.

JetEye Net allows mobile computing users to easily attach to an Ethernet or
TokenRing network. End users requiring a high degree of mobility within an
organization rely on JetEye Net to provide fast network access, without
cumbersome cables, lost network interface cards or broken connectors.

The JetEye Printer was introduced in 1991, and initially allowed handheld
computers to print by means of an infrared beam to a printer. The JetEye Printer
has since been enhanced to support the IrDA standard and to support notebook
computers that are equipped with an IrDA port.

The JetEye PC enables IrDA communications from portable computers equipped
with a serial port. The JetEye PC is used for data transfers, file
synchronization and software updates between mobile devices or portable PCs and
desktop computers.

Through the acquisition of Counterpoint, the Company expanded its Mobile
Systems product family to include IrDA Connectivity Software. The IrDA
Connectivity Software product line consists of three core products: (i)
QuickBeam, (ii) JetBeam and (iii) IrLite. QuickBeam is an infrared file transfer
application which enables mobile data exchange between portable devices or from
portable devices to desktop PCs. JetBeam is a complete set of IrDA infrared
communication applications designed for use with Windows 95, Windows NT and
Windows 98. The IrLite Development Kit is infrared communication software
designed to enable the integration of IrDA capability into portable systems. The
IrLite Development Kit provides robust infrared communications with a compact
code base.

The Company's Mobile Connectivity product line consists of two core
products: Port Replicators and Port Replicators with Ethernet. The port
replicators connect notebook computers to external peripherals such as a
monitor, keyboard, mouse and printer. Similar solutions provided by PC
manufacturers typically are costly, have limited features and are late to
market. Recognizing the market opportunity, the Company developed a product that
is cost-effective and easy to use. With minor modifications, the Company's port
replicators can be used with a wide variety of notebook computers.

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<PAGE> 36

LOGO

TECHNOLOGY

The Company's core technological competencies are in the areas of embedded
systems software and microcontroller hardware design. In addition, the Company's
engineers have a high degree of expertise in supporting network hardware
topologies, software transport protocols and application-layer networking. The
Company's software development group has placed particular emphasis on the
development of network management tools for multi-protocol networking.

The Company has maintained an active program to develop and deploy new
enterprise networking technologies across its product lines. The Company has
focused product development efforts upon such enterprise networking capabilities
as Novell NEST/NDS and Windows NT enterprise services. In addition, the Company
was an early and active supporter of industry standard SNMP-based management
capabilities for easy control of devices over the network. Today, end users use
these technologies to deploy and maintain worldwide access to key network
resources.

With the emergence of the Internet as a commercial network, the Company has
deployed key virtual private networking capabilities for the support of mobile
and distributed workforces over the Internet. The Company has embedded an
implementation of the Point-to-Point Tunneling Protocol ("PPTP") into ExtendNet
VPN. The Company has also developed other technologies that will enable it to
develop additional VPN products. The Company's secure embedded real-time
operating system and virtual private networking software are integrated in flash
memory within the ExtendNet VPN, which enables users to upgrade the product
remotely. Unlike competing VPN products implemented with open operating systems
running on

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<PAGE> 37

standard server platforms, the embedded operating system of ExtendedNet VPN
deters hackers and prevents tampering with the system. The Company believes that
a real-time embedded operating system and dedicated hardware platforms are key
differentiators in constructing effective and secure VPN solutions.

The ExtendNet VPN solution also provides multi-protocol networking support
for end users deploying both TCP/IP-based and SPX/IPX-based network systems.
SPX/IPX is the transport protocol utilized by Novell's NetWare network operating
system. In contrast to competing products based on other VPN technologies, such
as IPSec, ExtendNet VPN permits virtual private networking in the multi-protocol
networking environments common in many corporate settings.

The Company will continue to enhance its product lines with additional
advanced network management capabilities. Currently, ExtendNet print servers,
ExtendNet IAS and ExtendNet VPN incorporate web-based management agents that
permit the monitoring and control of these devices via browser software tools.
In an effort to advance its network management support, the Company is
contributing to the development of next-generation secure management
capabilities such as an encrypted version of SNMP.

The Advantage Database Server implements technologies for enhancing the
execution of client/server database transactions across a network. This includes
algorithms for "burst-mode" transmission of data records across the LAN or WAN,
which speeds the flow of data between server and client. ADS capabilities
include transaction processing, filter optimization, enhanced locking algorithms
and support for a variety of communications protocols.

The Company designs its products to adhere to industry standards and widely
accepted protocols, and is active in the organizations that develop and maintain
these standards and protocols. The Company was a founding contributor to the
IrDA standards committee and is currently represented on the IrDA executive
committee. Today more than 160 companies are active participants in the IrDA,
and are developing a broad range of mobile products that are IrDA-compliant. The
Company believes that IrDA infrared connectivity, due to its benign, low cost,
low power consumption, high speed and device independent characteristics, will
become an increasingly important technology in permitting the seamless
connection of mobile devices to each other and to the virtual enterprise.

Through the Company's efforts, standards such as the IrLAN protocol
(co-developed with Microsoft Corporation and Hewlett-Packard) were proposed,
developed, ratified and adopted for network connectivity to notebook computers.
The Company has been actively guiding IrOBEX, which is an object-oriented
standard for transferring files, graphics and other data by infrared
transmission. The Company's QuickBeam and JetBeam products implement a
communications application using IrOBEX.

The Company has been aggressively developing new applications for OEM and
corporate customers based on its IrDA technology, including inventory
management, data logging, network access, computer docking and data
communications products. The Company believes that these technologies and
applications will have even broader applicability to connectivity for mobile
workforces in the coming years.

SALES AND MARKETING

The Company conducts its North American sales and marketing activities
primarily from its offices in Boise, Idaho and Bozeman, Montana. The Company's
in-house sales and marketing staff is largely responsible for generating end
user demand for the Company's products by soliciting prospective customers,
providing technical advice with respect to the Company's products and working
closely with distributors to sell the Company's products. The Company's sales
and marketing staff actively participates with distributors and

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<PAGE> 38

resellers in the selling process, which provides end users with the level of
support needed for the successful integration of solutions in enterprise
networks.

In international markets, the Company markets and sells its products
through its sales subsidiaries in France, Germany and the United Kingdom. In
addition, the Company has distribution agreements with companies located in more
than 28 foreign countries, including Australia, Brazil, Japan, Mexico, The
Netherlands and Sweden. In fiscal 1996, fiscal 1997 and the first six months of
fiscal 1998, international sales represented 38%, 44% and 41%, respectively, of
net revenue, and the Company expects that international sales will continue to
represent a substantial portion of its net revenue for the foreseeable future.
International sales are subject to a number of risks, including changes in
foreign government regulations, export license requirements, tariffs and taxes,
other trade barriers, fluctuations in currency exchange rates, difficulty in
collecting accounts receivable, difficulty in staffing and managing foreign
operations and political and economic instability. See "Risk Factors -- Risks of
International Sales and Operations."

The Company's key distributors include Ingram Micro and Tech Data. In
fiscal 1997, sales to Ingram Micro accounted for 19% of the Company's net
revenue. In the first six months of fiscal 1998, sales to Ingram Micro accounted
for 24% of the Company's net revenue and sales to Tech Data accounted for 13% of
the Company's net revenue. The loss of, or reduction in sales to, any of the
Company's key customers could have a material adverse affect on the Company's
business and results of operations. See "Risk Factors -- Reliance on
Distribution Channels."

The Company's key OEM customers include printer manufacturers and
manufacturers of notebook computers, PDAs, digital cameras and other mobile
computing devices. The Company intends to increase its sales to OEMs in the
future. Sales to OEMs involve a number of potential risks, including lengthy
sales cycles and potential competition from OEM customers. See "Risk
Factors -- Reliance on Distribution Channels."

The Company provides most of its distributors and resellers with limited
product return rights for stock rotation. Stock rotation rights permit
distributors to return products to the Company for credit against an offsetting
purchase order, but are limited based upon amounts purchased by a given
distributor during the preceding quarter. Although the Company believes that its
allowance for product returns is adequate, there can be no assurance that the
Company will not experience significant returns in the future or that such
allowances will be adequate. The Company also provides most of its distributors
and resellers with price protection rights. Price protection rights require that
the Company grant retroactive price adjustments for inventories of the Company's
products held by distributors or resellers if the Company lowers its prices for
such products. See "Risk Factors -- Reliance on Distribution Channels."

The timing and volume of customer orders are difficult to forecast because
the Company's customers typically require prompt delivery of products and a
substantial majority of the Company's sales are booked and shipped in the same
quarter. Accordingly, the Company typically operates with a relatively small
order backlog. Further, sales are generally made pursuant to standard purchase
orders that can be rescheduled, reduced or canceled with little or no penalty.
The Company believes that its backlog at any given time is not a meaningful
indicator of future net revenue. See "Risk Factors -- Potential Fluctuations in
Operating Results."

SERVICE AND SUPPORT

The Company believes that service and support are critical components of
end user satisfaction and the success of the Company's business. The Company's
commitment to service and support enables it to interact regularly with network
administrators and to identify and respond to their needs on an ongoing basis.
The Company maintains service and support personnel in Bozeman, Montana and
Boise, Idaho. In addition, the Company's foreign sales subsidiaries and
international distributors provide service and support to foreign end users. The
Company offers a wide range of customer support services under the ExtendAssist
Program. It includes a technical support hotline to provide a range of telephone
support to its distributors, dealers and end user customers through a toll-free
number. In addition, the Company maintains a technical support group comprised
of engineers and technicians, 24-hour automated support, and an on-line bulletin
board which contains in depth technical information. Through ExtendAssist, the
Company's engineering staff provides

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technical support via e-mail. The Company also provides on-line services to
distribute technical advice and software updates.

RESEARCH AND DEVELOPMENT

The Company believes that its future success will depend in large part on
its ability to develop, introduce and manufacture new products and enhance
existing products, allowing it to offer its customers products that achieve
higher levels of performance and reliability. The Company's research and
development efforts are currently focused on infrared communications, networking
protocols, enterprise network management tools, client/server data management,
Internet connectivity and new networking and mobile connectivity platforms.

As of December 31, 1997, the Company had 61 engineers engaged in research
and development. During fiscal 1995, 1996 and 1997 and the six months ended
December 31, 1997, research and development expenses were $3.7 million, $4.4
million, $5.3 million and $3.1 million, respectively. The Company anticipates
that it will continue to commit substantial resources to research and
development in the future.

The product development process involves a number of risks. The development
of new, technologically advanced hardware and software products is a complex and
uncertain process requiring high levels of innovation, as well as the accurate
anticipation of technological and market trends. There can be no assurance that
the Company will successfully develop, introduce or manage the transition to new
products. See "Risk Factors -- Risks Associated with New Product Development."

MANUFACTURING

The Company focuses its manufacturing efforts on cost-effectively producing
high-quality products. The Company's manufacturing operations are located in
Boise, Idaho and consist mainly of materials procurement, final assembly,
testing, quality assurance and shipping. The only product assembly performed by
the Company is final assembly, which consists of the integration of major
components into a final product and the preparation of that product for
shipment. The Company performs testing and quality assurance of certain products
at its Boise facilities and plans to expand its in-house automated testing
efforts as its product volume increases. The Company has received ISO 9001
certification, which the Company believes is crucial in order to sell its
products internationally.

The Company subcontracts other manufacturing functions, including the
production of its printed circuit boards. Certain of the Company's products are
manufactured in their entirety by third parties. For example, the ExtendNet IAS
is manufactured by Apexx Technology, Inc. In addition, the Company's port
replicator and in-air and in-car charger products are manufactured by Mobility
Electronics. The Company's reliance on third-party manufacturers involves a
number of risks, including the potential inability to obtain an adequate supply
of products and control over delivery schedules, product quality and product
cost. See "Risk Factors -- Risks Associated with Third-Party Manufacturers and
Suppliers."

The Company relies on third-party suppliers for components used in its
products. Certain of the components used in the Company's products, including
certain semiconductor components and infrared transmission components, are
currently available from a limited number of suppliers. Disruption in service by
any of the Company's manufacturers or the Company's suppliers could lead to
supply constraints or delays in the delivery of the Company's products. Such
supply constraints or delays could have a material adverse effect on the
Company's business and results of operations. See "Risk Factors -- Risks
Associated with Third-Party Manufacturers and Suppliers."

COMPETITION

The markets for the Company's products are intensely competitive, and are
characterized by frequent new product introductions, rapidly changing technology
and standards, constant price pressure and competition for distribution
channels. The principal competitive factors in the Company's markets include
brand-name awareness, price, product performance, reliability, breadth of
product line, sales and distribution capability and technical support and
service. Certain of these factors are outside the Company's control. There

38
<PAGE> 40

can be no assurance that the Company will be able to compete successfully in the
future with respect to these or any other competitive factors or that
competition will not have a material adverse effect on the Company's business
and results of operations.

The Company's principal competitors in the market for print servers include
Hewlett-Packard, Intel Corporation, Lexmark International, Inc. and Emulex
Corporation. In the market for infrared mobile computing products, the Company's
competitors include a number of companies which have hardware or software
solutions. As the market for infrared connectivity matures, the Company may face
increased competition from the major PC manufacturers, who may choose to develop
infrared solutions for use with their own products. The Company currently faces
limited direct competition from major applications and operating systems
software vendors who may choose to incorporate infrared connectivity
functionality into their software, thereby potentially reducing the need for
OEMs to include the Company's products in their notebook and desktop PCs. The
Company's ExtendNet IAS product currently competes with the product offerings of
Bay Networks, Inc., as well as those of a number of smaller companies. The
Company's ExtendNet VPN product currently competes with software-based solutions
offered by Microsoft Corporation and others. As the market for these distributed
connectivity products matures, the Company expects to face direct competition
from other large computer networking and software companies. The Company's
Advantage Database Server product currently competes with low-end database
products from companies such as Microsoft Corporation and Oracle Corporation, in
addition to smaller competitors offering data management software. The Company
faces indirect competition from existing and potential customers that provide
internally developed solutions. As a result, the Company must demonstrate to
prospective customers the advantages of the Company's products over internally
developed solutions.

