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

                                  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, 2005

                                       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

                               YDI WIRELESS, 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)

                                8000 LEE HIGHWAY
                             FALLS CHURCH, VA 22042
                    (Address of principal executive offices)

                                 (703) 205-0600
              (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 an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [_] No [X]

      As of July 30, 2005, there were 21,389,787 shares of the registrant's
common stock outstanding.

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

<PAGE>
<TABLE>
<CAPTION>
                                        YDI WIRELESS, INC.
                                              INDEX


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

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

                      Consolidated Balance Sheets as of June 30, 2005 (unaudited)
                        and December 31, 2004 ......................................    4

                      Consolidated Statements of Operations for the six months ended
                        June 30, 2005 and 2004 (unaudited) .........................    5

                      Consolidated Statement of Changes in Stockholders' Equity for
                        the six months ended June 30, 2005 (unaudited) .............    6

                      Consolidated Statements of Cash Flows for the six months ended
                        June 30, 2005 and 2004 (unaudited) .........................    7

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

       Item 2.     Management's Discussion and Analysis of Financial Condition and
                   Results of Operations ...........................................   13

       Item 3.     Quantitative and Qualitative Disclosures about Market Risk ......   23

       Item 4.     Controls and Procedures .........................................   24

PART II.       OTHER INFORMATION

       Item 1.     Legal Proceedings ...............................................   27

       Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds .....   28

       Item 4.     Submission of Matters to a Vote of Security Holders .............   29

       Item 6.     Exhibits ........................................................   29

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 I, Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Safe
Harbor for Forward-Looking Statements. 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>

                               YDI WIRELESS, INC.
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                     June 30,  December 31,
                                                                                       2005       2004
                                                                                     --------   --------
                                                                                   (unaudited)
<S>                                                                                  <C>        <C>
Assets
Current assets:
   Cash and cash equivalents .....................................................   $ 34,038   $ 35,368
   Investment securities - available-for-sale ....................................        340      5,369
   Accounts receivable, net ......................................................      3,751      2,972
   Refundable income taxes .......................................................         --        151
   Inventory .....................................................................      7,471      7,442
   Prepaid expenses ..............................................................        393        253

       Total current assets ......................................................     45,993     51,555

Property and equipment, net ......................................................      2,367      2,511

Other Assets:
  Restricted cash ................................................................      5,076      5,136
  Goodwill .......................................................................      6,013      6,072
  Intangible assets, net .........................................................     11,502     11,919
  Deposits .......................................................................         99         91
                                                                                     --------   --------

       Total other assets ........................................................     22,690     23,218
                                                                                     --------   --------

       Total assets ..............................................................   $ 71,050   $ 77,284
                                                                                     ========   ========

Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable and accrued expenses .........................................   $  4,763   $  6,965
   Deferred revenue ..............................................................        148        159
   Current maturities of notes payable ...........................................      2,767      2,899
                                                                                     --------   --------

       Total current liabilities .................................................      7,678     10,023

Notes payable, net of current maturities .........................................      1,255      1,270
                                                                                     --------   --------

       Total liabilities .........................................................      8,933     11,293

Commitments and contingencies

Stockholders' Equity
   Preferred stock, $0.01 par value; authorized 4,500,000, none issued at June 30,
     2005 and December 31, 2004 ..................................................         --         --
   Common stock, $0.01 par value, 100,000,000 shares authorized, 21,389,287 issued
     and outstanding at June 30, 2005 and 22,845,847 issued with 22,345,847
     outstanding at December 31, 2004 ............................................        214        228
   Additional paid-in capital ....................................................     56,518     59,637
   Retained earnings .............................................................      5,319      7,277
   Treasury stock ................................................................         --     (1,155)
   Accumulated other comprehensive income:
     Net unrealized gain (loss) on available-for-sale securities .................         66          4
                                                                                     --------   --------

       Total stockholders' equity ................................................     62,117     65,991
                                                                                     --------   --------

       Total liabilities and stockholders' equity ................................   $ 71,050   $ 77,284
                                                                                     ========   ========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       4
<PAGE>

                               YDI WIRELESS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                 For the Three Months Ended      For the Six Months Ended
                                                         June 30,                       June 30,
                                               ------------------------------------------------------------

                                                   2005            2004            2005            2004
                                               ------------    ------------    ------------    ------------
<S>                                            <C>             <C>             <C>             <C>
Revenues ...................................   $      7,165    $      4,733    $     13,762    $     10,750

Cost of goods sold .........................          3,687           3,193           7,006           6,744
                                               ------------    ------------    ------------    ------------

    Gross profit ...........................          3,478           1,540           6,756           4,006

Operating expenses:
    Selling costs ..........................          1,034             480           2,031             920
    General and administrative .............          2,777           2,180           5,285           3,907
    Research and development ...............            879             477           1,650             969
                                               ------------    ------------    ------------    ------------

       Total operating expenses ............          4,690           3,137           8,966           5,796
                                               ------------    ------------    ------------    ------------

Operating income (loss) ....................         (1,212)         (1,597)         (2,210)         (1,790)

Other income (expenses):
    Interest income ........................            269              26             490              50
    Interest expense .......................            (70)            (34)           (136)            (63)
    Other income (loss) ....................              3              --            (116)            503
                                               ------------    ------------    ------------    ------------

       Total other income (expenses) .......            202              (8)            238             490
                                               ------------    ------------    ------------    ------------

Income (loss) before income taxes ..........         (1,010)         (1,605)         (1,972)         (1,300)

    Benefit (provision) for income taxes ...             23              --              14              (2)
                                               ------------    ------------    ------------    ------------

Net income (loss) ..........................   $       (987)   $     (1,605)   $    (1,958)    $     (1,302)
                                               ============    ============    ============    ============


Weighted average shares - basic  and diluted     22,009,434      15,799,225      22,204,249      15,016,816
                                               ============    ============    ============    ============
    EPS, basic and diluted .................   $      (0.04)   $      (0.10)   $      (0.09)   $      (0.09)
                                               ============    ============    ============    ============
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       5
<PAGE>

                               YDI WIRELESS, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                     FOR THE SIX MONTHS ENDED JUNE 30, 2005
                        (in thousands, except share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                          Common Stock           Additional                                Other
                                   --------------------------     Paid-in       Retained    Treasury   Comprehensive
                                       Shares        Amount       Capital       Earnings      Stock    (Loss) Income     Total
                                   ----------------------------------------------------------------------------------------------
<S>                                  <C>          <C>           <C>           <C>          <C>           <C>          <C>
Balances, January 1, 2005 ........   22,345,847   $       228   $    59,637   $     7,277  $    (1,155)  $         4  $    65,991
Treasury stock retired ...........   (1,033,750)          (15)       (3,207)                     1,155                     (2,067)
Exercise of stock options and
  warrants .......................       77,190             1            88                                                    89
 Comprehensive income:
   Net income  (loss) ............                                                 (1,958)                                 (1,958)
   Unrealized gain on investments                                                                                 62           62
                                    -----------   -----------   -----------   -----------  -----------   -----------  -----------
     Total comprehensive income ..
                                                                                   (1,958)                        62       (1,896)
                                    -----------   -----------   -----------   -----------  -----------   -----------  -----------
Balances, June 30, 2005
  (unaudited) ....................   21,389,287   $       214   $    56,518   $     5,319  $        --   $        66  $    62,117
                                    ===========   ===========   ===========   ===========  ===========   ===========  ===========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       6
<PAGE>

                               YDI WIRELESS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                  For the Six Months Ended
                                                                          June 30,
                                                                  ------------------------
                                                                     2005          2004
                                                                  ----------    ----------
<S>                                                               <C>           <C>
Cash flows from operating activities:
   Net income (loss) ..........................................   $   (1,958)   $   (1,302)
     Depreciation and amortization ............................        1,007           286
     Loss on write-down of investments available-for-sale .....          112            --
     Bad debt allowance (recovery) ............................          190           169
     Inventory allowance ......................................           34            --
     Changes in assets and liabilities affecting operations:
       Restricted cash ........................................           60           700
       Accounts receivable ....................................       (1,105)          341
       Refundable income taxes ................................          151            76
       Inventory ..............................................          (63)         (100)
       Deposits ...............................................           (8)            2
       Prepaid expenses .......................................         (139)           60
       Accounts payable and accrued expenses ..................       (2,176)           (5)
       Deferred revenue .......................................          (11)           --
                                                                  ----------    ----------

