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 QUARTER ENDED MARCH 31, 1999

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

COMMISSION FILE NUMBER 0-26536

SMITH MICRO SOFTWARE, INC.
- -------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 33-0029027
- ------------------------------- ----------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

51 COLUMBIA, SUITE 200, ALISO VIEJO, CA 92656
- ---------------------------------------- ----------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 362-5800

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE

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 ( )
--- ---

As of April 30, 1999, there were 14,504,417 shares of Common Stock
outstanding.

SMITH MICRO SOFTWARE, INC.

FORM 10-Q

TABLE OF CONTENTS

Page
----

PART I. FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999 (UNAUDITED)
AND DECEMBER 31, 1998 3

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 4

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998 5

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 6

MANAGEMENT'S DISCUSSION AND ANALYSIS 9

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS 20

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 20

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21

SIGNATURES 23

FORWARD LOOKING STATEMENTS

THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE
HARBOR" FOR FORWARD-LOOKING STATEMENTS. THE STATEMENTS CONTAINED IN THIS
QUARTERLY REPORT ON FORM 10-Q THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE
FORWARD LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS OF THE COMPANY TO MATERIALLY
DIFFER FROM THOSE ANTICIPATED. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS THAT SPEAK ONLY AS THE DATE HEREOF. THE
COMPANY DISCLAIMS ANY OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD LOOKING STATEMENTS THAT MAY BE MADE TO REFLECT EVENTS
OR CIRCUMSTANCES OCCURRING SUBSEQUENT TO THE FILING OF THIS FORM 10-Q WITH THE
SECURITIES AND EXCHANGE COMMISSION OR OTHERWISE TO REVISE OR UPDATE ANY ORAL OR
WRITTEN FORWARD LOOKING STATEMENT THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY. READERS ARE ALSO URGED TO CAREFULLY REVIEW AND CONSIDER
THE VARIOUS DISCLOSURES MADE BY THE COMPANY THAT DESCRIBE CERTAIN FACTORS WHICH
AFFECT THE COMPANY'S BUSINESS, INCLUDING THE "RISK FACTORS" COMMENCING ON PAGE
12 OF THIS QUARTERLY REPORT AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."

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3

SMITH MICRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)

March 31, December 31,
1999 1998
----------- ------------
(unaudited)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 11,299 $ 12,699
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $1,715 (1999) and $1,255 (1998) 4,504 4,093
Income taxes receivable 1,302 931
Deferred tax asset 470 470
Inventories 468 629
Prepaid expenses and other current assets 386 423
-------- --------
Total current assets 18,429 19,245

EQUIPMENT AND IMPROVEMENTS, net 334 350
DEFERRED TAX ASSET 336 336
OTHER ASSETS 307 304
INTANGIBLE ASSETS, net 445 568
-------- --------
$ 19,851 $ 20,803
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 1,039 $ 1,373
Accrued liabilities 1,259 1,185
-------- --------
Total current liabilities 2,298 2,558

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.001 per share; 5,000,000 shares
authorized; none issued and outstanding
Common stock, par value $0.001 per share; 20,000,000 shares
authorized; 14,075,000 shares issued and outstanding (1999 and 1998) 14 14
Additional paid-in capital 21,250 21,250
Accumulated deficit (3,711) (3,019)
-------- --------
Total stockholders' equity 17,553 18,245
-------- --------
$ 19,851 $ 20,803
======== ========

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SMITH MICRO SOFTWARE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share and Per Share Data)

For the Three Months
Ended March 31,
----------------------
1999 1998
-------- --------

NET REVENUES $ 2,866 $ 3,266

COST OF REVENUES 736 866
-------- --------
GROSS PROFIT 2,130 2,400

OPERATING EXPENSES:
Selling and marketing 1,533 768
Research and development 891 786
General and administrative 892 836
-------- --------
Total operating expenses 3,316 2,390
-------- --------

OPERATING INCOME (LOSS) (1,186) 10

INTEREST INCOME 138 180
-------- --------

INCOME (LOSS) BEFORE INCOME TAXES (1,048) 190

INCOME TAX EXPENSE (BENEFIT) (356) 77
-------- --------
NET INCOME (LOSS) $ (692) $ 113
======== ========
NET INCOME (LOSS) PER SHARE, basic and diluted $ (0.05) $ 0.01
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 14,075 14,076
======== ========

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

SMITH MICRO SOFTWARE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)

For The Three Months
Ended March 31,
----------------------
1999 1998
-------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (692) $ 113
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 215 167
Provision for doubtful accounts and other
adjustments to accounts receivable 460 (659)
Change in operating accounts:
Accounts receivable (871) (4)
Income taxes receivable (371) 78
Inventories 161 (21)
Prepaid expenses and other assets (160)
Accounts payable and accrued liabilities (260) 402
-------- --------
Net cash used in operating activities (1,358) (84)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of technology (458)
Capital expenditures (42) (18)
-------- --------
Net cash used in investing activities (42) (476)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,400) (560)

CASH AND CASH EQUIVALENTS, beginning of period 12,699 14,367
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 11,299 $ 13,807
======== ========

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

SMITH MICRO SOFTWARE, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - The accompanying unaudited consolidated
financial statements have been prepared by Smith Micro Software, Inc. ("Smith
Micro" or the "Company") pursuant to Securities and Exchange Commission
regulations. The accompanying unaudited consolidated financial statements
reflect the operating results and financial position of Smith Micro Software,
Inc. and its wholly-owned subsidiaries. All significant intercompany amounts
have been eliminated in consolidation. In the opinion of management, such
information contains all adjustments necessary for a fair presentation of the
results of such periods. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the results to be expected for
the full year ended December 31, 1999. The accompanying unaudited consolidated
financial statements should be read in conjunction with the audited financial
statements included in the Company's report on Form 10-K for the year ended
December 31, 1998 as footnotes and certain financial presentations are condensed
or omitted from generally accepted accounting principles presentation
requirements, pursuant to the SEC rules and regulations.

Cash Equivalents - Cash equivalents are considered to be highly liquid
investments with initial maturities of three months or less.

Accounts Receivable - The Company sells its products worldwide. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral. The Company maintains reserves for potential credit
losses, and those losses have been within management's expectations. Allowances
for product returns and price protection are included in other adjustments to
accounts receivable on the accompanying balance sheets.

Inventories - Inventories consist principally of manuals and diskettes
and are stated at the lower of cost (determined by the first- in, first-out
method) or market.

Equipment and Improvements - Equipment and Improvements are stated at
cost. Depreciation is computed using the straight-line method based on the
estimated useful lives of the assets, generally ranging from three to seven
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the estimated useful life of the asset or the lease term.

Long Lived Assets - The Company accounts for the impairment and
disposition of long-lived assets in accordance with Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. In accordance with SFAS No.
121, long-lived assets to be held are reviewed for events or changes in
circumstances which indicate that their carrying value may not be recoverable.
The Company periodically reviews the carrying value of long-lived assets to
determine whether or not an impairment to such value has occurred and has
determined that there was no impairment at March 31, 1999.

Goodwill and Other Intangibles - Goodwill represents the excess
purchase cost over the net assets acquired and is amortized over five years
using the straight-line method. Other intangible assets include acquired
workforce value, acquired technology and translation costs which are being
amortized using the straight-line methods over three to five years. The Company
periodically evaluates the recoverability of goodwill based on a profitability
analysis related to its product sales and evaluates the recoverability of other
intangible assets based on the requirements of SFAS No. 121.

