10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTER ENDED MARCH 31, 2003

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

COMMISSION FILE NUMBER 0-26536

SMITH MICRO SOFTWARE, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE (STATE OR OTHER JURISDICTION OF ORGANIZATION)	33-0029027 (I.R.S. EMPLOYER INCORPORATION OR IDENTIFICATION NUMBER)
51 COLUMBIA, SUITE 200, ALISO VIEJO, CA (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	92656 (ZIP CODE)

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

          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 whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES [  ]   NO [ X ]

          As of April 30, 2003, there were 16,202,819 shares of Common Stock outstanding.

1

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		UNAUDITED CONSOLIDATED BALANCE SHEETS
		UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
		UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
CERTIFICATIONS:
EXHIBIT INDEX
EXHIBIT 99.1

SMITH MICRO SOFTWARE, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Unaudited Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002	3
	Unaudited Consolidated Statements of Operations For The Three Months Ended March 31, 2003 and March 31, 2002	4
	Unaudited Consolidated Statements of Cash Flows For The Three Months Ended March 31, 2003 and March 31, 2002	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	24
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	25
Item 2.	Changes In Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters To A Vote Of Security Holders	25
Item 5.	Other Information	25
Item 6.	Exhibits and Reports On Form 8-K	25
Signatures		26
Certifications		27

2

     PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

		March 31,			December 31,
		2003			2002
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	3,450		$	3,627
Accounts receivable, net of allowances for doubtful accounts and other adjustments of $463 (2003) and $565 (2002)			667			633
Inventories, net			33			45
Prepaid expenses and other current assets			219			263
	Total current assets		4,369			4,568
EQUIPMENT AND IMPROVEMENTS, net			165			220
INTANGIBLE ASSETS, net			153			224
GOODWILL			1,715			1,715
OTHER ASSETS			32			39
		$	6,434		$	6,766
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	497		$	445
Accrued liabilities			583			709
	Total current liabilities		1,080			1,154
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, par value $0.001 per share; 5,000,000 shares authorized; none issued and outstanding
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 16,211,000 and 16,227,000 shares issued and outstanding at March 31, 2003 and December 31, 2002, respectively			16			16
Additional paid-in capital			24,779			24,787
Accumulated deficit			(19,441	)		(19,191	)
	Net stockholders’ equity		5,354			5,612
		$	6,434		$	6,766

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

3

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

			Three Months Ended
			March 31,
			2003			2002
NET REVENUES
	Products		$	1,585		$	1,457
	Services			282			436
		Total Net Revenues		1,867			1,893
COST OF REVENUES
	Products			321			370
	Services			84			399
		Total Cost of Revenues		405			769
GROSS PROFIT				1,462			1,124
OPERATING EXPENSES:
Selling and marketing				582			665
Research and development				654			540
General and administrative				468			489
	Total operating expenses			1,704			1,694
OPERATING LOSS				(242	)		(570	)
INTEREST INCOME				7			12
INTEREST AND OTHER EXPENSE				(12	)		(20	)
LOSS BEFORE INCOME TAXES				(247	)		(578	)
INCOME TAX EXPENSE				3			4
NET LOSS			$	(250	)	$	(582	)
NET LOSS PER SHARE, basic and diluted			$	(0.02	)	$	(0.04	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING, basic and diluted				16,223			16,232

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

4

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

				Three Months
				Ended March 31,
				2003			2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss				$	(250	)	$	(582	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization				138			145
	Provision for doubtful accounts and other adjustments to accounts receivable				25			64
	Change in operating accounts:
		Accounts receivable			(59	)		574
		Inventories			12			68
		Prepaid expenses and other assets			44			(4	)
		Accounts payable and accrued liabilities			(74	)		(938	)
			Net cash used in operating activities		(164	)		(673	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures					(5	)		(11	)
			Net cash used in investing activities		(5	)		(11	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash used in repurchase of common stock					(8	)		—
			Net cash used in financing activities		(8	)		—
NET DECREASE IN CASH AND CASH EQUIVALENTS					(177	)		(684	)
CASH AND CASH EQUIVALENTS, beginning of period					3,627			3,226
CASH AND CASH EQUIVALENTS, end of period				$	3,450		$	2,542
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes				$	3		$	4

SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.

5

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

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Description of Business - Smith Micro Software, Inc. and subsidiaries (“Smith Micro” or the “Company”) develops and markets wireless communication and utility software products. The Company designs integrated, cross platform, easy-to-use software for personal computing and business solutions around the world. With a focus on the Internet, wireless, and broadband technologies, the Company’s products and services enable eBusiness, Internet communications (voice-over-IP), video conferencing, wireless communications, and network fax, along with traditional computer telephony. This quarter, the Company announced its latest addition to the QuickLink family, namely Windows software solutions that take advantage of the exploding demand for Wi-Fi (802.11) services. Smith Micro’s complete line of products is available through direct sales, retail stores, value-added resellers (“VAR”) and original equipment manufacturers (“OEM”). The Company also offers professional services consulting which include methodologies to help clients focus, define and prioritize Internet investments; develop eBusiness sites and custom eBusiness applications; implement tools to increase revenue per online transaction and transactions per customer; warehouse, mine and integrate data for enhanced accessibility and effective decision support; and select the right technology infrastructure to support eBusiness. An extension of the Company’s eBusiness activity includes the offering of fulfillment services for customer web stores. A portion of the Company’s sales are made direct to hardware device and personal computer manufacturers under OEM agreements. The Company sells communication and diagnostic utility products through independent distributors and retail channels. The Company’s eBusiness products enable websites to be created with standard HTML text and provide fully automated payment processing and order accounting.

