================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549


                        ---------------------------------
                                    FORM 10-Q
                        ---------------------------------


[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006

                                       OR

[ ]      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                                     04-2751645
  (State or other jurisdiction              (I.R.S. Employer Identification No.)
of incorporation or organization)

                                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 [X] 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 [X]

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

         As of July 31, 2006, there were 21,540,865 shares of the registrant's
common stock outstanding.

================================================================================

<PAGE>
<TABLE>
<CAPTION>

                                          TERABEAM, INC.
                                              INDEX


                                                                                        PAGE NO.
                                                                                        --------
<S>                                                                                      <C>
PART I.         FINANCIAL INFORMATION

       Item 1.      Financial Statements ............................................      3

                       Consolidated Balance Sheets as of June 30, 2006 (unaudited)
                         and December 31, 2005 ......................................      4

                       Consolidated Statements of Operations for the six months ended
                         June 30, 2006 and 2005 (unaudited) .........................      5

                       Consolidated Statement of Changes in Stockholders' Equity for
                         the six months ended June 30, 2006 (unaudited) .............      6

                       Consolidated Statements of Cash Flows for the six months ended
                         June 30, 2006 and 2005 (unaudited) .........................      7

                       Notes to Consolidated Financial Statements (unaudited) .......      8

       Item 2.      Management's Discussion and Analysis of Financial Condition and
                    Results of Operations ...........................................     16

       Item 3.      Quantitative and Qualitative Disclosures about Market Risk ......     22

       Item 4.      Controls and Procedures .........................................     23

PART II.        OTHER INFORMATION

       Item 1.      Legal Proceedings ...............................................     24

       Item 1A.     Risk Factors ....................................................     25

       Item 4.      Submission of Matters to a Vote of Security Holders..............     28

       Item 6.      Exhibits.........................................................     28

SIGNATURE ...........................................................................     29

</TABLE>

                                                2
<PAGE>

                         PART I - FINANCIAL INFORMATION

         This Quarterly Report on Form 10-Q contains forward-looking statements
as defined by federal securities laws. Forward-looking statements are
predictions that relate to future events or our future performance and are
subject to known and unknown risks, uncertainties, assumptions, and other
factors that may cause actual results, outcomes, levels of activity,
performance, developments, or achievements to be materially different from any
future results, outcomes, levels of activity, performance, developments, or
achievements expressed, anticipated, or implied by these forward-looking
statements. Forward-looking statements should be read in light of the cautionary
statements and important factors described in this Form 10-Q, including Part II,
Item 1A -- Risk Factors. We undertake no obligation to update or revise any
forward-looking statement to reflect events, circumstances, or new information
after the date of this Form 10-Q or to reflect the occurrence of unanticipated
or any other subsequent events.

Item 1.  Financial Statements.



                                        3
<PAGE>
<TABLE>
<CAPTION>

                                         TERABEAM, INC.
                                   CONSOLIDATED BALANCE SHEETS
                                (In thousands, except share data)

                                                                     June 30,      December 31,
                                                                       2006            2005
                                                                   ------------    ------------
<S>                                                                      <C>             <C>
Assets                                                              (unaudited)
Current assets:
  Cash and cash equivalents                                        $     13,426    $     14,133
  Investment securities - available-for-sale                                181             260
  Accounts receivable, net                                                5,901           8,378
  Inventory                                                              10,822          10,070
  Prepaid expenses                                                        1,661           1,045
                                                                   ------------    ------------
    Total current assets                                                 31,991          33,886

Property and equipment, net                                               3,406           3,924
Other Assets:
Restricted cash                                                              76           5,076
Goodwill                                                                  7,923           7,380
Intangible assets, net                                                   21,881          23,817
Deposits and prepaid expenses                                               238             675
                                                                   ------------    ------------
    Total other assets                                                   30,118          36,948
                                                                   ------------    ------------
    Total assets                                                   $     65,515    $     74,758
                                                                   ============    ============
Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable and accrued expenses                            $     12,152    $     15,600
  Deferred revenue                                                        4,229           2,503
  License agreement payable - current maturities                            813             981
                                                                   ------------    ------------
    Total current liabilities                                            17,194          19,084
License agreement payable, net of current maturities                      2,527           2,956
                                                                   ------------    ------------
    Total liabilities                                                    19,721          22,040
Commitments and contingencies
Stockholders' Equity
   Preferred stock, $0.01 par value; authorized 4,500,000, none
   issued at June 30, 2006 and December 31, 2005                             --              --
   Common stock, $0.01 par value, 100,000,000 shares authorized,
   21,540,865 issued and outstanding at June 30, 2006, and
   21,446,217 issued and outstanding at December 31, 2005                   215             214
 Additional paid-in capital                                              57,261          56,638
 Retained earnings  (accumulated deficit)                               (11,590)         (4,122)
 Treasury stock                                                              --              --
 Accumulated other comprehensive income:
 Net unrealized gain (loss) on available-for-sale securities                (92)            (12)
                                                                   ------------    ------------
    Total stockholders' equity                                           45,794          52,718
                                                                   ------------    ------------
    Total liabilities and stockholders' equity                     $     65,515    $     74,758
                                                                   ============    ============
</TABLE>

                                     See accompanying notes

                                               4
<PAGE>
<TABLE>
<CAPTION>

                                        TERABEAM, INC.
                            CONSOLIDATED STATEMENTS OF OPERATIONS
                            (In thousands, except per share data)
                                         (Unaudited)

                                                 Three Months Ended       Six Months Ended
                                                      June 30,                June 30,
                                                --------------------    --------------------
                                                  2006        2005        2006        2005
                                                --------    --------    --------    --------
<S>                                             <C>         <C>         <C>         <C>
Revenues                                        $ 20,750    $  7,165    $ 39,286    $ 13,762
Cost of goods sold                                12,062       3,687      22,957       7,006
                                                --------    --------    --------    --------
  Gross profit                                     8,688       3,478      16,329       6,756
Operating expenses:
  Selling costs                                    4,027       1,034       8,296       2,031
  Restructuring Charges                              116          --         116          --
  General and administrative                       4,021       2,777       7,355       5,285
  Research and development                         3,762         879       8,648       1,650
                                                --------    --------    --------    --------
      Total operating expenses                    11,926       4,690      24,415       8,966
                                                --------    --------    --------    --------
Operating loss                                    (3,238)     (1,212)     (8,086)     (2,210)
Other income (expenses):
  Interest income                                    114         269         202         490
  Interest expense                                   (68)        (70)       (101)       (136)
  Other income (loss)                                212           3         543        (116)
                                                --------    --------    --------    --------
      Total other income (expenses)                  258         202         644         238
                                                --------    --------    --------    --------
  Loss before income taxes                        (2,980)     (1,010)     (7,442)     (1,972)
  Benefit (provision) for income taxes                (5)         23         (26)         14
                                                --------    --------    --------    --------
Net loss                                        ($ 2,985)   ($   987)   ($ 7,468)   ($ 1,958)
                                                ========    ========    ========    ========

