**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 MARCH 31,
                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  ̈




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   ̈         Accelerated
      filer   ̈         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  ̈ No ý




As
      of
      April 30, 2007, there were 21,554,369 shares of the registrant’s common stock
      outstanding.
















**TERABEAM,
      INC.**


**INDEX**








**PAGE
                NO.****PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Consolidated
                Financial Statements
            3Consolidated
                Balance Sheets as of March 31, 2007 (unaudited)
                and December 31, 2006
            4Consolidated
                Statements of Operations for the three months
                ended March 31, 2007 and 2006 (unaudited)
            5Consolidated
                Statement of Changes in Stockholders’ Equity for
                the three months ended March 31, 2007 (unaudited)
            6Consolidated
                Statements of Cash Flows for the three months
                ended March 31, 2007 and 2006 (unaudited)
            7Notes
                to Consolidated Financial Statements
                (unaudited)
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            16Item
                3.
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            20Item
                4.
            Controls
                and Procedures
            20**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            22Item
                1A.
            Risk
                Factors
            23Item
                6.
            Exhibits
            26SIGNATURE
            26














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.  FinancialStatements.**




3
 *Index*


**TERABEAM,
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      thousands, except share data)**








**March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006****Assets**
            
            **(unaudited)**Current
                assets:Cash
                and cash equivalents
            
            $
            7,912
            
            
            $
            10,290Investment
                securities – available-for-sale
            
            
            201
            
            
            
            168Accounts
                receivable, net
            
            
            6,814
            
            
            
            5,539Inventory
            
            
            9,301
            
            
            
            10,142Prepaid
                expenses
            
            
            1,602
            
            
            
            1,246Total
                current assets
            
            
            25,830
            
            
            
            27,385Property
                and equipment, net
            
            
            2,563
            
            
            
            2,660Other
                Assets:Restricted
                cash
            
            
            76
            
            
            
            76Goodwill
            
            
            7,922
            
            
            
            7,922Intangible
                assets, net
            
            
            11,012
            
            
            
            11,545Deposits
                and prepaid expenses
            
            
            297
            
            
            
            287Total
                other assets
            
            
            19,307
            
            
            
            19,830Total
                assets
            
            $
            47,700
            
            
            $
            49,875**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            13,830
            
            
            $
            13,887Deferred
                revenue
            
            
            2,767
            
            
            
            2,198License
                agreement payable - current maturities
            
            
            879
            
            
            
            868Total
                current liabilities
            
            
            17,476
            
            
            
            16,953License
                agreement payable, net of current maturities
            
            
            1,864
            
            
            
            2,088Total
                liabilities
            
            
            19,340
            
            
            
            19,041Commitments
                and contingencies**Stockholders’
                Equity**Preferred
                stock, $0.01 par value; authorized 4,500,000, none issued at March
                31,
                2007 and December 31, 2006
            
            
            -
            
            
            
            -Common
                stock, $0.01 par value, 100,000,000 shares authorized, 21,554,369
                issued
                and outstanding at March 31, 2007 and 21,552,572 issued and outstanding
                at
                December 31, 2006
            
            
            216
            
            
            
            216Additional
                paid-in capital
            
            
            58,454
            
            
            
            57,976Retained
                earnings  (accumulated deficit)
            
            
            (30,271
            )
            
            
            (27,285
            )Accumulated
                other comprehensive income:Net
                unrealized gain (loss) on available-for-sale securities
            
            
            (39
            )
            
            
            (73
            )Total
                stockholders’ equity
            
            
            28,360
            
            
            
            30,834Total
                liabilities and stockholders’ equity
            
            $
            47,700
            
            
            $
            49,875





See
      accompanying notes





4
 *Index*





**TERABEAM,
      INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(In
      thousands, except per share data)**


**(Unaudited)**





**Three
                Months Ended****March
                31,****2007**
            
            
            **2006**Revenues
            
            $
            17,658
            
            
            $
            18,536Cost
                of goods sold
            
            
            9,732
            
            
            
