<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A

                                   ----------

                  FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
          SECTIONS 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

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

      For the fiscal year ended December 31, 1998

                                       OR

[ ]   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 0-25297


                        SMITH-GARDNER & ASSOCIATES, INC.
--------------------------------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


             FLORIDA                                    65-0090038
--------------------------------------------------------------------------------
  (State or Other Jurisdiction                       (I.R.S. Employer
of Incorporation or Organization)                   Identification No.)


1615 SOUTH CONGRESS AVENUE
DELRAY BEACH, FLORIDA                                 33445-6368
(Address of Principal Executive Offices)             (Zip Code)


                                 (561) 265-2700
--------------------------------------------------------------------------------
               (Registrant telephone number, including area code)


        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:


         COMMON STOCK, $.01 PAR VALUE PER SHARE (NASDAQ NATIONAL MARKET)
--------------------------------------------------------------------------------
                              (Title of Each Class)

         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 [ ] No [X]

         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. [X]

         As of March 15, 1999, the aggregate market value of the voting stock
held by non-affiliates of the registrant was approximately $119,543,310 based on
the closing price on that date of $16.625 per share. As of that date, there were
12,191,504 shares of the registrant's Common Stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                 Not Applicable



<PAGE>   2
                                EXPLANATORY NOTE




         This Amended Annual Report on Form 10-K/A is being filed for the
purpose of amending and restating "Item 8. Financial Statements and
Supplementary Data," to include the city and state in the independent
accountant's report dated February 12, 1999 and to include disclosure pertaining
to SAB Topic 11M regarding SOP 98-9, MODIFICATION OF SOP 97-2, SOFTWARE REVENUE
RECOGNITION, WITH RESPECT TO CERTAIN TRANSACTIONS.


































                                       2
<PAGE>   3
                                    PART II

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Smith-Gardner & Associates, Inc.:

We have audited the accompanying consolidated balance sheets of Smith-Gardner &
Associates, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, redeemable preferred stock and
stockholders' deficit and cash flows for each of the years in the three-year
period ended December 31, 1998. In connection with our audits of the
consolidated financial statements, we have also audited the financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
as listed in item 14(a)2 of the Company's 1998 Annual Report on Form 10-K. These
consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Smith-Gardner &
Associates, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule for each of the years in the three-year period ended December 31, 1998,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.

/s/ KPMG LLP


February 12, 1999
Ft. Lauderdale, Florida


















                                       3
<PAGE>   4



                SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES

                           Consolidated Balance Sheets

                           December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                                              1998                1997
                                                                          ------------       ------------
<S>                                                                       <C>                 <C>
                                     Assets
Current assets:
    Cash and cash equivalents                                             $  1,576,804       $    168,590
    Accounts receivable, net of allowance for doubtful accounts
       of $459,000 in 1998 and $469,227 in 1997                              5,855,140          1,845,225
    Inventory                                                                  197,465            219,963
    Prepaid expenses and other current assets                                  195,173            135,382
                                                                          ------------       ------------
               Total current assets                                          7,824,582          2,369,160

Deferred offering costs                                                        551,946                 --
Property and equipment, net                                                    984,780            685,319
Other assets                                                                   108,195             80,576
                                                                          ------------       ------------
                                                                          $  9,469,503       $  3,135,055
                                                                          ============       ============
                     Liabilities, Redeemable Preferred Stock
                            and Stockholders' Deficit

Current liabilities:
    Accounts payable                                                      $  1,160,773       $    548,350
    Accrued expenses                                                         1,594,197          1,420,990
    Deferred revenue                                                         1,165,275            383,378
                                                                          ------------       ------------
               Total current liabilities                                     3,920,245          2,352,718

Convertible debt                                                            12,000,000         12,000,000
Accrued interest payable                                                     4,500,000          2,700,000
                                                                          ------------       ------------
               Total liabilities                                            20,420,245         17,052,718

Redeemable preferred stock, 10,000,000 shares authorized:
    Redeemable convertible participating preferred stock,
       $.01 par value; none issued                                                  --                 --
    Redeemable preferred stock, $1,000 par value, none issued                       --                 --

Commitments and contingencies (notes 4 and 12)

Stockholders' deficit:
    Common stock, $0.01 par value.  Authorized 50,000,000
       shares; issued and outstanding 5,263,100 shares                          52,631             52,631
    Additional paid-in capital                                               3,516,258          3,481,562
    Accumulated deficit                                                    (14,519,631)       (17,451,856)
                                                                          ------------       ------------
               Total stockholders' deficit                                 (10,950,742)       (13,917,663)
                                                                          ------------       ------------
                                                                          $  9,469,503       $  3,135,055
                                                                          ============       ============

</TABLE>


See accompanying notes to consolidated financial statements.




                                        4
<PAGE>   5

                SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES

                      Consolidated Statements of Operations

     For each of the years in the three-year period ended December 31, 1998

<TABLE>
<CAPTION>
                                                                                  1998                1997                1996
                                                                               ------------       ------------       ------------
<S>                                                                            <C>                   <C>                <C>
Revenue:
    Computer software                                                          $ 11,536,185       $  5,083,442       $  5,932,255
    Computer hardware                                                            13,263,909          8,144,206          7,370,088
    Support                                                                       5,334,728          4,100,488          4,037,966
    Services                                                                      3,567,450          1,324,074          1,188,468
                                                                               ------------       ------------       ------------
           Total revenue                                                         33,702,272         18,652,210         18,528,777
                                                                               ------------       ------------       ------------
Cost of sales and services:
    Computer software                                                             2,500,452          1,504,002            584,493
    Computer hardware                                                             9,786,288          6,009,813          5,804,615
    Support                                                                       3,222,259          3,271,268          3,141,395
    Services                                                                      2,270,564          1,104,195            902,077
                                                                               ------------       ------------       ------------
           Total cost of sales and services                                      17,779,563         11,889,278         10,432,580
                                                                               ------------       ------------       ------------
           Gross profit                                                          15,922,709          6,762,932          8,096,197

Operating expenses:
    General and administrative                                                    6,538,097          4,567,292          4,775,430
    Research and development                                                      2,253,663          2,010,858          2,254,206
    Sales and marketing                                                           2,430,460          1,482,061            980,371
                                                                               ------------       ------------       ------------
           Total operating expenses                                              11,222,220          8,060,211          8,010,007
                                                                               ------------       ------------       ------------
           Income (loss) from operations                                          4,700,489         (1,297,279)            86,190

