The following discussion of our financial condition and results of operations should be read together with the financial statements and related notes that are included elsewhere in this quarterly report. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this quarterly report, particularly in Part II, Item 1, Legal Proceedings and 1A, Risk Factors, in this report.

Overview

We are a product driven company that leverages innovative proprietary technologies to deliver networking solutions with compelling price-performance characteristics to both start-up and established network operators and service providers. Our products bridge the digital divide by fundamentally changing the economics of deploying high performance networking solutions in underserved and underpenetrated wireless broadband access markets globally. These markets include emerging markets and other areas where individual users and small and medium sized enterprises do not have access to the benefits of carrier class broadband networking. Our business model has enabled us to break down traditional barriers, such as high product and network deployment costs, which are driven by business model inefficiencies and achieve rapid market adoption of our products and solutions in previously underserved and underpenetrated markets. Our business model and proprietary technologies provide us with a significant and sustainable competitive advantage over incumbents, who we believe are unable to respond effectively due to their higher cost business models.

We offer a broad and expanding portfolio of networking products and solutions and in the outdoor wireless, enterprise WLAN, video surveillance, wireless backhaul and machine-to-machine communications markets. We began shipping embedded radios in fiscal 2006. In fiscal 2008 we introduced a line of products based on 802.11 standard protocols and in early fiscal 2010, we introduced a number of new products based on our proprietary airMAX protocol, which have been rapidly adopted by network operators and high-performance proprietary airMAX service providers. Since the beginning of fiscal 2011, we have introduced UniFi, airVision, airFiber, mFi and EdgeMAX, which are collectively referred to in this report as our New Platforms. In both the three months ended September 30, 2012 and 2011, our systems revenue accounted for 83% of our revenues. In the future, we expect sales of our airMAX platform and our new product platforms to continue to represent a growing portion of our revenues and the portion of our revenues derived from our 802.11 standard products to decline as a percentage of total revenues.

Building on our leadership in the underserved and underpenetrated segments of the wireless broadband access market, we intend to expand our product offerings in our existing market and enter adjacent markets by relying on the combination of our efficient business model and proprietary technologies. For example, we have introduced products and solutions for the enterprise WLAN, video surveillance, and since late fiscal 2011 licensed microwave wireless backhaul, machine-to-machine communication and router markets. As we enter such new markets, we plan to leverage existing distributor relationships and establish engaged communities similar to that of the Ubiquiti Community to keep our operating expenses in line with our current model and enable us to offer products in these new markets with compelling price-performance characteristics.

Our revenues decreased 22% to $61.5 million in the three months ended September 30, 2012 from $79.2 million in the three months ended September 30, 2011. We believe the overall decrease in revenues during the three months ended September 30, 2012 was primarily driven by lost sales due to the proliferation of counterfeit versions of our products, which has also created customer uncertainty regarding the authenticity of their potential purchases. We had net income of $13.2 million and $21.5 million in the three months ended September 30, 2012 and 2011, respectively.

Key Components of Our Results of Operations and Financial Condition

Revenues

Our revenues are derived principally from the sale of networking hardware and management tools. In addition, while we do not sell maintenance and support separately, because we have historically included it free of charge in many of our arrangements, we attribute a portion of our systems revenues to this implied post-contract customer support ("PCS").

We classify our revenues into three product categories: systems, embedded radios and antennas/other.

• Systems consists of three product categories:

• Our proprietary airMAX platform products for network operators and service providers;

• Our new platform products which include significant platforms introduced in late fiscal 2011 and during 2012 which includes the UniFi, airVision and airFiber, mFi and EdgeMAX platforms; and

• Other 802.11 standard products including base stations, radios, backhaul equipment and CPE.

• Embedded radios consist of more than 25 radio products primarily for OEMs, including both point to point and point to multipoint radios in the 2.0 to 6.0GHz spectrum, that are offered with a variety of features.

• Antennas/other consist of antenna products in the 2.0 to 6.0GHz spectrum, as well as miscellaneous products such as mounting brackets, cables and power over Ethernet adapters. These products include both high performance sector and directional antennas. This category also includes our allocation of revenues to PCS.

We sell substantially all of our products through a limited number of distributors and other channel partners, such as resellers and OEMs. Sales to distributors accounted for 97% and 98% of our revenues in the three months ended September 30, 2012 and 2011, respectively. Other channel partners, such as resellers and OEMs, largely accounted for the balance of our revenues. We sell our products without any right of return.

Cost of Revenues

Our cost of revenues is comprised primarily of the costs of procuring finished goods from our contract manufacturers and chipsets that we consign to certain of our contract manufacturers. In addition, cost of revenues includes tooling, labor and other costs associated with engineering, testing and quality assurance, warranty costs, stock-based compensation and excess and obsolete inventory.