            Net cash provided by (used in) operating activities       (3,906)          227
                                                                  ----------    ----------

Cash flows from investing activities:
   Cash received from acquisitions ............................           --        10,252
   Cash used in acquisitions ..................................           --        (4,800)
   Sale of securities .........................................        5,220           633
   Purchase of securities .....................................         (241)           --
   Purchase of intangible asset ...............................           --          (121)
   Proceeds on disposal of assets held for sale ...............          169            46
   Purchase of property and equipment .........................          (65)           --
   Investment in capitalized software .........................         (382)           --
                                                                  ----------    ----------

       Net cash provided by (used in) investing activities ....        4,701         6,010
                                                                  ----------    ----------

Cash flows from financing activities:
   Distributions to Merry Fields members ......................           --           (50)
   Repurchase of common stock .................................       (2,067)           --
   Exercise of stock options and warrants .....................           89           227
   Repayment of notes payable .................................         (147)         (119)
                                                                  ----------    ----------

       Net cash provided by (used in) financing activities ....       (2,125)           58
                                                                  ----------    ----------

Net increase (decrease) in cash and cash equivalents ..........       (1,330)        6,295
Cash and cash equivalents, beginning of period ................       35,368         8,990
                                                                  ----------    ----------

Cash and cash equivalents, end of period ......................   $   34,038    $   15,285
                                                                  ==========    ==========

Supplemental disclosure of cash flow information:
   Cash paid for interest .....................................   $      136    $       51
                                                                  ==========    ==========
   Income taxes paid ..........................................   $       --    $        2
                                                                  ==========    ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.

                                       7
<PAGE>

                               YDI WIRELESS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Basis of Presentation

      The consolidated financial statements of YDI Wireless, Inc. (the "Company"
or "YDI") for the three month and six month periods ended June 30, 2005 and 2004
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 our
Annual Report on Form 10-K for the year ended December 31, 2004 filed with the
Securities and Exchange Commission.

      Effective May 13, 2004, the Company acquired KarlNet, Inc., a wireless
software development company. Effective June 22, 2004, the Company acquired
Terabeam Corporation, a wireless telecommunications company. Effective June 25,
2004, the Company acquired Ricochet Networks, Inc., a wireless service provider.
The financial results of these companies from and after the dates of acquisition
are included in the financial results reported for the Company.

      During 2004, YDI began operating in two different business areas. The
first business is the historic operations of YDI as a designer, manufacturer,
and seller of wireless telecommunications equipment ("Equipment"). The second
business is as a wireless Internet service provider ("Services") in several
major metropolitan cities. This business was acquired with the Ricochet Networks
acquisition during the second quarter of 2004. There are no significant
inter-company transactions which affect the revenue or expenses of either
business.

      Summarized information for our Equipment and Services businesses for the
three months and six months ended June 30, 2005 is as follows:

      Three Months Ended June 30, 2005 (000's):

                                         Equipment      Services         Total
Assets ............................      $ 67,286       $  3,764       $ 71,050
Revenue ...........................      $  6,475       $    690       $  7,165
Operating income (loss) ...........      $   (717)      $   (495)      $ (1,212)

      Six Months Ended June 30, 2005 (000's):

                                         Equipment      Services         Total
Assets ............................      $ 67,286       $  3,764       $ 71,050
Revenue ...........................      $ 12,382       $  1,380       $ 13,762
Operating income (loss) ...........      $ (1,123)      $ (1,087)      $ (2,210)

         The results of operations for interim periods are not necessarily
indicative of the results of operations for any other interim period or for a
full fiscal year.


                                       8
<PAGE>

2.    Stock Based Compensation

      The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123"), but applied the intrinsic value method set forth in
Accounting Principles Board Opinion No. 25. No compensation expense has been
recognized in connection with options, as all options have been granted with an
exercise price equal to the fair value of the Company's common stock on the date
of grant. 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 2005 and 2004: risk-free interest rate of 3.58%
and 3.67%, expected life of 5 years, volatility 111% and 205% and dividend rate
of zero percent, respectively. Using these assumptions, the fair value of the
stock options granted in 2005 and 2004 was between $1.93 and $2.69, and $5.34,
respectively, which would be amortized as compensation expense over the vesting
period of the options.

      If the Company had elected to recognize compensation expense based on the
fair value at the grant dates, consistent with the method prescribed by SFAS No.
123, net income per share would have been changed to the pro forma amount
indicated below (in thousands, except per share amounts) for the three months
and six months ended June 30, 2005:

<TABLE>
<CAPTION>
                                                              Three Months Ended June 30,
                                                             -----------------------------
                                                                 2005              2004
                                                             ------------     ------------
                                                              (unaudited)      (unaudited)
<S>                                                          <C>              <C>
Net income (loss) attributable to common stockholders, as
    reported: ...........................................    $       (987)    $     (1,605)
Less:  Total stock based employee compensation expense
    determined under the fair value based method for all
    awards ..............................................              62               14
                                                             ------------     ------------

Pro forma net income (loss) attributable to common
    stockholders ........................................    $     (1,049)    $     (1,591)
                                                             ============     ============
Basic and diluted net income (loss) per common share, as
    reported ............................................    $      (0.04)    $      (0.10)
                                                             ============     ============
Basic and diluted net income (loss) per common share, pro
    forma ...............................................    $      (0.05)    $      (0.10)
                                                             ============     ============
<CAPTION>
                                                                Six Months Ended June 30,
                                                             -----------------------------
                                                                 2005              2004
                                                             ------------     ------------
                                                              (unaudited)      (unaudited)
<S>                                                          <C>              <C>
Net income (loss) attributable to common stockholders, as
    reported: ...........................................    $     (1,958)    $     (1,302)
Less:  Total stock based employee compensation expense
    determined under the fair value based method for all
    awards ..............................................             786               14
                                                             ------------     ------------
Pro forma net income (loss) attributable to common
    stockholders ........................................    $     (2,744)    $     (1,316)
                                                             ============     ============
Basic and diluted net income (loss) per common share, as
    reported ............................................    $      (0.09)    $      (0.09)
                                                             ============     ============
Basic and diluted net income (loss) per common share, pro
    forma ...............................................    $      (0.12)    $      (0.09)
                                                             ============     ============
</TABLE>

3.    Comprehensive Income (Loss)

      The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." During the six months ended June 30, 2005, and
2004, the Company had comprehensive income (loss) of $(1,896,000) and
$(1,459,000), respectively, including approximately $62,000 and $(157,000)
(unaudited), respectively, of unrealized (losses) gains on available-for-sale
investments, net of income taxes of $0 and $0, respectively.