Other (expense) income:
    Interest expense:
      Interest on outstanding debt                                               (1,800,000)        (1,500,000)        (1,200,000)
      Amortization of original issue discount                                            --           (679,697)        (1,378,276)
    Interest income                                                                 102,346            109,067             41,814
                                                                               ------------       ------------       ------------
           Net income (loss)                                                   $  3,002,835       $ (3,367,909)      $ (2,450,272)
                                                                               ============       ============       ============
Net income (loss) per share:
    Basic                                                                      $       0.57       $      (0.64)      $      (0.47)
                                                                               ============       ============       ============
    Diluted                                                                    $       0.50       $      (0.64)      $      (0.47)
                                                                               ============       ============       ============
Weighted average shares used in calculating net income (loss)
    per share:
      Basic                                                                       5,263,100          5,263,100          5,263,100
                                                                               ============       ============       ============
      Diluted                                                                     8,131,344          5,263,100          5,263,100
                                                                               ============       ============       ============
Pro forma data:
    Net income (loss) before income tax (expense) benefit                         3,002,835         (3,367,909)        (2,450,272)
    Pro forma provision for income tax (expense) benefit (unaudited)             (1,214,770)           948,427            359,819
                                                                               ------------       ------------       ------------
    Pro forma net income (loss) (unaudited)                                    $  1,788,065       $ (2,419,482)      $ (2,090,453)
                                                                               ============       ============       ============
    Pro forma net income per share (unaudited):
      Basic                                                                            0.34
                                                                               ============
      Diluted                                                                          0.34
                                                                               ============
Weighted average shares outstanding used in calculating
    pro forma net income per share (unaudited):
      Basic                                                                       5,263,100
                                                                               ============
      Diluted                                                                     5,263,100
                                                                               ============

</TABLE>

See accompanying notes to consolidated financial statements.







                                        5
<PAGE>   6

                SMITH-GARDNER & ASSOCIATES, INC. AND SUBSIDIARIES

Consolidated Statements of Redeemable Preferred Stock and Stockholders' Deficit

     For each of the years in the three-year period ended December 31, 1998



<TABLE>
<CAPTION>
                                                                             STOCKHOLDERS' DEFICIT
                                                 ----------------------------------------------------------------------------
                                                                                                  RETAINED
                                    REDEEMABLE         COMMON STOCK                                EARNINGS           TOTAL
                                    PREFERRED    ---------------------------      ADDITIONAL    (ACCUMULATED      STOCKHOLDERS'
                                      STOCK       SHARES            AMOUNT     PAID-IN CAPITAL     DEFICIT)          DEFICIT
                                   -----------   ----------      -----------   ---------------   ------------     -----------
<S>                                <C>            <C>            <C>             <C>              <C>              <C>
Balance, December 31, 1995         $        --    5,263,100      $    52,631     $ 3,481,562     $(11,633,675)    $(8,099,482)

    Net loss                                --           --               --              --       (2,450,272)     (2,450,272)
                                   -----------   ----------      -----------     -----------      -----------     -----------

Balance, December 31, 1996                  --    5,263,100           52,631       3,481,562      (14,083,947)    (10,549,754)

    Net loss                                --           --               --              --       (3,367,909)     (3,367,909)
                                   -----------   ----------      -----------     -----------      -----------     -----------

Balance, December 31, 1997                  --    5,263,100           52,631       3,481,562      (17,451,856)    (13,917,663)

    Net income                              --           --               --              --        3,002,835       3,002,835

    Non-cash compensation expense           --           --               --          34,696               --          34,696

    Shareholders distributions              --           --               --              --          (70,610)        (70,610)
                                   -----------   ----------      -----------     -----------      -----------     -----------

Balance, December 31, 1998         $        --    5,263,100      $    52,631     $ 3,516,258     $(14,519,631)   $(10,950,742)
                                   ===========   ==========      ===========     ===========     ============    ============

</TABLE>


See accompanying notes to consolidated financial statements.






















                                        6
<PAGE>   7

                SMITH-GARDNER & ASSOCIATES, INC. AND SUBSDIAIRES

                      Consolidated Statements of Cash Flows

     For each of the years in the three-year period ended December 31, 1998



<TABLE>
<CAPTION>
                                                                    1998              1997              1996
                                                                -----------       -----------       -----------
<S>                                                             <C>                <C>               <C>
Cash flows provided by operating activities:
    Net income (loss)                                           $ 3,002,835       $(3,367,909)      $(2,450,272)
    Adjustments to reconcile net income (loss) to net cash
      provided by operating activities:
        Depreciation and amortization                               285,314           232,548           184,772
        Amortization of original issue discount                          --           679,697         1,378,276
        Non-cash compensation expense                                34,696                --                --
        Bad debt expense                                            458,330           485,185           771,567
        Change in assets and liabilities:
           Accounts receivable                                   (4,468,245)          359,329          (156,777)
           Inventory                                                 22,498          (207,097)          292,086
           Prepaid expenses and other current assets                (59,791)           30,067           249,524
           Other assets                                             (27,619)          (26,246)           (4,330)
           Accrued interest payable                               1,800,000         1,500,000         1,200,000
           Accounts payable                                         612,423           268,323          (581,374)
           Accrued expenses                                         173,207           552,243          (194,900)
           Deferred revenue                                         781,897            36,510          (602,363)
                                                                -----------       -----------       -----------

                Net cash provided by operating activities         2,615,545           542,650            86,209
                                                                -----------       -----------       -----------

Cash flows used in investing activities:
    Capital expenditures                                           (584,775)         (234,277)         (251,192)
                                                                -----------       -----------       -----------

                Net cash used in investing activities              (584,775)         (234,277)         (251,192)
                                                                -----------       -----------       -----------

Cash flows (used in) provided by financing activities:
    Distributions to stockholders                                   (70,610)               --                --
    Advances from officers                                               --                --           200,000
    Proceeds from repayment of employees loans                           --                --            24,600
    Repayment of advances from officers                                  --          (200,000)               --
    Deferred offering costs                                        (551,946)               --                --
                                                                -----------       -----------       -----------

                Net cash (used in) provided by financing
                  activities                                       (622,556)         (200,000)          224,600
                                                                -----------       -----------       -----------

                Net increase in cash and cash equivalents         1,408,214           108,373            60,217

Cash and cash equivalents at beginning of year                      168,590            60,217                --
                                                                -----------       -----------       -----------

Cash and cash equivalents at end of year                        $ 1,576,804       $   168,590       $    60,217
                                                                ===========       ===========       ===========

Supplemental cash flow information:
    Cash paid during the year for interest                      $        --       $        --       $        --
                                                                ===========       ===========       ===========

</TABLE>

See accompanying notes to consolidated financial statements.