INTELLECTUAL PROPERTY

The Company relies on a combination of patent, copyright and trademark
laws, trade secrets, confidentiality procedures and contractual provisions to
protect its proprietary intellectual property rights. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. The Company
currently has three issued United States patents that expire in 2006 and beyond
and has five patent applications pending. The Company has registered nine
trademarks in the United States, including "JetEye" and "ExtendNet." The
Company's future success is dependent in part upon its proprietary technology.
There can be no assurance that any patent, trademark or copyright owned by the
Company will not be invalidated, circumvented or challenged, that the rights
granted thereunder will provide competitive advantages to the Company or that
any of the Company's pending or future patent applications will be issued with
the scope of the claims sought by the Company, if at all. Further, there can be
no assurance that others will not develop technologies that are similar or
superior to the Company's technology, duplicate the Company's technology or
design around the patents owned by the Company. Effective intellectual property
protection may be unavailable or limited in certain foreign countries. There can
be no assurance that the steps taken by the Company will prevent
misappropriation of its technology by foreign companies.

39
<PAGE> 41

EMPLOYEES

As of December 31, 1997, the Company had 269 full-time equivalent
employees, including 62 in research and development, 129 in sales, marketing and
customer support, 47 in manufacturing and 31 in administration. None of the
Company's employees is represented by a labor union or is subject to a
collective bargaining agreement with respect to his or her employment with the
Company. The Company believes that its relations with its employees are good.

The Company's future success will depend, in part, upon its ability to
attract and retain qualified personnel. Competition for qualified personnel in
the Company's industry is intense, and there can be no assurance that the
Company will be successful in retaining its key employees or that it will be
able to attract skilled personnel as the Company grows. See "Risk
Factors -- Management of Growth" and "Risk Factors -- Dependence on Key
Personnel."

FACILITIES

The Company owns its corporate headquarters facility in Boise, Idaho which
consists of approximately 100,000 square feet of space located on 24 acres of
land which are also owned by the Company. This space is used for research and
development, manufacturing, sales and marketing, customer support and
administration. In addition, the Company owns a facility of approximately 20,000
square feet in Bozeman, Montana. This facility is used primarily for customer
support and sales and marketing. The Company believes that its current
facilities in Boise and Bozeman are adequate to meet its needs for at least the
next 12 months.

The Company also leases a number of sales, support and development offices
in the United States and Europe. The Company believes that existing field sales,
support and development facilities are adequate to meet its current
requirements. The Company plans to continue to expand its field sales, support
and development facilities worldwide where appropriate.

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<PAGE> 42

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth certain information regarding the executive
officers and directors of the Company as of December 31, 1997.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Steven D. Simpson(1)....... 50 President, Chief Executive Officer and Director
Karla K. Rosa.............. 35 Vice President, Finance and Chief Financial Officer
Holmes T. Lundt............ 40 Vice President, Corporate Research and Development and
Business Development
Scott J. Ritchie........... 42 Vice President, Operations
Thomas C. White............ 48 Vice President, Sales and Marketing
Bradley J. Surkamer........ 43 Vice President, Technical Support and Third-Party
Marketing
Douglas B. Winterrowd(1)... 46 Chief Engineer and Director
Raymond A. Smelek(3)....... 63 Chairman of the Board of Directors
Gregory M. Avis(2)......... 39 Director
S. Scott Wald(3)........... 42 Director
</TABLE>

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

(1) Class I Director

(2) Class II Director

(3) Class III Director

Steven D. Simpson has served as the Company's President and Chief Executive
Officer and as a director since January 1996. From January 1995 to January 1996,
Mr. Simpson served as the Company's Executive Vice President of Sales and
Marketing. Prior to joining the Company, Mr. Simpson was employed by
Hewlett-Packard from 1978 to 1994. From 1991 to 1994, Mr. Simpson was General
Manager of the Boise LaserJet Printer Division. He holds a B.S. in Marketing
from the University of Utah and an M.B.A. from the University of Wyoming.

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

Holmes T. Lundt has served as the Company's Vice President of Corporate
Research and Development and Business Development since January 1996. From
December 1994 to January 1996, Mr. Lundt was the Company's Vice President of
Research and Development, from October 1993 to December 1994, Mr. Lundt was Vice
President of Marketing and from January 1991 to October 1993, Mr. Lundt was
Business Unit Manager of Network Printing. Mr. Lundt joined the Company in 1984.
Mr. Lundt holds a B.S. in Electrical Engineering from Iowa State University and
a M.S. of Electrical Engineering from Stanford University.

Scott J. Ritchie has served as the Company's Vice President of Operations
since he joined the Company in December 1995. From May 1978 to November 1995,
Mr. Ritchie was employed by Hewlett-Packard and held a number of positions in
manufacturing and material management, most recently as Materials Manager in the
Disk Memory Division. He holds a B.B.A. in Management and an M.B.A. from Boise
State University.

Thomas C. White has served as the Company's Vice President of Sales and
Marketing since January 1996. From June 1995 to January 1996, Mr. White was the
Company's Vice President of North American Sales. From July 1993 to June 1995,
Mr. White was National Account Director for MicroAge Computer Centers, Inc.
("MicroAge"). Prior to joining MicroAge, Mr. White spent seven years at Apple
Computer, where he served as Large Enterprise Manager. He holds a B.S. in
Business Administration from Western Illinois University.

41
<PAGE> 43

Bradley J. Surkamer has served as the Company's Vice President of Technical
Support and Third-Party Marketing since January 1996. From January 1995 to
January 1996, Mr. Surkamer was the Company's Manager of Technical and Third
Party Marketing. From 1991 to January 1995, Mr. Surkamer was the Company's
Manager of Sales and Marketing. He holds a B.S. in Mathematics from the
University of Montana and an M.B.A. from Northern Arizona University.

Douglas B. Winterrowd is a founder of the Company and has been a Director
of the Company since October 1995. Previously, Mr. Winterrowd served as a
Director of the Company from 1984 to 1992. He has served as Chief Engineer since
February 1994. Prior to such time, Mr. Winterrowd held various positions with
the Company, including Program Manager, Quality Assurance Manager, Technical
Support Manager, Project Manager and Senior Engineer. Prior to joining the
Company, Mr. Winterrowd was employed by Hewlett-Packard for 10 years and held a
number of positions in Research and Development. Mr. Winterrowd holds a B.S. in
Electrical Engineering and an M.S. in Electrical Engineering from Montana State
University.

Raymond A. Smelek has served as the Company's Chairman of the Board of
Directors since June 1995 and he has been a Director of the Company since June
1994. From June 1994 to February 1996, Mr. Smelek was the Company's President
and Chief Executive Officer. Prior to joining the Company, Mr. Smelek was
employed by Hewlett-Packard and held a number of positions, most recently as
Vice President and General Manager of the Mass Storage Group. Mr. Smelek is also
a director of Apexx Technology and Gem Pharmaceuticals. Mr. Smelek holds a B.S.
in Electrical Engineering from San Jose State University.

Gregory M. Avis has been a Director of the Company since September 1992.
Mr. Avis has served as a General Partner of Summit Partners, L.P., a venture
capital partnership, since 1987 and has served as a Managing Partner of Summit
Partners, L.P. since 1990. Mr. Avis is also a director of Digital Link
Corporation, a manufacturer of digital access products for wide area networks,
Powerwave Technologies, Inc., a designer and manufacturer of linear power
amplifiers for wireless communications, and Splash Technology Holdings, Inc., a
supplier of open-platform color servers. Mr. Avis holds a B.A. in Political
Economy from Williams College and an M.B.A. from Harvard Business School.

S. Scott Wald has been a Director of the Company since July 1994. Mr. Wald
is the founder of ASAP Software Express, Inc. ("ASAP"). Mr. Wald has served as
President and Chief Executive Officer of ASAP since September 1985. Prior to
joining ASAP, Mr. Wald was employed by Hewlett-Packard and held positions in
sales and product management. Mr. Wald holds a B.S. in Business Administration
and an M.B.A. from Arizona State University.

The Company's Board of Directors is divided into three classes. The term of
the Class I director expires at the Company's annual meeting of stockholders in
1999, the term of the Class II directors expires at the Company's annual meeting
of stockholders in 2000, and the term of the Class III directors expires at the
Company's annual meeting of stockholders in 1998. Thereafter, the term of each
class of directors shall be three years. All directors hold office until the
annual meeting of stockholders at which their respective class is subject to
re-election and until their successors are duly elected and qualified, or until
their earlier resignation or removal. Executive officers are appointed by the
Board of Directors and serve at the discretion of the Board. There are no family
relationships among the directors or officers of the Company.

BOARD COMMITTEES

Audit Committee. The Audit Committee of the Board of Directors reviews and
monitors the corporate financial reporting and external audits of the Company,
including among other things, the Company's internal control functions, the
results and scope of the annual audit and other services provided by the
Company's independent accountants, and the Company's compliance with legal
matters with a significant impact on the Company's financial reports. In
addition, the Audit Committee has the responsibility to consider and recommend
the appointment of the Company's independent accountants. The Audit Committee
also monitors transactions between the Company and its officers, directors and
employees for any potential conflicts of interest. The current members of the
Audit Committee are Gregory M. Avis and S. Scott Wald.

42
<PAGE> 44

Compensation Committee. The Compensation Committee of the Board of
Directors reviews and makes recommendations to the Board regarding the Company's
compensation policy and all forms of compensation to be provided to executive
officers and directors of the Company, including, among other things, annual
salaries and bonuses, and stock option and other incentive compensation
arrangements. In addition, the Compensation Committee reviews bonus and stock
compensation arrangements for all other employees of the Company. As part of the
foregoing, the Compensation Committee also administers the Company's 1998 Stock
Plan and 1998 Employee Stock Purchase Plan. The current members of the
Compensation Committee are Gregory M. Avis and S. Scott Wald.

Nominating Committee. The Nominating Committee of the Board of Directors
reviews and makes recommendations to the Board regarding annual elections of
directors and potential new directors. The current members of the Nominating
Committee are Raymond A. Smelek (Chairman), Gregory M. Avis and S. Scott Wald.

DIRECTOR COMPENSATION

Non-employee directors of the Company (the "Outside Directors") receive no
cash fees as compensation for their services as directors. The Outside Directors
are reimbursed for travel and other expenses incurred in attending meetings of
the Company's Board of Directors and meetings of committees of the Board of
Directors.

1998 Director Plan. The Company's 1998 Director Option Plan (the "Director
Plan") was adopted by the Board of Directors in December 1997 and approved by
the stockholders in January 1998. The Director Plan becomes effective on the
effectiveness of the registration statement relating to this Offering. A total
of 250,000 shares of Common Stock have been reserved for issuance under the
Director Plan. The Outside Directors are eligible to participate in the Director
Plan. Option grants under the Director Plan are automatic and non-discretionary,
and the exercise price of the options is 100% of the fair market value of the
Common Stock on the grant date. The Director Plan provides for an initial grant
of an option to purchase 15,000 shares of Common Stock (the "First Option") to
each Outside Director on the later of the date on which such person first
becomes an Outside Director or the date of effectiveness of the Director Plan;
provided, however, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive the First Option. Thereafter, the
Company shall automatically grant to each Outside Director an option to purchase
7,500 shares of Common Stock (a "Subsequent Option") on the date of the
Company's annual meeting of stockholders of each year; provided, however, that
such Outside Director shall have served on the Board for at least 6 months. Each
First Option and each Subsequent Option shall have a term of 10 years, or
shorter upon termination of an Outside Director's status as a director. The
shares subject to each First Option shall vest and become exercisable in
installments at a rate of one-third of the total of such shares on the first
anniversary date of grant and at a rate of 1/36th of the total of such shares
per month thereafter. The shares subject to each Subsequent Option shall vest
and become exercisable in full on the first anniversary of the date of grant of
that Subsequent Option. The fair market value of any option granted concurrently
with the initial effectiveness of the Director Plan shall be the Price to Public
set forth in the final prospectus relating to this Offering.

The Director Plan provides that in the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding option under the Director Plan will be assumed
or substituted for by the successor corporation (the "Successor Corporation").
If the Successor Corporation refuses to assume or substitute for the option, the
optionee shall have the right to exercise all of the optioned stock, including
shares as to which it would not otherwise be exercisable.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No member of the Compensation Committee was or is an officer or employee of
the Company or any of its subsidiaries. No executive officer of the Company
serves as a member of the Board of Directors or Compensation Committee of any
entity that has one or more executive officers serving as a member of the
Company's Board of Directors or Compensation Committee.

43
<PAGE> 45

EXECUTIVE COMPENSATION

The following table sets forth all compensation earned during the fiscal
year ended June 30, 1997 (the "Last Fiscal Year") by the Company's Chief
Executive Officer and the four other most highly compensated executive officers
of the Company whose total annual salary and bonus during such fiscal year
exceeded $100,000 (collectively, the "Named Executive Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION(1)
--------------------------- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Steven D. Simpson.............................. $193,333 $4,256 33,333 $59,268(2)
President and Chief Executive Officer
Holmes T. Lundt................................ 122,850 2,711 4,000 4,448(3)
Vice President, Corporate Research and
Development and Business Development
Scott J. Ritchie............................... 120,450 2,657 6,000 4,334(4)
Vice President, Operations
Thomas C. White................................ 110,040 41,402(5) 6,000 16,321(6)
Vice President, Sales and Marketing
Raymond A. Smelek.............................. 100,000 27,212 -- 2,486(7)
Chairman of the Board of Directors
</TABLE>

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

(1) Includes $78 in premiums paid by the Company with respect to term life
insurance for the benefit of the respective individual.

(2) Includes $5,674 of contributions by the Company to defined contribution
plans and $53,516 deferred compensation from options granted under the
Company's 1987 Restricted Stock Option Plan, as amended.

(3) Includes $4,370 of contributions by the Company to defined contribution
plans.

(4) Includes $4,256 of contributions by the Company to defined contribution
plans.

(5) Includes sales commissions of $38,968.

(6) Includes $4,983 of contributions by the Company to defined contribution
plans and $11,260 deferred compensation from options that were granted under
the Company's 1987 Restricted Stock Option Plan, as amended.

(7) Includes $2,408 of contributions by the Company to defined contribution
plans.

44
<PAGE> 46

STOCK OPTION GRANTS

The following table provides information concerning stock option grants
made to each of the Named Executive Officers during the Last Fiscal Year.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF SHARES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED OPTION TERM (2)
OPTIONS TO EMPLOYEES IN EXERCISE EXPIRATION -----------------------
NAME GRANTED(#)(1) LAST FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
---- ---------------- ---------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven D. Simpson....... 16,667 4.1% $8.36 12/16/06 $226,824 $361,179
16,667 4.1 8.88 01/01/07 241,076 383,874
Holmes T. Lundt......... 4,000 1.0 8.36 12/16/06 54,438 86,683
Scott J. Ritchie........ 6,000 1.5 8.36 12/16/06 81,656 130,024
Thomas C. White......... 6,000 1.5 8.36 12/16/06 81,626 130,024
Raymond A. Smelek....... -- -- -- -- -- --
</TABLE>

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

(1) Unless otherwise noted, all options vest over a period of five years and
have a ten year term.