            10,895Gross
                profit
            
            
            7,926
            
            
            
            7,641Operating
                expenses:Selling
                costs
            
            
            4,745
            
            
            
            4,269General
                and administrative
            
            
            3,409
            
            
            
            3,334Research
                and development
            
            
            2,810
            
            
            
            4,886Total
                operating expenses
            
            
            10,964
            
            
            
            12,489Operating
                loss
            
            
            (3,038
            )
            
            
            (4,848
            )Other
                income (expenses):Interest
                income
            
            
            44
            
            
            
            88Interest
                expense
            
            
            (34
            )
            
            
            (33
            )Other
                income (loss)
            
            
            66
            
            
            
            331Total
                other income (expenses)
            
            
            76
            
            
            
            386Loss
                before income taxes
            
            
            (2,962
            )
            
            
            (4,462
            )Benefit
                (provision) for income taxes
            
            
            (24
            )
            
            
            (21
            )Net
                Income (loss)
            
            $
            (2,986
            )
            
            $
            (4,483
            )Weighted
                average shares - basic  and diluted
            
            
            21,553
            
            
            
            21,462Loss
                per share, basic and diluted
            
            $
            (0.14
            )
            
            $
            (0.21
            )








See
      accompanying notes






6
 *Index*




**TERABEAM,
      INC.**


**CONSOLIDATED
      STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY**


**FOR
      THE THREE MONTHS ENDED MARCH 31, 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
              
              
              
              -
              
              
              
              1
              
              
              
              -
              
              
              
              -
              
              
              
              1Employee
                  stock option amortization
              
              
              -
              
              
              
              -
              
              
              
              477
              
              
              
              -
              
              
              
              -
              
              
              
              477Comprehensive
                  income:Net
                  income (loss)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,986
              )
              
              
              -
              
              
              
              (2,986
              )Unrealized
                  gain (loss) on investments
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              34
              
              
              
              34Total
                  comprehensive income (loss)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,986
              )
              
              
              34
              
              
              
              (2,952
              )**Balances,
                  March 31, 2007**
              
              
              21,554,369
              
              
              $
              216
              
              
              $
              58,454
              
              
              $
              (30,271
              )
              
              $
              (39
              )
              
              $
              28,360










See
      accompanying notes






6
 *Index*




**TERABEAM,
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED MARCH 31**


**(In
      thousands)**


**(Unaudited)**





**Three
                Months Ended March 31,****2007**
            
            
            **2006**Cash
                flows from operating activities:Net
                income (loss)
            
            $
            (2,986
            )
            
            $
            (4,483
            )Depreciation
                and amortization
            
            
            976
            
            
            
            1,388Bad
                debt allowance (recovery)
            
            
            (14
            )
            
            
            (61
            )Employee
                stock option amortization
            
            
            477
            
            
            
            252Inventory
                allowance
            
            
            (926
            )
            
            
            (89
            )Changes
                in assets and liabilities affecting operations:Restricted
                cash
            
            
            -
            
            
            
            -Accounts
                receivable, net
            
            
            (1,261
            )
            
            
            2,025Inventory
            
            
            1,767
            
            
            
            (666
            )Deposits
            
            
            (10
            )
            
            
            (101
            )Prepaid
                expenses
            
            
            (355
            )
            
            
            (354
            )Accounts
                payable and accrued expenses
            
            
            (57
            )
            
            
            (1,913
            )License
                agreement payable
            
            
            (213
            )
            
            
            (597
            )Deferred
                revenue
            
            
            569
            
            
            
            3,119Net
                cash provided by (used in) operating activities
            
            
            (2,033
            )
            
            
            (1,480
            )Cash
                flows from investing activities:Purchase
                of property and equipment
            
            
            (75
            )
            
            
            (201
            )Investment
                in capitalized software
            
            
            (271
            )
            
            
            -Net
                cash provided by (used in) investing activities
            
            
            (346
            )
            
            
            (201
            )Cash
                flows from financing activities:Exercise
                of stock options
            
