**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
                  D.C. 20549****FORM
                  10-Q**
 
 **ý**
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30,
                  2007**
 **OR**
 **o**
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE TRANSITION PERIOD FROM
                  _________TO____________**
 
 **Commission
        File Number 000-29053**
 
 **TERABEAM,
        INC.**
 **(Exact
        name of registrant as specified in its charter)**
 
 **DELAWARE**
                **(State
                  or other jurisdiction**
                **of
                  incorporation or organization)**
              **04-2751645**
                **(I.R.S.
                  Employer Identification
                  No.)**
 
 **2115
        O’NEL DRIVE**
 **SAN
        JOSE, CA  95131**
 **(Address
        of principal executive offices)**
 
 **(408)
        731-2700**
 **(Registrant’s
        telephone number, including area code**)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.  Yes ý  No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.  (Check one):
  Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer  ý
 
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).  Yes o No ý
  As
        of
        July 31, 2007, there were 25,854,369 shares of the registrant’s common stock
        outstanding.
  
 
  *Index*
  **TERABEAM,
        INC.**
 **INDEX**
 
 
 **PAGE
                  NO.****PART
                  I.**
              **FINANCIAL
                  INFORMATION**Item
                  1.
              Financial
                  Statements
              3Consolidated
                  Balance Sheets as of June 30, 2007 (unaudited) and
                  December 31, 2006
              4Consolidated
                  Statements of Operations for the six months ended
                  June 30, 2007 and 2006 (unaudited)
              5Consolidated
                  Statement of Changes in Stockholders’ Equity for
                  the six months ended June 30, 2007 (unaudited)
              6Consolidated
                  Statements of Cash Flows for the six months ended
                  June 30, 2007 and 2006 (unaudited)
              7Notes
                  to Consolidated Financial Statements
                  (unaudited)
              8Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              17Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market
                  Risk
              22Item
                  4.
              Controls
                  and Procedures
              23**PART
                  II.**
              **OTHER
                  INFORMATION**Item
                  1.
              Legal
                  Proceedings
              24Item
                  1A.
              Risk
                  Factors
              25Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              29Item
                  6.
              Exhibits
              29SIGNATURE
              30
 
  2
 *Index*
  **PART
        I – FINANCIAL INFORMATION**
 
 This
        Quarterly Report on Form 10-Q contains forward-looking statements as defined
        by
        federal securities laws.  Forward-looking statements are predictions
        that relate to future events or our future performance and are subject to
        known
        and unknown risks, uncertainties, assumptions, and other factors that may
        cause
        actual results, outcomes, levels of activity, performance, developments,
        or
        achievements to be materially different from any future results, outcomes,
        levels of activity, performance, developments, or achievements expressed,
        anticipated, or implied by these forward-looking
        statements.  Forward-looking statements should be read in light of the
        cautionary statements and important factors described in this Form 10-Q,
        including Part II, Item 1A — Risk Factors.  We undertake no obligation
        to update or revise any forward-looking statement to reflect events,
        circumstances, or new information after the date of this Form 10-Q or to
        reflect
        the occurrence of unanticipated or any other subsequent events.
  **Item
        1.  Financial Statements.**
   3
 *Index*
  **TERABEAM,
        INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(In
        thousands, except share data)**
 
 **June
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****Assets**
              
              **(unaudited)**Current
                  assets:Cash
                  and cash equivalents
              
              $
              6,175
              
              
              $
              10,290Investment
                  securities – available-for-sale
              
              
              233
              
              
              
              168Accounts
                  receivable, net
              
              
              8,165
              
              
              
              5,539Inventory
              
              
              9,272
              
              
              
              10,142Prepaid
                  expenses
              
              
              1,431
              
              
              
              1,246Total
                  current assets
              
              
              25,276
              
              
              
              27,385Property
                  and equipment, net
              
              
              2,548
              
              
              
              2,660Other
                  Assets:Restricted
                  cash
              
              
              76
              
              
              
              76Goodwill
              
              
              7,922
              
              
              
              7,922Intangible
                  assets, net
              
              
              10,440
              
              
              
              11,545Deposits
                  and prepaid expenses
              
              
              298
              
              
              
              287Total
                  other assets
              
              
              18,736
              
              
              
              19,830Total
                  assets
              
              $
              46,560
              
              
              $
              49,875**Liabilities
                  and Stockholders’ Equity**Current
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              13,065
              
              
              $
              13,887Deferred
                  revenue
              
              
              2,293
              
              
              
              2,198License
                  agreement payable - current maturities
              
              
              942
              
              
              
              868Total
                  current liabilities
              
              
              16,300
              
              
              
              16,953License
                  agreement payable, net of current maturities
              
              
              1,585
              
              
              
              2,088Total
                  liabilities
              
              
              17,885
              
              
              
              19,041Commitments
                  and contingencies**Stockholders’
                  Equity**Preferred
                  stock, $0.01 par value; authorized 4,500,000, none issued at June
                  30, 2007
                  and December 31, 2006
              
              
              –
              
              
              
              –Common
                  stock, $0.01 par value, 100,000,000 shares authorized, 21,554,369
                  issued
                  and outstanding at June 30, 2007, and 21,552,572 issued and outstanding
                  at
                  December 31, 2006
              
              
              216
              
              
              
              216Additional
                  paid-in capital
              
              
              59,076
              
              
              
              57,976Retained
                  earnings  (accumulated deficit)
              
              
              (30,610
              )
              
              
              (27,285
              )Accumulated
                  other comprehensive income:Net
                  unrealized gain (loss) on available-for-sale securities
              
              
              (7
              )
              
              
              (73
              )Total
                  stockholders’ equity
              
              
              28,675
              
              
              
              30,834Total
                  liabilities and stockholders’ equity
              
              $
              46,560
              
              
              $
              49,875
 
 
 See
        accompanying notes
  4
 *Index*
  **TERABEAM,
        INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 **(In
        thousands, except per share data)**
 **(Unaudited)**
 
 **Three
                  Months Ended**
              
              
              **Six
                  Months Ended****June
                  30,**
              
              
              **June
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Revenues
              
              $
              19,012
              
              
              $
              20,750
              
              
              $
              36,670
              
              
              $
              39,286Cost
                  of goods sold
              
              
              10,573
              
              
              
              12,062
              
              
              
              20,305
              
              
              
              22,957Gross
                  profit
              
              
              8,439
              
              
              
              8,688
              
              
              
              16,365
              
              
              
              16,329Operating
                  expenses:Selling
                  costs
              
              
              5,212
              
              
              
              4,027
              
              
              
              9.957
              
              
              
              8,296Restructuring
                  Charges
              
              
              91
              
              
              
              116
              
              
              
              91
              
              
              
              116General
                  and administrative
              
              
              3,272
              
              
              
              4,021
              
              
              
              6,681
              
              
              
              7,355Research
                  and development
              
              
              2,733
              
              
              
              3,762
              
              
              
              5,543
              
              
              
              8,648Total
                  operating expenses
              
              
              11,308
              
              
              
              11,926
              
              
              
              22,272
              
              
              
              24,415Operating
                  loss
              
              
              (2,869
              )
              
              
              (3,238
              )
              
              
              (5,907
              )
              
              
              (8,086
              )Other
                  income (expenses):Interest
                  income
              
              
              28
              
              
              
              114
              
              
              
              72
              
              
              
              202Interest
                  expense
              
              
              (34
              )
              
              
              (68
              )
              
              
              (68
              )
              
              
              (101
              )Other
                  income (loss)
              
              
              2,580
              
              
              
              212
              
              
              
              2,646
              
              
              
              543Total
                  other income (expenses)
              
              
              2,574
              
              
              
              258
              
              
              
              2,650
              
              
              
              644Loss
                  before income taxes
              
              
              (295
              )
              
              
              (2,980
              )
              
              
              (3,257
              )
              
              
              (7,442
              )Benefit
                  (provision) for income taxes
              
              
              (44
              )
              
              
              (5
              )
              
              
              (68
              )
              
              
              (26
              )Net
                  loss
              
              $
              (339
              )
              
              $
              (2,985
              )
              
              $
              (3,325
              )
              
              $
              (7,468
              )Weighted
                  average shares - basic  and diluted
              
              
              21,554
              
              
              
              21,541
              
              
              
              21,554
              
              
              
              21,502Loss
                  per share, basic and diluted
              
              $
              (0.02
              )
              
              $
              (0.14
              )
              
              $
              (0.15
              )
              
              $
              (0.35
              )
 
 
  
 See
        accompanying notes
  5
 *Index*
  **TERABEAM,
        INC.**
 **CONSOLIDATED
        STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY**
 **FOR
        THE SIX MONTHS ENDED JUNE 30, 2007**
 **(In
        thousands, except share data)**
 **(Unaudited)**
 
 
  
 **Common
                    Stock****Shares**
                
                
                **Amount**
                
                
                **Additional**
                  **Paid-in**
                  **Capital**
                
                
                **Retained**
                  **Earnings**
                  **(Deficit)**
                
                
                **Accumulated**
                  **Other**
                  **Comprehensive**
                  **Income
                    (Loss)**
                
                
                **Total****Balances,
                    January 1, 2007**
                
                
                21,552,572
                
                
                $
                216
                
                
                $
                57,976
                
                
                $
                (27,285
                )
                
                $
                (73
                )
                
                $
                30,834Exercise
                    of stock options and warrants
                
                
                1,797
                
                
                
                
                
                
                
                3
                
                
                
                
                
                
                
                
                
                
                
                3Employee
                    stock option amortization
                
                
                
                
                
                
                
                
                
                
                1,097
                
                
                
                
                
                
                
                
                
                
                
                1,097Comprehensive
                    income:Net
                    income (loss)
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (3,325
                )
                
                
                
                
                
                
                (3,325
                )Unrealized
                    gain (loss) on investments
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                66
                
                
                
                66Total
                    comprehensive income (loss)
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (3,325
                )
                
                
                66
                
                
                
                (3,259
                )**Balances,
                    June 30, 2007**
                
                
                21.554,369
                
                
                $
                216
                
                
                $
                59,076
                
                
                $
                (30,610
                )
                
                $
                (7
                )
                
                $
                28,675
 
   
 See
        accompanying notes
  6
 *Index*
  **TERABEAM,
          INC.**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS**
 **FOR
          THE SIX MONTHS ENDED JUNE 30**
 **(In
          thousands)**
 **(Unaudited)**
 
 **Six
                    Months Ended June 30,****2007**
                
                
                **2006**Cash
                    flows from operating activities:Net
                    income
                    (loss)
                
                $
                (3,325
                )
                
                $
                (7,468
                )Depreciation
                    and
                    amortization
                
                
                1,941
                
                
                
                2,774Bad
                    debt allowance
                    (recovery)
                
                
                98
                
                
                
                (74
                )Employee
                    stock option
                    amortization
                
                
                1098
                
                
                
                569Inventory
                    allowance
                
                
                (1,328
                )
                