(2) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years) and is calculated by assuming that the stock
price on the date of grant (the Board of Directors' determination of the
fair market value of the Company's Common Stock based on an independent
appraisal) appreciates at the indicated annual rate compounded annually for
the entire term of the option and that the option is exercised and sold on
the last day of its term for the appreciated price. Actual gains, if any, on
stock option exercises are dependent on the future performance of the Common
Stock and overall stock market conditions.

The following table sets forth the number of shares acquired upon exercise
of stock options during the Last Fiscal Year by each of the Named Executive
Officers, and the value of unexercised options as of June 30, 1997. Also
reported are values "in-the-money" options that represent the positive "spread"
between the respective exercise prices of outstanding stock options and the fair
market value of the Company's Common Stock as of June 30, 1997, as determined by
the Board of Directors.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END(#)(1) AT FISCAL YEAR-END($)(2)
-------------------------------- --------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Steven D. Simpson.................. 71,673 100,573 $329,311 $217,036
Holmes T. Lundt.................... 47,067 12,933 42,800 --
Scott J. Ritchie................... 6,667 32,667 10,900 43,600
Thomas C. White.................... 15,915 20,300 27,600 18,400
Raymond A. Smelek.................. 214,667 58,659 7,578 30,324
</TABLE>

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

(1) No Named Executive Officer exercised options during the fiscal year ended
June 30, 1997.

(2) There was no public trading market for the Company's Common Stock as of June
30, 1997. Accordingly, the value of unexercised in-the-money options is
calculated based on a price of $7.05 per share, the Board of Directors'
determination of the fair market value of the Company's Common Stock which
was based on an independent appraisal as of June 30, 1997. Amounts reflected
are based on the assumed value minus the exercise price and do not
necessarily indicate that the optionee sold such stock.

45
<PAGE> 47

EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT

The Company has entered into employment agreements with each of the Named
Executive Officers. These agreements generally set forth the individual's
salary, position and benefits. In addition, Mr. Simpson's contract with the
Company entitles Mr. Simpson to a continued salary and bonus for a period of 12
months if he is terminated by the Company without cause or without 12-months
written notice.

In 1994, the Company entered into an employment agreement with Raymond
Smelek pursuant to which the Company agreed to pay Mr. Smelek a base salary and
an annual bonus. In fiscal 1997, Mr. Smelek received $100,000 in salary and a
bonus of $27,212 for services rendered as Chairman of the Board of Directors. In
addition, for the first six months of fiscal 1998 the Company paid Mr. Smelek
$50,000. In January 1998, the Company and Mr. Smelek entered into a new
employment agreement pursuant to which Mr. Smelek will receive an annual salary
of $100,000 through December 1998, is eligible for a bonus and will be eligible
for stock options under the 1998 Stock Plan.

STOCK PLANS

1998 Stock Plan. The Company's 1998 Stock Plan (the "1998 Plan") provides
for the grant to employees of incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
for the grant to employees, directors and consultants of nonstatutory stock
options and stock purchase rights. The 1998 Plan was adopted by the Board of
Directors in December 1997 and approved by the stockholders in January 1998. The
1998 Plan becomes effective on the effectiveness of the registration statement
relating to this Offering. Unless terminated sooner, the 1998 Plan will
terminate automatically in January 2008. The maximum aggregate number of shares
which may be issued under the 1998 Plan is 1,600,000.

The 1998 Plan may be administered by a committee appointed by the Board of
Directors (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, consist of two or more "outside directors" within
the meaning of Section 162(m) of the Code. The Committee has, pursuant to the
terms of the 1998 Plan, the power to determine the terms of options granted,
including the exercise price, to reduce the exercise price of any option to the
then current fair market price if the fair market value of the Common Stock
covered by such option shall have declined since the date the option was
granted, number of shares subject to the option, and the exercisability thereof,
the form of consideration payable upon such exercise. In addition, the Board of
Directors has the authority to amend, suspend or terminate the 1998 Plan,
provided that no such action may affect any share of Common Stock previously
issued and sold or any option previously granted under the 1998 Plan.

Unless determined otherwise by the Committee, options and stock purchase
rights granted under the 1998 Plan are not transferable by the optionee, and
each option and stock purchase right is generally exercisable during the
lifetime of the optionee only by such optionee. Options granted under the 1998
Plan must generally be exercised within three months following termination of an
optionee's status as an employee, director or consultant of the Company, within
twelve months after an optionee's termination by disability, and within twelve
months after an optionee's termination by death, but in no event later than the
expiration of the option. In the case of stock purchase rights, unless the
administrator determines otherwise, a restricted stock purchase agreement shall
grant the Company a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment with the Company for any
reason (including death or disability). The purchase price for shares
repurchased pursuant to a restricted stock purchase agreement shall be the
original price paid by the purchaser and may be paid by cancellation of any
indebtedness of the purchaser to the Company. The repurchase option shall lapse
at a rate determined by the administrator. The exercise price of all incentive
stock options granted under the 1998 Plan must be at least equal to the fair
market value of the shares on the date of grant. The exercise price of
nonstatutory stock options granted under the 1998 Plan is determined by the
Committee, but with respect to nonstatutory stock options intended to qualify as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the exercise price must be at least equal to the fair market value of the
Common Stock on the date of grant. With

46
<PAGE> 48

respect to any employee who owns stock possessing more than ten percent of the
voting power of all classes of the Company's, or any parent or subsidiary of the
Company's outstanding capital stock, the exercise price of any incentive stock
option granted to such person must equal at least 110% of the fair market value
of the Common Stock on the date of grant and the term of such incentive stock
option must not exceed five years. The term of all other options granted under
the 1998 Plan may not exceed ten years.

The 1998 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each outstanding option and stock purchase right will be assumed or
substituted for by the successor corporation. In the event the successor
corporation refuses to assume or substitute for the option or stock purchase
right, the optionee shall have the right to exercise all of the optioned stock,
including shares as to which it would not otherwise be exercisable.

1998 Employee Stock Purchase Plan. The Company's 1998 Employee Stock
Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in
December 1997 and approved by the stockholders in January 1998. A total of
700,000 shares of Common Stock (plus an annual increase to be added each year
equal to the lesser of the number of shares necessary to bring the number of
shares available for sale under the Purchase Plan to 700,000 or an amount
determined by the Board of Directors) has been reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423
of the Code, is implemented by 24-month offering periods beginning on the first
trading day on or after June 30 and December 31 each year, except for the first
such offering period which commences on the first trading day or after the
effective date of this Offering and ends on the last trading day on or after
December 31, 1999. Each offering period contains four purchase periods of
approximately six months duration. The Purchase Plan is administered by the
Board of Directors or by a committee of members of the Board. All persons
employed by the Company on an enrollment date (June 30 or December 31 of each
year) are eligible to participate in the Purchase Plan, provided, however that
no employee shall be granted an option under the Purchase Plan that would result
in the employee owning capital stock of the company or holding options to
purchase such stock possessing 5% or more of the total combined voting power or
value of all classes of the capital stock of the Company. The Purchase Plan
permits eligible employees to purchase Common Stock through payroll deductions
of up to 15% of an employee's compensation (excluding commissions, overtime,
shift premium, incentive compensation, incentive payments and bonuses), except
that no participant's right to purchase shares of Common Stock may accrue at a
rate which exceeds $25,000 each calendar year. The price of stock purchased
under the Purchase Plan is 85% of the lower of the fair market value of the
Common Stock on the first day of an offering period or the last day of each six
month purchase period. Employees may end their participation at any time during
an offering period, and they will be paid their payroll deductions to date
(without interest). Participation ends automatically upon termination of
employment with the Company.

Rights granted under the Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Purchase Plan. The Purchase Plan provides that, in
the event of a merger of the Company with or into another corporation or a sale
of substantially all of the Company's assets, the option shall be assumed or
substituted by a successor corporation, or if the successor corporation refuses
to assume or substitute such options, the Board of Directors shall shorten any
offering periods then in progress (so that employees' rights to purchase stock
under the Purchase Plan are exercised prior to the merger or sale of assets).
The Purchase Plan will terminate in December 2007. The Board of Directors has
the authority to amend or terminate the Purchase Plan, except that no such
action may adversely affect any outstanding rights to purchase stock under the
Purchase Plan.

1994 Incentive Stock Option Plan. The Company's 1994 Incentive Stock Option
Plan (the "1994 Plan") provides for the grant to full-time employees of
incentive stock options within the meaning of Section 422 of the Code. The 1994
Plan was adopted by the Board of Directors and approved by the stockholders in
October 1993. The Board of Directors has the authority to amend the 1994 Plan,
unless such amendment relates to a change in the aggregate number of shares of
Common Stock to be issued by the Company under the 1994 Plan. The maximum
aggregate number of shares that may be issued pursuant to the 1994 Plan is
2,666,667 shares of Common Stock. Options that the Company grants under the 1994
Plan are non-transferable by the optionee, except on death, and exercisable
during the optionee's lifetime only by the optionee. The 1994 Plan requires the
exercise price of any option granted by the Company thereunder be at

47
<PAGE> 49

least equal to the fair market value of the shares on the date of grant. An
employee who owns stock representing 10% or more of the voting power of the
Common Stock is eligible under the 1994 Plan; provided, however, the exercise
price of any option granted by the Company to such employee is equal to at least
110% of the fair market value of the Common Stock on the date of grant and such
option expires 5 years from the date of grant. All other options granted by the
Company under the 1994 Plan must be exercised by the optionee within 10 years
from the date of grant. Options generally vest 20% per year over a period of
five years from the date of grant. The 1994 Plan, by its terms, terminates
automatically in December 2004, however, the Board of Directors has determined
that the Company will make no further option grants under the 1994 Plan after
the effective date of the Offering.

1984 Incentive Stock Option Plan. The Company's 1984 Incentive Stock Option
Plan, as amended (the "1984 Plan") provided for the grant to full-time employees
of incentive stock options within the meaning of Section 422 of the Code. The
1984 Plan was adopted by the Board of Directors and approved by the stockholders
in June 1984. The maximum aggregate number of shares that may be issued pursuant
to the 1984 Plan is 3,333,333 shares of Common Stock. Options that the Company
has granted under the 1984 Plan are non-transferable by the optionee, except on
death, and are exercisable during the optionee's lifetime only by the optionee.
The 1984 Plan required that the exercise price of any option granted by the
Company thereunder be at least equal to the fair market value of the shares on
the date of grant, which value was determined by an independent appraiser each
quarter. The 1984 Plan prohibited the Company from making option grants to any
employee who owned stock representing 10% or more of the voting power of the
Common Stock. Any option granted by the Company under the 1984 Plan must be
exercised by the optionee within ten years from the date of grant. The 1984 Plan
expired in June 1994.

1987 Restricted Stock Option Plan. The Company's 1987 Restricted Stock
Option Plan, as amended (the "1987 Plan"), provided for the grant to full-time
employees and directors of the Company nonqualified restricted stock options.
The 1987 Plan was adopted by the Board of Directors in September 1987. A total
of 1,666,667 shares of Common Stock was reserved for issuance under the 1987
Plan. The 1987 Plan required that the exercise price of the options granted
thereunder be a price determined by the Board of Directors or the current
appraised value of the shares on the date of grant, which value was determined
by an independent appraiser each quarter. Options under the 1987 Plan are not
exercisable before the first anniversary of the date of grant. Thereafter, such
options generally vest and are exercisable at a rate of 20% on each subsequent
anniversary of the date of grant. The term of all options under the 1987 Plan
generally is ten years. The 1987 Plan provided that upon termination of
employment or directorship by any party and for any reason except death or
permanent disability, any unexercised options automatically terminate. The Board
of Directors had the authority to amend the 1987 Plan at any time. The 1987 Plan
terminated in September 1997.

EMPLOYEE STOCK OWNERSHIP PLAN

Effective July 1, 1985, the Company adopted the Extended Systems Employee
Stock Ownership Plan (the "ESOP"). The ESOP is a combined employee stock
ownership plan and tax credit employee stock ownership plan. The ESOP and its
related trust are qualified under Sections 401(a), 409, 4975(e)(7) and 501(a) of
the Code and last received a Determination Letter from the Internal Revenue
Service in June of 1997. Douglas B. Winterrowd is the Trustee. Participation in
the Plan was open to all employees over the age of 21 who had at least one year
of service with the Company. Although the Company previously made significant
contributions to the ESOP, the Company has made no contributions have been made
since 1991. The ESOP trust currently owns approximately 333,872 shares of Common
Stock. Participants are entitled to distribution of their accounts, including
in-kind distributions of Common Stock, in the event of death, disability,
retirement or other termination of employment. Company contributions to the ESOP
are not taxable to participants until distributed.

The ESOP's assets are held in trust by the Trustee. Participants have the
right to direct the vote of Common Stock allocated to their accounts with
respect to significant corporate matters. The Trustee is entitled to vote
unallocated stock. Currently, all shares of Common Stock are allocated to
participant accounts. Common Stock allocated to a participant's tax credit
account is 100% vested. All other allocated

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<PAGE> 50

Common Stock is subject to a five-year "cliff" vesting schedule. However,
because no contributions have been made for six years, substantially all
accounts are 100% vested at this time.

401(k) PLAN

The Company maintains a tax-qualified employee savings and retirement plan
(the "401(k) Plan") which covers certain of the Company's employees who are at
least 21 years of age and have completed six consecutive months of service with
the Company (the "Participants"). Pursuant to the 401(k) Plan, Participants may
elect to reduce their current eligible compensation by up to 15% and up to 100%
of bonuses, or the statutorily prescribed annual limit, whichever is lower, and
have the amount of such reduction contributed to the 401(k) Plan. Participants'
salary reduction contributions are fully vested at all times. A Participant will
also receive a dollar-for-dollar match on his salary reduction contribution each
year up to a maximum of 3% of the Participant's eligible compensation. The
Company, at the sole discretion of the Board, may make an additional matching
contribution. Each Participant's interest in his matching contributions vests in
accordance with a four-year graduated vesting schedule. The Company, at the sole
discretion of the Board, may also make a discretionary contribution to
Participants who have completed 1,000 hours of service with the Company during
that plan year. The discretionary contribution, if any, is fully vested.
Participants are eligible for a distribution from the 401(k) Plan upon their
reaching age 59 1/2, reaching early retirement age (age 55 and completing five
years of service), death, disability or separation from service with the
Company. The 401(k) Plan is intended to qualify under Sections 401(a) and 501(a)
of the Code so that contributions by Participants and by the Company to the
401(k) Plan, and income earned on such contributions, are not currently taxable
to Participants and so that contributions by the Company will be deductible by
the Company when made. The trustee under the 401(k) Plan, at the direction of
Participants, invests the assets of the 401(k) Plan in any of a number of
designated investment options.

LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation limits the liability of
directors to the fullest extent permitted by the Delaware General Corporation
Law (the "Delaware Law"). Under the Delaware Law, a director's liability to a
company or its stockholders may not be limited with respect to (i) any breach of
his duty of loyalty to the company or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) unlawful payments or dividends or unlawful stock repurchases or
redemptions or (iv) transactions from which the director derived an improper
personal benefit.

The Company's Bylaws provide that the Company shall indemnify its officers
and directors and may indemnify its employees and other agents to the fullest
extent permitted under Delaware Law, and the Bylaws also permit the Company to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of such person's actions, regardless of whether
Delaware Law would permit such indemnification.

The Company intends to enter into indemnification agreements with each of
its directors and executive officers and has obtained a directors' and officers'
liability insurance policy that insures such persons against the cost of
defense, settlement or payment of judgments under certain circumstances. As of
the date of this Prospectus, there is no pending litigation or proceeding
involving a director or officer of the Company as to which indemnification is
being sought, nor is the Company aware of any pending or threatened litigation
that may result in claims for indemnification by any director or officer.

CERTAIN TRANSACTIONS

In fiscal 1997, the Company paid legal fees in the amount of $73,389 to
Hamlin & Sasser, P.A., a law firm in which Robert G. Hamlin, a former director
of the Company, is a partner.

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<PAGE> 51

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 26, 1998, and as adjusted
to reflect the sale of the 1,550,000 shares of Common Stock offered hereby, with
respect to (i) each person or entity who is known by the Company to own
beneficially 5% or more of the Company's outstanding Common Stock, (ii) each of
the Company's directors, (iii) each of the Named Executive Officers, (iv) each
Selling Stockholder and (v) all directors and executive officers of the Company
as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING(1)(2)
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Douglas B. Winterrowd(3)................ 1,531,372 22.3% 13,593 1,517,779 18.6%
Charles M. Jopson(4).................... 1,262,666 18.4 13,593 1,249,073 15.3
5777 North Meeker Ave.
Boise, Idaho 83713
Gary D. Atkins(5)....................... 1,260,278 17.5 156,839 1,103,439 13.0
P.O. Box 68
Pinedale, Wyoming 82941
Ted L. Wimer(6)......................... 1,016,133 14.8 21,434 994,699 12.2
5777 North Meeker Ave.
Boise, Idaho 83713
Raymond A. Smelek(7).................... 302,541 4.3 -- 302,541 3.6
Steven D. Simpson(8).................... 102,245 1.5 -- 102,245 1.2
S. Scott Wald(9)........................ 14,370 * -- 14,370 *
Gregory M. Avis(10)..................... -- -- -- -- --
Holmes T. Lundt(11)..................... 337,400 4.9 6,273 331,127 4.0
Thomas C. White(12)..................... 17,114 * -- 17,114 *
Scott J. Ritchie(13).................... 14,533 * -- 14,533 *
Steven Bolen(14)........................ 257,000 3.7 9,410 247,590 3.0
David W. Suvak(15)...................... 211,867 3.1 3,137 208,730 2.5
Patrick J. Megowan(16).................. 211,867 3.1 9,410 202,457 2.5
Michael D. Kyle(17)..................... 70,000 1.0 2,196 67,804 *
Gerald A. Loyd.......................... 63,333 * 14,115 49,218 *
All directors and executive officers as
a group (10 persons).................. 2,402,975 32.6 19,866 2,383,109 32.3
</TABLE>

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

* Less than 1%.

(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options currently exercisable, or exercisable within 60 days of February
26, 1998, and are deemed outstanding for computing the percentage of the
person holding such options but are not deemed outstanding for computing
the percentage of any other person. Except as indicated by footnote and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock owned by them.

(2) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, Mr. Winterrowd
will sell an additional 12,641 shares, Mr. Jopson will sell an additional
12,641 shares, Mr. Atkins will sell an additional 145,860 shares, Mr. Wimer
will sell an additional 19,934 shares, Mr. Lundt will sell an additional
5,834 shares, Mr. Bolen will sell an additional 8,752 shares, Mr. Suvak
will sell an additional 2,917 shares, Mr. Megowan will sell an additional
8,752 shares, Mr. Kyle will sell an additional 2,042 shares and Mr. Loyd
will sell an additional 13,127 shares.

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<PAGE> 52

(3) Includes 40,183 shares held of record by Mr. Winterrowd's daughter and
333,872 shares held of record by the Employee Stock Ownership Plan for
which Mr. Winterrowd serves as trustee. Mr. Winterrowd is Chief Engineer
and a director of the Company.

(4) Includes 6,000 shares held of record by Mr. Jopson's daughter. Mr. Jopson
is an employee of the Company.

(5) Includes 60,278 shares held of record by Mr. Atkins' wife and 333,334
shares subject to options exercisable within 60 days of February 26, 1998.

(6) Mr. Wimer is an employee of the Company.

(7) Includes 1,942 shares held of record by Smelek & Associates, a business
owned by Mr. Smelek's wife, 17,933 shares held of record by Mr. Smelek's
wife and 216,000 shares subject to options exercisable within 60 days of
February 26, 1998. Mr. Smelek is the Chairman of the Board of Directors.

(8) Represents shares subject to options exercisable within 60 days of February
26, 1998. Mr. Simpson is the President, Chief Executive Officer and a
director of the Company.

(9) Represents shares subject to options exercisable within 60 days of February
26, 1998. Mr. Wald is a director of the Company.

(10) Mr. Avis is the Managing Partner of Summit Partners, L.P. which is the
general partner of Summit Investors II, L.P. ("Summit Investors") and
Summit Ventures II, L.P. ("Summit Ventures"). Summit Investors and Summit
Ventures hold subordinated notes convertible into 557,787 shares of the
Company's Common Stock. Mr. Avis is a director of the Company.

(11) Includes 52,400 shares subject to options exercisable within 60 days of
February 26, 1998. Mr. Lundt is Vice President of Corporate Research and
Development and Business Development of the Company.

(12) Represents shares subject to options exercisable within 60 days of February
26, 1998. Mr. White is Vice President of Sales and Marketing of the
Company.

(13) Represents shares subject to options exercisable within 60 days of February
26, 1998. Mr. Ritchie is Vice President of Operations of the Company.

(14) Includes 9,900 shares held of record by Mr. Bolen's daughters.

(15) Includes 11,867 shares subject to options exercisable within 60 days of
February 26, 1998. Mr. Suvak is Chief Technical Officer of Counterpoint
Systems Foundry, Inc., a subsidiary of the Company.

(16) Includes 100,000 shares held of record by Mr. Megowan's wife and 11,867
shares subject to options exercisable within 60 days of February 26, 1998.
Mr. Megowan is President of Counterpoint Systems Foundry, Inc., a
subsidiary of the Company.

(17) Includes 4,000 shares held of record by Mr. Kyle's sons.

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<PAGE> 53

DESCRIPTION OF CAPITAL STOCK

GENERAL

Upon the closing of the Offering, the Company will be authorized to issue
75,000,000 shares of Common Stock, $0.001 par value per share, and 5,000,000
shares of Preferred Stock, $0.001 par value per share.

The following description of the Company's capital stock does not purport
to be complete and is subject to and qualified in its entirety by the Company's
Certificate of Incorporation and Bylaws, which are included as exhibits to the
Registration Statement of which this Prospectus forms a part, and by the
provisions of applicable Delaware law.

COMMON STOCK

As of December 31, 1997, there were 6,873,855 shares of Common Stock
outstanding held of record by 145 stockholders. As of December 31, 1997, there
were options to purchase 2,509,066 shares of Common Stock outstanding. Holders
of Common Stock are entitled to one vote per share on all matters to be voted
upon by the stockholders. Holders of Common Stock do not have cumulative voting
rights, and, therefore, holders of a majority of the shares voting for the
election of directors can elect all of the directors who are to be elected in
that year. In such event, the holders of the remaining shares will not be able
to elect any directors.

Holders of the Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any Preferred Stock that may be
issued in the future or any agreements between the Company and its creditors.
The Company has not declared or paid cash dividends on its capital stock since
September 30, 1994, expects to retain future earnings, if any, for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future. See "Dividend Policy."

PREFERRED STOCK

Following the Offering, the Board of Directors will have the authority to
issue the undesignated Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued shares of undesignated Preferred Stock and to fix the number of
shares constituting any series in the designations of such series, without any
further vote or action by the stockholders. The Board of Directors, without
stockholder approval, can issue Preferred Stock with voting and conversion
rights which could adversely affect the voting power of the holders of Common
Stock. The issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Risk Factors --
Anti-Takeover Effects of Charter Provisions and Delaware Law." The Company has
no present plan to issue Preferred Stock.

REGISTRATION RIGHTS

The holders of 92,695 shares of Common Stock and the holders of the
subordinated notes convertible into 557,787 shares of Common Stock have certain
rights to require the Company to register those shares under the Securities Act.

SUBORDINATED NOTES

On September 30, 1992 the Company, Summit Investors II, L.P. ("Summit
Investors") and Summit Ventures II, L.P. ("Summit Ventures") entered into the
Convertible Subordinated Promissory Notes and Warrant Purchase Agreement (the
"Note Purchase Agreement") pursuant to the terms of which the Company issued (i)
a zero coupon convertible subordinated promissory note to Summit Investors (the
"Summit Investors Zero Coupon Note"), (ii) a zero coupon convertible
subordinated promissory note to Summit Ventures (the "Summit Ventures Zero
Coupon Note"), (iii) a 10% convertible subordinated promissory note to Summit
Investors (the "Summit Investors 10% Note"), (iv) a 10% convertible

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<PAGE> 54

subordinated promissory note to Summit Ventures (the "Summit Ventures 10% Note")
and (v) warrants to purchase Common Stock. The warrants were not exercised and
expired in 1995.

The Summit Ventures Zero Coupon Note was issued for $3,941,840 and has a
maturity value in September 1999 of $7,514,133. Summit Ventures may convert all
or a portion of the principal and accrued interest of the note into Common Stock
at any time prior to maturity. If Summit Ventures converts the note it will
receive 488,600 shares of Common Stock.

The Summit Investors Zero Coupon Note was issued for $58,160 and has a
maturity value in September 1999 of $110,867. Summit Investors may convert all
or a portion of the principal and accrued interest of the note at any time prior
to maturity into Common Stock. If Summit Investors converts the note it will
receive 7,209 shares of Common Stock.

The Summit Ventures 10% Note was issued by the Company for $492,730, bears
interest at a rate of ten percent (10%) and is due on September 29, 1999. Summit
Ventures may convert all or a portion of the principal amount into Common Stock
at any time prior to the due date. If Summit Ventures converts the full
principal amount of the note, it will receive 61,077 shares of Common Stock.

The Summit Investors 10% Note was issued by the Company for $7,270, and it
bears interest at a rate of ten percent (10%) and is due on September 29, 1999.
Summit Investors may convert all or a portion of the principal amount into
Common Stock at any time prior to the due date. If Summit Investors converts the
full principal amount of the note, it will receive 901 shares of Common Stock.

CERTAIN CHARTER PROVISIONS AND ANTI-TAKEOVER EFFECTS OF DELAWARE LAW

The Company's Certificate of Incorporation provides that all stockholder
actions must be effected at a duly called annual or special meeting and may not
be effected by written consent. The Company's Bylaws provide that, except as
otherwise required by law, special meetings of the stockholders can only be
called by the Chairman of the Board of Directors, the President, a majority of
the Board of Directors or by holders of a majority of the Company's stock issued
and outstanding and entitled to vote at such meeting. In addition, the Company's
Bylaws establish an advance notice procedure for stockholder proposals to be
brought before an annual meeting of stockholders, including proposed nominations
of persons for election to the Board. Stockholders at an annual meeting may only
consider proposals or nominations specified in the notice of meeting or brought
before the meeting by or at the direction of the Board of Directors or by a
stockholder who was a stockholder of record on the record date for the meeting,
who is entitled to vote at the meeting and who has delivered timely written
notice in proper form to the Company's Secretary of the stockholder's intention
to bring such business before the meeting.

In addition, the Company's Board of Directors is divided into three
classes. The directors are classified with respect to the time for which they
severally hold office into three classes, as nearly equal in number as possible,
designated Class I, Class II and Class III, with staggered terms of office. The
term of office of the Class I Directors will expire at the annual meeting of
stockholders in 1999 and Class I Directors will be elected for a full term of
three years. The term of office of the Class II Directors will expire at the
annual meeting of stockholders in the year 2000 and Class II Directors will be
elected for a full term of three years. The term of office of the Class III
Directors will expire at the annual meeting of stockholders in 1998 and Class
III Directors will be elected for a full term of three years. At each succeeding
annual meeting of stockholders, the successors of the class of directors whose
terms expire at such meeting will be elected by the holders of a majority of the
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, to hold office for a term expiring at the annual meeting
of stockholders held in the third year following the year of their election.

The foregoing provisions of the Company's Certificate of Incorporation and
Bylaws are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions which may
involve an actual or threatened change of control of the Company. Such
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and, accordingly, could discourage

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<PAGE> 55

potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions are also intended to discourage certain tactics
that may be used in proxy fights but could, however, have the effect of
discouraging others from making tender offers for the Company's shares and,
consequently, may also inhibit fluctuations in the market price of the Company's
shares that could result from actual or rumored takeover attempts. These
provisions may also have the effect of preventing changes in the management of
the Company. See "Risk Factors -- Anti-Takeover Effects of Charter Provisions
and Delaware Law."

