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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 QUARTER ENDED JUNE 30, 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 July 31,1999, there were 14,504,417 shares of Common Stock
outstanding.

SMITH MICRO SOFTWARE, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1999 (UNAUDITED)
AND DECEMBER 31, 1998 3

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 4

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998 5

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 7

MANAGEMENT'S DISCUSSION AND ANALYSIS 10

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23

SIGNATURES 25

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. WORDS SUCH AS "ANTICIPATES," "BELIEVES," "EXPECTS,"
"INTENDS," "PLANS" OR SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE NOT GUARANTEES A FUTURE
PERFORMANCE AND 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
14 OF THIS QUARTERLY REPORT , IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND SIMILAR DISCUSSIONS IN OUR
OTHER SECURITIES AND EXCHANGE COMMISSION FILINGS. YOU SHOULD CAREFULLY CONSIDER
THOSE FACTORS, IN ADDITION TO THE OTHER INFORMATION IN THIS QUARTERLY REPORT,
BEFORE DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR
INVESTMENT.

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

June 30, December 31,
1999 1998
----------- -------------
(unaudited)

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 9,554 $ 12,699
Accounts receivable, net of allowances for doubtful accounts
and other adjustments of $2,740 (1999) and $1,255 (1998) 5,314 4,093
Income taxes receivable 840 931
Deferred tax asset 470 470
Inventories 506 629
Prepaid expenses and other current assets 421 423
-------- --------

Total current assets 17,105 19,245

EQUIPMENT AND IMPROVEMENTS, net 411 350
DEFERRED TAX ASSET 336 336
OTHER ASSETS 292 304
INTANGIBLE ASSETS, net 2,627 568
-------- --------

$ 20,771 $ 20,803
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 1,350 $ 1,373
Accrued liabilities 1,493 1,185
-------- --------

Total current liabilities 2,843 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; 14,504,000 and 14,075,000 shares issued and outstanding 15 14
Additional paid-in capital 22,308 21,250
Accumulated deficit (4,395) (3,019)
-------- --------

Total stockholders' equity 17,928 18,245
-------- --------

$ 20,771 $ 20,803
======== ========

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

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

For The Three Months For The Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------

NET REVENUES $ 3,201 $ 1,656 $ 6,067 $ 4,922

COST OF REVENUES 578 581 1,314 1,447
-------- -------- -------- --------

GROSS PROFIT 2,623 1,075 4,753 3,475

OPERATING EXPENSES:
Selling and marketing 1,510 759 3,043 1,527
Research and development 940 839 1,831 1,625
General and administrative 967 840 1,859 1,676
-------- -------- -------- --------

Total operating expenses 3,417 2,438 6,733 4,828
-------- -------- -------- --------

OPERATING LOSS (794) (1,363) (1,980) (1,353)

INTEREST INCOME 110 183 248 363
-------- -------- -------- --------

LOSS BEFORE INCOME TAXES (684) (1,180) (1,732) (990)

INCOME TAX BENEFIT (471) (356) (394)
-------- -------- -------- --------

NET LOSS $ (684) $ (709) $ (1,376) $ (596)
======== ======== ======== ========

NET LOSS PER SHARE, basic and diluted $ (0.05) $ (0.05) $ (0.10) $ (0.04)
======== ======== ======== ========

WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 14,462 14,075 14,268 14,075
======== ======== ======== ========

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

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

For The Six Months
Ended June 30,
1999 1998
-------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,376) $ (596)
Adjustments to reconcile net loss to net cash
used in operating activities, net of the effects of the acquisition:
Depreciation and amortization 414 338
Provision for doubtful accounts and other adjustments
to accounts receivable 1,485 (793)
Change in operating accounts, net of the effects of the acquisition:
Accounts receivable (2,548) 891
Income taxes receivable 115 745
Inventories 194 (132)
Prepaid expenses and other assets 29 (133)
Accounts payable and accrued liabilities (171) 51
-------- --------

Net cash provided by (used in) operating activities (1,858) 371

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of STF Technologies, Inc. (1,091)
Acquisition of technology assets (458)
Capital expenditures (115) (44)
-------- --------

