SMITH MICRO SOFTWARE INC - 10-K Annual Report

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

FORM 10-K

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

For the fiscal year ended December 31, 1999

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

For the transition period from _____________________ to ____________________

COMMISSION FILE NUMBER 0-26536

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

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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

COMMON STOCK, $.001 PAR VALUE NASDAQ NATIONAL MARKET
(Title of each class) (Name of each exchange on which registered)

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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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].

The Registrant does not have different classes of Common Stock. As of
March 21, 2000, the aggregate market value of the Common Stock of the Registrant
held by non-affiliates was $133,733,589, based upon the closing sale price of
such stock on that date. For purposes of such calculation, only executive
officers, board members, and beneficial owners of more than 10% of the Company's
outstanding Common Stock are deemed to be affiliates.

As of March 21, 2000, there were 15,845,126 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders currently expected to be held on May 25, 2000, as filed with the
Securities Exchange Act of 1934, as amended, are incorporated by reference in
Part III of this Report.

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SMITH MICRO SOFTWARE, INC.

1999 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PAGE
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PART I

Item 1. BUSINESS............................................................... 3
Item 2. PROPERTIES............................................................. 18
Item 3. LEGAL PROCEEDINGS...................................................... 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS..................... 18

PART II

Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.................................................... 19
Item 6. SELECTED FINANCIAL DATA................................................ 21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................................................. 22
Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK............. 27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................ 27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................................... 27

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS....................................... 28
Item 11. EXECUTIVE COMPENSATION................................................. 28
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......... 28
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................... 28

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........ 29

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THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE
HARBOR" FOR FORWARD-LOOKING STATEMENTS. THE STATEMENTS CONTAINED IN THIS ANNUAL
REPORT ON FORM 10-K 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 OF 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-K 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
11 OF THIS ANNUAL 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 ANNUAL REPORT, BEFORE
DECIDING TO INVEST IN OUR COMPANY OR TO MAINTAIN OR INCREASE YOUR INVESTMENT.

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PART I

ITEM 1. BUSINESS

GENERAL

Smith Micro Software, Inc. (Smith Micro) develops and sells eCommerce
and 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. Smith Micro's eCommerce
software and services enable businesses to create and launch online Internet
storefronts.

Our products for the consumer and business markets are available
through Internet sales, retail stores, direct sales, and value-added resellers
(VARs). Retail outlets that sell our products include CompUSA, OfficeMax, Office
Depot, Micro Center, Staples, and Fry's Electronics. On the web, our products
can be found at Buy.com, Beyond.com, Egghead.com and many others. In the OEM
market, we are a supplier of communication software, having shipped over 40
million copies of products. OEM customers include manufacturers of personal
computers, digital cameras, video capture cards, cable modems and 56k modems. We
currently maintain OEM relationships with several companies including Apple, HP,
Gateway, Brother International, Philips Consumer Electronics, Thomson
Multimedia, Viking Components, Zoom, D-Link, TDK Systems and 3Com.

Through our merger with Pacific Coast Software, Inc. (PCS) at the end
of the third quarter of 1999, we now offer a broad spectrum of services that are
Internet-related and focused on e-Commerce, such as consulting services that
range from WebCatalog support to complete website design and installation. We
also offer website hosting and co-location services as well as ASP (Application
Service Provider) services for WebCatalog. Our customer list includes Pillsbury
Dough Shop, Ben & Jerry's, Troublewear.com, Stanford Gear, Zamboni,
XTERRAgear.com and others.

INDUSTRY BACKGROUND

Businesses and consumers are using the Internet to communicate,
transact business, share information and access vast information resources. The
increasing demand for Internet access is driving the adoption of new technology
that enhances the Internet experience. These advances are found in multimedia
personal computers and Internet access devices such as analog modems, cable
modems, xDSL modems, network interface cards and software solutions. Statistics
taken from two research groups, International Data Corporation and The Yankee
Group, suggest that the number of Worldwide Web users will grow dramatically in
the future. Households having access to high-speed Internet connections of cable
and/or DSL will increase from 1.4 billion to 8.1 billion in 2003. Web hosting
fees will increase from $2 billion in 1999 to $9.8 billion in 2003. In addition,
the dollar amount of transactions over the Internet is expected to increase from
$131 billion in 1999 to an approximation of $1.6 trillion in 2003. People
utilizing wireless communication will also continue to grow. Subscribers to
internet wireless messaging services will grow from 7.4 million in 1999 to 61.5
million in 2003 and the number of people using wireless telephones will grow
from 425 million in 1999 to 1.1 trillion in 2003.

Manufacturers of connectivity devices such as analog modems, cable
modems, xDSL modems and network interface cards enable personal computer
communication using direct connections, or connections over the Internet,
intranets, Local Area Networks and Wide Area Networks. By adopting new
technology, these manufacturers have been able to deliver products with higher
transmission speeds and increased functionality. The rapid pace of these
changes, the need to support a variety of operating systems, including Windows
95, Windows 98, Windows NT, Windows 2000, Unix, Linux and Macintosh, and the
desire to differentiate products present a significant communication software
challenge. These manufacturers generally focus on hardware and do not find it
cost effective to develop software internally to meet the evolving needs of
communication software for multiple platforms. Instead, these manufacturers
typically bundle software from outside providers with their hardware.

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Demand for personal computer communication software products is
generated by three distinct sources: OEM customers, retail end-user consumers
and corporate/government customers who generally purchase user licenses for
installations over networks. OEMs, consisting primarily of Internet access
device, camera, video capture card, modem and personal computer manufacturers,
purchase software and bundle or pre-load it with their products. This software
provides basic functionality and effectively serves the needs of most users.
Users with more complex communication requirements typically seek software with
more features in the retail market.

As communication hardware device manufacturers develop and adopt
emerging technology, thereby expanding the functionality of communication
devices, communication software must be continually enhanced to provide
integrated, easy-to-use solutions to enable this functionality to be utilized.
Emerging telephony applications can provide full duplex speakerphones, complex
voicemail functions, and an enhanced level of information management
capabilities to the home and small office. In addition, video conferencing,
which traditionally has been available only to high-end corporate board rooms at
a cost of thousands of dollars, has reached the desktop, with solutions that are
affordable for the home and small office. Most recently, communication hardware
device manufacturers have introduced devices such as cable and xDSL modems that
enable high speed Internet access. These devices improve the functionality and
efficiency of voice, fax, data and video transmissions over the Internet or
intranets. The functionality of communication software must continue to evolve
to keep pace with consumer expectations, future hardware functions and the
rapidly changing competitive environment.

SMITH MICRO STRATEGY AND PRODUCTS

Our company has traditionally served the analog fax business markets
for both OEM and retail customers with our existing products. With the
acquisition of PCS at the end of the third quarter of 1999, we gained entry into
the eCommerce market. Going forward, our company's strategy is to develop and
introduce new products that are focused on the following markets:

o Wireless telephony

o eCommerce

o Internet communications (VoIP)

We offer software products for Windows 98, Windows 95, Windows NT,
Windows 2000, Unix, Linux and Macintosh operating systems. We believe that our
strong engineering focus and our relationships with analog modem, cable modem,
xDSL modem, camera, video capture card, personal computer and chip manufacturers
enable us to develop communication software in anticipation of changes in
product design and to customize our OEM software to meet specific customer
requirements. To address the complexity of personal computer communication, we
have consistently developed products that are intuitive and easy-to-use. Our
strategy is to build upon the easy-to-use reputation of our OEM software
products to encourage new users to migrate to our retail products as they
require higher levels of functionality.

ANALOG FAX PRODUCTS - These are the traditional products that our company
was built on. These products allow users to send and receive faxes,
broadcast faxes to unlimited recipients, and create multi-user voice mail
systems. Wireless messaging sends messages directly from the desktop to
pagers. The QuickLink(R) product family is targeted to the OEM PC market
while HotFaxMessageCenter(R) and HotPage(R) are aimed at the retail PC
market. FAXstf serves the OEM Macintosh market and FAXstf Pro serves the
retail Macintosh market.

WIRELESS TELEPHONY - These products represent our core fax and data
telephony technology and have been updated to include wireless phones.
These products are targeted at the OEM market, including cell phone
manufacturers, service providers and silicon fabricators. The underlying
design concept is the long-standing Smith Micro concept of "enhancing the
out-of-box experience" for the ultimate end-customer and thereby keeping
the OEM device sold.

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ECOMMERCE - These products mark our entry into the eCommerce market.
WebCatalog and WebMerchant comprise the cross-platform core of our
eCommerce solutions. WebCatalog's server-side language, WebDNA, enables web
sites to be created with standard HTML text files. WebMerchant provides
fully automated payment processing and order accounting for WebCatalog.
Both products have been designed for business owners who want to publish a
catalog and sell products but don't want to commit to a large investment.

WEBCATALOG is a comprehensive solution for online commerce and dynamic
web publishing. It designs and operates online storefronts with all the
features found in the leading sites. With WebCatalog and WebMerchant,
users have a completely automated sales force available 24 hours a day,
7 days a week.

