EXTENDED SYSTEMS INC, 10-Q, 2000-11-14

EXTENDED SYSTEMS INC
10-Q, 2000-11-14
COMPUTER PERIPHERAL EQUIPMENT, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

/x/	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2000

/ /	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number 000-23597

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

Delaware
(State or other jurisdiction of
incorporation or organization)

82-0399670
(I.R.S. Employer
Identification No.)

5777 North Meeker Avenue, Boise, ID 83713
(Address of principal executive office) (Zip Code)

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

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

The number of shares outstanding of the registrant's Common Stock as of September 30, 2000 was 10,434,193.

EXTENDED SYSTEMS INCORPORATED

FORM 10-Q

For the Three Months Ended September 30, 2000

INDEX

		Page
*Part I. Financial Information*
Item 1.	Financial Statements
	Consolidated Statements of Operations for the Three Months Ended September 30, 2000 and 1999	1
	Consolidated Statements of Comprehensive Loss for the Three Months Ended September 30, 2000 and 1999	2
	Consolidated Balance Sheets as of September 30, 2000 and June 30, 2000	3
	Consolidated Condensed Statements of Cash Flows for the Three Months Ended September 30, 2000 and 1999	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	7
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	23
*Part II. Other Information*
Item 6.	Exhibits and Reports on Form 8-K	24
*Signature*		25

Part I. Financial Information

Item 1. Financial Statements

EXTENDED SYSTEMS INCORPORATED

Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

			Three Months Ended September 30,
			2000			1999
Net revenue			$	12,229		$	13,089
Cost of net revenue				5,249			6,978

		Gross profit		6,980			6,111
Operating expenses:
	Research and development			3,090			2,237
	Acquired in-process research and development			—			2,365
	Marketing and sales			4,970			4,164
	General and administrative			1,304			1,055
	Amortization of intangibles			243			170

		Loss from operations		(2,627	)		(3,880	)
Other expense (income), net				(119	)		79
Interest expense				—			178

		Loss before income taxes		(2,508	)		(4,137	)
Income tax benefit				(928	)		(1,076	)

		Net loss	$	(1,580	)	$	(3,061	)

Loss per share:
	Basic		$	(0.15	)	$	(0.34	)
	Diluted		$	(0.15	)	$	(0.34	)
Number of shares used in per share calculation:
	Basic			10,360			8,995
	Diluted			10,360			8,995

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

		Three Months Ended September 30,
		2000			1999
Net income loss		$	(1,580	)	$	(3,061	)
Change in currency translation			(113	)		—

	Comprehensive loss	$	(1,693	)	$	(3,061	)

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

Consolidated Balance Sheets

(in thousands, except par value)

(unaudited)

			September 30, 2000			June 30, 2000
ASSETS
Current:
	Cash and cash equivalents		$	5,389		$	6,191
	Receivables			13,764			12,499
	Inventories			2,762			3,484
	Prepaids and other			1,200			1,200
	Deferred income taxes			715			715

		Total current assets		23,830			24,089
Property and equipment, net				7,647			7,817
Intangibles, net				5,833			6,237
Deferred income taxes				7,487			5,785
Other assets				293			293

		Total assets	$	45,090		$	44,221

LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
	Current debt		$	—		$	67
	Accounts payable			3,586			3,026
	Accrued expenses			2,835			2,643
	Deferred revenue			1,014			770

		Total current liabilities		7,435			6,506

Stockholders' equity:
	Preferred Stock; $0.001 par value per share, 5,000 shares authorized; no shares issued or outstanding			—			—
	Common stock; $0.001 par value per share, 75,000 shares authorized; 10,434 and 10,309 shares issued and outstanding			10			10
	Additional paid-in capital			29,696			28,108
	Retained earnings			8,960			10,540
	Deferred compensation			(219	)		(264	)
	Accumulated other comprehensive loss			(792	)		(679	)