                
                31Changes
                    in assets and liabilities affecting operations:Accounts
                    receivable,
                    net
                
                
                (2,724
                )
                
                
                2,506Inventory
                
                
                2,198
                
                
                
                (1,157
                )Deposits
                
                
                (11
                )
                
                
                129Prepaid
                    expenses
                
                
                (185
                )
                
                
                (339
                )Accounts
                    payable and accrued
                    expenses
                
                
                (822
                )
                
                
                (3,541
                )License
                    agreement
                    payable
                
                
                (429
                )
                
                
                (597
                )Deferred
                    revenue
                
                
                95
                
                
                
                1,726Net
                    cash provided by (used in) operating activities
                
                
                (3,394
                )
                
                
                (5,441
                )Cash
                    flows from investing activities:Release
                    of restricted
                    cash
                
                
                -
                
                
                
                5,000Purchase
                    of property and
                    equipment
                
                
                (233
                )
                
                
                (321
                )Investment
                    in capitalized
                    software
                
                
                (491
                )
                
                
                -Net
                    cash provided by (used in) investing activities
                
                
                (724
                )
                
                
                4,679Cash
                    flows from financing activities:Exercise
                    of stock
                    options
                
                
                3
                
                
                
                55Net
                    cash provided by (used in) financing activities
                
                
                3
                
                
                
                55Net
                    increase (decrease) in cash and cash
                    equivalents
                
                
                (4,115
                )
                
                
                (707
                )Cash
                    and cash equivalents, beginning of
                    period
                
                
                10,290
                
                
                
                14,133Cash
                    and cash equivalents, end of
                    period
                
                $
                6,175
                
                
                $
                13,426Supplemental
                    disclosure of cash flow information:Cash
                    paid for
                    interest
                
                $
                68
                
                
                $
                4Income
                    taxes
                    paid
                
                $
                125
                
                
                $
                21
 See
        accompanying notes
  7
 *Index*
  **TERABEAM,
        INC.**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
  **1.**
              **Basis
                  of Presentation**
  The
        consolidated financial statements of Terabeam, Inc. (the “Company” or
“Terabeam”) for the three month and six month periods ended June 30, 2007 and
        2006 are unaudited and include all adjustments which, in the opinion of
        management, are necessary to present fairly the financial position and results
        of operations for the periods then ended.  All such adjustments are of
        a normal recurring nature.  These consolidated financial statements
        should be read in conjunction with the consolidated financial statements
        and
        notes thereto included in the Company’s Annual Report on Form 10-K for the year
        ended December 31, 2006 filed with the Securities and Exchange
        Commission.
  The
        Company provides high-speed wireless communications equipment and services
        in
        the United States and internationally.  Its systems enable service
        providers, enterprises, and governmental organizations to deliver high-speed
        data connectivity enabling a broad range of applications.  The Company
        provides wireless solutions for the mobile enterprise, security and
        surveillance, last mile access, voice and data backhaul, and municipal
        networks.  The Company believes its fixed wireless systems address the
        growing need of our customers and end-users to rapidly and cost effectively
        deploy high-speed communication networks.
  Terabeam
        and its subsidiaries operate in two primary businesses: broadband wireless
        equipment and high-speed wireless service and connectivity.  The
        equipment business is the historic operations of Terabeam as a designer,
        manufacturer, and seller of wireless telecommunications equipment (“Equipment”)
        and generates the substantial majority of the Company’s revenues and
        expenses.  This business is conducted through its Proxim Wireless
        Corporation subsidiary and includes the financial results of the business
        acquired from Old Proxim.  Terabeam’s services business, which it
        began in 2004, is conducted through its Ricochet Networks, Inc.
        subsidiary.  This business (“Services”) was acquired with the Ricochet
        Networks acquisition during the second quarter of 2004.  Ricochet
        Networks has been ranked as one of the five largest wireless Internet service
        providers (WISPs) in the United States (in terms of
        subscribers).  There are no significant inter-company transactions
        which affect the revenue or expenses of either segment.
  In
        April
        2006, the Company announced the retention of an outside consulting firm to
        explore a variety of possible strategic alternatives for our Ricochet services
        business.  Subsequent to June 30, 2007, the Company announced the
        sale on July 31, 2007 of the Ricochet wireless network and operations
        for greater Denver metropolitan area to Civitas Wireless Solutions, LLC
        (Civitas). In addition, we announced Ricochet Networks ,Inc (RNI) ceased
        operations of the San Diego network and is no longer in the business of
        providing wireless internet services.
 
 Summarized
        information for the business segments as of June 30, 2007 and 2006 and for
        the
        quarters then ended is as follows (in thousands):
  
  **Three
        Months Ended June 30,:**
  **2007:**
              
              
              **2006:****Equipment**
              
              
              **Services**
              
              
              **Total**
              
              
              **Equipment**
              
              
              **Services**
              
              
              **Total**Assets
              
              $
              45,566
              
              
              $
              994
              
              
              $
              46,560
              
              
              $
              63,232
              
              
              $
              2,283
              
              
              $
              65,515Revenue
              
              $
              18,117
              
              
              $
              895
              
              
              $
              19,012
              
              
              $
              20,037
              
              
              $
              713
              
              
              $
              20,750Operating
                  income (loss)
              
              $
              (2,442
              )
              
              $
              (427
              )
              
              $
              (2,869
              )
              
              $
              (2,718
              )
              
              $
              (520
              )
              
              $
              (3,238
              )
 
  8
 *Index*
  **Six
        Months Ended June 30,:**
  **2007:**
              
              
              **2006:****Equipment**
              
              
              **Services**
              
              
              **Total**
              
              
              **Equipment**
              
              
              **Services**
              
              
              **Total**Assets
              
              $
              45,566
              
              
              $
              994
              
              
              $
              46,560
              
              
              $
              63,232
              
              
              $
              2,283
              
              
              $
              65,515Revenue
              
              $
              34,790
              
              
              $
              1,880
              
              
              $
              36,670
              
              
              $
              37,683
              
              
              $
              1,603
              
              
              $
              39,286Operating
                  income (loss)
              
              $
              (5,200
              )
              
              $
              (707
              )
              
              $
              (5,907
              )
              
              $
              (7,147
              )
              
              $
              (939
              )
              
              $
              (8,086
              )
 
 
 The
        results of operations for any interim period are not necessarily indicative
        of
        the results of operations for any other interim period or for a full fiscal
        year.
  
  **2.**
              **Stock
                  Based Compensation**
  Prior
        to
        2006, the Company accounted for its stock-based compensation under the
        recognition and measurement principles of APB Opinion No. 25, Accounting
        for Stock Issued to Employees and related interpretations (“APB 25”). Under APB
        25, no stock-based compensation cost was reflected in net income for grants
        of
        stock prior to fiscal year 2006 because the Company grants stock options
        with an
        exercise price equal to or greater than the market value of the underlying
        common stock on the date of grant.
  Effective
        January 1, 2006 the Company adopted Statement of Financial Accounting Standards
        No. 123 (Revised 2004) Share-Based Payment (“SFAS 123R”), which requires
        the measurement and recognition of compensation cost at fair value for all
        share-based payments, including stock options. Stock-based compensation for
        2006
        and 2007 includes compensation expense, recognized over the applicable vesting
        periods, for new share-based awards and for share-based awards granted prior
        to,
        but not yet vested, as of December 31, 2005 (modified prospective application).
        Stock-based compensation for the three-month periods ended June 30, 2007
        and
        2006 totaled approximately $618,000 and $317,000,
        respectively.  Stock-based compensation for the six-month periods
        ended June 30, 2007 and 2006 totaled approximately $1,098,000 and $569,000,
        respectively.
  For
        the
        quarter and six months ended June 30, 2007, the operating loss, the loss
        before
        income taxes and the net loss were $618,000 and  $1,098,000 higher,
        respectively, and the basic and diluted loss per share were $.03 and $.05
        higher
        due to the adoption of SFAS 123R.  Net cash used in operating
        activities and net cash provided by financing activities were not changed
        by the
        adoption of SFAS 123R.
  The
        fair
        value of each option grant has been estimated as of the date of grant using
        the
        Black-Scholes options pricing model with the following weighted average
        assumptions for 2007 and 2006:  risk-free interest rate of 4.50% -
        4.81 % and 4.75%-4.96%, expected life of 4 years and 4 years, volatility,
        calculated using historical volatility, of 231% - 240% and 250%-280% and
        dividend rate of zero percent, respectively.  Using these assumptions,
        the weighted average fair value of the stock options granted in the quarter
        and
        six months ended June 30, 2007 was $2.57, and the weighted average fair value
        of
        the stock options granted in 2006 was $2.49  The fair value of the
        stock options granted will be amortized as compensation expense over the
        vesting
        period of the options.  Estimates of fair value are not intended to
        predict actual future events or the value ultimately realized by employees
        who
        receive equity awards, and subsequent events are not indicative of the
        reasonableness of the original estimates of fair value made by the Company
        under
        SFAS No. 123R.
  No
        tax
        effects are recognized currently for the granting of share-based compensation
        arrangements as the Company currently cannot estimate the realizability of
        related tax benefits as the Company is in a net operating tax loss position
        with
        tax NOL as described in the Company’s Annual Report on Form 10-K for the fiscal
        year ended December 31, 2006, as filed with the SEC.
 
  9
 *Index*
  **3.**
              **Comprehensive
                  Loss**
 
 The
        Company reports comprehensive income in accordance with SFAS No. 130, “Reporting
        Comprehensive Income.”  During the six months ended June 30,
        2007  and 2006, the Company had comprehensive losses of $3.3 million
        and $7.5 million respectively, including approximately $66,000 (unaudited)
        and
        80,000 , respectively, of unrealized (losses) gains on available-for-sale
        investments, net of income taxes of $0 and $0, respectively.
  **4.**
              **Inventory**
  Inventory
        consisted of the following at the indicated dates (in thousands):
  (in
                  thousands)**June
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****(unaudited)**Raw
                  materials
              
              $
              7,771
              
              
              
              8,247Work
                  in process
              
              
              696
              
              
              
              480Finished
                  goods
              
              
              9,130
              
              
              
              11,06817,597
              
              
              
              19,795Allowance
                  for excess and obsolescence
              
              
              (8,325
              )
              
              
              (9,653
              )Net
                  Inventory
              
              $
              9,272
              
              
              $
              10,142
 
 
 **5.**
              **Goodwill**
  Goodwill
        consisted of the following (in thousands):
  **June
                  30,**
              
              **December
                  31,****Acquisition**
              
              **2007**
              
              **2006**KarlNet
              
              $
              2,491
              
              
              $
              2,491Terabeam
              
              
              3,322
              
              
              
              3,322Old
                  Proxim
              
              
              2,109
              
              
              2,109Goodwill
              
              $
              7,922
              
              $
              7,922
 
 Goodwill
        is tested for impairment at least annually at the reporting unit level, and
        more
        frequently if an event occurs or circumstances change that would more likely
        than not reduce the fair value of a reporting unit below its carrying
        amount.
   10
 *Index*
  **6.**
              **Intangibles**
  *Schedule
        of Non-Amortizable Assets*
  **June
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****(in
                  thousands)**Trade
                  names – indefinite useful life
              
              
              1,150
              
              
              
              1,150$
              1,150
              
              
              $
              1,150
 
  
  *Schedule
        of Amortizable Assets*
  **June
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****(in
                  thousands)**Patents,
                  customer relationships and other technologies with identifiable
                  useful
                  lives
              
              
              14,521
              
              
              
              14,521Less:  accumulated
                  amortization
              
              
              (5,231
              )
              
              
              (4,126
              )Amortizable
                  intangible assets, net
              
              $
              9,290
              
              
              $
              10,395
 
 
 Amortization
        is computed using the straight-line method over the estimated useful life,
        based
        on the Company’s assessment of technological obsolescence of the respective
        assets.  Amortization expense for the three months and six months
        ended June 30, 2007 totaled approximately $0.5 million and $1.0 million,
        respectively.  The weighted average estimated useful life is 5
        years.  There is no estimated residual value.
 