The Company is also subject to the anti-takeover provisions of Section 203
of the Delaware General Corporation Law prohibits the Company from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 could have the effect of delaying or preventing a
change of control of the Company. The Company's Certificate of Incorporation
does not permit cumulative voting. This provision and other provisions of the
Company's Certificate of Incorporation and Bylaws may have the effect of
deterring hostile takeovers or delaying or preventing changes in control or
management of the Company, including transactions in which stockholders might
otherwise receive a premium for their shares over then current market prices. A
Delaware corporation may "opt out" of Section 203 with an express provision in
its original certificate of incorporation or an express provision in its
certificate of incorporation or bylaws resulting from amendments approved by the
holders of at least a majority of the Company's outstanding voting shares. The
Company has not "opted out" of the provisions of Section 203. See "Risk
Factors -- Anti-Takeover Effects of Charter Provisions and Delaware Law."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is BankBoston, N.A.
Its telephone number is (781) 575-2514.

LISTING

The Company's Common Stock has been approved for listing on The Nasdaq
National Market under the trading symbol "XTND."

RESCISSION OFFER

Approximately thirty days after the effectiveness of this Offering the
Company intends to commence a rescission offer (the "Rescission Offer") pursuant
to a registration statement filed under the Securities Act and pursuant to the
securities laws of the states of Idaho, California, Montana and New York
covering shares of Common Stock which may have been sold in violation of the
registration requirements of applicable federal and state securities laws, which
represented an aggregate of 175,531 shares as of December 31, 1997. Because of
the frequency and number of sales, including the number of persons who received
offers and who purchased shares, the private placement exemption under the
Securities Act may not have been available for the Company's prior sales of the
Rescission Stock. The Company will offer to rescind such prior sales by
repurchasing the Rescission Stock at the price per share paid therefor (a range
of $0.15 per share to $8.76 per share) plus interest thereon at various
statutory rates in effect for the applicable states from the date of purchase by
each purchaser to the expiration of the Rescission Offer. The Rescission Offer
will expire approximately thirty days after the effectiveness of the
registration statement with respect to the Rescission Stock. Under the
Rescission Offer, the Company would be required to make an aggregate payment of
approximately $388,000 plus interest of $45,000 as of December 31, 1997.
Offerees who do not accept the Rescission Offer will, for purposes of applicable
federal and state securities laws, be deemed to hold registered shares under the
Securities Act which will be freely tradeable in the public market as of the
effective date of the registration statement with respect to the Rescission
Stock. The Securities Act does not expressly provide that a Rescission Offer
will terminate a purchaser's right to rescind a sale of stock which was not
registered under the Securities Act as required. However, federal law does
provide that a stockholder may lose any rescission rights under federal
securities laws one year from the date of purchase of such stockholder's shares.

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<PAGE> 56

Accordingly, should the Rescission Offer be rejected by any or all offerees, the
Company may continue to have contingent liability under the Securities Act for
the purchase price of Rescission Stock up to an aggregate amount of
approximately $128,000.

As of the date hereof, the Company is not aware of any claims for
rescission against the Company. While the Company will offer to rescind the
sales of the Rescission Stock, there can be no assurance that the Company will
not otherwise be subject to possible penalties or fines relating to these
issuances. The Company believes that the Rescission Offer will provide it with
additional meritorious defenses to any such future claims. See "Risk
Factors -- Rescission Offer," "Shares Eligible for Future Sale" and Note 13 of
Notes to Consolidated Financial Statements.

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<PAGE> 57

SHARES ELIGIBLE FOR FUTURE SALE

Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that a significant public market for the Common
Stock will develop or be sustained after the Offering. Future sales of
substantial amounts of Common Stock in the public market could adversely affect
the market price of the Common Stock and could impair the Company's future
ability to raise capital through the sale of its equity securities.

Upon the closing of the Offering, the Company will have outstanding
8,173,855 shares of Common Stock based upon shares outstanding as of December
31, 1997. In addition to the 1,550,000 shares of Common Stock offered hereby
(1,782,500 if the Underwriters' over-allotment option is exercised in full), as
of the effective date of the Registration Statement (the "Effective Date"),
there will be 6,623,855 shares of Common Stock outstanding all of which are
"restricted" shares (the "Restricted Shares") under the Securities Act. Such
Restricted Shares may be sold only if registered under the Securities Act or
sold in accordance with an available exemption from such registration.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus a person (or persons whose shares are aggregated in
accordance with the Rule) who has beneficially owned his shares for at least one
year, including persons who are affiliates of the Company, will be entitled to
sell, within any three month period a number of shares of Common Stock that does
not exceed the greater of (i) one percent (1%) of the then outstanding number of
shares of Common Stock (up to 81,739 shares of Common Stock immediately after
the consummation of the Offering) or (ii) the average weekly trading volume of
the shares during the four calendar weeks preceding each such sale. In addition,
sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
the Company. After shares are held for two years, a person who is not an
affiliate of the Company is entitled to sell such shares under Rule 144 without
regard to such volume limitations, or manner of sale, notice or public
information requirements under Rule 144. Sales of shares by affiliates will
continue to be subject to such volume limitations, and manner of sale, notice
and public information requirements.

The Company has agreed with the Underwriters not to offer, pledge, sell,
contract to sell, or otherwise dispose of or enter into any transaction which is
designed to, or could be expected to, result in the disposition (whether by
actual disposition or effective economic disposition due to cash settlement or
otherwise) by the Company, any affiliate of the Company or any person in privity
with the Company, directly or indirectly, or announce the offering of any other
shares of Common Stock or any securities or options convertible into,
exchangeable or exercisable for shares of Common Stock for a period of 180 days
following the date of the Underwriting Agreement without the prior written
consent of Volpe Brown Whelan & Company, LLC; provided, however, that the
Company may issue and sell shares of Common Stock pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan of the Company
in effect at the date of the Underwriting Agreement and the Company may issue
shares of Common Stock issuable upon the conversion of securities or the
exercise of warrants outstanding at such date.

Each of the Company's officers, directors and certain of the Company's
stockholders holding in the aggregate 5,735,053 shares of Common Stock, have
agreed with the Underwriters not to offer, sell, contract to sell, pledge or
otherwise dispose of or file a registration statement with the Securities and
Exchange Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the meaning
of Section 16 of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act") with respect to any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for shares of Common Stock, or publicly
announce an intention to effect any such transaction, for a period of 180 days
after the date of the Underwriting Agreement without the prior written consent
of Volpe Brown Whelan & Company, LLC, other than (i) upon the exercise of any
option or warrant or the conversion of a security, outstanding on the date of
the Underwriting Agreement and referred to in this Prospectus and (ii) shares of
Common Stock disposed of as bona fide gifts approved by Volpe Brown Whelan &
Company, LLC.

56
<PAGE> 58

Approximately 467,338 Restricted Shares are immediately available for sale
in the public market upon the date of this Prospectus without restriction.
Beginning 90 days after the Effective Date, 53,467 Restricted Shares will be
available for sale in the public market, subject to certain volume and other
resale restrictions pursuant to Rule 144. Beginning 180 days after the Effective
Date, approximately 5,306,144 additional Restricted Shares of Common Stock
subject to the lock-up agreements will first become eligible for sale in the
public market (unless the Representatives elect, in their sole discretion, the
earlier release of such shares from the lock-up agreement) pursuant to Rule 144.
Approximately 515,635 of the remaining Restricted Shares will become eligible
for sale at various times after 180 days after the Effective Date pursuant to
Rule 144.

See "Management -- 1994 Incentive Stock Option Plan." The Company intends
to file a registration statement on Form S-8 to register shares reserved for
issuance under this stock option plan and shares issuable upon exercise of
outstanding options. Shares of Common Stock issued upon the exercise of options
after the effective date of the Form S-8 will be available for sale in the
public market, subject to Rule 144 volume limitations applicable to affiliates
and lock-up agreements. Beginning 180 days after the Effective Date, 1,546,915
shares issuable upon the exercise of vested options will be eligible for sale.

57
<PAGE> 59

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Stockholders have agreed to sell to each of the
underwriters named below (the "Underwriters"), for whom Volpe Brown Whelan &
Company, LLC and Needham & Company, Inc. are acting as representatives (the
"Representatives"), and each of the Underwriters has agreed severally to
purchase from the Company and the Selling Stockholders, the respective number of
shares of Common Stock set forth opposite its name below. The Underwriters are
committed to purchase and pay for all shares if any shares are purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ -----------
<S> <C>
Volpe Brown Whelan & Company, LLC........................... 355,000
Needham & Company, Inc. .................................... 355,000
BancAmerica Robertson Stephens.............................. 90,000
Credit Suisse First Boston Corporation...................... 90,000
Hambrecht & Quist LLC....................................... 90,000
NationsBanc Montgomery Securities LLC....................... 90,000
Smith Barney Inc. .......................................... 90,000
UBS Securities LLC.......................................... 90,000
D.A. Davidson & Co., Inc. .................................. 50,000
Gerard Klauer Mattison & Co., Inc. ......................... 50,000
Parker/Hunter Incorporated.................................. 50,000
Piper Jaffray Inc. ......................................... 50,000
Sanders Morris Mundy Inc. .................................. 50,000
Wheat First Securities, Inc. ............................... 50,000
---------
Total............................................. 1,550,000
=========
</TABLE>

The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $0.30 per share, of which $0.10 per share may be reallocated to other
dealers. After the Offering, the public offering price, concession and
reallowance to dealers may be reduced by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company and Selling
Stockholders as set forth on the cover page of this Prospectus.

Certain Selling Stockholders have granted the Underwriters an option for 45
days after the date of this Prospectus to purchase, at the initial public
offering price, less the underwriting discounts and commissions as set forth on
the cover page of this Prospectus, up to 232,500 additional shares of Common
Stock at the same price per share as the Company and the Selling Stockholders
receive for the 1,550,000 shares of Common Stock offered hereby, solely to cover
over-allotments, if any. If the Underwriters exercise their over-allotment
option, the Underwriters have severally agreed, subject to certain conditions,
to purchase approximately the same percentage thereof that the number of shares
of Common Stock to be purchased by each of them, as shown in the foregoing
table, bears to the 1,550,000 shares of Common Stock offered hereby. The
Underwriters may exercise such option only to cover the over-allotments made in
connection with the sale of 1,550,000 shares of Common Stock offered hereby.

The Company's executive officers and directors and the Selling Stockholders
have agreed not to offer, sell, contract to sell or otherwise dispose of Common
Stock or securities convertible into or exchangeable for, or any rights to
purchase or acquire, Common Stock for a period of 180 days following the date of
this Prospectus, without the prior written consent of Volpe Brown Whelan &
Company, LLC. The Company also has agreed not to offer, sell, contract to sell
or otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, Common Stock for
a period of 180 days following the date of this Prospectus without prior written
consent of Volpe Brown Whelan & Company, LLC, except for the granting of options
or the issuance of stock pursuant to the Company's

58
<PAGE> 60

existing stock option plans. Volpe Brown Whelan & Company, LLC, in its
discretion, may waive the foregoing restrictions in whole or in part, with or
without a public announcement of such action. In recent offerings in which it
has served as lead manager of underwriters, Volpe Brown Whelan & Company, LLC
has consented to early releases from lock-up agreements only in a limited number
of circumstances, after considering all circumstances that it deemed to be
relevant. Volpe Brown Whelan & Company, LLC will, however, have complete
discretion in determining whether to consent to early releases from the lock-up
agreements delivered in connection with this Offering, and no assurance can be
given that it will not consent to the early release of all or a portion of the
shares of Common Stock and options covered by such lock-up agreements.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which the Underwriters have
discretionary authority.

Prior to the Offering, there was no public market for the Common Stock. The
initial public offering price of the Common Stock was determined by negotiations
between the Company, the Selling Stockholders and the Representatives. Among the
factors considered in determining the initial public offering price of the
Common Stock, in addition to prevailing market conditions, were the Company's
historical performance, estimates of the business potential and earnings
prospects of the Company, an assessment of the Company's management and the
consideration of the above factors in relation to market valuations of companies
in related businesses.

In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the price of Common Stock. Such
transactions may include stabilization transactions effected in accordance with
Rule 104 of Regulation M, pursuant to which such persons may bid for or purchase
Common Stock for the purpose of stabilizing its market price. The Underwriters
also may create a short position for the account of the Underwriters by selling
more Common Stock in connection with the Offering than they are committed to
purchase from the Company and the Selling Stockholders, and in such case may
purchase Common Stock in the open market following completion of the Offering to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to 232,500 shares, by exercising the
Underwriters' over-allotment option referred to above. In addition, Volpe Brown
Whelan & Company, LLC, on behalf of the Underwriters, may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim from
an Underwriter (or dealer participating in the Offering), for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discounted at any time.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities that may be incurred in connection with
the Offering, including liabilities under the Securities Act, or to contribute
to payments that the Underwriters may be required to make in respect thereof.

The foregoing contains a summary of the principal terms of the Underwriting
Agreement and does not purport to be complete. Reference is made to the copy of
the Underwriting Agreement that is on file as an exhibit to the Registration
Statement of which this Prospectus is a part.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with the Offering will be
passed upon for the Underwriters by Cooley Godward LLP, Palo Alto, California.

59
<PAGE> 61

EXPERTS

The consolidated balance sheets as of June 30, 1997 and 1996 and the
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended June 30, 1997, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete. In each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, and each such statement is qualified in
all respects by such reference. The Registration Statement, including exhibits
and schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Northwestern Atrium
Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.

60
<PAGE> 62

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Income........................... F-4
Consolidated Statements of Stockholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 63

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
Extended Systems Incorporated

We have audited the accompanying consolidated balance sheets of Extended
Systems Incorporated as of June 30, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Extended
Systems Incorporated as of June 30, 1997 and 1996, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended June 30, 1997 in conformity with generally accepted accounting
principles.

COOPERS & LYBRAND L.L.P.

Boise, Idaho
August 11, 1997 except
as to Notes 1, 9, 11, 13 and 14,
the date of which is
January 26, 1998.