		Total stockholders' equity		37,655			37,715

		Total liabilities and stockholders' equity	$	45,090		$	44,221

The accompanying notes are an integral part of the financial statements

EXTENDED SYSTEMS INCORPORATED

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

					Three Months Ended September 30,
					2000			1999
Cash flows from operating activities:
	Net loss				$	(1,580	)	$	(3,061	)
	Adjustments to reconcile net loss to net cash used by operating activities:
		Acquired in-process research and development				—			2,365
		Provision for bad debts				46			39
		Provision for write-down of inventory				210			60
		Depreciation and amortization				767			662
		Accretion of discount on long-term debt				—			174
		Payment of discount on long-term debt				—			(3,675	)
		Tax benefit from employee stock options				771			—
		Deferred income taxes				(1,702	)		—
		Stock option compensation				44			47
		Other				(3	)		—
		Changes in assets and liabilities, net of effect of acquisitions:
			Receivables			(1,351	)		(335	)
			Inventories			480			536
			Prepaids and other assets			(1	)		(7	)
			Accounts payable and accrued expenses			1,003			319

				Net cash used by operating activities		(1,316	)		(2,876	)

Cash flows from investing activities:
	Purchase of property and equipment					(202	)		(188	)
	Maturities of available-for-sale securities					—			3,001
	Acquisitions:
		Oval (1415) Limited, net of cash acquired				—			(5,286	)
	Other investing activities					21			(38	)

				Net cash used by investing activities		(181	)		(2,511	)

Cash flows from financing activities:
	Proceeds from the issuance of common stock					802			—
	Payments on long-term debt					(67	)		(4,552	)
	Net borrowings under line of credit agreement					—			2,575

				Net cash provided by (used by) financing activities		735			(1,977	)
	Effect of exchange rate changes on cash					(40	)		—

	Net decrease in cash and cash equivalents					(802	)		(7,364	)
Cash and cash equivalents:
	Beginning of period					6,191			9,668

	End of period				$	5,389		$	2,304

The accompanying notes are an integral part of the financial statements

Extended Systems Incorporated
Notes to Consolidated Financial Statements
(unaudited)

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

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

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

Recently Issued Accounting Standards. The Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements," in December 1999. This bulletin summarizes the Securities and Exchange Commission's view in applying generally accepted accounting principles to revenue recognition in financial statements. The SEC has recently indicated it intends to issue further guidance with respect to adoption of specific issues addressed by SAB 101. Until such time as this additional guidance is issued, we are unable to assess the impact, if any, SAB 101 may have on our operations. We are required to adopt this bulletin no later than our fourth quarter of fiscal 2001.

Receivables

Receivables consisted of the following at:

	September 30, 2000			June 30, 2000
Accounts receivable	$	11,749		$	10,332
Income taxes receivable		1,686			1,520
Other receivables		566			848
Allowance for doubtful accounts		(237	)		(201	)

	$	13,764		$	12,499

Inventories

Inventories consisted of the following at:

	September 30, 2000		June 30, 2000
Purchased parts	$	1,216	$	1,417
Work in process		247		308
Finished goods		1,299		1,759

	$	2,762	$	3,484

Intangible Assets

Intangible assets consisted of the following at:

	September 30, 2000			June 30, 2000
Goodwill	$	4,080		$	4,065
Purchased technology		3,128			3,128
Other intangibles		894			894

		8,102			8,087
Less accumulated amortization		(2,269	)		(1,850	)

	$	5,833		$	6,237

Accrued Expenses

Accrued expenses consisted of the following at:

	September 30, 2000		June 30, 2000
Accrued payroll and related benefits	$	1,632	$	1,145
Accrued warranty and support costs		445		435
Other		758		1,063

	$	2,835	$	2,643

Business Segment, Geographic Area Data and Major Customers

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

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

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

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

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

Segment information is as follows for the three months ended September 30:

			2000			1999
Net revenue:
	Mobile information management		$	8,722		$	8,485
	Printing solutions			3,506			4,579
	Other products			1			25

		Total	$	12,229		$	13,089

Loss from operations:
	Mobile information management		$	(2,522	)	$	(3,648	)
	Printing solutions			(89	)		(214	)
	Other products			(16	)		(18	)

		Total	$	(2,627	)	$	(3,880	)

Our mobile information management segment's loss from operations includes an acquired in-process research and development charge of $2.4 million recorded in the three months ended September 30, 1999.

Sales to a distributor accounted for 14% of net revenue in the first quarter of fiscal 2001 and were primarily in our mobile information management segment. Sales to an original equipment manufacturer accounted for 22% of net revenue in the first quarter of fiscal 2000 and were primarily in our mobile information management segment.