                                       9
<PAGE>

4.    Inventory

      Inventory consisted of the following as of the dates shown in the table
below (in thousands):

                                                       June 30,     December 31,
                                                         2005          2004
                                                      ----------    ----------
                                                     (unaudited)
      Raw materials ................................  $    1,841    $    1,968
      Work in process ..............................         191           124
      Finished goods ...............................       6,073         5,950
                                                      ----------    ----------
                                                           8,105         8,042
      Allowance for excess and obsolescence ........        (634)         (600)
                                                      ----------    ----------
      Net Inventory ................................  $    7,471    $    7,442
                                                      ==========    ==========

5.    Earnings per share

<TABLE>
<CAPTION>
                                                Three Months Ended June 30, Six Months Ended June 30,
                                                -----------------------------------------------------
                                                    2005          2004         2005          2004
                                                 ----------    ----------   ----------    ----------
                                                        (unaudited)                (unaudited)
    <S>                                          <C>           <C>          <C>           <C>
      Numerator:
           Net income (loss) .................   $     (987)   $   (1,605)  $   (1,958)   $   (1,302)
                                                 ==========    ==========   ==========    ==========
      Denominator- weighted average shares:
           Denominator for basic earnings per
           share .............................   22,009,434    15,799,225   22,204,249    15,016,816
           Dilutive effect of stock options ..   $       --    $       --   $       --    $       --
                                                 ----------    ----------   ----------    ----------
           Denominator for diluted earnings
           per share .........................   22,009,434    15,799,225   22,204,249    15,016,816
                                                 ==========    ==========   ==========    ==========
           Basic earnings (loss) per share ...   $     (0.4)   $    (0.10)  $     (0.0)   $    (0.09)
                                                 ==========    ==========   ==========    ==========
           Diluted earnings (loss) per share .   $     (0.4)   $    (0.10   $     (0.0)   $    (0.09)
                                                 ==========    ==========   ==========    ==========
</TABLE>

      At June 30, 2005 and 2004, stock options and warrants to purchase
approximately 2.2 million and 2.7 million, respectively, shares of common stock
were outstanding, but were not included in the computation of diluted earnings
for the three month and six month periods ended June 30, 2005 and 2004 because
there was a net loss for each of the applicable periods, and the effect would
have been anti-dilutive.

6.    Concentrations

      During the six months ended June 30, 2005, one customer accounted for
approximately 11% of sales, and there were no customers accounting for more than
10% of sales in the corresponding period of 2004.

      The Company maintains its cash, cash equivalent, and restricted cash
balances in several banks. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000 per bank. At June 30, 2005 and 2004, the
uninsured portion totaled approximately $39.1 million and $20.1 million,
respectively.

7.    Acquisitions

      On May 13, 2004, YDI acquired KarlNet. The definitive acquisition
agreement contained provisions that provided for various contingent
consideration after the initial acquisition date. YDI will pay up to an
additional $2.5 million over the two years following closing based on
achievement of certain milestones and compliance with other conditions. As of
June 30, 2005, no events have occurred that have triggered the obligation to pay
any of the contingent consideration. Pursuant to the provisions of Statement of
Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141), the
Company believes the payment of any contingent consideration will be treated as
additional cost of the acquisition as the contingencies are resolved.


                                       10
<PAGE>

8.    Convertible debt

      The Company assumed convertible notes as part of the Terabeam acquisition.
The convertible notes' aggregate principal amount totals $2.5 million. The notes
mature in July 2005, with interest only payments at an annual rate of 6.75% in
quarterly installments. At the discretion of holders of the notes, the notes are
convertible into shares of the Company's common stock beginning in July 2004,
based on a value of $27.27 per share of common stock or 91,675 shares. If the
conversion option is not elected prior to July 12, 2005, the holders will be
entitled to receive the principal of $2.5 million in cash on the maturity date.
The Company has classified the convertible notes as a short-term liability on
the accompanying balance sheet as of June 30, 2005.

9.    Restricted cash

      As part of the Terabeam acquisition, YDI acquired restricted cash. As of
June 30, 2005, the restricted cash amounted to approximately $5.1 million which
consisted of approximately $0.1 million as collateral for letters of credit
relating to lease obligations and $5.0 million held in an indemnification trust
for the benefit of former Terabeam directors and officers. This trust was
established by Terabeam in January 2002, and the funds are managed by an
unrelated trustee. To date, no claims have been asserted against the trust
funds. The trust expires at the end of 2007 and any remaining funds will be
distributed to the Company.

10.   Investment securities

      Other income (loss) for the six months ended June 30, 2005 included a loss
of $112,000 due to a decline in value deemed to be other than temporary on our
investment securities - available for sale due to rising interest rates and a
decline in one of our equity positions during the period.

11.   Stock Repurchase

      On May 25, 2005, YDI repurchased 1,000,000 shares of its common stock for
an aggregate purchase price of $2,000,000. This stock had originally been issued
in a private placement in May 2004 as part of the consideration paid to the
stockholders of KarlNet, Inc. in connection with YDI's acquisition of KarlNet.
In addition, on May 6, 2005, YDI signed a stock purchase agreement pursuant to
which YDI agreed to repurchase 33,750 shares of its common stock from a private
investor. These 33,750 shares were issued to that investor in a private
placement in July 2000. The aggregate purchase price for this stock was $67,500.

12.   Recent Accounting Pronouncements

      In December 2004, the FASB issued Statement No. 123 (revised 2004),
Share-Based Payment ("SFAS No. 123R"), which replaces SFAS No. 123, Accounting
for Stock-Based Compensation, (SFAS No. 123) and supercedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. The pro forma
disclosures previously permitted under SFAS No. 123 no longer will be an
alternative to financial statement recognition. We are required to adopt SFAS
No. 123R no later than the first quarter of fiscal 2006, beginning January 1,
2006. Under SFAS No. 123R, we must determine the appropriate fair value model to
be used for valuing share-based payments, the amortization method for
compensation cost and the transition method to be used at date of adoption. The
transition methods include prospective and retroactive adoption options. Under
the retroactive option, prior periods may be restated either as of the beginning
of the year of adoption or for all periods presented. The prospective method
requires that compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of adoption of SFAS
No. 123R, while the retroactive method would record compensation expense for all
unvested stock options and restricted stock beginning with the first period
restated. We are evaluating the requirements of SFAS No. 123R, and management
anticipates that the adoption of SFAS No. 123R will have a material impact on
our consolidated results of operations and earnings per share. We are currently
evaluating the method of adoption and the effect of adoption of SFAS No. 123R
will have on our results of operations and financial condition.


                                       11
<PAGE>

      In June 2005, FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20 and FASB Statement No. 3. The
statement applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle unless it is
impracticable. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. Earlier
application is permitted for accounting changes and corrections of errors made
occurring in fiscal years beginning after June 1, 2005. The statement does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
statement. The Company does not expect the adoption of SFAS No. 154 to have a
material effect on its consolidated financial statements.

13.   Contingencies

      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 YDI, 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 complaints 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 a large majority of
the other 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 elect 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. This means there will be no monetary obligation to the plaintiffs if
they recover $1 billion or more from the underwriter defendants. 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.


                                       12
<PAGE>

      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.
Therefore, the potential exposure of each participating issuer defendant should
decrease as the number of participating issuer defendants increases. 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 remains conditioned on obtaining
both preliminary and final court approval. Formal settlement documents were
submitted to the court in June 2004, together with a motion asking the court to
preliminarily approve the form of settlement. Certain underwriters who were
named as defendants in the settling cases, and who are not parties to the
proposed settlement, opposed preliminary approval of the proposed settlement of
those cases. On February 15, 2005, the court issued an order preliminarily
approving the proposed settlement in all respects but one. In response to this
order, the plaintiffs and the issuer defendants are in the process of submitting
revised settlement documents to the court. The underwriter defendants may object
to the revised settlement documents. If the court preliminarily approves the
proposed settlement, notice of the terms of the proposed settlement will be sent
to all proposed class members and published in several newspapers and on the
Internet. The court will also schedule a fairness hearing at which any
objections to the proposed settlement may be heard. Thereafter, the court will
determine 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.

      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. 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.

14.   Subsequent Event.

      Subsequent to the quarter ended June 30, 2005 (on July 27, 2005), the
Company purchased substantially all of the assets of Proxim Corporation and its
subsidiaries Proxim Wireless Networks, Inc. and Proxim International Holdings,
Inc. (collectively, "Proxim") pursuant to an asset purchase agreement dated as
of July 18, 2005. Under the terms of the asset purchase agreement, the Company
acquired and assumed most of the domestic and foreign operations of Proxim for a
cash purchase price of approximately $25,200,000, subject to certain
adjustments, liability assumptions, and deductions. At the closing, the Company
assumed specified obligations of Proxim, including specified employee-related
obligations.