We outsource our manufacturing and order fulfillment and utilize contract manufacturers located primarily in China and, to a lesser extent, Taiwan. We also evaluate and utilize other vendors for various portions of our supply chain from time to time. Our manufacturing organization consists of employees and consultants engaged in the management of our contract manufacturers, new product introduction activities, logistical support and engineering.

Gross Profit

Our gross profit has been, and may in the future be, influenced by several factors including changes in product mix, target end markets for our products, pricing due to competitive pressure, production costs, foreign exchange rates and global demand for electronic components. Although we procure and sell our products in U.S. dollars, our contract manufacturers incur many costs, including labor costs, in other currencies. To the extent that the exchange rates move unfavorably for our contract manufacturers, they may try to pass these additional costs on to us, which could have a material impact on our future average selling prices and unit costs.

Operating Expenses

We classify our operating expenses as research and development and sales, general and administrative expenses.

• Research and development expenses consist primarily of salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in research, design and development activities, as well as costs for prototypes, facilities and travel. Over time, we expect our research and development costs to increase as we continue making significant investments in developing new products and developing new versions of our existing products.

• Sales, general and administrative expenses include salary and benefit expenses, including stock-based compensation, for employees and costs for contractors engaged in sales, marketing and general and administrative activities, as well as the costs of trade shows, marketing programs, promotional materials, bad debt expense, professional services, facilities, general liability insurance and travel. As our product portfolio and targeted markets expand, we may need to employ different sales models, such as building a direct sales force. These sales models would likely increase our costs. Over time, we expect our sales, general and administrative expenses to increase in absolute dollars due to continued growth in headcount, expand our registration and defense of trademarks and patents efforts and to support our business and operations as a public company.

Deferred Revenues and Costs

In the event that collectability of a receivable from products we have shipped is not probable, we classify those amounts as deferred revenues on our balance sheet until such time as we receive payment of the accounts receivable. We classify the cost of products associated with these deferred revenues as deferred costs of revenues. At September 30, 2012 and June 30, 2012, we did not have any revenue deferred for transactions where we lacked evidence that collectability of the receivables recorded was reasonably probable.

Also included in our deferred revenues is a portion related to PCS obligations that we estimate we will perform in the future. As of September 30, 2012 and June 30, 2012, we had deferred revenues of $798,000 and $805,000 respectively, related to these obligations.

Prepayments

We have historical agreements with certain contract manufacturers whereby we prepay for a portion of the product costs to assure the manufacture and timely delivery of our products. As of September 30, 2012 and June 30, 2012, we had prepayment balances of $875,000 and $129,000, respectively.

Critical Accounting Policies

We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management's judgment in its application. In other cases, management's judgment is required in selecting among available alternative accounting standards that provide for different accounting treatment for similar transactions. The preparation of condensed consolidated financial statements also requires us to make estimates and assumptions that affect the amounts we report as assets, liabilities, revenues, costs and expenses and affect the related disclosures. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. In many instances, we could reasonably use different accounting estimates, and in some instances changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, our actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. Our critical accounting policies are discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, as filed on September 28, 2012 with the SEC, or the Annual Report, and there have been no material changes.

Results of Operations

Comparison of Three Months Ended September 30, 2012 and 2011



                                                              Three Months Ended September 30,
                                                                2012                      2011
                                                             (In thousands, except percentages)
Revenues                                               $    61,535        100 %    $ 79,167        100 %
Cost of revenues(1)                                         36,515         59 %      46,154         58 %

Gross profit                                                25,020         41 %      33,013         42 %

Operating expenses:
Research and development(1)                                  4,711          8 %       3,369          4 %
Sales, general and administrative(1)                         4,534          7 %       2,144          3 %

Total operating expenses                                     9,245         15 %       5,513          7 %

Income from operations                                      15,775         26 %      27,500         35 %
Interest expense and other, net                                (86 )        * %        (634 )       (1 )%

Income before provision for income taxes                    15,689         25 %      26,866         34 %
Provision for income taxes                                   2,510          4 %       5,373          7 %

Net income                                             $    13,179         21 %    $ 21,493         27 %

* Less than 1%
(1) Includes stock-based compensation as follows:

Cost of revenues                                       $        81                 $      6
Research and development                                       266                      116
Sales, general and administrative                              309                      229

Total stock-based compensation                         $       656                 $    351

Revenues

Revenues decreased $17.6 million, or 22%, from $79.2 million in the three months ended September 30, 2011 to $61.5 million in the three months ended September 30, 2012. We believe the overall decrease in revenues during the three months ended September 30, 2012 was primarily driven by lost sales due to the proliferation of counterfeit versions of our products, which has also created customer uncertainty regarding the authenticity of their potential purchases, and the effects of a buildup in channel inventory with our distributors. This has had the most significant impact on our airMAX platform which decreased $17.8 million.