WEBMERCHANT is designed to work with WebCatalog and automate the
payment, notification, and delivery process. It takes orders submitted
via WebCatalog and performs credit card verification, order
notification, and, if desired, electronic delivery. A site can be
implemented with WebCatalog and updated with WebMerchant as a separate
installation.

TYPHOON enhances web server functionality. Typhoon can automatically
insert the current date or time, include information from other files,
hide or show portions of text based upon the current visitor, configure
sophisticated database solutions, and much more. Banner Ads, Online
Quizzes, Email Forms, Mass Emailing, User Tracking, Page Counters and
Password Protection are some of the features that can easily be added
to web sites. Typhoon is also cross platform and includes sophisticated
examples that improve web server performance.

WEBCATALOG BUILDER(TM) is a retail product that allows users to build
an online store. It employs an easy-to-use Wizard Program to walk
through the design and launch phases of the process. There is no HTML
or programming experience necessary to launch an eCommerce site. This
product is currently available for Windows systems and will be
available early in 2000 for Apple systems.

INTERNET COMMUNICATION - Smith Micro has several products in this emerging
market:

INTERNET COMMSUITE(TM) is an all-in-one retail Internet product that
enables users to add voice and video to e-mail and on-line chat
sessions, talk to friends and family over the Internet, send faxes
without paying long-distance phone charges, conduct Internet video
phone-calls and much more. Internet CommSuite's intuitive interface
provides easy, single-click access to Internet activities. Internet
CommSuite has been designed for all types of Internet access including
cable, xDSL and traditional analog modems.

CONEXS - is an entry level Internet communication product that
alleviates traditional calling costs and is available through Internet
download or through OEM's.

CONEXS.COM is an Internet Directory Service that offers a real-time,
person-to-person locator to facilitate Internet communication and
includes enhanced privacy features.

VIDEOLINK MAIL(R) allows users to attach audio/video messages to their
emails as self-extracting files. Recipients do not require special
software because a player is embedded in the message. VideoLink Mail(R)
is targeted to the OEM market.

VIDEOLINK(R) enables video and audio communications over the Internet,
intranet or ordinary telephone lines using a standard analog modem
connection and is for the OEM market.

NETWORK FAX - is multi-platform fax software for networked environments
including LAN's, WAN's and the Internet. HotFaxShare(R) handles fax
creation, transmission and fax routing for companies with high fax
volume or geographically separated computer users connected to a
network. Internet gateways allow companies to send faxes over the
Internet to lower their telecommunications costs. FaxSTF Network is
available for those users operating in a Macintosh only environment.

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SALES AND MARKETING

We sell our software products worldwide to corporations and small
office/home office businesses; distributors and retailers who sell the product
to end user customers; and OEM customers who bundle or preload our software with
their hardware products. We also have products that address vertical markets,
such as telemedicine, that are distributed directly through corporate partners.

Internet Solutions Products

These products are developed for eCommerce with an emphasis on the
business-to-business market segment. We derive revenues for our Internet
solutions from three sources: software products, consulting services and hosting
services. WebCatalog and WebMerchant comprise the cross-platform core of our
eCommerce solutions. Both products have been designed for business owners who
want to publish a catalog and sell products but don't want to commit to a large
investment.

Macintosh Products

These products are developed with Apple as the primary focus and
customer. The FAXstf product is preloaded on iMac's, iBooks and selected G3
computers worldwide. We work very closely with Apple to assure compatibility
with Apple computers as well as to coordinate product features and updates. Our
new retail product, HotFaxMessageCenter Pro, was released in late 1999 as an
upgrade path for FAXstf users. FAXstf and HotFaxMessageCenter Pro are sold
internationally through Apple distributors. Selected products are available in
eight languages.

Our revenues from Apple are based upon royalties accrued by Apple based
upon personal computer shipments. As a result, we have no backlog for our
Macintosh products and we do not consider backlog to be a significant indicator
of future performance. Our revenues from our Macintosh products in any quarter
are substantially dependent on Apple shipments. Apple could reduce its orders of
our products in favor of a competitor's product or for any other reason. The
loss of Apple as customer or decisions by Apple to substantially decrease
purchases from us could have an adverse effect on our business.

Wireless & Broadband Products

These products are geared to both retail and OEM customers. Our major
retail product is HotFaxMessageCenter. This has been in retail for 4 years and
the current release of this product is version 4.

Our OEM market continues to evolve as we continue to offer new
communications products and OEM's adopt new technologies and software bundling
techniques. The wireless and broadband markets including cell phone, cable modem
and xDSL manufacturers are the major focus of this business unit along with
personal computer and camera manufacturers, Internet service providers and
content providers. This is a strategic departure from our historical OEM
customer base that consisted primarily of analog modem manufacturers. We have
translated our products into as many as 18 languages to allow our OEM customers
the flexibility of offering multi-language products that meet the needs of their
worldwide markets. Our OEM customers include Brother Industries Ltd., Hewlett
Packard Company, Gateway (Japan), Philips Consumer Electronics B.V.
(Netherlands), and 3Com. Each of these manufacturers bundles or pre-loads Smith
Micro's software products with its own hardware products.

The cycle from the placement of an OEM order to shipping is very short.
OEM customers generally operate under a just-in-time system and we generally
ship our products as we receive orders. Additionally, an increasing percentage
of our OEM revenue is derived from royalties accrued by customers that are
authorized to replicate our software products on a CD or to preload our software
on a personal computer. As a result of these factors, we have relatively little
backlog for our wireless and broadband products at any given time and we do not

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consider backlog to be a significant indicator of future performance. Moreover,
we generally do not produce software in advance of anticipated orders and
therefore have insignificant amounts of inventory. As a result of the foregoing,
our revenues in any quarter are substantially dependent on orders booked in that
quarter.

Our three largest OEM customers and their affiliates accounted for
26.8% of our net revenues in 1999, 33.0% in 1998 and 54.4% in 1997. Our major
customers could reduce their orders of our products in favor of a competitor's
product or for any other reason. The loss of any of our major OEM customers,
decisions by a significant OEM customer to substantially decrease purchases or
our inability to collect receivables from these customers could have an adverse
effect on our business. We allow our OEM customers to return unused software. To
date, however, such returns have been infrequent.

Retail Sales

We have a corporate sales staff responsible for retail sales that works
closely with our retail distributors on the management of orders, inventory
levels, sell-through to retailers and promotions and marketing activities.
Domestically, our retail products are sold by independent distributors including
Ingram Micro and Tech Data. In addition, our retail sales force is responsible
for contacting major retail outlets to generate demand for our retail products
in the retail distribution channel. We continue to develop Internet retail
outlets by selling products through our web site and electronic distributors.
End user customers can receive delivery of our retail products through
electronic download or via shipment of a retail package.

We allow distributors and retailers to return products without charge
or penalty. In addition, there are times when we update products and request the
distributors of our products to replace inventory on the shelves with the new
version in what is called a stock rotation. A component of our revenue
recognition policy is that we calculate an allowance for product returns based
on our historical experience with product returns. If retail sales of our
products increase, the 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, causing us to revise our estimates and
increase the allowances for such returns.

We employ direct mail programs to offer end-users promotional upgrades
from our OEM products to our retail products. We advertise in selected computer
end-user and re-seller publications and periodically introduce promotions and
incentive offers such as special pricing for the purchase of upgrades. We also
participate in major trade shows, professional conferences and personal computer
user group events to reach our target markets.

As a percentage of our net revenues, retail sales represented 31.9% of
our revenues in 1999, 24.8% of 1998 revenues and 5.0% of our revenues in 1997.

CUSTOMER SERVICE AND TECHNICAL SUPPORT

We provide technical support and customer service through our Corporate
web site, email, telephone and fax. OEM customers generally provide their own
primary customer support functions and rely on us for back-up support for their
own technical support personnel. We provide technical support to end users of
OEM customers through the Technical Support section of our Corporate web site
including a user accessible data base of FAQ's (Frequently Asked Questions).

PRODUCT DEVELOPMENT

The software industry, particularly the Internet and wireless/broadband
markets are characterized by rapid and frequent changes in technology and user
needs. We work closely with industry groups and customers, both current and
potential, to help us anticipate changes in technology and determine future
customer needs. Software functionality depends upon the capabilities of the
hardware, accordingly we maintain engineering relationships with various
hardware and silicon chip manufacturers and we develop our software in tandem
with their development. Our engineering relationships with manufacturers, as
well as with our major customers, are central to our product

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development efforts. In addition, we participate in software product developer
programs sponsored by key industry companies such as Microsoft, Intel and Apple.

We believe that we must be responsive to the specific requests of our
customers. With this need for flexibility in mind, our engineering environment
is designed to allow rapid application development while supporting customer
requirements within tight development schedules.

As of December 31, 1999, we had a product development staff of 41
engineers and quality assurance and product testing specialists. We plan to add
additional software engineers and product testing personnel in the future, as
they are required.