 
 **7.**
              **Restructuring
                  Charges**
  The
        Company accounts for restructuring charges under the provisions of Statement
        of
        Financial Accounting Standards No. 146 (“FAS 146”), Accounting for Costs
        Associated with Exit or Disposal Activities.
  During
        the quarter ended June 30, 2007 the Company recorded restructuring charges
        of
        approximately $91,000.  These charges consisted of one-time
        termination benefits related to a reduction in force at its San Jose, California
        headquarters implemented in an effort to streamline operations.
 
  11
 *Index*
  **8.**
              **Earnings
                  per share**
 
 **(In
                  Thousands)**
              
              **Three
                  Months Ended June 30,**
              
              
              **Six
                  Months Ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****(unaudited)**
              
              
              **(unaudited)**Numerator:Net
                  income (loss)
              
              $
              (339
              )
              
              $
              (2,985
              )
              
              $
              (3,325
              )
              
              $
              (7,468
              )Denominator-
                  weighted average shares:Denominator
                  for basic earnings per share
              
              
              21,554
              
              
              
              21,541
              
              
              
              21,554
              
              
              
              21,502Dilutive
                  effect of stock options
              
              
              
              
              
              $
              -
              
              
              
              
              
              
              $
              -Denominator
                  for diluted earnings per share
              
              
              21,554
              
              
              
              21,541
              
              
              
              21,554
              
              
              
              21,502Basic
                  earnings (loss) per share
              
              $
              (0.02
              )
              
              $
              (0.14
              )
              
              $
              (0.15
              )
              
              $
              (0.35
              )Diluted
                  earnings (loss) per share
              
              $
              (0.02
              )
              
              $
              (0.14
              )
              
              $
              (0.15
              )
              
              $
              (0.35
              )
 
 At
        June
        30, 2007 and 2006, stock options and warrants to purchase approximately 2.8
        million and 2.7 million, respectively, shares of common stock were outstanding,
        but were not included in the computation of diluted earnings for the three
        month
        and six month periods ended June 30, 2007 and 2006 because there was a net
        loss
        for each of the applicable periods, and the effect would have been
        anti-dilutive.
 
 **9.**
              **Concentrations**
  During
        six months ended June 30, 2007, there were two customers who accounted for
        approximately 21%, 11%, of consolidated sales respectively, and in the
        corresponding six months of 2006 these same customers accounted for 16%,
        and
        13%, of consolidated sales respectively.
  The
        Company maintains the majority of its cash, cash equivalent, and restricted
        cash
        balances at two major US banks.  The balances are insured by the
        Federal Deposit Insurance Corporation up to $100,000 per bank.  At
        June 30, 2007 and 2006, the uninsured portion totaled approximately $6.2
        million
        and $13.4 million, respectively.
  **10.**
              **Patent
                  License Agreement – License Agreement
                  Payable**
  In
        February 2006, Terabeam, Inc. and its subsidiaries entered into a settlement
        agreement with Symbol Technologies, Inc. and its subsidiaries (“Symbol”)
        resolving all outstanding litigation between the companies.
  The
        Company recorded an intangible asset related to the license at December 31,
        2005
        based on the present value of the scheduled payments, and will amortize the
        intangible asset over the useful life of the patents through
        2014.  The amortization expense recorded for the six months ended June
        30, 2007 totaled approximately $209,000.  The Company also recorded a
        license payable equal to the present value of the scheduled
        payments.  License agreements payable consisted (in
        thousands):
  
 **June
                  30,**
                **2007**
              
              
              **December
                  31,**
                **2006**License
                  Agreement Payable
              
              
              2,527
              
              
              
              2,956Current
                  portion
              
              
              (942
              )
              
              
              (868
              )Long
                  term portion
              
              $
              1,585
              
              
              $
              2,088
 
  
   12
 *Index*
  **11.**
              **Allowance
                  for Product Warranty Costs**
  Warranty****costs
        were significantly reduced for the 6 months ended June 30,
        2007****versus the comparable period ended June 30, 2006.
        This reduction was due to an analysis performed by the Company of allowance
        for
        product warranty costs utilizing updated information of actual warranty costs
        and changes that have been made to the Company’s warranty policy. The company
        booked a change in the estimate of allowance for product warranty costs as
        an
        adjustment to cost of goods sold during the quarter ended March
        31,2007.
  **June
                      30**
                    **2007**
                  
                  
                  **June
                      30**
                    **2006**Balance
                      at January 1,
                  
                  
                  1,102
                  
                  
                  
                  1,146Settlements
                  
                  
                  (226
                  )
                  
                  
                  (397
                  )Other
                      Provision Adjustments
                  
                  
                  (465
                  )
                  
                  
                  417Balance
                      at June 30,
                  
                  
                  411
                  
                  
                  
                  1,166
  **12.**
              **Recent
                  Accounting Pronouncements**
  In
        June
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        No. (FIN) 48, *Accounting for Uncertainty in Income Taxes—An Interpretation
        of FASB Statement No. 109,*which prescribes a recognition threshold
        and measurement attribute for the financial statement recognition and
        measurement of a tax position taken or expected to be taken in a tax return.
        FIN
        48 is effective beginning Q1 2007.The Company has performed a preliminary
        analysis under FIN 48 and believes that any unrecognized benefits or potential
        interest and penalties are not material to the financial statements. The
        Company
        files income tax returns in the U.S. federal jurisdictions and in various
        state
        jurisdictions. Generally, the Company is no longer subject to income tax
        examinations by tax authorities in these jurisdictions for years before
        2003.
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No. 157 (“SFAS 157”), “Fair Value Measurements.” SFAS No. 157 defines
        fair value, establishes a framework for measuring fair value in generally
        accepted accounting principles (“GAAP”), and expands disclosures about fair
        value measurements. SFAS 157 does not require any new fair value measurements
        in
        financial statements, but standardizes its definition and guidance in GAAP.
        Thus, for some entities, the application of this statement may change current
        practice. SFAS 157 is effective for the Company beginning on January 1,
        2008. The Company is currently evaluating the impact that the adoption of
        this
        statement may have on its financial position and results of
        operations.
  In
        September 2006, the FASB issued SFAS No. 158 (“SFAS 158”), “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans.” SFAS 158
        requires employers to fully recognize the obligations associated with
        single-employer defined benefit pension, retiree healthcare, and other
        postretirement plans in their financial statements. The provisions of SFAS
        158
        are effective for fiscal years ending after December 15, 2006. The
        provisions of SFAS 158 did not have a material impact on the Company’s financial
        position, results of operations, or cash flows.
  In
        September 2006, the SEC staff issued Staff Accounting Bulletin 108 (“SAB 108”)
“Considering the Effects of Prior Year Misstatements when Quantifying
        Misstatements in Current Year Financial Statements.” SAB 108 requires that
        public companies utilize a “dual-approach” to assessing the quantitative effects
        of financial misstatements. This dual approach includes both an income statement
        focused assessment and a balance sheet focused assessment. The guidance in
        SAB
        108 must be applied to annual financial statements for fiscal years ending
        after
        November 15, 2006. The adoption of SAB 108 did not have a material effect
        on our consolidated financial position or results of operations.
  In
        February 2007, the FASB issued SFAS 159 (“SFAS 159”) “The Fair Value Option for
        Financial Assets and Financial Liabilities”. SFAS 159 permits entities to choose
        to measure many financial assets and financial
   13
 *Index*
  liabilities
        at fair value. Unrealized gains and losses on items for which the fair value
        option has been elected are reported in earnings. SFAS 159 is effective for
        fiscal years beginning after November 15, 2007. The Company is currently
        assessing the impact of SFAS 159 on its consolidated financial position and
        results of operations.
  