          Basis of Presentation - The accompanying unaudited interim consolidated financial statements reflect adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position of the Company at March 31, 2003, and the results of its operations and cash flows for the three month periods ended March 31, 2003 and 2002. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures in the unaudited consolidated financial statements are adequate to ensure the information presented is not misleading. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002. The results of operations of interim periods are not necessarily indicative of the operating results for the year.

          Cash and Cash Equivalents - Cash and cash equivalents generally consist of cash, government securities and money market funds. These securities are all held in one financial institution. 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 estimated credit losses, and those losses have been within management’s expectations. Allowances for product returns are included in other adjustments to accounts receivable on the accompanying consolidated balance sheets.

          Inventories - Inventories consist principally of manuals and CDs and are stated at the lower of cost (determined by the first-in, first-out method) or market. The Company regularly reviews its inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on management’s estimated forecast of product demand and production requirements.

          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. 144, Accounting for Impairment or Disposal of Long-Lived Assets. In accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. The Company periodically reviews the carrying value of long-lived assets to determine whether or not an impairment to such value has occurred. The Company has determined that there was no impairment at March 31, 2003.

6

          Revenue Recognition - Software revenue is recognized in accordance with the Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended, when persuasive evidence of an arrangement exists, delivery has occurred, the price to seller is fixed and determinable, and collectibility is probable. The Company generally recognizes revenues from sales of its software as completed products are shipped and title passes and from royalties generated as authorized customers duplicate the Company’s software. Returns from OEM customers are generally limited to defective goods or goods shipped in error. The Company may permit retail customers to return or exchange product and may provide price protection on products unsold by a customer. As a result revenue from resellers is recognized upon sell-through to the end customer, rather than upon shipment. The Company also provides technical support to its customers. Such costs have historically been insignificant.

          Consulting services and hosting revenues are recognized as services are provided or as milestones are delivered and accepted by customers.

          Sales Incentives – The Company accounts for sales incentives in accordance with Emerging Issues Task Force (“EITF”) Issue 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Product). Pursuant to the consensus of Issue 01-09, the cost of sales incentives the Company offers without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction is required to be accounted for as a reduction 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 March 31, 2003, software has been substantially completed concurrently with the establishment of technological feasibility; and, accordingly, no costs have been capitalized to date.

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

          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 and related interpretations.

          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 four to eight years); stock volatility, 131% and 170% for grants issued in 2003 and 2002, respectively; risk-free interest rates of 4.39% in the three months ended March 31, 2002; 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 2003 and 2002 awards had been amortized to expense over the vesting period of the awards, pro forma net loss would have been as follows:

7

		Three Months Ended March 31,
		2003			2002
		(in thousands, except per share data)
Net Loss:
Net loss, as reported		$	(250	)	$	(582	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects						(233	)
	Pro forma net loss	$	(250	)	$	(815	)
Loss per Common Share
	Basic and diluted, as reported	$	(0.02	)	$	(0.04	)
	Basic and diluted, pro forma	$	(0.02	)	$	(0.05	)

          Net Income (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. Potential common shares of 524,000 and 77,000 have been excluded from diluted weighted average common shares for the three month periods ended March 31, 2003 and 2002, respectively. Therefore, there was no difference between basic and diluted EPS for each period presented.

          Fulfillment Services - The Company currently holds approximately $500,000 of consigned inventory for a customer, which is used to fulfill internet orders. As the Company does not hold title to the inventory, it is not recorded in the accompanying consolidated balance sheet. In addition, the Company receives cash for internet fulfillment orders which is paid out to the fulfillment customer on a monthly basis net of the Company’s service fee. Such cash and the related payable are recorded on a net basis.

          Segment Information – The Company currently operates in two business segments: products and services. In addition, revenues are broken down into three markets, Wireless and Broadband products, Macintosh products, and Internet and Software Solutions. The Company’s Internet Solutions market includes Internet based software products as well as consulting, fulfillment and hosting revenue.

     The Company does not separately allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only revenues and cost of revenues.

     The following table shows the net revenues and cost of revenues generated by each segment:

8

			Three Months Ended March 31,
	2003				2002
			(in thousands)
	Products		Services		Products		Services
Wireless and Broadband	$	797	$	—	$	450	$	—
MacIntosh		436				470
Internet and Software Solutions		352		282		537		436
Total Revenues		1,585		282		1,457		436
Cost of revenues		321		84		370		399
Gross Profit	$	1,264	$	198	$	1,087	$	37

          Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 – Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. For each of the periods ended March 31, 2003 and 2002, there was no difference between net income (loss), as reported, and comprehensive income (loss).

2. NEW ACCOUNTING PRONOUNCEMENTS

          In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS No. 146 effective January 1, 2003 and such adoption did not have a material effect on the consolidated financial statements.

          In November 2002, the FASB issued FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the disclosure provisions of FIN No. 45 in the fourth quarter of 2002 and adopted the recognition provisions effective January 1, 2003. The adoption of the recognition provisions of FIN 45 did not have a material effect the consolidated financial statements as the estimated fair value of guarantees issued was not significant.

          In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation

9

and the effect of the method used on reported results. The Company is required to follow the prescribed disclosure format and has provided the additional disclosures required by SFAS No. 148 for the three months ended March 31, 2003.