MANUFACTURING

Smith Micro software is sold in three forms. First, our software is
sold in the form of an OEM kit or retail package that includes disks or a
CD-ROM, a manual and certain other documentation or marketing material. Second,
we permit certain of our OEM customers to duplicate their own disks or CD-ROMs
and pay us a royalty based on usage. This method of sale does not require us to
provide a disk or manual. Finally, we grant licenses to certain OEM customers
that enable those customers to pre-load a copy of our software onto a personal
computer's hard drive. With the corporate sales program, we offer site licenses
under which a corporate user is allowed to distribute copies of the software to
users within the corporate sites.

We rely on third party suppliers who provide the components for our
software product kits. These components include disks, CD-ROMs and printed
manuals. Disk shortages have occurred in the past and may recur in the future.
If we cannot obtain a sufficient quantity of disks, CD-ROMs or other components,
or cannot obtain disks, CD-ROMs or other components at prices at least
comparable to the prices we currently pay, our business could be adversely
affected.

We rely on third party suppliers to provide CD-ROM components and
CD-ROM replication for the CD-ROMs that are placed in many of our product kits.
The equipment to replicate CD-ROMs is very costly making it unlikely that we
will add this capability internally. This leaves us dependent on CD-ROM
replication facilities for both the timing and pricing of our software produced
in CD-ROM format. This could impair our ability to deliver products to our
customers. In addition, any price increases that we experience could reduce
gross margins, which would have an adverse effect on our business.

We duplicate most of the diskettes that are placed in certain of our
OEM product kits at our Aliso Viejo, California facility. This facility is
capable of producing 50,000 duplicated disks in a single eight-hour shift.
Operations are primarily conducted on a single shift basis, although we operate
a second shift from time to time to accommodate customer delivery requirements.
We have outside production alternatives in the event of a disruption of our
Aliso Viejo operations. We use outside vendors for the printing of labels,
manuals and packaging.

COMPETITION

The markets in which we operate are highly competitive and subject to
rapid changes in technology. The strategic directions of major personal computer
hardware manufacturers and operating system developers are also subject to
change. Smith Micro competes 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 and in attracting qualified personnel.

We believe that the principal competitive factors affecting the
communication software market include product features and ease of use,
willingness of the vendor to customize the product to fit customer-specific
needs, product reputation, product quality, product performance, price, customer
service and support and the effectiveness of sales and marketing efforts.
Although we believe that our products currently compete favorably with respect
to these factors, there can be no assurance that we can maintain our competitive
position against current and potential

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competitors, especially those with significantly greater financial, marketing,
service, support, technical and other resources.

Because there are relatively low barriers to entry in the communication
software market and because rapidly changing technology is constantly creating
new opportunities in this market, we expect new competitors to enter the market.
We also believe that competition from established and emerging software
companies will continue to intensify as fax and data applications merge with
video and audio applications and the emerging cellular, wireless and Internet
telephony markets develop. The markets in which we compete have been
characterized by the consolidation of established communication software
suppliers and we believe that this trend, which may lead to the creation of
additional large and better-financed competitors, may continue. Increased
competition could result in price reductions, reduced gross margins and loss of
market share, any of which could have a material adverse effect on our business.

We compete primarily with Symantec, Cheyenne, White Pine, Intel,
Microsoft, VocalTec and RightFAX, among others, for communication software
products. Some of our 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. Such a pricing strategy could have an adverse effect on
our business.

Many of our other current and prospective competitors have
significantly greater financial, marketing, service, support, technical and
other resources than Smith Micro. Moreover, these companies may introduce
additional products that are competitive with ours, and our products may not
compete effectively with such products. 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 and introduction, product
performance, price, distribution and customer support. We may not be able to
compete successfully with respect to these and other factors. We believe that
the market for our software products has been and will continue to be
characterized by significant price competition. A material reduction in the
price of our products could negatively affect our profitability.

Many of our existing and potential OEM customers have substantial
technological capabilities. These customers may currently be developing, or may
in the future develop, products that compete directly with our products. In such
event, these customers may discontinue purchases of our products. Our future
performance is substantially dependent upon the extent to which existing OEM
customers elect to purchase communication software from us rather then design
and develop their own software. In light of the fact that our customers are not
contractually obligated to purchase any of our products, they may cease to rely,
or fail to expand their reliance, on us as an external source for communication
software in the future.

We also face competition from Microsoft, which dominates the personal
computer software industry. Due to its market dominance and the fact that it is
the publisher of the most prevalent personal computer operating systems,
Windows, Microsoft represents a significant competitive threat to all personal
computer software vendors, including Smith Micro.

PROPRIETARY RIGHTS AND LICENSES

Although we believe that our products do not infringe on the
intellectual property rights of others, such a claim may be asserted against us
in the future. If we fail to protect our proprietary information, our business
could be materially and adversely affected.

From time to time, we have received and may receive in the future
communications from third parties asserting that trademarks used by us or
features or content of certain of our products infringe upon intellectual
property rights held by such third parties. As the number of trademarks,
patents, copyrights and other intellectual property rights in our industry
increases, and as the coverage of these patents and rights and the functionality
of products in the market further overlap, we believe that our products, with
their existing technology, may increasingly

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become the subject of infringement claims. Moreover, any of these proceedings
could also result in an adverse decision as to the priority of our inventions.
Such results would materially and adversely affect us, and may also require us
to obtain one or more licenses from third parties. We may not be able to obtain
any such required licenses upon reasonable terms, if at all, and the failure by
us to obtain such licenses could prohibit us from selling some of our products
or require us to modify some of our existing products.

Our success is dependent upon our software code base, our programming
methodologies and other intellectual properties. To protect our proprietary
technology, we rely on a combination of trade secret, nondisclosure and patent,
copyright and trademark law that may afford only limited protection. We apply
for various patents and trademarks to protect intellectual property. Prior to
becoming a publicly held entity, we did not require our employees to sign
proprietary information and inventions agreements stipulating, among other
things, software ownership rights. The steps that we have taken to protect our
proprietary technology may not be adequate to deter misappropriation of our
proprietary information or prevent the successful assertion of an adverse claim
to software utilized by us. In addition, we may not be able to detect
unauthorized use of our intellectual property rights or take effective steps to
enforce those rights.

In selling our products, we primarily rely on "shrink wrap" licenses
that are not signed by licensees and, therefore, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of some foreign countries
do not protect our proprietary rights to as great an extent as do the laws of
the United States. Accordingly, the means we use currently to protect our
proprietary rights may not be adequate. Moreover, our competitors may
independently develop similar technology to ours. We also license technology on
a non-exclusive basis from several companies for inclusion in our products and
anticipate that we will continue to do so in the future. If we are unable to
continue to license these technologies or to license other necessary
technologies for inclusion in our products, or if we experience substantial
increases in royalty payments under these third party licenses, our business
could be materially and adversely affected.

EMPLOYEES

As of December 31, 1999, Smith Micro had a total of 88 employees, of
which 41 were engaged in engineering, 19 were in sales and marketing, 11 were in
customer support, 10 were in finance and administration and 7 were in
manufacturing. We utilize temporary labor to assist during periods of increased
manufacturing volume. None of our employees is represented by a labor union. We
have not experienced any work stoppages, and consider our relations with our
employees to be good.

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RISK FACTORS

This Annual Report on Form 10-K 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 Annual Report on Form 10-K.
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. Accordingly, 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.

There are a number of factors that could cause our quarterly operating
results to fluctuate. 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;

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.

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

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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 have Depended 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, primarily to its wholly-owned subsidiary, U.S.
Robotics, and subsidiaries of U.S. Robotics. These 3Com entities represented
15.2% of our net revenues in 1999, 23.3% of our net revenues in 1998 and 41.4%
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 traditionally, 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 U.S. Robotics. If, through our efforts
to diversify our product lines, we are not successful in replacing these sales,
the continued decrease or delay in sales to the 3Com entities in any quarter
would have an adverse effect on our results of operations.

We have Depended Upon a Small Number of OEM Customers. Sales to our
three largest OEM customers, including 3Com Corporation, accounted for
approximately 26.8% of our net revenues in 1999, 33.0% of our net revenues in
1998 and 54.4% of our net revenues in 1997. Although we have begun to diversify
our product lines, we expect that we will continue to be dependent upon orders
from our major OEM customers for a significant portion of our revenues in future
periods. However, none of these customers are 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 in any quarter would have an
adverse effect on our results of operations. 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 result in a substantial
decrease in our revenues.

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. Sales of our QuickLink related products represented approximately
37.1% of our net revenues in 1999, 55.3% of our net revenues in 1998, and 77.7%
of our net revenues in 1997. If our revenues from these software products
continue to decline, whether as a result of competition, technological change,
price pressures or other factors and our efforts to replace these sales through
the addition of new products are not successful, our business 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. We recently added Internet CommSuite to our existing line of
retail software products that includes HotFaxMessageCenter, HotFax, VideoLink
Mail, FAXstf, HotPage and HotFaxShare. Sales of our retail products represented
approximately 31.9% of our net revenues in 1999, 24.8% of our net revenues in
1998 and 5.0% 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.

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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.
Our retailers include Staples, CompUSA, Office Depot, OfficeMax and numerous
Internet retail stores, among others. As a result, net revenues to Ingram Micro,
a retail distributor, were 23.4% of our net revenues in 1999, 18.0% of our net
revenues in 1998 and 0.0% of our net revenues in 1997. 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 retail sales may be adversely affected. We may not
be successful in recruiting new VARs and retailers to represent us.