Net cash used in investing activities (1,206) (502)
-------- --------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 58
Repayment of bank line of credit (139)
-------- --------

Net cash used in financing activities (81)
-------- --------

NET DECREASE IN CASH AND CASH EQUIVALENTS (3,145) (131)

CASH AND CASH EQUIVALENTS, beginning of period 12,699 14,367
-------- --------

CASH AND CASH EQUIVALENTS, end of period $ 9,554 $ 14,236
======== ========

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

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

For The Six Months
Ended June 30,
-------------------------
1999 1998
-------- ---------

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Detail of business acquired in purchase transaction:
Fair value of assets acquired, including goodwill of $2,157 $ 2,686 --
Common stock issued in acquisition (1,000) --
Cash paid for acquisition (1,091) --
------- ----

Liabilities assumed or created $ 595 --
======= ====

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. On April 9, 1999, the Company acquired
STF Technologies, Inc. ("STF"), a Missouri corporation that develops
communications software for Macintosh computers. The periods presented in the
financial statements include STF's operations from the date of acquisition. 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 and six months ended June 30, 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 June 30, 1999.

Goodwill and Other Intangibles - Goodwill represents the excess purchase
cost over the net assets acquired and is amortized over five to seven 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.

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

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according to design specifications. After technological feasibility is
established, any additional costs are capitalized. Through June 30, 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 June 30, 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 - Net income (loss) per share is presented
as "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 and six month periods ended June 30, 1999 and
1998, there was no difference between net loss, as reported, and comprehensive
loss.

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 in exchange for $1.1 million in cash,
including acquisition costs, and 409,164 shares of Smith Micro Common Stock
valued at $1,000,000. 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 acquisition was treated as
a purchase and the excess of cost over fair value of net assets acquired was
allocated to goodwill, which is amortized using the straight-line method over 7
years. The consolidated financial statements of the Company include the results
of operations from the acquisition date and pro forma financial statements for
the three-month period ending June 30, 1999 would not be materially different.

Unaudited pro forma consolidated results of operations for the six
months ended June 30, 1999 and 1998 would have been as follows had the
acquisition occurred as of January 1, 1998 (in thousands, except per share
data):

For the Six Months Ended
June 30,
1999 1998
------- -------
Pro forma net revenues $ 6,444 $ 5,698
======= =======
Pro forma net loss $(1,635) $(1,004)
======= =======
Pro forma net loss per share,
basic and diluted $ (0.11) $ (0.07)
======= =======
Pro forma weighted average
number of shares outstanding 14,491 14,484
======= =======

Pro forma adjustments have been applied to reflect the addition of
amortization related to the intangible assets acquired and reduction in
interest income as if the acquisition had occurred on January 1, 1998. The pro
forma adjustment for amortization related to intangible assets acquired was
$81,000 for the pro forma period ended June 30, 1999 and $162,000 for the pro
forma period ended June 30, 1998.

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.

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 e-mail, data, paging, video
security and video conferencing.

Recently, we have been leveraging our core technologies to develop new
products that address the consumer's use of the Internet and corporate
intranets. We intend to take advantage of 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 enable 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 communications 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 recorded 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 6.7% for the six months ended June 30, 1999, 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 4.0% for the six months ended June 30, 1999,
0.6% in 1998 and 14.6% in 1997.

Although we have successfully expanded our OEM customer base during the
past two years, a small number of OEM customers have historically accounted for
a substantial portion of our revenues. Sales to 3Com (including its affiliates
and subcontractors), primarily for its U.S. Robotics product lines, accounted
for approximately 15.3% of our net revenues for the six months ended June 30,
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: 30.4% in the six months ended June 30, 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.

Beginning in the third quarter of 1998, we renewed our commitment of
resources and efforts towards the retail channel. Our effort coincided with the
launch of our first retail Internet telephony product, Internet CommSuite. We
have expanded into new retail outlets, particularly office supply chains such as
Staples, Office Depot and OfficeMax and into numerous Internet retail stores. As
a result of this expansion, sales to Ingram Micro, a retail distributor, were
22.7% of our net revenues for the six months ended June 30, 1999, 28.6% of our
net revenues in 1998 and 0.0% of our net revenues in 1997. Inventory in the
retail channel exposes us to product returns. We consider this exposure when we
establish allowances for product returns. Substantial returns of products 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.