          In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN No. 46 did not have a material impact on the Company’s financial position or results of operations because it has no variable interest entities.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

          Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets. As a result of adopting SFAS No. 142, the Company’s goodwill is no longer amortized, but is subject to an impairment test at least annually. The following table sets forth the intangible assets by major asset class:

			March 31, 2003							December 31, 2002
	Useful
	Life				Accumulated			Net Book				Accumulated			Net Book
	(Years)		Gross		Amortization			Value		Gross		Amortization			Value
(in thousands)
Goodwill			$	1,715	$	—		$	1,715	$	1,715	$	—		$	1,715
Other Intangible Assets (Amortizing):
Purchased and Licensed Technology		3	$	2,260	$	(2,107	)	$	153	$	2,260	$	(2,036	)	$	224

          Aggregate amortization expense on intangible assets was approximately $71,000 for the three months ended March 31, 2003 and $284,000 for the year ended December 31, 2002. The estimated amortization expense for acquired technology is approximately $184,000 and $40,000 for fiscal years ending December 31, 2003, and 2004, respectively, at which time all amortizing intangible assets, which existed at December 31, 2002, will be fully amortized.

          The Company’s reporting units are equivalent to its operating segments. At March 31, 2003 the amount of goodwill allocated to the products segment is $1,380,000. The amount of goodwill allocated to the services segment is $335,000.

10

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                 RESULTS OF OPERATIONS

          Certain Statements In This Report, Including Statements Regarding The Company’s Strategy, Financial Performance And Revenue Sources, Are Forward-Looking Statements Within The Meaning Of The Private Securities Litigation Reform Act Of 1995, Section 21e Of The Securities Exchange Act Of 1934, As Amended, And Section 27a Of The Securities Act Of 1933, As Amended, And Are Subject To The Safe Harbors Created By Those Sections. These Forward-Looking Statements Are Based On Current Expectations And Entail Various Risks And Uncertainties That Could Cause Actual Results To Differ Materially From Those Expressed In Such Forward-Looking Statements. The Company’s Actual Results Could Differ Materially From The Results Anticipated In These Forward-Looking Statements As A Result Of Certain Factors Set Forth Under “Risk Factors” And Elsewhere In This Report. Readers Are Urged To Carefully Review And Consider The Various Disclosures Made By The Company In This Report And In The Company’s Other Reports Filed With The SEC, Including The Company’s Annual Report On Form 10-K For The Year Ended December 31, 2002 And Our Subsequent Reports On Forms 10-Q And 8-K, That Attempt To Advise Interested Parties Of Certain Risks And Factors That May Affect The Company’s Business. Readers Are Cautioned Not To Place Undue Reliance On These Forward-Looking Statements. You Should Read The Following Discussion And Analysis In Conjunction With The Company’s Consolidated Financial Statements And Notes Thereto Contained Elsewhere In This Report.

          We Do Not Undertake Any Obligation To Revise Or Update Publicly Any Forward-Looking Statements For Any Reason. Additional Information On Various Risk And Uncertainties Potentially Affecting Our Results Are Discussed Below And Are Contained In Publicly Filed Disclosures Available Though SEC’s EDGAR Database (http://www.sec.gov) Or From Our Investor Relations Department.

OVERVIEW

          We are a developer and marketer of wireless, communications, diagnostic, utility and eBusiness software products as well as a provider of Internet consulting and hosting services. We design integrated, cross platform, easy-to-use software for personal computing and business solutions. Our software includes products developed for the wireless, Internet and broadband technologies, products that enable wireless communications, eBusiness, Internet communications (voice-over-IP), video conferencing, general system utility and diagnostic products and network fax along with traditional computer telephony. An extension of the Company’s eBusiness activity includes the offering of fulfillment services for customer web stores.

          We continue to develop new products that leverage off our core technologies. We also leverage our experience and position with original equipment manufacturers, commonly known as OEM’s, to deploy these new product releases. Additionally, we are expanding our customer base to include wireless service providers and manufacturers that produce wireless handsets and produce devices that take advantage of the high bandwidth Internet connectivity such as cable and xDSL modems. Our 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 intranets.

          We were first incorporated in California in 1983 and later reincorporated in Delaware in 1995. In 1985, we shipped our first data communication software product. At that time, we 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 Internet 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 surety, fax, video conferencing and text based chat functionality over the Internet and other IP protocol services such as LAN’s and WAN’s. 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 products with the acquisition of STF Technologies, Inc. This acquisition enhanced our ability to develop and sell communications (primarily fax) software to the Macintosh market. In September 1999, we acquired Pacific Coast Software so that we could offer eBusiness business solutions. In July 2000, we acquired the TouchStone CheckIt® product line. We market these products under the Smith Micro CheckIt® brand including CheckIt® Firewall. Finally, in September 2000 we acquired the consulting practice unit of QuickStart Technologies, Inc., a provider of integrated Internet business services to middle market companies.