F-2
<PAGE> 64

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 30,
--------------------- DECEMBER 31,
1996 1997 1997
---------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current:
Cash and cash equivalents............................... $ 5,729 $ 6,621 $ 6,301
Accounts receivable, net of $223, $207 and $260
allowance for doubtful accounts...................... 4,331 6,917 5,990
Inventories:
Purchased parts...................................... 2,810 2,240 2,073
Finished goods....................................... 1,384 1,647 3,065
Prepaids and other...................................... 257 411 750
------- ------- -------
Total current assets................................. 14,511 17,836 18,179
------- ------- -------
Property and equipment, net............................... 6,285 7,335 8,557
Intangibles, net.......................................... 321 133 66
Investments and other assets.............................. 221 373 196
------- ------- -------
Total assets......................................... $21,338 $25,677 $26,998
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable........................................ $ 2,355 $ 3,040 $ 2,830
Accrued payroll and related benefits.................... 620 1,059 867
Income taxes payable.................................... 103 110 --
------- ------- -------
Total current liabilities............................ 3,078 4,209 3,697
Long-term debt............................................ 6,151 7,210 7,489
Deferred income taxes..................................... 587 233 384
------- ------- -------
Total liabilities.................................... 9,816 11,652 11,570
------- ------- -------
Stockholders' equity:
Common stock $.10 par value per share, 13,333,333 shares
authorized; 6,607,767, 6,874,765 and 6,874,872 shares
issued............................................... 661 687 687
Additional paid-in capital.............................. 330 538 1,335
Retained earnings....................................... 11,684 14,004 15,084
Treasury stock, 137,542, 7,789 and 1,017 shares, at
cost................................................. (1,003) (43) (12)
Deferred compensation................................... (79) (1,002) (1,374)
Cumulative translation adjustment....................... -- (123) (264)
Incentive stock option plan receivables................. (71) (36) (28)
------- ------- -------
Total stockholders' equity........................... 11,522 14,025 15,428
------- ------- -------
Total liabilities and stockholders' equity........... $21,338 $25,677 $26,998
======= ======= =======
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 65

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------ -----------------
1995 1996 1997 1996 1997
------- ------- ---------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue................................ $28,588 $34,670 $39,535 $18,558 $23,283
Cost of net revenue...................... 11,901 14,829 15,287 7,247 9,391
------- ------- ------- ------- -------
Gross profit............................. 16,687 19,841 24,248 11,311 13,892
Operating costs and expenses:
Research and development................. 3,701 4,362 5,259 2,395 3,096
Marketing and sales...................... 7,114 9,007 10,802 4,938 6,647
General and administrative............... 2,416 2,273 2,879 1,362 1,506
------- ------- ------- ------- -------
Income from operations................ 3,456 4,199 5,308 2,616 2,643
Other expense, net......................... 90 198 494 212 136
Interest expense........................... 535 558 629 305 345
------- ------- ------- ------- -------
Income before income taxes............ 2,831 3,443 4,185 2,099 2,162
Provision for income taxes................. 1,033 1,164 1,509 757 768
------- ------- ------- ------- -------
Net income............................ $ 1,798 $ 2,279 $ 2,676 $ 1,342 $ 1,394
======= ======= ======= ======= =======
Earnings per share:
Basic.................................... $ 0.28 $ 0.33 $ 0.39 $ 0.20 $ 0.20
Diluted.................................. 0.26 0.32 0.38 0.19 0.19
Number of shares used in earnings per share
calculation:
Basic.................................... 6,368 6,826 6,870 6,869 6,864
Diluted.................................. 6,867 7,029 7,133 7,099 7,156
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 66

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
INCENTIVE
ADDITIONAL CUMULATIVE STOCK
COMMON PAID-IN RETAINED TREASURY DEFERRED TRANSLATION OPTION PLAN
STOCK CAPITAL EARNINGS STOCK COMPENSATION ADJUSTMENT RECEIVABLES TOTAL
------ ---------- -------- -------- ------------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30,
1994.............. $ 661 $ 745 $ 9,217 $(1,558) $ -- $ -- $(133) $ 8,932
Net income........ -- -- 1,798 -- -- -- -- 1,798
Shares issued for:
Employee stock
transactions... -- (401) (63) 2,405 -- -- (4) 1,937
Services and
other......... -- -- -- 44 -- -- -- 44
Restricted stock
option
activity........ -- -- -- -- (181) -- -- (181)
Treasury stock
purchased....... -- -- -- (3,169) -- -- -- (3,169)
Payments
received........ -- -- -- -- -- -- 80 80
Dividends......... -- -- (481) -- -- -- -- (481)
Income tax benefit
from employee
stock
transactions.... -- 262 -- -- -- -- -- 262
------ ------ ------- ------- ------- ----- ----- -------
Balance at June 30,
1995.............. 661 606 10,471 (2,278) (181) -- (57) 9,222
Net income........ -- -- 2,279 -- -- -- -- 2,279
Shares issued for:
Employee stock
transactions... -- (280) (1,025) 1,327 -- -- (36) (14)
Services and
other......... -- (7) (41) 61 -- -- -- 13
Amortization of
deferred
compensation.... -- -- -- -- 102 -- -- 102
Treasury stock
purchased....... -- -- -- (113) -- -- -- (113)
Payments
received........ -- -- -- -- -- -- 22 22
Income tax benefit
from employee
stock
transactions.... -- 11 -- -- -- -- -- 11
------ ------ ------- ------- ------- ----- ----- -------
Balance at June 30,
1996.............. 661 330 11,684 (1,003) (79) -- (71) 11,522
Net income........ -- -- 2,676 -- -- -- -- 2,676
Shares issued for:
Employee stock
transactions... -- (46) (15) 125 -- -- (3) 61
Pooling of
interests..... 26 (823) -- 945 -- -- -- 148
Services or
other......... -- (13) (148) 48 -- -- -- (113)
Treasury stock
purchased....... -- -- -- (158) -- -- -- (158)
Restricted stock
option
activity........ -- 1,084 -- -- (1,084) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- 161 -- -- 161
Counterpoint
distribution
(Note 2)........ -- -- (193) -- -- -- -- (193)
Payments
received........ -- -- -- -- -- -- 38 38
Translation
Adjustment...... -- -- -- -- -- (123) -- (123)
Income tax benefit
from employee
stock
transactions.... -- 6 -- -- -- -- -- 6
------ ------ ------- ------- ------- ----- ----- -------
Balance at June 30,
1997.............. 687 538 14,004 (43) (1,002) (123) (36) 14,025
First six months
of 1998
transactions
(unaudited):
Net income...... -- -- 1,394 -- -- -- -- 1,394
Shares issued
for:
Employee stock
transactions... -- (57) (54) 224 -- -- -- 113
Services or
other....... -- -- -- 12 -- -- -- 12
Treasury stock
purchased..... -- -- -- (205) -- -- -- (205)
Amortization of
deferred
compensation... -- -- -- -- 202 -- -- 202
Adjustment to
deferred
compensation... -- (157) (260) -- 417 -- -- --
Stock option
activity...... -- 991 -- -- (991) -- -- --
Payments
received...... -- -- -- -- -- -- 8 8
Translation
adjustment.... -- -- -- -- -- (141) -- (141)
Income tax
benefit from
employee stock
transactions... -- 20 -- -- -- -- -- 20
------ ------ ------- ------- ------- ----- ----- -------
Balance at December
31, 1997
(unaudited)....... $ 687 $1,335 $15,084 $ (12) $(1,374) $(264) $ (28) $15,428
====== ====== ======= ======= ======= ===== ===== =======
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 67

EXTENDED SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
---------------------------- ------------------
1995 1996 1997 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 1,798 $ 2,279 $ 2,676 $ 1,342 $ 1,394
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 693 937 1,123 506 561
Accretion of discount................ 454 498 546 248 292
Provision for deferred income
taxes.............................. (285) 148 (354) (90) 151
Writedown of investment.............. -- -- 180 180 20
Stock option compensation............ 364 102 160 45 202
Provision for bad debts.............. 82 101 34 54 70
Other................................ 111 (40) 39 -- (45)
Changes in assets and liabilities:
Accounts receivable................ (213) 353 (2,655) (595) 824
Inventories........................ 295 (789) 278 213 (1,293)
Income taxes receivable............ (117) 117 -- (81) (79)
Prepaids and other assets.......... (107) 34 (499) (585) (115)
Accounts payable................... 249 (613) 691 (116) (430)
Accrued payroll and related
benefits........................ (176) 434 439 33 (191)
Income taxes payable............... (613) 103 7 (115) (110)
------- ------- ------- ------- -------
Net cash provided by operating
activities.................... 2,535 3,664 2,665 1,039 1,251
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...... (955) (1,032) (1,490) (1,169) (1,500)
Cash acquired from purchase of
affiliate, net of cash paid.......... -- 258 -- -- --
Purchase of intangibles................. (242) -- -- -- --
Other investing activities.............. (61) (17) 54 29 8
------- ------- ------- ------- -------
Net cash used by investing
activities.................... (1,258) (791) (1,436) (1,140) (1,492)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury stock purchased................ (3,169) (113) (158) (12) (205)
Proceeds from exercise of stock
options.............................. 1,395 104 64 15 112
Income tax benefit from employee stock
transfers............................ 262 11 6 -- 66
Dividends............................... (481) -- -- -- --
Other financing activities.............. 80 -- (193) -- 12
------- ------- ------- ------- -------
Net cash provided by (used by)
financing activities.......... (1,913) 2 (281) 3 (15)
Effect of exchange rate changes on
cash................................. -- -- (56) -- (64)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents.......................... (636) 2,875 892 (98) (320)
CASH AND CASH EQUIVALENTS:
Beginning of period..................... 3,490 2,854 5,729 5,729 6,621
------- ------- ------- ------- -------
End of period........................... $ 2,854 $ 5,729 $ 6,621 $ 5,631 $ 6,301
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES:
Income taxes paid, net of refunds....... $ 1,795 $ 830 $ 1,891 $ 1,021 $ 799
Deferred compensation................... -- -- -- -- 991
Equipment financed with lease line of
credit............................... -- -- 513 151 210
Interest paid........................... 50 50 64 50 58
Purchase of intangibles for contracts
payable.............................. 238 -- -- -- --
</TABLE>

The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 68

EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Extended Systems Incorporated provides distributed and mobile computing
solutions that address the needs of the virtual enterprise.

Basis of Presentation. The consolidated financial statements include the
accounts of Extended Systems Incorporated, a Delaware corporation, and its
wholly owned subsidiaries (the "Company"). All significant intercompany accounts
and transactions have been eliminated. The Company translates the accounts of
its foreign subsidiaries using the local foreign currency as the functional
currency. The assets and liabilities of the foreign subsidiaries are translated
into U.S. dollars using exchange rates in effect at the balance sheet date.
Revenue and expenses are translated into U.S. dollars using the average exchange
rate for the period. Gains and losses from this translation process are
reflected as a component of stockholders' equity. To date, foreign currency
translation gains and losses have not been material to the consolidated
financial statements.

Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases and decreases in
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.

Earnings per share are calculated pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Securities and
Exchange Commission Staff Accounting Bulletin No. 98. Earnings per share-basic
is computed by dividing net income by the weighted average number of common
shares outstanding during the period. Earnings per share-diluted is computed by
dividing net income by the weighted average number of common shares outstanding
increased by the additional common shares that would be outstanding if the
potential dilutive common shares had been issued.

Revenues on hardware products are recognized when products are shipped to
customers, including when products are shipped to distributors and resellers.
Revenues earned under software license agreements are recognized when software
has been delivered, payment is due within one year, collectability is probable
and there are no significant obligations remaining. The Company does not provide
any material post-contract customer support.

Cash equivalents are highly liquid investments with original maturities of
three months or less.

Inventories of purchased parts and finished goods are valued at the lower
of cost (principally standard cost, which approximates actual cost on a
first-in, first-out basis) or market.

Intangible assets, consisting primarily of a customer list, non-compete
agreements and goodwill, are carried at cost less accumulated amortization.
Costs are being amortized over estimated useful lives of 2-5 years using the
straight-line method.

Research and development costs are expensed as incurred.

Advertising costs are expensed as incurred.

Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax and financial reporting bases of assets and
liabilities. The provision for income taxes includes taxes payable for the
period and the change during the period in deferred tax assets and liabilities.

Recently issued accounting standards. In June 1997, the Financial
Accounting Standards Board (the "FASB") issued SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and displaying
comprehensive income and its components (revenues, expenses, gains and losses)
in the financial statements. This statement requires that an enterprise classify
items of other comprehensive income by their nature in a financial statement and
display the accumulated balance of other comprehensive

F-7
<PAGE> 69
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

income separately from retained earnings and additional paid-in capital in the
equity section of a balance sheet. This statement is effective for fiscal years
beginning after December 25, 1997.

In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas, and major customers. This statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments on the basis that it is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. This statement is effective for financial statements for
periods beginning after December 15, 1997.

Management is currently evaluating the requirements of SFAS No. 130 and No.
131.

In October 1997, the American Institute of Certified Public Accountants
Accounting Standards Executive Committee issued Statement of Position ("SOP")
97-2, "Software Revenue Recognition." SOP 97-2 supersedes SOP 91-1 and provides
guidance on when and in what amounts revenue should be recognized for the
licensing, selling, leasing or marketing of computer software. SOP 97-2 is
effective for transactions entered into in fiscal years beginning after December
15, 1997. The Company does not expect SOP 97-2 to have a material effect on the
Company's revenue recognition.

2. POOLING OF INTERESTS

On April 23, 1997, Counterpoint Systems Foundry, Inc. ("Counterpoint")
merged with the Company through the issuance of 400,000 shares of the Company's
common stock in exchange for all of the outstanding common stock of
Counterpoint.

The merger qualified as a tax-free reorganization and was accounted for as
a pooling of interests. Accordingly, the Company's financial statements include
Counterpoint for 1996 (Counterpoint had no material effect on the 1995 financial
statements). Separate and combined results of the Company and Counterpoint were
as follows (in thousands):

<TABLE>
<CAPTION>
EXTENDED
SYSTEMS COUNTERPOINT COMBINED
-------- ------------ --------
<S> <C> <C> <C>
For the period July 1, 1996 through April 30,
1997 (unaudited)
Sales........................................ $30,850 $799 $31,649
Net income................................... 2,272 52 2,324
For the year ended June 30, 1996
Sales........................................ 34,045 624 34,669
Net income................................... 2,019 260 2,279
</TABLE>

F-8
<PAGE> 70
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

3. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and depreciated over estimated
useful lives of 5-40 years using the straight-line method. Property and
equipment at June 30 were as follows (in thousands):

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Land and land improvements.................................. $ 914 $ 931
Buildings................................................... 4,610 5,058
Computer hardware........................................... 2,666 3,681
Furniture and fixtures...................................... 1,177 1,385
------ ------
9,367 11,055
Less accumulated depreciation............................... (3,082) (3,720)
------ ------
$6,285 $7,335
====== ======
</TABLE>

Depreciation and amortization of property and equipment were $603,000 for
1995, $731,000 for 1996 and $935,000 for 1997.