                                        7
<PAGE>   8



                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (a)    DESCRIPTION OF BUSINESS

              Smith-Gardner & Associates, Inc. (the "Company") was incorporated
              on December 13, 1988 under the laws of the state of Florida. The
              Company primarily licenses a computer software package it designed
              and developed to automate companies that sell through catalogs,
              media advertisement, direct mail or broadcast advertisements, and
              also sells the computer hardware required to use the software. The
              Company also provides consulting, training, programming and
              technical support services.

              The Company opened two satellite offices in Sydney Australia (SGA
              Pty.) and Cambridge, England (SGA Ltd.) in September 1997 and June
              1997, respectively. These offices are separately incorporated and
              are wholly owned subsidiaries of the Company.

       (b)    CASH AND CASH EQUIVALENTS

              The Company considers all highly liquid investments purchased with
              an original maturity of three months or less to be cash
              equivalents.

       (c)    PRINCIPLES OF CONSOLIDATION

              The consolidated financial statements include the accounts of the
              Company and its two wholly owned subsidiaries SGA Pty. and SGA
              Ltd. All significant intercompany balances and transactions have
              been eliminated in consolidation.

       (d)    INVENTORY

              Inventory consists of computer hardware. It is stated at the lower
              of cost or market as determined on a specific identification
              basis.

       (e)    PROPERTY AND EQUIPMENT

              Property and equipment are stated at cost and are depreciated on
              the straight-line basis over the estimated useful lives of the
              assets which range from five to seven years. Leasehold
              improvements are amortized on the straight-line basis over the
              shorter of the lease term or estimated useful life of the asset.



                                                                     (Continued)




















                                        8
<PAGE>   9

                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


              The Company implemented the provisions of Statement of Financial
              Accounting Standards No. 121, "Accounting for Impairment of
              Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
              effective January 1, 1996. The Company reviews its long-lived
              assets (property and equipment) for impairment whenever events or
              circumstances indicate that the carrying amount of an asset may
              not be recoverable. If the sum of the expected cash flows,
              undiscounted and without interest, is less than the carrying
              amount of the asset, an impairment loss is recognized as the
              amount by which the carrying amount of the asset exceeds its fair
              value. The Company has no material impaired assets.

       (f)    SOFTWARE DEVELOPMENT COSTS

              The Company accounts for software development costs under
              Statement of Financial Accounting Standards No. 86, "Accounting
              for Costs of Computer Software to Be Sold, Leased or Otherwise
              Marketed" ("FAS 86"). Under FAS 86, the costs associated with
              software development are required to be capitalized after
              technological feasibility has been established. Technological
              feasibility was established when the product design and working
              model of the software product was completed and confirmed by
              testing the software product. Costs incurred by the Company
              subsequent to the establishment of technological feasibility have
              been insignificant and, as a result, the Company has not
              capitalized any development costs.

       (g)    REVENUE RECOGNITION

              Prior to 1997, the Company followed the provisions of Statement of
              Position (SOP) 91-1. Revenue from computer hardware and software
              sales was recognized upon installation, substantial fulfillment of
              all obligations under the sales contract and when collectibility
              was probable. Revenues related to consulting, training and
              technical support were recognized upon completion of the services.

              In October 1997, the American Institute of Certified Public
              Accountants (AICPA) issued SOP 97-2, SOFTWARE REVENUE RECOGNITION,
              which superseded SOP 91-1. The Company adopted SOP 97-2 for
              software transactions entered into in 1997. SOP 97-2 generally
              requires revenue earned on software arrangements involving
              multiple elements to be allocated to each element based on vendor
              specific objective evidence (VSOE) of the relative fair values of
              the elements. VSOE is determined by the price charged when the
              element is sold separately. For an element not yet being sold
              separately, VSOE is determined using managements best estimate
              based on development costs to date of the element. The revenue
              allocated to hardware and software products generally is
              recognized when the hardware and software has been delivered and
              installed, the fee is fixed and determinable and the
              collectibility is probable. The revenue allocated to postcontract
              customer support is consistent with fees charged for renewals and
              is recognized ratably over the term of the support. Revenue
              allocated to service elements is recognized as the services are
              performed. The adoption of SOP 97-2 did not have a material impact
              on the Company's results of operations.

              In March 1999, the AICPA issued SOP 98-9, MODIFICATIONS OF SOP
              97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
              TRANSACTIONS, which amends SOP 97-2 guidance on vendor specific
              objective evidence (VSOE) for multiple element arrangements in
              which there is VSOE of fair market value of all the undelivered
              elements, and VSOE of fair value does not exist for one or more of
              the delivered elements. This SOP does not currently apply to the
              Company since VSOE of fair value exists for all elements in its
              contracts.

                                                                     (Continued)






                                       9
<PAGE>   10
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


              At December 31, 1998 and 1997, the Company had deferred revenue
              recorded in the accompanying consolidated balance sheets related
              to systems, customer support and services paid in advance.

       (h)    FAIR VALUE OF FINANCIAL INSTRUMENTS

              Statement of Financial Accounting Standards No. 107, "Disclosures
              About Fair Value of Financial Instruments," requires disclosure of
              fair value of certain financial instruments. Cash and cash
              equivalents, accounts receivable, inventory and prepaid expenses
              and other current assets, as well as accounts payable, accrued
              expenses and other current liabilities, as reflected in the
              consolidated financial statements, approximate fair value because
              of the short-term maturity of these instruments. The fair value of
              the conversion feature of the long-term debt instrument was
              determined in note 6(b).

              Fair value estimates are made at a specific point in time, based
              on relevant market information and information about the financial
              instrument. These estimates are subjective in nature and involve
              uncertainties and matters of significant judgment and therefore
              cannot be determined with precision. Changes in assumptions could
              significantly affect the estimates.