11

          Our products for the consumer and business markets are available through Internet sales, retail stores, direct sales, eTailers and value-added resellers (VARs). Retail outlets that sell our products include CompUSA, Office Depot, Micro Center, Staples, Circuit City, PC Connections, Multiplezones, and Fry’s Electronics. Our products can be purchased at many online locations, including Buy.com, Beyond.com and Amazon.com. In the original equipment manufacturers (or OEM) market we are a supplier of communication and diagnostic utility software, having shipped over 40 million copies of products. This quarter, we announced our latest addition to the QuickLink family, namely Windows software solutions that take advantage of the exploding demand for Wi-Fi (802.11) services. QuickLink Mobile Wi-Fi provides notebook users with the ability to easily roam between wireless wide area networks (“WWAN”) and Wi-Fi hot spots. QuickLink Wi-Fi allows users to seek out and select available hot spots in their area. Our OEM customers include manufacturers of wireless devices and services, personal computers, digital cameras and data modems. We currently maintain OEM relationships with several companies including Verizon, Tektronix, Hughes Network Systems, Apple, Hewlett Packard, Gateway, Brother International, Philips Consumer Electronics, Viking Components, Zoom, D-Link, Audiovox, LGIC, and Kyocera.

          Our Internet and Software Solutions Division services include supporting our WebCatalog product, complete website design and installation, website hosting and co-location services and application service provider services for WebCatalog. Our eBusiness customers include Kyocera/Infocomm, Harmon Multimedia, Diedrich’s Coffee and Boomtown Casino, among others. An extension of the Company’s eBusiness activity includes the offering of fulfillment services for customer web stores.

CRITICAL ACCOUNTING POLICIES

          Our discussion and analysis of results of operations, financial condition and liquidity are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments 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 period. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may materially differ from these estimates under different assumptions or conditions. On an on-going basis, we review our estimates to ensure that the estimates appropriately reflect changes in our business or as new information becomes available.

          We believe the following critical accounting policies affect our more significant estimates and assumptions used in the preparation of our consolidated financial statements:

          Revenue Recognition - Software revenue is recognized in accordance with the Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended, when persuasive evidence of an arrangement exists, delivery has occurred, the price to seller is fixed and determinable, and collectibility is probable. We generally recognize revenues from sales of our software as completed products are shipped and title passes and from royalties generated as authorized customers duplicate our software. Returns from OEM customers are generally limited to defective goods or goods shipped in error. We may permit retail customers to return or exchange product and may provide price protection on products unsold by a customer. As a result revenue from resellers is recognized upon sell-through to the end customer, rather than upon shipment. We also provide technical support to our customers. Such costs have historically been insignificant.

          Consulting services and hosting revenues are recognized as services are provided or as milestones are delivered and accepted by customers.

          Sales Incentives – We account for sales incentives in accordance with EITF Issue 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Product). Pursuant to the consensus of Issue 01-09, the cost of sales incentives we offer without charge to customers that can be used in, or that are exercisable by a customer as a result of, a single exchange transaction is required to be accounted for as a reduction of revenue.

          Accounts Receivable – We sell our products worldwide. We perform ongoing credit evaluations of our customers and generally do not require collateral. We maintain reserves for estimated credit losses, and those losses have historically been within our expectations. We cannot, however, guarantee that we will continue to experience the same credit loss rates that we have in the past. If not, this could have an adverse effect on our consolidated financial statements. Allowances for product returns are included in other adjustments to accounts receivable on the accompanying consolidated balance sheet.

          Long Lived Assets - We account for the impairment and disposition of long-lived assets in accordance with SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. In accordance with SFAS No. 144, long-lived assets to be held are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. We periodically

12

review the carrying value of long-lived assets to determine whether or not an impairment to such value has occurred. We have determined that there was no impairment at March 31, 2003.

RESULTS OF OPERATIONS

          The following table sets forth, for the periods indicated, certain statement of operations data expressed as a percentage of total revenue.

		Three Months Ended
		March 31,
		2003			2002
Net Revenues:
	Products		84.9	%		77.0	%
	Services		15.1	%		23.0	%
Total net revenues			100.0	%		100.0	%
Cost of revenues:
	Products		17.2	%		19.5	%
	Services		4.5	%		21.1	%
Total cost of revenues			21.7	%		40.6	%
Gross profit			78.3	%		59.4	%
Operating expenses:
	Selling and marketing		31.2	%		35.1	%
	Research and development		35.0	%		28.6	%
	General and administrative		25.1	%		25.8	%
Total operating expenses			91.3	%		89.5	%
Operating loss			-13.0	%		-30.1	%
Interest income			0.4	%		0.6	%
Interest and other expenses			-0.6	%		-1.0	%
Loss before income taxes			-13.2	%		-30.5	%
Income tax benefit (expense)			0.2	%		0.2	%
Net income (loss)			-13.4	%		-30.7	%

Three months ended March 31, 2003 and 2002

Revenues

          Total net revenues were relatively constant at $1.9 million for both the three months ended March 31, 2003 and 2002, respectively.

          Products. Net product revenues were $1.6 million and $1.5 million in the three months ended March 31, 2003 and 2002, respectively, representing an increase of $128,000, or 8.8%, from 2002 to 2003. While Wireless and Broadband sales to both new and existing customers increased, sales in our Internet Solutions Division were reduced by the reduced emphasis on retail channel software sales. Products revenue accounted for 84.9% of total revenues in the three months ended March 31, 2003 compared with 77.0% of total revenues in the comparable period of 2002.

          Services. Services revenues were $282,000 and $436,000 in the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $154,000 or 35.3%, from 2002 to 2003. The announcement of a new strategic direction for our Internet Solutions Division resulted in the cessation of significant Microsoft Product consulting in 2002. Services revenue accounted for 15.1% of total revenues in the three months ended March 31, 2003 compared with 23.0% of total revenues in the comparable period of 2002.