            
            1
            
            
            
            55Repayment
                of notes payable
            
            
            -
            
            
            
            -Net
                cash provided by (used in) financing activities
            
            
            1
            
            
            
            55Net
                increase (decrease) in cash and cash equivalents
            
            
            (2,378
            )
            
            
            (1,626
            )Cash
                and cash equivalents, beginning of period
            
            
            10,290
            
            
            
            14,133Cash
                and cash equivalents, end of period
            
            $
            7,912
            
            
            $
            12,507Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            
            -
            
            
            
            -Income
                taxes paid
            
            $
            24
            
            
            $
            21





See
      accompanying notes








*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 period ended March 31, 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 and 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 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.




We
      continue to explore a variety of possible strategic alternatives for our
      Ricochet services business.  These alternatives may include the
      divestiture of Ricochet, an investment in Ricochet, strategic relationships
      with
      Ricochet, sale of some or all of the assets of Ricochet, curtailment of the
      current scope of Ricochet’s operations, and a number of other possible
      alternatives. There can be no assurance that any transaction or other corporate
      action regarding Ricochet will result from this exploration of alternatives.
      Further, there can be no assurance whatsoever concerning the type, form,
      structure, nature, results, timing, or terms and conditions of any such
      potential action, even if such an action does result from this
      exploration.


8
 *Index*


Summarized
      information for the business segments as of March 31, 2007 and 2006 and for
      the
      quarters then ended is as follows:




($000’s)




**March
      31, 2007:**




**Equipment**
            
            
            **Services**
            
            
            **Total**Assets
            
            $
            46,602
            
            
            $
            1,098
            
            
            $
            47,700Revenue
            
            $
            16,673
            
            
            $
            985
            
            
            $
            17,658Operating
                income
                (loss)
            
            $
            (2,758
            )
            
            $
            (280
            )
            
            $
            (3,038
            )







**March
      31, 2006:**




**Equipment**
            
            
            **Services**
            
            
            **Total**Assets
            
            $
            68,524
            
            
            $
            2,679
            
            
            $
            71,203Revenue
            
            $
            17,646
            
            
            $
            890
            
            
            $
            18,536Operating
                income
                (loss)
            
            $
            (4,429
            )
            
            $
            (419
            )
            
            $
            (4,848
            )






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
      the
      first quarter of  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 March 31, 2007 and 2006 totaled approximately $480,000 and $252,000,
      respectively, and is included in cost of goods sold and operating expenses
      in
      the condensed consolidated statements of operations.




For
      the
      quarter ended March 31, 2007, the operating loss, the loss before income taxes
      and the net loss were all $480,000 higher and the basic and diluted loss per
      share were $0.02 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% to
      4.81% and 4.51% respectively, expected life of 4 years for both years,
      volatility, calculated using historical volatility of 235% to 240% and 284%
      respectively, and dividend rate of zero percent, respectively. The expected
      volatility is calculated using historical volatility. The company uses the
      “simplified” method to determine the expected term for “plain vanilla” options.
      Using these assumptions, the weighted average fair value of the
      stock


9
 *Index*


options
      granted in the first quarter of 2007 was $1.92 to $2.25, and the weighted
      average fair value of the stock options granted in first quarter of 2006 was
      $3.74.  The fair value of the stock options granted will be amortized
      as compensation expense over the vesting period of the options.  As of
      March 31,2007 there was $3.0 million of total unrecognized compensation expense
      related to share based compensation arrangements. The cost is expected to be
      recognized over a weighted-average period of 2.1 years.  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 carryforwards 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.





**3.           Comprehensive
      Loss**




The
      Company reports comprehensive income in accordance with SFAS No. 130, “Reporting
      Comprehensive Income.”  During the three months ended March 31, 2007,
      and 2006, the Company had comprehensive losses of $3.0 million and $4.5 million,
      respectively, including approximately $34,000 and $12,000, respectively, of
      unrealized gains (losses) on available-for-sale investments, net of income
      taxes
      of $0 for each period.