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

Forward-Looking Statements

In addition to historical information, this Form 10-Q contains forward-looking statements. In this Form 10-Q, the words "expects," "anticipates," "believes," "intends," "will" and similar expressions identify forward-looking statements, which are based upon information currently available to us, speak only as of the date hereof and are subject to certain risks and uncertainties. These forward-looking statements include, but are not limited to, statements regarding future levels of software product sales, international sales, original equipment manufacturer sales, gross margin percentages, staffing levels, expense levels, levels of accounts receivable, anticipated cash funding needs, and future acquisitions. We assume no obligation to update any forward-looking statements. Our actual results may differ materially from the results discussed in such forward-looking statements. Factors that may cause a difference include, but are not limited to, those discussed in this section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Results and Market Price of Stock." You should carefully review the risk factors described in other documents that we file from time to time with the Securities and Exchange Commission, including our 2000 Annual Report on Form 10-K and other Quarterly Reports on Form 10-Q that we will file in fiscal 2001. All period references are to our first quarters ended September 30, 2000 and 1999 and our fiscal year ended June 30, 2001 and 2000, unless otherwise indicated. Tabular amounts are in thousands, except percentages.

Results of Operations

We classify our product offerings into three segments:

•: mobile information management;
•: printing solutions; and
•: other products.

Our mobile information management segment includes both mobile data management and universal mobile connectivity products that enable users to access, collect, synchronize and print information on demand. The products in our mobile information management segment include data synchronization and management software, wireless connectivity products, enterprise Internet appliances and client/ server database management systems with remote access capabilities. We sell our mobile information management products primarily to original equipment manufacturers, enterprises, application developers and computer resellers both directly and through our e-commerce storefronts on the Internet. We derive revenue from:

•: software license fees;
•: sales of hardware products;
•: non-recurring development fees that are generated when we adapt our products to a customer's specifications;
•: support and maintenance fees; and
•: royalties.

We believe that net revenue from mobile information management products, specifically our mobile information management software products, will generate a larger percentage of net revenue as we continue to focus our research and development and our marketing and sales efforts on our mobile information management software products and as our mobile information management software products continue to achieve increased market acceptance. Our future results of operations will be highly dependent upon the success of recently introduced products.

Our printing solutions segment includes our maturing network print server and non-network printer sharing products sold primarily through our worldwide distribution channel to computer resellers and Fortune 1000 companies. We also sell printing solutions products to a number of original equipment manufacturers. Our net revenue from the printing solutions segment has been decreasing, partially due to decreased unit sales of both network print server and non-network printer sharing products as we shifted resources to support our mobile information management products. We derive revenue primarily from sales of hardware products and, to a lesser extent, from non-recurring development fees and royalties. We expect net revenue from our printing solutions products will continue to decline over the next several quarters and will continue to become a smaller percentage of our net revenue.

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

We derive a substantial portion of our net revenue from international sales, principally from our international sales subsidiaries, original equipment manufacturers and from a limited number of distributors. In the first quarters of fiscal 2001 and 2000, sales outside of North America represented 59% and 79% of our net revenue, respectively. We typically experience a decrease in international sales in the first fiscal quarter as a result of typical seasonality in Europe and certain other regions in the summer months when business activities decrease. We expect that international sales will continue to represent a substantial portion of our net revenue in the foreseeable future.

In the first quarters of fiscal 2001 and 2000, sales to customers in Asia represented 22% and 31% of net revenue, respectively. Decreasing revenue from Asian customers was primarily related to the expected decrease in sales of our XTNDAccess IrDA Printer Adapter to Hewlett-Packard. This decrease was offset in part by an increase in sales to other multi-national original equipment manufacturers that incorporate or bundle our products with their products and sell their products worldwide.

Several of our products, in particular our XTNDAccess wireless connectivity products, ExtendNet print servers and XTNDConnect data synchronization and management software, are sold to original equipment manufacturers. We intend to continue to increase sales to original equipment manufacturers in the future, particularly with our mobile information management products. In fiscal 2000, sales of mobile information management products and services to Hewlett-Packard accounted for 23% of our net revenue. Substantially all of our net revenue derived from Hewlett-Packard was generated by sales of our XTNDAccess IrDA Printer Adapter for bundling with one of its mid-range printers. Hewlett-Packard also licenses and purchases other mobile information management products. In April 2000, Hewlett-Packard notified us that it is no longer bundling our XTNDAccess IrDA Printer Adapter with Hewlett-Packard printers sold in North America, but that it is offering our product as a free accessory to its customers with the purchase of the Hewlett-Packard printer.