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 statements
of operations.

For The Three Months For The Six Months
Ended June 30, Ended June 30,
---------------------------- ---------------------------
1999 1998 1999 1998
-------- -------- -------- --------

Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 18.1% 35.1% 21.7% 29.4%
-------- -------- -------- --------
Gross profit 81.9% 64.9% 78.3% 70.6%
Operating expenses:
Selling and marketing 47.2% 45.8% 50.2% 31.0%
Research and development 29.3% 50.7% 30.2% 33.0%
General and administrative 30.2% 50.7% 30.6% 34.1%
-------- -------- -------- --------
Total operating expenses 106.7% 147.2% 111.0% 98.1%
-------- -------- -------- --------
Operating loss -24.8% -82.3% -32.7% -27.5%
Interest income 3.4% 11.1% 4.1% 7.4%
-------- -------- -------- --------
Loss before income taxes -21.4% -71.2% -28.6% -20.1%
Income tax benefit 0.0% -28.4% -5.9% -8.0%
-------- -------- -------- --------
Net loss -21.4% -42.8% -22.7% -12.1%
======== ======== ======== ========

NET REVENUES

Our net revenues increased 93.3% to $3.2 million in the three months
ended June 30, 1999 from $1.7 million in the three months ended June 30, 1998.
The primary sources for this increase in net revenues were growth in both our
retail and OEM market channels. The growth in retail was the result of renewed
efforts and resources to this market. Retail revenues are primarily generated
from HotFax MessageCenter and Internet CommSuite, our Internet telephony product
that was introduced in the third quarter of 1998. The growth in the OEM market
channel resulted primarily from our efforts to expand our OEM customer base. New
customers include Eastman Kodak, Hewlett-Packard and Apple Computer, who became
a customer has a result of our acquisition of STF Technologies, Inc. We also
experienced growth from existing customers including a 19.9% increase in
revenues from sales to 3Com for the three months ended June 30, 1999 when
compared to the same quarter of 1998.

Our net revenues increased 23.3% to $6.1 million in the six months ended
June 30, 1999 from $4.9 million in the six months ended June 30, 1998. The
increase in our revenue was the result of growth in our retail market channel
and revenues from our expanded base of OEM customers, both discussed in the
previous paragraph. The increase in these two areas was partially offset by a
decrease in sales to our largest OEM analog modem customers, including 3Com. The
decrease in sales to OEM analog modem customers 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 six
months of 1999 decreased 39.8% when compared to the same period of 1998.

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
increased 144.0% to $2.6 million in the three months ended June 30, 1999 from
$1.1 million in the three months ended June 30, 1998. Our increase in gross
profit was due to three significant factors: the 93.3% increase in net revenues;
a significant shift to OEM revenues derived from royalties rather than software

products that are delivered on CD or diskette; and the increase in retail net
revenues, which have a higher gross margin percentage than our traditional OEM
products. These factors also contributed to the increase in gross profit as a
percentage of net revenues, to 81.9% in the three months ended June 30, 1999
from 64.9% in the three months ended June 30, 1998.

Gross profit increased 36.8% to $4.8 million in the six months ended
June 30, 1999 from $3.5 million in the six months ended June 30, 1998. Our
increase in gross profit was primarily due to two significant factors: a
significant shift to our OEM revenues derived from royalties rather than
software products that are delivered on CD or diskette and the increase in
retail net revenues, which have a higher gross margin percentage than our
traditional OEM products. These factors contributed to the increase in gross
profit as a percentage of net revenues, to 78.3% for the six months ended June
30, 1999 from 70.6% in the same period in 1998

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 99.0% to
$1.5 million in the three months ended June 30, 1999 from $759,000 in the three
months ended June 30, 1998. The increase in selling and marketing expenses is
primarily due to promotional campaigns in the retail channel for our fax and
Internet communications products. Additionally, the company expanded its sales
and marketing teams to cover its Internet telephony, network fax and Macintosh
product lines. The expansion of the Macintosh team came solely from the
acquisition of STF. As a percent of net revenues, selling and marketing expenses
increased to 47.2% of net revenues in the three months ended June 30, 1999 from
45.8% in the three months ended June 30, 1998.

