Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

Cautionary Notice Regarding Forward-Looking Statements

In this quarterly report on Form 10-Q ("Report"), references to "SmartMetric," "SMME," "the Company," "we," "us," and "our" refer to Smartmetric, Inc.

The following discussion should be read in conjunction with our condensed consolidated financial statements and other financial information appearing elsewhere in this quarterly report. In addition to historical information, the following discussion and other parts of this quarterly report contain forward-looking statements. You can identify these statements by forward-looking words such as "plan," "may," "will," "expect," "intend," "anticipate," believe," "estimate" and "continue" or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties set forth under "Risk Factors" in our Annual Report on Form 10-K as of and for the year ended June 30, 2012 and other periodic reports filed with the United States Securities and Exchange Commission ("SEC"). Accordingly, to the extent that this Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company's actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in forward-looking statements. We do not undertake any responsibility to publicly release any revisions to these forward-looking statements to take into account events or circumstances that occur after the date of this Report, except as required by law. Additionally, we do not undertake any responsibility to update you on the occurrence of any unanticipated events which may cause actual results to differ from those expressed or implied by any forward-looking statements.

Overview

Incorporated in 2002, SmartMetric and its founder and CEO, C. Hendrick, have been engaged in research and development of a biometric security solution which would authenticate the identity of a person in a self-contained credit card-sized device. SmartMetric's Biometric Datacard has been designed to use an on-board finger print sensor which is embedded in the card along with an integrated circuit chip which will provide varying degrees of encrypted memory SmartMetric has completed development of its card along with pre mass manufacturing cards but has not yet begun to mass manufacture the biometric fingerprint activated cards. To date, SmartMetric has had no sales revenues.

The manufacturing of the cards requires that the Company build not only a special factory that meets security conditions but also that the Company manufacture specialized mass production machines that will allow for the specialized manufacturing process required to mount sub micro thin silicon components; along with accredit card plastic manufacturing procedure that operates using low pressure and low heat so as not to harm the internal electronic components.

The Company is currently concentrating on building out its manufacturing facility that will be incorporating SmartMetric's advanced manufacturing processes. We expect to begin mass production of our product in the second quarter of 2013 however this is dependent on a number of factors including the supply of specific silicon based components that may require a modest longer lead time then original planned.

The company may at its discretion for logistical reasons operate its initial manufacturing of plastic fingerprint activated cards in another location other than Buenos Aires, Argentina.

Our ability to continue as a going concern prior to the generation of sales is almost exclusively dependent upon our ability to raise capital, specifically through sales of unregistered securities. The ability to raise capital through private placement sales is very unpredictable, thus greatly influencing the Company's ability to continue as a going concern.

The Company's research and development is being undertaken by contractors working in Israel and Argentina.

SmartMetric does not believe its business is seasonal.

Results of Operations

Comparison of the Six Months Ended December 31, 2012 and 2011

Revenue and Net Loss

For the six months ended December 31, 2012, there was no revenue and a net loss of $2,425,525. For the six months ended December 31, 2011, there was no revenue and a net loss of $1,424,741. This increased loss of $1,000,784 or 70.2% resulted primarily from increased general and administrative costs.

General and Administrative Expenses

General and administrative expenses for the six months ended December 31, 2012 were $2,041,810, an increase of $849,922 or 71.3% compared to $1,191,888 for the comparable period in 2011. This increase was primarily attributed to higher consulting fees.

Research and Development Expenses

Research and development expenses for the six months ended December 31, 2012 were $297,048, an increase of $149,195 or 100.9% compared to $147,853 for the comparable period in 2011. This increase was primarily attributable to higher engineering costs.

Income Tax Expense

Income tax expense for the six months ended December 31, 2012 was $0, unchanged from the comparable period in 2011.

Comparison of the Three Months Ended December 31, 2012 and 2011

Revenue and Net Loss

For the three months ended December 31, 2012, there was no revenue and a net loss of $1,475,769. For the three months ended December 31, 2011, there was no revenue and a net loss of $541,584. This increased loss of $934,185, or 175.2% resulted primarily from increased general and administrative costs and increased research and development costs.

General and Administrative Expenses

General and administrative expenses for the three months ended December 31, 2012 were $1,220,370, an increase of $776,175 or 174.7% compared to $444,195 for the comparable period in 2011. This increase was primarily attributed to higher consulting fees.

