In this document, the terms "Smith Micro," "Company," "we," "us," and "our" refer to Smith Micro Software, Inc. and, where appropriate, its subsidiaries.

This report contains forward-looking statements regarding Smith Micro which include, but are not limited to, statements concerning projected revenues, expenses, gross profit and income, the competitive factors affecting our business, market acceptance of products, customer concentration, the success and timing of new product introductions and the protection of our intellectual property. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management's beliefs, and certain assumptions made by us. Words such as "anticipates," "expects," "intends," "plans," "predicts," "potential," "believes," "seeks," "estimates," "should," "may," "will" and variations of these words or similar expressions are intended to identify forward-looking statements. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed or implied in any forward-looking statements as a result of various factors. Such factors include, but are not limited to, the following:

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

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

• our business and stock price may decline further which could cause an additional impairment of long-lived assets or restructuring charge resulting in a material adverse effect on our financial condition and results of operations;

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

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

• the continued economic slowdown and uncertainty and its effects on capital expenditures by our customers and their end users;

• the amount of our legal expenses and our financial exposure to any adverse judgments or settlements associated with the outstanding securities litigation, and any future litigation that may arise, and the adequacy of our insurance policy coverage regarding those expenses and any damages or settlement payments related to such litigation; 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, 2011.

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 Securities and Exchange Commission (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. provides software and services that simplify, secure and enhance the mobile experience. The Company's portfolio of wireless solutions includes a wide range of client and server applications that manage voice, data, video and connectivity over mobile broadband networks. Our primary customers are the world's leading mobile network operators, mobile device manufacturers and enterprise businesses. In addition to our wireless and mobility software, Smith Micro offers personal productivity and graphics products distributed through a variety of consumer channels worldwide.

The proliferation of mobile broadband technology continues to provide new opportunities for Smith Micro on a global basis. Over the last decade, the Company has developed extensive expertise in embedded software for networked devices (both wireless and

wired), and we have leveraged that expertise to solve an unending tide of connectivity and mobile service challenges for our customers. As network operators and businesses struggle to reduce costs and complexity in a market that is characterized by rapid evolution and fragmentation, Smith Micro answers with innovative solutions that increase reliability, security, performance, efficiency, and usability of wireless services over a wide variety of networks and device platforms.

Our innovative line of productivity and graphics products are distributed through a variety of consumer channels worldwide, our online stores, and third-party wholesalers, retailers and value-added resellers. We offer products that operate on Windows, Mac, UNIX, Linux, Apple iPhone/iPad, Android, Windows Mobile, Symbian and Java platforms.

Sales to two customers and their respective affiliates in the Wireless business segment accounted for 32.1% and 25.7% of the Company's total revenues for the three months ended March 31, 2012. Sales to four customers and their respective affiliates in the Wireless business segment accounted for 21.4%, 20.0%, 13.3% and 12.7% of the Company's total revenues for the three months ended March 31, 2011.

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, 2012 and 2011. Our
historical results are not necessarily indicative of the operating results that
may be expected in the future.



                                                     Three Months Ended
                                                          March 31,
                                                     2012           2011

          Revenues                                     100.0 %       100.0 %
          Cost of revenues                              21.7          21.2

          Gross profit                                  78.3          78.8
          Operating expenses:
          Selling and marketing                         45.4          47.0
          Research and development                      70.3          65.6
          General and administrative                    54.4          39.3
          Restructuring expenses                         3.3            -

          Total operating expenses                     173.4         151.9

          Operating loss                               -95.1         -73.1
          Interest and other income, net                 0.3           0.2

          Loss before provision for income taxes       -94.8         -72.9
          Income tax expense (benefit)                   0.9         -29.3

          Net loss                                     -95.7 %       -43.6 %

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. Our operations are organized into two business segments:

• Wireless, which includes our connection management, mobile VPN, media and content management, device management, Push-To-Talk, Visual Voicemail, Voicemail to Text, video content delivery and network traffic optimization solutions; and

• Productivity & Graphics, which includes retail and direct sales of our compression and broad consumer-based software.

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

                                         Three Months Ended March 31,
                                           2012                 2011
            Wireless                  $        8,575       $       15,981
            Productivity & Graphics            1,475                1,742
            Corporate/Other                       64                   68

            Total revenues                    10,114               17,791
            Cost of revenues                   2,195                3,776

            Gross profit              $        7,919       $       14,015

"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 certain acquired intangibles.

General and administrative. General and administrative expenses consist primarily of personnel costs, professional services and fees paid for external service providers, space and occupancy costs, and legal and other public company costs.

Restructuring expenses. Restructuring expenses consist primarily of one-time employee termination benefits, lease and other contract terminations and costs to consolidate facilities and relocate employees.