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 results of operations.

Our Future Success Will Partially Depend on the Level of Market
Acceptance of Our Internet Communications Products, Video Related Products and
eCommerce products and services. 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. Subsequent to our merger with PCS, we increased the level of
resources directed at our eCommerce product group and we expect to continue to
focus significant resources on the development, marketing and selling of
eCommerce products and services, including our currently released products:
WebCatalog and WebCatalog Builder. Lack of market acceptance for these products
or other similar products could have an adverse impact on our business. In
addition, we may experience delays in or non-completion of the development of
new software for these products, which could adversely affect our competitive
position in these markets. 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. Our first eCommerce software
product was released in late 1995. The current version of this software product
enables businesses of all sizes to create and operate online Internet
storefronts and web sites. Sales of this product line have primarily been made
through VARs and direct sales to businesses. Revenue from this product group has
achieved modest growth and has not become a significant part of net revenues.
Our Internet telephony and video communications software products compete
against several competitors, including White Pine, Logitech, Intel, Microsoft
and VocalTech and our eCommerce software products also compete against several
competitors, including Intershop, Intel, IBM, Yahoo and others, 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, video conferencing software markets or eCommerce
software market.

Rapid Technological Change Could Render Our Products Obsolete. The
communications software markets in which we operate are 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

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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 competitive
positions in these markets 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 adversely 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.

We Face Significant Competition from Software Vendors in the Retail
Market. Our principal fax related retail products, HotFaxMessageCenter 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 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.

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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 results of operations.

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 sales and results of operations 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 results of operations 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. In September
1999, we merged with PCS, which provided us with eCommerce products for this
market. 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.

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. Export net revenues represented 17.8%
of our total net revenues in 1999, 21.5% of our total net revenues in 1998 and
23.3% 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:

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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;

o potentially adverse tax consequences; and

o 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 subject 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 results of operations 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, service and support teams may limit the
rate at which we can generate revenue and develop new products or product
enhancements. 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.

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

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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 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 and proprietary
rights. 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 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 ability to market our products.

Our Officers and Directors Could Control Matters Submitted to Our
Stockholders. As of March 21, 2000, William Smith, the President, Chief
Executive Officer and Chairman of the Board of the company, and Rhonda Smith,
the Secretary, Treasurer and Vice-Chairman of the Board of our company,
beneficially owned approximately 61.8% 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

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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 March 21, 2000, we had 15,845,126 shares of Common Stock
outstanding. Of this amount, the 9,794,670 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.

ITEM 2. PROPERTIES

Our principal administrative, sales and marketing, customer support and
research and development facility is located in approximately 28,500 square feet
of space in Aliso Viejo, California. We have leased this facility through March
31, 2003. We also lease a facility of approximately 4,500 square feet in San
Diego, California pursuant to a lease that expires April 30, 2004, a facility of
approximately 3,100 square feet in Beaverton, Oregon pursuant to a lease which
extends through February 28, 2005, a facility of approximately 1,900 square feet
in Boulder, Colorado pursuant to a lease which extends through August 31, 2003,
a facility of approximately 3,000 square feet in Lee's Summit, Missouri pursuant
to a lease that expires August 31, 2004, and a facility of approximately 900
square feet in Plano, Texas, pursuant to a lease which extends through June 30,
2000. We believe that suitable additional or alternative space will be available
in the future on commercially reasonable terms as needed.

ITEM 3. LEGAL PROCEEDINGS

There were no pending legal issues at this time.

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

There were no matters submitted to a vote of stockholders during the
quarter ended December 31, 1999.

18

19
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

MARKET INFORMATION

Smith Micro's common stock is traded on the Nasdaq National Market
under the symbol "SMSI." The high and low closing sale prices for our common
stock as reported by Nasdaq are set forth below for the periods indicated.

High Low
------- -------
YEAR ENDED DECEMBER 31, 1999:
First Quarter $ 3 7/8 $ 1 7/8
Second Quarter 3 7/8 1 13/16
Third Quarter 3 1 1/2
Fourth Quarter 11 3/4 5/8

YEAR ENDED DECEMBER 31, 1998:
First Quarter 5 9/16 $ 1 9/16
Second Quarter 4 7/16 2 1/4
Third Quarter 2 3/4 1 1/4
Fourth Quarter 4 3/8 1 7/16

YEAR ENDED DECEMBER 31, 1997:
First Quarter 5 1/2 2 7/8
Second Quarter 4 1/2 2
Third Quarter 3 1/2 1 7/8
Fourth Quarter 3 7/8 1 5/8

On March 21, 2000, the closing sale price for our common stock as
reported by Nasdaq was $22.125.

HOLDERS

As of March 21, 2000, there were 114 holders of record of our common
stock.

DIVIDENDS

We have never paid any cash dividends on our common stock and we have
no current plans to do so.

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20

USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING

The effective date of Smith Micro's first 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, we sold 1,700,000 shares of
common stock for an aggregate offering price of $20,400,000, and certain of our
stockholders sold 2,210,000 shares of our common stock for an aggregate offering
price of $26,520,000.

We 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 us after total expenses were $18,138,000.

As of December 31, 1999, we had used the net proceeds from the offering
as follows: $4,188,000 to repay amounts due under a promissory note issued by us
to certain of our stockholders as a part of a distribution of retained earnings
in connection with our prior S corporation status, $3,011,000 for our
acquisition of Performance Computing Incorporated, which was consummated in
March 1996, $1,091,000 for our acquisition of STF which was consummated in April
1999, $458,000 for our acquisition of technology assets from Mitek Systems,
Inc., which was consummated in January 1998 and $190,000 in the acquisition of
other technologies and $4,700,000 has been used for working capital
requirements. We have invested the remainder of the net proceeds from the
offering 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.

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21

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data with respect to Smith Micro's
consolidated statements of operations for the years ended and consolidated
balance sheets as of December 31, 1999, 1998, 1997, 1996 and 1995 are derived
from the audited Consolidated Financial Statements of Smith Micro Software, Inc.
Prior year's amounts have been restated to reflect the merger with of PCS, which
has been accounted for as a pooling of interests. The following information
should be read in conjunction with the Consolidated Financial Statements of the
company and the related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Annual Report on Form 10-K.

YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(in thousands, except per share data)

STATEMENT OF OPERATIONS DATA:
Net revenues $ 10,700 $ 10,151 $ 12,229 $ 22,483 $18,172
Cost of revenues 2,476 2,911 3,868 6,808 5,901
-------- -------- -------- -------- -------
Gross profit 8,224 7,240 8,361 15,675 12,271
Operating expenses:
Selling and marketing 6,135 3,984 3,725 3,275 2,189
Research and development 3,826 3,416 3,420 3,491 1,722
General and administrative 3,923 3,556 4,227 3,879 2,643
Acquired in-process research and development 5,169
-------- -------- -------- -------- -------
Total operating expenses 13,884 10,956 11,372 15,814 6,554
-------- -------- -------- -------- -------
Operating income (loss) (5,660) (3,716) (3,011) (139) 5,717
Interest income, net 447 708 711 837 307
-------- -------- -------- -------- -------
Income (loss) before income taxes (5,213) (3,008) (2,300) 698 6,024
Income tax expense (benefit) 888 (1,112) (839) 2,435 810
-------- -------- -------- -------- -------
Net income (loss) $ (6,101) $ (1,896) $ (1,461) $ (1,737) $ 5,214
======== ======== ======== ======== =======
Net income (loss) per share, basic and dilutive $ (0.40) $ (0.13) $ (0.10) $ (0.12) $ 0.38
======== ======== ======== ======== =======

Pro forma net income(1) $ 3,519
=======
Pro forma net income per share, basic and dilutive(1) $ 0.26
=======

Weighted average shares used in computation 15,292 15,075 15,075 14,992 13,627
======== ======== ======== ======== =======

AS OF DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------

Balance Sheet Data:
Total assets $ 15,929 $ 20,947 $ 21,853 $ 24,158 $23,746
Total liabilities 2,097 2,655 1,664 2,501 3,493
Retained earnings (accumulated deficit) (9,223) (3,122) (1,226) 235 2,010
Total stockholders' equity 13,832 18,292 20,188 21,649 20,253

(1) Prior to the date of the initial public offering, the company was treated as
an S corporation pursuant to the Internal Revenue Code. Subsequent to the
effective date of the initial public offering, the company's tax status
reverted to that of a C corporation. The pro forma information presented on
the statement of operations data reflect a provision for income taxes in
1995 as if the company had been taxed as a C corporation for the entire
year, assuming effective tax rates that would have been in effect at such
time. The principal difference between the effective pro forma tax rate and
the statutory federal tax rate relates to state taxes and research and
development tax credits.

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22

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

Smith Micro Software, Inc. develops and sells eCommerce and
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. Smith Micro's eCommerce
software and services enable businesses to create and launch online Internet
storefronts.