Selling and marketing expenses increased 99.3% to $3.0 million in the
six months ended June 30, 1999 from $1.5 million in the six months ended June
30, 1998. The increase is the result of the factors described in the preceding
paragraph. The expansion of the Macintosh sales and marketing team occurred in
the second half of the six-month period. As a percent of net revenues, selling
and marketing expenses increased to 50.2% of net revenues in the six months
ended June 30, 1999 from 31.0% in the six months ended June 30, 1998.

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 12.0% to $940,000 in the three months ended June 30, 1999
from $839,000 in the three months ended June 30, 1998. The increase was
primarily associated with our expansion of our Macintosh engineering team
through the acquisition of STF which was partially offset by a decrease in the
amortization of acquired technology assets. As a percent of net revenues, our
research and development expenses decreased to 29.4% for the three months ended
June 30, 1999 from 50.7% for the three months ended June 30, 1998.

Research and development expenses increased 12.7% to $1.8 million in the
six months ended June 30, 1999 from $1.6 million in the six months ended June
30, 1998. The increase was primarily associated with our expansion of our
Macintosh engineering team through the acquisition of STF and development
expenses related to our Internet telephony and network communications products.
As a percent of net revenues, research and development expenses decreased to
30.2% of net revenues in the six months ended June 30, 1999 from 33.0% in the
six months ended June 30, 1998.

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 15.1% to $967,000
in the three months ended June 30, 1999 from $840,000 in the three months ended
June 30, 1998. General and administrative expenses increased as the combined
result of the amortization of goodwill associated with the STF acquisition and
an increased headcount for support services related to our Macintosh division.
These increases were offset by a reduction in professional services. As a
percent of net revenues, general and administrative expenses decreased to 30.2%
of net revenues in the three months ended June 30, 1999 from 50.7% in the three
months ended June 30, 1998.

General and administrative expenses increased 10.9% to $1.9 million in
the six months ended June 30, 1999 from $1.7 million in the six months ended
June 30, 1998. General and administrative expenses increased as the combined
result of the amortization of goodwill related to the STF acquisition and an
increased headcount for support services related to our Macintosh division. As a
percent of

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net revenues, general and administrative expenses decreased to 30.6% of net
revenues in the six months ended June 30, 1999 from 34.1% in the six months
ended June 30, 1998.

INCOME TAXES

No income tax benefit was recognized for the three months ended June 30,
1999 due to the inability to recover amounts paid in prior years. The income tax
benefit was $356,000 for the six months ended June 30, 1999 based on a loss
before income taxes of $1.7 million. For the six months ended June 30, 1998, an
income tax benefit of $394,000 was reported based on a loss before income taxes
of $1.0 million.

LIQUIDITY AND CAPITAL RESOURCES

Since its inception, we have financed operations primarily through cash
generated from operations and from proceeds generated by our initial public
offering in 1995. Net cash used in operating activities was $1.9 million in the
six months ended June 30, 1999 compared to $371,000 provided by operations in
the six months ended June 30, 1998. The primary uses of cash during the six
months ended June 30, 1999 were the Company's net loss and an increase in net
accounts receivable that were partially offset by depreciation and amortization.

During the six months ended June 30, 1999, we used $1.2 million in
investing activities. On April 9, 1999, we used $1.1 million in cash and 409,164
shares of our Common Stock to acquire all of the outstanding capital stock of
STF. STF, headquartered in Concordia, Missouri, is a developer and publisher of
fax and communications software products for the Apple Macintosh computer.

At June 30, 1999, the Company had $9.6 million in cash and cash
equivalents and $14.3 million of working capital. The Company had $5.3 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 six months, 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.