Interest and other income, net. Interest and other income are directly related to our average cash and short term investment balances during the period and vary among periods. Our other excess cash is invested in short term marketable equity and debt securities classified as cash equivalents.

Provision for tax expense (benefit). The Company accounts for income taxes as required by Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic No. 740, 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, we are required to evaluate the probability of being able to realize the future benefits indicated by such asset. The deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period generally results in an increase or decrease in tax expense in the statement of operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any valuation allowance to be recorded against deferred tax assets. After consideration of the Company's three year cumulative loss position as of December 31, 2011 and sources of taxable income, the Company recorded a valuation allowance related to its U.S.-based deferred tax amounts, with a corresponding charge to income tax expense, of $53.2 million for the year ended December 31, 2011.

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

Revenues. Revenues were $10.1 million and $17.8 million for the three months ended March 31, 2012 and 2011, respectively, representing a decrease of $7.7 million, or 43.2%. Wireless revenues decreased $7.4 million, or 46.3%, primarily due to lower sales of our connection manager products. Productivity & Graphics revenues decreased $0.3 million, or 15.3% due to lower sell through at large retailers. Due to the introduction and market acceptance of mobile hotspot devices, Tablets and Smartphones capable of functioning as a WWAN hotspot, our core connection management products continue to experience lower demand in our North American marketplace. While we have launched new wireless products that address this technology shift, they are new to the market and their rate of adoption and deployment is unknown at this time causing material uncertainty regarding the timing of our future wireless revenues.

Cost of revenues. Cost of revenues was $2.2 million and $3.8 million for the three months ended March 31, 2012 and 2011, representing a decrease of $1.6 million, or 41.9%. Direct product costs decreased $0.3 million primarily due to lower maintenance costs and other cost reductions. Amortization of intangibles decreased $1.3 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011.

Gross profit. Gross profit was $7.9 million, or 78.3% of revenues for the three months ended March 31, 2012, a decrease of $6.1 million, or 43.5%, from $14.0 million, or 78.8% of revenues for the three months ended March 31, 2011. The 0.5 percentage point decrease was primarily due to lower product margins of 7.7 points as a result of the decrease in revenues. Amortization of intangibles as a percentage of revenues decreased 7.2 points due to no amortization of intangibles this fiscal quarter versus the same fiscal period last year.

Selling and marketing. Selling and marketing expenses were $4.6 million and $8.4 million for the three months ended March 31, 2012 and 2011, respectively, representing a decrease of $3.8 million, or 45.1%. This decrease was primarily due to lower headcount of $2.0 million, lower third party commissions/distribution fees of $0.3 million, and other cost reductions of $0.2 million. Amortization of intangibles decreased $0.7 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $0.8 million to $0.2 million, or $0.6 million.

Research and development. Research and development expenses were $7.1 million and $11.7 million for the three months ended March 31, 2012 and 2011, respectively, representing a decrease of $4.6 million, or 39.2%. This decrease was primarily due to lower headcount of $3.9 million and less travel of $0.2 million. Amortization of intangibles decreased $0.1 million all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $0.6 million to $0.2 million, or $0.4 million.

General and administrative. General and administrative expenses were $5.5 million and $7.0 million for the three months ended March 31, 2012 and 2011, respectively, representing a decrease of $1.5 million, or 21.2%. This decrease was primarily due to lower headcount of $0.8 million partially offset by increased depreciation and amortization of leasehold improvements associated with facility expansions made last year of $0.2 million. Stock-based compensation decreased from $1.6 million to $0.7 million, or $0.9 million.

Restructuring expenses. Restructuring expenses were $0.3 million for the three months ended March 31, 2012 and were zero for the same period last year. These expenses were related to one-time termination benefits for employees of $0.2 million and expenses related to facility consolidations of $0.1 million.

Interest and other income, net. Interest and other income was de minimis for both of the three months ended March 31, 2012, and 2011.

Provision for income tax expense (benefit). We recorded income tax expense of $0.1 million for the three months ended March 31, 2012. We recorded an income tax benefit of $5.2 million for the three months ended March 31, 2011. The effective tax rate for the three months ended March 31, 2012 only reflects state income tax minimums and foreign income taxes. For 2012, we have reserved our income tax benefit due to consecutive quarterly losses. The effective tax rate for the three months ended March 31, 2011 was 40%, primarily due to the ability to claim income tax benefits for state and R&D tax credits.

Liquidity and Capital Resources

At March 31, 2012, we had $37.6 million in cash and cash equivalents and short-term investments and $44.9 million of working capital.