13

Cost of Revenues

          Cost of Product Revenues. Cost of product revenues was $321,000 and $370,000 in the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $49,000, or 13.2%, from 2002 to 2003. Cost of product revenue as a percentage of product revenues was 20.3% and 25.4% for 2003 and 2002, respectively. The decrease in the cost of product revenue in 2003 is a direct result of the higher percentage download sales with reduced emphasis on the retail channel.

          Cost of Service Revenues. Cost of service revenues was $84,000 and $399,000 in the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $315,000 or 79.0%, from 2002 to 2003. Cost of service revenue as a percentage of service revenues was 29.8% and 91.5% for 2003 and 2002, respectively. Cost of service revenues includes the cost of our consulting personnel and the cost of hiring outside contractors to support our staff of consultants. The absolute dollar decrease in the total cost of service revenues was primarily the result of our cost reduction measures, which consisted primarily of reductions in headcount.

Operating Expenses

          Selling and Marketing. Selling and marketing expenses were $582,000 and $665,000 in the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $83,000, or 12.5%, from 2002 to 2003. 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. The decrease in our selling and marketing expenses were the result of the reduction in retail channel focus, including marketing and promotional activities previously discussed partially offset by trade show expenses not present in 2002.

          Research and Development. Research and development expenses were $654,000 and $540,000 in the three months ended March 31, 2003 and 2002, respectively, representing an increase of $114,000, or 21.1%, from 2002 to 2003. 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 wireless, diagnostic, utility and Internet software technologies. The increase in our research and development expenses is primarily due to the development of new products that were released during the quarter in Wireless and Broadband, MacIntosh and Internet and a refocus of engineering resources from consulting projects to product development.

          General and Administrative. General and administrative expenses were $468,000 and $489,000 in the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $21,000, or 4.3%, from 2002 to 2003. The decrease in our general and administrative expenses is due to the recovery of costs relating to the closure of the Oregon office in 2001, which was partially offset by minor increases in other expenses.

          Interest Income. Interest income was $7,000 and $12,000 in the three months ended March 31, 2003 and 200, respectively, representing a decrease of $5,000, or 41.8% from 2002 to 2003. The decrease in our net interest income is directly related to our lower cash balance and declining interest rates. We have not changed our investment strategy during the periods being reported on, with our excess cash consistently being invested in short term marketable securities.

          Interest and Other Expense. Interest and other expenses were $12,000 and $20,000 the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $8,000, or 40.0%, from 2002 to 2003. Interest and other expense primarily consist of bank fees and credit card processing charges and may vary considerably from year to year.

          Provision for Income Taxes. The provision for income taxes was $3,000 and $4,000 in the three months ended March 31, 2003 and 2002, respectively, representing a decrease of $1,000 or 25.0% from 2002 to 2003. The income tax expense reported each year related to taxes paid on foreign sales and minimum state tax payments.

Liquidity and Capital Resources

          Since our inception, we have financed operations primarily through cash generated from operations and from proceeds of $18.1 million generated by our initial public offering in 1995. Our principal sources of liquidity as of March 31, 2003 consisted primarily of cash and cash equivalents of $3.5 million.

14

          Net cash used in operating activities was $164,000 in the three months ended March 31, 2003 compared to $673,000 in the comparable period of 2002. The primary operating use of cash during both periods was funding our net loss and a reduction in accounts payable and accrued liabilities, partially offset by the decrease in accounts receivable in 2002.

          During the three months ended March 31, 2003, we used $5,000 in investing activities compared to $11,000 in the same period of 2002. Our capital expenditures in both periods consisted of the purchase of computers and other office equipment.

          At March 31, 2003, we had $3.5 million in cash and cash equivalents and $3.3 million of working capital. Our accounts receivable balance, net of allowance for doubtful accounts and other adjustments was $667,000 at March 31, 2003. We have no significant capital commitments, and currently anticipate that capital expenditures will not vary significantly from recent periods. We believe that our existing cash, cash equivalents and investment balances and cash flow from operations will be sufficient to finance our working capital and capital expenditure requirements through at least the next 12 months. We may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity or debt financing or from other sources. If additional financing is needed, we cannot assure you that such financing will be available to us at commercially reasonable terms or at all.

          We are currently in the process of renegotiating a long-term facility lease to replace the lease on our corporate headquarters, which expired at the end of March, 2003. We are currently evaluating alternative solutions for that facility and have entered into a month-to-month arrangement with our current landlord. We do not anticipate any difficulty in locating other space at a comparable lease rate. We have non-cancelable operating leases for our other building facilities that expire on various dates through July 31, 2005 and no debt. Future minimum rental commitments for these leases consist of the following (in thousands):

Year ending December 31:
	2003 (remaining 9 months)	$	308
	2004		303
	2005		136
		$	747

15

RISK FACTORS

Before Deciding To Invest In Our Company Or To Maintain Or Increase Your Investment, You Should Carefully Consider The Risks Described Below, In Addition To The Other Information Contained In This Report And In Our Other Filings With The SEC, Including Our Subsequent Reports On Forms 10-Q And 8-K. The Risks And Uncertainties Described Below Are Not The Only Ones Facing Our Company. Additional Risks And Uncertainties Not Presently Known To Us Or That We Currently Deem Immaterial May Also Affect Our Business Operations. If Any Of These Risks Actually Occur, That Could Seriously Harm Our Business, Financial Condition Or Results Of Operations. In That Event, The Market Price For Our Common Stock Could Decline And You May Lose All Or Part Of Your Investment.

Our quarterly operating results may fluctuate and cause the price of our common stock to fall.