  Weighted average shares - basic and diluted     21,541      22,009      21,502      22,204
                                                ========    ========    ========    ========
    Loss per share, basic and diluted           ($  0.14)   ($  0.04)   ($  0.35)   ($  0.09)
                                                ========    ========    ========    ========
</TABLE>

                                    See accompanying notes

                                              5
<PAGE>
<TABLE>
<CAPTION>

                                                     TERABEAM, INC.
                               CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                         FOR THE SIX MONTHS ENDED JUNE 30, 2006
                                           (In thousands, except share data)
                                                      (Unaudited)


                                              Common Stock
                                         -----------------------
                                                                                              Accumulated
                                                                    Additional   Retained       Other
                                                                     Paid-in     Earnings   Comprehensive
                                           Shares       Amount       Capital     (Deficit)   Income (Loss)     Total
                                         -----------------------------------------------------------------------------
<S>                                     <C>          <C>          <C>          <C>           <C>           <C>
Balances, January 1, 2006                21,446,217   $      214   $   56,638   ($   4,122)   ($      12)   $   52,718

Exercise of stock options and warrants       94,648            1           54           --            --            55
Employee stock option amortization               --           --          569           --            --           569
Comprehensive income:
  Net income (loss)                              --           --           --       (7,468)           --        (7,468)
  Unrealized gain (loss) on
investments                                      --           --           --           --           (80)          (80)
                                         -----------------------------------------------------------------------------
Total comprehensive income (loss)                --           --           --       (7,468)          (80)       (7,548)
                                         -----------------------------------------------------------------------------
Balances, June 30, 2006                  21,540,865   $      215   $   57,261   ($  11,590)   ($      92)   $   45,794
                                         =============================================================================

</TABLE>



                                                 See accompanying notes

                                                           6
<PAGE>
<TABLE>
<CAPTION>

                                     TERABEAM, INC.
                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                            FOR THE SIX MONTHS ENDED JUNE 30
                                     (In thousands)
                                      (Unaudited)

                                                              Six Months Ended June 30,
                                                              ------------------------
                                                                 2006          2005
                                                              ----------    ----------
<S>                                                               <C>           <C>
Cash flows from operating activities:

  Net income (loss)                                           $   (7,468)   $   (1,958)
    Depreciation and amortization                                  2,774         1,007

    Loss on write-down of investments available-for-sale              --           112
    Bad debt allowance (recovery)                                    (74)          190
    Employee stock option amortization                               569            --
    Inventory allowance                                               31            34
    Changes in assets and liabilities affecting operations:

      Restricted cash                                                 --            60
      Accounts receivable, net                                     2,506        (1,105)
      Refundable income taxes                                         --           151
      Inventory                                                   (1,157)          (63)
      Deposits                                                       129            (8)
      Prepaid expenses                                              (339)         (139)
      Accounts payable and accrued expenses                       (3,541)       (2,176)
      License agreement payable                                     (597)           --
      Deferred revenue                                             1,726           (11)
                                                              ----------    ----------
          Net cash provided by (used in) operating
activities                                                        (5,441)       (3,906)
                                                              ----------    ----------
Cash flows from investing activities:
  Release of restricted cash                                       5,000            --
  Purchase of securities                                              --          (241)
  Purchase of property and equipment                                (321)          (65)
  Proceeds on disposal of assets held for sale                        --           169

  Investment in capitalized software                                  --          (382)

  Sale of securities                                                  --         5,220
                                                              ----------    ----------
      Net cash provided by (used in) investing activities          4,679         4,701
                                                              ----------    ----------
Cash flows from financing activities:
    Repurchase of common stock                                        --        (2,067)
  Exercise of stock options                                           55            89
  Repayment of notes payable                                          --          (147)
                                                              ----------    ----------
      Net cash provided by (used in) financing activities             55        (2,125)
                                                              ----------    ----------
Net increase (decrease) in cash and cash equivalents                (707)       (1,330)
Cash and cash equivalents, beginning of period                    14,133        35,368
                                                              ----------    ----------
Cash and cash equivalents, end of period                      $   13,426    $   34,038
                                                              ==========    ==========
Supplemental disclosure of cash flow information:
  Cash paid for interest                                      $        4    $      136
                                                              ==========    ==========
  Income taxes paid                                           $       21    $        0
                                                              ==========    ==========
</TABLE>

                                 See accompanying notes

                                           7
<PAGE>

                                 TERABEAM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Basis of Presentation

         The consolidated financial statements of Terabeam, Inc. (the "Company"
or "Terabeam") for the three month and six month periods ended June 30, 2006 and
2005 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, 2005 filed with the Securities and Exchange Commission.

         The Company provides high-speed wireless communications equipment and
services in the United States and internationally. Its systems enable service
providers, enterprises, and governmental organizations to deliver high-speed
data connectivity enabling a broad range of applications. The Company provides
wireless solutions for the mobile enterprise, security and surveillance, last
mile access, voice and data backhaul, and municipal networks. The Company
believes its fixed wireless systems address the growing need of our customers
and end-users to rapidly and cost effectively deploy high-speed communication
networks.

         On July 27, 2005, Terabeam, through its wholly owned subsidiary Proxim
Wireless Corporation ("New Proxim"), completed its purchase of substantially all
of the assets of Proxim Corporation and its subsidiaries Proxim Wireless
Networks, Inc. and Proxim International Holdings, Inc. (collectively, "Old
Proxim") pursuant to an asset purchase agreement. Old Proxim was a leading
provider of wireless networking equipment for Wi-Fi and broadband wireless
networks, and provided enterprise and service provider customers with wireless
solutions for the mobile enterprise, security and surveillance, last mile
access, voice and data backhaul, public hot spots, and metropolitan area
networks. Subsequent to the purchase, the Company moved its corporate
headquarters to the Old Proxim offices in San Jose, CA.

         Terabeam and its subsidiaries operate in two primary businesses:
broadband wireless equipment and high-speed wireless service and connectivity.
The equipment business is the historic operations of Terabeam as a designer,
manufacturer, and seller of wireless telecommunications equipment ("Equipment")
and generates the substantial majority of the Company's revenues and expenses.
This business is conducted through its Proxim Wireless Corporation subsidiary
and includes the financial results of the business acquired from Old Proxim.
Terabeam's services business, which it began in 2004, is conducted through its
Ricochet Networks, Inc. subsidiary. This business ("Services") was acquired with
the Ricochet Networks acquisition during the second quarter of 2004. Ricochet
Networks has been ranked as one of the five largest wireless Internet service
providers (WISPs) in the United States (in terms of subscribers). There are no
significant inter-company transactions which affect the revenue or expenses of
either segment.