       (i)    INCOME TAXES

              The Company has elected to be taxed under the provisions of
              Subchapter S of the Internal Revenue Code (the "Code").
              Accordingly, the taxable income (loss) of the Company is reported
              on the individual income tax returns of the stockholders. The only
              states in which the Company does business in, who do not recognize
              S corporation status are California and New Jersey. The Company
              started doing business in these states in 1997. The California and
              New Jersey income tax expense is immaterial to the consolidated
              financial statements for the years ended December 31, 1998 and
              1997. Therefore, the consolidated statements of operations do not
              include federal or state income tax expense.

              For the foreign entities, there is no charge for corporation tax
              or provision for deferred tax, due to the availability of
              accumulated tax losses of $413,594 as of December 31, 1998.

              Subsequent to year-end, the Company terminated its S corporation
              status due to the initial public offering discussed in note 2. In
              connection with this termination, the Company will record income
              taxes in accordance with Statement of Financial Accounting
              Standards No. 109, ACCOUNTING FOR INCOME TAXES.


                                                                     (Continued)





                                        10

<PAGE>   11

                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


              The unaudited pro forma net income (loss) presented in the
              consolidated statements of operations reflects the pro forma
              effects for income taxes as if the Company had been a taxable
              entity for all periods presented.

       (j)    BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

              The Company has presented net income (loss) per share pursuant to
              SFAS No. 128, Earnings Per Share and the Securities and Exchange
              Commission Staff Accounting Bulletin No. 98.

              In February 1997, the Financial Accounting Standards Board issued
              Statement of Financial Accounting Standards No. 128 (SFAS 128),
              EARNINGS PER SHARE. SFAS 128 specifies new standards designed to
              improve the earnings per share ("EPS") information provided in
              financial statements by simplifying the existing computational
              guidelines, revising the disclosure requirements and increasing
              the comparability of EPS data on an international basis. SFAS 128
              is effective for financial statements issued for periods ending
              after December 15, 1997. The adoption of SFAS 128 in 1997 did not
              have a significant impact on the Company's reported EPS.

              In accordance with Securities and Exchange Commission ("SEC")
              Staff Accounting Bulletin No. 98, certain common stock and common
              stock equivalents issued for nominal consideration prior to the
              initial filing of a registration statement relating to an Offering
              are treated as outstanding for the entire period. The Company had
              no nominal issuances during this period.

              Basic net income (loss) per share was computed by dividing net
              income (loss) by the weighted average number of shares of common
              stock outstanding for each period presented. Diluted net income
              per share was computed by giving effect to common stock
              equivalents and assuming conversion of debt to redeemable
              preferred stock. Incremental shares and adjustments to net income
              are determined using the if converted and treasury stock methods
              for the year ended December 31, 1998 as follows:

<TABLE>
<S>                                                                                  <C>
                   Net income as reported                                            $ 3,002,835
                   Plus:  interest expense on convertible debt assuming
                        conversion                                                     1,800,000
                   Less:  preferred stock dividends assuming conversion of debt
                        to redeemable preferred stock                                   (719,541)
                                                                                     -----------

                   Net income available to common stockholders, as adjusted          $ 4,083,294
                                                                                     ===========

                   Weighted average shares outstanding                                 5,263,100
                   Common stock equivalents                                            2,868,244
                                                                                     -----------
                                                                                       8,131,344
                                                                                     ===========
                   Basic net income per share                                        $       .57
                                                                                     ===========
                   Diluted net income per share                                      $       .50
                                                                                     ===========

</TABLE>


                                                                     (Continued)




                                        11
<PAGE>   12
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


              Common stock equivalents were not considered for the years ended
              December 31, 1996 and 1997 since their effect would be
              antidilutive.

       (k)    PRO FORMA NET INCOME (LOSS) AND PRO FORMA NET INCOME PER SHARE
              COMPUTATIONS (UNAUDITED)

              The pro forma net income (loss) presented in the consolidated
              statements of operations reflects the pro forma effects for income
              taxes as if the Company had been a taxable entity for the periods
              presented.

              Pro forma basic and diluted net income per share for the year
              ended December 31, 1998 was computed by dividing pro forma net
              income by the weighted average number of shares of common stock
              outstanding.

<TABLE>
<CAPTION>
                                                                                1998
                                                                              ----------

<S>                                                                           <C>
                   Pro forma net income                                       $1,788,065
                                                                              ==========
                   Weighted average shares outstanding                         5,263,100
                                                                              ==========
                   Basic and diluted pro forma net income per share           $      .34
                                                                              ==========
</TABLE>


              Common stock equivalents in the diluted proforma net income per
              share calculation were not considered for the year ended December
              31, 1998 since their effect would be antidilutive.

       (l)    FOREIGN CURRENCY TRANSLATION

              The functional currency of the Company's foreign subsidiaries,
              which began operations in 1997, is their respective local
              currencies. The translation of the applicable foreign currencies
              into U.S. dollars is performed for balance sheet accounts using
              current exchange rates in effect at the balance sheet date and for
              revenue and expense accounts using average rates of exchange
              prevailing during the year. Adjustments resulting from the
              translation of foreign currency financial statements for the years
              ended December 31, 1998 and 1997 were $(1,136) and ($5,000),
              respectively. Such amounts were recorded in the consolidated
              statements of operations for each period.

              The Company does not enter into transactions that may result in
              foreign currency risk. All transactions are made based on the
              Company's local currency. Therefore, the Company does not utilize
              hedging instruments.

                                                                     (Continued)



                                       12
<PAGE>   13
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997



       (m)    USE OF ESTIMATES

              Management of the Company has made a number of estimates and
              assumptions relating to the reporting of assets and liabilities
              and the disclosure of contingent assets and liabilities to prepare
              these consolidated financial statements in conformity with
              generally accepted accounting principles. Actual results could
              differ from those estimates.

       (n)    YEAR 2000 (UNAUDITED)

              Management believes their internal computer systems are Year 2000
              compliant. The Year 2000 issue results from computer programs
              being written using two digits rather than four to define the
              applicable year. The Company's products have been determined by
              the Company to be Year 2000 compliant.

              The Company has also reviewed its internal support systems and to
              the extent possible, its vendors' systems to confirm Year 2000
              compliance. Any failure of the Company or its suppliers or clients
              to be "Year 2000" compliant could have a material adverse effect
              on the Company's business, financial condition or results of
              operations. The Company has expensed all costs associated with
              these systems changes as the costs are incurred.