 
 **13.**
              **Commitments
                  and Contingencies**
  IPO
        Litigation
  During
          the period from June 12 to September 13, 2001, four purported securities
          class
          action lawsuits were filed against Telaxis Communications Corporation,
          a
          predecessor company to Terabeam, Inc., in the U.S. District Court for the
          Southern District of New York: Katz v. Telaxis Communications Corporation
          et
          al., Kucera v. Telaxis Communications Corporation et al., Paquette v. Telaxis
          Communications Corporation et al., and Inglis v. Telaxis Communications
          Corporation et al.  The lawsuits also named one or more of the
          underwriters in the Telaxis initial public offering and certain of its
          officers
          and directors.  On April 19, 2002, the plaintiffs filed a single
          consolidated amended complaint which supersedes the individual complaints
          originally filed.  The amended complaint alleges, among other things,
          violations of the registration and antifraud provisions of the federal
          securities laws due to alleged statements in and omissions from the Telaxis
          initial public offering registration statement concerning the underwriters’
alleged activities in connection with the underwriting of Telaxis’ shares to the
          public.  The amended complaint seeks, among other things, unspecified
          damages and costs associated with the litigation.  These lawsuits have
          been assigned along with, we understand, approximately 1,000 other lawsuits
          making substantially similar allegations against approximately 300 other
          publicly-traded companies and their public offering underwriters to a single
          federal judge in the U.S. District Court for the Southern District of New
          York
          for consolidated pre-trial purposes.  We believe the claims against us
          are without merit and have defended the litigation vigorously.  The
          litigation process is inherently uncertain, however, and there can be no
          assurance that the outcome of these claims will be favorable for
          us.
  On
          July
          15, 2002, together with the other issuer defendants, Telaxis filed a collective
          motion to dismiss the consolidated amended complaint against the issuers
          on
          various legal grounds common to all or most of the issuer
          defendants.  The underwriters also filed separate motions to dismiss
          the claims against them.  In October 2002, the court approved a
          stipulation dismissing without prejudice all claims against the Telaxis
          directors and officers who had been defendants in the litigation.  On
          February 19, 2003, the court issued its ruling on the separate motions
          to
          dismiss filed by the issuer defendants and the underwriter
          defendants.  The court granted in part and denied in part the issuer
          defendants’ motions.  The court dismissed, with prejudice, all claims
          brought against Telaxis under the anti-fraud provisions of the securities
          laws.  The court denied the motion to dismiss the claims brought under
          the registration provisions of the securities laws (which do not require
          that
          intent to defraud be pleaded) as to Telaxis and as to substantially all
          of the
          other issuer defendants.  The court denied the underwriter defendants’
motion to dismiss in all respects.
  In
          June
          2003, along with virtually all of the other non-bankrupt issuer defendants,
          we
          elected to participate in a proposed settlement agreement with the plaintiffs
          in
          this litigation.  If the proposed settlement had been approved by the
          court, it would have resulted in the dismissal, with prejudice, of all
          claims in
          the litigation against us and against the other issuer defendants who elected
          to
          participate in the proposed settlement, together with the current or former
          officers and directors of participating issuers who were named as individual
          defendants.  This proposed settlement was conditioned on, among other
          things, a ruling by the court that the claims against us and against the
          other
          issuers who had agreed to the settlement would be certified for class action
          treatment for purposes of the proposed settlement, such that all investors
          included in the proposed classes in these cases would be bound by the terms
          of
          the settlement unless an investor opted to be excluded from the settlement.
  14
 *Index*
  On
          December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued
          a
          decision in *In re Initial Public Offering Securities Litigation* that
          six purported class action lawsuits containing allegations substantially
          similar
          to those asserted against us may not be certified as class actions due,
          in part,
          to the Appeals Court’s determination that individual issues of reliance and
          knowledge would predominate over issues common to the proposed
          classes.  On January 8, 2007, the plaintiffs filed a petition seeking
          rehearing *en banc* of the Second Circuit Court of Appeals’ decision. On
          April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing
          of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained
          free to ask the District Court to certify classes different from the ones
          originally proposed which might meet the standards for class certification
          that
          the Court of Appeals articulated in its December 5, 2006 decision.
  In
          light
          of the Court of Appeals’ December 5, 2006 decision regarding certification of
          the plaintiffs’ claims, the District Court entered an order on June 25, 2007
          terminating the proposed settlement between the plaintiffs and the issuers,
          including us. Because it is expected that any possible future settlement
          with
          the plaintiffs, if such a settlement were ever to be agreed to, would involve
          the certification of a class action for settlement purposes, the impact
          of the
          Court of Appeals’ class certification-related rulings on the possible future
          settlement of the claims against us cannot now be predicted.
  With
          the
          termination of the proposed settlement, we intend to continue to defend
          the
          litigation vigorously.  The litigation process is inherently uncertain
          and unpredictable, however, and there can be no guarantee as to the ultimate
          outcome of this pending lawsuit.  Moreover, we believe that the
          underwriters may have an obligation to indemnify us for the legal fees
          and other
          costs of defending these suits.  While there can be no assurance as to
          the ultimate outcome of these proceedings, we currently believe that the
          final
          result of these actions will have no material effect on our consolidated
          financial condition, results of operations, or cash flows.
  Linex
          Technologies Litigation
  On
          June
          1, 2007, Linex Technologies, Inc. filed suit against Proxim Wireless Corporation
          (a wholly owned subsidiary of Terabeam, Inc.) for alleged patent infringement
          in
          the United States District Court for the Eastern District of Texas, Marshall
          Division.  Other named defendants in this lawsuit are Belair Networks,
          Inc., Cisco Systems, Inc., Firetide, Inc., and Skypilot Networks,
          Inc.  This lawsuit generally alleges that Proxim’s mesh products
          infringe two United States patents purportedly owned by Linex.  Linex
          is seeking damages allegedly caused by the alleged infringement of its
          two
          patents.  This matter is at an extremely early stage.  We
          believe the claims against us are without merit and intend to defend the
          litigation vigorously.  The litigation process is inherently
          uncertain, however, and there can be no assurance that the outcome of these
          claims will be favorable for us.
  KarlNet
  On
          May
          13, 2004, Terabeam acquired KarlNet.  The definitive acquisition
          agreement contained provisions that provided for certain contingent
          consideration after the initial acquisition date.  Terabeam may pay up
          to an additional $2.5 million over the two years following closing based
          on
          achievement of certain milestones and compliance with other
          conditions.  Although the Company has received a letter from sellers
          demanding payment of the first $1.0 million contingent payment, it is the
          Company’s position that, as of December 31, 2006, no events have occurred that
          have triggered the obligation to pay any of the contingent
          consideration.
  General
  We
          are
          subject to potential liability under contractual and other matters and
          various
          claims and legal actions which are pending or may be asserted against us
          or our
          subsidiaries, including claims arising from the termination of the operations
          of
          Ricochet Networks, Inc. in the San Diego metropolitan area and the transfer
          of
          the operations of Ricochet Networks, Inc. in the Denver metropolitan area
          to
          Civitas Wireless Solutions, LLC.  These matters may arise in the
          ordinary course and conduct of our business.  While we cannot predict
          the outcome of such claims and legal actions with certainty, we currently
          believe that such matters should not result in any liability which would
          have a
          material adverse affect on our business.
  15
 *Index*
    **14.Patent
        Sale**
  During
        Q3, 2007 the Company sold two of it’s patents for $2.5 million to a third party.
        As part of the sale, Terabeam and it’s subsidiaries received a license to
        continue to make and sell its products generally in the ordinary course of
        business, subject to certain limitations.
  **15.          Subsequent
        Events**
  On
            July
            23, 2007 we completed a private placement of our common stock raising
            proceeds
            of approximately $7,500,000. We issued 4,300,000 shares of common stock
            at $1.75
            per share and issued warrants to the investors to purchase an aggregate
            of
            2,150,000 shares of our common stock at an exercise price of $2.45 per
            share.  The net proceeds of the sale of our common stock and any
            proceeds from the cash exercise of the accompanying warrants are currently
            expected to be used for working capital and general corporate
            purposes.
  On
            July
            31, 2007 we completed the sale of the Ricochet wireless network and operations
            for the greater Denver metropolitan area to Civitas Wireless Solutions,
            LLC
            (Civitas). In return, RNI received (a) the assumption by Civitas generally
            of
            obligations relating to the operation of the Ricochet wireless network
            in the
            Denver Colorado metropolitan area, (b) a cash payment of $200,000, (c)
            15%
            equity ownership in Civitas, and (d) potential future payments contingent
            on
            certain future potential business of Civitas. RNI generally is retaining
            the
            obligations relating to the operation of the Ricochet network in San
            Diego,
            California metropolitan area of which we discontinued on July 31, 2007.
            In
            addition, substantially all of RNI’s employees were terminated effective July
            31, 2007 and subsequently re-hired by Civitas. We anticipate that we
            will record
            a restructuring charge in our third fiscal quarter to reflect the remaining
            and
            contingent obligations related to terminating various lease obligations
            for the
            San Diego network and impairment of existing assets no longer utilized
            by RNI.
            We also anticipate that RNI will be accounted for as discontinued operation
            beginning in the third fiscal quarter.
  16
 *Index*
  
  **Item
        2.  Management’s Discussion and Analysis of Financial
        Condition and Results of Operations.**
  **Overview**
  We
        provide high-speed wireless communications equipment and services in the
        United
        States and internationally.  Our systems enable service providers,
        enterprises, and governmental organizations to deliver high-speed data
        connectivity enabling a broad range of applications.  We also provide
        wireless solutions for the mobile enterprise, security and surveillance,
        last
        mile access, voice and data backhaul, and municipal networks.  We
        believe our fixed wireless systems address the growing need of our customers
        and
        end-users to rapidly and cost effectively deploy high-speed broadband
        communication networks.
  Terabeam
        and its subsidiaries operate in two primary businesses: broadband wireless
        equipment and high-speed wireless service and connectivity.  The
        equipment business is the historic operations of Terabeam as a designer,
        manufacturer, and seller of wireless telecommunications equipment (“Equipment”)
        and generates the substantial majority of the Company’s revenues and
        expenses.  This business is conducted through its Proxim Wireless
        Corporation subsidiary and includes the financial results of the business
        acquired from Proxim Corporation (“Old Proxim”) in July
        2005.  Terabeam’s services business, which it began in 2004, is
        conducted through its Ricochet Networks, Inc. subsidiary.  This
        business (“Services”) was acquired with the Ricochet Networks acquisition during
        the second quarter of 2004.  Ricochet Networks has been ranked as one
        of the largest wireless Internet service providers (WISPs) in the United
        States
        (in terms of subscribers).  In December 2006, Terabeam entered into an
        agreement with Ricochet Networks to transfer certain Ricochet Networks
        intellectual property to Terabeam.
  As
        a
        subsequent event, we announced the sale on July 31, 2007 of the
        Ricochet wireless network and operations for greater Denver metropolitan
        area to
        Civitas Wireless Solutions, LLC (Civitas). In addition, we announced Ricochet
        Networks ,Inc (RNI) ceased operations of the San Diego network and is no
        longer
        in the business of providing wireless internet services.
 