In November 2011, the Company announced that its Board of Directors had approved a program authorizing the repurchase of up to five million shares of the company's common stock over a period of up to two years. Under this program, stock repurchases may be made from time to time and the actual amount expended will depend on a variety of factors including market conditions, regulatory and legal requirements, corporate cash generation and other factors. The stock repurchases may be made in both open market and privately negotiated transactions, and may include the use of Rule 10b5-1 trading plans. The program does not obligate Smith Micro to repurchase any particular amount of common stock during any period and the program may be modified or suspended at any time at the company's discretion. During the three months ended March 31, 2012, we repurchased 125,000 shares at a cost of $0.3 million.

Capital expenditures were only $0.1 million for the three months ended March 31, 2012 versus $6.6 million for the three months ended March 31, 2011 as we expanded our Aliso Viejo datacenter and built out our new Pittsburgh facility last year. We currently anticipate that capital expenditures will be considerably lower in 2012 from 2011.

We believe that our existing cash, cash equivalents and short-term investment balances 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 used by operating activities was $8.1 million for the three months ended March 31, 2012. The primary uses of operating cash were our net loss of $9.7 million, a decrease of our accounts payable and accrued expenses of $1.5 million, and an increase in our accounts receivable of $0.4 million. These were partially offset by non-cash expenses including stock-based compensation of $1.2 million, depreciation and amortization of $1.1 million, and other working capital and non-cash expense increases of $1.2 million. Net cash used by operating activities was $2.3 million for the three months ended March 31, 2011. The primary uses of operating cash were our net loss of $7.8 million, the increase of deferred tax assets of $5.5 million and other assets increasing by $0.3 million. These were partially offset by a decrease in accounts receivable of $4.8 million, non-cash expenses including depreciation and amortization of $2.7 million, stock-based compensation of $2.1 million and increases of current liabilities of $1.7 million.

Investing activities

During the three months ended March 31, 2012, we received $17.1 million from investing activities due to proceeds from our short-term investments of $17.2 million, partially offset by capital expenditures of $0.1 million. During the three months ended March 31, 2011, we used $8.5 million in investing activities due to investing in capital expenditures of $6.5 million as we expanded our Aliso Viejo datacenter and built out our new Pittsburgh facility and short-term investments of $2.0 million.

Financing activities

During the three months ended March 31, 2012, we used $0.3 million for the repurchase of our common stock. During the three months ended March 31, 2011, we received $0.3 million from the stock sale for the employee stock purchase plan and $0.3 million from tax benefits related to stock-based compensation.

Contractual obligations and commercial commitments

As of March 31, 2012 we had no debt. The following table summarizes our contractual obligations as of March 31, 2012 (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                $ 19,806     $  2,579     $     5,204     $     4,368     $     7,655
Purchase Obligations                          1,743        1,743              -               -               -

Total                                      $ 21,549     $  4,322     $     5,204     $     4,368     $     7,655

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. 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 52,700 square feet of

space pursuant to leases that expire on May 31, 2016 and January 31, 2022. We lease approximately 55,600 square feet in Pittsburgh, Pennsylvania under a lease that expires December 31, 2021. We leased approximately 21,000 square feet in Mountain View, California under a lease that was to expire on February 28, 2014, but on March 31, 2012 we moved to a new facility in Sunnyvale, California and have no further obligation on this lease as of April 1, 2012. We lease approximately 16,000 square feet in Sunnyvale, California under a lease that expires February 28, 2015. We lease approximately 14,400 square feet in Chicago, Illinois under a lease that expires August 31, 2012. We lease approximately 15,300 square feet in Watsonville, California under a lease that expires September 30, 2018. Internationally, we lease space in Belgrade, Serbia and Vancouver, Canada. These leases are for two to six-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 Productivity & Graphics. Within each of these groups software revenue is recognized based on the customer and contract type. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is probable as required by FASB ASC Topic No. 985-605, Software-Revenue Recognition. We recognize revenues from sales of our software to our 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 are met. If the requirements are not met at the date of shipment, revenue is not recognized until these elements are known or resolved. Returns from customers are limited to defective goods or goods shipped in error. Historically, customer returns have not exceeded the very nominal estimates and reserves. We also provide some technical support to our customers. Such costs have historically been insignificant.

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). As of January 1, 2011, we adopted ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements which amends revenue recognition guidance for arrangements with multiple deliverables. The new guidance eliminated the residual method of revenue recognition and allows the use of management's best estimate of selling price for individual elements of an arrangement when vendor specific objective evidence ("VSOE"), vendor objective evidence ("VOE") or third-party evidence ("TPE") is unavailable. For most of our multiple element agreements, VSOE for all contract elements is used and the timing of the individual element revenue streams is determined and recognized as delivered.

For Productivity & Graphics sales, 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. Certain revenues are booked net of revenue sharing payments. Sales directly to end-users are recognized upon . . .