Revenue Recognition - The Company recognizes revenues from sales of its
software as completed products are shipped and from royalties generated as
authorized customers duplicate the Company's software. The Company generally
allows its retail distributors to exchange unsold products for other products
and provides inventory price protection in the event of price reductions by the
Company. Allowances for product returns and price protection are estimated based
on previous experience and are recorded as a reduction of revenue at the time
sales are recognized. The Company provides technical support and customer
service to its customers. Such costs have historically been insignificant.

The Company has adopted Statement of Position (SOP) 97-2, Software
Revenue Recognition, issued by the American Institute of Certified Public
Accountants which supersedes SOP 91-1. SOP 97-2 provides guidance on when
revenue should be recognized, and in what amounts, for licensing, selling,
leasing or otherwise marketing computer software. The adoption of SOP 97-2 had
no material impact on the Company's recognition of revenue.

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7

Software Development Costs - Development costs incurred in the research
and development of new software products and enhancements to existing software
products are expensed as incurred until technological feasibility has been
established. The Company considers technological feasibility to be established
when all planning, designing, coding and testing has been completed according to
design specifications. After technological feasibility is established, any
additional costs are capitalized. Through March 31, 1999, software has been
substantially completed concurrently with the establishment of technological
feasibility; and, accordingly, no costs have been capitalized to date.

Income Taxes - The Company accounts for income taxes under SFAS No.
109, Accounting for Income Taxes. This statement requires the recognition of
deferred tax assets and liabilities for the future consequences of events that
have been recognized in the Company's financial statements or tax returns. The
measurement of the deferred items is based on enacted tax laws. In the event the
future consequences of differences between financial reporting bases and the tax
bases of the Company's assets and liabilities result in a deferred tax asset,
SFAS No. 109 requires an evaluation of the probability of being able to realize
the future benefits indicated by such asset. A valuation allowance related to a
deferred tax asset is recorded when it is more likely than not that some portion
or all of the deferred tax asset will not be realized.

Fair Value of Financial Instruments - Pursuant to SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, the Company is required
to estimate the fair value of all financial instruments included on its balance
sheet at March 31, 1999. The Company considers the carrying value of such
amounts in the financial statements to approximate their fair value due to (1)
the relatively short period of time between origination of the instruments and
their expected realization, (2) interest rates which approximate current market
rates, or (3) the overall immateriality of the amounts.

Stock-Based Compensation - The Company accounts for stock-based awards
to employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees.

Net Income (Loss) Per Share - The Company has adopted SFAS No. 128,
Earnings per Share, the Company provides dual presentation of "basic" and
"diluted" earnings per share (EPS). Basic EPS amounts are based upon the
weighted average number of common shares outstanding. Diluted EPS amounts are
based upon the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares include stock options using the treasury
stock method. Common equivalent shares are excluded from the calculation of
diluted EPS in loss years, as the impact is antidilutive. There was no
difference between basic and diluted EPS for each period presented.

Segment Information - The Company engages in business activity in only
one operating segment, the development, marketing and sale of communication
software for personal computers. The Company's software products are developed,
sold and marketed by common departments within the Company.

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 revenues and expenses
during the reporting years. Actual results could differ from those estimates.

Comprehensive Income - The Company has adopted SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the reporting of
comprehensive income and its components. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from nonowner
sources. For each of the three month periods ending March 31, 1999 and 1998,
there was no difference between net income, as reported, and comprehensive
income.

Reclassifications - Certain reclassifications have been made to the
1998 financial statements to conform to the 1999 presentation.

2. ACQUISITIONS

On April 9, 1999, Smith Micro acquired all of the outstanding capital
stock (the "Acquisition") of STF Technologies, Inc., a Missouri corporation
("STF') in exchange for $1.0 million in cash and 409,164 shares of Smith Micro
Common Stock. STF is a developer and publisher of fax and communications
software products for the Apple Macintosh computer. STF is headquartered in
Concordia, Missouri and as a result of this Acquisition, STF became a wholly
owned subsidiary of Smith Micro. The aggregate number of shares delivered was
determined by dividing $1.0 million by the average closing price on the Nasdaq
National Market of a

7
8

share of Smith Micro Common Stock as reported in the Wall Street Journal for the
ten (10) consecutive trading days ending on the trading day immediately prior to
the closing date. The cash portion of the Acquisition consideration was funded
with proceeds received in connection with Smith Micro's initial public offering
in September, 1995.

During 1998, the Company acquired certain fax technology assets from
Mitek Systems, Inc. for $458,000 in cash. The fax software acquired provides fax
functionality over Local Area Networks ("LANs"), the Internet and intranets.

8
9

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

GENERAL

Smith Micro Software, Inc. develops and sells communications software
for personal and business use. Our objective is to enhance human interaction by
giving users the ability to communicate through multimedia technologies over
analog and digital platforms. Smith Micro's products enable personal
communication through telephony, fax, multimedia email, data, paging, video
security and video conferencing.

Recently, we have been developing new products that leverage off our
core technologies to address the consumer's use of the Internet and corporate
intranets. We intend to leverage our experience and position with the original
equipment manufacturers to deploy these new product releases. Additionally, we
are expanding our customer base to include manufacturers that produce devices
that take advantage of the high bandwidth Internet connectivity such as cable
and xDSL modems. The Company's corporate products are designed to provide cost
effective and efficient methods of communicating that take advantage of
corporate local and wide area networks, including the Internet or intranet.

We shipped our first data communication software product in 1985 and,
since that time, we have generated revenues primarily from the market acceptance
of our OEM fax and data communication software products. We began providing
video communication products in 1996 to both OEM and retail customers. In
January 1998, we purchased certain fax software assets of Mitek Systems, Inc. to
provide LAN, Internet and intranet fax transmission solutions designed for the
corporate market. In September 1998, we shipped our first Internet
communications software product. This multi-purpose product provides for
integrated telephony, multimedia e-mail, video security, fax, video conferencing
and text based chat functionality over the Internet and other IP protocol
services such as LANs and WANs. Designed to take advantage of high bandwidth
technology, this product functions over a variety of IP connectivity hardware
including xDSL modems, cable modems, network interface devices and analog
modems.

We recognize revenues from sales of our software as completed products
are shipped and from royalties generated as authorized customers duplicate our
software. Any material reduction in demand for our products would have an
adverse effect on our business, results of operations and financial condition.
We continue to introduce new products; and our future success will depend in
part on the continued introduction of new and enhanced OEM, retail and corporate
products that achieve market acceptance. Revenues are net of estimated returns
and other adjustments at the time the products are shipped. We have allowed our
customers to return unused software and to rotate stock for new versions of
retail releases. As a percentage of our net revenues, returns constituted 3.3%
for the three months ended March 31, 1999, and 5.1% for the year ended December
31, 1998 and 26.8% in 1997. As a percentage of our net revenues, returns for
stock rotation were 0.9% for the three months ended March 31, 1999, and 0.6% in
1998 and 14.6% in 1997.

