Independent developer working for two competitors

Hello everyone, I'm looking for some ethics advice on how to handle a potentially sticky situation.

I am a software developer, and I sell my software to many people from all parts of the world. Sometimes, my customers will contact me to make further modifications to the software in order to suit their needs better. Occasionally, I get two clients who are in competition with each other. Typically these are small modifications they request, so until now I have not considered it worthy of disclosure.

Over the past few months, I have been working off-and-on as a developer for two different customers who are hotly competing with each other. The development requests have escalated from simple jobs into interesting and complicated development jobs. Let's call them client A and client B. Both are in the same "field" of competition.

A while ago, in a telephone conversation with client A, they made an offhand remark about the direction of client B's website. Unsure of how to handle this awkward position, I said nothing and let it slide. However in my heart, I know there must be some sort of disclosure. Not only to satisfy my own set of morals, but they'll find out eventually regardless. I'd rather the discovery was on my terms. I have good rapport with both customers and we are on friendly terms. I'd very much like to continue to have their trust, and to do so I must bring this to their attention myself.

My questions are this:

As a software developer, I sell my software anonymously and indiscriminately to many people. Sometimes they are competitors. I don't see a problem with this, but the issue becomes more entangled when these competitors are designing their future business strategies around my extended development and modifications.

How should I handle myself professionally in a case like this? I personally feel a comfortable middle ground is to not be a consultant, and relegate myself to a strictly developmental role. Meaning, I will not give advice to either client about the direction of their business strategy, I will accept and perform work requests only. In other words, be a developer only and not a consultant.

Secondly, does anyone have any tactful strategies for disclosing my position? I'm thinking a simple phone conversation or written letter with each client explaining my situation is in order. Idealy I would like to keep each other's details confidential, something along the lines of "As an independent contractor, sometimes I receive requests from competitors in the same field of interest. In preventing any conflicts of interest, I can not provide consultancy, form unique partnerships, or disclose any information about the nature of my other contracts. I can only provide services such as are required to perform any development tasks set forth explicitly by you."

Something like that anyway..

As a very small business, I would like to avoid having to drop one of the clients entirely. Plus I'm not entirely convinced that's appropriate in a developer's role. Most of the ethics material I have been reading deals with consultants, and not contractors specifically. However, I am open minded to advice and am willing to take those steps if it is determined to be the most appropriate course of action.

Any ideas?

Thanks, I'm really interested to hear what others think about this.

you are not held back to deal with their competition, since you have not signed any contract containing a non compete clause