• our ability to predict consumer needs, introduce new products, gain broad market acceptance for such products and ramp up manufacturing in a timely manner;

• changes in demand for our products from our customers and their end-users;

• the intensity of the competition and our ability to successfully compete;

• the pace at which the market for new products develop;

• the response of competitors, many of whom are bigger and better financed than us;

• our ability to successfully execute our business plan and control costs and expenses;

• our ability to protect our intellectual property and our ability to not infringe on the rights of others; and

• those additional factors which are listed under the section "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008.

The forward-looking statements contained in this report are made on the basis of the views and assumptions of management regarding future events and business performance as of the date this report is filed with the SEC. We do not undertake any obligation to update these statements to reflect events or circumstances occurring after the date this report is filed. Overview
Smith Micro Software, Inc. ("we," "us," "our," "Smith Micro," or the "Company") designs, develops and markets software products and services for the mobile industry. The Company is focused on developing connectivity, multimedia, and device management solutions for a converging world of wireless and wired networks. The Company's portfolio of wireless software products and services include the QuickLink family of desktop and mobile products to manage wireless data communications; including software applications for 3G and 4G broadband mobile networks, Wi-Fi, personal information management, mobile content management, device management, and data compression solutions. We sell our products and services to many of the world's leading wireless service providers ("carriers"), original equipment manufacturers ("OEM"), PC and device manufacturers, enterprise businesses, as well as direct to consumers. The proliferation of broadband mobile wireless technologies is providing new opportunities for our products and services on a global basis. When these broadband wireless technologies-EVDO, UMTS/HSPA, Wi-Fi, and WiMAX-are combined with new devices such as mobile phones, Personal Computers ("PCs"), Netbooks, Smartphones, and Ultra-Mobile PCs ("UMPCs"), opportunities emerge for new communications software products. Our core technologies are designed to address these emerging mobile convergence opportunities.
In addition, the Company distributes its consumer product lines and a variety of third party Mac and Windows PC products worldwide through our online stores and third-party wholesalers, retailers and value-added resellers.

We offer software products that operate on Windows, Mac, UNIX, Linux, Windows Mobile, Symbian, and Java platforms. The underlying design concept common across our products is our ability to improve the customer's experience and this philosophy is based on the combination of solid engineering and exceptional design that reinforces our brand's competitive differentiation and customer value. We have over 25 years of experience in design, creation and custom engineering services for software products. We create value by leveraging our business model to build new services and solutions that allow our customers to quickly enter a market with new product offerings that target their customer segments.
Sales to two customers and their respective affiliates in the Wireless business segment accounted for 28.1% and 14.2% of the Company's total revenues for the three months ended March 31, 2009. Sales to one customer in the Wireless business segment accounted for 43.6% of the Company's total revenues for the three months ended March 31, 2008.
On December 10, 2007, Smith Micro entered into an Asset Purchase Agreement with PCTEL, Inc. pursuant to which Smith Micro agreed to acquire substantially all of the assets of PCTEL's Mobility Solutions Group ("MSG"). The acquisition was completed on January 4, 2008. Pursuant to the terms of the Asset Purchase Agreement, Smith Micro paid $59.7 million in cash to PCTEL at the closing on January 4, 2008.
Results of Operations
The table below sets forth certain statements of operations data expressed as a percentage of revenues for the three months ended March 31, 2009 and 2008. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

                                                 Three Months Ended
                                                      March 31,
                                                  2009          2008
                Revenues                            100.0 %      100.0 %
                Cost of revenues                     19.0 %       23.4 %

                Gross profit                         81.0 %       76.6 %
                Operating expenses:
                Selling and marketing                26.4 %       30.8 %
                Research and development             34.1 %       32.3 %
                General and administrative           18.9 %       22.2 %

                Total operating expenses             79.4 %       85.3 %

                Operating income (loss)               1.6 %       -8.7 %
                Interest and other income             1.1 %        1.3 %

                Profit (loss) before taxes            2.7 %       -7.4 %
                Income tax expense (benefit)          1.5 %       -5.9 %

                Net income (loss)                     1.2 %       -1.5 %

Revenues and Expense Components
The following is a description of the primary components of our revenues and expenses:
Revenues. Revenues are net of sales returns and allowances. Substantially all of our operations are organized into two business units:
• Wireless, which includes our connection manager solutions for the OEM and Enterprise channels, music, photo and video content management, device management; and

• Consumer, which includes retail sales of our compression and broad consumer-based software.

