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.

Revenues to two customers and their respective affiliates in the Wireless business segment accounted for 39.9% and 15.6% of the Company's total revenues for the three months ended June 30, 2012. Revenues to three customers and their respective affiliates in the Wireless business segment accounted for 33.8%, 18.4% and 11.4% of the Company's total revenues for the three months ended June 30, 2011. Revenues to two customers and their respective affiliates in the Wireless business segment accounted for 36.0% and 20.6% of the Company's total revenues for the six months ended June 30, 2012. Revenues to four customers and their respective affiliates in the Wireless business segment accounted for 23.1%, 19.2%, 12.1% and 11.3% of the Company's total revenues for the six months ended June 30, 2011.

Results of Operations

The table below sets forth certain statements of comprehensive loss data
expressed as a percentage of revenues for the three and six months ended
June 30, 2012 and 2011. Our historical results are not necessarily indicative of
the operating results that may be expected in the future.



                                         Three Months Ended June 30,               Six Months Ended June 30,
                                         2012                   2011               2012                 2011
Revenues                                    100.0 %                100.0 %            100.0 %              100.0 %
Cost of revenues                             17.7                   22.1               19.7                 21.6

Gross profit                                 82.3                   77.9               80.3                 78.4
Operating expenses:
Selling and marketing                        38.9                   44.1               42.1                 45.6
Research and development                     60.7                   70.2               65.5                 67.9
General and administrative                   50.6                   44.6               52.5                 41.8
Restructuring expense (income)               (0.8 )                  0.0                1.3                  0.0

Total operating expenses                    149.4                  158.9              161.4                155.3

Operating loss                              (67.1 )                (81.0 )            (81.1 )              (76.9 )
Interest and other income, net                0.3                    0.3                0.3                  0.3

Loss before provision for income
taxes                                       (66.8 )                (80.7 )            (80.8 )              (76.6 )
Provision for income tax expense
(benefit)                                     0.3                  (32.0 )              0.6                (30.6 )

Net loss                                    (67.1 )%               (48.7 )%           (81.4 )%             (46.0 )%

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 June 30,             Six Months Ended June 30,
                                             2012                 2011              2012                2011
Wireless                                $        8,731       $       13,808     $      17,306       $      29,789
Productivity & Graphics                          1,395                2,232             2,870               3,974
Corporate/Other                                     45                   65               109                 133

Total revenues                                  10,171               16,105            20,285              33,896
Cost of revenues                                 1,796                3,560             3,991               7,336

Gross profit                            $        8,375       $       12,545     $      16,294       $      26,560

"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 expense (income). 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 income 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 comprehensive loss. 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 June 30, 2012 Compared to the Three Months Ended June 30, 2011

Revenues. Revenues were $10.2 million and $16.1 million for the three months ended June 30, 2012 and 2011, respectively, representing a decrease of $5.9 million, or 36.8%. Wireless revenues decreased $5.1 million, or 36.8%, primarily due to lower sales of our connection manager products. Productivity & Graphics revenues decreased $0.8 million, or 37.5% due to lower sell through at large retailers and overall lower demand. 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 $1.8 million and $3.6 million for the three months ended June 30, 2012 and 2011, representing a decrease of $1.8 million, or 49.6%. Direct product costs decreased $0.5 million primarily due to the lower volume and 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 $8.4 million, or 82.3% of revenues for the three months ended June 30, 2012, a decrease of $4.1 million, or 33.2%, from $12.5 million, or 77.9% of revenues for the three months ended June 30, 2011. The 4.4 percentage point increase was primarily due to lower product margins of 3.4 points as a result of the decrease in revenues being offset by the amortization of intangibles that decreased as a percentage of revenues by 7.8 points due to no amortization this fiscal quarter versus the same fiscal period last year.

Selling and marketing. Selling and marketing expenses were $4.0 million and $7.1 million for the three months ended June 30, 2012 and 2011, respectively, representing a decrease of $3.1 million, or 44.3%. This decrease was primarily due to lower headcount of $1.9 million, lower third party commissions/distribution fees of $0.2 million, partially offset by higher trade shows of $0.1 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 $0.6 million to $0.2 million, or $0.4 million.

Research and development. Research and development expenses were $6.2 million and $11.3 million for the three months ended June 30, 2012 and 2011, respectively, representing a decrease of $5.1 million, or 45.4%. This decrease was primarily due to lower headcount of $4.4 million, less travel of $0.2 million, and less small equipment and software maintenance of $0.2 million. Amortization of intangibles decreased $0.1 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $0.4 million to $0.2 million, or $0.2 million.

General and administrative. General and administrative expenses were $5.2 million and $7.2 million for the three months ended June 30, 2012 and 2011, respectively, representing a decrease of $2.0 million, or 28.3%. This decrease was primarily due to lower legal fees of $0.6 million, lower headcount and people related cost of $0.6 million, and lower rent expense of $0.2 million. Stock-based compensation decreased from $1.2 million to $0.6 million, or $0.6 million.

Restructuring expense (income). Restructuring income was $0.1 million for the three months ended June 30, 2012 and was zero for the same period last year. We returned to profit $0.1 million of the restructuring reserve as a result of lower one-time employee termination benefits and relocation expenses.

Interest and other income, net. Interest and other income was de minimis for both of the three months ended June 30, 2012, and 2011.

Provision for income tax expense (benefit). We recorded income tax expense of $32,000 for the three months ended June 30, 2012. We recorded an income tax benefit of $5.2 million for the three months ended June 30, 2011. The income tax expense for the three months ended June 30, 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 June 30, 2011 was 40%, primarily due to the ability to claim income tax benefits for state and R&D tax credits.