A small number of our customers have historically accounted for a
substantial portion of our revenues. In June 1997, 3Com Corporation acquired our
largest customer to date, U.S. Robotics Corporation. Sales to 3Com (including
its affiliates and subcontractors), accounted for approximately 17.3% of our net
revenues for the three months ended March 31, 1999, 24.7% of our net revenues in
1998 and 43.4% of our net revenues in 1997. Our three largest OEM customers,
including 3Com, accounted for the following portions of our net revenues: 32.9%
in the three months ended March 31, 1999, 35.1% in 1998 and 56.9% in 1997. Any
reduction, delay or change in orders from such customers could have an adverse
effect on our business, results of operations and financial condition.

The OEM product ordering cycle beginning from placement of an order to
shipment is very short. OEM customers generally operate under a just-in-time
system and order software to be delivered as needed by their manufacturing
operations. We generally ship our products as we receive orders; and,
accordingly, we have historically operated with little backlog. We do not
consider backlog to be a significant indication of future performance. As a
result, our sales in any quarter are dependent on orders booked and shipped in
that quarter and are not predictable with any degree of certainty. Moreover, we
generally do not produce software in advance of orders and, therefore, have not
maintained a material amount of software inventory.

Inventory in the retail channel exposes us to product returns. We
consider this exposure when we establish allowances for product returns.
Substantial returns of product from the retail channel could have an adverse
effect on our business, results of operations and financial condition.

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and related notes thereto
included elsewhere. Historical results of operations, percentage relationships
and any trends that may be inferred from the discussion below are not
necessarily indicative of our operating results for any future period.

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10

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated, the
percentages of net revenues represented by each item in the Company's statement
of income.

For The Three Months
Ended March 31,
--------------------
1999 1998
------ ------

Net revenues 100.0% 100.0%
Cost of revenues 25.7% 26.5%
------ ------
Gross profit 74.3% 73.5%
Operating expenses:
Selling and marketing 53.5% 23.5%
Research and development 31.1% 24.1%
General and administrative 31.1% 25.6%
------ ------
Total operating expenses 115.7% 73.2%
------ ------
Operating income (loss) (41.4)% 0.3%
Interest income 4.8% 5.5%
------ ------
Income (loss) before income taxes (36.6)% 5.8%
Income tax expense (benefit) (12.4)% 2.3%
------ ------
Net income (loss) (24.2)% 3.5%
====== ======

NET REVENUES

Our net revenues decreased 12.2% to $2.9 million in the three months
ended March 31, 1999 from $3.3 million in the three months ended March 31, 1998.
This decrease in our revenue was the result of a decrease in sales to our
largest OEM analog modem customers, including 3Com. The decrease in sales
resulted from a combination of factors including changes in product mix
resulting from the analog modem industry's acceptance of the V.90, 56K modem
standard, reduced demand for certain fax products and pricing pressures within
the analog modem industry. In response to these factors, our revenues from sales
to 3Com in the first quarter of 1999 decreased 58.2% when compared to the same
quarter of 1998. This decrease in our revenues from analog modem manufacturers
was partially offset by an increase in retail revenues and an increase in
revenues from all other types of OEM customers, including PC manufacturers.

GROSS PROFIT

Gross profit represents net revenues, less cost of revenues, which
includes costs of materials, costs related to the operations of the Company's
duplicating facilities, freight charges and royalties to licensors. Gross profit
decreased 11.3% to $2.1 million in the three months ended March 31, 1999 from
$2.4 million in the three months ended March 31, 1998. As a percentage of net
revenues, gross profit increased to 74.3% in the three months ended March 31,
1999 from 73.5% in the three months ended March 31, 1998. Our decrease in gross
profit is primarily due to the decrease in net revenues. Our gross profit as a
percentage of net revenues improved slightly from an increased percentage of
revenue from royalty agreements, cost control measures and increased
manufacturing efficiencies that were partially were offset by an increased
allowance for slow-moving and obsolete inventory.

SELLING AND MARKETING EXPENSES

Our selling and marketing expenses consist primarily of personnel costs,
advertising costs, sales commissions and trade show expenses. These expenses
vary considerably from quarter to quarter based on the timing of trade shows and
new product introductions. Our selling and marketing expenses increased 99.6% to
$1.5 million in the three months ended March 31, 1999 from $768,000 in the three
months ended March 31, 1998. As a percent of net revenues, selling and marketing
expenses increased to 53.5% of net revenues in

the three months ended March 31, 1999 from 23.5% in the three months ended March
31, 1998. The increase in selling and marketing expenses is primarily due to
promotional campaigns in retail channel for our fax and Internet communications
products. Additionally, the company expanded its sales and marketing teams to
cover its Internet telephony and network fax product lines.

RESEARCH AND DEVELOPMENT EXPENSES

Our research and development expenses consist primarily of personnel
and supply costs required to conduct the Company's software development
activities, and the amortization of acquired technology assets. Our research and
development expenses increased 13.4% to $891,000 in the three months ended March
31, 1999 from $786,000 in the three months ended March 31, 1998. As a percent of
net revenues, our research and development expenses increased to 31.1% for the
three months ended March 31, 1999 from 24.1% for the three months ended March
31, 1998. Our increase in research in development expenses was primarily
associated with development expenses related to our Internet and network
communications products and an increase in the amortization of acquired
technology assets.

GENERAL AND ADMINISTRATIVE EXPENSES

Our general and administrative expenses represent operating expenses
that are not included as costs of sales, selling and marketing or research and
development. Our general and administrative expenses increased 6.7% to $892,000
in the three months ended March 31, 1999 from $836,000 in at her the three
months ended March 31, 1998. An increase in professional services was offset by
a reduced provision for bad debt. As a percent of net revenues, general and
administrative expenses increased to 31.1% of net revenues in the three months
ended March 31, 1999 from 25.6% in the three months ended March 31, 1998.

INCOME TAXES

For the three months ended March 31, 1999, our income tax benefit was
34.0% of the loss before income taxes. The income tax benefit was $356,000 for
the three months ended March 31, 1999 based on a loss before income taxes of
$1.0 million. compared to an income tax expense of $77,000 for the three months
ended March 31, 1998 based on income before income taxes of $190,000.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, the Company has financed its operations primarily
through cash generated from operations and from proceeds generated by its
initial public offering in 1995. Net cash used in operating activities was $1.3
million in the three months ended March 31, 1999 compared to $0.1 million used
in operations in the three months ended March 31, 1998. The primary uses of cash
during the three months ended March 31, 1999 were the Company's net loss and an
increase in accounts receivable.

During the three months ended March 31, 1999, the Company used no cash
in investing activities. On April 9, 1999, Smith Micro acquired all of the
outstanding capital stock STF Technologies, Inc., in exchange for $1.0 million
in cash and 409,164 shares of Smith Micro Common Stock. STF, headquartered in
Concordia, Missouri, is a developer and publisher of fax and communications
software products for the Apple Macintosh computer.

At March 31, 1999, the Company had $11.3 million in cash and cash
equivalents and $16.1 million of working capital. The Company had $4.5 million
of accounts receivable, net of allowance for doubtful accounts and other
adjustments. The Company has no significant capital commitments, and currently
anticipates that growth in capital expenditures will not vary significantly from
recent periods.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software applications are
coded to accept only two digit entries to identify the year in the date code
field, without considering the impact of the change in the century. As a result,
in less than one year, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements. We believe
that Year 2000 issues could encompass our own software products, internal
systems used to operate and monitor our business and our third party vendors and
customers.