       (o)    SEGMENT REPORTING

              In June 1997, the FASB issued Statement of Financial Accounting
              Standards No. 131 "Disclosures about Segments of an Enterprise and
              Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
              for financial statements for periods beginning after December 15,
              1997. SFAS No. 131 establishes standards for the way public
              business enterprises report information about operating segments
              in annual financial statements and requires those enterprises to
              report selected information about operating segments in interim
              financial reports issued to shareholders. The adoption of SFAS No.
              131 did not have a significant impact on the Company's financial
              reporting as of and for the three year period ended December 31,
              1998.

       (p)    START-UP COSTS

              In March 1998, the AICPA issued Statement of Position 98-5 (SOP
              98-5) "REPORTING ON THE COSTS OF START-UP ACTIVITIES." Pursuant to
              the provisions of SOP 98-5, all costs associated with start-up
              activities, including organization costs, should be expensed as
              incurred. Companies that previously capitalized such costs are
              required to write-off the unamortized portion of such costs as a
              cumulative effect of a change of accounting principle. The Company
              had an insignificant amount of these costs and the adoption of SOP
              98-5 did not have a significant impact on the Company's financial
              statements.


                                                                     (Continued)






                                       13
<PAGE>   14

                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


(2)    LIQUIDITY

       The Company has been developing its software and new products and has
       expanded its operations internationally which resulted in losses for the
       years ended December 31, 1996 and 1997.

       On January 29, 1999, the Company and selling shareholders sold 4,410,000
       shares of its common stock in an Initial Public Offering (Offering) from
       which the Company received proceeds of $44,640,000 after payment of
       underwriter commissions.

       On February 3, 1999, the Company redeemed in full the redeemable
       participating preferred stock for $12,000,000 and paid accrued interest
       in the amount of $4,665,000 (see note 6).

       On February 26, 1999, the underwriter exercised the option to purchase
       661,500 additional shares of the Company's common stock from which the
       Company received proceeds of $7,382,340.

       Based on the Offering proceeds, payment of outstanding convertible debt,
       increased sales in 1998 and the Company's anticipated operating results,
       management believes there is sufficient funding to meet its operating
       expenditures.

(3)    PROPERTY AND EQUIPMENT, NET

       Property and equipment, net consists of the following:

<TABLE>
<CAPTION>
                                                                  1998             1997
                                                               ----------      ----------
<S>                                                            <C>              <C>
                   Office equipment                            $1,655,823      $1,144,364
                   Office furnishings and fixtures                199,953         131,553
                   Leasehold improvements                          77,328          32,179
                                                               ----------      ----------
                                                                1,933,104       1,308,096
                   Less accumulated depreciation and
                       amortization                               948,324         622,777
                                                               ----------      ----------
                                                               $  984,780      $  685,319
                                                               ==========      ==========
</TABLE>

(4)    OPERATING LEASES

       The Company entered into an agreement to lease office facilities under a
       noncancelable operating lease commencing January 1995 and expiring
       December 2001 with an option to renew for one five-year term. The lease
       contains certain incentives including rent abatements, rent discounts,
       leasehold improvement reimbursements, cash allowances and scheduled base
       rent increases over the term of the lease. Generally accepted accounting
       principles require that the full costs of a lease be recognized ratably
       over the term of the lease. Accordingly, the Company has recorded a
       deferred credit ($205,060 and $235,440 at December 31, 1998 and 1997,
       respectively) to reflect the excess of rent expense over cash payments
       (see note 5). In addition to the base rent payment, the Company pays a
       monthly allocation of the building's operating expenses. During 1997, the
       Company also entered into lease agreements for office facilities in the
       United Kingdom and Sydney which expire in 2003.


                                                                     (Continued)




                                       14
<PAGE>   15
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


       Future minimum lease payments under these office facilities leases as
       well as equipment leases as of December 31, 1998 are as follows:

                   Year ending December 31,
                        1999                             $    597,435
                        2000                                  552,822
                        2001                                  542,348
                        2002                                   96,938
                        2003                                   18,849
                                                         ------------

                  Total minimum lease payments           $  1,808,392
                                                         ============

       Rental expense, including operating leases with lease terms of less than
       one year, was $1,237,607, $669,543 and $597,905 during 1998, 1997 and
       1996, respectively.

(5)    ACCRUED EXPENSES

       Accrued expenses consists of the following:

                                                        1998              1997
                                                     ----------      ----------
                   Sales tax payable                 $  145,409      $   92,011
                   Sales tax contingencies              614,783         614,783
                   Deferred rent                        205,060         235,440
                   Accrued payroll                       75,980          95,215
                   Accrued legal                        127,000         109,000
                   Accrued vacation                     192,610         132,162
                   Other                                233,355         142,379
                                                     ----------      ----------
                                                     $1,594,197      $1,420,990
                                                     ==========      ==========

(6)    CONVERTIBLE DEBT

       (a)    DEBENTURE PURCHASE AGREEMENT

              On December 19, 1994, the Company entered into a Debenture
              Purchase Agreement (the "Agreement") with various partnerships
              (the "Lenders") in connection with the private placement of
              $12,000,000 convertible subordinated debentures (the
              "Debentures"). Principal on the Debentures was payable in two
              equal installments of $6,000,000 on December 1, 1999 and December
              1, 2000, and bore interest at 10 percent through June 30, 1997 and
              bore interest at 15 percent through maturity. A portion of this
              borrowing was attributed to its conversion feature due to the
              difference between the stated rates and the estimated market rate
              at the time of issuance. [See note 6(b).] Interest was payable
              quarterly in arrears and commenced on March 31, 1995. The
              Agreement provided for a default rate of interest of 20 percent on
              all principal amounts not paid within 15 days of the date due. At
              December 31, 1998, the Company


                                                                     (Continued)


                                        15
<PAGE>   16
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


              was not in compliance with certain debt covenants. The Lenders
              waived any remedies on default against the Company as outlined in
              the Agreement and waived compliance by the Company with respect to
              such covenants through the consummation of an Offering. The
              Company agreed with the Lenders to defer all quarterly interest
              and principal payments due or payable in order to maintain
              sufficient working capital for the Company's needs through the
              consummation of an Offering.

              On June 30, 1997 the Debentures became convertible at the option
              of a majority in interest of the Lenders into 22,556.14 shares of
              the Company's redeemable convertible participating preferred stock
              and one share of redeemable participating preferred stock for each
              $1,000 of principal outstanding. The redeemable convertible
              participating preferred stock is convertible to common stock at
              the rate of 100 shares of common stock for each share of preferred
              stock. See note 6(b) for valuation of conversion features. See
              redemption features of preferred stock in note 7.