         In April 2006, the Company announced the retention of an outside
consulting firm to explore a variety of possible strategic alternatives for our
Ricochet services business. Given the recent interests that have been expressed
in Ricochet, we believe that now is an appropriate time to consider various
alternatives. 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, 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
<PAGE>

         Summarized information for the business segments as of June 30, 2006
and 2005 and for the quarters then ended is as follows (in thousands):

<TABLE>
<CAPTION>

Three Months Ended June 30,:

                                          2006:                              2005:
                              Equipment   Services     Total     Equipment   Services     Total
                              ---------   --------     -----     ---------   --------     -----
<S>                          <C>          <C>        <C>        <C>          <C>        <C>
Assets...................... $  63,232    $ 2,283    $ 65,515   $  67,286    $ 3,764    $ 71,050
Revenue..................... $  20,037    $   713    $ 20,750   $   6,475    $   690    $  7,165
Operating income (loss)..... $  (2,718)   $  (520)     (3,238)  $    (717)   $  (495)   $ (1,212)

<CAPTION>

Six Months Ended June 30,:

                                          2006:                              2005:
                              Equipment   Services     Total     Equipment   Services     Total
                              ---------   --------     -----     ---------   --------     -----
<S>                          <C>          <C>        <C>        <C>          <C>        <C>
Assets...................... $  63,232    $ 2,283    $ 65,515   $  67,286    $ 3,764    $ 71,050
Revenue..................... $  37,683    $ 1,603    $ 39,286   $  12,382    $ 1,380    $ 13,762
Operating income (loss)..... $  (7,147)   $  (939)     (8,086)  $  (1,123)   $(1,087)   $ (2,210)

</TABLE>

         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 half of 2006 includes compensation expense,
recognized over the applicable vesting periods, for new share-based awards and
for share-based awards granted prior to, but not yet vested, as of December 31,
2005 (modified prospective application). Stock-based compensation for the
three-month periods ended June 30, 2006 and 2005 totaled approximately $317,000
and $62,000, respectively, and is included in cost of goods sold and operating
expenses in the condensed consolidated statements of operations only for the
period ended June 30, 2006. Stock-based compensation for the six-month periods
ended June 30, 2006 and 2005 totaled approximately $569,000 and $786,000,
respectively, and is included in cost of goods sold and operating expenses in
the condensed consolidated statements of operations only for the period ended
June 30, 2006.

         For the quarter and six months ended June 30, 2006, the operating loss,
the loss before income taxes and the net loss were $317,000 and $569,000 higher,
respectively, and the basic and diluted loss per share were $0.01 and $0.03
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.

                                       9
<PAGE>

         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 2006 and 2005: risk-free interest rate of 4.51%
- 4.98 % and 3.58%, expected life of 4 years and 5 years, volatility, calculated
using historical volatility, of 280% - 284% and 111% and dividend rate of zero
percent, respectively. Using these assumptions, the weighted average fair value
of the stock options granted in the quarter and six months ended June 30, 2006
was $2.50 and $2.62, respectively, and the weighted average fair value of the
stock options granted in 2005 was $2.38. The fair value of the stock options
granted will be amortized as compensation expense over the vesting period of the
options. Estimates of fair value are not intended to predict actual future
events or the value ultimately realized by employees who receive equity awards,
and subsequent events are not indicative of the reasonableness of the original
estimates of fair value made by the Company under SFAS No. 123R.

         No tax effects are recognized currently for the granting of share-based
compensation arrangements as the Company currently cannot estimate the
realizability of related tax benefits as the Company is in a net operating tax
loss position with tax NOL carryforwards as described in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with
the SEC.

         Had the Company used the fair value based accounting method for stock
compensation expense prescribed by SFAS 123R for the quarter and six months
ending June 30, 2005, the consolidated net loss and net loss per share would
have increased to the pro forma amounts indicated below (in thousands, except
per share amounts):

<TABLE>
<CAPTION>
                                                               Three months     Six months ended
                                                               ended June 30,       June 30,
                                                                   2005               2005
                                                               -------------------------------
<S>                                                            <C>                <C>
                                                                (unaudited)       (unaudited)
Net income (loss) attributable to common stockholders, as
    reported: ............................................     $       (987)      $     (1,958)
Less:  Total stock based employee compensation expense
    determined under the fair value based method for all
    awards ...............................................               62                786
                                                               -------------------------------
Pro forma net income (loss) attributable to common
    stockholders .........................................     $     (1,049)      $     (2,744)
                                                               ===============================
Basic and diluted net loss per common share, as reported..     $      (0.04)      $      (0.09)
                                                               ===============================
Basic and diluted net loss per common share, pro forma....     $      (0.05)      $      (0.12)
                                                               ===============================
</TABLE>

3.       Comprehensive Loss

         The Company reports comprehensive income in accordance with SFAS No.
130, "Reporting Comprehensive Income." During the six months ended June 30, 2006
and 2005, the Company had comprehensive losses of $7.5 million and $1.9 million
respectively, including approximately $80,000 and 62,000 (unaudited),
respectively, of unrealized (losses) gains on available-for-sale investments,
net of income taxes of $0 and $0, respectively.


                                       10
<PAGE>

4.       Inventory

         (in thousands)
                                                    June 30,       December 31,
                                                      2006            2005
                                                  ------------    ------------
                                                   (unaudited)
         Raw materials ........................   $      7,067    $      4,737
         Work in process ......................            183             437
         Finished goods .......................         12,944          13,863
                                                  ------------    ------------
                                                        20,194          19,037
         Allowance for excess and obsolescence          (9,372)         (8,967)
                                                  ------------    ------------
         Net Inventory ........................   $     10,822    $     10,070
                                                  ============    ============

5.       Goodwill

         Goodwill consisted of the following (in thousands):

                                        June 30,     December 31,
               --------------------   ------------   ------------
               Acquisition                2006           2005
               --------------------   ------------   ------------
               KarlNet ............   $      2,491   $      2,491
               Terabeam ...........          3,322          3,322
               Old Proxim .........          2,110          1,567
                                      ------------   ------------
               Goodwill ...........   $      7,923   $      7,380
                                      ============   ============

         Old Proxim goodwill increased by approximately $543,000 during the
first half of 2006 due to adjustments in the purchase price allocation related
to the Proxim acquisition.

         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.