 **Critical
        Accounting Policies**
  The
        preparation of our consolidated financial statements in accordance with
        accounting principles generally accepted in the United States of America
        requires 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.  We are
        required to make judgments and estimates about the effect of matters that
        are
        inherently uncertain.  Actual results could differ from our
        estimates.  The most significant areas involving our judgments and
        estimates are described below.
  *Revenue
        Recognition*
  Product
        revenue is generally recognized upon shipment when persuasive evidence of
        an
        arrangement exists, the price is fixed or determinable, and collectibility
        is
        reasonably assured. The Company grants certain distributors limited rights
        of
        return and price protection on unsold products.  The company has
        historically deferred revenue on a limited number of major distributors based
        on
        grounds that it did not satisfy all of the conditions outlined in *SFAS 48
        Revenue Recognition When Right of Return Exists*.  Generally, the
        Company has no obligation to provide any modification or customization upgrades,
        enhancements or other post-sale customer support.  Revenue from
        services, such as pre-installation diagnostic testing and product repair
        services, is recognized over the period for which the services are performed,
        which is typically less than one month.  Revenue from enhanced service
        contracts is recognized over the contract period, which ranges from one to
        three
        years.
  For
        our
        services business, we recognize revenue when the customer pays for and then
        has
        access to our network for the current fiscal period.  Any funds the
        customer pays for future fiscal periods are treated as deferred revenue and
        recognized in the future fiscal periods for which the customer has access
        to our
        network.
   17
 *Index*
  *Asset
        Impairment*
  The
        Company periodically evaluates the carrying value of long-lived assets when
        events and circumstances warrant such a review.  The carrying value of
        a long-lived asset is considered impaired when the anticipated undiscounted
        cash
        flow from such asset is separately identifiable and is less than the carrying
        value.  In that event, a loss is recognized based on the amount by
        which the carrying value exceeds the fair market value of the long-lived
        asset.  Fair market value is determined primarily using the
        anticipated cash flows discounted at a rate commensurate with the risk
        involved.
  *Accounts
        Receivable Valuation*
  We
        maintain an allowance for doubtful accounts for estimated losses resulting
        from
        the inability or unwillingness of our customers to make required
        payments.  If the financial condition of our customers were to
        deteriorate resulting in an impairment of their ability to make payments,
        additional allowances may be required.
  *Inventory
        Valuation*
  Inventory
        is stated at the lower of cost or market, cost being determined on a first-in,
        first-out basis.  Provisions are made to reduce excess or obsolete
        inventory to its estimated net realizable value.  The process for
        evaluating the value of excess and obsolete inventory often requires us to
        make
        subjective judgments and estimates concerning future sales levels, quantities,
        and prices at which such inventory will be able to be sold in the normal
        course
        of business, particularly where we have made last-time-buys of
        components.  Accelerating the disposal process or incorrect estimates
        of future sales may necessitate future adjustments to these
        provisions.
  *Goodwill*
  Goodwill
        is the excess of the cost of an acquired entity over the net amounts assigned
        to
        assets acquired and liabilities assumed.  Goodwill is not amortized
        but is tested for impairment at least annually at the reporting unit level,
        and
        more frequently if an event occurs or circumstances change that would more
        likely than not reduce the fair value of a reporting unit below its carrying
        amount.
  *Intangible
        Assets*
  Intangible
        assets are accounted for in accordance with SFAS No. 142 “Goodwill and Other
        Intangible Assets.”  Intangible assets with finite lives are amortized
        over the estimated useful lives using the straight-line method.  An
        impairment loss on such assets is recognized if the carrying amount of an
        intangible asset is not recoverable and its carrying amount exceeds its fair
        value.  Intangible assets with indefinite useful lives are not
        amortized but are tested for impairment at least annually or more frequently
        if
        there are indications that the asset is impaired.  The impairment test
        for these assets consists of a comparison of the fair value of the asset
        with
        its carrying amount.  If the carrying amount of an intangible asset
        with an indefinite useful life exceeds its fair value, an impairment loss
        is
        recognized in an amount equal to that excess.  For either type of
        intangible asset, after an impairment loss is recognized, the adjusted carrying
        amount of the intangible asset becomes its new accounting
        basis.  Subsequent reversal of a previously recognized impairment loss
        is prohibited.
  Our
        intangible assets include purchased technology and various assets acquired
        in
        business combination transactions.  Assets acquired in business
        combination transactions include existing hardware technologies, trade names,
        existing software technologies, customer relationships, and
        patents.  Some of these assets have finite useful lives, and some have
        indefinite useful lives.
  **Results
        of Operations**
  **For
        the three months ended June 30, 2007 and 2006**
  The
        following table provides statement of operations data as a percentage of
        sales
        for the periods presented.
   18
 *Index*
  
  **Three
                  Months Ended June 30,****2007**
              
              
              **2006**Sales
              
              
              100
              %
              
              
              100
              %Cost
                  of goods sold
              
              
              56
              
              
              
              58Gross
                  profit
              
              
              44
              
              
              
              42Operating
                  expensesSelling
                  costs
              
              
              27
              
              
              
              19Restructuring
                  charges
              
              
              1
              
              
              
              1General
                  and administrative
              
              
              17
              
              
              
              19Research
                  and development
              
              
              14
              
              
              
              18Total
                  operating expenses
              
              
              59
              
              
              
              57Operating
                  (loss) income
              
              
              (15
              )
              
              
              (15
              )Other
                  income (expenses)
              
              
              13
              
              
              
              1Income
                  taxes
              
              
              -
              
              
              
              -Net
                  loss
              
              
              (2
              )%
              
              
              (14
              )%
 
  *Sales*
  Sales
        for
        the three months ended June 30, 2007 were $19.0 million as compared to $20.8
        million for the same period in 2006 for a decrease of $1.8 million or
        8%.
  In
        the
        most recent quarter, our service business made up less than 5% of our total
        consolidated revenue.
  For
        the quarters ending June 30, 2007 and 2006, international sales, excluding
        Canada, approximated 50% and 54%, respectively, of total sales.
  *Cost
        of goods sold and gross profit*
  Cost
        of
        goods sold and gross profit for the three months ended June 30, 2007 were
        $10.6
        million and $8.4 million, respectively.  For the same period in 2006,
        costs of goods sold and gross profit were $12.1 million and $8.7 million,
        respectively.  Gross profit margin, as a percentage of sales, for the
        three months ended June 30, 2007 and 2006 was 44% and 42%,
        respectively.  The increase in gross margin percentage was primarily
        due to the product mix in the current quarter compared to the second quarter
        of
        the prior year.
  *Sales
        and Marketing Expenses*
  Sales
        and
        marketing expenses consist primarily of employee salaries and associated
        costs
        for selling, marketing, customer and technical support as well as field
        support.  Sales and marketing expenses for the three months ended June
        30, 2007 were $5.2 million, an increase of $1.2 million over $4.0 million
        for
        the same period in 2006.  This increase was due primarily to increased
        headcount combined with higher marketing and sales costs related to trade
        shows
        and promotion of the new MeshMax product line.
  *Restructuring
        Charges*
  During
        the quarter ended June 30, 2007 we recorded restructuring charges of
        approximately $91,000.  These charges consisted of one-time
        termination benefits related to streamlining engineering operations at
        our  San Jose, California headquarters.  The restructuring
        charges recorded in Q2, 2006 were $116,000 related to a reduction in force
        to
        streamline operations in response to first quarter of 2006 financial
        results.
   19
 *Index*
  *General
        and Administrative Expenses*
  General
        and administrative expenses consist primarily of employee salaries, benefits
        and
        associated costs for information systems, finance, legal, and administration
        of
        a public company.  General and administrative expenses were $3.3
        million for the three months ended June 30, 2007 compared to $4.0 million
        for
        the three months ended June 30, 2006 resulting in a decrease of about 18%
        or
        over $0.7 million from the prior year’s reporting period.
  *Research
        and Development Expenses*
  Research
        and development expenses consist primarily of personnel salaries and fringe
        benefits and related costs associated with our product development
        efforts.  These include costs for development of products and
        components, test equipment and related facilities.  Research and
        development expenses decreased to $2.7 million for the three months ended
        June
        30, 2007 from $3.8 million for the three months ended June 30, 2006, an
        approximate decrease of $1.1 million or 29%.  The decrease in research
        and development expenses was due to reduction in headcount costs as significant
        R&D activities were transitioned to India, combined with a $0.3 million
        reduction in expense related to software capitalization.
  *Other
        income (expenses)*
  Other
        income and expenses totaled approximately $2.6 million in the second quarter
        2007 compared to $0.2 million for the corresponding quarter of
        2006.  This was due to a one-time payment of $2.5 million related to
        the sale of two patents to a third party.
  **For
        the six months ended June 30, 2007 and 2006**
  The
        following table provides statement of operations data as a percentage of
        sales
        for the periods presented.
  **Six
                  Months Ended June 30,****2007**
              
              
              **2006**Sales
              
              
              100
              %
              
              
              100
              %Cost
                  of goods sold
              
              
              55
              
              
              
              58Gross
                  profit
              
              
              45
              
              
              
              42Operating
                  expensesSelling
                  costs
              
              
              27
              
              
              
              21Restructuring
                  charges
              
              
              1
              
              
              
              -General
                  and administrative
              
              
              18
              
              
              
              19Research
                  and development
              
              
              15
              
              
              
              22Total
                  operating expenses
              
              
              61
              
              
              
              62Operating
                  (loss) income
              
              
              (16
              )
              
              
              (20
              )Other
                  income (expenses)
              
              
              7
              
              
              
              1Income
                  taxes
              
              
              -
              
              
              
              -Net
                  loss
              
              
              (9
              )%
              
              
              (19
              )%
 
  *Sales*
  Sales
        for
        the six months ended June 30, 2007 were $36.7 million as compared to $39.3
        million for the same period in 2006 for a decrease of $2.6 million or
        7%.  This decrease was primarily due to a reduction in demand for
        mature products such as wireless LAN equipment and HXI Components. This was
        partially offset by growth in the Broadband Access.
  In
        the
        first six months of 2007, our service business made up less than 5% of our
        total
        consolidated revenue.   Effective July 31, 2007 the Denver
        metropolitan service business was sold to Civitas Wireless
   20
 *Index*
  Solutions,
        LLC, and Ricochet Networks also announced it’s plan to discontinue
        wireless network service to the San Diego metropolitan area.
  For
        the
        six months ending June 30, 2007 and 2006, international sales, excluding
        Canada,
        approximated 50% and 54%, respectively, of total sales.
  *Cost
        of goods sold and gross profit*
  Cost
        of
        goods sold and gross profit for the six months ended June 30, 2007 were $20.3
        million and $16.4 million, respectively.  For the same period in 2006,
        costs of goods sold and gross profit were $22.9 million and $16.3 million,
        respectively.  Gross profit margin, as a percentage of sales, for the
        six months ended June 30, 2007 and 2006 was 45% and 42%,
        respectively.  The increase in gross margin percentage for the six
        months ended June 30, 2007 was primarily due to the shift in product mix
        to
        higher margin Broadband Access products compared to the first six months
        of the
        prior year.  In addition, we had a one time pick up during the first
        quarter of 2007 for release of excess warranty reserves of $0.5 million or
        1% of sales.
  *Sales
        and Marketing Expenses*
  Sales
        and
        marketing expenses consist primarily of employee salaries and associated
        costs
        for selling, marketing, customer and technical support as well as field
        support.  Sales and marketing expenses for the six months ended June
        30, 2007 were $10.0 million, an increase of $1.7 million, or 20% over the
        $8.3
        million for the same period in 2006.  This increase was due primarily
        to increased headcount combined with higher marketing and sales costs related
        to
        trade shows and promotion of the new MeshMax  product
        line.
  *General
        and Administrative Expenses*
  General
        and administrative expenses consist primarily of employee salaries, benefits
        and
        associated costs for information systems, finance, legal, and administration
        of
        a public company.  General and administrative expenses were $6.7
        million for the six months ended June 30, 2007 compared to $7.3 million for
        the
        six months ended June 30, 2006 resulting in a decrease of about 8% or over
        $0.6
        million from the prior year’s reporting period.  The decrease is
        principally a result of decreased headcount and lower legal and outside services
        expense versus the comparable 6 months ended June 30, 2006. General and
        administrative expenses as a percentage of sales during the first six months
        of
        2007 were 18% as compared to 19% in the first six months of 2006.
  *Research
        and Development Expenses*
  Research
        and development expenses consist primarily of personnel salaries and fringe
        benefits and related costs associated with our product development
        efforts.  These include costs for development of products and
        components, test equipment and related facilities.  Research and
        development expenses decreased to $5.5 million for the six months ended June
        30,
        2007 from $8.6 million for the six months ended June 30, 2006, an approximate
        decrease of $3.1 million or 36%.  The decrease in research and
        development expenses was due to reduction in headcount at our San Jose
        ,California location and certain other engineering functions that were
        transitioned to our facility in Hyderabad, India. This was combined
        with  $0.6 million reduction in expense related to software
        capitalization which began in the first fiscal quarter of 2007.
  