**4.           Inventory**




Inventory
      consisted of the following at
      the indicated dates (in thousands):




**March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006****(unaudited)**Raw
                materials
            
            $
            7,126
            
            
            $
            8,247Work
                in
                process
            
            
            245
            
            
            
            480Finished
                goods
            
            
            10,657
            
            
            
            11,06818,028
            
            
            
            19,795Allowance
                for excess and
                obsolescence
            
            
            (8,727
            )
            
            
            (9,653
            )Net
                Inventory
            
            $
            9,301
            
            
            $
            10,142








**5.           Goodwill**




Goodwill
      consisted of the following at the indicated dates (in thousands):




**March
                31,**
            
            
            **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*




**March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006****(in
                thousands)**Trade
                names – indefinite useful
                life
            
            
            1,150
            
            
            
            1,150$
            1,150
            
            
            $
            1,150


*Schedule
      of Amortizable Assets*




**March
                31,**
            
            
            **December
                31,****2007**
            
            
            **2006****(in
                thousands)**Patents,
                customer relationships and other technologies with identifiable useful
                lives
            
            
            14,521
            
            
            
            14,52114,521
            
            
            
            14,521Less:  accumulated
                amortization
            
            
            (4,659
            )
            
            
            (4,126
            )Amortizable
                intangible assets, net
            
            $
            9,862
            
            
            $
            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 quarter ended March 31, 2007
      totaled approximately $0.5 million.  The weighted average estimated
      useful life is 5.3 years.  There is no estimated residual
      value.





**7.           Earnings
      per share**




**March
                31,****2007**
            
            
            **2006****(unaudited)**
            
            
            **(unaudited)**Numerator
                (in thousands):Net
                income
                (loss)
            
            $
            (2,986
            )
            
            $
            (4,483
            )Denominator-
                weighted average shares:Denominator
                for basic earnings per
                share
            
            
            21,553,351
            
            
            
            21,462,335Dilutive
                effect of stock
                options
            
            
            -
            
            
            
            -Denominator
                for diluted earnings per
                share
            
            
            21,553,351
            
            
            
            21,462,335Basic
                earnings (loss) per
                share
            
            $
            (0.14
            )
            
            $
            (0.21
            )Diluted
                earnings (loss) per
                share
            
            $
            (0.14
            )
            
            $
            (0.21
            )







At
      March
      31, 2007 and 2006, stock options and warrants to purchase shares of common
      stock
      were outstanding, but were not included in the computation of diluted earnings
      for either of the three month periods ended March 31, 2007 or March 31, 2006
      because there was a net loss for each of the applicable periods and the effect
      would have been anti-dilutive.







**8.           Concentrations**




During
      the three months ended March 31, 2007, there was two customers who accounted
      for
      approximately 29% of consolidated sales and, in the corresponding quarter of
      2006, one customer accounted for approximately 12% of sales.




11
 *Index*


The
      Company maintains its cash, cash equivalent, and restricted cash balances in
      several banks.  The balances are insured by the Federal Deposit
      Insurance Corporation up to $100,000 per bank.  At March 31, 2007 and
      2006, the uninsured portion totaled approximately $7.5 million and $18.2
      million, respectively.




**9.           Patent
      License Agreement – License Agreement Payable**




On
      February 24, 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 company
      also recorded a license payable equal to the present value of the scheduled
      payments. License agreements payable consisted of the following at March 31,
      2007 (in thousands):








**March
                31 2007**
            
            
            **December
                31 2006**License
                Agreement
                Payable
            
            
            2,743
            
            
            
            2,956Current
                portion
            
            
            (879
            )
            
            
            (868
            )Long
                term
                portion
            
            $
            1,864
            
            
            $
            2,088







Payouts
      of license agreements are as follows as of March 31, 2007 for the twelve months
      ended (in thousands):




2008
              
              $
              8792009
              
              $
              1,1282010
              
              $
              736




**10.           Allowance
      for Product Warranty Costs**




During
      the quarter ended March 31, 2007, the Company performed the analysis of its
      allowance for product warranty costs utilizing updated information of actual
      warranty costs and changes that have been made to the Company’s warranty
      policies. As a result, the Company recorded a change in the estimate of its
      allowance for product warranty costs as an adjustment to cost of goods sold
      during the quarter ended March 31, 2007.




