• 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 mobile software products and services and an extensive line of personal computing graphic and utility software products. We sell our products and services to many of the world's leading wireless mobile device operators (carriers and cable), mobile device original equipment manufacturers ("OEM"), personal computer ("PC") manufacturers, and enterprise businesses, as well as directly to consumers.
We develop mobility solutions that enable seamless broadband connectivity and next-generation multimedia and fixed-mobile convergence products over wireless networks. The Company's portfolio of mobility solutions include the QuickLinkฎ family of client and server products that enable seamless broadband connectivity to manage wireless data communications for 3G and 4G WWAN, WiMAX and WiFi broadband wireless networks, and next generation multimedia products to manage content mobility and fixed-mobile convergence products for mobile devices and wireless networks. The Company also integrates device management and data compression solutions into both existing connectivity products and standalone product offerings.
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, WiFi, and WiMAX-are combined with new devices such as mobile phones, PCs, Netbooks, Smartphones, and Ultra-Mobile PCs, opportunities emerge for new communications software products. Our core technologies are designed to address these emerging mobile convergence opportunities.

We distribute our product lines and various third-party software products worldwide, directly and through our online stores, 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.
On September 9, 2009, we agreed to acquire Core Mobility, Inc. ("Core Mobility"), a developer of mobility software and solutions, for $10 million in cash and 700,000 shares of Smith Micro common stock. The transaction closed on October 26, 2009, and Core Mobility became a wholly-owned subsidiary of Smith Micro. In addition, the former shareholders of Core Mobility have the ability to earn additional cash consideration of up to $1.9 million in the form of earn-out payments, contingent on Core Mobility achieving certain milestone deliverables for product development and deployment. Acquisition-related costs of $0.1 million were recorded in the period ended September 30, 2009 in the general and administrative section of the consolidated statement of operations. Results of Operations
The table below sets forth certain statements of operations data expressed as a percentage of revenues for the three and nine months ended September 30, 2009 and 2008. Our historical results are not necessarily indicative of the operating results that may be expected in the future.

                                        Three Months Ended         Nine Months Ended
                                          September 30,              September 30,
                                        2009          2008         2009         2008

        Revenues                         100.0 %     100.0 %       100.0 %     100.0 %
        Cost of revenues                  12.7        19.5          15.4        21.9

        Gross profit                      87.3        80.5          84.6        78.1
        Operating expenses:
        Selling and marketing             21.4        23.5          23.7        26.2
        Research and development          33.2        30.8          33.6        32.1
        General and administrative        17.8        18.5          18.0        20.2

        Total operating expenses          72.4        72.8          75.3        78.5

        Operating income (loss)           14.9         7.7           9.3        (0.4 )
        Interest and other income          0.4         0.4           0.6         0.7

        Profit before taxes               15.3         8.1           9.9         0.3
        Income tax expense                 8.2        14.0           5.3         3.1

        Net income (loss)                  7.1 %      (5.9 )%        4.6 %      (2.8 )%

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, and device management; and

• Productivity & Graphics, 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          Nine Months Ended
                                        September 30,              September 30,
                                      2009          2008         2009          2008
         Wireless                  $   22,665     $ 19,919     $  63,295     $ 52,911
         Productivity & Graphics        4,986        6,396        13,569       18,101
         Corporate/Other                  169          326           730          961

         Total Revenues                27,820       26,641        77,594       71,973
         Cost of revenues               3,540        5,197        11,985       15,776

         Gross profit              $   24,280     $ 21,444     $  65,609     $ 56,197

"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 and short term investment balances during the period and vary among periods. 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 as required by the Income Taxes Topic of the FASB Accounting Standards Codification. 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, we are required to evaluate 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. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Three Months Ended September 30, 2009 Compared to the Three Months Ended September 30, 2008
Revenues. Revenues were $27.8 million and $26.6 million for the three months ended September 30, 2009 and 2008, respectively, representing an increase of $1.2 million, or 4.4%. Wireless sales increased $2.7 million, or 13.8%, primarily due to new connectivity and security product OEM licenses of $5.2 million. These increases were partially offset by a $2.5 million decrease in revenues primarily due to a change in how our multimedia products were merchandised by our primary music customers, which changed from higher revenue, lower margin music kits (including software, cable and ear buds) to downloadable software or a software-only CD, resulting in lower revenue per unit but a much higher margin per unit. Productivity & Graphics sales decreased $1.4 million, or 22.0%, primarily due to the continued consumer economic downturn. Corporate/Other sales decreased $0.1 million as we have de-emphasized this business.
Cost of revenues. Cost of revenues were $3.5 million and $5.2 million for the three months ended September 30, 2009 and 2008, respectively, representing a decrease of $1.7 million, or 31.9%. Direct product costs decreased $1.9 million primarily due to a shift in product mix and overhead cost reductions. The product mix was due to a decrease in sales of lower margin multimedia and productivity and graphics products and an increase of sales of higher margin OEM license products. Amortization of intangibles