  *Other
        income (expenses)*
  Other
        income and expenses totaled approximately $2.6 million in the first six months
        of 2007 compared to $543,000 for the corresponding first half of
        2006.   The majority of this increase of approximately $2.1
        million in the first 6 months was the sale of intellectual property in the
        form
        of two patents to a third party for $2.5 million.
   21
 *Index*
  **Liquidity
        and Capital Resources**
  At
        June
        30, 2007, we had cash, cash equivalents, and investments available-for-sale
        of
        $6.4 million. This excludes restricted cash of $0.1 million.  For the
        six months ended June 30, 2007, cash used by operations was approximately
        $3.3
        million.  We currently are meeting our working capital needs through
        cash on hand as well as internally generated cash from operations and other
        activities.  Net cash used in investing activities was $0.8
        million.
 
 For
        the
        six months ended March 31, 2007, cash used in investing activities was
        approximately $724,000 which was principally related to the purchase of property
        plant and equipment and investment of capitalized software.
 
 During
        the quarter ended June 30, 2007 we realized cash proceeds from sale of two
        patents totaling $2.5 million, with a cost of $52,000. This was included
        in
        results for the quarter ended June 30, 2007 as other income.
 
 We
        believe that cash flow from operations, along with our cash on hand, and
        proceeds of a private placement of $7.5 million which was completed in July,
        2007(See Subsequent Events) should be sufficient to meet the operating cash
        requirements over the next twelve month period as currently
        contemplated.  Our long-term financing requirements depend upon our
        growth strategy, which relates primarily to our desire to increase revenue
        both
        domestically as well as internationally.  However, although the
        acquisition of Old Proxim’s operations in 2005 significantly increased both our
        domestic and international revenue, we incurred operating losses totaling
        $5.9
        million in the first half of 2007.  For the remainder of 2007, we must
        attempt to increase revenues and adjust operating expenses to levels that
        will
        produce positive cash flows and return us to operating
        profitability.  Due to the recent nature of the Old Proxim operation
        acquisition and the large fluctuations in quarterly revenue we have experienced
        since the acquisition, management is closely following revenue trends and
        operating expenses, and reviewing its long term business strategy to evaluate
        whether there will be a requirement for external financing to fund our
        operations.  One significant constraint to our equipment business
        growth is the rate of new product introduction.  New products or
        product lines may be designed and developed internally or acquired from existing
        suppliers to reduce the time to market and inherent risks of new product
        development.    Our current resources may have to be
        supplemented through new bank debt financing, public debt or equity offerings,
        or other means due to a number of factors, including our acquisition of Old
        Proxim’s operations and our desired rate of future growth.  See Item
        1A – Risk Factors below and the more detailed discussion of risk factors
        described in our Annual Report on Form 10-K for the year ended December 31,
        2006
        filed with the Securities and Exchange Commission.
  **Item
        3.  Quantitative and Qualitative Disclosures about
        Market Risk.**
  **Disclosures
        About Market Risk**
  The
        following discusses our exposure to market risks related to changes in interest
        rates, equity prices and foreign currency exchange rates.  This
        discussion contains forward-looking statements that are exposed to risks
        and
        uncertainties, many of which are out of our control.  Actual results
        could vary materially as a result of a number of factors, including those
        discussed below in Item 1A – Risk Factors.
  As
        of
        June 30, 2007, we had cash and cash equivalents of $6.2 million.  The
        majority of total cash and cash equivalents were on deposit in short-term
        accounts with two major US banking organizations.  Therefore, we do
        not expect that an increase in interest rates would materially reduce the
        value
        of these funds.  The primary risk to loss of principal is the fact
        that these balances are only insured by the Federal Deposit Insurance
        Corporation up to $100,000 per bank.  At June 30, 2007, the uninsured
        portion totaled approximately $5.8 million.  Although an immediate
        increase in interest rates would not have a material effect on our financial
        condition or results of operations, declines in interest rates over time
        would
        reduce our interest income.
  In
        the
        past three years, all sales to international customers were denominated in
        United States dollars and, accordingly, we were not exposed to foreign currency
        exchange rate risks.  However, we may make sales denominated in
        foreign currencies in the future.  Additionally, we import from other
        countries.  Our sales and product supply may therefore be subject to
        volatility because of changes in political and economic conditions in these
        countries.
   22
 *Index*
  We
        presently do not use any derivative financial instruments to hedge our exposure
        to adverse fluctuations in interest rates, foreign exchange rates, and
        fluctuations in commodity prices or other market risks; nor do we invest
        in
        speculative financial instruments.
  Due
        to
        the nature of our liabilities and our short-term investments, we have concluded
        that there is no material market risk exposure and, therefore, no quantitative
        tabular disclosures are required.
  **Item
        4.  Controls and Procedures.**
  *Disclosure
        controls and procedures*
  Based
        on
        their evaluation as of June 30, 2007, our Chief Executive Officer and Chief
        Financial Officer concluded that our disclosure controls and procedures (as
        defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
        of
        1934, as amended) were effective as of that date to ensure that information
        required to be disclosed by us in reports that we file or submit under the
        Exchange Act is recorded, processed, summarized and reported within the time
        periods specified in SEC’s rules and forms.  In coming to this
        conclusion, our Chief Executive Officer and Chief Financial Officer considered
        the matters described under the next heading and elsewhere in this Form
        10-Q.
  *Internal
        control over financial reporting*
  Under
        current SEC regulations, we are not currently required to evaluate or provide
        a
        report on our internal control over financial reporting.  However, we
        continue our analysis and action plans on that subject to better prepare
        us for
        the time when we will be required to evaluate and provide a report on our
        internal control over financial reporting.  In connection with its
        2006 annual audit and review procedures, our independent auditors considered
        and
        provided input to us relating to our internal control over financial reporting,
        and reported no material weaknesses in our internal control over financial
        reporting.
  We
        acquired the Old Proxim business, including the related accounting and financial
        systems, during the third quarter of 2005.  We have moved our
        corporate headquarters to the Old Proxim offices in San Jose, CA, and during
        the
        quarter ended June 30, 2006 we substantially completed the process of
        integrating the accounting and financial systems of the two
        companies.   The acquisition of Proxim and integration of the
        accounting and financial systems has caused us to review our internal control
        processes.  We are in the process of completing this review, and we
        will determine and implement any necessary revisions to our internal controls
        resulting from the integration of the two company’s accounting and financial
        systems.
  *Changes
        in internal control over financial reporting*
  There
        was
        no change in our internal control over financial reporting during the quarter
        ended June 30, 2007 that has materially affected, or is reasonably likely
        to
        materially affect, our internal control over our financial reporting other
        than
        the changes described above under the preceding heading “Internal Control over
        Financial Reporting.”  We expect we will continue to make revisions
        and improvements to our internal control over financial reporting, particularly
        as we complete the final phase of reviewing the integration of the accounting
        and financial systems of Old Proxim and Terabeam.
   23
 *Index*
  **PART
        II – OTHER INFORMATION**
 
 **Item
        1.  Legal Proceedings.**
  
  IPO
        Litigation
  During
        the period from June 12 to September 13, 2001, four purported securities
        class
        action lawsuits were filed against Telaxis Communications Corporation, a
        predecessor company to Terabeam, Inc., in the U.S. District Court for the
        Southern District of New York: Katz v. Telaxis Communications Corporation
        et
        al., Kucera v. Telaxis Communications Corporation et al., Paquette v. Telaxis
        Communications Corporation et al., and Inglis v. Telaxis Communications
        Corporation et al.  The lawsuits also named one or more of the
        underwriters in the Telaxis initial public offering and certain of its officers
        and directors.  On April 19, 2002, the plaintiffs filed a single
        consolidated amended complaint which supersedes the individual complaints
        originally filed.  The amended complaint alleges, among other things,
        violations of the registration and antifraud provisions of the federal
        securities laws due to alleged statements in and omissions from the Telaxis
        initial public offering registration statement concerning the underwriters’
alleged activities in connection with the underwriting of Telaxis’ shares to the
        public.  The amended complaint seeks, among other things, unspecified
        damages and costs associated with the litigation.  These lawsuits have
        been assigned along with, we understand, approximately 1,000 other lawsuits
        making substantially similar allegations against approximately 300 other
        publicly-traded companies and their public offering underwriters to a single
        federal judge in the U.S. District Court for the Southern District of New
        York
        for consolidated pre-trial purposes.  We believe the claims against us
        are without merit and have defended the litigation vigorously.  The
        litigation process is inherently uncertain, however, and there can be no
        assurance that the outcome of these claims will be favorable for
        us.
  On
        July
        15, 2002, together with the other issuer defendants, Telaxis filed a collective
        motion to dismiss the consolidated amended complaint against the issuers
        on
        various legal grounds common to all or most of the issuer
        defendants.  The underwriters also filed separate motions to dismiss
        the claims against them.  In October 2002, the court approved a
        stipulation dismissing without prejudice all claims against the Telaxis
        directors and officers who had been defendants in the litigation.  On
        February 19, 2003, the court issued its ruling on the separate motions to
        dismiss filed by the issuer defendants and the underwriter
        defendants.  The court granted in part and denied in part the issuer
        defendants’ motions.  The court dismissed, with prejudice, all claims
        brought against Telaxis under the anti-fraud provisions of the securities
        laws.  The court denied the motion to dismiss the claims brought under
        the registration provisions of the securities laws (which do not require
        that
        intent to defraud be pleaded) as to Telaxis and as to substantially all of
        the
        other issuer defendants.  The court denied the underwriter defendants’
motion to dismiss in all respects.
  In
        June
        2003, along with virtually all of the other non-bankrupt issuer defendants,
        we
        elected to participate in a proposed settlement agreement with the plaintiffs
        in
        this litigation.  If the proposed settlement had been approved by the
        court, it would have resulted in the dismissal, with prejudice, of all claims
        in
        the litigation against us and against the other issuer defendants who elected
        to
        participate in the proposed settlement, together with the current or former
        officers and directors of participating issuers who were named as individual
        defendants.  This proposed settlement was conditioned on, among other
        things, a ruling by the court that the claims against us and against the
        other
        issuers who had agreed to the settlement would be certified for class action
        treatment for purposes of the proposed settlement, such that all investors
        included in the proposed classes in these cases would be bound by the terms
        of
        the settlement unless an investor opted to be excluded from the settlement.
  On
        December 5, 2006, the U.S. Court of Appeals for the Second Circuit issued
        a
        decision in *In re Initial Public Offering Securities Litigation* that
        six purported class action lawsuits containing allegations substantially
        similar
        to those asserted against us may not be certified as class actions due, in
        part,
        to the Appeals Court’s determination that individual issues of reliance and
        knowledge would predominate over issues common to the proposed
        classes.  On January 8, 2007, the plaintiffs filed a petition seeking
        rehearing *en banc* of the Second Circuit Court of Appeals’ decision. On
        April 6, 2007 the Court of Appeals denied the plaintiffs’ petition for rehearing
        of the Court’s December 5, 2006 ruling but noted that the plaintiffs remained
        free to ask the District Court to certify
   24
 *Index*
  classes
        different from the ones originally proposed which might meet the standards
        for
        class certification that the Court of Appeals articulated in its December
        5,
        2006 decision.
  In
        light
        of the Court of Appeals’ December 5, 2006 decision regarding certification of
        the plaintiffs’ claims, the District Court entered an order on June 25, 2007
        terminating the proposed settlement between the plaintiffs and the issuers,
        including us. Because it is expected that any possible future settlement
        with
        the plaintiffs, if such a settlement were ever to be agreed to, would involve
        the certification of a class action for settlement purposes, the impact of
        the
        Court of Appeals’ class certification-related rulings on the possible future
        settlement of the claims against us cannot now be predicted.
  With
        the
        termination of the proposed settlement, we intend to continue to defend the
        litigation vigorously.  The litigation process is inherently uncertain
        and unpredictable, however, and there can be no guarantee as to the ultimate
        outcome of this pending lawsuit.  Moreover, we believe that the
        underwriters may have an obligation to indemnify us for the legal fees and
        other
        costs of defending these suits.  While there can be no assurance as to
        the ultimate outcome of these proceedings, we currently believe that the
        final
        result of these actions will have no material effect on our consolidated
        financial condition, results of operations, or cash flows.
  Linex
        Technologies Litigation
  On
        June
        1, 2007, Linex Technologies, Inc. filed suit against Proxim Wireless Corporation
        (a wholly owned subsidiary of Terabeam, Inc.) for alleged patent infringement
        in
        the United States District Court for the Eastern District of Texas, Marshall
        Division.  Other named defendants in this lawsuit are Belair Networks,
        Inc., Cisco Systems, Inc., Firetide, Inc., and Skypilot Networks,
        Inc.  This lawsuit generally alleges that Proxim’s mesh products
        infringe two United States patents purportedly owned by Linex.  Linex
        is seeking damages allegedly caused by the alleged infringement of its two
        patents.  This matter is at an extremely early stage.  We
        believe the claims against us are without merit and intend to defend the
        litigation vigorously.  The litigation process is inherently
        uncertain, however, and there can be no assurance that the outcome of these
        claims will be favorable for us.
  General
  We
        are
        subject to potential liability under contractual and other matters and various
        claims and legal actions which are pending or may be asserted against us
        or our
        subsidiaries, including claims arising from the termination of the operations
        of
        Ricochet Networks, Inc. in the San Diego metropolitan area and the transfer
        of
        the operations of Ricochet Networks, Inc. in the Denver metropolitan area
        to
        Civitas Wireless Solutions, LLC.  These matters may arise in the
        ordinary course and conduct of our business.  While we cannot predict
        the outcome of such claims and legal actions with certainty, we currently
        believe that such matters should not result in any liability which would
        have a
        material adverse affect on our business.
  