The
      following is a summary of the product warranty reserve changes during the
      quarter ended March 31, 2007:




Balance
                  at January 1, 2007
              
              $
              1,102Settlements
              
              
              (126
              )Other
                  provision adjustments
              
              
              (539
              )Balance
                  at March 31, 2007
              
              $
              437





**11.           Recent
      Accounting Pronouncements**




In
      June
      2006, the Financial Accounting Standards Board (FASB) issued FASB interpretation
      No. 48 (“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 tax benefits or potential interest and penalties are not material
      to the financial statements. The Company files income tax returns in the U.S.
      federal jurisdiction 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.




12
 *Index*


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 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.




**12.           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




13
 *Index*


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, we elected to participate in a proposed settlement agreement with the
      plaintiffs in this litigation.  We understand that virtually all of
      the other non-bankrupt issuer defendants have also elected to participate in
      this proposed settlement.  If ultimately approved by the court, this
      proposed settlement would result in the dismissal, with prejudice, of all claims
      in the litigation against us and against the other issuer defendants who have
      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.  The proposed settlement does not provide for
      the resolution of any claims against the underwriter defendants.  The
      proposed settlement provides that the insurers of the participating issuer
      defendants will guarantee that the plaintiffs in the cases brought against
      the
      participating issuer defendants will recover at least $1 billion.  If
      recoveries totaling $1 billion or more are obtained by the plaintiffs from
      the
      underwriter defendants, however, the monetary obligations to the plaintiffs
      under the proposed settlement will be satisfied.  In addition, we and
      the other participating issuer defendants will be required to assign to the
      plaintiffs certain claims that the participating issuer defendants may have
      against the underwriters of their IPOs.




The
      proposed settlement contemplates that any amounts necessary to fund the
      guarantee contained in the settlement or settlement-related expenses would
      come
      from participating issuers’ directors and officers liability insurance policy
      proceeds as opposed to funds of the participating issuer defendants
      themselves.  A participating issuer defendant could be required to
      contribute to the costs of the settlement if that issuer’s insurance coverage
      were insufficient to pay that issuer’s allocable share of the settlement
      costs.  We currently expect that our insurance proceeds will be
      sufficient for these purposes and that we will not otherwise be required to
      contribute to the proposed settlement.




Consummation
      of the proposed settlement is conditioned upon obtaining approval by the
      court.  On September 1, 2005, the court preliminarily approved the
      proposed settlement and directed that notice of the terms of the proposed
      settlement be provided to class members.  Thereafter, the court held a
      fairness hearing on April 24, 2006, at which objections to the proposed
      settlement were heard.  After the fairness hearing, the court took
      under advisement whether to grant final approval to the proposed
      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 remain free
      to ask the District Court to certify a different class which might meet the
      standards for class certification that the Court of Appeals articulated in
      its
      December 5, 2006 decision. Because our proposed settlement with the plaintiffs
      involves the certification of the case against us as a class action for
      settlement purposes, the impact of the Court of Appeals’ rulings on the possible
      settlement of the case cannot now be predicted.




If
      the
      proposed settlement described above is not consummated, we intend to continue
      to
      defend the litigation vigorously.  Moreover, if the proposed
      settlement is not consummated, 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.




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




14
 *Index*


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 excess leased
      facilities.  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 believe that such matters should
      not
      result in any liability which would have a material adverse affect on our
      business.










15
 *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.