The following table shows the revenues generated by each business unit (in thousands):

                                           Three Months Ended
                                                March 31,
                                            2009          2008
                      Wireless           $   19,257     $ 16,156
                      Consumer                4,251        5,485
                      Corporate/Other           280          239

                      Total Revenues         23,788       21,880
                      Cost of revenues        4,523        5,116

                      Gross Profit       $   19,265     $ 16,764

"Corporate/Other" refers to the consulting portion of our services sector which has been de-emphasized and is no longer considered a strategic element of our future plans.
Cost of revenues. Cost of revenues consists of direct product costs, royalties, and the amortization of purchased intangibles and capitalized software.
Selling and marketing. Selling and marketing expenses consist primarily of personnel costs, advertising costs, sales commissions, trade show expenses, and the amortization of certain purchased intangibles. These expenses vary significantly from quarter to quarter based on the timing of trade shows and product introductions.
Research and development. Research and development expenses consist primarily of personnel and equipment costs required to conduct our software development efforts, and the amortization of acquired intangibles. We remain focused on the development and expansion of our technology, particularly our wireless, compression and multimedia software technologies.
General and administrative. General and administrative expenses consist primarily of personnel costs, professional services and fees paid for external service providers, travel, legal, and other public company costs.
Interest and other income. Interest and other income are directly related to our average cash balance during the period and vary among periods. On January 4, 2008, we purchased substantially all of the assets of the Mobile Solutions Group of PCTEL at a cost of $59.7 million. In June 2008 we changed our investment strategy to include short-term investments in equity and debt securities with maturity dates within three to 12 months. Our other excess cash is invested in short term marketable equity and debt securities classified as cash equivalents.
Income tax expense. The Company accounts for income taxes under the provision of 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. Measurement of the deferred items is based on enacted tax laws. In the event the future consequences of differences between financial reporting bases and 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. Effective January 1, 2007, the Company adopted FIN No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements.
Three Months Ended March 31, 2009 Compared to the Three Months Ended March 31, 2008
Revenues. Revenues were $23.8 million and $21.9 million for the three months ended March 31, 2009 and 2008, respectively, representing an increase of $1.9 million, or 8.7%. Wireless sales increased $3.1 million, or 19.2%, primarily due to new connectivity and security product OEM licenses of $7.5 million. These increases were partially offset by a $4.4 million decrease primarily due to the change in how our multimedia products were merchandised by our primary music customers; changing from higher revenue, lower margin music kits (including software, cable and ear buds) to downloadable software or as a software-only CD, resulting in lower revenue per unit, but at a much higher margin per unit. Consumer group sales decreased $1.2 million, or 22.5%, primarily due to a one-time inventory sell-in of a new major consumer product launched in the first quarter of 2008 and the effect of the worldwide economic downturn in the first quarter of 2009.