increased from $0.9 million to $1.2 million, or $0.3 million, due to several small acquisitions made in the fourth quarter of 2008. Stock-based compensation expense decreased $0.1 million, from $0.1 million to essentially zero.
Gross profit. Gross profit was $24.3 million, or 87.3% of revenues for the three months ended September 30, 2009, an increase of $2.8 million, or 13.2%, from $21.5 million, or 80.5% of revenues for the three months ended September 30, 2008. The 6.8 percentage point increase in gross profit as a percentage of revenues was primarily due to improved product margins of 7.4 points as a result of the change in product mix mentioned above and overhead cost reductions, and lower stock-based compensation expense as a percentage of revenues of 0.3 points. These items were partially offset by higher amortization of intangibles due to several small acquisitions of 0.9 points.
Selling and marketing. Selling and marketing expenses were $5.9 million and $6.2 million for the three months ended September 30, 2009 and 2008, respectively, representing a decrease of $0.3 million, or 4.9%. This decrease was primarily due to overall reduced spending in areas such as travel and other areas of $0.2 million and stock-based compensation expense of $0.1 million, decreasing from $0.8 million $0.7 million. Amortization of intangible assets was $0.6 million for both fiscal quarters ended September 30, 2009 and 2008.
Research and development. Research and development expenses were $9.2 million and $8.2 million for the three months ended September 30, 2009 and 2008, respectively, representing an increase of $1.0 million, or 12.6%. This increase was primarily due to increased personnel and recruiting costs associated with new hired headcount of $1.4 million to support our product initiatives and contract wins. This increase was partially offset by lower stock-based compensation expense which decreased by $0.2 million, from $0.9 million to $0.7 million. Amortization of purchased technologies decreased by $0.2 million, from $0.5 million to $0.3 million.
General and administrative. General and administrative expenses were $5.0 million and $4.9 million for the three months ended September 30, 2009 and 2008, respectively, representing an increase of $0.1 million, or 0.5%. Expense increases were primarily due to increased space and occupancy and infrastructure costs of $0.4 million, higher salaries and bonuses of $0.1 million, and legal and accounting fees incurred with our acquisition of Core Mobility of $0.1 million. These cost increases were partially offset by lower stock-based compensation expense which decreased from $1.5 million to $1.0 million, respectively, for the fiscal quarters ended September 30, 2008 and 2009.
Interest and other income. Interest and other income was $0.1 million for both fiscal quarters ended September 30, 2009 and 2008.
Income tax provision. We recorded an income tax expense for the three months ended September 30, 2009 in the amount of $2.3 million. The high effective tax rate is due to incentive stock option compensation book expense which is a permanent difference to the taxable income. We recorded an income tax expense for the three months ended September 30, 2008 in the amount of $3.7 million as a result of reversing tax benefits recorded in the prior quarters. This was a result of using the effective tax rate calculated based on the year-to-date financials ("cut-off method") because we believed this tax rate was more accurate than the annual effective tax rate.
Nine Months Ended September 30, 2009 Compared to the Nine Months Ended September 30, 2008
Revenues. Revenues were $77.6 million and $72.0 million for the nine months ended September 30, 2009 and 2008, respectively, representing an increase of $5.6 million, or 7.8%. Wireless sales increased $10.4 million, or 19.6%, primarily due to new connectivity and security product OEM licenses of $19.9 million. These increases were partially offset by a $9.5 million decrease in revenues primarily due to a change in how our multimedia products were merchandised by our primary music customers, which changed from higher revenue, lower margin music kits (including software, cable and ear buds) to downloadable software or a software-only CD, resulting in lower revenue per unit but a much higher margin per unit. Productivity & Graphics sales decreased $4.5 million, or 25.0%, primarily due to the continued consumer economic downturn. Corporate/Other sales decreased $0.3 million as we have de-emphasized this business.
Cost of revenues. Cost of revenues were $12.0 million and $15.8 million for the nine months ended September 30, 2009 and 2008, respectively, representing a decrease of $3.8 million, or 24.0%. Direct product costs decreased $4.4 million primarily due to a shift in product mix and overhead cost reductions. The product mix was due to a decrease in sales of lower margin multimedia and productivity and graphics products and an increase of sales of higher margin OEM license products. Amortization of intangibles increased from $2.7 million to $3.5 million, or $0.8 million, due to several small acquisitions made in the fourth quarter of 2008. Stock-based compensation expense decreased from $0.3 million to $0.1 million, or $0.2 million.
Gross profit. Gross profit was $65.6 million, or 84.6% of revenues for the nine months ended September 30, 2009, an increase of $9.4 million, or 16.7%, from $56.2 million, or 78.1% of revenues for the nine months ended September 30, 2008. The 6.5