We
      continue to explore a variety of possible strategic alternatives for our
      Ricochet services business.  These alternatives may include the
      divestiture of Ricochet, an investment in Ricochet, strategic relationships
      with
      Ricochet, sale of some or all of the assets of Ricochet, curtailment of the
      current scope of Ricochet’s operations, and a number of other possible
      alternatives. There can be no assurance that any transaction or other corporate
      action regarding Ricochet will result from this exploration of alternatives.
      Further, there can be no assurance whatsoever concerning the type, form,
      structure, nature, results, timing, or terms and conditions of any such
      potential action, even if such an action does result from this
      exploration.




**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.  Since certain
      conditions of SFAS 48 *Revenue Recognition When Right of Return Exists*
      are not met for sales to these distributors, revenue is deferred until the
      product is sold to an end customer.  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.




16
 *Index*


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.




*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.




17
 *Index*







**Results
      of Operations**




**For
      the three months ended March 31, 2007 and 2006**




The
      following table provides statement of operations data as a percentage of sales
      for the periods presented.




**2007**
            
            
            **2006**Sales
            
            
            100
            %
            
            
            100
            %Cost
                of goods
                sold
            
            
            55
            
            
            
            59Gross
                profit
            
            
            45
            
            
            
            41Operating
                expensesSelling
                costs
            
            
            27
            
            
            
            23General
                and
                administrative
            
            
            19
            
            
            
            18Research
                and development
            
            
            16
            
            
            
            26Total
                operating
                expenses
            
            
            62
            
            
            
            67Operating
                (loss)
                income
            
            
            (17
            )
            
            
            (26
            )Other
                income
                (expenses)
            
            
            -
            
            
            
            2Income
                taxes
            
            
            -
            
            
            
            -Net
                income
            
            
            (17
            )%
            
            
            (24
            )%







*Sales*




Sales
      for
      the three months ended March 31, 2007 were $17.7 million as compared to $18.5
      million for the same period in 2006 for a decrease of $0.8 million or
      4%.  This decrease was primarily due to reduced point-to-point and
      enterprise Wi-Fi product sales versus the same quarter in 2006.




In
      the
      most recent quarter, our service business made up less than 6% of our total
      consolidated revenue.   We continue our efforts to increase the
      number of subscribers for the service business.




For
      the
      quarters ending March 31, 2007 and 2006, international sales, excluding Canada,
      approximated 48% and 51%, respectively, of total sales.




*Cost
      of goods sold and gross profit*




Cost
      of
      goods sold and gross profit for the three months ended March 31, 2007 were
      $9.7
      million and $7.9 million, respectively.  For the same period in 2006,
      costs of goods sold and gross profit were $10.9 million and $7.6 million,
      respectively.  Gross profit margin, as a percentage of sales, for the
      three months ended March 31, 2007 and 2006 was 45% and 41%,
      respectively.  The increase in gross margin percentage in the first
      quarter 2007 was primarily due to a change in warranty estimation which had
      a 3%
      favorable impact in the current quarter compared to the first 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
      March 31, 2007 were $4.7 million, an increase of $0.4 million over $4.3 million
      for the same period in 2006.  This increase was due primarily to
      increased headcount and higher marketing and sales costs related to trade shows,
      and promotion of the new MeshMaxTM product line.




18
 *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 $3.4
      million for the three months ended March 31, 2007 compared to $3.3 million
      for
      the three months ended March 31, 2006 resulting in an increase of about 3%
      or
      over $0.1 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 $2.8 million for the three months ended March
      31, 2007 from $4.9 million for the three months ended March 31, 2006, an
      approximate decrease of $2.1 million or 43%.  The decrease in research
      and development was primarily due to transitioning of some of our R&D
      efforts to our lower cost design center in Hyderabad, India, combined with
      a
      $0.3 million benefit from capitalization of software for sale per SOP 97-2,
      Software Revenue Recognition, which is expected to continue in future
      quarters.




*Other
      income (expenses)*




Other
      income and expenses totaled approximately $76,000 in the first quarter 2007
      compared to $386,000 for the corresponding quarter of 2006.  There was
      a decrease in interest income of $44,000 due to the use of cash needed to
      support operations.  There also was a decrease of $266,000 versus the
      first quarter 2006 which had a one-time benefit from the settlement of certain
      old Terabeam Corporation leases and bond and stock holdings.