In the first quarter of fiscal 2001, sales to CF Company, a distributor of our mobile information management products and the account manager for a number of our other original equipment manufacturer customers, accounted for 14% of our net revenue.

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

We market and sell some of our products, primarily our printing solution products, through multiple indirect channels, primarily distributors and resellers. We support our indirect channels with our own marketing and sales organization. We provide most of our distributors and resellers with price protection rights and limited product return rights for stock rotation. Stock rotation rights permit distributors to return products to us for credit against an offsetting purchase order, but are limited

based upon amounts purchased by a given distributor during the preceding quarter. Price protection rights require that we grant retroactive price adjustments for inventories of our products held by distributors or resellers if we lower our prices for those products.

		Three months ended September 30,
		2000			% Change		1999
Net revenue		$	12,229		(6.6)	%	$	13,089

The decrease in net revenue in the first quarter of fiscal 2001 from the same period in fiscal 2000 was due primarily to a 33% decrease in net revenue from sales of our mobile information management hardware products and a 23% decrease in net revenue from sales of our printing solutions products. The weakening of the Euro since the prior year also contributed to the decrease in net revenue, as a result of translating the net revenue of our international subsidiaries, which is generally denominated in their local currencies, into U.S. dollars. This decrease was offset, in part, by a 71% increase in net revenue from sales of our mobile information management software products.

	Three months ended September 30,
	2000			% Change		1999
Gross profit	$	6,980		14.2	%	$	6,111
Gross margin		57.1	%				46.7	%

Our cost of net revenue consists primarily of costs associated with components, out-sourced manufacturing of particular subassemblies, in-house labor associated with assembly, testing, procurement, shipping and quality assurance, amortization of purchased technology, facility costs and royalties for the use of third-party software. The increase in gross margin in the first quarter of fiscal 2001 from the same period in fiscal 2000 was the result of increased sales of mobile information management software products and decreased shipments of lower margin mobile information management hardware products. The increase in gross margin was partially offset by a shift in product mix in the printing solutions segment toward lower margin products.

We expect that increased sales of our mobile information management software products will continue to have a positive impact on our gross margin. We also expect that gross margin in our printing solutions segment may continue to decline as a result of a continued shift in product mix toward lower margin products.

		Three months ended September 30,
		2000			% Change		1999
Research and development		$	3,090		38.1	%	$	2,237
	as a % of net revenue		25.3	%				17.1	%

Research and development expenses generally consist of salaries and other personnel costs of our research and development teams, consulting costs, facility costs and travel expenses. The increase in research and development expenses in the first quarter of fiscal 2001 from the same period last year was primarily the result of additional personnel in our mobile information management segment. This increase is partially offset by a decrease in expenses in our printing solutions segment as we continued to refocus our development efforts to new mobile information management products. At September 30, 2000, we had 127 research and development personnel, a 25% increase from the 102 personnel at the same time last year.

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

		Three months ended September 30,
		2000			% Change		1999
Marketing and sales		$	4,970		19.4	%	$	4,164
	as a % of net revenue		40.6	%				31.8	%

Marketing and sales expenses consist primarily of salaries, commissions and other personnel costs of our marketing, sales and support personnel and promotional expenses. The increase in marketing and sales expenses for the first quarter of fiscal 2001 from the same period last year was primarily due to increased personnel costs and promotional activities for the mobile information management segment, both domestically and at our European subsidiaries. These increases were partially offset by decreased promotional activities in our printing solutions segment. We had 186 sales and marketing personnel on staff at September 30, 2000, up from the 179 on staff at the same time last year.

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

		Three months ended September 30,
		2000			% Change		1999
General and administrative		$	1,304		23.6	%	$	1,055
	as a % of net revenue		10.7	%				8.1	%

General and administrative expenses generally consist of salaries and other personnel costs of our finance, management information systems, human resources and other administrative employees and professional service expenses. The increase in general and administrative expenses in the first quarter of fiscal 2001 from the same period last year was primarily attributable to an increase in the cost of our directors and officers insurance. Our insurance premiums increased as a result of an increase in coverage limit and the current market environment for directors and officers insurance.

We expect general and administrative expenses to continue to increase in the future as our operations continue to expand.

		Three months ended September 30,
		2000			% Change		1999
Amortization of intangibles		$	243		42.9	%	$	170
	as a % of net revenue		2.0	%				1.3	%

Amortization of intangibles is the result of goodwill and other intangibles, which resulted from our acquisitions of Advance Systems, Rand Software and Parallax Research.