6.       Intangibles

         Schedule of Non-Amortizable Assets

                                                       June 30,     December 31,
                                                     ------------   ------------
                                                         2006           2005
                                                     ------------   ------------
                                                           (in thousands)
         Trade names - indefinite useful life .....         2,250          2,250
                                                     ------------   ------------
                                                     $      2,250   $      2,250
                                                     ============   ============

         Schedule of Amortizable Assets
<TABLE>
<CAPTION>
                                                                         June 30,      December 31,
                                                                       ------------    ------------
                                                                           2006            2005
                                                                       ------------    ------------
<S>                                                                          <C>             <C>
                                                                      (in thousands)
         Capitalized software - placed in service ..................   $      1,225    $      1,225
         Patents, customer relationships and other technologies with
           identifiable useful lives ...............................         24,031          24,031
                                                                       ------------    ------------
                                                                             25,256          25,256
         Less:  accumulated amortization ...........................         (5,625)         (3,689)
                                                                       ------------    ------------
         Amortizable intangible assets, net ........................   $     19,631    $     21,567
                                                                       ============    ============
</TABLE>

                                       11
<PAGE>

          Amortization is computed using the straight-line method over the
estimated useful life, based on the Company's assessment of technological
obsolescence of the respective assets. Amortization expense for the three months
and six months ended June 30, 2006 totaled approximately $1.0 million and $1.9
million, respectively. The weighted average estimated useful life is 6.2 years.
There is no estimated residual value.

7.       Restructuring Charges

         The Company accounts for restructuring charges under the provisions of
Statement of Financial Accounting Standards No. 146 ("FAS 146"), Accounting for
Costs Associated with Exit or Disposal Activities.

         During the quarter ended June 30, 2006 the Company recorded
restructuring charges of approximately $116,000. These charges consisted of
one-time termination benefits related to a reduction in force, implemented in an
effort to streamline operations in response to the first quarter financial
results.


8.       Earnings per share

<TABLE>
<CAPTION>
                         (In Thousands)                 Three Months Ended June 30,   Six Months Ended June 30,
                                                        --------------------------    --------------------------
                                                             2006          2005           2006            2005
                                                        -----------    -----------    -----------    -----------
<S>                                                     <C>            <C>            <C>            <C>
                                                               (unaudited)                    (unaudited)
         Numerator:

              Net income (loss) .....................   $    (2,985)   $      (987)   $    (7,468)   $    (1,958)
                                                        ===========    ===========    ===========    ===========
         Denominator- weighted average shares:

              Denominator for basic earnings per
              share .................................        21,541         22,009         21,502         22,204

              Dilutive effect of stock options ......   $        --    $        --    $        --    $        --
                                                        -----------    -----------    -----------    -----------

              Denominator for diluted earnings
              per share .............................        21,541         22,009         21,502         22,204
                                                        ===========    ===========    ===========    ===========

              Basic earnings (loss) per share .......   $     (0.14)   $     (0.04)   $     (0.35)   $     (0.09)
                                                        ===========    ===========    ===========    ===========

              Diluted earnings (loss) per share .....   $     (0.14)   $     (0.04)   $     (0.35)   $     (0.09)
                                                        ===========    ===========    ===========    ===========
</TABLE>

         At June 30, 2006 and 2005, stock options and warrants to purchase
approximately 2.7 million and 2.2 million, respectively, shares of common stock
were outstanding, but were not included in the computation of diluted earnings
for the three month and six month periods ended June 30, 2006 and 2005 because
there was a net loss for each of the applicable periods, and the effect would
have been anti-dilutive.

9.       Concentrations

         During six months ended June 30, 2006, there were three customers who
accounted for approximately 16%, 13%, and 11% of consolidated sales
respectively, and in the corresponding six months of 2005, a different customer
accounted for approximately 11% of sales.

         The Company maintains the majority of its cash, cash equivalent, and
restricted cash balances at two major US banks. The balances are insured by the
Federal Deposit Insurance Corporation up to $100,000 per bank. At June 30, 2006
and 2005, the uninsured portion totaled approximately $13.4 million and $39.1
million, respectively.

10.      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

                                       12
<PAGE>

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 June
30, 2006, no events have occurred that have triggered the obligation to pay any
of the contingent consideration.

11.      Restricted cash

         As part of the Terabeam Corporation acquisition in 2004, the Company
acquired restricted cash of approximately $5.0 million, which was held in an
indemnification trust for the benefit of former Terabeam Corporation directors
and officers. This trust was established by Terabeam Corporation in January
2002, the funds were managed by an unrelated trustee, and no claims were
asserted against the trust funds. In March 2006, the beneficiaries of that
indemnification trust agreed to the early termination of that trust. During the
quarter ended June 30, 2006 that indemnification trust was terminated and the
net trust proceeds of approximately $5.0 million (after payments to the
beneficiaries) were distributed to the Company as unrestricted cash.

         As of June 30, 2006, restricted cash consisted of $0.1 million as
collateral for letters of credit relating to lease obligations.

12.      Patent License Agreement - License Agreement Payable

         In February 2006, Terabeam, Inc. and its subsidiaries entered into a
settlement agreement with Symbol Technologies, Inc. and its subsidiaries
("Symbol") resolving all outstanding litigation between the companies.

         The Company recorded an intangible asset related to the license at
December 31, 2005 based on the present value of the scheduled payments, and will
amortize the intangible asset over the useful life of the patents through 2014.
The amortization expense recorded for the quarter and six months ended June, 30
2006 totaled approximately $ 278,000 and $383,000, respectively. The Company
also recorded a license payable equal to the present value of the scheduled
payments. License agreements payable consisted of the following at June 30 (in
thousands):

                                                     June 30,       December 31
                                                       2006            2005
                                                   ----------------------------

License Agreement Payable ......................          3,340           3,937
     Current portion ...........................           (813)           (981)
                                                   ------------    ------------
     Long term portion .........................   $      2,527    $      2,956
                                                   ------------    ------------

13.      Recent Accounting Pronouncements

         In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes--An
Interpretation of FASB Statement No. 109, which prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. FIN
48 will be effective beginning Q1 2007. The Company has not yet evaluated the
impact of implementation on the consolidated financial statements.

                                       13
<PAGE>

14.      Commitments and Contingencies

     IPO Litigation
     --------------

         During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against Telaxis Communications
Corporation, a predecessor company to Terabeam, Inc., in the U.S. District Court
for the Southern District of New York: Katz v. Telaxis Communications
Corporation et al., Kucera v. Telaxis Communications Corporation et al.,
Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis
Communications Corporation et al. The lawsuits also named one or more of the
underwriters in the Telaxis initial public offering and certain of its officers
and directors. On April 19, 2002, the plaintiffs filed a single consolidated
amended complaint which supersedes the individual complaints originally filed.
The amended complaint alleges, among other things, violations of the
registration and antifraud provisions of the federal securities laws due to
alleged statements in and omissions from the Telaxis initial public offering
registration statement concerning the underwriters' alleged activities in
connection with the underwriting of Telaxis' shares to the public. The amended
complaint seeks, among other things, unspecified damages and costs associated
with the litigation. These lawsuits have been assigned along with, we
understand, approximately 1,000 other lawsuits making substantially similar
allegations against approximately 300 other publicly-traded companies and their
public offering underwriters to a single federal judge in the U.S. District
Court for the Southern District of New York for consolidated pre-trial purposes.
We believe the claims against us are without merit and have defended the
litigation vigorously. The litigation process is inherently uncertain, however,
and there can be no assurance that the outcome of these claims will be favorable
for us.