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

Overview

      We are a designer and manufacturer of broadband wireless equipment and
systems in the licensed-free wireless products communications industry. Our
point-to-point (PTP) and point-to-multipoint (PTM) systems are primarily used by
wireless operators to connect their base stations to other base stations and to
existing wire line networks. We continually invest in the development and
introduction of wireless products in the marketplace in an effort to provide
customers with the best price/performance ratio for license-free wireless
communications. During 2004 and 2003, we made a strategic decision to expand our
product suite to include high bandwidth PTP backhaul products that would
complement our 802.11b PTM TeraStar(TM) and TeraStar(TM) Turbo product
offerings. Therefore, rather than design such backhaul products on our own, we
purchased inventory as well as license rights to


                                       13
<PAGE>

manufacture and sell what we call our TeraBridge(TM) products. In addition,
through our acquisition of Terabeam Corporation, we also acquired our high-end
GigaLink(R) millimeter wave product suite and our TeraOptic(TM) free space
optics (FSO) product. These products continue to give us a broad product line
within this large market segment. Our PTP products primarily enable service
providers, businesses, and other enterprises to expand or establish private
networks by bridging data traffic among multiple facilities. In addition, our
enhanced PTM systems, known as our TeraMax(TM) product suite, enable service
providers, businesses, and other enterprises to connect multiple facilities
within a geographic area to a central hub. We also believe that our diverse and
expanding customer base as well as our market and industry experience makes us a
strong competitor in the wireless communications market. In addition, we are an
experienced designer of turnkey long distance wireless systems for applications
such as wireless Internet, wireless video, wireless local area networks (LANs),
wireless wide area networks (WANs), and private wireless networks.

      We also have had a wireless Internet service provider business since the
acquisition of Ricochet Networks in June 2004. Our services business is
currently operated in the United States in Denver and Aurora, Colorado and San
Diego, California. We are actively considering the expansion of the Ricochet(R)
network, particularly in those cities where Ricochet infrastructure has
previously been deployed. In addition to our current model of providing high
speed mobile wireless Internet services to primarily individuals, we are
considering offering those services to various municipal departments and
personnel for mobile communications, especially homeland security, fire, safety,
health and welfare requirements. Finally, we are exploring opportunities to
offer the Ricochet services on a wholesale level to parties interested in
reselling our services on a private label or co-labeled basis.

      For the six months ended June 30, 2005, the revenue and operating loss for
our equipment business were $12.4 million and $1.1 million, respectively, and
the revenue and operating loss for our services business were $1.4 million and
$1.1 million, respectively. As of June 30, 2005, assets of our equipment
business were $67.3 million and assets of our services business were
approximately $3.8 million. Thus, our services business constituted
approximately 10% of our overall revenue and approximately 49% of our operating
loss for that period.

      Effective May 13, 2004, we acquired KarlNet, Inc., a wireless software
development company. Effective June 22, 2004, we acquired Terabeam Corporation,
a wireless telecommunications company. Effective June 25, 2004, we acquired
Ricochet Networks, Inc., a wireless Internet service provider. The financial
results of these companies from and after the dates of acquisition are included
in the financial results reported herein.

      Subsequent to the quarter ended June 30, 2005 (on July 27, 2005), the
Company purchased substantially all of the assets of Proxim Corporation and its
subsidiaries Proxim Wireless Networks, Inc. and Proxim International Holdings,
Inc. (collectively, "Proxim") pursuant to an asset purchase agreement dated as
of July 18, 2005. Under the terms of the asset purchase agreement, the Company
acquired and assumed most of the domestic and foreign operations of Proxim for a
cash purchase price of approximately $25,200,000, subject to certain
adjustments, liability assumptions, and deductions. At the closing, the Company
assumed specified obligations of Proxim, including specified employee-related
obligations.

Critical Accounting Policies

      The preparation of our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect: the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements; and the reported amounts of revenues and
expenses during the reporting periods. We are required to make judgments and
estimates about the effect of matters that are inherently uncertain. Actual
results could differ from our estimates. The most significant areas involving
our judgments and estimates are described below.

   Revenue Recognition

      For our equipment business, we recognize revenue when a formal purchase
commitment has been received, shipment has been made to the customer, collection
is probable and, if contractually required, a customer's acceptance has been
received. 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


                                       14
<PAGE>

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. As of June 30, 2005, no impairment losses have been recognized
on any of our acquired goodwill.

   Intangible Assets

      Intangible assets are accounted for in accordance with SFAS No. 142
"Goodwill and Other Intangible Assets". Intangible assets with finite lives are
amortized over the estimated useful lives using the straight-line method. An
impairment loss on such assets is recognized if the carrying amount of an
intangible asset is not recoverable and its carrying amount exceeds its fair
value. Intangible assets with indefinite useful lives are not amortized but are
tested for impairment at least annually, or more frequently if there are
indications that the asset is impaired. The impairment test for these assets
consists of a comparison of the fair value of the asset with its carrying
amount. If the carrying amount of an intangible asset with an indefinite useful
life exceeds its fair value, an impairment loss is recognized in an amount equal
to that excess. For either type of intangible asset, after an impairment loss is
recognized, the adjusted carrying amount of the intangible asset becomes its new
accounting basis. Subsequent reversal of a previously recognized impairment loss
is prohibited.

      Our intangible assets include purchased technology and various assets
acquired in business combination transactions. Assets acquired in business
combination transactions include existing hardware technologies, trade names,
existing software technologies, customer relationships and patents. Some of
these assets have finite useful lives and some have indefinite useful lives. As
of June 30, 2005, no impairment losses have been recognized on any of the
intangible assets we owned.


                                       15
<PAGE>

   Capitalized Software

      We have capitalized software costs of approximately $1.2 million, net of
amortization, related to software products available for sale. We are amortizing
those costs over the expected lives of the products. The annual amortization
will be the straight-line method over the remaining estimated economic life of
the product including the period being reported on. In addition, we capitalize
software costs for projects from the time the project is determined to be
technologically feasible until the project is salable. When the project becomes
salable, we will cease capitalizing costs and begin amortizing costs previously
capitalized over the expected salable life of the project. Approximately $1.1 of
software related costs are not being amortized since the software has not been
placed in service as of the June 30, 2005. Approximately $185,000 was
capitalized in software costs during the second quarter of 2005. Prior to the
KarlNet acquisition on May 13, 2004, we had no internally developed software
capitalized costs.

Results of Operations

   For the three months ended June 30, 2005 and 2004:

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

                                             Three Months Ended June 30,
                                                    (unaudited)
                                             -------------------------

                                                2005            2004
                                             ----------     ----------

       Sales .............................          100%           100%
       Cost of goods sold ................           51             67
                                             ----------     ----------

       Gross profit ......................           49             33
       Operating expenses:
           Selling costs .................           14             10
           General and administrative ....           39             46
           Research and development ......           12             10
                                             ----------     ----------

              Total operating expenses ...           65             66
                                             ----------     ----------

       Operating (loss) income ...........          (17)           (34)
       Other income (expenses) ...........            3             --
       Income taxes ......................           --             --
                                             ----------     ----------

       Net income ........................          (14)%          (34)%
                                             ==========     ==========

   Sales

      Sales for the quarter ended June 30, 2005 were $7.2 million as compared to
$4.7 million for the same period in 2004 for an increase of $2.5 million or
about 51%. The three primary reasons for the increase in our revenue were a full
quarter of combined operations with the three companies we acquired in the
second quarter of 2004, the sale of new TeraMax(TM) point-to-multipoint products
and related peripherals, and results from our strategic focus on increasing our
sales to international markets, established carriers, and government entities.
The companies we acquired in 2004 contributed positively to our revenue through
enhanced equipment sales with improved software, service revenue, and
higher-frequency and higher-data rate products and components. We are pleased
with the early sales levels of our TeraMax(TM) products, which we believe is a
feature-rich product that can address the needs of larger operators. We continue
to maintain our pricing levels as much as possible across all our product lines
and focus our sales efforts on the additional features and benefits of our
products. While this may have a negative impact on our revenue, this decision is
consistent with our goal of expanding our customer base to include larger
customers who demand premium quality and support. We believe that larger
customers tend to consider product functionality and quality, customer service
support, field and technical support, and on-going training as important factors
in their purchasing decision rather than simply focusing on price. We also
believe our marketing and branding efforts are bearing fruit and more wireless
equipment customers are beginning to recognize the product offerings and other
capabilities we offer. We continue to see intense competition and pricing
pressure in our industry


                                       16
<PAGE>

across all of our product lines, especially at the lower bandwidths. We continue
to monitor this competition so that we can react as we deem appropriate.