		Three months ended September 30,
		2000			% Change		1999
Income tax benefit		$	(928	)	(13.8)	%	$	(1,076	)
	as a % of (loss) before taxes		37.0	%				26.0	%

The decrease in the income tax benefit for the first quarter of fiscal 2001 from the same period last year was attributable to a decrease in the loss before income taxes, partially offset by an increase in the effective tax rate for the first quarter of fiscal 2001. The change in the effective tax rate for the first quarter of fiscal 2001 was primarily the result of valuation allowances recorded in the prior year on deferred tax assets arising from our acquisition of Advance Systems and on foreign tax credit carryforwards. Although realization is not assured, we believe it is more likely than not that the remaining net deferred tax assets will be realized.

Results of Operations by Segment

The discussion below addresses the operating results attributable to our two primary segments.

Mobile Information Management Segment

	Three months ended September 30,
	2000			% Change		1999
Net revenue	$	8,722		2.8	%	$	8,485
Loss from operations		(2,522	)	(30.9)	%		(3,648	)

Net revenue from sales of mobile information management products grew to 71% of our net revenue for the first quarter of fiscal 2001, up from 65% in the same period last year.

Net revenue increased in the first quarter of 2001 from the same period last year as a result of a higher content of net revenue from mobile information management software licenses, royalties and support and maintenance fees as a percentage of total sales. Net revenue from our mobile information management software products, including our XTNDAccess Bluetooth and our XTNDConnect data synchronization and management software products, was $5.0 million in the first quarter of fiscal 2001, an increase of 71% from the $2.9 million in the same period last year. This increase in sales of software products was partially offset by a decrease in unit sales of our XTNDAccess hardware products to original equipment manufacturers, which in turn was partially offset by an increase in the average selling price of XTNDAccess hardware products sold.

We expect that net revenue from mobile information management software products will continue to expand to become the majority of our net revenue and will continue to have a positive impact on our gross margin. While we saw some renewed interest in our XTNDAccess hardware products from original equipment manufacturers in the first quarter of fiscal 2001, we do expect that net revenue from our mobile information management hardware products will continue to decline in the coming quarters.

The decreased loss from operations for our mobile information management segment in the first quarter of fiscal 2001 from the same period last year was primarily the result of an acquired in-process research and development charge of $2.4 million recorded in the prior year from our August 1999 acquisition of Advance Systems and increased gross profit. This decreased loss from operations was offset in part by an increase in spending for research and development projects for mobile information management software products and increased spending in marketing and sales for all mobile information management products worldwide.

Printing Solutions Segment

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

	Three months ended September 30,
	2000			% Change		1999
Net revenue	$	3,506		(23.4)	%	$	4,579
Loss from operations		(89	)	(58.4)	%		(214	)

In the first quarter of fiscal 2001, 29% of our net revenue was derived from sales of our printing solutions products, as compared to 35% in the same period last year.

The decrease in net revenue for the first quarter of fiscal 2001 from the same period last year was principally due to decreased unit sales of both network print server products and non-network printer sharing products worldwide. This decrease in unit sales was coupled with a decrease in average selling price of print server products sold, which was due primarily to a change in product mix.

We expect that net revenue from sales of printing solutions products will continue to decline in coming quarters. We also expect that gross margin in our printing solutions segment may continue to decline as a result of a continued shift in product mix toward lower margin products.

The loss from operations from our printing solutions segment decreased in the first quarter of fiscal 2001 from the same period last year primarily due to a decrease in operating expenses as we shifted resources to support our mobile information management products. This decrease was partially offset by decreased gross profit from network print server products as a result of sales of lower priced and lower margin products.

Liquidity, Capital Resources and Financial Condition

Net cash used by operating activities in the first quarter of fiscal 2001 was $1.3 million and was primarily a result of our net loss, adjusted for such non-cash items as depreciation and amortization, and an increase in receivables. These cash uses were partially offset by an increase in accounts payable and accrued expenses and a decrease in inventories. Net cash used by operating activities in the first quarter of fiscal 2000 was $2.9 million and was primarily the result of the payment of a discount on long-term debt, partially offset by a decrease in inventories.

Accounts receivable was $11.5 million at September 30, 2000 as compared to $10.1 million at June 30, 2000. We expect that accounts receivable may increase in the event that net revenue increases and as net revenue from original equipment manufacturers and international customers represents a higher percentage of our net revenue.