          Our quarterly revenues and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to a number of factors, including the following:

• the volume of our product sales and pricing concessions on volume sales;

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

• the size and timing of any return product requests for our products;

• our ability to maintain or increase gross margins;

• general economic and market conditions;

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

• the gain or loss of a key customer;

• our ability to specify, develop, complete, introduce, market and transition to volume production new products and technologies in a timely manner;

• the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products;

• the effect of new and emerging technologies;

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

• the continued success of our cost-cutting measures.

          A large portion of our operating expenses, including rent, depreciation, amortization, and capital lease expenditures, is fixed and difficult to reduce or change. Accordingly, if our total revenue does not meet our expectations, we may not be able to adjust our expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition and results of operations would be materially and adversely affected.

          Due to all of the foregoing factors, and the other risks discussed in this report, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance.

16

If we are unable to comply with NASDAQ’s continued listing requirements, our common stock could be delisted.

          In June 2002, our common stock failed to meet the minimum bid price of $1.00 per share for 30 consecutive days, which caused our stock price to fail to meet one of the minimum standards required by Nasdaq for continued listing as a Nasdaq National Market security. On July 25, 2002, we announced that we had voluntarily submitted an application to Nasdaq to transfer from the Nasdaq National Market to the Nasdaq SmallCap Market. Our application was approved and, our common stock was listed on the Nasdaq SmallCap Market effective August 5, 2002. This change increased the grace period available for SmallCap companies that comply with the core initial listing standards of the Nasdaq SmallCap Market – that is, either net income of $750,000, stockholders’ equity of $5 million or market capitalization of $50 million. If our stock cannot maintain trading at prices over $1.00, or we cannot meet any subsequent grace period requirements, we may become subject to the delisting process.

          There can be no assurance that we will satisfy all requirements for continued listing of our common stock on the Nasdaq SmallCap Market. If we are unable to meet the continued listing requirements in the future, our common stock will be subject to delisting, which may have a material adverse effect on the price of our common stock and the levels of liquidity currently available to our stockholders.

In order to meet NASDAQ’s continued minimum $1.00 trading price requirement and remain listed, we have asked our shareholders to approve a reverse split for our common stock, which will be voted on in May.

          The effect of a reverse split upon the market price of our common stock cannot be predicted with any certainty, and it is possible that the per share price of our common stock after the reverse split will not rise in proportion to the reduction in the number of shares of our common stock outstanding resulting from the reverse stock split. There can be no assurance that the market price per post-reverse split share will either exceed or remain in excess of the $1.00 minimum bid price for any sustained period of time. The market price of our common stock may also be based on other factors that may be unrelated to the number of shares outstanding, including our future performance. In addition, there can be no assurance that we will not be delisted due to a failure to meet other continued listing requirements, even if the market price per post-reverse split share of our common stock remains in excess of $1.00.

Technology and customer needs change rapidly in our market, which could render our products obsolete and negatively affect our revenues.

          Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. We will also need to continue to develop and introduce new and enhanced products to meet our customers’ changing demands, keep up with evolving industry standards, including changes in the Microsoft operating systems with which our products are designed to be compatible, and to promote those products successfully. The communications and utilities software markets in which we operate are characterized by rapid technological change, changing customer needs, frequent new product introductions, evolving industry standards and short product life cycles. Any of these factors could render our existing products obsolete and unmarketable. In addition, new products and product enhancements can require long development and testing periods as a result of the complexities inherent in today’s computing environments and the performance demanded by customers. If our software markets do not develop as we anticipate or our products do not gain widespread acceptance in these markets, or if we are unable to develop new versions of our software products that can operate on future operating systems, our business, financial condition and results of operations could be materially and adversely affected.

Competition within our product markets is intense and includes numerous established competitors, which could negatively affect our revenues.

          We operate in markets that are extremely competitive and subject to rapid changes in technology. Microsoft Corporation poses a significant competitive threat to us because Microsoft operating systems, Windows XP, Windows ME, Windows 2000, Windows 98, Windows 95 and Windows NT, may include some capabilities now provided by certain of our OEM and retail software products. If users are satisfied relying on the capabilities of the Windows-based systems or other operating systems, or Symantec’s fax-related products, sales of our products are likely to decline. In addition, our principal fax-related retail products, HotFax

17

MessageCenter and HotFax, currently compete directly with Symantec’s WinFax Pro. 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.

          Microsoft and many of our other 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 of 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.

We maintain relationships with multiple distributors and retailers to sell our retail software products. Loss of a distributor, retailer or unanticipated retail product returns could have a negative impact on our revenues.

          In addition to our direct sales efforts including our web store, we depend on distributors and retailers to sell our retail software products. Our relationships with these distributors and retailers depend upon a number of factors, including sales volume. Our agreements with distributors and retailers are not exclusive and may be terminated by either party without cause. Distributors or retailers may purchase fewer products from us in any given quarter with little or no advanced notice to us for reasons beyond our control. Although we do not recognize revenue until our product is sold through the channel, if any of these events were to occur, our future retail sales would be adversely affected.

Acquisitions of companies or technologies may disrupt our business and divert management attention and cause our current operations to suffer.

          We have in the past made and we expect to continue to consider acquisitions of complementary companies, products or technologies. If we make any additional acquisitions, we will be required to assimilate the operations, products and personnel of the acquired businesses and train, retain and motivate key personnel from the acquired businesses. We may be unable to maintain uniform standards, controls, procedures and policies if we fail in these efforts. Similarly, acquisitions may cause disruptions in our operations and divert management’s attention from our company’s day-to-day operations, which could impair our relationships with our current employees, customers and strategic partners. Acquisitions may also subject us to liabilities and risks that are not known or identifiable at the time of the acquisition.