4. LEASES

The Company leases certain office space and equipment. Total lease expense
was $38,000 in 1995, $44,000 in 1996 and $67,000 in 1997. The minimum future
lease commitments for all operating leases are $29,000 in 1998, $29,000 in 1999
and $13,000 in 2000.

5. INCOME TAXES

The provision for income taxes consisted of the following (in thousands):

<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal........................................ $ 873 $ 952 $1,619
State.......................................... 183 147 238
Deferred......................................... (285) 148 (354)
Provision allocated to equity for employee stock
transactions................................... 262 11 6
------ ------ ------
$1,033 $1,258 $1,509
====== ====== ======
</TABLE>

Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes at enacted tax rates. The
tax effects of temporary differences and carryforwards which give rise to the
net deferred tax liability were as follows as of June 30 (in thousands):

<TABLE>
<CAPTION>
1996 1997
----- -----
<S> <C> <C>
Accrued Stock Option Compensation........................... $ 117 $ 195
Foreign Loss Carryforwards.................................. 198 380
----- -----
Deferred Assets............................................. 315 575
Depreciation................................................ (318) (332)
Deferred DISC Income........................................ (436) (363)
Other....................................................... (148) (113)
----- -----
Net Deferred Income Tax Liability........................... $(587) $(233)
===== =====
</TABLE>

F-9
<PAGE> 71
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The effective income tax rate varies from the federal statutory rate of 34%
as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal tax rate...................................... 34.0% 34.0% 34.0%
States taxes, net of federal benefit.................. 4.3 4.0 3.3
Foreign Sales Corporation............................. (5.4) (6.5) (6.4)
Non-deductible expense................................ 2.9 3.2 --
Other, net............................................ 0.7 (0.9) 5.2
---- ---- ----
Effective income tax rate............................. 36.5% 33.8% 36.1%
==== ==== ====
</TABLE>

6. CONTINGENCY

Substantially all of the Company's products are warranted against material
and workmanship defects for periods of two to five years from the date of
shipment. Warranty costs associated with sales through December 31, 1997 are not
expected to be material, therefore, no accrual has been made for such costs.

7. LONG-TERM DEBT

Long-term debt consisted of the following at June 30 (in thousands):

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Zero coupon convertible subordinated promissory notes due
September 1999............................................ $5,651 $6,197
10% convertible subordinated promissory notes due September
1999...................................................... 500 500
Lease line of credit to a bank to be refinanced into a
long-term lease; Interest paid at prime plus 1%,
collateralized by equipment............................... -- 513
------ ------
$6,151 $7,210
====== ======
</TABLE>

The zero coupon promissory notes were issued on September 30, 1992 for
$4,000,000, had a maturity value in September 1999 of $7,625,000 and may be
converted at any time at the option of the holders into a total of 495,810
shares of common stock. If held to maturity, the promissory notes would yield
9.25%.

The 10% promissory notes were issued September 30, 1992 and may be
converted at any time prior to maturity in September 1999 at the option of the
holders into a total of 61,977 shares of common stock. Interest is paid annually
in arrears.

Both the zero coupon and the 10% promissory notes are subordinated in right
of payment to future senior indebtedness of the Company.

In the event of a change in control, as defined in the promissory note
agreement, or the sale of substantially all of the assets of the Company, the
holders may require redemption of the zero coupon and 10% promissory notes at
the issue price plus accrued original issue discount. In addition, the Company's
outstanding convertible promissory notes limit the Company's ability to pay
dividends.

The Company has a right of first refusal to purchase the zero coupon and
the 10% promissory notes or, if converted, the stock.

During 1997, the Company obtained a $1,000,000 lease line of credit.
Borrowings under this line of credit were to be refinanced into a long-term
lease on or before September 30, 1997. The lease agreement provides for 36
monthly installments in an amount to be determined at the inception of the lease
based on the total amount refinanced. The lease agreement requires the Company
to remain within certain financial ratio boundaries. The Company had borrowings
of $513,000 under this line as of June 30, 1997.

F-10
<PAGE> 72
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has a $5 million uncollateralized bank revolving line of credit
that expires on March 31, 1999. Interest on borrowings is at the bank's prime
rate. There were no borrowings under this line as of June 30, 1997 or 1996.

8. STOCKHOLDERS' EQUITY

In connection with the issuance of the subordinated promissory notes, the
Company reserved 557,787 shares of common stock for issuance upon conversion of
the notes.

The Company declared and paid dividends of $.075 per share in 1995. There
were no dividends declared in 1997 and 1996.

Employee notes receivable accepted upon exercise of options are a component
of stockholders' equity.

The Company has two incentive stock option plans, adopted in 1984 and 1994.
Regular, full-time employees are eligible for options under these plans. Options
generally vest 20 percent per year over a period of five years from the date of
grant. The exercise price generally is equal to the fair market value of the
Company's common stock on the date the option is granted. Unexercised options
lapse ten years after issuance or upon the date the option holder ceases to be
an employee of the Company. Shares available for grant under these plans totaled
2,103,000 and 2,046,000 at June 30, 1996 and 1997, respectively. During 1995,
the Company granted a variable incentive stock option to a key employee to
purchase a maximum of 11,667 shares. The option vests over a period of three
years from date of grant. In December 1997, the Company granted to employees
options to purchase 330,421 shares of Common Stock with an exercise price of
$8.00 per share. Deferred compensation expense resulting therefrom of $991,000
at December 31, 1997 will be amortized to expense over the four year vesting
period of the options on a quarterly basis.

The Company also has a restricted stock option plan, adopted in 1987.
Regular, full-time employees and directors of the Company are eligible for
options under this plan. Terms of the options are determined at the date of
grant. Unexercised options lapse ten years after issuance or upon the date the
option holder ceases to be an employee or director of the Company. Unearned
compensation related to these options is recorded at the date of the award based
on the market value of the shares and is amortized over the periods during which
the restrictions lapse. Shares available for grant under this plan totaled
751,333 at June 30, 1996 and 992,000 at June 30, 1997.

During 1997, the Company granted restricted stock options to purchase
150,000 shares to key employees. These options vest over periods of up to 3
years. The weighted-average exercise price of the options was $.15 per share and
the weighted-average fair value was $7.31 per share. The Company recognized
$99,000 of compensation expense related to these options in 1997.

During 1995, the Company granted restricted stock options to purchase
26,667 shares to key employees with no minimum service periods. The
weighted-average exercise price of the options was $.15 per share and the
weighted-average fair value was $10.89 per share. The Company recognized
$286,400 of compensation expense related to these options in 1995. In 1995, the
Company also granted restricted stock options to two key employees to purchase
an estimated maximum of 36,000 shares at exercise prices below the fair market
value of the stock. These options vest over periods of 3 to 4 years from date of
grant. The weighted-average exercise price was $.15 per share and the
weighted-average fair value of the options was $10.47 per share. The Company
recognized $102,200 and $62,000 of compensation expense related to these options
in 1996 and 1997, respectively.

The Company granted a key employee restricted stock options to purchase
183,333 shares in 1994 at prices equaling or exceeding the fair market value of
the stock at the date of grant. These options vest over periods of 3 to 5 years.
Certain of these options vest immediately at the time of an initial public
offering or upon a change of control of the Company.

F-11
<PAGE> 73
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant date as
prescribed by SFAS No.123, net income would have decreased in the pro forma
amounts indicated below (in thousands):

<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Net income -- as reported.................................. $2,279 $2,676
Net income -- pro forma.................................... 2,248 2,573
</TABLE>

The fair value of options at date of grant was estimated using the
Black-Scholes option-pricing model assuming a weighted-average risk-free
interest rate of 6.15% and a weighted-average expected option life of 7.36
years.

Stock option activity is summarized as follows:

<TABLE>
<CAPTION>
WEIGHTED-
PRICE RANGE AVERAGE PRICE OUTSTANDING EXERCISABLE
------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
June 30, 1994........................ $ .15 - 12.45 $7.74 1,988,607 708,607
Granted............................ .15 - 11.33 8.87 359,960 --
Became exercisable................. .15 - 12.45 -- 398,400
Exercised.......................... .81 - 9.69 5.57 (250,009) (250,009)
Canceled/expired................... 5.76 - 10.89 8.72 (206,200) (9,533)
--------- ---------
June 30, 1995........................ .15 - 12.45 8.13 1,892,358 847,465
Granted............................ 3.75 - 7.16 5.57 393,737 --
Became exercisable................. .15 - 12.45 -- 386,345
Exercised.......................... .15 - 8.55 1.46 (110,411) (110,411)
Canceled/expired................... .15 - 10.89 6.32 (248,661) (79,567)
--------- ---------
June 30, 1996........................ .15 - 12.45 8.31 1,927,023 1,043,832
Granted............................ .15 - 8.36 5.04 399,426 --
Became exercisable................. .15 - 12.45 -- 300,629
Exercised.......................... .81 - 8.55 4.49 (12,500) (12,500)
Canceled/expired................... .15 - 8.55 8.61 (123,892) (44,633)
--------- ---------
June 30, 1997........................ .15 - 12.45 7.74 2,190,057 1,287,327
========= =========
</TABLE>

The weighted-average remaining contractual life of options outstanding at
June 30, 1997 was 6.60 years. The weighted-average exercise price of options
exercisable at June 30, 1995, 1996 and 1997 was $6.89, $8.19 and $8.36,
respectively. The weighted-average exercise prices which were equal to the
market price at the date of grant were $10.61, $5.66 and $8.04 for the years
ended June 30, 1995, 1996 and 1997, respectively.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------- OPTIONS EXERCISABLE
WEIGHTED- ---------------------
WEIGHTED- AVERAGE WEIGHTED-
AVERAGE REMAINING AVERAGE
RANGE OF EXERCISE NUMBER OF EXERCISE CONTRACTUAL NUMBER OF EXERCISE
PRICES SHARES PRICE LIFE SHARES PRICE
- ----------------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
$.15 to $.30 209,093 $ .15 9.14 50,339 $ .15
$1.65 to $2.72 60,267 2.70 0.80 60,267 2.70
$5.24 to $7.58 627,429 6.00 5.85 371,649 6.12
$8.36 to $12.45 1,293,268 10.05 6.82 805,072 10.32
--------- ---------
$.15 to $12.45 2,190,057 1,287,327
========= =========
</TABLE>

F-12
<PAGE> 74
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. EARNINGS PER SHARE:

In December 1997, the Company adopted SFAS No. 128, "Earnings per Share,"
which requires the presentation of "basic" earnings per share and "diluted"
earnings per share on the face of the income statement. SFAS No. 128 required
restatement of all prior earnings per share data presented.

<TABLE>
<CAPTION>
BASIC NET EFFECT OF DILUTED
EARNINGS DILUTIVE STOCK EFFECT OF EARNINGS
PER SHARE OPTIONS WARRANTS PER SHARE
--------- -------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
For the year ended June 30, 1995:
Net income.................................... $1,798 -- -- $1,798
Shares........................................ 6,368 494 5 6,867
------ ------
$ 0.28 $ 0.26
====== ======
For the year ended June 30, 1996:
Net income.................................... $2,279 -- -- $2,279
Shares........................................ 6,826 203 -- 7,029
------ ------
$ 0.32 $ 0.32
====== ======
For the year ended June 30, 1997:
Net income.................................... $2,676 -- -- $2,676
Shares........................................ 6,870 263 -- 7,133
------ ------
$ 0.39 $ 0.38
====== ======
</TABLE>

Options to purchase shares of common stock that were outstanding during the
period but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares were as follows for the years ended June 30 (in thousands):

The zero coupon and 10% promissory notes that may be converted into a total
of 557,787 shares of common stock were not included in the computation of
diluted earnings per share because to do so would have been antidilutive.

10. EMPLOYEE BENEFIT PLANS

The Company established the Extended Systems Incorporated 401(k) Investment
Plan, a defined contribution benefit plan, effective January 1991. All regular
employees are eligible to participate. For all participants having completed six
months of service, the Company makes dollar-for-dollar matching contributions to
the participants account up to a maximum of 3% of the participant's annual
pretax compensation. The Company's contributions to the plan for the years ended
June 30, 1995, 1996 and 1997 were $149,000, $163,000 and $200,000, respectively.

The Company has an employee stock ownership plan. All regular employees
credited with at least 1,000 hours of service by the end of the plan year are
eligible to participate. No contributions were made for 1995, 1996 or 1997.

F-13
<PAGE> 75
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. GEOGRAPHIC DATA AND MAJOR CUSTOMER

The Company's foreign operations were as follows for the years ended June
30 (in thousands):

<TABLE>
<CAPTION>
UNITED STATES EUROPE ELIMINATIONS CONSOLIDATED
------------- ------- ------------ ------------
<S> <C> <C> <C> <C>
1995
Sales to unaffiliated customers................... $26,135 $ 2,453 $ -- $28,588
Transfers between geographic areas................ 1,710 -- (1,710) --
------- ------- ------- -------
Total net revenue....................... $27,845 $ 2,453 $(1,710) $28,588
======= ======= ======= =======
Income (loss) from operations..................... $ 3,548 $ (4) $ (88) $ 3,456
======= ======= ======= =======
1996
Sales to unaffiliated customers................... $27,398 $ 7,272 $ -- $34,670
Transfers between geographic areas................ 4,936 -- (4,936) --
------- ------- ------- -------
Total net revenue....................... $32,334 $ 7,272 $(4,936) $34,670
======= ======= ======= =======
Income (loss) from operations..................... $ 4,389 $ (37) $ (153) $ 4,199
======= ======= ======= =======
Identifiable Assets............................... $21,359 $ 2,195 $(2,216) $21,338
======= ======= ======= =======
1997
Sales to unaffiliated customers................... $29,125 $10,410 $ -- $39,535
Transfers between geographic areas................ 7,744 -- (7,744) --
------- ------- ------- -------
Total net revenue....................... $36,869 $10,410 $(7,744) $39,535
======= ======= ======= =======
Income (loss) from operations..................... $ 5,826 $ (217) $ (301) $ 5,308
======= ======= ======= =======
Identifiable Assets............................... $23,752 $ 4,899 $(2,974) $25,677
======= ======= ======= =======
</TABLE>

Sales between geographic areas are accounted for at prices which provide a
profit and are in accord with regulations of the governing tax authority. Export
net revenues for 1995, 1996 and 1997 were $7.6 million, $13.0 million and $17.5
million, respectively. Sales to one customer accounted for 16% and 19% of the
Company's net revenue in 1996 and 1997, respectively.

12. FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and trade accounts
receivable. Cash balances held in financial institutions may at times, exceed
federally insured amounts. A concentration of credit risk may exist with respect
to trade accounts receivable, as primarily all customers are North American and
European distributors and manufacturers of computer equipment. The Company
performs ongoing credit evaluations on customers and generally does not require
collateral. The Company has not experienced significant losses related to
receivables.

The estimated fair value of financial instruments is made in accordance
with the requirements of SFAS No. 107, "Disclosure about Fair Value of Financial
Instrument." The carrying amount of debt is considered to be a reasonable
approximation of its fair value. The fair value estimate was based on market
information available to management as of June 30, 1997. The use of different
market assumptions and estimation methodologies could have a material effect on
the estimated fair value amounts.

13. COMMON STOCK SUBJECT TO RESCISSION

The Company sold shares of its common stock to employees and others which
were not made pursuant to a registration statement filed under the Securities
Act of 1933 as amended or any filings pursuant to the laws of any of the states
in which such sales occurred ("State Blue Sky Laws"). Appropriate exemptions
from the registration and qualification provisions of the Securities Act and
State Blue Sky Laws may not have been

F-14
<PAGE> 76
EXTENDED SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

available. As a result, the Company is planning to make a Rescission Offer and
purchasers of these securities will be entitled to a return of the consideration
paid of approximately $388,000 for their stock plus interest of $45,000 at
applicable statutory rates, as of December 31, 1997. However, the amount of the
rescission offer to substantially all of such purchasers is less than the
estimated fair market value of the Common Stock. Accordingly, management does
not expect acceptances of the Rescission Offer to have a material impact on the
financial position or cash flows of the Company.

14. REVERSE STOCK SPLIT

The consolidated financial statements reflect a 2-for-3 reverse stock split
of the Company's Common Stock approved by the Board of Directors on December 18,
1997.

F-15
<PAGE> 77
APPENDIX A -- DESCRIPTION OF GRAPHICS

INSIDE FRONT COVER:

Diagram defining the virtual enterprise concept, including depictions of
information resources being shared in the virtual enterprise and example clients
of the virtual enterprise, such as mobile workers and satellite offices.

GATEFOLD:

Diagram of a virtual enterprise incorporating icons for a central corporate LAN,
the Internet used for connectivity and support for mobile workers, satellite
offices and business partners. On the virtual enterprise diagram will be several
example applications of the Company's products, depicted graphically, supporting
the constituents of the network. Across the lower edge of the panel will be a
row of photographs showing examples of the Company's products, with captions
describing key features.

PAGE 29:

At this location in the text appears a diagram depicting the elements of a
virtual enterprise, including key information resources being shared and some
example constituents of the virtual enterprise, such as mobile workers and
satellite offices.

PAGE 33:

At this location in the text appears a diagram representing several
applications of the Company's distributed connectivity products.

PAGE 35:

At this location in the text appears a diagram illustrating several
applications of the Company's mobile systems products.

INSIDE BACK COVER:

Graphics, text and images describing the Company's customer support programs,
the Company's key distribution customers and the Company's operating
facilities.
<PAGE> 78

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

NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER
TO BUY, ANY OF THE SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES, OR AN OFFER TO, OR A SOLICITATION OF ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 15
Dividend Policy........................... 15
Capitalization............................ 16
Dilution.................................. 17
Selected Consolidated Financial Data...... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 19
Business.................................. 27
Management................................ 41
Certain Transactions...................... 49
Principal and Selling Stockholders........ 50
Description of Capital Stock.............. 52
Rescission Offer.......................... 54
Shares Eligible for Future Sale........... 56
Underwriting.............................. 58
Legal Matters............................. 59
Experts................................... 60
Additional Information.................... 60
Index to Consolidated Financial
Statements.............................. F-1
- ------------------------------------------------
UNTIL MARCH 29, 1998 (25 DAYS AFTER THE DATE
OF THIS PROSPECTUS) ALL DEALERS EFFECTING
TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

================================================
</TABLE>

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

1,550,000 SHARES

LOGO

COMMON STOCK
--------------------
PROSPECTUS

MARCH 4, 1998

--------------------
VOLPE BROWN WHELAN & COMPANY

NEEDHAM & COMPANY, INC.
============================================================
<PAGE> 79

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts, commissions and certain accountable expenses, payable by
the Company in connection with the sale of Common Stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 8,142
NASD Filing Fee............................................. 3,620
Nasdaq National Market Listing Fee.......................... 72,875
Printing Fees and Expenses.................................. 175,000
Legal Fees and Expenses..................................... 325,000
Accounting Fees and Expenses................................ 100,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees........................... 10,000
Miscellaneous............................................... 30,363
--------
Total............................................. $730,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits a corporation
to include in its charter documents, and in agreements between the corporation
and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

The Registrant's Amended and Restated Certificate of Incorporation provides
for the indemnification of directors to the fullest extent permissible under
Delaware law.

The Registrant's Bylaws provide for the indemnification of officers,
directors and third parties acting on behalf of the Registrant if such person
acted in good faith and in a manner reasonably believed to be in and not opposed
to the best interest of the Registrant, and, with respect to any criminal action
or proceeding, the indemnified party had no reason to believe his conduct was
unlawful.

The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for in
the Registrant's Bylaws, and intends to enter into indemnification agreements
with any new directors and executive officers in the future.

The form of Underwriting Agreement filed as Exhibit 1.1 hereto provides for
the indemnification of the Registrant's directors and officers in certain
circumstances as provided therein.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since January 1, 1995, the Registrant has issued and sold the following
securities:

1. From January 1, 1995 to December 31, 1997, the Registrant issued
to employees, officers, directors and consultants options to purchase an
aggregate of 1,154,262 shares of Common Stock of the Company, at exercise
prices ranging from $0.15 per share to $9.50 per share, pursuant to the
Company's 1994 Stock Option Plan.

2. From January 1, 1995 to December 31, 1997, the Company has issued
to those individuals referred to in paragraph 1 above an aggregate of
289,419 shares of Common Stock of the Company upon exercise of options at
prices ranging from $0.15 per share to $8.76 per share.

The sales of securities set forth in paragraph 2 above were deemed to be
exempt from the registration requirements of the Securities Act in reliance on
Section 4(2) thereof, or Regulation D promulgated

II-1
<PAGE> 80

thereunder, as transactions by an issuer not involving a public offering. The
granting of stock options described in paragraph 1 above did not require
registration under the Securities Act, or an exemption therefrom, insofar as
such grants did not involve a "sale" of securities as such term is used in
Section 2(3) of the Securities Act.

The recipients of the securities in each of the transactions set forth in
paragraph 2 above represented their intention to acquire such securities for
investment only and not with a view to or for sale in connection with any
distribution thereof, and appropriate legends were affixed to the share
certificates and instruments used in such transactions. All recipients received
adequate information about the Registrant at the time of the acquisition of such
securities or had access, through employment or other relationships with the
Registrant, to such information.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.+
3.1 Restated Certificate of Incorporation.+
3.2 Restated Bylaws.+
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as to the legality of the securities being
registered.+
10.1 Form of Indemnification Agreement for directors and
officers.+
10.2 1998 Stock Plan and form of agreement thereunder.+
10.3 1998 Employee Stock Purchase Plan and forms of participation
agreements thereunder.+
10.4 1998 Directors Stock Option Plan and form of agreement
thereunder.+
10.5 1994 Incentive Stock Option Plan.+
10.6 1987 Restricted Stock Option Plan, as amended.+
10.7 1984 Incentive Stock Option Plan, as amended.+
10.8 Extended Systems Incorporated Employee Stock Ownership
Plan.+
10.9 Extended Systems Incorporated 401(k) Plan.+
10.10 Convertible Subordinated Promissory Notes and Warrant
Purchase Agreement among the Company, Summit Ventures II,
L.P. and Summit Investors II, L.P. dated September 30,
1992.+
10.11 Zero Coupon Convertible Subordinated Promissory Note dated
September 30, 1992 issued to Summit Ventures II, L.P.+
10.12 Zero Coupon Convertible Subordinated Promissory Note dated
September 30, 1992 issued to Summit Investors II, L.P.+
10.13 Summit Investors II, L.P. Convertible Subordinated
Promissory Note dated September 30, 1992 issued to Summit
Ventures II, L.P.+
10.14 Convertible Subordinated Promissory Note dated September 30,
1992 issued to Summit Investors II, L.P.+
10.15 Stockholders' Agreement among the Company, Gary Atkins,
Charles M. Jopson, Douglas B. Winterwood, Ted L. Wimer,
Steven Bolen, Summit Ventures II, L.P. and Summit Investors
II, L.P. dated September 30, 1992.+
10.16 Sale, License and Noncompetition Agreement between the
Company and Electronic Accessory Specialist International,
L.L.C. dated June 14, 1996, as amended.**+
10.17 OEM Purchasing Agreement between the Company and Apexx
Technology, Inc. dated August 14, 1997.**+
10.18 Form of Distribution Agreement -- North America.+
10.19 Form of Distribution Agreement -- Europe.+
10.20 Registration Rights Agreement.+
10.21 Employment Agreement between the Company and Steven D.
Simpson.+
10.22 Employment Agreement between the Company and Raymond A.
Smelek.+
10.23 Employment Agreement between the Company and Thomas C.
White.+
10.24 Employment Agreement between the Company and Holmes T.
Lundt.+
10.25 Employment Agreement between the Company and Scott J.
Ritchie.+
</TABLE>

II-2
<PAGE> 81

<TABLE>
<S> <C>
11.1 Computation of earnings per share.+
21.1 List of Subsidiaries of the Registrant.+
23.1 Consent of Independent Accountants.++
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).+
27.1 Financial Data Schedule.+
</TABLE>

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

** Registrant has sought confidential treatment pursuant to Rule 406 for
portions of the referenced exhibit.

+ Previously filed.

++ Filed herewith.

(b) FINANCIAL STATEMENT SCHEDULE

Schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the financial statements or notes
thereto.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933, and will be governed by the final adjudication of such
issue.

The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act of 1933, each posteffective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE> 82

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Post-Effective Amendment No. 1 to Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boise, in the State of Idaho, on the 3rd day of
March 1998.

EXTENDED SYSTEMS INCORPORATED

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

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ STEVEN D. SIMPSON President, Chief March 3, 1998
- -------------------------------------------------------- Executive Officer and
Steven D. Simpson Director (Principal
Executive Officer)

/s/ KARLA K. ROSA Vice President, Finance March 3, 1998
- -------------------------------------------------------- and Chief Financial
Karla K. Rosa Officer (Principal
Financial Officer and
Principal Accounting
Officer)

* Director March 3, 1998
- --------------------------------------------------------
Gregory M. Avis

* Director March 3, 1998
- --------------------------------------------------------
Raymond A. Smelek

* Director March 3, 1998
- --------------------------------------------------------
S. Scott Wald

* Director March 3, 1998
- --------------------------------------------------------
Douglas B. Winterrowd

*By: /s/ KARLA K. ROSA
---------------------------------------------------
Karla K. Rosa
Attorney-in-Fact
</TABLE>

II-4
<PAGE> 83

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE NO.
------- ----------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.+
3.1 Restated Certificate of Incorporation.+
3.2 Restated Bylaws.+
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, as to the legality of the securities being
registered.+
10.1 Form of Indemnification Agreement for directors and
officers.+
10.2 1998 Stock Plan and form of agreement thereunder.+
10.3 1998 Employee Stock Purchase Plan and forms of participation
agreements thereunder.+
10.4 1998 Directors Stock Option Plan and form of agreement
thereunder.+
10.5 1994 Incentive Stock Option Plan.+
10.6 1987 Restricted Stock Option Plan, as amended.+
10.7 1984 Incentive Stock Option Plan, as amended.+
10.8 Extended Systems Incorporated Employee Stock Ownership
Plan.+
10.9 Extended Systems Incorporated 401(k) Plan.+
10.10 Convertible Subordinated Promissory Notes and Warrant
Purchase Agreement among the Company, Summit Ventures II,
L.P. and Summit Investors II, L.P. dated September 30,
1992.+
10.11 Zero Coupon Convertible Subordinated Promissory Note dated
September 30, 1992 issued to Summit Ventures II, L.P.+
10.12 Zero Coupon Convertible Subordinated Promissory Note dated
September 30, 1992 issued to Summit Investors II, L.P.+
10.13 Convertible Subordinated Promissory Note dated September 30,
1992 issued to Summit Ventures II, L.P.+
10.14 Convertible Subordinated Promissory Note dated September 30,
1992 issued to Summit Investors II, L.P.+
10.15 Stockholders' Agreement among the Company, Gary Atkins,
Charles M. Jopson, Douglas B. Winterwood, Ted L. Wimer,
Steven Bolen, Summit Ventures II, L.P. and Summit Investors
II, L.P. dated September 30, 1992.+
10.16 Sale, License and Noncompetition Agreement between the
Company and Electronic Accessory Specialist International,
L.L.C. dated June 14, 1996, as amended.**+
10.17 OEM Purchasing Agreement between the Company and Apexx
Technology, Inc. dated August 14, 1997.**+
10.18 Form of Distribution Agreement -- North America.+
10.19 Form of Distribution Agreement -- Europe.+
10.20 Registration Rights Agreement.+
10.21 Employment Agreement between the Company and Steven D.
Simpson.+
10.22 Employment Agreement between the Company and Raymond A.
Smelek.+
10.23 Employment Agreement between the Company and Thomas C.
White.+
10.24 Employment Agreement between the Company and Holmes T.
Lundt.+
10.25 Employment Agreement between the Company and Scott J.
Ritchie.+
11.1 Computation of earnings per share.+
21.1 List of Subsidiaries of the Registrant.+
23.1 Consent of Independent Accountants.++
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).+
27.1 Financial Data Schedule.+
</TABLE>

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

** Registrant has sought confidential treatment pursuant to Rule 406 for
portions of the referenced exhibit.

+ Previously filed.

++ Filed herewith.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in Post-Effective Amendment No. 1 of this
registration statement on Form S-1 of our report dated August 11, 1997, except
as to notes 1, 9, 11, 13 and 14, the date of which is January 26, 1998, on our
audits of the consolidated financial statements of Extended Systems
Incorporated. We also consent to the references to our firm under the captions
"Experts" and "Selected Financial Data."

COOPERS & LYBRAND L.L.P.

Boise, Idaho
March 3, 1998