In the three months ended September 30, 2012, revenues from Distributor A represented 15% of our revenues. In the three months ended September 30, 2011, revenues from Distributor A and Distributor B represented 18% and 16% of our revenues, respectively. No other distributor or customer represented more than 10% of our revenues in the three months ended September 30, 2012 or 2011.

Revenues by Product Type



                                      Three Months Ended September 30,
                                        2012                       2011
                                     (in thousands, except percentages)
              airMAX           $     32,057         52 %    $ 49,835        63 %
              New platforms          15,628         25 %       2,734         4 %
              Other systems           3,784          6 %      12,765        16 %

              Systems                51,469         83 %      65,334        83 %
              Embedded radio          1,714          3 %       3,225         4 %
              Antennas/other          8,352         14 %      10,608        13 %

              Total revenues   $     61,535        100 %    $ 79,167       100 %

Systems revenues decreased $13.9 million, or 21%, from $65.3 million in the three months ended September 30, 2011 to $51.5 million in the three months ended September 30, 2012. As noted above, we believe the decrease in systems revenues was primarily driven by lost sales due to the proliferation of counterfeit versions of our products, in particular our airMAX product line. The decrease in our airMAX product line was partially offset by increased sales in our new platforms category, which includes significant platforms introduced since late fiscal 2011. Our new platforms contributed $15.6 million and $2.7 million of revenue the three months ended September 30, 2012 and 2011, respectively. Our other systems revenue decreased $9.0 million during the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 due primarily to our September 2011 quarter including a large order to a direct customer.

Embedded radio revenues decreased $1.5 million from the three months ended September 30, 2011 to 2012. We anticipate that embedded radio products will decline as a percentage of revenues in future periods as sales of these products are outpaced by sales of systems products.

Antennas/other revenues decreased $2.3 million, or 21% from $10.6 million in the three months ended September 30, 2011 to $8.4 million in the three months ended September 30, 2012. The decline in antennas/other revenues was primarily due to the decreased sales of our systems platforms, which negatively impacted the demand for associated antennas. Other revenues also include revenues that are attributable to PCS. Antenna/other revenues may continue to increase in absolute dollars in future periods but will decline as a percentage of total revenues due to more rapid growth of systems revenues.

Revenues by Geography

We generally forward products directly from our manufacturers to freight companies in Hong Kong, which have been retained by our distributors and who in turn ship to other locations throughout the world. We have determined the geographical distribution of our product revenues based on ship-to destinations. A majority of our sales are to distributors who in turn sell to resellers or directly to end customers. As a result of these factors, we believe that sales to certain geographic locations might be higher or lower, as the ultimate destinations are difficult to ascertain. Revenues in North Americas decreased primarily due to a significant decline in orders from one of our distributors. We believe the decrease in revenues in South American and Europe, the Middle East and Africa was primarily driven by the proliferation of counterfeit versions of our products, which has also created customer uncertainty regarding the authenticity of their potential purchases. Revenues in the Asia Pacific region tend to be volatile given the low levels of revenues. The following are our revenues by geography for the three months ended September 30, 2012 and 2011 (in thousands, except percentages):

                                                 Three Months Ended September 30,
                                                    2012                      2011
                                                (In thousands, except percentages)
     North America(1)                     $     20,361          33 %   $ 24,941        32 %
     South America                              10,243          17 %     19,835        25 %
     Europe, the Middle East and Africa         23,144          37 %     24,783        31 %
     Asia Pacific                                7,787          13 %      9,608        12 %

     Total revenues                       $     61,535         100 %   $ 79,167       100 %

(1) Revenue for the United States was $19.3 million and $24.4 million for the three months ended September 30, 2012 and 2011, respectively.

Cost of Revenues and Gross Margin

Cost of revenues decreased $9.6 million, or 21%, from $46.2 million in the three months ended September 30, 2011 to $36.5 million in the three months ended September 30, 2012, primarily due to decreased revenues and to a lesser extent, changes in product mix. Gross margin decreased from 42% in the three months ended September 30, 2011 to 41% in the three months ended September 30, 2012, reflecting an increase in variable operating costs.

Operating Expenses

Research and Development

Research and development expenses increased $1.3 million, or 40%, from $3.4 million in the three months ended September 30, 2011 to $4.7 million in the three months ended September 30, 2012. As a percentage of revenues, research and development expenses increased from 4% in the three months ended September 30, 2011 to 8% in the three months ended September 30, 2012. The increase in research and development expenses in absolute dollars was due to increases in headcount as we broadened our research and development activities to new product areas. As a percentage of revenues, research and development expenses increased primarily due to our overall decrease in revenues. Over time, we expect our research and development costs to increase in absolute dollars as we continue making significant investments in developing new products and developing new versions of our existing products.