Cost of revenues. Cost of revenues was $4.5 million and $5.1 million for the three months ended March 31, 2009 and 2008, respectively, representing a decrease of $0.6 million, or 11.6%. Direct product costs decreased $0.8 million primarily due to a shift in product mix. A decrease in sales of lower margin multimedia and consumer products were more than offset by sales of higher margin OEM license products. Amortization of intangibles increased from $1.0 million to $1.2 million, or $0.2 million, due to several small acquisitions made in the fourth quarter of 2008. Stock-based compensation expense was $0.1 million for both fiscal quarters ended March 31, 2009 and 2008.
Gross profit. Gross profit was $19.3 million, or 81.0% of revenues for the three months ended March 31, 2009, an increase of $2.5 million, or 14.9%, from $16.8 million, or 76.6% of revenues for the three months ended March 31, 2008. The 4.4 percentage point increase was primarily due to improved product margins of 4.8 points as a result of the change in product mix mentioned above, and lower stock based compensation expense as a percentage of sales of 0.2 points. These items were partially offset by higher amortization of intangibles due to several small acquisitions of 0.6 points.
Selling and marketing. Selling and marketing expenses were $6.3 million and $6.7 million for the three months ended March 31, 2009 and 2008, respectively, representing a decrease of $0.4 million, or 6.8%. This decrease was primarily due to lower stock-based compensation expense which decreased from $1.3 million to $0.7 million, or $0.6 million. This decrease was partially offset by increased personnel costs and higher headcount of $0.2 million.
Research and development. Research and development expenses were $8.1 million and $7.1 million for the three months ended March 31, 2009 and 2008, respectively, representing an increase of $1.0 million, or 14.8%. This increase was primarily due to increased personnel and recruiting costs associated with acquired and new hired headcount of $1.1 million to support our new product initiatives and new contract wins, and other cost increases of $0.1 million. This increase was partially offset by lower stock-based compensation expense which decreased from $0.8 million to $0.6 million, or $0.2 million. Amortization of purchased technologies was $0.3 million for both fiscal quarters ended March 31, 2009 and 2008.
General and administrative. General and administrative expenses were $4.5 million and $4.8 million for the three months ended March 31, 2009 and 2008, respectively, representing a decrease of $0.3 million, or 7.4%. This decrease was primarily due lower stock-based compensation expense which decreased from $1.4 million to $1.2 million, or $0.2 million and overall reduced spending of $0.1 million.
Interest and other income. Interest and other income was $0.3 million for both fiscal quarters ended March 31, 2009 and 2008.
Income tax provision. We recorded an income tax expense for the three months ended March 31, 2009 in the amount of $0.4 million. We recorded a tax benefit of $1.3 million for the three months ended March 31, 2008. Liquidity and Capital Resources
At March 31, 2009, we had $41.0 million in cash, cash equivalents, and short-term investments and $51.9 million of working capital. On January 4, 2008, we acquired the Mobile Solutions Group of PCTEL at a cost of $59.7 million in cash plus $0.6 million of legal and banking fees which were paid through March 31, 2008. We currently 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 short-term investment balances and cash flow from operations will be sufficient to finance our working capital and capital expenditure requirements through at least the next twelve 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 that such financing will be available to us at commercially reasonable terms or at all. Operating activities
Net cash provided by operating activities was $5.2 million for the three months ended March 31, 2009. The primary sources of operating cash were adjustments for non-cash expenses including depreciation and amortization of $2.5 million, stock based compensation of $2.4 million, net income and other non-cash expenses of $0.9 million, and increases of current liabilities of $0.9 million. The primary use of cash affecting operating cash flow was an increase in accounts receivable of $1.2 million and the reduction of other assets of $0.3 million. Net cash used in operating activities was $0.5 million for the three months ended March 31, 2008. The primary uses of operating cash were for increases in accounts receivable of $4.2 million, and reduction of deferred taxes of $1.3 million, and a reduction of all other working capital assets of $0.8 million. These uses of cash were partially offset by non-cash expenses including stock based compensation of $3.3 million, depreciation and amortization of $2.1 million, and the net loss and other non-cash expenses of $0.4 million.

Investing activities
During the three months ended March 31, 2009, we used $8.4 million in investing activities due to investing in short-term investments of $7.6 million and capital expenditures, primarily leasehold improvements, of $0.8 million. In the three months ended March 31, 2008, we used $60.6 million in investing activities for the acquisition of the Mobility Solutions Group of PCTEL for $60.3 million, capital expenditures of $0.2 million, and some other acquisition cost adjustments of $0.1 million.
Financing activities
We received less than $0.1 million in cash during the three months ended March 31, 2009 from the exercise of stock options. In the three months ended March 31, 2008, we used $0.2 million from financing activities for tax benefits from stock-based compensation in accordance with SFAS No. 123(R). Contractual obligations and commercial commitments As of March 31, 2009 we had no debt. The following table summarizes our contractual obligations as of March 31, 2009 (in thousands):

                                                                  Payments due by period
                                                     1 year                                                More than
Contractual obligations:              Total         or less          1-3 years          3-5 years           5 years
Operating Lease Obligations          $ 8,426        $  1,597        $     3,083        $     2,137        $     1,609
Purchase Obligations                      97              97                  -                  -                  -