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Revenues. Revenues were $20.3 million and $33.9 million for the six months ended June 30, 2012 and 2011, respectively, representing a decrease of $13.6 million, or 40.2%. Wireless revenues decreased $12.5 million, or 41.9%, primarily due to lower sales of our connection manager products. Productivity & Graphics revenues decreased $1.1 million, or 27.8% due to lower sell through at large retailers and overall lower demand. 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 $4.0 million and $7.3 million for the six months ended June 30, 2012 and 2011, representing a decrease of $3.3 million, or 45.6%. Direct product costs decreased $0.8 million primarily due to the lower volume, lower maintenance, and other cost reductions. Amortization of intangibles decreased $2.5 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011.

Gross profit. Gross profit was $16.3 million, or 80.3% of revenues for the six months ended June 30, 2012, a decrease of $10.3 million, or 38.7%, from $26.6 million, or 78.4% of revenues for the six months ended June 30, 2011. The 1.9 percentage point

increase was primarily due to lower product margins of 5.5 points as a result of the decrease in revenues being offset by the amortization of intangibles that decreased as a percentage of revenues by 7.4 points due to no amortization for the six months ended June 30, 2012 versus the same fiscal period last year.

Selling and marketing. Selling and marketing expenses were $8.6 million and $15.5 million for the six months ended June 30, 2012 and 2011, respectively, representing a decrease of $6.9 million, or 44.7%. This decrease was primarily due to lower headcount of $3.0 million, lower travel expense of $0.7 million, lower third party commissions/distribution fees of $0.5 million, and other cost reductions of $0.3 million. Amortization of intangibles decreased $1.4 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $1.5 million to $0.5 million, or $1.0 million.

Research and development. Research and development expenses were $13.3 million and $23.0 million for the six months ended June 30, 2012 and 2011, respectively, representing a decrease of $9.7 million, or 42.3%. This decrease was primarily due to lower headcount of $8.4 million, less travel of $0.4 million, and less small equipment and software maintenance of $0.2 million. Amortization of intangibles decreased $0.1 million as all intangibles were fully impaired at the end of the fiscal third quarter of 2011. Stock-based compensation decreased from $1.0 million to $0.4 million, or $0.6 million.

General and administrative. General and administrative expenses were $10.7 million and $14.2 million for the six months ended June 30, 2012 and 2011, respectively, representing a decrease of $3.5 million, or 24.8%. This decrease was primarily due to lower headcount and people related cost of $1.0 million, lower legal fees of $0.6 million, and other cost reductions of $0.4 million. Stock-based compensation decreased from $2.8 million to $1.3 million, or $1.5 million.

Restructuring expense (income). Restructuring expense was $0.3 million for the six months ended June 30, 2012 and was zero for the same period last year. The expense was primarily related to severance and relocation costs.

Interest and other income, net. Interest and other income was $0.1 million for both of the six months ended June 30, 2012, and 2011.

Income tax provision. We recorded income tax expense of $0.1 million for the six months ended June 30, 2012. We recorded an income tax benefit of $10.4 million for the six months ended June 30, 2011. The income tax expense for the six months ended June 30, 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 six months ended June 30, 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 June 30, 2012, we had $31.3 million in cash and cash equivalents and short-term investments and $39.8 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 six months ended June 30, 2012, we repurchased 375,000 shares at a cost of $0.8 million.

Capital expenditures were only $0.1 million for the six months ended June 30, 2012 versus $11.3 million for the six months ended June 30, 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 are hopeful that our new products will gain market acceptance in order to increase our revenues in upcoming quarters. If our new products do not gain market acceptance, or market acceptance is slower than anticipated, then we anticipate that it will be necessary to undertake additional restructuring to lower costs to bring them more in line with actual revenues, thus slowing the usage of cash. 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 in operating activities was $14.0 million for the six months ended June 30, 2012. The primary uses of operating cash were to fund our net loss of $16.5 million, and decreases in our accounts payable and accrued expenses of $2.4 million and accounts receivable of $0.4 million. These were partially offset by non-cash expenses including depreciation and amortization of $2.2 million, stock-based compensation of $2.2 million, state income tax refunds of $0.6 million, and other account adjustments of $0.3 million.

Net cash provided by operating activities was $0.2 million for the six months ended June 30, 2011. The primary sources of operating cash were accounts receivable of $17.4 million, non-cash expenses including depreciation and amortization of $5.8 million, stock-based compensation of $4.0 million, lease incentives of $2.2 million and other account adjustments of $0.3 million. These were partially offset by our net loss of $15.6 million, the increase of deferred tax assets of $10.6 million and other net assets increasing by $3.3 million.

Investing activities

During the six months ended June 30, 2012, we were provided with $18.2 million in investing activities due to the sale of short-term investments of $18.3 million, partially offset by capital expenditures of $0.1 million.

During the six months ended June 30, 2011, we used $1.5 million in investing activities due to investing in capital expenditures of $11.3 million as we expanded our Aliso Viejo datacenter and built out our new Pittsburgh facility and datacenter partially offset by the sale of short-term investments of $9.8 million.

Financing activities

During the six months ended June 30, 2012, we used $0.8 million to repurchase our common stock and received $0.1 million from the stock sale for the employee stock purchase plan.

During the six months ended June 30, 2011, we received $0.3 million from the stock sale for the employee stock purchase plan and $0.2 million from tax benefits related to stock-based compensation.

Contractual obligations and commercial commitments

As of June 30, 2012 we had no debt. The following table summarizes our contractual obligations as of June 30, 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           $ 19,164      $  2,590      $     5,146      $     4,219      $     7,209
Purchase Obligations                     1,262         1,262               -                -                -
. . .