**Liquidity
      and Capital Resources**




At
      March
      31, 2007, we had cash, cash equivalents, and investments available-for-sale
      of
      $8.1 million.  This excludes restricted cash of $0.1
      million.  For the quarter ended March 31, 2007, cash used by
      operations was approximately $2.0 million.  We currently are meeting
      our working capital needs through cash on hand as well as internally generated
      cash from operations and other activities.  Cash used by operations
      includes a net loss of $3.0 million offset by $0.5 in changes in assets and
      liabilities affecting operations and by $0.5 million of non-cash
      items.





For
      the
      quarter ended March 31, 2007, cash used in investing activities was
      approximately $346,000 which was principally related to the purchase of property
      and equipment and investment in capitalized software.




Cash
      provided by financing activities was approximately $1,000 for the quarter ended
      March 31, 2007 and resulted from the exercise of employee stock options during
      this period.




We
      believe that our cash on hand with cash flow from operations should be
      sufficient to meet the operating cash requirements over the next twelve month
      period. Our long-term financing requirements depend upon our growth strategy
      both domestically and internationally in the broadband equipment and high speed
      wireless services market place. Although we have grown revenues significantly
      compared to prior years, the acquisition of Old Proxim’s operations in 2005
      significantly increased both our domestic and international operating expenses
      and as a result our cash usage from operating losses has also increased. For
      fiscal 2007, we must continue to grow our revenues and adjust our operating
      expenses to levels that will at a minimum produce breakeven cash flow and bring
      us to operating profitability. Due to the fluctuations in quarterly revenue
      we
      have experienced since acquiring the operations of Old Proxim, management is
      closely monitoring 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. Accordingly, our current resources
      may have to be supplemented through new debt financing, equity offerings, or
      other means. Depending on market conditions , additional financing may not
      be
      available to us at all or on acceptable terms. See Item 1A – Risk Factors above
      for additional information.




19
 *Index*







**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
      March 31, 2007, we had cash and cash equivalents of $7.9 million and restricted
      cash of $0.1 million.  All these funds were on deposit in short-term
      accounts with several national 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 March 31, 2006, the uninsured
      portion totaled approximately $7.5 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.




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 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 March 31, 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 assets and operations of Proxim Corporation (“Old Proxim”),
      including the related accounting and financial systems, out of that company’s
      bankruptcy estate during the third quarter of 2005.  We




20
 *Index*


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.  We will continue to review our internal control processes
      as we move forward with the process to comply with Sarbanes-Oxley Act Section
      404 by the end of  fiscal 2007 (as currently scheduled), and we will
      determine and implement any necessary revisions to our internal controls
      resulting from this process.




*Changes
      in internal control over financial reporting*




There
      was
      no change in our internal control over financial reporting during our first
      quarter ended March 31, 2007 that has materially affected, or is reasonably
      likely to materially affect, our internal control over our financial
      reporting.  We expect we will continue to make revisions and
      improvements to our internal control over financial reporting, particularly
      as
      we continue to move forward with the process to comply with Sarbanes-Oxley
      Act
      Section 404. .




21
 *Index*


**PART
      II – OTHERINFORMATION**





**Item
      1. LegalProceedings.**




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, we elected to participate in a proposed settlement agreement with the
      plaintiffs in this litigation.  We understand that virtually all of
      the other non-bankrupt issuer defendants have also elected to participate in
      this proposed settlement.  If ultimately approved by the court, this
      proposed settlement would result in the dismissal, with prejudice, of all claims
      in the litigation against us and against the other issuer defendants who have
      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.  The proposed settlement does not provide for
      the resolution of any claims against the underwriter defendants.  The
      proposed settlement provides that the insurers of the participating issuer
      defendants will guarantee that the plaintiffs in the cases brought against
      the
      participating issuer defendants will recover at least $1 billion.  If
      recoveries totaling $1 billion or more are obtained by the plaintiffs from
      the
      underwriter defendants, however, the monetary obligations to the plaintiffs
      under the proposed settlement will be satisfied.  In addition, we and
      the other participating issuer defendants will be required to assign to the
      plaintiffs certain claims that the participating issuer defendants may have
      against the underwriters of their IPOs.