      In the most recent quarter, our service business made up just over 9.6% of
our total consolidated revenue, totaling $0.7 million from over 8,000
subscribers.

      For the quarters ending June 30, 2005 and 2004, international sales,
excluding Canada, approximated 11% and 13%, respectively, of total sales. The
reason for the decline in international sales as a percent of sales is the fact
that all of our services business is domestic and in the second quarter of 2004
there was no comparable services revenue. International sales are up in dollar
terms from the year ago comparable quarter.

   Cost of goods sold and gross profit

      Cost of goods sold and gross profit for the quarter ended June 30, 2005
were $3.7 million and $3.5 million, respectively. For the same period in 2004,
costs of goods sold and gross profit were $3.2 million and $1.5 million,
respectively. Gross profit margin, as a percentage of sales, for the three
months ended June 30, 2005 and 2004 was 49% and 33%, respectively. Gross profits
improved significantly from last year's second quarter primarily due to the
following factors: 1) our maintaining or even increasing our product prices
wherever competition or market conditions would allow; 2) our ability to offer
more feature-rich products without significant additional cost due in large part
to our acquisition of KarlNet last year; 3) the introduction of our newest
point-to-multipoint product TeraMax(TM); and 4) our increased offshore
manufacturing of mechanical components.

      Gross margins in our services business were approximately 32% of service
net revenue in the second quarter. Those gross margins have increased as we have
added additional subscribers to our operating networks, and we believe we have
the opportunity to increase our service gross margin by continuing to add
additional subscribers to those operating networks given the relatively low
incremental cost of adding subscribers to those networks.

   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 quarter ended June 30,
2005 were $1.0 million, an increase of $0.5 million (approximately 100%) over
$0.5 million for the same period in 2004. This increase was due primarily to the
following factors: 1) increased sales and marketing headcount as well as
increased salaries for more experienced sales personnel amounted to
approximately $400,000; and 2) increased travel by sales personnel, attendance
at tradeshows, increased amounts being spent on sales collateral for products,
brands and new company identity, and increased advertising and promotion
expenses amounted to approximately $130,000. We are also continuing to have our
products certified by selected in-country regulatory authorities, such as those
in the Asia Pacific, Latin America, Europe, Middle East, and Africa regions to
improve our products' acceptance in these regions. This process has been slower
to mature than we had hoped, but our focus on hiring good, experienced
international salespeople to help the expansion continues to be one of the top
priorities.

      Our service business sales and marketing expenses were approximately 8.0%
of service net revenues for the second quarter. We are making efforts to promote
this service in our San Diego and Denver markets focused on both retaining
existing subscribers and obtaining new subscribers. We believe customer
acquisition and retention costs and employee salary and benefit costs will
continue to be the significant sales and marketing costs for our services
business.

   General and Administrative Expenses

      General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for real estate leases, information
systems, finance, legal, and administration of a public company. General and
administrative expenses were $2.8 million for the quarter ended June 30, 2005
compared to $2.2 million for the quarter ended June 30, 2004 resulting in an
increase of about 27% or $0.6 million from the prior year's reporting period.
The increase is a result of the three acquisitions that we made during the
second quarter of 2004 offset by


                                       17
<PAGE>

reductions we were able to achieve from the prior year's second quarter. The
increase is comprised primarily of the following factors: 1) increased
depreciation and amortization expense amounted to approximately $310,000; 2)
costs of increased personnel being hired or acquired through the acquisitions
amounted to just under $340,000; and 3) increased rents and related expenses
amounted to about $90,000.

      Our services business general and administrative expenses were just over
74% of services net revenue in the second quarter. The primary expenses in this
category are employee salary and benefit costs, depreciation and amortization,
facility rental expense, and professional fees. While we monitor these costs
very closely, we do not expect these costs to decrease significantly. However,
we expect they will begin to decline as a percentage of services revenue as more
new subscribers are added to our operating networks.

   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
$0.9 million for the quarter ended June 30, 2005 from $0.5 million for the
quarter ended June 30, 2004, an approximate increase of $400,000 or
approximately 80%. The increase in research and development was primarily due to
the addition of research and development engineering personnel through our
acquisitions as well as additional prototype material and other related support
costs required for our new product development efforts.

      Our services business research and development expenses were approximately
22% of services net revenue in the second quarter. These expenses primarily
consist of employee salary and benefit costs. We expect these expenses to remain
relatively stable in the short-term, but we expect they will begin to decline as
a percentage of services revenue as more new subscribers are added to our
operating networks.

   Other income (expenses)

      Other income and expenses totaled approximately $202,000 in the second
quarter 2005, as compared to ($8,000) in the corresponding quarter of 2004. This
was principally due to an increase in interest income to approximately $269,000
in 2005, from $26,000 in the same period in 2004, because of the investments and
cash and cash equivalents we acquired as a result of the Terabeam acquisition.



For the six months ended June 30, 2005 and 2004:

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

                                             Six Months Ended June 30,
                                                    (unaudited)
                                             -------------------------
                                                2005            2004
                                             ----------     ----------
       Sales .............................          100%           100%
       Cost of goods sold ................           51             63
                                             ----------     ----------
       Gross profit ......................           49             37
       Operating expenses:
           Selling costs .................           15              9
           General and administrative ....           38             36
           Research and development ......           12              9
                                             ----------     ----------
              Total operating expenses ...           65             54
                                             ----------     ----------
       Operating (loss) income ...........          (16)           (17)
       Other income (expenses) ...........            2              5
       Income taxes ......................           --             --
                                             ----------     ----------
       Net income ........................          (14)%          (12)%
                                             ==========     ==========

                                       18
<PAGE>

   Sales

      Sales for the six months ended June 30, 2005 were $13.8 million as
compared to $10.8 million for the same period in 2004 for an increase of $3.0
million or 28%. The three primary reasons for the increase in our revenue were a
full six months of combined operations with the three companies we acquired in
the second quarter of 2004, the introduction and sale of new TeraMax(TM)
point-to-multipoint products and related peripherals, and results from our
strategic focus on increasing our sales to international markets, established
carriers, and government entities.

      In six months ended June 30, 2005, our service business made up just over
10% of our total consolidated revenue, totaling of $1.4 million from over 8,000
subscribers. This represents an increase of just over 8% from the number of
subscribers when we acquired Ricochet(R) network on June 25, 2004. We continue
our efforts to increase the number of subscribers.

      For the six months ending June 30, 2005 and 2004, international sales,
excluding Canada, approximated 18% and 14%, respectively, of total sales. The
reason for the decline in international sales as a percent of sales is the fact
that all of our services business is domestic and in the first six months of
2004 there was no comparable services revenues. International sales are up in
dollar terms from the year ago comparable period.

   Cost of goods sold and gross profit

      Cost of goods sold and gross profit for the six months ended June 30, 2005
were $7.0 million and $6.8 million, respectively. For the same period in 2004,
costs of goods sold and gross profit were $6.7 million and $4.0 million,
respectively. Gross profit margin, as a percentage of sales, for the six months
ended June 30, 2005 and 2004 was 49% and 37%, respectively. Gross profits
improved significantly from the first six months of the prior year primarily due
to the following factors: 1) our maintaining or even increasing our product
prices wherever competition or market conditions would allow; 2) our ability to
offer more feature-rich products without significant additional cost due in
large part to our acquisition of KarlNet last year; 3) the introduction of our
newest point-to-multipoint product TeraMax(TM); and 4) our increased offshore
manufacturing of mechanical components.