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12

We currently offer software products that are designed to be Year 2000
compliant. Our software products do not utilize dates in their primary
functions. We have evaluated our software products and their interaction with
hardware, such as fax machines, and possible software applications, such as word
processors, and believe that Year 2000 problems will not effect the
functionality of its software products. However, it is possible that our
products, or the hardware or software applications used by a customer, may
contain undetected errors or defects associated with Year 2000 date functions.

We believe that we have identified substantially all of the major
internal systems and software applications that are important to the operation
and monitoring of our business. We have obtained confirmation from vendors of
certain purchased systems and software applications used in our internal
operations that current releases or upgrades, if installed, are designed to be
Year 2000 compliant. We have recently completed the installation of such
upgrades to our current systems. We believe that with the upgrades,
modifications and conversions we have made to date, the Year 2000 issue will not
have a material impact on our internal systems. However, it is possible that the
systems and software applications used for our internal operations contain
undetected errors or defects associated with Year 2000 date functions.

We are currently in the process of evaluating our critical external
relationships, including relationships with both third party vendors and
customers, to determine the extent to which we may be vulnerable to the failure
of such third parties to resolve their own Year 2000 issues. We are gathering
information through direct communication with third parties, SEC filings,
information provided by the third parties' corporate web sites and product
marketing documentation. Third parties being evaluated include, among others,
software duplication vendors, freight companies, payroll service providers and
our largest customers. Where practicable, we will assess and attempt to mitigate
our risks with respect to failure of these entities to be Year 2000 ready. The
effect, if any, on our results of operations from the failure of such parties to
be Year 2000 ready is not reasonably estimable.

Although we are not aware of any material operational issues or costs
associated with preparing our products or internal information systems for the
Year 2000, it is possible that we may experience serious unanticipated negative
consequences and/or material costs caused by undetected errors or defects in the
technology used in our internal systems, which are composed predominantly of
third party software and hardware. If we are not completely successful in
mitigating our internal and external Year 2000 risks, we could experience a
system failure or disruptions in our operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. We have developed a contingency plan to work
around unexpected Year 2000 issues that may arise. Our contingency plan
includes, among other things, the use of manual processing, the use of Year 2000
compliant personal computer software alternatives and a program to obtain
inventory through numerous alternate vendors. This contingency plan is designed
to facilitate the ongoing operation and monitoring of our business. Any of these
problems, if they occur, would have an adverse effect on our business, results
of operations and financial condition.

RISK FACTORS

This Quarterly Report on Form 10-Q contains forward-looking statements
that involve risks and uncertainties and the company's actual results may
materially differ from the results anticipated in those statements. Factors that
might cause such a difference include, without limitation, those discussed in
this section, in the Management's Discussion and Analysis of Financial Condition
and Results of Operations section and elsewhere in this Form 10-Q. All such
factors should be considered in evaluating Smith Micro and a decision to invest
in the company.

Our Quarterly Operating Results are Subject to Significant Fluctuations
that Could Adversely Impact Our Stock Price. Our quarterly operating results
have fluctuated significantly in the past and may continue to vary from quarter
to quarter due to a number of factors. Many of these factors are not in our
control. These factors include:

o the size and timing of orders from, and shipments to, our
major customers;
o our ability to maintain or increase gross margins;
o changes in pricing policies or price reductions by us or our
competitors;
o variations in the our sales channels or the mix of our product
sales;
o the timing of new product announcements and introductions by
us, our competitors or customers;
o the availability and cost of supplies;
o the financial stability of our major customers;
o the market acceptance of our new products, applications and
product enhancements;

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o our ability to develop, introduce and market new products,
applications and product enhancements;
o possible delays that we may face in the shipment of new
products;
o our success in expanding our sales and marketing programs;
o deferrals of orders by our customers in anticipation of new
products, applications, product enhancements or operating
systems;
o changes in our strategy; and
o personnel changes.

While we historically have not experienced significant fluctuations in
our sales from season to season, we may face greater seasonality in our sales in
the future. Many of our OEM customers experience seasonality in their sales,
which may affect their buying patterns from us. In addition, as we increase our
sales of retail products, we expect to experience greater seasonality in our
sales.

Due to all of the foregoing factors, and the other risks discussed in
this section, you should not rely on quarter-to-quarter comparisons of our
operating results as an indication of our future performance. It is possible
that in some future periods our results of operations may be below the
expectations of public market analysts and investors. In that event, the price
of our Common Stock would likely decline.

Because We Currently Operate With Little Backlog, Our Revenues in Each
Quarter are Substantially Dependent on Orders Booked and Shipped in that
Quarter. We operate with little backlog because we generally ship our software
products as we receive orders and because our royalty revenue is based upon our
customers' actual usage in a given period. Accordingly, we recognize revenue
shortly after orders are received or royalty reports are generated. As a result,
our sales in any quarter are dependent on orders that we book and ship in that
quarter. This makes it difficult for us to predict what our revenues and
operating results will be in any quarter. If orders in the first month or two of
a quarter fall short of expectations, it is likely that we will not meet our
revenue targets for that quarter. If this happens, our quarterly operating
results would be adversely affected.

An Unexpected Shortfall in Revenue May Adversely and Disproportionately
Affect Our Business Because Our Expenses are Largely Fixed. Our expense levels
are based, in part, on our expectations of our future revenues and a significant
portion of our expenses is fixed. As a result, we may not be able to adjust our
spending rapidly enough to compensate for an unexpected shortfall in revenue.
Therefore, if revenue levels fall below our expectations, our operating results
and net income are likely to be adversely and disproportionately affected.

We Depend on 3Com Corporation for a Significant Portion of our
Revenues. In the past we have derived a substantial portion of our revenues from
sales to 3Com Corporation (including its affiliates and subcontractors). These
3Com entities represented 17.3% of our net revenues in the three months ended
March 31, 1999, 24.7% of our net revenues in 1998 and 43.4% of our net revenues
in 1997. The OEM agreements we have with these 3Com entities do not require a
3Com entity to purchase any minimum quantity of our products and may be
terminated by a 3Com entity or us at any time for any reason upon 60 days prior
written notice. As a result, we cannot be certain that the 3Com entities will
continue to purchase our products in substantial quantities, or at all. While we
believe that we have been the principal supplier of OEM fax, voice and data
communications software products to the U.S. Robotics product line, 3Com may
seek additional sources for such products in the future. Accordingly, our sales
to the 3Com entities in the future may not reach or exceed our historical levels
of sales to the 3Com entities (including its affiliates and subcontractors). A
substantial decrease or delay in sales to the 3Com entities would have an
adverse effect on our business, results of operations and financial condition.