              An Offering was consummated on January 29, 1999. As discussed in
              note 2, the Company repaid all principal and interest outstanding
              related to the debentures. On January 29, 1999, the debentures
              were converted into two classes of preferred stock.
              Contemporaneous with the offering, the lenders converted the
              redeemable convertible participating preferred stock into
              2,255,614 shares of common stock.

       (b)    ORIGINAL ISSUE DISCOUNT

              The fair value of the conversion feature of the $12,000,000
              debentures discussed in note 6(a) was determined to be $3,481,562
              based on the difference between the stated interest rates and the
              market rate of such debentures estimated to be 18 percent on the
              date of issuance. The amount is included in additional paid-in
              capital in the accompanying consolidated balance sheets. The
              resulting original issue discount (OID) on the convertible debt
              was amortized from the issue date (December 19, 1994) to the date
              it first became convertible (June 30, 1997) to achieve an 18
              percent effective interest rate. At December 31, 1998 and 1997,
              the OID was fully amortized.

(7)    PREFERRED STOCK

       In connection with the issuance of $12,000,000 of Debentures [see note
       6(a)], the Company amended its Articles of Incorporation by designating
       22,556.14 shares of authorized preferred stock as redeemable convertible
       participating preferred stock (the "redeemable convertible preferred
       stock"). Holders of the redeemable convertible preferred stock are
       entitled to receive (i) dividends at the same rate as dividends are paid
       with respect to the common stock based on the number of shares of common
       stock into which such shares of redeemable convertible preferred stock is
       then convertible; and (ii) $31.90 per share cumulative dividend per year
       through November 30, 1999 ($15.95 per share for the year ended December
       1, 2000) less the amount of common stock dividends paid.

       The redeemable convertible stock is redeemable at the option of the
       Company between December 1, 2000 and December 1, 2001 at the fair market
       value per share.



                                                                     (Continued)



                                       16
<PAGE>   17
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997


       Each share of redeemable convertible preferred stock entitles the holder
       to such number of votes per share as shall equal the number of shares of
       common stock into which such share of redeemable convertible preferred
       stock is then convertible. Shares of redeemable convertible preferred
       stock were convertible into shares of common stock automatically upon the
       closing of the Offering discussed in note 2. Shares of redeemable
       convertible preferred stock were converted into shares of common stock at
       an initial conversion rate of 100 shares of common stock for each share
       of preferred stock, whereby each share of convertible preferred stock was
       valued for conversion purposes at $532.00 per share.

       In addition, as part of the aforementioned amendment to its articles of
       incorporation, the Company designated 12,000 shares of authorized
       preferred stock as redeemable preferred stock. The holders of the
       redeemable preferred stock are not entitled to receive any cash dividends
       nor any voting rights or powers. The redeemable preferred stock was
       subject to mandatory redemption upon the closing date of the Offering
       (February 3, 1999). All redeemable preferred stock was redeemed at a
       redemption price of $1,000 per share.

       The redeemable preferred stockholders have liquidation preference of
       $1,000 per share to any convertible preferred and common stockholder. The
       convertible preferred and common stockholders share ratably in the
       proceeds from any liquidation of assets.

(8)    EMPLOYEE BENEFIT AND STOCK OPTIONS PLANS

       The Company maintains an employee retirement savings plan (the "Plan")
       under Internal Revenue Code Section 401(k). The Plan is available to all
       full-time employees over 21 years of age with more than three months of
       employment. Effective April 1994, the Company provides matching
       contributions which vest to the employees immediately and range from 10
       percent to 35 percent, depending on years of service of the matchable
       deferrals of each participant entitled to matching contributions, not to
       exceed 2.8 percent of the participant's compensation. There was $102,713,
       $46,573 and $39,069 provided by the Company in matching contributions for
       the years ended December 31, 1998, 1997 and 1996, respectively.

       SGA Ltd., also maintains an employee benefit plan (the "Ltd. Plan"). This
       is an employee-directed plan which allows the employee to set aside from
       1 to 5 percent of their salary to be deposited to a fund of their choice.
       SGA Ltd. will match the employee's contribution up to 5 percent.
       Provisions of the Ltd. Plan are substantially the same as the Plan.

       On April 1, 1996 the Company adopted a stock-option plan. Under this
       plan, the Company may grant options for up to 850,000 shares of common
       stock. An option's maximum term is ten years. Each option vests as
       follows: 25 percent one year after the date of grant and the balance in
       successive equal quarterly installments of 6.25 percent each, at the end
       of each of the next 12 calendar quarters subsequent to the date of grant.
       During 1998, 1997 and 1996, 65,720, 155,000 and 214,000 options,
       respectively, were granted to employees. Of these options, 142,314 were
       exercisable at December 31, 1998. In addition, on April 1, 1996, under
       the stock-option plan 494,120 options to purchase common stock were
       granted to an executive officer of the Company. The options vest as
       follows: 82,353 shares


                                                                     (Continued)




                                       17
<PAGE>   18

                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997



       one year after the grant date; 20,588 shares at the end of each of the
       next 12 calendar quarters subsequent to the vesting commencement date;
       82,355 shares upon the earlier to occur of (a) March 21, 2006, or (b) the
       market value of the Company's outstanding stock has equaled or exceeded
       $100 million for 30 days; and the remaining 82,356 shares upon the
       earlier to occur of (a) March 21, 2006 or (b) the market value of the
       Company's outstanding stock has equaled or exceeded $150 million for 30
       days. At December 31, 1998, the officer had 226,469 of exercisable
       options, none of which were exercised.

       At June 30, 1998, the Company adopted an additional stock-option plan
       (1998 Stock-Option Plan). Under this plan the Company may grant options
       for up to 1,500,000 shares of common stock. At December 31, 1998, the
       Company has granted 602,041 options under the 1998 Stock-Option Plan at
       an exercise price of $12.00 per share which represents the Offering
       price. None of these options were exercised at December 31, 1998. Each
       option vests based on the same schedule as the 1996 stock option plan.

