**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
                D.C. 20549****FORM
                10-Q**


**ý**
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31,
                  2006**
  **OR**
  **o**  **TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
        FOR THE TRANSITION PERIOD FROM
        _________TO____________**


**Commission
      File Number 000-29053**





**TERABEAM,
      INC.**


**(Exact
      name of registrant as specified in its charter)**





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





**2115
      O’NEL DRIVE**


**SAN
      JOSE, CA 95131**


**(Address
      of principal executive offices)**





**(408)
      731-2700**


**(Registrant’s
      telephone number, including area code** )





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x  No o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
                  accelerated filer:o
              Accelerated
                  filer:o
              Non-accelerated
                  filer: x




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




As
      of
      April 30, 2006, there were 21,540,865 shares of the registrant’s common stock
      outstanding.














**TERABEAM,
      INC.**


**INDEX**








**PAGE
                NO.****PART
                I.**
            **FINANCIAL
                INFORMATION**Item
                1.
            Consolidated
                Financial Statements
            3Consolidated
                Balance Sheets as of March 31, 2006
                (unaudited) and December 31, 2005
            4Consolidated
                Statements of Operations for the
                three months ended March 31, 2006 and 2005 (unaudited)
            5Consolidated
                Statement of Changes in
                Stockholders’ Equity for the three months ended March 31, 2006 (unaudited)
            6Consolidated
                Statements of Cash Flows for the three
                months ended March 31, 2006 and 2005 (unaudited)
            7Notes
                to Consolidated Financial Statements (unaudited)
            8Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            16Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            20Item
                4.
            Controls
                and Procedures
            21**PART
                II.**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            22Item
                1A.
            Risk
                Factors
            24Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            26Item
                5.
            Other
                Information
            27Item
                6.
            Exhibits
                and Reports on Form 8-K
            27SIGNATURE
            27











2


**PART
      I - FINANCIAL INFORMATION**





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




**Item
      1. Financial Statements.**







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 3


**TERABEAM,
      INC.**


**CONSOLIDATED
      BALANCE SHEETS**


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








**March
                31,**
            
            **December
                31,****2006**
            
            **2005****Assets**
            
            **(unaudited)**Current
                assets:Cash
                and cash equivalents
            
            $
            12,507
            
            $
            14,133Investment
                securities - available-for-sale
            
            
            273
            
            
            260Accounts
                receivable, net
            
            
            6,358
            
            
            8,378Inventory
            
            
            10,825
            
            
            10,070Prepaid
                expenses
            
            
            1,675
            
            
            1,045Total
                current assets
            
            
            31,638
            
            
            33,886Property
                and equipment, net
            
            
            3,713
            
            
            3,924Other
                Assets:Restricted
                cash
            
            
            5,076
            
            
            5,076Goodwill
            
            
            7,467
            
            
            7,380Intangible
                assets, net
            
            
            22,841
            
            
            23,817Deposits
                and prepaid expenses
            
            
            468
            
            
            675Total
                other assets
            
            
            35,852
            
            
            36,948Total
                assets
            
            $
            71,203
            
            $
            74,758**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            13,687
            
            $
            15,600Deferred
                revenue
            
            
            5,622
            
            
            2,503License
                agreement payable - current maturities
            
            
            597
            
            
            981Total
                current liabilities
            
            
            19,906
            
            
            19,084License
                agreement payable, net of current maturities
            
            
            2,743
            
            
            2,956Total
                liabilities
            
            
            22,649
            
            
            22,040Commitments
                and contingencies**Stockholders’
                Equity**Preferred
                stock, $0.01 par value; authorized 4,500,000, none issued at March
                31,
                2006 and December 31, 2005
            
            
            -
            
            
            -Common
                stock, $0.01 par value, 100,000,000 shares authorized, 21,540,865
                issued
                and outstanding at March 31, 2006 and 21,446,217 issued and outstanding
                at
                December 31, 2005
            
            
            215
            
            
            214Additional
                paid-in capital
            
            
            56,944
            
            
            56,638Retained
                earnings (accumulated deficit)
            
            
            (8,605
            )
            
            (4,122
            )Accumulated
                other comprehensive income:Net
                unrealized gain (loss) on available-for-sale securities
            
            
            -
            
            
            (12
            )Total
                stockholders’ equity
            
            
            48,554
            
            
            52,718Total
                liabilities and stockholders’ equity
            
            $
            71,203
            
            $
            74,758











See
      accompanying notes


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          to Index*
 4


**TERABEAM,
      INC.**


**CONSOLIDATED
      STATEMENTS OF
      OPERATIONS**


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


**(Unaudited)**





**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Revenues
              
              $
              18,536
              
              $
              6,597Cost
                  of goods sold
              
              
              10,895
              
              
              3,319Gross
                  profit
              
              
              7,641
              
              
              3,278Operating
                  expenses:Selling
                  costs
              
              
              4,269
              
              
              997General
                  and administrative
              
              
              3,334
              
              
              2,508Research
                  and development
              
              
              4,886
              
              
              771Total
                  operating expenses
              
              
              12,489
              
              
              4,276Operating
                  loss
              
              
              (4,848
              )
              