We Depend Upon a Small Number of OEM Customers. Sales to our three
largest OEM customers, including 3Com Corporation, accounted for approximately
32.9% of our net revenues in the three months ended March 31, 1999, 35.1% of our
net revenues in 1998 and 56.9% of our net revenues in 1997. We expect that we
will continue to be dependent upon relatively large orders from our major OEM
customers for a significant portion of our revenues in future periods. However,
none of these customers is obligated to purchase any of our products.
Accordingly, we cannot be certain that these customers will continue to place
large orders for our products in the future, or purchase our products at all.
Our customers may acquire products from our competitors or develop their own
products that compete directly with ours. Any substantial decrease or delay in
our sales to one or more of these entities would have an adverse effect on our
business, results of operations and financial condition. In addition, certain of
our OEM customers have in the past and may in the future acquire competitors or
be acquired by competitors, causing further industry consolidation. In the past,
such acquisitions have caused the purchasing departments of the combined
companies to reevaluate their purchasing decisions. If one of our major OEM
customers engages in an acquisition in the future, it could change its current
purchasing habits. In that event, we could lose the customer, experience a
decrease in orders from that customer or a delay in orders previously made by
that customer. Moreover, if one of our existing OEM customers acquires another
existing OEM customer, the concentration of our revenues from the combined
companies

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could increase if the combined companies continue to purchase our software
products. Although we maintain allowances for doubtful accounts, the insolvency
of one or more of our major customers could substantially impair our business,
results of operations and financial condition.

Our Operating Results Have Been Substantially Dependent upon One Family
of Products Sold to Original Equipment Manufacturers. In the past we have
derived a significant portion of our revenues from a relatively small number of
products and will likely continue to do so in the future. Sales of our QuickLink
related products represented approximately 41.3% of our net revenues in the
three months ended March 31, 1999, 58.8% of our net revenues in 1998 and 81.3%
of our net revenues in 1997. We expect that revenues from these products will
continue to account for a substantial portion of our total revenues in the
foreseeable future. If our revenues from these software products decline,
whether as a result of competition, technological change, price pressures or
other factors, our business, results of operations and financial condition could
be seriously impaired.

Our Efforts to Develop a Market for Our Retail Software Products
Require Substantial Investments that May Adversely Affect Our Operating Margins.
We are continuing our efforts to develop a market for our retail communication
software products. In the second half of 1998, we added Internet CommSuite to
our existing line of retail software products that includes HotFax
MessageCenter, HotFax, VideoLink Mail, MacComCenter HotPage and HotFaxShare.
Sales of our retail products represented approximately 36.7% of our net revenues
in the three months ended March 31, 1999, 26.4% of our net revenues in 1998 and
5.2% of our net revenues in 1997. In order to strengthen our product recognition
and build distribution channels for our retail products, we will have to make
significant investments in advertising, trade shows, public relations,
distributor relationships and a dedicated sales force. Accordingly, our retail
sales may not provide us with the same contribution margin to operating income
that we have historically achieved on our OEM sales.

We May Not be Able to Develop and Maintain Relationships with
Distributors and Retailers to Sell Our Retail Software Products. We rely on
distributors, retailers, Internet distributors and value added resellers,
commonly known as VARs, to market and distribute our retail software products.
We may not be successful in recruiting VARs and retailers to represent us. Our
ability to maintain distributor and retailer relationships is largely a function
of our sales volume. If we do not meet certain minimum volume requirements, we
may not be able to maintain our relationships with our current distributors and
retailers. Our agreements with retailers and VARs are not exclusive and in many
cases may be terminated by either party without cause. Many of our retailers and
VARs carry product lines that are competitive with our retail software products.
These retailers and VARs may not give a high priority to the marketing of our
products or may not continue to carry our products. In addition, our retailers
and VARs may change their inventory strategies, with little or no warning to us.
In many cases, such changes in inventory strategy may not be related to end user
demand. If this happens, our business, results of operations and financial
condition may be adversely affected.

Our Risk of Product Returns Will Increase as Our Retail Sales Increase.
We typically allow the retailers and VARs who sell our retail software products
to return our products without charge or penalty. As part of our revenue
recognition policy, we calculate an allowance for product returns based on our
historical experience. If retail sales of our products increase, our risk of
product returns will increase. While our revenue recognition policy contemplates
this risk, it is possible that returns may occur in excess of our previous
experience. If this happens, we would have to revise our estimates and increase
our allowances for such returns. Excessive or unanticipated returns could
adversely affect our business, results of operations and financial condition.

Rapid Technological Change Could Render Our Products Obsolete. The
communication software market in which we operate is characterized by rapid
technological change, changing customer needs, frequent product introductions
and evolving industry standards. These factors make it difficult for us to
estimate the life cycles of our products. Our future success will depend upon
our ability to develop and introduce new software products (including new
releases, applications and enhancements) on a timely basis that keep pace with
technological developments and emerging industry standards and address the
increasingly sophisticated needs of our customers. We may experience
difficulties that could delay or prevent our development, introduction and
marketing of new products. If we are unable to develop and introduce new
products in a timely manner in response to changing market conditions or
customer requirements, or technological or other reasons, our business, results
of operations and financial condition would be adversely affected.

Microsoft is the leading developer of operating systems for personal
computers. We may not be able to successfully develop new versions of our
software products that will operate on future Microsoft operating systems. Even
if we are able to develop such new versions, we may not be able to do so
concurrently with or prior to introductions by our competitors of communication
software products for those new operating systems. Any such failure or delay
could affect our competitive position or lead to obsolescence of our products in
the future.

Microsoft Poses a Significant Competitive Threat to Us. We face
competition from Microsoft, which is the publisher of the most prevalent
personal computing operating platforms, Windows, Windows NT and DOS. Due to its
market dominance, Microsoft

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represents a significant competitive threat to all personal computer software
vendors, including us. The latest Microsoft operating systems, Windows 98,
Windows 95 and Windows NT, include capabilities now provided by certain of our
OEM and retail software products, including our principal product, QuickLink. If
the communications capabilities of Windows 98, Windows 95, Windows NT or other
operating systems are adopted by users, sales of our products could decline.

We Face Significant Competition from Other Companies. We operate in
markets that are highly competitive and subject to rapid changes in technology.
We compete with other software vendors for access to distribution channels,
retail shelf space and the attention of customers. We also compete with other
software companies in our efforts to acquire software technology developed by
third parties. Competitive pressures could reduce our market share or require us
to reduce the prices of our products, either of which could have an adverse
effect on our business, results of operations and financial condition.

We face significant competition from software vendors in the retail
market. Our principal fax related retail products, HotFax MessageCenter and
HotFax, compete directly with Symantec's WinFax Pro. Our new Internet
communications software products, Internet CommSuite and conexs.com, compete
with product offerings by Microsoft, Intel, White Pine, VDONet and VocalTech,
among others. In addition, because there are low barriers to entry into the
software market, we expect significant competition from other established and
emerging software companies in the future. Furthermore, many of our existing and
potential OEM customers may acquire or develop products that compete directly
with our products.

Many of our current and prospective competitors have significantly
greater financial, marketing, service, support, technical and other resources
than we do. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products. There is also a
substantial risk that announcements of competing products by large competitors
such as Microsoft and Symantec could result in the cancellation of orders by
retailers, distributors or other customers in anticipation of the introduction
of such new products. In addition, some or our competitors, such as Symantec,
currently make complementary products that are sold separately. Such competitors
could decide to enhance their competitive position by bundling their products to
attract customers seeking integrated, cost-effective software applications. Some
competitors have a retail emphasis and offer OEM products with a reduced set of
features. The opportunity for retail upgrade sales may induce these and other
competitors to make OEM products available at their own cost or even at a loss.
We also expect competition to increase as a result of software industry
consolidations, which may lead to the creation of additional large and
well-financed competitors. Increased competition is likely to result in price
reductions, fewer customer orders, reduced margins and loss of market share, any
of which could adversely affect our business, results of operations and
financial condition.