       The fair market value of the underlying stock related to these options
       was estimated to be $2.53 - $12.00 as of grant dates from 1996 through
       1998. The Company applies APB Opinion No. 25 in accounting for its
       stock-option plan. Stock compensation expense is recognized at the date
       options are vested when the exercise price is lower than fair market
       value at the date of grant. There was no compensation expense recorded in
       1996 and 1997. Stock compensation expense for the year ended December 31,
       1998 was $34,696. Had the Company determined compensation cost based on
       fair value at the grant date for its stock options under Statement No.
       123, there would have been no effect for the year ended December 31,
       1996. The Company's net loss for the year ended December 31, 1997 would
       have increased by $311,525. The Company's net income for the year ended
       December 31, 1998 would have decreased by $347,834.

       The weighted-average fair market value per share of options granted to
       employees was estimated at $1.62 and $1.60, for the years ended December
       31, 1998 and 1997, respectively. The fair value of each option was
       estimated at the date of grant using the minimum value method with the
       following assumptions used:

                  Expected life                 5 years
                  Dividends                     None
                  Interest rate                 5.65% in 1998
                                                and 5.45% in 1997



                                                                     (Continued)







                                       18
<PAGE>   19
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997



       Stock option activity since inception is indicated as follows:


<TABLE>
<CAPTION>
                                                                                                        Weighted
                                                                                        Weighted        average
                                                                                         Average        remaining
                                                                                        Exercise       contractual
                                                                         Shares          Price         life (years)
                                                                       ---------       ----------      -----------
<S>                                                                      <C>           <C>             <C>

                   Outstanding at inception                                   --
                      Granted                                            708,120       $    2.53
                      Forfeited                                          (77,000)           2.53
                                                                       ---------

                   Balance outstanding at December 31, 1996              631,120            2.53

                      Granted                                            155,000            2.53
                      Forfeited                                          (34,000)           2.53
                                                                       ---------

                   Balance outstanding at December 31, 1997              752,120            2.53

                      Granted                                             30,607            2.53
                      Granted                                            637,154           12.00
                      Forfeited                                           (6,427)
                                                                       ---------

                   Balance outstanding at December 31, 1998            1,413,454
                                                                       =========

                   Exercisable at December 31, 1998                      357,908         $  2.53          8.79
                                                                       =========

</TABLE>


       Subsequent to December 31, 1998, an additional 200,000 shares were
       granted at $12.00 per share.

       The amount of stock compensation expense recognized at the date options
       are vested for options granted as of December 31, 1998 when the exercise
       price was lower than fair market value at the date of grant is as
       follows:


                         (Unaudited)
                 Years ending December 31,
                 --------------------------
                            1999                         $43,612
                            2000                          34,447
                            2001                          23,494
                            2002                           1,513

(9)    RELATED PARTY TRANSACTIONS

       In connection with the issuance of convertible debt (see note 6), certain
       of the Company's senior executives entered into noncompete agreements,
       which expire upon the third anniversary date of the termination of the
       executives' employment.


                                                                     (Continued)




                                        19
<PAGE>   20
                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997



(10)   INCOME TAXES

<TABLE>
<CAPTION>
                                                                              Years Ended December 31,
                                                                   ----------------------------------------------
                                                                       1998              1997             1996
                                                                   -----------       -----------      -----------
<S>                                                                 <C>                  <C>              <C>

                   Income taxes as reported                        $        --                --               --
                   Pro forma adjustment (unaudited)                 (1,214,770)      $   948,427      $   359,819
                                                                   -----------       -----------      -----------
                   Pro forma income tax (expense) benefit
                       (unaudited)                                 $(1,214,770)      $   948,427      $   359,819
                                                                   ===========       ===========      ===========

</TABLE>


       The unaudited proforma income tax (expense) benefit presented on the
       consolidated statements of operations represent the estimated taxes that
       would have been recorded had the Company been a C corporation for income
       tax purposes for each of the periods presented. The proforma income tax
       (expense) benefit is as follows (unaudited):

<TABLE>
<CAPTION>
                                                        1998              1997              1996
                                                    -----------       -----------       -----------
<S>                                                 <C>                   <C>                <C>
                   Pro forma (unaudited):
                      Current:
                         Federal                    $(1,004,126)      $   897,416       $    62,798
                         Foreign                             --                --                --
                         State                         (203,627)          187,580            12,609

                      Deferred:
                         Federal                         (4,045)         (108,897)          229,124
                         State                           (2,972)          (27,672)           55,288
                                                    -----------       -----------       -----------

                         Total pro forma            $(1,214,770)      $   948,427       $   359,819
                                                    ===========       ===========       ===========


</TABLE>




       A reconciliation of income tax (expense) benefit calculated using the
       statutory federal income tax rate and the pro forma income tax (expense)
       benefit is as follows (unaudited):

<TABLE>
<CAPTION>
                                                                              1998              1997               1996
                                                                           -----------       -----------       -----------
<S>                                                                        <C>                 <C>                 <C>
                   Income tax (expense) benefit using statutory
                       tax rate                                            $(1,020,964)      $ 1,145,089       $   833,092
                   Effect of:
                    State and local income taxes, net of federal
                      income tax                                           $  (136,356)      $   105,539       $    44,812
                    Change in valuation allowance                          $   (56,274)      $   (61,263)      $        --
                    Difference between US and non-US tax rates             $     7,298       $   (27,221)               --
                    Original issue discount amortization                   $        --       $  (231,097)      $  (468,614)
                    Change in effective tax rates                          $     9,761       $    22,256       $   (43,379)
                    Other, net                                             $   (18,235)      $    (4,876)      $    (6,092)
                                                                           -----------       -----------       -----------

                      Pro forma income tax (expense) benefit               $(1,214,770)      $   948,427       $   359,819
                                                                           ===========       ===========       ===========
</TABLE>




                                       20
<PAGE>   21

                        SMITH-GARDNER & ASSOCIATES, INC.
                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997



       The Company will issue promissory notes to its existing shareholders in
       an aggregate amount representing the individual tax liability for each of
       the existing shareholders for the period beginning January 1, 1998 and
       ending on December 31, 1998. Amount is estimated to be $850,000.

(11)   BUSINESS AND CREDIT CONCENTRATIONS

       The Company currently derives substantially all of its revenue from sales
       of its MACS family of products and related services and hardware. Any
       factor adversely affecting the sale of the Company's MACS products or
       other new products, could have a material affect on the Company's
       business, financial condition and results of operations.

       The Company sells its products primarily to customers located in the
       United States. Continuing relationships are maintained with most
       customers through product-support arrangements and sales of system
       upgrades.