         On July 15, 2002, together with the other issuer defendants, Telaxis
filed a collective motion to dismiss the consolidated amended complaint against
the issuers on various legal grounds common to all or most of the issuer
defendants. The underwriters also filed separate motions to dismiss the claims
against them. In October 2002, the court approved a stipulation dismissing
without prejudice all claims against the Telaxis directors and officers who had
been defendants in the litigation. On February 19, 2003, the court issued its
ruling on the separate motions to dismiss filed by the issuer defendants and the
underwriter defendants. The court granted in part and denied in part the issuer
defendants' motions. The court dismissed, with prejudice, all claims brought
against Telaxis under the anti-fraud provisions of the securities laws. The
court denied the motion to dismiss the claims brought under the registration
provisions of the securities laws (which do not require that intent to defraud
be pleaded) as to Telaxis and as to substantially all of the other issuer
defendants. The court denied the underwriter defendants' motion to dismiss in
all respects.

         In June 2003, 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.

                                       14
<PAGE>

         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.

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


                                       15
<PAGE>

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 communication networks.

         On July 27, 2005, Terabeam, through its wholly owned subsidiary Proxim
Wireless Corporation ("New Proxim"), completed its purchase of substantially all
of the assets of Proxim Corporation and its subsidiaries Proxim Wireless
Networks, Inc. and Proxim International Holdings, Inc. (collectively, "Old
Proxim") pursuant to an asset purchase agreement. Old Proxim was a leading
provider of wireless networking equipment for Wi-Fi and broadband wireless
networks, and provided enterprise and service provider customers with wireless
solutions for the mobile enterprise, security and surveillance, last mile
access, voice and data backhaul, public hot spots, and metropolitan area
networks. Subsequent to the purchase, we moved our corporate headquarters to the
Old Proxim offices in San Jose, CA.

         Terabeam and its subsidiaries operate in two primary businesses:
broadband wireless equipment and high-speed wireless service and connectivity.
The equipment business is the historic operations of Terabeam as a designer,
manufacturer, and seller of wireless telecommunications equipment ("Equipment")
and generates the substantial majority of the Company's revenues and expenses.
This business is conducted through its Proxim Wireless Corporation subsidiary
and includes the financial results of the business acquired from Old Proxim.
Terabeam's services business, which it began in 2004, is conducted through its
Ricochet Networks, Inc. subsidiary. This business ("Services") was acquired with
the Ricochet Networks acquisition during the second quarter of 2004. Ricochet
Networks has been ranked as one of the five largest wireless Internet service
providers (WISPs) in the United States (in terms of subscribers). There are no
significant inter-company transactions which affect the revenue or expenses of
either segment.

         In April 2006 we announced the retention of an outside consulting firm
to explore a variety of possible strategic alternatives for our Ricochet
services business. Given the recent interests that have been expressed in
Ricochet, we believe that now is an appropriate time to consider various
alternatives. 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, 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. We base
these estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from our estimates. During the six months ended June 30, 2006,
there were no significant changes to the critical accounting policies we
disclosed in Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on

                                       16
<PAGE>

Form 10-K for the year ended December 31, 2005. 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.

         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

                                       17
<PAGE>

recoverable and its carrying amount exceeds its fair value. Intangible assets
with indefinite useful lives are not amortized but are tested for impairment at
least annually or more frequently if there are indications that the asset is
impaired. The impairment test for these assets consists of a comparison of the
fair value of the asset with its carrying amount. If the carrying amount of an
intangible asset with an indefinite useful life exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess. For either type
of intangible asset, after an impairment loss is recognized, the adjusted
carrying amount of the intangible asset becomes its new accounting basis.
Subsequent reversal of a previously recognized impairment loss is prohibited.

         Our intangible assets include purchased technology and various assets
acquired in business combination transactions. Assets acquired in business
combination transactions include existing hardware technologies, trade names,
existing software technologies, customer relationships, and patents. Some of
these assets have finite useful lives, and some have indefinite useful lives.

Results of Operations

For the three months ended June 30, 2006 and 2005

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

                                                    Three Months Ended June 30,
                                                    --------------------------

                                                      2006              2005
                                                    --------          --------
Sales .............................................      100%              100%
Cost of goods sold ................................       58                51
                                                    --------          --------

Gross profit ......................................       42                49
Operating expenses
    Selling costs .................................       19                14
    Restructuring charges .........................        1                --
    General and administrative ....................       19                39
    Research and development ......................       18                12
                                                    --------          --------

       Total operating expenses ...................       57                65
                                                    --------          --------

Operating (loss) income ...........................      (15)              (17)
Other income (expenses) ...........................        1                 3
Income taxes ......................................       --                --
                                                    --------          --------

Net loss ..........................................      (14)%             (14)%
                                                    ========         ========

     Sales

         Sales for the three months ended June 30, 2006 were $20.8 million as
compared to $7.2 million for the same period in 2005 for an increase of $13.6
million or 189%. This increase is primarily due to the acquisition of the Old
Proxim operations in the third quarter of 2005.

         In the most recent quarter, our service business made up less than 5%
of our total consolidated revenue. We continue our efforts to increase the
number of subscribers for the service business.

         For the quarters ending June 30, 2006 and 2005, international sales,
excluding Canada, approximated 54% and 11%, respectively, of total sales. The
reason for the large increase in international sales as a percent of sales is
because a significant percentage of the sales from the Old Proxim operations
were ultimately made to international customers.

                                       18
<PAGE>

     Cost of goods sold and gross profit

         Cost of goods sold and gross profit for the three months ended June 30,
2006 were $12.1 million and $8.7 million, respectively. For the same period in
2005, costs of goods sold and gross profit were $3.7 million and $3.5 million,
respectively. Gross profit margin, as a percentage of sales, for the three
months ended June 30, 2006 and 2005 was 42% and 49%, respectively. The decrease
in gross margin percentage was primarily due to the product mix 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 June
30, 2006 were $4.0 million, an increase of $3.0 million over $1.0 million for
the same period in 2005. This increase was due primarily to increased headcount
and increased sales related expenses due to the acquisition of the Old Proxim
sales and distribution channels in the third quarter of 2005.