      Gross margins in our services business were approximately 28% of service
net revenue in the first six months of the fiscal year. Those gross margins have
increased as we have added additional subscribers to our operating networks, and
we believe we have the opportunity to increase our service gross margin by
continuing to add additional subscribers to those operating networks given the
relatively low incremental cost of adding subscribers to those networks.

   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,
2005 were $2.0 million, an increase of $1.1 million (approximately 122%) over
$0.9 million for the same period in 2004. This increase was due primarily to the
following factors: 1) increased sales and marketing headcount as well as
increased salaries for more experienced sales personnel amounted to
approximately $700,000; and 2) increased travel by sales personnel, attendance
at tradeshows and increased amounts being spent on sales collateral for
products, brands and new company identity, and increased advertising and
promotion expenses totaled approximately $210,000.

      Our service business sales and marketing expenses were approximately 8% of
service net revenues for the six month period. We are making efforts to promote
this service in our San Diego and Denver markets focused on both retaining
existing subscribers and obtaining new subscribers. We believe customer
acquisition and retention costs and employee salary and benefit costs will
continue to be the significant sales and marketing costs for our services
business.

                                       19
<PAGE>

   General and Administrative Expenses

      General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for real estate leases, information
systems, finance, legal, and administration of a public company. General and
administrative expenses were $5.3 million for the six months ended June 30, 2005
compared to $3.9 million for the six months ended June 30, 2004 resulting in an
increase of about 36% or $1.4 million from the prior year's reporting period.
The increase is a result of the three acquisitions that we made during the
second quarter of 2004 offset by reductions we were able to achieve from the
first six month of the prior year. The increase is comprised primarily of the
following factors: 1) increased depreciation and amortization expense amounted
to approximately $671,000; 2) costs of increased personnel being hired or
acquired through the acquisitions amounted to approximately $400,000; and 3)
increased rents and related expenses amounted to about $315,000.

      Our services business general and administrative expenses were over 56% of
services net revenue in the first six months of 2005. The primary expenses in
this category are employee salary and benefit costs, depreciation and
amortization, facility rental expense, and professional fees. While we monitor
these costs very closely, we do not expect these costs to decrease
significantly. However, we expect they will begin to decline as a percentage of
services revenue as more new subscribers are added to our operating networks.

   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
$1.6 million for the six months ended June 30, 2005 from $1.0 million for the
six months ended June 30, 2004, an approximate increase of $0.6 million, or 60%.
The increase in research and development was primarily due to the addition of
research and development engineering personnel through our acquisitions as well
as additional prototype material and other related support costs required for
our new product development efforts.

      Our services business research and development expenses were just over 21%
of services net revenue in the first six months of 2005. These expenses
primarily consist of employee salary and benefit costs. We expect these expenses
to remain relatively stable in the short-term, but we expect they will begin to
decline as a percentage of services revenue as more new subscribers are added to
our operating networks.

   Other income (expenses)

      Other income and expenses totaled approximately $239,000 in the first six
months of 2005 as compared to $490,000 for the corresponding period of 2004.
There were a number of significant factors in this category. First, for the six
months ended June 30, 2005 compared to the same period in 2004, interest income
increased to approximately $490,000 from $50,000 because of the investments and
cash and cash equivalents we acquired as a result of the Terabeam acquisition.
Second, we took a permanent write-down of certain bond and stock holdings in the
amount of approximately $112,000 during the first half of 2005. During the first
half of 2004, we realized a gain of approximately $500,000 from the sale of
legacy Telaxis intellectual property.


Liquidity and Capital Resources

      At June 30, 2005, we had cash, cash equivalents, and investments
available-for-sale of $34.4 million. This excludes restricted cash of $5.1
million. For the six months ended June 30, 2005, cash used by operations was
approximately $3.9 million. Cash used by operations includes net loss of $1.9
million and $3.3 million in changes in assets and liabilities affecting
operations, offset by $1.3 million of non-cash items. The changes in assets and
liabilities affecting operation consisted primarily of an increase in accounts
receivable of $1.1 million and a decrease in accounts payable and accrued
expenses of $2.2 million for the six months ended June 30, 2005.


                                       20
<PAGE>

      For the six months ended June 30, 2005, cash provided by investing
activities was $4.7 million. The majority of this amount was due to several
fixed income investments maturing during the second quarter of 2005.

      Cash used in financing activities was $2.1 million for the six months
ended June 30, 2005. In May 2005 we repurchased 1,000,000 shares of common stock
for an aggregate purchase price of $2,000,000. This stock had originally been
issued in a private placement in May 2004 as part of the consideration paid to
the stockholders of KarlNet, Inc. in connection with YDI's acquisition of
KarlNet. In addition, on May 6, 2005, we signed a stock purchase agreement
pursuant to which we agreed to repurchase 33,750 shares of our common stock from
a private investor. These 33,750 shares were issued to that investor in a
private placement in July 2000. The aggregate purchase price for this stock was
$67,500.

      During the first six months of 2005 and 2004, Merry Fields distributed to
its members $0 and $50,000, respectively. The distributed amounts were Merry
Fields' funds generated from YDI rental payments to Merry Fields. Although Merry
Fields is a separate legal entity from YDI, its financial statements are
consolidated with YDI's for financial reporting purposes. The financial results
are consolidated because YDI guarantees the bank loan made to Merry Fields that
is secured by the 8000 Lee Highway facility in Falls Church, Virginia. That
facility is leased to YDI by Merry Fields.

      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. We recently expended approximately $25.2 million to
purchase substantially all of the operations of Proxim Corporation. Although
this acquisition significantly reduced on cash on hand, we believe this
acquisition will increase both our domestic and international revenue. Due to
recent nature of this acquisition, management is currently determining the scope
of our expected day-to-day normal operations and therefore evaluating whether
there will be a requirement over the next twelve months for external financing
to fund those normal operations. One significant constraint to our equipment
business growth is the rate of new product introduction. These 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 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 funding levels 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 recent acquisition of Proxim's
operations and our desired rate of future growth.


Safe Harbor for Forward-Looking Statements

   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


                                       21
<PAGE>

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.

   Specific Cautionary Statements Relating to the Recent Acquisition of
   Proxim Corporation's Operations

      On July 27, 2005, we acquired substantially all of the operations of
Proxim Corporation. Risks associated with or arising from this transaction
include the substantial time and costs expended and incurred relating to this
transaction; the ability to integrate the acquired Proxim operations in a
cost-effective, timely manner without material liabilities or loss of desired
employees, customers, or suppliers; the risk that the expected synergies and
other benefits of the transaction will not be realized at all or to the extent
expected; the risk that cost savings from the transaction 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 transaction; the time and costs required to integrate the acquired
Proxim operations; management and board interest in and distraction due to the
transaction and integrating the acquired Proxim operations; the uncertain impact
of the transaction on the trading market, volume, and price of our stock,
particularly in light of the amount of our cash paid in the transaction; the
effect of any risks, liabilities, or obligations imposed on or threatened
against us arising from the acquisition of Proxim's operations, relationships,
and products; developments in and effects of Proxim's ongoing bankruptcy
process; difficulties in predicting our future business and financial
performance after the acquisition; difficulties, costs, and delays in
implementing common internal controls, disclosure controls, systems, and
procedures, including financial accounting systems, particularly in light of the
enhanced scrutiny given to those items in the current environment; and the
possibility that we may want or be required to raise additional debt or equity
capital, which, if available at all, may be on terms deemed undesirable by
investors, customers, suppliers, employees, or others.