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 original
equipment manufacturers, commonly known as OEMs, 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. As a result of our recent merger with PCS,
development efforts are underway to combine the technologies originating from
Smith Micro and PCS to expand the functionality of our eCommerce software and
services.

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. In April 1999 we expanded our Macintosh division with the STF
acquisition. STF develops and sells communications software, primarily fax, to
the Macintosh market. Goodwill recorded in the acquisition of STF was $2,271,000
and will be amortized over seven years. Our Macintosh division is currently
working to provide Internet telephony products for this market. In September
1999, we merged with PCS to provide eCommerce business solutions. In late 1995,
PCS sold its first copy of the original version of WebCatalog, an Internet store
development software designed for the Macintosh. PCS began selling a Windows
version in early 1997 and recently released its Unix version in late 1999.

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 27.6%
in 1999, 4.8% in 1998 and 25.7% in 1997. As a percentage of our net revenues,
returns for stock rotation were 23.9% in 1999, .6% in 1998 and 14.0% 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, primarily U.S Robotics and
its subsidiaries, accounted for approximately 15.2% of our net revenues in 1999,
23.3% of our net revenues in 1998 and 41.4% of our net revenues in 1997. Our
three largest OEM customers, including 3Com, accounted for the following
portions of our net revenues: 26.8% in 1999, 33.0% in 1998 and 54.4% in 1997.

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23

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. Our
strongest retail product continues to be HotFax MessageCenter, which provides
fax, answering machine and data communication functionality via the PC. We
recently began to ship the retail version of our Internet store software
product, WebCatalog Builder. We have expanded into new retail outlets,
particularly office supply chains such as Staples, Office Depot and Office Max
and into numerous Internet retail stores. As a result of this expansion, sales
to Ingram Micro, a retail distributor, were 23.4% of our net revenues in 1999,
18.0% 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 in this Annual Report. 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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24
RESULTS OF OPERATIONS

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

YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
------ ------ ------
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 23.1% 28.7% 31.6%
----- ----- -----
Gross profit 76.9% 71.3% 68.4%
Operating expenses:
Selling and marketing 57.3% 39.3% 30.4%
Research and development 35.8% 33.7% 28.0%
General and administrative 36.7% 35.0% 34.6%
----- ----- -----
Total operating expenses 129.8% 108.0% 93.0%
----- ----- -----
Operating loss (52.9)% (36.7)% (24.6)%
Interest income 4.2% 7.0% 5.8%
----- ----- -----
Income loss before income taxes (48.7)% (29.7)% (18.8)%
Income tax expense (benefit) 8.3% (11.0)% (6.9)%
----- ----- -----
Net loss (57.0)% (18.7)% (11.9)%
===== ===== =====

1999 COMPARED TO 1998

Net Revenues

Our net revenues increased 5.4% to $10.7 million for 1999 from $10.2
million for 1998. Although we experienced a 30% decline in our Windows fax
product sold to modem manufacturers during 1999, our efforts to diversify our
markets generated the growth in our net revenues. Contributions to this increase
came from our retail, Macintosh and eCommerce products.

Gross Profit

Gross profit represents net revenues, less cost of revenues, which
includes costs of materials, costs related to the operations of our duplication
facilities, freight charges and royalties to licensors. Our gross profit
increased 13.6% to $8.2 million in 1999 from $7.2 million in 1998. Gross profit
as a percentage of net revenues increased to 76.9% in 1999 compared to 71.3% in
1998. The increase in our gross profit during 1999 was due primarily to an
increased amount of OEM business derived from royalties, and the increase in
retail revenue that has a higher gross margin.

Operating Expenses

Our selling and marketing expenses consist primarily of personnel
costs, advertising costs, sales commissions and trade show expenses. These
expenses vary significantly from quarter to quarter based on the timing of trade
shows and product introductions. Selling and marketing expenses increased 54.0%
to $6.1 million in 1999 from $4.0 million in 1998. As a percentage of net
revenues, sales and marketing expenses increased to 57.3% in 1999 from 39.3% in
1998. The increase in our sales and marketing expenses in 1999 was primarily due
to increased expenditures for our major retail products, and our expansion
efforts in the eCommerce and Macintosh markets. Our merger with Pacific Coast
Software in September 1999 and the acquisition of STF Technologies in April 1999
were the initial steps in our expansion within the eCommerce and Macintosh
markets.

24
25

Our research and development expenses consist primarily of personnel
and equipment costs required to conduct our software development efforts. We
remain focused on the development and expansion of our technology, particularly
our Internet technologies. Our development efforts include work on our eCommerce
products, Internet telephony and videoconferencing products, including Macintosh
versions, wireless products and new camera support. Research and Development
expenses increased 12.0% to $3.8 million in 1999 from $3.4 million in 1998. As a
percentage of net revenues, research and development expenditures increased to
35.8% in 1999 from 33.7% in 1998. The increase in costs was primarily due to the
additional engineering resources acquired in the expansion of our Macintosh
Division through the acquisition of STF Technologies.

Our general and administrative expenses include expenses related to our
general operations. General and administrative expenses increased 10.3% to $3.9
million in 1999 from $3.6 million in 1998. As a percentage of net revenues,
general and administrative expenditures increased to 36.7% in 1999 from 35.0% in
1998. The increase in general and administrative expense was primarily the
result of the amortization of goodwill related to the STF acquisition, an
increased headcount for support services related to the Macintosh Division, and
costs associated with the merger with PCS.

Income Taxes

Income tax expense was $888,000 in 1999 compared with an income tax
benefit of $1.1 million in 1998. During the third quarter of 1999, we increased
the valuation allowance to offset all deferred tax assets, as recent historical
results of operations provide insufficient evidence that the deferred tax assets
will be realized.

1998 COMPARED TO 1997

Net Revenues

Our net revenues decreased 17.0% to $10.2 million for 1998 from $12.2
million for 1997. 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 1998 decreased 53.4% when compared to 1997. This decrease in our
revenues from analog modem manufacturers was partially offset by an increase in
revenues from other OEM customers, including PC manufacturers, and increased
retail revenues. During 1998, net retail revenues increased approximately 313%
over 1997 net retail revenues.

Gross Profit

Our gross profit decreased 13.4% to $7.2 million in 1998 from $8.4
million in 1997. Gross profit as a percentage of net revenues increased to 71.3%
in 1998 compared to 68.4% in 1997. The increase in our gross profit percentage
was due to a shift in our product mix, our flexible manufacturing process and
our improvement of controls over our manufacturing expenses. These improvements
were partially offset by the translation costs of certain software products.

Operating Expenses

Our selling and marketing expenses increased 7.0% to $4.0 million in
1998 from $3.7 million in 1997. As a percentage of net revenues, sales and
marketing expenses increased to 39.3% in 1998 from 30.4% in 1997. The increase
in our sales and marketing expenses in 1998 was primarily due to increased
expenditures for our major retail products, including expenditures related to
the introduction of Internet CommSuite, a multi-function Internet communications
software product. Expenditures for our corporate and VAR product group,
primarily our LAN fax products, also increased in 1998.

25

26

In 1998, research and development expenses remained constant at $3.4
million as compared to 1997. As a percentage of net revenues, research and
development expenditures increased to 33.7% in 1998 from 28.0% in 1997. An
increase in the amortization of purchased technologies, primarily for the
network fax technology that we acquired in 1998, was offset by a reduction in
salaries and benefits. To date, we have not capitalized any of our software
development expenses because our development efforts have been completed
concurrently with the establishment of technological feasibility. However,
significant new products that we develop in the future may require the
capitalization of certain software development expenses.

General and administrative expenses decreased 15.9% to $3.6 million in
1998 from $4.2 million in 1997. As a percentage of net revenues, general and
administrative expenditures increased to 35.0% in 1998 from 34.6% in 1997,
primarily due to the decrease in our net revenues. The overall decrease was
primarily due to the lower allowance for bad debt in 1998 and cost control
measures that reduced most expense categories during 1998.

Income Taxes

During 1998, our income tax benefit was 37.0% of the loss before income
taxes. Income tax benefit was $1.1 million in 1998 and $839,000 in 1997.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through cash
generated from operations and from proceeds generated by our initial public
offering in 1995. Net cash used in operations was $3.2 million in 1999 compared
to $869,000 in 1998. Net cash provided by operating activities was $127,000 in
1997. The primary use of cash in 1999 and 1998 was the Company's net loss, which
in 1999 was partially offset by the non-cash increase in the valuation allowance
for deferred tax assets and depreciation and amortization. The cash provided by
operations in 1997 was primarily due to a decrease in accounts receivable that
was offset by a net loss for the year.

We used $1.4 million in cash in 1999, $811,000 in 1998 and $221,000 in
1997, for investing activities. Our primary use of cash for investing activities
related to our acquisition of STF Technologies for $1.1 million in cash and
409,164 shares of our Common Stock, and the acquisition of technology from Mitek
in 1998. We also invested in property and equipment, including computers and
production equipment, during each of 1999, 1998 and 1997.

In 1999, $502,000 was generated from the financing activities,
primarily the exercise of stock options, which was offset by the repayment of a
loan assumed in the acquisition of STF.