Research and Development Expenses

Research and development expenses for the three months ended December 31, 2012 were $211,232, an increase of $156,343 or 284.8% compared to $54,889 for the comparable period in 2011. This increase was primarily attributable to higher engineering costs.

Income Tax Expense

Income tax expense for the three months ended December 31, 2012 was $0, unchanged from the comparable period in 2011.

Liquidity and Capital Resources

The Company is a development stage company and has spent a majority of resources and time in developing its technology. There is no guarantee that the Company can continue to raise enough capital or generate revenues to sustain its operations. These conditions raise a substantial doubt about the Company's ability to continue as a going concern. Management believes that the Company's capital requirements will depend on a number of factors including the final phase of product development and the development of its production process as well as product implementation and distribution. The consolidated financial statements do not include any adjustments relating to the carrying amounts of recorded assets or the carrying amount and classification of recorded liabilities that may be required should the Company be unable to continue as a going concern.

At December 31, 2012, the Company had an accumulated deficit of $13,701,902 and it is likely that we will incur additional losses in the future. While we have funded our operations since inception from operations and through private placements of equity securities, there can be no assurance that adequate financing will continue to be available to us and, if available, on terms that are favorable to us.

We believe that we will require additional financing to carry out our intended objectives during the next twelve months. There can be no assurance, however, that such financing will be available or, if it is available, that we will be able to structure such financing on terms acceptable to us and that it will be sufficient to fund our cash requirements until we can reach a level of profitable operations and positive cash flows. If we are unable to obtain the financing necessary to support our operations, we may be unable to continue as a going concern. The Company currently has a non-binding commitment from a potential source of capital.

A downturn in the United States stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our shares of common stock or the debt securities may cause us to be subject to restrictive covenants. There is a risk of dilution whenever the Company sells securities to raise capital. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Cash

Our cash balance was $82,909 at December 31, 2012 compared with $289,689 at December 31, 2011. The decrease was primarily attributable operating losses greater than the amount of capital raised by the Company.

Net cash used in operating activities

Net cash used in operating activities was $1,395,115 for the six months ended December 31, 2012, an increase of $640,291 or 84.8% from the comparable period in 2011. The Company is largely dependent on the capital it raises to fund operations. When capital is raised the development process is accelerated, and when cash flows are decreased the Company conserves its cash by delaying development and other operating costs.

Net cash used in investing activities

Net cash used in investing activities was $0 for the six months ended December 31, 2012, unchanged from the comparable period in 2011.

Net cash provided by financing activities

Net cash provided by financing activities was $588,435 for the six months ended December 31, 2012, a decrease of $183,479 or 23.8% from the comparable period in 2011. The decrease of was based on the Company raising less capital.

Contractual Obligations and Off-Balance Sheet Arrangements.

There were no off-balance sheet arrangements as of December 31, 2012 and June 30, 2012.

In connection with an Assignment and Assumption Agreement with Applied Cryptography, Inc. ("ACI"), a corporation controlled by the Company's president and the owner of certain technology, ACI conveyed, assigned and transferred to the Company all of ACI's rights, title and interest in and to its patents (collectively, the "Patent") and delegated to the Company all of its duties and obligations to be performed under the Patent.

In consideration for the assignment of the Patent, the Company issued 200,000 shares of Series B Convertible Preferred Stock. ACI may only convert these shares into common shares (in accordance with the conversion terms noted herein) upon delivering to the Company, a third party valuation of the assigned Patent conducted by a nationally qualified accounting firm or IP law firm mutually agreed upon between the Company and ACI, indicating that such Patent is valued at a minimum of $1,000,000. Subsequent to December 31, 2012, ACI has authorized for conversion 190,000 of its series B shares.

In connection with the Assignment and Assumption Agreement, the Company and ACI entered into a 24 month option agreement pursuant to which the Company agreed to grant ACI an option to purchase the Patent from the Company for 100,000 shares of Series B Convertible Preferred Stock, only in the event that the Company fails to generate at least $1,000,000 in gross revenues attributable to the Patent at the conclusion of 24 months from the date of the Assignment and Assumption Agreement.

ACI did not exercise its option to purchase the patent back from Smartmetric within the 24 month option period, and Smartmetric owns, outright, all rights, title and interest in the patent.

Critical accounting policies and estimates

The condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions 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 periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

Intangible assets

SmartMetric issued 200,000 of its series B convertible preferred shares to ACI during the period in exchange for the Medical Keyring patent.