   Cautionary Statements of General Applicability

      In addition to other factors and matters discussed elsewhere in this Form
10-Q, in our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those expressed, anticipated, or implied in the forward-looking
statements include, without limitation, a severe worldwide slowdown in the
telecommunications equipment market and in the United States in particular; the
downturn and ongoing uncertainty in the telecommunications industry and larger
economy; developments in our relatively new industry and in the larger economy;
the intense competition in the telecommunications equipment and services
industries and resulting pressures on our pricing, gross margins, and general
financial performance; the impact, availability, pricing, and success of
competing technologies and products; difficulties in distinguishing our products
from competing technologies and products; difficulties or delays in obtaining
customers; dependence on a limited number of significant customers; lack of or
delay in market acceptance and demand for our current and contemplated products;
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; risks arising from and relating to our 2004 acquisitions of
Ricochet Networks, Inc., Terabeam Corporation, and KarlNet, Inc. (including
without limitation resolution of any remaining contingent payment obligations;
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; and the risk that those transactions will, or could,
expose us to lawsuits or other liabilities); 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


                                       22
<PAGE>

settling and the outcome of pending and any future litigation against us; our
recent focus on certain aspects of our current business; difficulties or delays
inherent in entering new markets and business areas; difficulties or delays in
developing and establishing new products, product lines, and business lines;
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 limited ability to predict our future financial performance; the
expected fluctuation in our quarterly results; the expected fluctuation in
customer demand and commitments; difficulties in attracting and retaining
qualified personnel; our dependence on key personnel; inability to protect our
proprietary technology; the potential for intellectual property infringement,
warranty, product liability, and other claims; failure of our customers to sell
broadband connectivity solutions that include our products; difficulties in our
customers or ultimate end users of our products obtaining sufficient funding;
cancellation of orders without penalties; difficulties in complying with
existing governmental regulations and developments or changes in governmental
regulation; difficulties or delays in obtaining any necessary governmental or
regulatory permits, waivers, or approvals; our dependence on third-party
suppliers and manufacturers; difficulties in obtaining satisfactory performance
from third-party manufacturers and suppliers; our expected continued losses from
the operation of our services business; difficulties in attracting and retaining
subscribers for our services business; difficulties in expanding our services
business and costs and management issues associated with any expansion;
diversion of management time and other company resources to our services
business; risks associated with foreign sales such as collection, currency and
political risk; investment risk resulting in the decrease in value of our
investments; difficulties in collecting our accounts receivable; the expected
volatility and possible stagnation or decline in our stock price, particularly
due to the number of shares of our stock we issued in connection with the
acquisitions we made in the second quarter of 2004 and 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,
particularly now that Gary E. Rieschel, a representative of our largest
stockholder Mobius Venture Capital, is no longer on our board of directors and
the lockup agreements entered into by some of the significant Terabeam
Corporation stockholders (including Mobius Venture Capital) in connection with
our acquiring that company have expired; the effect of our anti-takeover
defenses; 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,
2004 filed with the Securities and Exchange Commission.

   Possible Implications of Cautionary Statements

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


Item 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 above
in "Safe Harbor for Forward-Looking Statements."

      As of June 30, 2005, we had cash and cash equivalents of $34.4 million and
restricted cash of $5.1 million. All these funds are on deposit in short-term
accounts with several national banking organizations. Therefore, we do not
expect that an increase in interest rates would materially reduce the value of
these funds. The primary risk to loss of principal is the fact that these
balances are only insured by the Federal Deposit Insurance Corporation up to
$100,000 per bank. At June 30, 2005, the uninsured portion totaled approximately
$39.1 million. Although an


                                       23
<PAGE>

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 will reduce our interest income.

      We guarantee the Merry Fields, LLC debt. The interest rate on the loan is
fixed. Therefore, fluctuations in interest rates would not impact the amounts
payable relating to that debt.

      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. 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,
fluctuations in commodity prices or other market risks; nor do we invest in
speculative financial instruments.

      Due to the nature of our borrowings and our short-term investments, we
have concluded that there is no material market risk exposure and, therefore, no
quantitative tabular disclosures are required.

Item 4.  Controls and Procedures.

   Disclosure controls and procedures

      Based on their evaluation as of June 30, 2005, 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.

   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. As reported in our annual report on
Form 10-K for the year ended December 31, 2004, in connection with its annual
audit and review procedures, our independent auditor considered and provided
input to us relating to our internal control over financial reporting. Our
auditor expressed concern that certain of our internal control procedures
regarding the reliability of financial reporting and the preparation of our
financial statements have two material weaknesses. Upon discovery of these
concerns, our auditors performed numerous additional audit procedures relating
to our financial statements for the years ended December 31, 2004 and 2003
before rendering their unqualified audit opinion. During the six months ended
June 30, 2005, we made numerous changes to our internal control over financial
reporting. The following table identifies the material weaknesses identified by
our auditors as well as responsive changes we have made to our internal controls
in the six months ended June 30, 2005.

<TABLE>
<CAPTION>

     Original Material Weakness Described                  Responsive Changes Made
     ------------------------------------                  -----------------------
<S>                                                                         <C>

o Weaknesses in period-ending financial reporting
  process

 o General. We do not have a well-defined and     o In the first quarter of 2005, we created a
organized closing process. The result was a      written, detailed, well-defined, and
delay in producing financial reports and         organized fiscal period end closing process
schedules needed for the audit process,          checklist. This checklist describes required
numerous errors in various schedules             closing procedures as well as the personnel


                                       24
<PAGE>

prepared for the audit, the need for a           responsible for each procedure, the
number of significant and material adjusting     personnel responsible for reviewing each
entries that were identified during the          procedure, and dates for the completion and
audit process, and the incursion of extra        review of each procedure. We followed this
audit fees to perform the additional work.       checklist in closing the second quarter
                                                 2005. We believe we prepared all significant
                                                 closing schedules for the period ended June
                                                 30, 2005 within the time periods
                                                 contemplated for the preparation and review
                                                 of our second quarter 2005 financial
                                                 statements. We also believe no material
                                                 changes were made to any of these schedules
                                                 during the review process.

 o Documentation of the closing process. We       o See the discussion above about our closing
do not use a checklist to manage the closing     process checklist. In the first quarter of
process documenting who will perform each        2005, we created an organized process for
procedure, who will review each procedure,       saving all closing schedules and
and when completion and review of each           reconciliations. We save these materials
procedure is due and is accomplished. We do      both electronically in specific fiscal
not have an organized process for saving         period electronic files and in paper format
schedules and reconciliations to identify        in fiscal period closing binders. We
and calculate pre-audit adjusting entries        followed this process in closing the second
and support amounts in the basic financial       quarter 2005.
statements, in the financial statement
footnotes, and in other parts of our annual
report on Form 10-K.

 o Controls over non-routine and                  o We now require that at least two
non-systematic transactions. We need better      experienced accounting personnel review the
control over non-routine and non-systematic      accounting treatment of each non-routine and
transactions that are often more complex         non-systematic transaction. We are improving
when it comes to accounting and valuation        the level of understanding of accounting
issues. We need to better research and           principles and related compliance in our
carefully document the accounting principles     accounting department and will continue that
and procedures to be followed when these         education process. In order to help in this
non-routine transactions occur.                  area, we have purchased for our accounting
                                                 department electronic access to accounting
                                                 principles, standards, and guidance.

 o Review of the allowance for doubtful           o We believe we are making progress in
accounts. We currently adjust our allowance      identifying and taking into account other
for doubtful accounts based on percentages       factors that should be considered when
applied to each aging group. While we            calculating our allowance for doubtful
believe this provides a reasonable basis to      accounts. We are including a review of
begin evaluating the allowance, we need to       specific large accounts as part of the
assess other factors when considering the        process, and we continue to work on refining
allowance for doubtful accounts.                 this analysis.

o Weaknesses in the review and approval of the
  accounting function

 o General. Many of the accounting functions      o In the first quarter of 2005, we
have been done by a single person. There is      reorganized our accounting department so
no documented process for the review of the      that no single person performs a predominant
work product of that person by a member of       portion of our fiscal period end closing
management. Significant and material             process. In the reorganization, we also
adjusting entries were identified during the     divided some of the day-to-day accounting
audit process that appeared to be due to         functions among several people. Each closing
errors made by the single person.                procedure is reviewed by at least one other
                                                 person depending on the significance and
                                                 complexity of any entry. We have made
                                                 changes in our accounting personnel to
                                                 reduce the possibility of future data
                                                 errors. We believe no material changes were


                                       25
<PAGE>

                                                 made to any of our closing schedules during
                                                 the review process relating to our second
                                                 quarter 2005 financial statements.

 o Journal entry support and approval. Many       o In the first quarter of 2005, we
of our journal entries lacked proper support     implemented a written control procedure tha
and approval by a responsible employee.          requires all journal entries to have the
Also, many of the explanations accompanying      necessary support and a detailed
the entries were inadequate.                     explanation. During the second quarter of
                                                 2005 we implemented new procedures for the
                                                 review and approval of journal entries.
</TABLE>

   Changes in internal control over financial reporting

      There was no change in our internal control over financial reporting
during our second quarter ended June 30, 2005 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 improvements to our internal control over financial reporting.