          We may also have to incur debt or issue equity securities in order to finance future acquisitions. The issuance of equity securities for any acquisition could be substantially dilutive to our existing stockholders. In addition, we expect our profitability could be adversely affected because of acquisition-related accounting costs and write offs. In consummating acquisitions, we are also subject to risks of entering geographic and business markets in which we have had limited or no prior experience. If we are unable to fully integrate acquired businesses, products or technologies within existing operations, we may not receive the intended benefits of acquisitions.

18

Our stock price is highly volatile. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid for them.

          The market price of our common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. These fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:

• quarter-to-quarter variations in our operating results;

• announcements of technological innovations or new products by our competitors, customers or us;

• market conditions within our retail and OEM software markets;

• general global economic and political instability;

• changes in earnings estimates or investment recommendations by analysts;

• changes in investor perceptions; or

• changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

          In addition, the market prices of securities of high technology companies have been especially volatile. This volatility has significantly affected the market prices of securities of many technology companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been the subjects of securities class action litigation. If we were the object of a securities class action litigation, it could result in substantial losses and divert management’s attention and resources from other matters.

Our products may contain undetected software errors, which could negatively affect our revenues.

          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 and our OEM customers test our products, 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.

We may need to raise additional capital in the future through the issuance of additional equity or convertible debt securities or by borrowing money, in order to meet our capital needs. Additional funds may not be available on terms acceptable to us to allow us to meet our capital needs.

          We believe that the cash, cash equivalents and investments on hand and the cash we expect to generate from operations will be sufficient to meet our capital needs for at least the next twelve months. However, it is possible that we may need or choose to obtain additional financing to fund our activities. We could raise these funds by selling more stock to the public or to selected investors, or by borrowing money. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations or other business activities significantly or to obtain funds through arrangements with strategic partners or others that may require us to relinquish right to certain technologies or potential markets. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing stockholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of the holders of our common stock. We currently have no established line of credit or other business borrowing facility in place.

19

          It is possible that our future capital requirements may vary materially from those now planned. The amount of capital that we will need in the future will depend on many factors, including:

• the market acceptance of our products;

• the levels of promotion and advertising that will be required to launch our products and achieve and maintain a competitive position in the marketplace;

• our business, product, capital expenditure and research and development plans and product and technology roadmaps;

• the levels of inventory and accounts receivable that we maintain;

• capital improvements to new and existing facilities;

• technological advances;

• our competitors’ response to our products; and

• our relationships with suppliers and customers.

          In addition, we may require additional capital to accommodate planned growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies.

Marketing efforts for our retail software products require substantial investments that may adversely affect our operating margins.

          Maintaining product distribution channels for our retail software products requires significant investments in marketing and sales related to these products. We expect to continue to minimize these costs in the future. Accordingly, our retail sales may not provide us with the revenue levels that we have historically achieved.

Delays or failure in deliveries from our component suppliers could cause our net revenues to decline and harm our results of operations.

          We rely on third party suppliers to provide us with the components for our product kits. These components include CDs and printed manuals. We also rely on third parties for CD-ROM replication. We do not have long-term supply arrangements with any vendor to obtain these necessary components for our products. If we are unable to purchase components from these suppliers or 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 or enter into new orders because of a shortage in components. Any delays that we experience in delivering our products to customers could impair our customer relationships and adversely impact our reputation and our business. In addition, if our third party suppliers raise their prices for components or CD-ROM replication services, our gross margins would be reduced.

Because we currently operate with little or no backlog, our ability to predict our revenues and operating results is extremely limited.

          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.

20

We may be unable to adequately protect our intellectual property and other proprietary rights, which could negatively impact our revenues.

          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. We currently own United States trademark registrations for certain of our trademarks and United States patents for certain of our technologies, however, these measures afford us only limited protection. 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.

If we are unable to retain key personnel, the loss of their services could materially and adversely affect our business, financial condition and results of operations.

          Our future performance depends in significant part upon the continued service of our senior management and other key technical and consulting personnel. We do not have employment agreements with our key employees that govern the length of their service. The loss of the services of our key employees would likely materially and adversely affect our business, financial condition and results of operations. Our future success also depends on our ability to continue to attract, retain and motivate qualified personnel, particularly highly skilled engineers involved in the ongoing research and development required to develop and enhance our communication software products as well those in our highly specialized consulting business. Competition for these employees remains high and employee retention is a common problem in our industry. Our inability to attract and retain the highly trained technical personnel that are essential to our product development, consulting services, marketing, service and support teams may limit the rate at which we can generate revenue, develop new products or product enhancements and generally have an adverse effect on our business, financial condition and results of operations. Additionally, retaining key employees during restructuring efforts is critical to company success.

If commerce conducted over the Internet grows more slowly than in the past, our future sales and future profits may decline.

          If eCommerce does not continue to grow or grows more slowly than in the past, demand for certain of our products and services will be reduced. Certain of our products, including WebDNA™, enhance companies’ abilities to transact business and conduct Web-based operations. As a result, future sales and any future profits from those products are substantially dependent upon the widespread acceptance and use of the Internet as an effective medium of commerce by consumers and businesses.

21

Our business, financial condition and operating results could be adversely affected as a result of legal, business and economic risks specific to international operations.