At December 31, 1999, we had $8.7 million in cash and cash equivalents
and $10.9 million of working capital. We had $3.5 million in accounts
receivable, net of allowance for doubtful accounts and other adjustments. We
currently anticipate that capital expenditures will not vary significantly from
recent years. We anticipate that our present cash balances, together with
internally generated funds, will be sufficient to meet our working capital and
capital expenditure needs throughout 2000.

YEAR 2000 COMPLIANCE

Smith Micro is aware of the issues associated with computer systems
related to the year 2000. As described in previously issued filings, we had
developed plans to address the possible exposures related to the impact on our
computer systems and other operations. Since entering the year 2000, we have not
experienced any disruptions to our business nor are we aware of any significant
Year 2000 related disruptions impacting our customers or suppliers. We will
continue to monitor our critical systems over the next several months but we do
not anticipate any significant impact due to Year 2000 exposures of our internal
systems as well as from the activities of our suppliers and customers. Costs
incurred to achieve Year 2000 readiness were charged to expense as incurred and
have been insignificant.

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27

We currently offer software products that were 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 affect the
functionality of our software products. However, it is possible that our
products, or the hardware or software applications used by one of our customers,
may contain undetected errors or defects associated with Year 2000 date
functions.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

Smith Micro's financial instruments include cash and cash equivalents.
At December 31, 1999, the carrying values of our financial instruments
approximated fair values based on current market prices and rates. Because of
their short duration, changes in market interest rates would not have a
material effect on fair value.

It is our policy not to enter into derivative financial instruments. We
do not currently have any significant foreign currency exposure as we do not
transact business in foreign currencies. As such, we do not have significant
currency exposure at December 31, 1999.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Smith Micro's consolidated financial statements and schedule, as listed
under Item 14, appear in a separate section of this Annual Report on Form 10-K
beginning on page F-1 and S-1, respectively.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

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28

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS

The sections titled "Executive Officers of the Company," "Directors and
Nominees" and "Compliance with Section 16(a) of the Exchange Act" appearing in
Smith Micro's Proxy Statement for the 2000 Annual Meeting of Stockholders is
incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The section titled "Executive Compensation and Related Information"
appearing in Smith Micro's Proxy Statement for the 2000 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section titled "Principal Stockholders" appearing in Smith Micro's
Proxy Statement for the 2000 Annual Meeting of Stockholders is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

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29

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

Smith Micro's financial statements appear in a separate section of this
Annual Report on Form 10-K beginning on the pages referenced below:

PAGE
----

Independent Auditors' Report....................................................F-1
Consolidated Balance Sheets as of December 31, 1999 and 1998....................F-2
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1999...........................................F-3
Consolidated Statements of Stockholders' Equity for each of the three
years in the period ended December 31, 1999..................................F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1999...............................................F-5
Notes to Consolidated Financial Statements for each of the three years
in the period ended December 31, 1999........................................F-7

(2) FINANCIAL STATEMENT SCHEDULE

Smith Micro's financial statement schedule appears in a separate
section of this Annual Report on Form 10-K on the pages referenced below. All
other schedules have been omitted as they are not applicable, not required or
the information is included in the consolidated financial statements or the
notes thereto.

PAGE
----

Independent Auditors' Report....................................................S-1
Schedule II - Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 1999...........................................S-2

(3) EXHIBITS

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

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30

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

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.

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.

30

31

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

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 Distribution Registrant's Quarterly Report on Form 10-Q for the
Agreement, dated April 18, 1996, by and quarter ended September 30, 1996
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

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

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

10.25 Amendment No. 7 to Office Building Lease, Filed Herewith
dated November 5, 1999, by and between the
Company and World Outreach Center.

23.1 Independent Auditors' Consent. Filed Herewith

27 Financial Data Schedule. Filed Herewith

31

32

(b) EXHIBITS ON FORM 8-K

On September 16, 1999, the Company filed a Form 8-K in connection with
the acquisition of Pacific Coast Software, Inc. a California corporation.

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

32

33

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

SMITH MICRO SOFTWARE, INC.

Date: March 29, 2000 By: /s/ William W. Smith, Jr.
-------------------------
William W. Smith, Jr.
Chairman of the Board,
President and Chief Executive Officer

Date: March 29, 2000 By: /s/ Richard C. Bjorkman
-----------------------
Richard C. Bjorkman
Chief Financial Officer
(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ William W. Smith, Jr. Chairman of the Board, March 29, 2000
- -------------------------------- President and Chief Executive Officer
William W. Smith, Jr. (principal executive officer)

/s/ Rhonda L. Smith Vice-Chairman of the Board, Secretary, March 29, 2000
- -------------------------------- Treasurer and Director
Rhonda L. Smith

/s/ Robert W. Scheussler Senior Vice President, Chief Operating March 29, 2000
- -------------------------------- Officer, and Director
Robert W. Scheussler

/s/ Richard C. Bjorkman Vice President of Finance and Chief Financial March 29, 2000
- -------------------------------- Officer (principal financial and accounting
Richard C. Bjorkman officer)

/s/ David Sperling Vice President, Chief Technical Officer March 29, 2000
- --------------------------------
David Sperling

/s/ Thomas G. Campbell Director March 29, 2000
- --------------------------------
Thomas G. Campbell

/s/ David M. Stastny Director March 29, 2000
- --------------------------------
David M. Stastny

33

34

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Smith Micro Software, Inc.:

We have audited the accompanying consolidated balance sheets of Smith Micro
Software, Inc. and subsidiaries (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Smith Micro Software, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.

As discussed in Note 9 to the consolidated financial statements, on September 3,
1999, the Company consummated a merger with Pacific Coast Software, Inc. The
consolidated financial statements give retroactive effect, for all periods
presented, to the merger of Smith Micro Software, Inc. and Pacific Coast
Software, Inc., which has been accounted for as a pooling of interests.

DELOITTE & TOUCHE, LLP
Costa Mesa, California
February 8, 2000

F-1
35

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1999 1998

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 8,704 $ 12,732
Accounts receivable, net of allowances for
doubtful accounts and other adjustments of
$1,944 (1999) and $1,255 (1998) 3,487 4,203
Income taxes receivable 931
Deferred tax asset (Note 4) 470
Inventories 502 630
Prepaid expenses and other current assets 253 423
-------- --------
Total current assets 12,946 19,389

EQUIPMENT AND IMPROVEMENTS, net (Note 2) 456 350
DEFERRED TAX ASSET (Note 4) 336
OTHER ASSETS 215 304
INTANGIBLE ASSETS, net (Note 9) 2,312 568
-------- --------
$ 15,929 $ 20,947
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Accounts payable $ 747 $ 1,470
Accrued liabilities (Note 3) 1,350 1,185
-------- --------
Total current liabilities 2,097 2,655

COMMITMENTS AND CONTINGENCIES (Note 5)

STOCKHOLDERS' EQUITY (Note 8):
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; 15,724,000 and
15,075,000 shares issued and outstanding 16 15
Additional paid-in capital 23,039 21,399
Accumulated deficit (9,223) (3,122)
-------- --------
Total stockholders' equity 13,832 18,292
-------- --------
$ 15,929 $ 20,947
======== ========

See Independent Auditors' Report and notes to consolidated financial statements

F-2
36

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997

NET REVENUES (Note 6) $ 10,700 $ 10,151 $ 12,229

COST OF REVENUES 2,476 2,911 3,868
-------- -------- --------
GROSS PROFIT 8,224 7,240 8,361

OPERATING EXPENSES:
Selling and marketing 6,135 3,984 3,725
Research and development 3,826 3,416 3,420
General and administrative (Note 7) 3,923 3,556 4,227
-------- -------- --------
Total operating expenses 13,884 10,956 11,372
-------- -------- --------

OPERATING LOSS (5,660) (3,716) (3,011)

INTEREST INCOME 447 708 711
-------- -------- --------
LOSS BEFORE INCOME TAXES (5,213) (3,008) (2,300)

INCOME TAX EXPENSE (BENEFIT) (Note 4) 888 (1,112) (839)
-------- -------- --------
NET LOSS $ (6,101) $ (1,896) $ (1,461)
======== ======== ========
NET LOSS PER SHARE, basic and diluted $ (0.40) $ (0.13) $ (0.10)
======== ======== ========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 15,292 15,075 15,075
======== ======== ========

See Independent Auditors' Report and notes to consolidated financial statements

F-3
37

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(IN THOUSANDS)

RETAINED
COMMON STOCK ADDITIONAL EARNINGS
---------------------- PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------- ------- ---------- ------------ -------

BALANCE, January 1, 1997 15,075 $ 15 $21,399 $ 235 $21,649

Net loss (1,461) (1,461)
------ ------- ------- ------- -------
BALANCE, December 31, 1997 15,075 15 21,399 (1,226) 20,188

Net loss (1,896) (1,896)
------ ------- ------- ------- -------
BALANCE, December 31, 1998 15,075 15 21,399 (3,122) 18,292