       During 1997 and 1996, the Company purchased approximately 65 percent and
       74 percent, respectively, of its computer hardware from Hewlett Packard.
       At December 31, 1997, the Company owed this supplier approximately
       $98,000. In 1998, the Company began purchasing its hardware from a
       distributor of Hewlett Packard due to a change in Hewlett Packards
       distribution channels. 59 percent of its computer hardware was purchased
       from this distributor and Hewlett Packard for the year ended December 31,
       1998. The Company owed this supplier $259,102 at December 31, 1998.
       Accordingly, any adverse change in the product pricing or the operations
       of Hewlett Packard could significantly effect the operating results of
       the Company. However, the Company is currently in the process of
       engineering its product to operate on multiple platforms.

       No single customer accounted for more than 10 percent of total revenue
       for the year ended December 31, 1998 and 1997. One customer accounted for
       10.7 percent of total revenue for the year ended December 31, 1996. In
       addition, there were accounts receivable from three customers at December
       31, 1998, each of which exceeded 10 percent of total accounts receivable
       for approximately $2,325,000.

       The Company estimates an allowance for doubtful accounts generally based
       on an analysis of collections in prior years, the credit worthiness of
       its customers as well as general economic conditions. Consequently, an
       adverse change in those factors could effect the Company's estimate of
       its bad debts.






                                       21
<PAGE>   22


                        SMITH-GARDNER & ASSOCIATES, INC.

                                AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1997

(12)   COMMITMENTS AND CONTINGENCIES

       (a)    LEGAL PROCEEDINGS

              The Company is involved in various claims and legal actions
              arising in the ordinary course of business. If the plaintiff's
              claims are probable, the appropriate amount is accrued in the
              consolidated financial statements. In the opinion of management,
              the ultimate disposition of matters not accrued will not have a
              material adverse effect on the Company's consolidated financial
              position, results of operations or liquidity.

       (b)    COMMITMENTS

              The Company has committed to fund the operations of SGA Ltd. and
              SGA Pty. for a period of at least one year. The Company does not
              believe this to be a risk since the costs associated with
              operating these subsidiaries are not significant.

       (c)    TAX LIABILITY

              The Internal Revenue Service ("IRS") is currently auditing the
              Company's tax returns for fiscal 1995. One issue the IRS is
              reviewing is whether the issuance of the Convertible Debentures in
              December 1994 resulted in the Company failing to qualify as an S
              Corporation. In the event the IRS determines that the Company did
              not qualify as an S Corporation for fiscal 1995 or any fiscal year
              thereafter, the Company would be subject to a significant tax
              liability. The shareholders have agreed to indemnify the Company
              for any tax liability to the Company. To the extent the
              shareholders are unable to fulfill such indemnification and
              satisfy all outstanding tax liability to which the Company is
              subject, the Company's business, financial condition or results of
              operations could be materially adversely affected.

(13)   AUTHORIZATION OF COMMON AND PREFERRED STOCK

       In September 1998, the Company increased the capital stock to 50,000,000
       shares of common stock at $.01 par value per share and 10,000,000 shares
       of preferred stock at $.01 par value per share. The consolidated
       financial statements retroactively effect these increases in authorized
       capital stock.

(14)   NEW ACCOUNTING PRONOUNCEMENTS

       In June 1998, the FASB issued Statement of Financial Accounting Standards
       No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES"
       ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting
       standards for derivative instruments, including certain derivative
       instruments embedded in other contracts and for hedging activities. It
       requires an entity to recognize all derivatives as either assets or
       liabilities in the balance sheet and measure those instruments at fair
       value. The Company does not believe that the adoption of SFAS No. 133
       will have a significant impact on the Company's financial reporting.







                                       22
<PAGE>   23




                                    PART IV


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

      (a)(1)  The following consolidated financial statements are filed as part
of this Form 10-K:

               Smith-Gardner & Associates, Inc. Consolidated Financial
Statements:

               Independent Auditors Report

               Consolidated Balance Sheets at December 31, 1998 and 1997

               Consolidated Statements of Operations for each of the years in
               the three year period ended December 31, 1998

               Consolidated Statements of Redeemable Preferred Stock and
               Stockholders' Deficit for each of the years in the three year
               period ended December 31, 1998

               Consolidated Statements of Cash Flows for each of the years in
               the three year period ended December 31, 1998

               Notes to Consolidated Financial Statements.

         (2)  The following financial statement schedules are filed as part of
this Form 10-K:

              Schedule I of Valuation and Qualifying Accounts.

         (3)  See Exhibit Index included elsewhere herein.

      (b) Reports on Form 8-K:

              None











                                       23
<PAGE>   24



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amended Annual Report
on Form 10-K/A to be signed on its behalf by the undersigned thereunto duly
authorized.

Date: May 21, 1999
                                               SMITH-GARDNER & ASSOCIATES, INC.
                                                        (Registrant)

                                               By: /s/ Gary C. Hegna
                                                  ------------------------------
                                                  Gary C. Hegna
                                                  Chief Executive Officer
                                                  and President

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this Amended Annual Report on Form 10-K/A has been signed by the following
persons on behalf by the Registrant and in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>
               SIGNATURE                                   TITLE                                    DATE
               ---------                                   -----                                    ----
<S>                                     <C>                                                     <C>

/s/ Gary G. Hegna                       President, Chief Executive Officer and Director          May 21, 1999
---------------------------------       (Principal Executive Officer)
Gary G. Henna


/s/ Martin K. Weinbaum                  Vice President - Finance, Chief Financial                May 21, 1999
---------------------------------       Officer, Secretary and Treasurer
Martin K. Weinbaum                      (Principal Financial and Accounting Officer)


/s/ Allan Gardner                       Executive Vice President - Advanced                      May 21, 1999
---------------------------------       Technologies and Co-Chairman of the Board
Allan Gardner


/s/ Wilburn Smith                       Executive Vice President - Sales and Co-                 May 21, 1999
---------------------------------       Chairman of the Board
Wilburn Smith


/s/ Francis H. Zenie                    Director                                                 May 21, 1999
---------------------------------
Francis H. Zenie


/s/ Jacqueline C. Morby                 Director                                                 May 21, 1999
---------------------------------
Jacqueline C. Morby


/s/ James J. Felcyn, Jr.                Director                                                 May 21, 1999
---------------------------------
James J. Felcyn, Jr.



</TABLE>

                                       24

<PAGE>   25



                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT        DESCRIPTION
-------        -----------
<S>            <C>

23.1           Consent of KPMG LLP


</TABLE>


                                       25