We believe that our ability to compete depends on elements both within
and outside of our control, including:

o the success and timing of new product development;
o product performance;
o price;
o distribution; and
o customer support.

We cannot be certain that we will be able to compete successfully with respect
to these and other factors or that the competitive pressures that we face will
not adversely affect our business, results of operations and financial
condition.

Our Future Success Will Depend on Our Ability to Develop and Introduce
New Product Offerings. Our future success will depend, in significant part, on
our ability to successfully develop and introduce new software products and
improved versions of our existing software products on a timely basis and in a
manner that will allow such products to achieve broad customer acceptance. We
cannot be certain that we will be able to develop and introduce new products on
a timely basis, if at all, or that any new products that we do develop will be
accepted in the market. If new products are delayed or do not achieve market
acceptance, our business, results of operations and financial condition will be
adversely affected. In the past, we have experienced delays in purchases of our
products by customers anticipating the launch of new products by us.
Accordingly, it is possible that our customers may defer material orders in the
future in anticipation of new product introductions. If this happens, our
business, results of operations and financial condition may be adversely
affected.

Our Efforts to Sell Our Products in the Corporate and Government
Marketplaces May Not be Successful and May Adversely Affect Our Operating
Margins. In the past, we have generated our revenues almost entirely from OEM
sales. We began selling to the corporate/government marketplace while building
the infrastructure necessary to sell to these two customer bases in 1997. In
January 1998, we acquired the network fax software technology of Mitek Systems,
Inc. Through this acquisition, we acquired software that is

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designed to address the fax requirements of the corporate/government customer.
During 1998 we developed the acquired network fax product into the currently
shipping product, HotFaxShare, and we released a newly developed IP Gateway
module. Although we continue to invest resources in the research and development
of products for the corporate and government markets, and in building the
additional infrastructure required to market and sell products in these markets,
we cannot be certain that our efforts will yield any significant sales growth.
In addition, because we have had to make substantial investments to develop,
market and sell products for these markets, sales of such products may not
provide the operating margins historically achieved by us for OEM sales.

Our Products May Contain Undetected Software Errors. Our software
products are complex and may contain undetected errors. In the past, we have
discovered software errors in certain of our products and have experienced
delayed or lost revenues during the period it took to correct these errors.
Although we test our products along with our current and potential OEM
customers, it is possible that errors may be found in our new or existing
products after we have commenced commercial shipment of those products. These
undetected errors could result in adverse publicity, loss of revenues, delay in
market acceptance of our products or claims against us by customers, all of
which could seriously impair our business, results of operations and financial
condition.

Our Customers May Continue to Switch to the Pre-Loaded or CD-ROM
Versions of Our Products, Which May Adversely Affect Our Operating Results. We
primarily sell our software in a kit that includes a disk or CD-ROM and a
manual. However, some of our customers "pre-load" our software onto a CD,
diskette or the hard drive of a personal computer and pay us a royalty based on
units produced or shipped. These arrangements eliminate the need for us to
provide a disk or CD-ROM and may eliminate the need for a manual. The pre-load
arrangements produce smaller unit revenues for us and eliminate our ability to
generate revenues from our production facilities. We believe that our production
facilities contribute profits to our operations. Currently, we have the
capability to produce our products in-house on 3 1/2-inch diskettes. However, we
do not currently have the capability to produce CD-ROMs internally and the cost
to develop such production capability may be prohibitive. As the size of
software programs grows, CD-ROM is becoming a more prominent medium. We
currently contract CD-ROM production to specialized CD-ROM facilities. If more
of our customers request product pre-loads and CD-ROM versions of our products,
our operating results could be adversely affected.

Our Future Success Will Depend on the Level of Market Acceptance of Our
Internet Communications Products and Video Related Products. We continue to
focus significant resources on the development and introduction of Internet and
video communications products. Such products compete in new and rapidly changing
markets and we cannot be certain that our products will receive or gain market
acceptance. Our Internet communications software product was released in
September 1998. This software product includes a number of Internet
communications tools such as telephony, fax, multimedia e-mail, video
conferencing, video security and others. Our initial sales of this product were
made to retail channels and did not include significant orders from OEM
customers. We introduced our first video communications software in 1996. Since
that time, our sales volume for such product has achieved only modest growth and
has not become a significant part of net revenues. Lack of market acceptance for
our Internet or video communications products or other similar products could
have an adverse impact on our business, results of operations and financial
condition. In addition, we may experience delays in or non-completion of the
development of new Internet or video communications software products, which
could adversely affect our competitive position in these markets. Our Internet
and video communications software products compete against those of several
competitors, including White Pine, Logitech, Intel, Microsoft, VocalTech and
VDONet, some of whom have greater financial and other resources than we do. We
cannot be certain that we will be able to compete successfully against these and
any future competitors in the Internet communications or video conferencing
software markets.

Our Planned Expansion of Our International Business Activities May Make
Us More Susceptible to Global Economic Factors, Foreign Business Practices and
Currency Fluctuations. We presently operate in foreign markets and intend to
expand our international presence. International net revenues represented 22.4%
of our total net revenues for the three months ended March 31, 1999, 22.8% of
our total net revenues in 1998 and 24.3% of our total net revenues in 1997. We
may not be able to continue to generate significant international sales. Our
international business activities are subject to a number of risks, including:

o difficulties in managing distributors;
o difficulties in staffing and maintaining foreign operations;
o foreign currency exchange fluctuations;
o the possibility of difficulties in collecting accounts
receivable.
o varying technical standards;
o substantially different regulatory requirements in different
jurisdictions;
o tariffs and trade barriers;
o political and economic instability;
o reduced protection for our intellectual property rights in
certain countries;

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o potentially adverse tax consequences;
o burdens associated with complying with a wide variety of
complex foreign laws and treaties; and

While we currently do not accept payment in foreign currencies and
invoice all of our sales in U.S. dollars, we may not be able to continue this
policy if we are able to grow international sales. If we begin to receive
payment in foreign currencies, we are likely to be subjected to the risks of
foreign currency losses due to fluctuations in foreign currency exchange rates.
In addition, if we are successful in growing our business outside of the United
States, we may also face economic, political and foreign currency situations
that are substantially more volatile than those commonly experienced in the
United States. If this happens, our business, results of operations and
financial condition could be adversely affected.

We Must Continue to Hire and Retain Key Personnel in an Intensely
Competitive Labor Market. Our future performance depends in significant part
upon the continued service of our senior management and other key technical
personnel. We are dependent on our ability to identify, hire, train, retain and
motivate high quality personnel, especially highly skilled engineers involved in
the ongoing research and development required to develop and enhance our
communication software products and introduce enhanced future applications. The
software industry is characterized by a high level of employee mobility and an
aggressive approach to the recruiting of skilled personnel. Our inability to
attract and retain the highly trained technical personnel that are essential to
our product development, marketing and service and support teams may limit the
rate at which we can generate revenue and develop new products or product
enhancements. This could have an adverse effect on our business, results of
operations and financial condition. In order to attract and retain key
personnel, we may need to grant additional options and provide other forms of
incentive compensation.