percentage point increase in gross profit as a percentage of revenues was primarily due to improved product margins of 7.0 points as a result of the change in product mix mentioned above and overhead cost reductions, and lower stock-based compensation expense as a percentage of revenues of 0.3 points. These items were partially offset by higher amortization of intangibles due to several small acquisitions of 0.8 points.
Selling and marketing. Selling and marketing expenses were $18.4 million and $18.8 million for the nine months ended September 30, 2009 and 2008, respectively, representing a decrease of $0.4 million, or 2.4%. This decrease was primarily due to a lower stock-based compensation expense of $0.8 million, decreasing from $2.9 million to $2.1 million. This decrease was also due to reduced spending in areas such as travel and trade shows of $0.2 million. These decreases were partially offset by costs associated with headcount increases of $0.5 million and higher amortization of intangibles of $0.1 million, which increased from $1.8 million to $1.9 million.
Research and development. Research and development expenses were $26.1 million and $23.1 million for the nine months ended September 30, 2009 and 2008, respectively, representing an increase of $3.0 million, or 12.7%. This increase was primarily due to increased personnel, recruiting, and overhead costs associated with increased headcount of $4.3 million to support our product initiatives and contract wins. This increase was partially offset by lower consulting costs of $0.6 million as these temporary resources were replaced by full-time employees, lower stock-based compensation expense which decreased from $2.6 million to $2.0 million, or $0.6 million, and lower amortization of purchased technologies which decreased from $1.1 million to $1.0 million, or $0.1 million.
General and administrative. General and administrative expenses were $14.0 million and $14.6 million for the nine months ended September 30, 2009 and 2008, respectively, representing a decrease of $0.6 million, or 4.1%. Expense decreases were primarily due to lower stock-based compensation expense which decreased from $4.2 million to $3.2 million, or $1.0 million, and overall reduced spending in other areas of $0.4 million. These expense decreases were partially offset by increased space and occupancy and infrastructure costs of $0.7 million and legal and accounting fees incurred with our acquisition of Core Mobility of $0.1 million.
Interest and other income. Interest and other income was $0.5 million for both nine months ended September 30, 2009 and 2008.
Income tax provision. We recorded an income tax expense for the nine months ended September 30, 2009 in the amount of $4.2 million. The high effective tax rate is due to incentive stock option compensation book expense which is a permanent difference to the taxable income. We recorded an income tax provision for the nine months ended September 30, 2008 in the amount of $2.3 million as a result of our pre-tax operating profit for the period and the relatively large amount of incentive stock option expense which is not deductible for tax purposes.
Liquidity and Capital Resources
At September 30, 2009, we had $48.5 million in cash and cash equivalents and short-term investments and $63.4 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 $1.2 million of legal and banking fees which were paid through September 30, 2008. In October and November, we will payout approximately $7.0 million in cash in connection with our acquisition of Core Mobility. We currently have no other 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 $13.6 million for the nine months ended September 30, 2009. Our net cash provided by operating activities resulted from net income of $3.5 million adjusted for non-cash expenses including depreciation and amortization of $7.6 million, stock-based compensation of $6.5 million, other non-cash expenses of $1.4 million, and increases of current liabilities net of other assets of $0.8 million. The primary use of cash affecting operating cash flow was an increase in accounts receivable of $6.0 million and an increase of inventory net of other assets of $0.2 million. Net cash provided by operating activities was $8.5 million in the nine months ended September 30, 2008. The primary sources of operating cash were adjustments for non-cash expenses including stock-based compensation of $9.1 million, depreciation and amortization of $6.5 million, other non-cash expenses of $0.9 million, a decrease in deferred income taxes of $1.4 million, and a decrease in other net current assets of $0.7 million. The primary use of cash affecting operating cash flow was an increase in accounts receivable of $8.0 million and the net loss of $2.1 million. The increase in accounts receivable was due to the timing of invoicing during the period and an increase in revenue from the prior quarter.

Investing activities
During the nine months ended September 30, 2009, we used $13.8 million in investing activities due to investing in short-term investments of $9.8 million and capital expenditures for leasehold improvements, a new phone system, a new ERP system, and other computer equipment of $4.0 million. During the nine months ended September 30, 2008, we used $71.3 million in investing activities due to the acquisition of the Mobility Solutions Group of PCTEL of $60.9 million, investing in short-term investments $6.3 million, and capital expenditures, primarily leasehold improvements, of $3.2 million, and other acquisition-related cost adjustments of $0.9 million.
Financing activities
We received $2.4 million in cash during the nine months ended September 30, 2009; $1.6 million from the exercise of stock options and $0.8 million for tax benefits from stock-based compensation. We received $0.2 million in cash during the nine months ended September 30, 2008 from the exercise of stock options and tax benefits from stock-based compensation. Contractual obligations and commercial commitments As of September 30, 2009 we had no debt. The following table summarizes our contractual obligations as of September 30, 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          $ 7,863        $  1,699        $     3,180        $     1,718        $     1,266
Purchase Obligations                   1,342           1,342                  -                  -                  -

Total                                $ 9,205        $  3,041        $     3,180        $     1,718        $     1,266

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, . . .