Issuance of common stock
in acquisition (Note 9) 409 1 999 1,000

Exercise of common stock options 240 641 641

Net loss (6,101) (6,101)
------ ------- ------- ------- -------
BALANCE, December 31, 1999 15,724 $ 16 $23,039 $(9,223) $13,832
====== ======= ======= ======= =======

See Independent Auditors' Report and notes to consolidated financial statements

F-4

38

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,101) $ (1,896) $ (1,461)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 916 833 793
Provision for doubtful accounts and other adjustments
to accounts receivable (689) (158) (409)
Deferred income taxes 805 (200) 82
Change in operating accounts, net of amounts acquired:
Accounts receivable 1,563 (185) 2,592
Income taxes receivable 956 196 (607)
Inventories 199 (76) 12
Prepaid expenses and other assets 192 (373) (193)
Accounts payable and accrued liabilities (1,015) 990 (682)
-------- -------- --------
Net cash (used in) provided by operating activities (3,174) (869) 127

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (265) (164) (221)
Acquisition of STF (1,091)
Acquisition of other technologies (647)
-------- -------- --------
Net cash used in investing activities (1,356) (811) (221)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 641
Repayment of notes payable (139)
-------- -------- --------
Net cash provided by financing activities 502
-------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,028) (1,680) (94)

CASH AND CASH EQUIVALENTS, beginning of year 12,732 14,412 14,506
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 8,704 $ 12,732 $ 14,412
======== ======== ========

See Independent Auditors' Report and notes to consolidated financial statements

F-5

39
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
(IN THOUSANDS)

DECEMBER 31,
---------------------------------
1999 1998 1997

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION -
Cash paid (received) during the year for income taxes $(996) $(1,198) $206
===== ======= ====

DISCLOSURE OF NON-CASH FINANCING AND INVESTING ACTIVITIES.

During 1999, the Company acquired a business in a transaction summarized as
follows:

Fair value of assets acquired, including goodwill of $2,271 $ 2,686
Common stock issued (1,000)
Cash paid (1,091)
-------
Liabilities assumed or created $ 595
=======

See Independent Auditors' Report and notes to consolidated financial statements

F-6

40

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business - Smith Micro Software, Inc. and subsidiaries (the
Company) develops and markets communication software and services. The
Company's communication products allow its customers to communicate
through fax, telephony, video conferencing, multimedia email, video
security, paging and data transmission. The Company's software products
allow communication over a variety of data transmission devices that
include regular telephone lines via analog modems and over the Internet
and other IP protocol services (including the Local Area Networks and
Wide Area Networks) via connectivity hardware including cable modems,
xDSL modems, network interface devices and analog modems. A substantial
portion of the Company's sales are made direct to hardware connectivity
device and personal computer manufacturers under OEM agreements. The
Company sells its communication products through independent
distributors and retail channels. As a result of the merger with Pacific
Coast Software, Inc. (PCS) (Note 9), the Company entered into the
eCommerce market. The Company's eCommerce products enable websites to be
created with standard HTML text and provides fully automated payment
processing and order accounting.

Basis of Presentation - The accompanying consolidated financial
statements reflect the operating results and financial position of Smith
Micro Software, Inc. and its wholly owned subsidiaries in accordance
with accounting principles generally accepted in the United States of
America. All significant intercompany amounts have been eliminated in
consolidation.

Cash and Cash Equivalents - Cash and cash equivalents generally consist
of cash, government securities and money market funds. All have original
maturity dates 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 consolidated 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

F-7

41

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

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 December 31, 1999.

Goodwill and Other Intangibles - Goodwill represents the excess purchase
cost over the net assets acquired and is amortized over 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 method over three years.
Accumulated amortization on goodwill and other intangible assets
amounted to $1.4 million and $841,000 as of December 31, 1999 and 1998,
respectively. The Company periodically evaluates the recoverability of
goodwill based on an undiscounted operating profitability analysis
related to acquired 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 services to its
customers. Such costs have historically been insignificant.

Software revenue is recognized in accordance with the Statement of
Position (SOP) 97-2, Software Revenue Recognition, issued by the
American Institute of Certified Public Accountants which superseded SOP
91-1. SOP 97-2 provides guidance on when revenue should be recognized
for licensing, selling, leasing or otherwise marketing computer
software. The adoption of SOP 97-2 in 1998 had no material impact on the
Company's recognition of revenue.

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 December 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

F-8

42

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

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.
During the year ended December 31, 1999, a full valuation allowance was
provided for all deferred tax assets.

Fair Value of Financial Instruments - Pursuant to SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, the Company is
required to disclose the fair value of all financial instruments
included on its consolidated balance sheets. 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 Loss per Share - Pursuant to SFAS No. 128, Earnings per Share, the
Company is required to provide dual presentation of "basic" and
"diluted" earnings (loss) 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. Therefore, there was no difference between basic
and diluted EPS for each period presented.

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 non-owner sources. For each of the years ended December 31,
1999, 1998 and 1997, there was no difference between net loss and
comprehensive loss.

Reclassifications and Restatements - Certain reclassifications have been
made to the prior years' financial statements to conform to the current
year presentation. In addition, all prior year amounts have been
restated for the merger with PCS in September 1999, which was accounted
for as a pooling of interests (Note 9).

F-9
43

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

2. EQUIPMENT AND IMPROVEMENTS

Equipment and improvements consist of the following (in thousands):

DECEMBER 31,
-----------------------
1999 1998

Machinery and equipment $ 2,030 $ 1,056
Leasehold improvements 170 143
Office furniture and fixtures 246 244
------- -------
2,446 1,443

Less accumulated depreciation and amortization (1,990) (1,093)
------- -------
$ 456 $ 350
======= =======

3. ACCRUED LIABILITIES

Accrued liabilities consist of the following (in thousands):

DECEMBER 31,
-----------------------
1999 1998

Salaries and benefits $ 466 $ 505
Cooperative advertising and rebates 410 357
Royalties 191 56
Manufacturers' representative commissions 32 114
Other 251 153
------ ------
$1,350 $1,185
====== ======

F-10

44
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

4. INCOME TAXES

A summary of the income tax expense (benefit) is as follows (in
thousands):

YEAR ENDED DECEMBER 31,
-------------------------------------
1999 1998 1997

Current:
Federal $ 19 $(1,071) $(981)
State 7 74 6
Foreign 57 85 54
------- ------- -----
83 (912) (921)
Deferred:
Federal (2,433) 26 202
State (297) (226) (120)
Change in valuation allowance 3,535
------- ------- -----
805 (200) 82
------- ------- -----
$ 888 $(1,112) $(839)
======= ======= =====

A reconciliation of the provision (benefit) for income taxes to the
amount of income tax expense that would result from applying the federal
statutory rate (35%) to income before provision for taxes is as follows:

DECEMBER 31,
-------------------------------------
1999 1998 1997
------- ------- -----

Federal statutory rate (35)% (35)% (35)%
State tax, net of federal benefit 6 (3) (3)
Nondeductible expense related to
acquired intangibles 2 3 4
Other (3) (1) (1)
Change in valuation allowance 47 0 0
------- ------- -----
17% (36)% (35)%
======= ======= =====

F-11

45

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

The major components of the Company's deferred tax assets and
liabilities are as follows (in thousands):

DECEMBER 31,
---------------------
1999 1998

Various reserves $ 785 $ 564
Nondeductible accruals 74 74
Accrual to cash adjustment (44)
State taxes 1 (153)
Prepaid expenses (52) (90)
Credit carryforwards 481 216
Net operating loss carryforwards 2,172 234
Fixed Assets 74 3
Other 0 2
------- -----
Subtotal $ 3,535 $ 806
Valuation Allowance (3,535) 0
------- -----
$ 0 $ 806
======= =====

The Company has federal and state net operating loss carryforwards of
approximately $5,051,000 and $5,200,000, respectively, at December 31,
1999. These federal and state net operating loss carryforwards will
begin to expire in 2019 and 2002, respectively. In addition, the
Company has federal and state tax credit carryforwards of
approximately $368,000 and $113,000, respectively, at December 31,
1999.

As of December 31, 1999, a valuation allowance of approximately
$3,535,000 has been provided based upon the Company's assessment that
it is more likely than not that sufficient taxable income will not be
generated to realize the tax benefits of these temporary differences.

Additionally, as of December 31, 1999, approximately $332,000 of the
valuation allowance was attributable to the potential tax benefit of
stock option transactions that will be credited directly to additional
paid in capital, if realized.

5. COMMITMENTS AND CONTINGENCIES

Leases - The Company has noncancelable operating leases for its building
facilities which expire on various dates through February 28, 2005.
Future minimum rental commitments under leases with terms of one year or
more consist of the following (in thousands):

F-12

46

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

Year ending December 31:
2000 $ 678
2001 727
2002 736
2003 340
2004 127
Thereafter 10
------
$2,618
======

Total rent expense was $707,000, $636,000 and $552,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.

Litigation - The Company is subject to litigation in the normal course
of business, none of which management believes will have a material
adverse effect on the Company's financial condition or results of
operations.

6. 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 began selling software in the eCommerce
market with the merger with PCS (Note 9). Sales of eCommerce software
were immaterial for the periods being presented. The Company's software
products are developed, sold and marketed by common departments within
the Company.