     Restructuring Charges

         During the quarter ended June 30, 2006 the Company recorded
restructuring charges of approximately $116,000. These charges consisted of
one-time termination benefits related to a reduction in force, implemented in an
effort to streamline operations in response to the first quarter financial
results. There were no restructuring charges recorded in the corresponding
quarter of 2005.

     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
$4.0 million for the three months ended June 30, 2006 compared to $2.8 million
for the three months ended June 30, 2005 resulting in an increase of about 43%
or over $1.2 million from the prior year's reporting period. The increase is
principally a result of additional headcount and related general and
administrative expenses due to the acquisition of Old Proxim's operations.
However, due mainly to the higher sales in the current year, general and
administrative expenses as a percentage of sales during the second quarter of
2006 were reduced to 19% as compared to 39% in the second quarter of 2005.

     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 increased to $3.8 million for the three months ended June 30, 2006 from
$0.9 million for the three months ended June 30, 2005, an approximate increase
of $2.9 million or 322%. The increase in research and development expenses was
primarily due to the addition of research and development engineering personnel
through the acquisition of Old Proxim's operations as well as additional
prototype material and other related support costs required for our new product
development, certification, and introduction efforts.

     Other income (expenses)

         Other income and expenses totaled approximately $258,000 in the second
quarter 2006 compared to $202,000 for the corresponding quarter of 2005. There
was decrease in interest income of $155,000 due to the cash used to acquire Old
Proxim's operations. This decrease was offset by gains on the settlement of
certain old Terabeam Corporation property taxes and the sale of certain legacy
Ricochet intellectual property during the first quarter of 2006.

                                       19
<PAGE>

For the six months ended June 30, 2006 and 2005

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


                                                    Six Months Ended June 30,
                                                    --------------------------

                                                        2006           2005
                                                    -----------     ----------

Sales ............................................          100%           100%
Cost of goods sold ...............................           58             51
                                                    -----------     ----------

Gross profit .....................................           42             49
Operating expenses
    Selling costs ................................           21             15
    Restructuring charges ........................           --             --
    General and administrative ...................           19             38
    Research and development .....................           22             12
                                                    -----------     ----------

       Total operating expenses ..................           62             65
                                                    -----------     ----------

Operating (loss) income ..........................          (20)           (16)
Other income (expenses) ..........................            1              2
Income taxes .....................................           --             --
                                                    -----------     ----------

Net loss .........................................          (19)%          (14)%
                                                    ===========     ==========

     Sales

         Sales for the six months ended June 30, 2006 were $39.3 million as
compared to $13.8 million for the same period in 2005 for an increase of $25.5
million or 185%. This increase is primarily due to the acquisition of the Old
Proxim operations in the third quarter of 2005.

         In the first six months of 2006, our service business made up less than
5% of our total consolidated revenue. We continue our efforts to increase the
number of subscribers for the service business.

         For the six months ending June 30, 2006 and 2005, international sales,
excluding Canada, approximated 54% and 18%, respectively, of total sales. The
reason for the large increase in international sales as a percent of sales is
because a significant percentage of the sales from the Old Proxim operations
were ultimately made to international customers.

     Cost of goods sold and gross profit

         Cost of goods sold and gross profit for the six months ended June 30,
2006 were $22.9 million and $16.3 million, respectively. For the same period in
2005, costs of goods sold and gross profit were $7.0 million and $6.8 million,
respectively. Gross profit margin, as a percentage of sales, for the six months
ended June 30, 2006 and 2005 was 42% and 49%, respectively. The decrease in
gross margin percentage was primarily due to the product mix in the current
quarter compared to the first six months of the prior year. In addition, due to
lower than expected revenue results for the first six months of 2006, certain
fixed manufacturing costs were not fully absorbed and contributed to a reduction
in gross profit margins.

     Sales and Marketing Expenses

         Sales and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, customer and technical support as well
as field support. Sales and marketing expenses for the six months ended June 30,
2006 were $8.3 million, an increase of $6.3 million over $2.0 million for the
same period in 2005. This increase was due primarily to increased headcount and
increased sales related expenses due to the acquisition of the Old Proxim sales
and distribution channels in the third quarter of 2005.

                                       20
<PAGE>

     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
$7.3 million for the six months ended June 30, 2006 compared to $5.3 million for
the six months ended June 30, 2005 resulting in an increase of about 38% or over
$2.0 million from the prior year's reporting period. The increase is principally
a result of additional headcount and related general and administrative expenses
due to the acquisition of Old Proxim's operations. However, general and
administrative expenses as a percentage of sales during the first six months of
2006 were reduced to 19% as compared to 38% in the first six months of 2005.

     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 increased to $8.6 million for the six months ended June 30, 2006 from
$1.7 million for the six months ended June 30, 2005, an approximate increase of
$6.9 million or 406%. The increase in research and development was primarily due
to the addition of research and development engineering personnel through the
acquisition of Old Proxim's operations as well as additional prototype material
and other related support costs required for our new product development,
certification, and introduction efforts.

     Other income (expenses)

         Other income and expenses totaled approximately $644,000 in the first
six months of 2006 compared to $238,000 for the corresponding first half of
2005. There was decrease in interest income of $288,000 due to the cash used to
acquire Old Proxim's operations. This decrease was offset by gains on the
settlement of certain old Terabeam Corporation leases and property taxes during
the first half of 2006, the sale of certain Ricochet intellectual property
during the current period, and because there was a permanent write-down in the
first quarter of 2005 of certain bond and stock holdings totaling.

Liquidity and Capital Resources

         At June 30, 2006, we had cash, cash equivalents, and investments
available-for-sale of $13.6 million. For the six months ended June 30, 2006,
cash used by operations was approximately $5.4 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 $7.5 million and $1.2 million in changes in assets and liabilities
affecting operations, offset by $3.3 million of non-cash items.

         For the six months ended June 30, 2006, cash provided by investing
activities was approximately $4.7 million. The cash provided by investing
activities was principally related to the release of restricted cash, which had
been held in an indemnification trust for the benefit of former Terabeam
Corporation directors and officers. In March 2006, the beneficiaries of that
indemnification trust agreed to the early termination of that trust. During the
quarter ended June 30, 2006 that indemnification trust was terminated and the
net trust proceeds of approximately $5.0 million (after payments to the
beneficiaries) were distributed to the Company as unrestricted cash. The release
of restricted cash was offset by approximately $321,000 used for the purchase of
property and equipment.

         Cash provided by financing activities was approximately $55,000 for the
six months ended June 30, 2006 and resulted from the exercise of employee stock
options during this period.