Net cash used by investing activities in the first quarter of fiscal 2001 was $181,000, which consisted primarily of purchases of property and equipment. Net cash used by investing activities in the first quarter of fiscal 2000 was $2.5 million and consisted primarily of cash payments for the acquisition of Oval, the parent company of Advance Systems, partially offset by cash from maturities and sales of available-for-sale securities.

We currently plan to incur aggregate capital expenditures of approximately $1.4 million during fiscal 2001, primarily for software, system improvements and personal computers.

Net cash provided by financing activities in the first quarter of fiscal 2001 was $735,000, which consisted primarily of proceeds from the issuance of common stock under our stock plans. Net cash used by financing activities in the first quarter of fiscal 2000 was $2.0 million, which consisted primarily

of payments on our long-term debt, partially offset by proceeds from the issuance of common stock under our stock plans.

We have an uncollateralized bank revolving line of credit of $10.0 million, which expires on October 31, 2001. Interest on borrowings is at the lender's prime rate. There were no borrowings under this line at September 30, 2000 or June 30, 2000. The line of credit agreement has restrictive covenants that require us to maintain particular financial ratios.

We believe that our existing working capital and borrowing capacity, coupled with the funds generated from our operations, will be sufficient to fund our anticipated working capital, capital expenditures and debt payment requirements through fiscal 2001. In the longer term, we may require additional sources of liquidity to fund future growth. These sources of liquidity may include additional equity offerings, which could result in dilution to our stockholders, or additional debt financing.

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

Effects of Foreign Currency Exchange Rates

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

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

We do not hold or issue financial instruments for speculative purposes. From time to time, we enter into foreign currency forward contracts, typically against the British Pound and Euro, to offset currency fluctuations on payments and receipts of foreign currencies on transactions with international subsidiaries. While these instruments are subject to fluctuations in value, these fluctuations are generally offset by fluctuations in the value of the underlying asset or liability, resulting in minimal net exposure for us. The success of these currency activities depends upon estimation of intercompany balances denominated in various foreign currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses.

Recently Issued Accounting Standards

The Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements," in December 1999. This bulletin summarizes the Securities and Exchange Commission's view in applying generally accepted accounting principles to revenue recognition in financial statements. The SEC has recently indicated it intends to issue further guidance with respect to adoption of specific issues addressed by SAB 101. Until such time as this additional guidance is issued, we are unable to assess the impact, if any, SAB 101 may have on our operations. We are required to adopt this bulletin no later than our fourth quarter of fiscal 2001.

Factors That May Affect Future Results and Market Price of Stock

Our quarterly and annual operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline.

Our operating results have fluctuated in the past and we expect that they may continue to do so in the future. If our operating results fall below the expectations of securities analysts and investors, the price of our stock may fall. Some of the factors that may cause fluctuations in our operating results include, but are not limited to:

•: changes in the buying patterns of our original equipment manufacturer customers;
•: changes in customer demand for our products;
•: announcements or introductions of new products or services by our competitors;
•: delays in developing and introducing new products and services;
•: changes in our pricing policies as a result of increased competition;
•: the mix of distribution channels through which we sell our products;
•: the market acceptance of our new and enhanced products and the products of our original equipment manufacturers;
•: the emergence of new technologies or industry standards;
•: the timing of customer orders, which can be influenced by fiscal year-end buying pressure and seasonal trends;
•: a shift in the mix of products sold, resulting in increased sales of lower-margin products;
•: the discontinuation of any of our product offerings or segments, which could result in product returns and inventory writeoffs; and
•: changes in accounting standards, including standards relating to revenue recognition, business combinations and stock-based compensation.

Our stock price may be volatile and could drop significantly, resulting in the partial or total loss of your investment.

The trading price of our common stock may significantly fluctuate, which may cause your investment to decrease in value. For example, during the period from October 1, 1999 to September 30, 2000, the price of our common stock ranged from $6 to $150 per share. The following factors may have a significant impact on the market price of our common stock:

•: quarter-to-quarter variations in operating results;
•: announcements of technological innovations or new products by us or our competitors;

•: general conditions in the computer and mobile device industry; price and trading volume volatility in the public stock markets generally; and
•: changes in security analysts' earnings estimates or recommendations regarding us, our competitors or our customers.