Because We Rely on Third Party Suppliers, We Have Limited Control Over
Component Costs and Product Delivery Schedules. We rely on third party suppliers
to provide us with the components for our product kits. These components include
disks, CDs and printed manuals. We also rely on third parties for CD-ROM
replication. In the past, we have experienced disk shortages and may experience
such shortages in the future. If we cannot obtain a sufficient quantity of disks
or other components we may not be able to deliver products to our customers on a
timely basis. Similarly, if the CD-ROM replication facilities that we use do not
deliver our requirements on schedule, we may not be able to deliver products in
a CD-ROM format to our customers on a timely basis. Any delays that we
experience in delivering our products to customers could impair our customer
relationships and adversely impact our business. In addition, if our third party
suppliers raise their prices for disks or other components or CD-ROM replication
services, our gross margins would be reduced. If this happens, our business,
results of operations and financial condition would be adversely affected.

We Duplicate All of Our Disks at One Facility and May Not be Able to
Find Alternate Arrangements in an Economic or Timely Manner in the Event of a
Disruption at That Facility. We duplicate all of our diskette software at our
Aliso Viejo, California facility. As a result, if our production at this
facility is disrupted by natural disaster or another event, such as the presence
of a virus in our duplicators, we cannot be certain that we could find an
alternative arrangement in timely manner. Even if we are able to find an
alternate duplication facility or a third party to duplicate our diskette
software for us, we cannot be certain that we would be able to obtain such
alternatives at commercially reasonable prices.

We May be Unable to Adequately Protect Our Intellectual Property and
Other Proprietary Rights. Our success is dependent upon our software code base,
our programming methodologies and other intellectual properties. In order to
protect our proprietary technology, we rely on a combination of trade secret,
nondisclosure and copyright and trademark law. However, these measures afford us
only limited protection. We currently own United States trademark registrations
for certain of our trademarks, but we have not yet obtained registrations for
all of our trademarks in the United States or other countries. In addition,
prior to becoming a publicly held entity, we did not require our employees to
sign proprietary information and inventions agreements stipulating to our
software ownership rights. We only recently started the patent application
process for a number of technologies relating to our existing products and
products under development. Furthermore, we rely primarily on "shrink wrap"
licenses that are not signed by the end user and, therefore, may be
unenforceable under the laws of certain jurisdictions. Accordingly, despite the
precautions we have taken to protect our intellectual property and proprietary
rights, it is possible that third parties may copy or otherwise obtain our
rights without our authorization. It is also possible that third parties may
independently develop technologies similar to ours. It may be difficult for us
to detect unauthorized use of our intellectual property and proprietary rights.

We may be subject to claims of intellectual property infringement as
the number of trademarks, patents, copyrights and other intellectual property
rights asserted by companies in our industry grows and the coverage of these
patents and other rights and the functionality of software products increasingly
overlap. From time to time, we have received communications from third parties
asserting that our trade name or features, content, or trademarks of certain of
our products infringe upon intellectual property rights held by such third
parties. We have also received correspondence from third parties separately
asserting that our fax products may infringe on certain patents held by each of
the parties. Although we are not aware that any of our products infringe on the
proprietary rights of others, third

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parties may claim infringement by us with respect to our current or future
products. Infringement claims, whether with or without merit, could result in
time-consuming and costly litigation, divert the attention of our management,
cause product shipment delays or require us to enter into royalty or licensing
agreements with third parties. If we are required to enter into royalty or
licensing agreements, they may not be on terms that are acceptable to us.
Unfavorable royalty or licensing agreements could seriously impair our business,
results of operations and financial condition.

Our Business May be Adversely Affected by Unexpected Year 2000
Problems. Many currently installed computer systems and software applications
are coded to accept only two digit entries to identify the year in the date code
field, without considering the impact of the change in the century. As a result,
in less than one year, computer systems and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements. We believe
that Year 2000 issues could encompass our own software products, internal
systems used to operate and monitor our business and our third party vendors and
customers.

Our Officers and Directors Could Control Matters Submitted to Our
Stockholders. As of April 30, 1999, William Smith, the President, Chief
Executive Officer and Chairman of the Board of the company, and Rhonda Smith,
the Vice-Chairman of the Board, Secretary and Treasurer of our company,
beneficially owned approximately 67.3% of the outstanding shares of the Company.
William Smith and Rhonda Smith are married to one another and, acting together,
will have the ability to elect our directors and determine the outcome of any
corporate action requiring stockholder approval, including a merger or business
combination, irrespective of how you may vote. This concentration of ownership
may discourage a potential acquirer from making an offer to buy our company,
which, in turn, could adversely affect the market price of our common stock.

Provisions of Our Charter and Bylaws and Delaware Law Could Make a
Takeover of Our Company Difficult. Our certificate of incorporation and bylaws
contain provisions that may discourage or prevent a third party from acquiring
us, even if doing so would be

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beneficial to our stockholders. For instance, our certificate of incorporation
authorizes the board of directors to fix the rights and preferences of shares of
any series of preferred stock, without action by our stockholders. As a result,
the board can authorize and issue shares of preferred stock, which could delay
or prevent a change of control because the rights given to the holders of such
preferred stock may prohibit a merger, reorganization, sale or other
extraordinary corporate transaction. In addition, we are organized under the
laws of the State of Delaware and certain provisions of Delaware law may have
the effect of delaying or preventing a change in our control.

The Price of Our Stock Has Been Volatile and Could Continue to
Fluctuate Substantially. The market price of our common stock has been volatile
and could fluctuate substantially in response to a variety of factors that are
out of our control, in addition to our financial performance. Furthermore, stock
prices for many high technology companies, including our own fluctuate widely
for reasons that may be unrelated to the operating performance.

Future Sales of Our Common Stock Could Cause the Price of Our Shares to
Decline. As of April 30, 1999, we had 14,504,417 shares of Common Stock
outstanding. Of this amount, the 9,758,670 shares held by William Smith and
Rhonda Smith became available for sale in the public market (subject to the
volume and other applicable restrictions of Rule 144) in September 1997,
following the expiration of a two year lock-up agreement with certain
representatives of the underwriters of our initial public offering, which
consummated in September 1995. Sales of a substantial number of shares of our
common stock by William Smith, Rhonda Smith or any other person, either
individually or when aggregated with sales by other persons, could adversely
affect the market price of our common stock.

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PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company and its PCI Video Products, Inc. subsidiary ("PCI Video")
have been named parties to a lawsuit, Virtual Ambiance, Inc. v. Video
Conferencing Communications. Inc., et al., filed August 11, 1997 in the Superior
Court of the State of California for the County of Orange, Case No. 782856. In
October 1998, the Company and PCI Video successfully obtained a terminating
sanction against Virtual Ambiance, resulting in immediate dismissal of the
lawsuit with prejudice.

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

The effective date of the Company's first registration statement (the
"Registration Statement") filed on Form S-1 (Registration No. 33-95096) under
the Securities Act of 1993, as amended, was September 18, 1995. The class of
securities registered was Common Stock. The offering commenced on September 19,
1995 and all securities were sold in the offering. The managing underwriters for
the offering were Hambrecht & Quist LLC and Oppenheimer & Co., Inc.

Pursuant to the Registration Statement, the Company sold 1,700,000
shares of its Common Stock for an aggregate offering price of $20,400,000, and
certain selling shareholders sold 2,210,000 shares of the Common Stock of the
Company for an aggregate offering price of $26,520,000.