Sales, General and Administrative

Sales, general and administrative expenses increased $2.4 million, or 111%, from $2.1 million in the three months ended September 30, 2011 to $4.5 million in the three months ended September 30, 2012. As a percentage of revenues, sales, general and administrative expenses increased from 3% in the three months ended September 30, 2011 to 7% in the three months ended September 30, 2012. Sales, general and administrative expenses increased due largely to increased legal expenses associated with our anti-counterfeiting litigation, increased marketing and tradeshow activity and bad debt expense. As a percentage of revenues sales, general and administrative expenses increased primarily due to our overall revenue decrease in revenues. Over time, we expect our sales, general and administrative expenses to increase in absolute dollars due to continued efforts to protect our intellectual property and growth in headcount to support our business and operations.

Interest Expense and Other, Net

Interest expense and other, net was $86,000 for the three months ended September 30, 2012, representing an increase of $548,000 from $634,000 for the three months ended September 30, 2011. During the three months ended September 30, 2011, we incurred interest expense on our convertible subordinated promissory notes issued as part of the repurchase of Series A convertible preferred stock from entities affiliated with Summit Partners, L.P. in July 2011. The convertible subordinated promissory notes were repaid in full in October 2011.

Provision for Income Taxes

Our provision for income taxes decreased $2.9 million, or 53%, from $5.4 million for the three months ended September 30, 2011 to $2.5 million for the three months ended September 30, 2012. Our effective tax rate decreased to 16% for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011 due to a larger percentage of our overall profitability occurring in foreign jurisdictions with lower income tax rates.

Liquidity and Capital Resources

Sources and Uses of Cash

Since inception, our operations primarily have been funded through cash generated by operations. Cash, cash equivalents and short-term marketable securities increased from $122.1 million at June 30, 2012 to $132.5 million at September 30, 2012.

Consolidated Cash Flow Data

The following table sets forth the major components of our condensed
consolidated statements of cash flows data for the periods presented:



                                                             Three Months Ended
                                                                September 30,
                                                             2012          2011
                                                               (In thousands)
    Net cash provided by operating activities              $  23,695     $  15,719
    Net cash used in investing activities                     (2,349 )        (205 )
    Net cash used in financing activities                    (10,920 )     (39,299 )

    Net increase (decrease) in cash and cash equivalents   $  10,426     $ (23,785 )

Cash Flows from Operating Activities

Net cash provided by operating activities in the three months ended September 30, 2012 of $23.7 million consisted primarily of net income of $13.2 million and by net increases in operating assets and liabilities of 9.0 million. These changes consisted primarily of a $14.3 million decrease in accounts receivable due to decreased revenues, a $6.4 million decrease in accounts payable and accrued liabilities due to decreased overall business activity, a $2.3 million increase in taxes payable due the timing of federal tax payments and a $1.3 million increase in prepaid expenses and other current assets due primarily to increased deposits with our vendors. Additionally, our net income included non-cash adjustments due to stock-based compensation, depreciation and amortization, adjustments to our provisions for doubtful accounts and inventory obsolescence and an excess tax benefit from stock-based awards. The net of these non-cash adjustments resulted in an increase of our net cash provided by operating activities of $1.5 million.

Net cash provided by operating activities in the three months ended September 30, 2011 of $15.7 million consisted primarily of net income of $21.5 million offset by net decreases in operating assets and liabilities of $6.3 million. Changes in operating assets and liabilities consisted primarily of an $8.3 million increase in accounts receivable due to our overall revenue growth, a $2.9 million increase in taxes payable, a $2.7 million increase in inventories, a $1.3 million increase in accounts payable and accrued liabilities and an increase of $488,000 in deferred revenues and deferred cost of revenues.

Cash Flows from Investing Activities

Our investing activities consist solely of capital expenditures and purchases of intangible assets. Capital expenditures for the three months ended September 30, 2012 and 2011 were $1.6 million and $205,000, respectively. Additionally, we had cash outflows related to the purchase of intangible assets of $748,000 during the three months ended September 30, 2012.

Cash Flows from Financing Activities

On August 7, 2012, we entered into a Loan and Security Agreement (the "Loan Agreement") with U.S. Bank, as syndication agent, and East West Bank, as administrative agent. The Loan Agreement replaces the EWB Loan Agreement as discussed below. The Loan Agreement provides for (i) a $50.0 million revolving credit facility, with a $5.0 million sublimit for the issuance of letters of credit and a $5.0 million sublimit for the making of swingline loan advances (the "Revolving Credit Facility"), and (ii) a $50.0 million term loan facility . . .