          Approximately 21.7% and 14.4% of our revenues in the three months ended March 31, 2003 and 2002, respectively, were derived from sales to customers outside the United States. We also frequently ship products to our domestic customers’ international manufacturing divisions and subcontractors. In the future, we may expand these international business activities. International operations are subject to many inherent risks, including:

• general political, social and economic conditions causing instability;

• trade restrictions;

• the imposition of governmental controls;

• exposure to different legal standards, particularly with respect to intellectual property;

• burdens of complying with a variety of foreign laws;

• import and export license requirements and restrictions of the United States and each other country in which we operate;

• unexpected changes in regulatory requirements;

• foreign technical standards;

• changes in tariffs;

• difficulties in staffing and managing international operations;

• difficulties in collecting receivables from foreign entities; and

• potentially adverse tax consequences.

Our officers and directors could control matters submitted to our stockholders and affect the outcome of any vote.

          As of April 30, 2003, William W. Smith Jr., the President, Chief Executive Officer and Chairman of the Board of our company, and Rhonda L. Smith, the Secretary, Treasurer and Vice-Chairman of the Board of our company, beneficially owned approximately 60.3% of our outstanding shares of common stock. William W. Smith Jr. and Rhonda L. 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 sale of the company, irrespective of how other stockholders 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.

Sales of substantial numbers of our common stock could adversely impact the price of our stock.

          As of April 30, 2003, we had 16,202,819 shares of common stock outstanding. Of this amount, the 9,770,670 shares held by William W. Smith, Jr. and Rhonda L. Smith is available for sale in the public market (subject to the volume and other applicable restrictions of Rule 144). Overall, our trading volume fluctuates widely and at times is relatively limited. Sales of a substantial number of shares of our common stock by William W. Smith, Jr., Rhonda L. Smith or any other person, including through any directed selling plan, either individually or when aggregated with sales by other persons, could adversely affect the market price of our common stock.

22

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.

NEW ACCOUNTING PRONOUNCEMENTS

          In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes EITF Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS No. 146 effective January 1, 2003 and the adoption did not have a material effect on our consolidated financial statements.

          In November 2002, the FASB issued FIN No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107, and rescission of FASB Interpretation No. 34, Disclosure of Indirect Guarantees of Indebtedness of Others. FIN No. 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002; while, the provisions of the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted the disclosure provisions of FIN 45 in the fourth quarter of 2002 and adopted the recognition provisions effective January 1, 2003. The adoption of the recognition provisions of FIN 45 did not have a material effect on our consolidated financial statements as the estimated fair value of guarantees issued was not significant.

          In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. We are required to follow the prescribed disclosure format and have provided the additional disclosures required by SFAS No. 148 for the three months ended March 31, 2003.

          In January 2003, the FASB issued Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN No. 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The adoption of FIN No. 46 did not have a material impact on our financial position or results of operations because we have no variable interest entities.

23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Smith Micro’s financial instruments include cash and cash equivalents. At March 31, 2003, the carrying values of our financial instruments approximated fair values based on current market prices and rates.

          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 March 31, 2003.

ITEM 4. CONTROLS AND PROCEDURES

a)

Our principal executive officer and principal financial officer have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of a date within 90 days prior to the filing date of this report. Based on that evaluation, such officers have concluded that disclosure controls and procedures are effective to ensure that material information relating to Smith Micro Software, Inc. and its subsidiaries is made known to such officers in a timely manner for inclusion in our periodic filings with the SEC.

b)

There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation by our principal executive officer and principal financial officer.

24

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

       None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

       None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

       None.

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

       None.

ITEM 5. OTHER INFORMATION

       None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     (A)  EXHIBITS

Exhibit No.	Exhibit Description
99.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

     (B)  REPORTS ON FORM 8-K

     No such reports were filed during the three months ended March 31, 2003.

25

SIGNATURES

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

	SMITH MICRO SOFTWARE, INC.
May 13, 2003	By /s/ William W. Smith, Jr.
	William W. Smith, Jr. Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
May 13, 2003	By /s/ Robert W. Scheussler
	Robert W. Scheussler Chief Operating Officer and Chief Financial Officer (Principal Financial Officer)

26

CERTIFICATIONS:

I, William W. Smith, Jr., certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Smith Micro Software, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003

By: /s/ William W. Smith, Jr.

William W. Smith, Jr.
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)

27

I, Robert W. Scheussler, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Smith Micro Software, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003

By: /s/ Robert W. Scheussler

Robert W. Scheussler
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer)

28

EXHIBIT INDEX

Exhibit No.	Exhibit Description
99.1	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

29 EX-99.1 3 a90162exv99w1.htm EXHIBIT 99.1

EXHIBIT 99.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Each of the undersigned hereby certifies, in accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in his capacity as an officer of Smith Micro Software, Inc., that, to his knowledge, the Quarterly Report of Smith Micro Software, Inc. on Form 10-Q for the period ended March 31, 2003, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition and results of operation of the company.

May 13, 2003	By /s/ William W. Smith, Jr.
	William W. Smith, Jr. Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
May 13, 2003	By /s/ Robert W. Scheussler
	Robert W. Scheussler Chief Operating Officer and Chief Financial Officer (Principal Financial Officer)

A signed original of this written statement required by Section 906 has been provided to Smith Micro Software, Inc. and will be retained by Smith Micro Software, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

30 -----END PRIVACY-ENHANCED MESSAGE-----

EX-99.1

exv99w1