                                       26
<PAGE>

                           PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

      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 YDI Wireless, 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 complaints 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 a large majority of
the other 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 elect 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. This means there will be no monetary obligation to the plaintiffs if
they recover $1 billion or more from the underwriter defendants. 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.
Therefore, the potential exposure of each participating issuer defendant should
decrease as the number of participating issuer defendants increases. 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.



                                       27
<PAGE>

      Consummation of the proposed settlement remains conditioned on obtaining
both preliminary and final court approval. Formal settlement documents were
submitted to the court in June 2004, together with a motion asking the court to
preliminarily approve the form of settlement. Certain underwriters who were
named as defendants in the settling cases, and who are not parties to the
proposed settlement, opposed preliminary approval of the proposed settlement of
those cases. On February 15, 2005, the court issued an order preliminarily
approving the proposed settlement in all respects but one. In response to this
order, the plaintiffs and the issuer defendants are in the process of submitting
revised settlement documents to the court. The underwriter defendants may object
to the revised settlement documents. If the court preliminarily approves the
proposed settlement, notice of the terms of the proposed settlement will be sent
to all proposed class members and published in several newspapers and on the
Internet. The court will also schedule a fairness hearing at which any
objections to the proposed settlement may be heard. Thereafter, the court will
determine 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.

      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. 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 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

Stock Repurchase

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
                                                                                             (d) Maximum Number
                                                                                               (or Approximate
                                                                       (c) Total Number of    Dollar Value) of
             Period                  (a) Total     (b) Average Price    Shares (or Units)     Shares (or Units)
                                     Number of       Paid per Share   Purchased as Part of     that May Yet Be
                                     Shares (or        (or Unit)       Publicly Announced    Purchased Under the
                                  Units) Purchased                      Plans or Programs     Plans or Programs
------------------------------------------------------------------------------------------------------------------
<S>                               <C>              <C>                  <C>                   <C>
Month #1 (April 1, 2005 - April          0                N/A                  N/A                   N/A
30, 2005)
------------------------------------------------------------------------------------------------------------------
Month #2 (May 1, 2005 - May 31,    1,033,750 (1)         $2.00                  0                     0
2005)
------------------------------------------------------------------------------------------------------------------
Month #3 (June 1, 2005 - June            0                N/A                  N/A                   N/A
30, 2005)
------------------------------------------------------------------------------------------------------------------
Total                                1,033,750           $2.00                0 (2)                 0 (2)
------------------------------------------------------------------------------------------------------------------
</TABLE>

----------------
(1) On May 6, 2005, we signed a stock purchase agreement pursuant to which we
agreed to repurchase 33,750 shares of our common stock from a private investor.
These 33,750 shares were issued to that investor in a private placement in July
2000. The aggregate purchase price for this stock was $67,500. On May 25, 2005,
we signed stock purchase agreements pursuant to which we agreed to repurchase
1,000,000 shares of our common stock from the former stockholders of KarlNet,
Inc. These 1,000,000 shares were issued to those two investors in a private
placement in May 2004 as part of the consideration paid to the stockholders of
KarlNet in connection with our acquisition of KarlNet. The aggregate purchase
price for this stock was $2,000,000.
(2) We have not publicly announced any plan or program to repurchase any of our
common stock.


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<PAGE>

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

      We held our annual meeting of stockholders on May 24, 2005. At that
meeting, each of the following individuals was elected as a director of the
company (these individuals were at the time all the directors of the company) by
the following votes:

       Name of Individual               Votes For              Votes Withheld
       ------------------               ---------              --------------
      Daniel A. Saginario               20,134,804                 51,297
      Robert E. Fitzgerald              20,131,792                 54,309
       John W. Gerdelman                20,135,103                 50,998
        Daniel R. Hesse                 20,129,269                 56,832
        Gary E. Rieschel                20,069,021                117,080
       Robert A. Wiedemer               20,069,747                116,354

      As previously reported, Messrs. Hesse and Rieschel have since resigned
from our board.

      Also at that annual meeting, the stockholders of the company approved an
amendment to the company's 2004 Stock Plan increasing the shares of our common
stock issuable thereunder by 1,000,000 by a vote of 13,486,068 shares for,
329,626 shares against, 11,178 shares abstained, and 6,359,229 shares non-voted.


Item 6.  Exhibits.

      See Exhibit Index.

                                    SIGNATURE

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

                                YDI Wireless, Inc.

Date:  August 15, 2005          By: /s/  Patrick L. Milton
                                    --------------------------------------------
                                    Patrick L. Milton,
                                    Chief Financial Officer and Treasurer
                                    (principal financial and accounting officer)


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<PAGE>

                                  EXHIBIT INDEX

  Exhibit
   Number                          Description
   2.1      Asset Purchase Agreement, dated as of July 18, 2005, by and among
            Terabeam Wireless (the business name of YDI Wireless, Inc.), Proxim
            Corporation, Proxim Wireless Networks, Inc., and Proxim
            International Holdings, Inc. (incorporated by reference to Exhibit
            2.1 to the Form 8-K filed by the registrant with the SEC on July 22,
            2005).

   10.1     Amendment No. 1 to 2004 Stock Plan of YDI Wireless, Inc.
            (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by
            the registrant with the SEC on May 27, 2005).

   10.2     Employment Agreement, dated May 23, 2005, between YDI Wireless, Inc.
            and Len Gee (incorporated by reference to Exhibit 10.1 to the Form
            8-K filed by the registrant with the SEC on May 27, 2005).

   10.3     Incentive Stock Option Agreement, dated June 20, 2005, between YDI
            Wireless, Inc. and Len Gee (incorporated by reference to Exhibit
            10.1 to the Form 8-K filed by the registrant with the SEC on June
            24, 2005).

   10.4     Employment Agreement, effective as of July 27, 2005, between
            Terabeam Wireless (the business name of YDI Wireless, Inc.) and
            Kevin J. Duffy (incorporated by reference to Exhibit 10.1 to the
            Form 8-K filed by the registrant with the SEC on August 2, 2005).

   10.5     Employment Agreement, effective as of July 27, 2005, between
            Terabeam Wireless (the business name of YDI Wireless, Inc.) and
            David F. Olson (incorporated by reference to Exhibit 10.2 to the
            Form 8-K filed by the registrant with the SEC on August 2, 2005).

   10.6     Intellectual Property Agreement, dated as of August 5, 2002, by and
            between Agere Systems, Inc. and Proxim Corporation (previously filed
            as an exhibit to the current report on Form 8-K filed with the SEC
            by Proxim Corporation on August 19, 2002).

   10.7     Patent License Agreement, dated as of August 5, 2002, by and among
            Agere Systems Guardian Corporation, Agere Systems, Inc. and Proxim
            Corporation (previously filed as an exhibit to the current report on
            Form 8-K filed with the SEC by Proxim Corporation on August 19,
            2002).

   10.8     Supply Agreement, dated as of August 5, 2002, by and between Agere
            Systems, Inc. and Proxim Corporation (previously filed as an exhibit
            to the current report on Form 8-K filed with the SEC by Proxim
            Corporation on August 19, 2002).

   10.9     Lease, dated as of May 10, 2005, by and between CarrAmerica Realty
            Operating Partnership, L.P. and Proxim Corporation.

   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).


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