 
  ***Item
        1A.  Risk Factors.***
  *General
        Overview*
  This
        Quarterly Report on Form 10-Q contains forward-looking statements as defined
        by
        federal securities laws that are made pursuant to the safe harbor provisions
        of
        the Private Securities Litigation Reform Act of 1995.  Forward-looking
        statements include statements concerning plans, objectives, goals, strategies,
        expectations, intentions, projections, developments, future events, performance
        or products, underlying assumptions, and other statements, which are other
        than
        statements of historical facts.  In some cases, you can identify
        forward-looking statements by terminology such as “may,” “will,” “should,”
“could,” “expects,” “intends,” “plans,” “anticipates,” “contemplates,”
“believes,” “estimates,” “predicts,” “projects,” and other similar terminology
        or the negative of these terms.  From time to time, we may publish or
        otherwise make available forward-looking statements of this
        nature.  All such forward-looking statements, whether written or oral,
        and whether made by us or on our behalf, are
   25
 *Index*
  expressly
        qualified by the cautionary statements described in this Form 10-Q, including
        those set forth below, and any other cautionary statements which may accompany
        the forward-looking statements.  In addition, we undertake no
        obligation to update or revise any forward-looking statement to reflect events,
        circumstances, or new information after the date of this Form 10-Q or to
        reflect
        the occurrence of unanticipated or any other subsequent events, and we disclaim
        any such obligation.
  You
        should read forward-looking statements carefully because they may discuss
        our
        future expectations, contain projections of our future results of operations
        or
        of our financial position, or state other forward-looking
        information.  However, there may be events in the future that we are
        not able to accurately predict or control.  Forward-looking statements
        are only predictions that relate to future events or our future performance
        and
        are subject to substantial known and unknown risks, uncertainties, assumptions,
        and other factors that may cause actual results, outcomes, levels of activity,
        performance, developments, or achievements to be materially different from
        any
        future results, outcomes, levels of activity, performance, developments,
        or
        achievements expressed, anticipated, or implied by these forward-looking
        statements.  As a result, we cannot guarantee future results,
        outcomes, levels of activity, performance, developments, or achievements,
        and
        there can be no assurance that our expectations, intentions, anticipations,
        beliefs, or projections will result or be achieved or
        accomplished.  In summary, you should not place undue reliance on any
        forward-looking statements.
  *Cautionary
        Statements of General Applicability*
  In
        addition to other factors and matters discussed elsewhere in this Form 10-Q,
        in
        our other periodic reports and filings made from time to time with the
        Securities and Exchange Commission, and in our other public statements from
        time
        to time (including, without limitation, our press releases), some of the
        important factors that, in our view, could cause actual results to differ
        materially from those expressed, anticipated, or implied in the forward-looking
        statements include, without limitation, the downturn and continuing uncertainty
        in the telecommunications industry and global economy; the intense competition
        in the broadband wireless equipment industry and resulting pressures on our
        pricing, gross margins, and general financial performance; our limited capital
        resources and uncertain prospects for obtaining additional financing; the
        possibility that we may raise additional capital on terms that we or our
        stockholders find onerous; possible better terms of any equity, debt, or
        convertible securities we may issue in the future than the terms of our common
        stock; the possibility that we may sell or otherwise dispose of portions
        of our
        business and assets for strategic reasons or to raise capital; possible negative
        reactions from investors, customers, employees, and others to any business
        or
        assets dispositions we may effect; difficulties in differentiating our products
        from competing broadband wireless products and other competing technologies;
        the
        impact, availability, pricing, and success of competing technologies and
        products; possible delays in our customers making buying decisions due to
        the
        actual or potential availability of new broadband connectivity technologies;
        difficulties in developing products that will address a sufficiently broad
        market to be commercially viable; our developing products for portions of
        the
        broadband connectivity and access markets that do not grow; our inability
        to
        keep pace with rapid technological changes and industry standards; expected
        declining prices for our products over time; our inability to offset expected
        price declines with cost savings or new product introductions; our inability
        to
        recover capital and other investments made in developing and introducing
        new
        products; lack of or delay in market acceptance and demand for our current
        and
        contemplated products; difficulties or delays in developing, manufacturing,
        and
        supplying products with the contemplated or desired features, performance,
        price, cost, and other characteristics; difficulties in estimating costs
        of
        developing and supplying products; difficulties in developing, manufacturing,
        and supplying products in a timely and cost-effective manner; difficulties
        or
        delays in developing improved products when expected or desired and with
        the
        additional features contemplated or desired; decisions we may make to delay
        or
        discontinue efforts to develop and introduce certain new products; negative
        reactions to any such decisions; costs and accounting impacts from any such
        decisions; our fluctuating financial results, which may be caused at times
        by
        receipt of large orders from customers; our limited ability to predict our
        future financial performance; our possible desire to make limited or no public
        predictions as to our expected future financial performance; the expected
        fluctuation in customer demand and commitments; difficulties in predicting
        our
        future financial performance, in part due to our past and possible future
        acquisition activity; our inability to achieve the contemplated benefits
        of our
        July 2005 acquisition of Proxim Corporation’s operations and any other
        acquisitions we may contemplate or consummate; management distraction due
        to
        those acquisitions; the ability of the companies to integrate in a
        cost-effective, timely manner without material liabilities or loss of desired
        employees or customers; the risk that the expected synergies and other benefits
        of the transactions will not be realized at all or to the extent expected;
        the
        risk that cost savings from the transactions may not be fully realized or
        may
        take longer to realize than
   26
 *Index*
  expected;
        reactions, either positive or negative, of investors, competitors, customers,
        suppliers, employees, and others to the transactions; the risk that those
        transactions will, or could, expose us to lawsuits or other liabilities;
        obligations arising from contractual obligations of Proxim Corporation that
        we
        assumed; litigation risks, obligations, and expenses arising from contractual
        obligations of Proxim Corporation that we assumed; management and other employee
        distraction due to any litigation arising from contractual obligations of
        Proxim
        Corporation that we assumed; adverse impacts of purchase accounting treatment
        and amortization and impairment of intangible assets acquired in any
        acquisitions; our general lack of receiving long-term purchase commitments
        from
        our customers; cancellation of orders without penalties; the ability of our
        customers to return to us some or all of the products they had previously
        purchased from us with the resulting adverse financial consequences; costs,
        administrative burdens, risks, and obligations arising from terms and conditions
        that we find onerous but that are imposed upon us by certain customers as
        a
        condition of buying products from us; our not selling products to certain
        customers due to our refusal to accept their terms and conditions of sale that
        we find onerous; difficulties or delays in obtaining raw materials,
        subassemblies, or other components for our products at the times, in the
        quantities, and at the prices we desire or expect, particularly those that
        are
        sole source or available from a limited number of suppliers; inability to
        achieve and maintain profitability; purchases of excess inventory that
        ultimately may not be used; difficulties or delays in developing alternative
        sources for limited or sole source components; our having to reconfigure
        our
        products due to our inability to receive sufficient quantities of limited
        or
        sole source components; adverse impact of stock option and other accounting
        rules; our reliance on third party distributors and resellers in our indirect
        sales model; our dependence on a limited number of significant distributors;
        our
        inability to obtain larger customers; dependence on continued demand for
        broadband connectivity and access; difficulties in attracting and retaining
        qualified personnel; our dependence on key personnel; competition from companies
        that hire some of our former personnel; lack of key man life insurance on
        our
        executives or other employees; lack of a succession plan; inability of our
        limited internal manufacturing capacity to meet customers’ desires for our
        products; our substantial reliance on contract manufacturers to obtain raw
        materials and components for our products and to manufacture, test, and deliver
        our products; interruptions in our manufacturing operations or the operations
        of
        our contract manufacturers or other suppliers; possible adverse impacts on
        us of
        the directive on the restriction of the use of certain hazardous substances
        in
        electrical and electronic equipment (the RoHS directive), including, without
        limitation, adverse impacts on our ability to supply our products in the
        quantities desired and adverse impacts on our costs of supplying products;
        possible adverse impacts on us of the waste electrical and electronic equipment
        directive (the WEEE directive), including, without limitation, adverse impacts
        on our ability to supply our products in the quantities desired and adverse
        impacts on our costs of supplying products; our failing to maintain adequate
        levels of inventory; costs and accounting impacts associated with purchasing
        inventory that is later determined to be excess or obsolete; our failure
        to
        effectively manage our growth; difficulties in reducing our operating expenses;
        adverse impacts of the war in Iraq and the war on terrorism generally; the
        potential for intellectual property infringement, warranty, product liability,
        and other claims; risks, obligations, and expenses arising from litigating
        or
        settling any such intellectual property infringement, warranty, product
        liability, and other claims; management and other employee distraction due
        to
        any such intellectual property infringement, warranty, product liability,
        and
        other claims; risks associated with foreign sales such as collection, currency,
        and political risk; limited ability to enforce our rights against customers
        in
        foreign countries; lack of relationships in foreign countries which may limit
        our ability to expand our international sales and operations; difficulties
        in
        complying with existing governmental regulations and developments or changes
        in
        governmental regulation; difficulties or delays in obtaining any necessary
        Federal Communications Commission and other governmental or regulatory
        certifications, permits, waivers, or approvals; possible adverse consequences
        resulting from marketing, selling, or supplying products without any necessary
        Federal Communications Commission or other governmental or regulatory
        certifications, permits, waivers, or approvals; changes in governmental
        regulations which could adversely impact our competitive position; our
        maintaining tight credit limits which could adversely impact our sales;
        difficulties in our customers or ultimate end users of our products obtaining
        sufficient funding; difficulties in collecting our accounts receivable; failure
        or inability to protect our proprietary technology and other intellectual
        property; possible decreased ability to protect our proprietary technology
        and
        other intellectual property in foreign jurisdictions; ability of third parties
        to develop similar and perhaps superior technology without violating our
        intellectual property rights; the costs and distraction of engaging in
        litigation to protect our intellectual property rights, even if we are
        ultimately successful; adverse impacts resulting from our settlement of
        litigation initiated by Symbol Technologies, Inc.; time, costs, political
        considerations, typical multitude of constituencies, and other factors involved
        in evaluating, equipping, installing, and operating municipal networks; costs
        of
        complying with governmental regulations such as Section 404 and other provisions
        of the Sarbanes-Oxley Act; the expense of defending and settling and the
        outcome
        of pending and any future stockholder litigation; the expense of defending
        and
        settling and the outcome of pending and any future
   27
 *Index*
  litigation
        against us; the expected volatility and possible stagnation or decline in
        our
        stock price, particularly due to the relatively low number of shares that
        trade
        on a daily basis and public filings regarding sales of our stock by one or
        more
        of our significant stockholders; future stock sales by our current stockholders,
        including our current and former directors and management; future actual
        or
        potential sales of our stock that we issue upon exercise of stock options
        or
        stock warrants; possible dilution of our existing stockholders if we issue
        stock
        to acquire other companies or product lines or to raise additional capital;
        possible better terms of any equity securities we may issue in the future
        than
        the terms of our common stock; investment risk resulting in the decrease
        in
        value of our investments; and risks, impacts, and effects associated with
        any
        acquisitions, investments, or other strategic transactions we may evaluate
        or in
        which we may be involved.  Many of these and other risks and
        uncertainties are described in more detail in our annual report on Form 10-K
        for
        the year ended December 31, 2006 filed with the Securities and Exchange
        Commission.
  *Possible
        Risk Relating to Recent Equity Issuance*
  In
        July
        2007, we issued 4,300,000 shares of our common stock and warrants to purchase
        an
        additional 2,150,000 shares of our common stock in a private placement to
        institutional and other accredited investors.  We agreed to file a
        registration statement covering those shares within thirty days after the
        closing of the private placement.  This registration, or the
        anticipation of this registration, could cause our stock price to fall or
        prevent it from increasing.  Also, a substantial amount of this common
        stock being sold or becoming available (or being perceived to become available)
        for sale in the public market could cause the market price of our common
        stock
        to fall or prevent it from increasing, particularly given the relatively
        low
        trading volumes of our stock.  Customers, investors, employees,
        competitors, and others may react negatively to this stock sale and warrant
        issuance, the price at which the stock was sold and warrants may be exercised,
        the dilution resulting from the sale and issuance, and other ramifications
        of
        these transactions.  We could be subject to financial penalties to the
        investors in this transaction if we fail to file the registration statement
        within the prescribed period and also if we are unable to cause the registration
        statement to become effective within the prescribed period.
  *Specific
        Cautionary Statements relating to Ricochet Actions*
  In
        August
        2007, Ricochet Networks, Inc., a subsidiary of Terabeam, Inc., that it had
        discontinued operation of the Ricochet® network in the San Diego metropolitan
        area and sold the operations of the Ricochet network in the Denver metropolitan
        area.  There can be no assurance whatsoever that we will realize the
        expected benefits of these actions at all or to the extent
        anticipated.  Other risks associated with these actions include the
        risk that cost savings from these actions may not be fully realized or may
        take
        longer to realize than expected; the possibilities that these actions could
        result in increased liabilities and other adverse consequences; reactions,
        positive or negative, of customers, investors, employees, contract
        counterparties, competitors, and others to these actions; the uncertain impact
        of these actions on the trading market, volume, and price of Terabeam’s stock;
        the time and costs of discontinuing the operations of the Ricochet network
        in
        the San Diego metropolitan area; legal, financial statement, and accounting
        ramifications resulting from these actions; and management and board interest
        in
        and distraction due to these actions.
 