Total                                $ 8,523        $  1,694        $     3,083        $     2,137        $     1,609

During our normal course of business, we have made certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain transactions. These include: intellectual property indemnities to our customers and licensees in connection with the use, sale and/or license of our products; indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease; indemnities to vendors and service providers pertaining to claims based on the negligence or willful misconduct; indemnities involving the accuracy of representations and warranties in certain contracts; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. In addition, we have made contractual commitments to employees providing for severance payments upon the occurrence of certain prescribed events. We may also issue a guarantee in the form of a standby letter of credit as security for contingent liabilities under certain customer contracts. The duration of these indemnities, commitments and guarantees varies, and in certain cases, may be indefinite. The majority of these indemnities, commitments and guarantees may not provide for any limitation of the maximum potential for future payments we could be obligated to make. We have not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. Real Property Leases
Our corporate headquarters, including our principal administrative, sales and marketing, customer support and research and development facility, is located in Aliso Viejo, California, where we currently lease and occupy approximately 40,000 square feet of space pursuant to leases that expires May 31, 2016. We lease approximately 14,400 square feet in Chicago, Illinois under a lease that expires August 31, 2012. We lease approximately 13,300 square feet in Watsonville, California under a lease that expires September 30, 2013. We lease approximately 7,300 square feet in Herndon, Virginia under a lease that expires November 30, 2009. Internationally, we lease space in Stockholm, Sweden; Seoul, South Korea; Belgrade, Serbia; Oslo, Norway; and Vancouver, Canada. These leases are for one to three-year terms.
Critical Accounting Policies and Estimates 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 new information as it 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
We currently report our net revenues under two operating groups: Wireless and Consumer. Within each of these groups software revenue is recognized based on the customer and contract type. We recognize revenue in accordance with the AICPA Statement of Position ("SOP") No. 97-2, Software Revenue Recognition, as amended, when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is probable. We recognize revenues from sales of our software to OEM customers or end users as completed products are shipped and titles passes; or from royalties generated as authorized customers duplicate our software, if the other requirements of SOP No. 97-2 are met. If the requirements of SOP No. 97-2 are not met at the date of shipment, revenue is not recognized until these elements are known or resolved. Returns from OEM customers are limited to defective goods or goods shipped in error. Historically, OEM customer returns have not exceeded the very nominal estimates and reserves. Management reviews available retail channel information and makes a determination of a return provision for sales made to distributors and retailers based on current channel inventory levels and historical return patterns. Certain sales to distributors or retailers are made on a consignment basis. Revenue for consignment sales are not recognized until sell through to the final customer is established. Within the Consumer group certain revenues are booked net of revenue sharing payments, pursuant to the consensus of EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. We have a few multiple element agreements for which we have contracted to provide a perpetual license for use of proprietary software, to provide non-recurring engineering, and in some cases to provide software maintenance (post contract support). For multiple element agreements, vendor specific objective evidence of fair value for all contract elements is reviewed and the timing of the individual element revenue streams is determined and recognized consistent with SOP No. 97-2. Sales directly to end-users are recognized upon delivery. End users have a thirty day right of return, but such returns are reasonably estimable and have historically been immaterial. We also provide technical support to our customers. Such costs have historically been insignificant. Sales Incentives
Pursuant to the consensus of EITF No. 01-09, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Product), effective January 1, 2002, 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 accounted for as a reduction of revenue. We track incentives by program and use historical redemption rates to estimate the cost of customer incentives. Total sales incentives were $0.3 and $0.2 million for the three months ended March 31, 2009 and 2008, respectively.
Accounts Receivable and Allowance for Doubtful Accounts We sell our products worldwide. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history, the customer's current credit worthiness and various other factors, as determined by our review of their current credit information. We continuously monitor collections and payments from our customers. We estimate credit losses and maintain an allowance for doubtful accounts reserve based upon these estimates. While such credit losses have historically been within our estimated reserves, we cannot 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.
Internal 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, 2009, software has been substantially completed concurrently with the establishment of technological feasibility; accordingly, no costs have been capitalized to date. . . .