         We believe that cash flow from operations, along with our cash on hand,
should be sufficient to meet the operating cash requirements over the next
twelve month period as currently contemplated. Our long-term financing
requirements depend upon our growth strategy, which relates primarily to our
desire to increase revenue both domestically as well as internationally.
However, although the acquisition of Old Proxim's operations in 2005

                                       21
<PAGE>

significantly increased both our domestic and international revenue, we incurred
operating losses totaling $7.5 million in the first half of 2006. For the
remainder of 2006, we must attempt to increase revenues and adjust operating
expenses to levels that will produce positive cash flows and return us to
operating profitability. Due to the recent nature of the Old Proxim operation
acquisition and the large fluctuations in quarterly revenue we have experienced
since the acquisition, management is closely following revenue trends and
operating expenses, and reviewing its long term business strategy to evaluate
whether there will be a requirement for external financing to fund our
operations. One significant constraint to our equipment business growth is the
rate of new product introduction. New products or product lines may be designed
and developed internally or acquired from existing suppliers to reduce the time
to market and inherent risks of new product development. We will also need to
use some of our current capital to fund the expected future operating losses in
our services business given the significant numbers of new subscribers we would
have to add for that business to be profitable. We may also use some of our
current capital or raise additional capital for our services business if we
decide to expand the geographic areas in which we offer service. Our current
resources may have to be supplemented through new bank debt financing, public
debt or equity offerings, or other means due to a number of factors, including
our acquisition of Old Proxim's operations and our desired rate of future
growth. See Item 1A - Risk Factors below and the more detailed discussion of
risk factors described in our Annual Report on Form 10-K for the year ended
December 31, 2005 filed with the Securities and Exchange Commission.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk.

Disclosures About Market Risk

         The following discusses our exposure to market risks related to changes
in interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed below
in Item 1A - Risk Factors.

         As of June 30, 2006, we had cash and cash equivalents of $13.4 million.
The majority of total cash and cash equivalents were on deposit in short-term
accounts with two major US banking organizations. Therefore, we do not expect
that an increase in interest rates would materially reduce the value of these
funds. The primary risk to loss of principal is the fact that these balances are
only insured by the Federal Deposit Insurance Corporation up to $100,000 per
bank. At June 30, 2006, the uninsured portion totaled approximately $13.2
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 liabilities and our short-term investments, we
have concluded that there is no material market risk exposure and, therefore, no
quantitative tabular disclosures are required.

                                       22
<PAGE>

Item 4.  Controls and Procedures.

     Disclosure controls and procedures

         Based on their evaluation as of June 30, 2006, 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
2005 annual audit and review procedures, our independent auditors considered and
provided input to us relating to our internal control over financial reporting,
and reported no material weaknesses in our internal control over financial
reporting.

         We acquired the Old Proxim business, including the related accounting
and financial systems, during the third quarter of 2005. We have moved our
corporate headquarters to the Old Proxim offices in San Jose, CA, and during the
quarter ended June 30, 2006 we substantially completed the process of
integrating the accounting and financial systems of the two companies. The
acquisition of Proxim and integration of the accounting and financial systems
has caused us to review our internal control processes. We are in the process of
completing this review, and we will determine and implement any necessary
revisions to our internal controls resulting from the integration of the two
company's accounting and financial systems.

     Changes in internal control over financial reporting

         There was no change in our internal control over financial reporting
during the quarter ended June 30, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over our financial
reporting other than the changes described above under the preceding heading
"Internal Control over Financial Reporting." We expect we will continue to make
revisions and improvements to our internal control over financial reporting,
particularly as we complete the final phase of reviewing the integration of the
accounting and financial systems of Old Proxim and Terabeam.

                                       23
<PAGE>

                           PART II - OTHER INFORMATION

Item 1.    Legal Proceedings.

     IPO Litigation
     --------------

         During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against Telaxis Communications
Corporation, a predecessor company to Terabeam, Inc., in the U.S. District Court
for the Southern District of New York: Katz v. Telaxis Communications
Corporation et al., Kucera v. Telaxis Communications Corporation et al.,
Paquette v. Telaxis Communications Corporation et al., and Inglis v. Telaxis
Communications Corporation et al. The lawsuits also named one or more of the
underwriters in the Telaxis initial public offering and certain of its officers
and directors. On April 19, 2002, the plaintiffs filed a single consolidated
amended complaint which supersedes the individual complaints originally filed.
The amended complaint alleges, among other things, violations of the
registration and antifraud provisions of the federal securities laws due to
alleged statements in and omissions from the Telaxis initial public offering
registration statement concerning the underwriters' alleged activities in
connection with the underwriting of Telaxis' shares to the public. The amended
complaint seeks, among other things, unspecified damages and costs associated
with the litigation. These lawsuits have been assigned along with, we
understand, approximately 1,000 other lawsuits making substantially similar
allegations against approximately 300 other publicly-traded companies and their
public offering underwriters to a single federal judge in the U.S. District
Court for the Southern District of New York for consolidated pre-trial purposes.
We believe the claims against us are without merit and have defended the
litigation vigorously. The litigation process is inherently uncertain, however,
and there can be no assurance that the outcome of these claims will be favorable
for us.

         On July 15, 2002, together with the other issuer defendants, Telaxis
filed a collective motion to dismiss the consolidated amended complaint against
the issuers on various legal grounds common to all or most of the issuer
defendants. The underwriters also filed separate motions to dismiss the claims
against them. In October 2002, the court approved a stipulation dismissing
without prejudice all claims against the Telaxis directors and officers who had
been defendants in the litigation. On February 19, 2003, the court issued its
ruling on the separate motions to dismiss filed by the issuer defendants and the
underwriter defendants. The court granted in part and denied in part the issuer
defendants' motions. The court dismissed, with prejudice, all claims brought
against Telaxis under the anti-fraud provisions of the securities laws. The
court denied the motion to dismiss the claims brought under the registration
provisions of the securities laws (which do not require that intent to defraud
be pleaded) as to Telaxis and as to substantially all of the other issuer
defendants. The court denied the underwriter defendants' motion to dismiss in
all respects.

         In June 2003, 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.

                                       24
<PAGE>

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

Item 1A.   Risk Factors.

      General Overview

         This Quarterly Report on Form 10-Q contains forward-looking statements
as defined by federal securities laws that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, intentions, projections, developments, future
events, performance or products, underlying assumptions, and other statements,
which are other than statements of historical facts. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "intends," "plans," "anticipates," "contemplates,"
"believes," "estimates," "predicts," "projects," and other similar terminology
or the negative of these terms. From time to time, we may publish or otherwise
make available forward-looking statements of this nature. All such
forward-looking statements, whether written or oral, and whether made by us or
on our behalf, are expressly qualified by the cautionary statements described in
this Form 10-Q, including those set forth below, and any other cautionary
statements which may accompany the forward-looking statements. In addition, we
undertake no obligation to update or revise any forward-looking statement to
reflect events, circumstances, or new information after the date of this Form
10-Q or to reflect the occurrence of unanticipated or any other subsequent
events, and we disclaim any such obligation.