OEM product sales were 58.0%, 67.2% and 90.6% of net revenues in 1999,
1998 and 1997, respectively. Sales of retail products were 31.9%, 24.8%
and 5.0% of net revenues in 1999, 1998 and 1997, respectively. Sales of
other products accounted for less than 10% of net revenues in each of
the three year periods.

Sales to individual customers and their affiliates which amounted to
more than 10% of the Company's net revenues in the year indicated were
as follows:

DECEMBER 31,
---------------------------------
1999 1998 1997

Customer:
1 - (OEM) 15.2% 23.3% 41.4%
2 - (Retail) 23.4 18.0 --
---- ---- ----
38.6% 41.3% 41.4%
==== ==== ====

F-13
47

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

Accounts receivable from these two customers were $1,862,000 and
$452,000 at December 31, 1999 and $1,886,000 and $582,000 at December
31, 1998, respectively.

The Company has historically derived a significant portion of its
revenues from a relatively small number of customers. A decision by a
significant customer to substantially decrease or delay purchases from
the Company or the Company's inability to collect receivables from these
customers could have a material adverse effect on the Company's
financial condition and results of operations.

The Company also has export sales representing 17.8%, 21.5% and 23.3% of
its net revenues for the years ended December 31, 1999, 1998 and 1997,
respectively. Sales to customers in the Asia Pacific region were 11.7%,
15.1% and 11.1% of net revenues for the years ended December 31, 1999,
1998 and 1997, respectively. All export sales have been denominated in
U.S. dollars.

7. PROFIT SHARING

The Company offers its employees a 401(k) plan, in which the Company
matches the employee contribution at a rate of 20%, subject to a vesting
schedule. Total employer contributions amounted to $71,000, $42,000 and
$49,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.

8. STOCK-BASED COMPENSATION

In 1995, the Company adopted the 1995 Stock Option/Stock Issuance Plan
(the Plan). The Plan, as amended, provides for issuance of, or options
to be granted for the purchase of, an aggregate of 1,750,000 shares of
common stock. Under the terms of the Plan, incentive and nonqualified
options may be granted at an exercise price not less than 100% and 85%,
respectively, of the fair market value on the grant date, with terms of
up to 10 years, and with vesting to be determined by the Board of
Directors.

During 1997, the Company canceled 381,000 options held by certain
employees and simultaneously issued 381,000 options to the same
employees with a vesting period of two or three years depending upon the
grant date of the options canceled.

F-14

48
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

Stock option activity under the Plan is as follows:

WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE

OUTSTANDING, January 1, 1997 (138,000 shares
exercisable at weighted average
exercise price of $7.90) 627,000 7.85
Granted (weighted average fair value of $2.12) 746,000 2.89
Canceled (565,000) 7.21
---------
OUTSTANDING, December 31, 1997 (164,000 shares 3.72
exercisable at weighted average
exercise price of $6.01) 808,000 3.72
Granted (weighted average fair value of $1.34) 507,000 1.61
Canceled (152,000) 3.38
---------
OUTSTANDING, December 31, 1998 (382,000 shares
exercisable at weighted average
exercise price of $4.23) 1,163,000 2.85
Granted (weighted average fair value of $1.12) 373,000 1.72
Exercised (240,000) 2.67
Canceled (225,000) 2.88
---------
OUTSTANDING, December 31, 1999 1,071,000 2.72
=========

Additional information regarding options outstanding as of December 31,
1999 is as follows:

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE

$1.44 - $ 2.25 571,000 9.3 $ 1.60 130,000 $ 1.56
$2.88 - $ 3.13 404,000 7.6 $ 2.90 263,000 $ 2.90
$6.40 - $ 7.25 53,000 5.8 $ 6.85 52,000 $ 6.84
$9.07 - $14.00 43,000 5.8 $11.00 43,000 $11.00
--------- -------
1,071,000 8.3 $ 2.72 488,000 $ 3.67
========= =======

At December 31, 1999, 414,000 shares were available for future grants
under the Stock Option Plan.

F-15
49

SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

Additional Stock Plan Information - As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic
value method in accordance with APB Opinion No. 25 and its related
interpretations. No compensation expense has been recognized in the
consolidated financial statements for employee stock arrangements as all
grants have been made with an exercise price equal to the fair market
value of the underlying shares at the date of grant.

SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss and loss per share had the Company
adopted the fair value method as of the beginning of fiscal 1995. Under
SFAS No. 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such
models were developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These
models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values.

The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected
life, 48 months following vesting (ranging from 4 to 8 years); stock
volatility, 105%, 89% and 86% for grants issued in 1999, 1998 and 1997,
respectively; risk-free interest rates, 5.5%, 5.2% and 5.9% in 1999,
1998 and 1997, respectively; and no dividends during the expected term.
The Company's calculations are based on a single-option valuation
approach, and forfeitures or cancellations are recognized as they occur.
If the computed fair values of the 1999, 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma
net loss would have been $(6,420,000), or $(.42) per share, in 1999,
$(2,267,000), or $(.15) per share, in 1998 and $(1,692,000), or $(.11)
per share, in 1997.

9. ACQUISITIONS

On September 3, 1999, Smith Micro acquired all of the outstanding
capital stock of Pacific Coast Software, Inc. (the "PCS Merger") in
exchange for one million shares of Smith Micro common stock. PCS is a
developer and publisher of eCommerce software products and provides
development and web hosting services to its customers. PCS is
headquartered in San Diego, California and as a result of the PCS
Merger, PCS became a wholly owned subsidiary of Smith Micro. The
merger was treated as a pooling of interests for accounting
purposes and the Company's historical financial statements and footnotes
have been restated to reflect the combined amounts for all periods
reported. Direct expenses of the transaction amounted to $187,000 and
are included in general and administrative expenses.

The following table shows the separate historical results of the Company
and PCS for the six months ended June 30, 1999 and the years ended
December 31, 1998 and 1997. Amounts are shown in thousands.

F-16

50
SMITH MICRO SOFTWARE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999 (CONTINUED)
- --------------------------------------------------------------------------------

Six Months Years Ended December 31,
Ended ------------------------
June 30, 1999 1998 1997
------------- ------- -------
(unaudited)

Revenues:
Smith Micro $ 6,067 $ 9,547 $11,684
PCS 331 604 545
------- ------- -------
Total $ 6,398 $10,151 $12,229
======= ======= =======
Net income (loss):
Smith Micro $(1,376) $(1,998) $(1,587)
PCS (42) 102 126
------- ------- -------
Total $(1,418) $(1,896) $(1,461)
======= ======= =======

On April 9, 1999, Smith Micro acquired all of the outstanding capital
stock of STF Technologies, Inc. (the "STF Acquisition") 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 was headquartered in Concordia, Missouri and, as
a result of the STF 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.

Unaudited pro forma consolidated results of operations for the years
ended December 31, 1999 and 1998 would have been as follows had the STF
Acquisition occurred as of January 1, of each year (in thousands, except
per share data):

For the Years
Ended December 31,
-------------------------
1999 1998
------- -------

Pro forma net revenues $11,077 $12,615
======= =======
Pro forma net loss $(6,360) $(2,235)
======= =======
Pro forma net loss per share, basic and diluted $ (0.42) $ (0.14)
======= =======
Pro forma weighted average number of shares outstanding 15,292 15,484
======= =======

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 of each
year. The pro forma adjustment for amortization related to intangible
assets acquired was $81,000 for the period ended December 31, 1999 and
$324,000 for the period ended December 31, 1998.

In January 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, the Internet and
intranets.

F-17

51

INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To the Stockholders of
Smith Micro Software, Inc.:

We have audited the consolidated financial statements of Smith Micro
Software, Inc. and subsidiaries as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999, and
have issued our report thereon dated February 8, 2000, included
elsewhere in this Annual Report on Form 10-K. Our audits also included
the financial statement schedule listed in Item 14a(2). This financial
statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a
whole presents fairly, in all material respects, the information set
forth therein.

DELOITTE & TOUCHE, LLP
Costa Mesa, California
February 8, 2000

S-1

52

SMITH MICRO SOFTWARE INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS
IN THE PERIOD ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(IN THOUSANDS)

ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD

Allowance for doubtful accounts and
other adjustments(1):
1999 $1,255 $1,723 $(1,034) $1,944
1998 1,413 2,227 (2,385) 1,255
1997 1,822 2,335 (2,744) 1,413

- ------------------
(1) Other adjustments relate principally to sales returns.

S-2

53

EXHIBIT INDEX

Exhibit
No. Description
- ------- -----------

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.

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.

54
EXHIBIT INDEX (CONTINUED)

Exhibit
No. Description
- ------- -----------

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 Distribution Registrant's Quarterly Report on Form 10-Q for the
Agreement, dated April 18, 1996, by and quarter ended September 30, 1996
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

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

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

10.25 Amendment No. 7 to Office Building Lease, Filed Herewith
dated November 5, 1999, by and between the
Company and World Outreach Center.

23.1 Independent Auditors' Consent. Filed Herewith

27 Financial Data Schedule. Filed Herewith