We depend on a number of key business relationships and, if we fail to maintain these relationships or are unable to develop new relationships, our business would suffer.

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

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

If specific industry-wide standards and protocols, such as Bluetooth, WAP, SyncML and IrDA, upon which our products are or will be based, do not achieve widespread acceptance, our business would be harmed.

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

•: Bluetooth, a short-range radio communication protocol;
•: WAP, or the Wireless Application Protocol;
•: SyncML, a data synchronization protocol; and
•: IrDA, a wireless communication protocol created by the Infrared Data Association.

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

The mobile data management and universal mobile connectivity markets are new and evolving and may not continue to grow, which would reduce demand for our products and harm our business.

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

digital cameras. Enterprises and original equipment manufacturers may not develop sufficient confidence in mobile devices to deploy our products to a significant degree. Any inability to continue to penetrate the existing markets for mobile data management and universal mobile connectivity products, the failure of current markets to grow, new markets to develop or these markets to be receptive to our products, could harm our business. The emergence of these markets will be affected by a number of factors beyond our control.

If original equipment manufacturers reduce their purchases of our products, our operating results and future growth could be harmed.

A significant portion of our net revenue in any quarter is typically derived from sales to a limited number of original equipment manufacturers. For example, in fiscal 2000, sales of mobile information management products and services to Hewlett-Packard accounted for 23% of our net revenue. In April 2000, Hewlett-Packard notified us that it is no longer bundling our XTNDAccess IrDA Printer Adapter with Hewlett-Packard printers sold in North America, but that it is offering our product as a free accessory to its customers with the purchase of the Hewlett-Packard printer. As a result, sales to Hewlett-Packard were less than 3% of our net revenue in the first quarter of fiscal 2001.

In the event that other original equipment manufacturers reduce their purchases of our products, our operating results and future growth could be harmed. In addition, any significant deferral of purchases of our products by original equipment manufacturers could harm our quarterly operating results.

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

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

We intend to pursue additional acquisitions, and any acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value or adversely affect our operating results.

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

•: expansion into new markets and business areas;
•: the integration of acquired technologies with our existing products and technologies;
•: diversion of management's attention and other resources to the assimilation of the operations and personnel of the acquired companies;
•: availability of equity or debt financing on terms favorable to us or our stockholders;

•: integration of management information systems, personnel, research and development and marketing, sales and support operations; and
•: potential adverse short-term effects on our operating results.

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

We forecast certain component inventory purchases and many of our expenses based on expected net revenue, which is difficult to predict. If we fail to accurately predict net revenue in a particular period, we may be unable to adjust our component inventory purchasing and expenses in that period and our operating results would be harmed.

Our quarterly net revenue and operating results depend in large part on the volume and timing of orders received within the quarter, which are difficult to forecast. We typically operate with a relatively small order backlog and significant component inventory purchases and portions of our expenses are fixed in advance, based in large part on our forecast of future net revenue. In addition, a majority of our net revenue results from the sale of products to a number of original equipment manufacturers and distributors, which are difficult to predict. None of our distributors or original equipment manufacturers is obligated to purchase our products or certain component inventory that is used in the manufacturer of our products except pursuant to current purchase orders or purchase agreements. If net revenue is below expectations in any given quarter, the adverse impact of the shortfall on our operating results may be magnified by our inability to adjust component inventory purchasing and spending to compensate for the shortfall. Also, we may be required to record an increase in our provision for obsolete inventory if certain component inventory that we purchase in anticipation of a higher level of product sales cannot be returned to vendors and the inventory cannot be used in the manufacturer of our other products. Therefore, a shortfall in actual net revenue as compared to estimated net revenue could harm our operating results.

We have experienced seasonality in our net revenue, which may cause our operating results to fail to meet the expectations of securities analysts or investors, which could cause our stock price to decline.

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

Our market is becoming increasingly competitive, which could result in lower prices for our products or a loss of market share.

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

We compete with:

•: mobile data management companies, including Puma Technology, fusionOne, Aether Software and Starfish Software, a subsidiary of Motorola;
•: client/server database providers, including Microsoft, Interbase, Pervasive Software and Oracle;
•: mobile connectivity companies, including Widcomm, Digianswer (a subsidiary of Motorola) and ACTiSYS;
•: internet solutions providers, including IBM, Cobalt Networks, eSoft and Ramp Networks;
•: print server manufacturers, including Hewlett-Packard, Intel and Lexmark; and
•: internal research and development departments of original equipment manufacturers, many of whom are our current customers.