         You should read forward-looking statements carefully because they may
discuss our future expectations, contain projections of our future results of
operations or of our financial position, or state other forward-looking
information. However, there may be events in the future that we are not able to
accurately predict or control. Forward-looking statements are only predictions
that relate to future events or our future performance and are subject to
substantial known and unknown risks, uncertainties, assumptions, and other
factors that may cause actual results, outcomes, levels of activity,
performance, developments, or achievements to be materially different from any
future results, outcomes, levels of activity, performance, developments, or
achievements expressed, anticipated, or implied by these forward-looking
statements. As a result, we cannot guarantee future results, outcomes, levels of
activity, performance, developments, or achievements, and there can be no
assurance that our expectations, intentions, anticipations, beliefs, or
projections will result or be achieved or accomplished. In summary, you should
not place undue reliance on any forward-looking statements.

     Cautionary Statements of General Applicability

         In addition to other factors and matters discussed elsewhere in this
Form 10-Q, in our other periodic reports and filings made from time to time with
the Securities and Exchange Commission, and in our other public

                                       25
<PAGE>

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; 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; 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; 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; 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; 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; cancellation of orders without penalties; the
potential for 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

                                       26
<PAGE>

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 recent settlement
of litigation initiated by Symbol Technologies, Inc.; our limited experience in
operating our Ricochet(R) 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; 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; 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; 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; 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;
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.

     Specific Cautionary Statements relating to Possible Ricochet Strategic
      Transaction

         In April 2006, we announced the retention of an outside consulting firm
to explore a variety of possible strategic alternatives for our Ricochet
services business. There can be no assurance whatsoever 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.
Other risks associated with this process include our ability to identify
desirable strategic alternatives for our Ricochet business, as well as our
ability to execute such alternatives or the transactions associated with such
alternatives; the level of interest of third parties in pursuing possible
strategic transactions relating to our Ricochet business; our desire and ability
(or lack thereof) to continue to explore possible strategic alternatives and
opportunities relating to our Ricochet business; the desire and ability (or lack
thereof) of us and any relevant third parties to reach mutually acceptable
definitive documentation to effect a possible strategic transaction and, if that
occurs, whether the conditions to closing would then be satisfied; the time and
costs required to explore and investigate possible transactions and other
corporate actions; management and board interest in and distraction due to
exploring and investigating possible transactions and other corporate actions;
and reactions, either positive or negative, of investors, competitors,
customers, employees, and others to our exploring possible strategic
alternatives and opportunities relating to our Ricochet

                                       27
<PAGE>

business and to any specific strategic alternative or opportunity selected by
us. We do not intend to make any additional comments regarding this matter
unless and until a definitive transaction agreement has been reached, the
exploration of alternatives has been terminated, or there are other definitive
developments warranting further disclosure.

     Possible Implications of Cautionary Statements

         The items described above, either individually or in some combination,
could have a material adverse impact on our reputation, business, need for
additional capital, ability to obtain additional debt or equity financing,
current and contemplated products gaining market acceptance, development of new
products and new areas of business, sales, cash flow, results of operations,
financial condition, stock price, viability as an ongoing company, results,
outcomes, levels of activity, performance, developments, or achievements. Given
these uncertainties, investors are cautioned not to place undue reliance on any
forward-looking statements.

Item 4.    Submission of Matters to a Vote of Security Holders.

         We held our annual meeting of stockholders on May 23, 2006. At that
meeting, each of the following individuals was elected as a director of Terabeam
(these individuals were at the time all the directors of Terabeam) by the
following votes:

        Name of Individual             Votes For               Votes Withheld
        ------------------             ---------               --------------
        Daniel A. Saginario            19,629,844                 143,582
        Robert E. Fitzgerald           19,682,708                  90,718
        John W. Gerdelman              19,635,742                 137,684
        Robert A. Wiedemer             19,634,947                 138,479

         As previously reported, Pankaj Manglik has subsequently been appointed
to Terabeam's board of directors.

         Also at that annual meeting, our stockholders approved two amendments
to Terabeam's 2004 Stock Plan. The first increased the shares of our common
stock issuable thereunder by 1,000,000 and was approved by vote of 10,215,416
shares for, 791,704 shares against, 41,119 shares abstained, and 8,725,187
shares non-voted. The second amendment added a provision capping at 500,000 the
number of shares of our common stock with respect to which stock rights under
the plan may be granted to any participant in any calendar year and was approved
by a vote of 10,537,589 shares for, 461,408 shares against, 49,242 shares
abstained, and 8,725,187 shares non-voted.

Item 6.    Exhibits.

         See Exhibit Index.

                                       28
<PAGE>

                                    SIGNATURE

         Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                Terabeam, Inc.

Date:  August 14, 2006          By:       /s/  Brian J. Sereda
                                    -----------------------------------
                                    Brian J. Sereda,
                                    Chief Financial Officer
                                    (principal financial and accounting officer)


                                       29
<PAGE>

                                  EXHIBIT INDEX

       Exhibit
        Number                     Description

         10.1     Employment Agreement between the Registrant and Pankaj S.
                  Manglik dated May 19, 2006 (1).
         10.2     Form of Incentive Stock Option Agreement between the
                  Registrant and Pankaj S. Manglik dated as of May 19, 2006 (1)
         10.3     Amendment No. 2 to 2004 Stock Plan of the Registrant (1)
         10.4     Letter Employment Agreement between the Registrant and Len
                  Eisenstein dated May 24, 2005 (2)
         10.5     Letter Employment Agreement between the Registrant and Brian
                  J. Sereda dated August 2, 2006 (3)
         10.6     Form of Incentive Stock Option Agreement for Executive
                  Officers (3)
         31.1     Certification of Chief Executive Officer Pursuant to Rule
                  13a-14(a).
         31.2     Certification of Chief Financial Officer Pursuant to Rule
                  13a-14(a).
         32.1     Certification Pursuant to Rule 13a-14(b) and Section 906 of
                  the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
                  Section 1350 of Chapter 63 of Title 18 of the United States
                  Code).

--------------
All non-marked exhibits are filed herewith.

(1)      Incorporated herein by reference to the exhibits to Form 8-K filed with
         the SEC on May 25, 2006.
(2)      Incorporated herein by reference to the exhibits to Form 8-K filed with
         the SEC on July 31, 2006.
(3)      Incorporated herein by reference to the exhibits to Form 8-K filed with
         the SEC on August 4, 2006.


                                       30