The
      proposed settlement contemplates that any amounts necessary to fund the
      guarantee contained in the settlement or settlement-related expenses would
      come
      from participating issuers’ directors and officers liability insurance policy
      proceeds as opposed to funds of the participating issuer defendants
      themselves.  A participating issuer defendant could be required to
      contribute to the costs of the settlement if that issuer’s insurance coverage
      were insufficient to pay that issuer’s allocable share of the settlement
      costs.  We currently expect that our insurance proceeds will be
      sufficient for these purposes and that we will not otherwise be required to
      contribute to the proposed settlement.




22
 *Index*


Consummation
      of the proposed settlement is conditioned upon obtaining approval by the
      court.  On September 1, 2005, the court preliminarily approved the
      proposed settlement and directed that notice of the terms of the proposed
      settlement be provided to class members.  Thereafter, the court held a
      fairness hearing on April 24, 2006, at which objections to the proposed
      settlement were heard.  After the fairness hearing, the court took
      under advisement whether to grant final approval to the proposed
      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 remain free
      to ask the District Court to certify a different class which might meet the
      standards for class certification that the Court of Appeals articulated in
      its
      December 5, 2006 decision. Because our proposed settlement with the plaintiffs
      involves the certification of the case against us as a class action for
      settlement purposes, the impact of the Court of Appeals’ rulings on the possible
      settlement of the case cannot now be predicted.




If
      the
      proposed settlement described above is not consummated, we intend to continue
      to
      defend the litigation vigorously.  Moreover, if the proposed
      settlement is not consummated, 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.




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 excess leased
      facilities.  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.








**Item1A.  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 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








23
 *Index*




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 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






24
 *Index*




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.; our limited experience in
      operating our Ricochet® network; adverse impacts on our broadband wireless
      equipment business due to our Ricochet wireless communications services
      business; expected ongoing losses from our Ricochet business; our inability
      to
      increase and retain subscribers for the Ricochet service; the intense
      competition in the wireless data access market; different data access
      technologies which may be superior to the access afforded by our Ricochet
      business; costs, time, and commitments involved in our possible geographic
      expansion of the Ricochet network; time, costs, political considerations,
      typical multitude of constituencies, and other factors involved in evaluating,
      equipping, installing, and operating municipal networks; effectively managing
      any expansion of the Ricochet network; difficulties in obtaining roof and other
      attachment rights for our Ricochet network equipment at the times and at the
      costs and other terms we desire; possible insufficient equipment to expand
      our
      Ricochet network; dependence of our Ricochet network on network connections
      provided by third parties; failure of our third-party contractors to adequately
      maintain and repair the Ricochet network; possible harmful interference
      degrading or disrupting the service provided by the Ricochet network; the
      uncertain future of our Ricochet business given our previous efforts to explore
      strategic alternatives for that business; the internal and external pressures
      to
      take actions to reduce the losses associated with that Ricochet business, which
      could include selling the business or shutting it






25
 *Index*






down,
      making operational changes at Ricochet, changing the business model, or other
      actions; the potentially significant costs we may incur if we take any such
      actions relating to the Ricochet business; 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, including without limitation, our possible exposure
      under the contemplated settlement of that litigation; the expense of defending
      and settling and the outcome of pending and any future 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, 2005 filed with the Securities and Exchange
      Commission.




*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
      6.      Exhibits.**




See
      Exhibit Index.





**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:  May
                15, 2007
            By:
            /s*/  Brian
                J.
                Sereda*Brian
                J. Sereda,Chief
                Financial Officer and Treasurer*(principal
                financial and accounting
                officer)*


26
 *Index*


**EXHIBIT
      INDEX**




**Exhibit**
              **Number**
            
            **Description**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).








27