The Company incurred expenses of $2,262,000 of which $1,428,000
represented underwriting discounts and commissions and $834,000 represented
other expenses. All such expenses were direct or indirect payments to others.
The net offering proceeds to the Company after total expenses was $18,138,000.

Of the net proceeds from the offering, $4,188,000 were used to repay
amounts due under a promissory note issued by the Company to certain of its
stockholders as part of a distribution of retained earnings in connection with
the Company's prior S corporation status, $3,011,000 was used in the Company's
acquisition of Performance Computing Incorporated which was consummated in March
1996, $1,000,000 was used in the acquisition of STF Technologies, Inc. which was
consummated in April 1999, $458,000 was used in the acquisition of assets from
Mitek Systems, Inc. in January 1998, $190,000 was used in the acquisition of
other technologies, $1,700,000 has been used for working capital requirements
and the remainder has been invested in U.S. Government obligations and corporate
bonds. The use of the proceeds from the offering does not represent a material
change in the use of the proceeds described in the prospectus that is part of
the Registration Statement.

20
21

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibit
No. Title Method of Filing
------- ----- ----------------

3.1 Amended and Restated Certificate of Incorporated by reference to Exhibit 3.1 to the
Incorporation of the Company Registrant's Registration Statement No. 33-95096

3.2 Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the
Registrant's Registration Statement No. 33-95096

4.1 Specimen certificate representing shares of Incorporated by reference to Exhibit 4.1 to the
Common Stock of the Company. Registrant's Registration Statement No. 33-95096

10.1 Form of Indemnification Agreement. Incorporated by reference to Exhibit 10.1 to the
Registrant's Registration Statement No. 33-95096

10.2 1995 Stock Option/Stock Issuance Plan. Incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement No. 33-95096

10.3 Form of Notice of Grant of Stock Option Incorporated by reference to Exhibit 10.3 to the
under 1995 Stock Option/Stock Issuance Plan. Registrant's Registration Statement No. 33-95096

10.4 Form of 1995 Stock Option Agreement under Incorporated by reference to Exhibit 10.4 to the
1995 Stock Option /Stock Issuance Plan. Registrant's Registration Statement No. 33-95096

10.5 Form of 1995 Stock Purchase Agreement under Incorporated by reference to Exhibit 10.5 to the
1995 Stock Option/Stock Issuance Plan. Registrant's Registration Statement No. 33-95096

10.6 Distribution License Agreement dated Incorporated by reference to Exhibit 10.6 to the
September 30, 1991, by and between the Registrant's Registration Statement No. 33-95096
Company and Crandell Development Corporation.

10.7 Application Program Interface Retail License Incorporated by reference to Exhibit 10.7 to the
Agreement July 28, 1992 by and between the Registrant's Registration Statement No. 33-95096
Company and Rockwell International
Corporation.

10.8 Application Program Interface License Incorporated by reference to Exhibit 10.8 to the
Agreement July 28, 1992 by and between the Registrant's Registration Statement No. 33-95096
Company and Rockwell International
Corporation.

10.9 Rockwell High Speed Interface License Incorporated by reference to Exhibit 10.9 to the
Agreement dated June 2, 1994, by and between Registrant's Registration Statement No. 33-95096
the Company and Rockwell International
Corporation.

10.10 Letter Agreement dated February 22, 1994, by Incorporated by reference to Exhibit 10.10 to the
and between the Company and Rockwell Registrant's Registration Statement No. 33-95096
International Corporation.

10.11 Letter Agreement dated April 22, 1993, by Incorporated by reference to Exhibit 10.11 to the
and between the Company and Rockwell Registrant's Registration Statement No. 33-95096
International Corporation.

21
22

Exhibit
No. Title Method of Filing
------- ----- ----------------

10.12 Software Distribution Agreement dated May 8, Incorporated by reference to Exhibit 10.12 to the
1995, by and between the Company and Registrant's Registration Statement No. 33-95096
International Business Machines Corporation.

10.13 Office Building Lease, dated June 10, 1992, Incorporated by reference to Exhibit 10.13 to the
by and between the Company and Developers Registrant's Registration Statement No. 33-95096
Venture Capital Corporation.

10.14 Amendment No. 1 To Office Building Lease, Incorporated by reference to Exhibit 10.14 to the
dated July 9, 1993, by and between the Registrant's Registration Statement No. 33-95096
Company and Pioneer Bank.

10.15 Amendment No. 2 To Office Building Lease, Incorporated by reference to Exhibit 10.15 to the
dated August 15, 1994, by and between the Registrant's Registration Statement No. 33-95096
Company and T&C Development.

10.16 Fourth Addendum to Office Building Lease, Incorporated by reference to Exhibit 10.16 to the
dated April 21, 1995, by and between the Registrant's Registration Statement No. 33-95096
Company and T&C Development.

10.17 Form of Promissory Note related to S Incorporated by reference to Exhibit 10.17 to the
Corporation Distribution. Registrant's Registration Statement No. 33-95096

10.18 Smith Micro Software, Inc. Amended and Incorporated by reference to Exhibit 10.21 to the
Restated Software Licensing and Registrant's Quarterly Report on Form 10-Q for the
Distribution Agreement, dated April 18, quarter ended September 30, 1996
1996, by and between the Company and U.S.
Robotics Access Corp.

10.19 Office Building Lease, dated March 1, 1994, Incorporated by reference to Exhibit 10.19 to the
by and between Performance Computing Registrant's Annual Report on Form 10-K for the
Incorporated and Petula Associates, Ltd./KC fiscal year ended December 3l, 1995
Woodside.

10.20 Agreement and Plan of Merger by and between Incorporated by reference to Exhibit 2 to the
Smith Micro Software, Inc., Performance Registrant's Current Report on Form 8-K filed with
Computing Incorporated and PCI Video the Commission on March 28, 1996
Products, Inc. dated as of March 14, 1996.

10.21 Amendment No. 1, dated as of March 10, 1997, Incorporated by reference to Exhibit 10.21 to the
to Agreement and Plan of Merger by and Registrant's Annual Report on Form 10-K for the
between Smith Micro Software, Inc., fiscal year ended December 31, 1996
Performance Computing Incorporated and PCI
Video Products, Inc. dated as of March 14,
1996.

10.22 Amendment No. 6 to Office Building Lease, Incorporated by reference to Exhibit 10.22 to the
dated February 19, 1998, by and between the Registrant's Annual Report on Form 10-K for the
Company and World Outreach Center. fiscal year ended December 31, 1997

22
23

Exhibit
No. Title Method of Filing
------- ----- ----------------

10.23 Software licensing and Distribution Incorporated by reference to Exhibit 10.23 to the
Agreement dated December 1, 1998, by and Registrant's Annual Report on Form 10-K for the
between the Company and 3Com Corporation fiscal year ended December 31, 1998

27 Financial Data Schedule. Filed Herewith

(B) REPORTS ON FORM 8-K

No Current reports on Form 8-K were filed during the quarter ended
March 31, 1999.

SIGNATURES

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

SMITH MICRO SOFTWARE, INC.

May 13, 1999 By: /s/ WILLIAM W. SMITH, JR.
------------------------------------
William W. Smith, Jr.
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)

May 13, 1999 By: /s/ MARK W. NELSON
-----------------------------
Mark W. Nelson
Chief Financial Officer
(Principal Financial Officer)