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

If our third-party manufacturers fail to provide us with quality, cost-effective products in a timely manner or in sufficient volumes to meet customer demand, our business and operating results may be harmed.

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

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

If our third-party suppliers fail to make deliveries that meet our manufacturing schedules, our business may be harmed.

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

We rely upon third-party distributors and resellers, who may not devote resources to adequately support our products.

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

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

We depend on non-exclusive licenses for some of the technology we use with our products.

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

We may not be able to successfully develop or introduce new products.

The markets for our products are characterized by:

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

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

International sales and operations represent a substantial portion of our net revenue. Our business may be harmed due to risks associated with international sales and operations.

We derive a substantial portion of our net revenue from international sales. We expect that international sales will continue to represent a substantial portion of our net revenue for the foreseeable future. International sales are subject to a number of risks, including:

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

Currency exchange rate fluctuations could cause our operating results to fluctuate.

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

From time to time, we enter into foreign currency forward contracts, typically against the British Pound and Euro, to offset currency fluctuations on payments and receipts of foreign currencies on transactions with international subsidiaries. The success of these currency activities depends upon estimation of intercompany balances denominated in various foreign currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses.

If enterprises and individuals are reluctant to use the Internet to manage information, it will harm sales of some of our products.

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

The complex computer software and hardware products that we produce may contain defects for which we may be liable.

Software and computer hardware products as complex as those we offer may contain undetected errors when first introduced or as new versions are released. These errors could result in dissatisfied customers, product liability claims and the loss of or delay in market acceptance of new or enhanced products, any of which could harm our business. Testing of our products is particularly challenging because it is difficult to simulate the wide variety of computing environments in which our customers may deploy our products. For example, our mobile information management products are used in a wide variety of telecommunications environments. Changes in technology standards or an increase in

the number of telecommunications technologies used in the marketplace may create compatibility issues with our products and our customers' environments. Accordingly, despite testing by us and by current and potential customers, errors could be found after commencement of commercial shipment. A successful product liability claim brought against us could result in our payment of significant legal fees and damages, which would harm our business.

If we are unable to effectively manage our growth, our business will suffer.

Any growth we experience is likely to place a significant strain on our administrative, operational and financial resources and to increase demands on our systems and controls, which could harm our business. Growth may also result in an increase in the scope of responsibility for management personnel. We anticipate that growth and expansion will require us to recruit, hire, train and retain a substantial number of new engineering, executive, sales and marketing personnel. In the current employment environment we have experienced difficulty in recruiting qualified personnel, and continued difficulty in this regard could limit our ability to grow. In addition, in order to manage our growth successfully, we will need to continue to expand and improve our operational, management and financial systems and controls. The failure to do so could harm our business.

We may not be able to adequately protect our patent, trademark, copyright or other intellectual property rights from competitors, and we may be required to use a significant amount of our resources to defend ourselves from infringement claims made by others.

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

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

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

The loss of key personnel, or our inability to attract and retain additional personnel, may harm our business.

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

It may be difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

We do not hold or issue financial instruments for speculative purposes. From time to time, we enter into foreign currency forward contracts, typically against the British Pound and Euro, to offset currency fluctuations on payments and receipts of foreign currencies on transactions with international subsidiaries. At September 30, 2000, we had contracts in place totaling $4.1 million that matured within 30 days. While these instruments are subject to fluctuations in value, these fluctuations are generally offset by fluctuations in the value of the underlying asset or liability, resulting in minimal net exposure for us. The success of these currency activities depends upon estimation of intercompany balances denominated in various foreign currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses.

Part II. Other Information

Item 6. Exhibits and Reports on Form 8-K

(a)

EXHIBITS

27.1: Financial Data Schedule

(b): REPORTS ON FORM 8-K

The Company filed no reports on Form 8-K during the three months ended September 30, 2000.

Items 1, 2, 3, 4 and 5 of Part II are not applicable and have been omitted.

SIGNATURE

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

		Extended Systems Incorporated
		By:	/s/ KARLA K. ROSA Karla K. Rosa Vice President, Finance Chief Financial Officer
			(Principal Financial and Accounting Officer and Duly Authorized Officer)

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Extended Systems Incorporated Notes to Consolidated Financial Statements (unaudited)
Part II. Other Information
SIGNATURE