 *Intellectual
        Property Litigation*
 
 On
        June
        1, 2007, Linex Technologies, Inc. filed suit against Proxim Wireless Corporation
        (a wholly owned subsidiary of Terabeam, Inc.) for alleged patent infringement
        in
        the United States District Court for the Eastern District of Texas, Marshall
        Division.  Other named defendants in this lawsuit are Belair Networks,
        Inc., Cisco Systems, Inc., Firetide, Inc., and Skypilot Networks,
        Inc.  This lawsuit generally alleges that Proxim’s mesh products
        infringe two United States patents purportedly owned by Linex.  Linex
        is seeking damages allegedly caused by the alleged infringement of its two
        patents.  This matter is at an extremely early stage.  We
        believe the claims against us are without merit and intend to defend the
        litigation vigorously.  The litigation process is inherently
        uncertain, however, and there can be no assurance that the outcome of these
        claims will be favorable for us.  Even if we are completely successful
        in defending the claims asserted against us in this lawsuit, we expect we
        will
        incur significant defense costs and that management, technical, and other
        personnel will be distracted and diverted by this lawsuit.
   28
 *Index*
  
  *Possible
        Implications of Cautionary Statements*
  The
        items
        described above, either individually or in some combination, could have a
        material adverse impact on our reputation, business, need for additional
        capital, ability to obtain additional debt or equity financing, current and
        contemplated products gaining market acceptance, development of new products
        and
        new areas of business, sales, cash flow, results of operations, financial
        condition, stock price, viability as an ongoing company, results, outcomes,
        levels of activity, performance, developments, or achievements.  Given
        these uncertainties, investors are cautioned not to place undue reliance
        on any
        forward-looking statements.
  
 
  **Item
        4.                      Submission
        of Matters to a Vote of Security Holders.**
 
 We
        held
        our annual meeting of stockholders on May 23, 2007.  At that meeting,
        each of the following individuals was elected as a director of Terabeam (these
        individuals were all the directors of Terabeam after the meeting) by the
        following votes:
 
 Name
                  of Individual
              Votes
                  For
              Votes
                  WithheldDaniel
                  A. Saginario
              18,093,382
              277,315Robert
                  E. Fitzgerald
              18,128,341
              242,356John
                  W. Gerdelman
              18,096,382
              274,315Alan
                  B. Howe
              18,120,567
              250,130Pankaj
                  Manglik
              18,206,682
              164,015Robert
                  A. Wiedemer
              18,174,382
              196,315
 There
        were no other matters voted on by stockholders at the annual
        meeting.
  
  
  **Item
        6.                      Exhibits.**
  See
        Exhibit Index.
  29
   **SIGNATURE**
 
 Pursuant
          to the requirements of the Securities Exchange Act of 1934, the Company
          has duly
          caused this report to be signed on its behalf by the undersigned thereunto
          duly
          authorized.
  Terabeam,
                    Inc.Date:  August
                    14,  2007
                By:
                /s/  Brian
                    J. SeredaBrian
                    J. Sereda,Chief
                    Financial Officer*(principal
                    financial and accounting
                    officer)*
   30
    **EXHIBIT
        INDEX**
  **Exhibit**
                **Number**
              **Description**3.1
              Amendment
                  1 to By-laws of Terabeam, Inc. (2)10.1
              Assignment
                  Agreement dated as of April 24, 2007 between Terabeam, Inc. and
                  SPH
                  America, LLC (1)10.2
              Assignment
                  Agreement dated as of April 24, 2007 among Terabeam, Inc., Proxim
                  Wireless
                  Corporation, and SPH America, LLC (1)10.3
              Purchase
                  Agreement dated as of July 19, 2007 among Terabeam, Inc. and each
                  investor
                  named therein (3)10.4
              Registration
                  Rights Agreement dated as of July 23, 2007 among Terabeam, Inc.
                  and each
                  investor named therein (3)10.5
              Form
                  of warrant issued July 23, 2007 (3)31.1
              Certification
                  of Chief Executive Officer Pursuant to Rule 13a-14(a).31.2
              Certification
                  of Chief Financial Officer Pursuant to Rule 13a-14(a).
  32.1
              Certification
                  Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
                  Act of
                  2002 (subsections (a) and (b) of Section 1350 of Chapter 63 of
                  Title 18 of
                  the United States Code).99.1
              Asset
                  Purchase Agreement dated as of July 31, 2007 between Ricochet Networks,
                  Inc. and Civitas Wireless Solutions, LLC and joined in by Judi
                  A. Evans
                  (4)99.2
              Intellectual
                  Property Transfer and License Agreement dated as of July 31, 2007
                  between
                  Terabeam, Inc. and Civitas Wireless Solutions, LLC (4)99.3
              License
                  Agreement dated as of July 31, 2007 between Terabeam, Inc. and
                  Civitas
                  Wireless Solutions, LLC (4)
  ______________
 All
        non-marked exhibits are filed herewith.
 
 (1)
              Incorporated
                  herein by reference to the exhibits to Form 8-K filed with the
                  SEC on
                  April 30, 2007.(2)
              Incorporated
                  herein by reference to the exhibits to Form 8-K filed with the
                  SEC on May
                  29, 2007.(3)
              Incorporated
                  herein by reference to the exhibits to Form 8-K filed with the
                  SEC on July
                  24, 2007.(4)
              Incorporated
                  herein by reference to the exhibits to Form 8-K filed with the
                  SEC on
                  August 6, 2007.
 
 31