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 our software products. However, it is possible that our
products, or the hardware or software applications used by our customers, 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.

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 our 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 us and a decision to invest in us.

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:

- the size and timing of orders from, and shipments to, our major
customers;

- our ability to maintain or increase gross margins;

- changes in pricing policies or price reductions by us or our
competitors;

- variations in the our sales channels or the mix of our product
sales;

- the timing of new product announcements and introductions by us,
our competitors or customers;

- the availability and cost of supplies;

- the financial stability of our major customers;

- the market acceptance of our new products, applications and
product enhancements;

- our ability to develop, introduce and market new products,
applications and product enhancements;

- possible delays that we may face in the shipment of new
products;

- our success in expanding our sales and marketing programs;

- deferrals of orders by our customers in anticipation of new
products, applications, product enhancements or operating
systems;

- changes in our strategy; and

- 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 15.3% of our net revenues in the six months ended June 30,
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
30.4% of our net revenues in the six months ended June 30, 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 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 39.2% of our net revenues in the six
months ended June 30, 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, FAXstf, HotPage and HotFaxShare. Sales of our retail
products represented approximately 36.7% of our net revenues in the six months
ended June 30, 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

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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.

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
telephony and video communications products and services, including our
currently released products: conexs.com and Internet CommSuite. Such products
compete in new and rapidly changing markets and we cannot be certain that our
products will receive or gain market acceptance. Our first 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 telephony 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.

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 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:

- the success and timing of new product development;

- product performance;

- price;

- distribution; and

- 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 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

18
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 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 18.7%
of our total net revenues for the six months ended June 30, 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:

- difficulties in managing distributors;

- difficulties in staffing and maintaining foreign operations;

- foreign currency exchange fluctuations;

- the possibility of difficulties in collecting accounts
receivable;

- varying technical standards;

- substantially different regulatory requirements in different
jurisdictions;

- tariffs and trade barriers;

- political and economic instability;

- reduced protection for our intellectual property rights in
certain countries;

- potentially adverse tax consequences; and

- burdens associated with complying with a wide variety of complex
foreign laws and treaties.

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

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19

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.

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.

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 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 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 six months, 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.

products. However, it is possible that our products, or the hardware or software
applications used by our customers, may 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.

Our Officers and Directors Could Control Matters Submitted to Our
Stockholders. As of July 31, 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 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 July 31, 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.

21
22

PART II -- OTHER INFORMATION

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, $1,091,000 was used in the acquisition of STF 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, $3,200,000 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.

23
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
Incorporation of the Company to the Registrant's Registration Statement
No. 33-95096

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

4.1 Specimen certificate representing Incorporated by reference to Exhibit 4.1
shares of Common Stock of the to the Registrant's Registration Statement
Company. 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 Incorporated by reference to Exhibit 10.2
Plan. to the Registrant's Registration Statement
No. 33-95096

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

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

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

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

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

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

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

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

10.11 Letter Agreement dated April 22, Incorporated by reference to Exhibit 10.11
1993, by to the

23
24

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

and between the Company and Rockwell Registrant's Registration Statement
Rockwell International Corporation. No. 33-95096

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

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

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

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

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

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

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

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

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

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

10.22 Amendment No. 6 to Office Building Incorporated by reference to Exhibit 10.22
Lease, dated February 19, 1998, by to the Registrant's Annual Report on Form
and 10-K for the

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

between the Company and World fiscal year ended December 31, 1997
Outreach Center.

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

10.24 Stock Purchase Agreement dated as of Incorporated by reference to Exhibit 2 to
April 9, 1999 by and among Smith the Registrant's Current Report on Form
Micro Software, Inc. STF 8-K filed with the Commission on April 23,
Technologies, Inc. and the 1999
Shareholders of STF Technologies,
Inc.

27 Financial Data Schedule. Filed Herewith

(B) REPORTS ON FORM 8-K

On April 23, 1999, the Company filed a Form 8-K in connection with its
acquisition of STF Technologies, Inc., a Missouri corporation. Financial
statements of STF Technologies, Inc. and pro forma financial statements of the
Company were not required.

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.

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

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