              (998
              )Other
                  income (expenses):Interest
                  income
              
              
              88
              
              
              221Interest
                  expense
              
              
              (33
              )
              
              (66
              )Other
                  income (loss)
              
              
              331
              
              
              (118
              )Total
                  other income (expenses)
              
              
              386
              
              
              37Loss
                  before income taxes
              
              
              (4,462
              )
              
              (961
              )Benefit
                  (provision) for income taxes
              
              
              (21
              )
              
              (9
              )Net
                  Income (loss)
              
              
              ($4,483
              )
              
              ($970
              )Weighted
                  average shares - basic and diluted
              
              
              21,462
              
              
              22,401Loss
                  per share, basic and diluted
              
              
              ($0.21
              )
              
              ($0.04
              )























See
      accompanying notes


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          to Index*
 5


**TERABEAM,
      INC.**


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


**FOR
      THE THREE MONTHS ENDED MARCH 31, 2006**


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


**(Unaudited)**





**Common
                  Stock****Shares**
              
              **Amount**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Retained**
                **Earnings**
                **(Deficit)**
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Income
                  (Loss)**
              
              **Total****Balances,
                  January 1, 2006**
              
              
              21,446,217
              
              $
              214
              
              $
              56,638
              
              
              ($4,122
              )
              
              ($12
              )
              $
              52,718Exercise
                  of stock options and warrants
              
              
              94,648
              
              
              1
              
              
              54
              
              
              -
              
              
              -
              
              
              55Employee
                  stock option amortization
              
              
              -
              
              
              -
              
              
              252
              
              
              -
              
              
              -
              
              
              252Comprehensive
                  income:Net
                  income (loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,483
              )
              
              -
              
              
              (4,483
              )Unrealized
                  gain (loss) on investments
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12
              
              
              12Total
                  comprehensive income (loss)
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,483
              )
              
              12
              
              
              (4,471
              )**Balances,
                  March 31, 2006**
              
              
              21,540,865
              
              $
              215
              
              $
              56,944
              
              
              ($8,605
              )
              
              -
              
              $
              48,554











See
      accompanying notes


*Back
          to Index*
 6


**TERABEAM,
      INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**FOR
      THE THREE MONTHS ENDED MARCH 31**


**(In
      thousands)**


**(Unaudited)**





**Three
                Months Ended March 31,****2006**
            
            **2005**Cash
                flows from operating activities:Net
                income (loss)
            
            
            ($4,483
            )
            
            ($970
            )Depreciation
                and amortization
            
            
            1,388
            
            
            503Loss
                on write-down of investments available-for-sale
            
            
            -
            
            
            112Bad
                debt allowance (recovery)
            
            
            (61
            )
            
            (90
            )Employee
                stock option amortization
            
            
            252
            
            
            -Inventory
                allowance
            
            
            (89
            )
            
            59Changes
                in assets and liabilities affecting operations:Restricted
                cash
            
            
            -
            
            
            (2
            )Accounts
                receivable, net
            
            
            2,025
            
            
            178Inventory
            
            
            (666
            )
            
            (150
            )Deposits
            
            
            (101
            
            
            (6
            )Prepaid
                expenses
            
            
            (354
            )
            
            (245
            )Refundable
                income taxes
            
            
            -
            
            
            149Accounts
                payable and accrued expenses
            
            
            (1,913
            )
            
            (1,359
            )License
                agreement payable
            
            
            (597
            )
            
            -Deferred
                revenue
            
            
            3,119
            
            
            (11
            )Net
                cash provided by (used in) operating activities
            
            
            (1,480
            )
            
            (1,832
            )Cash
                flows from investing activities:Proceeds
                on investments available for sale
            
            
            -
            
            
            1,908Purchase
                of securities
            
            
            -
            
            
            (241
            )Purchase
                of property and equipment
            
            
            (201
            )
            
            (50
            )Investment
                in capitalized software
            
            
            -
            
            
            (197
            )Net
                cash provided by (used in) investing activities
            
            
            (201
            )
            
            1,420Cash
                flows from financing activities:Exercise
                of stock options
            
            
            55
            
            
            73Repayment
                of notes payable
            
            
            -
            
            
            (45
            )Net
                cash provided by (used in) financing activities
            
            
            55
            
            
            28Net
                increase (decrease) in cash and cash equivalents
            
            
            (1,626
            )
            
            (384
            )Cash
                and cash equivalents, beginning of period
            
            
            14,133
            
            
            35,368Cash
                and cash equivalents, end of period
            
            $
            12,507
            
            $
            34,984Supplemental
                disclosure of cash flow information:Cash
                paid for interest
            
            
            -
            
            $
            66Income
                taxes paid
            
            $
            21
            
            $
            9








See
      accompanying notes


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 7


**TERABEAM,
      INC.**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







**1.**  **Basis
      of Presentation**




The
      consolidated financial statements of Terabeam, Inc. (the “Company” or
“Terabeam”) for the three month period ended March 31, 2006 and 2005 are
      unaudited and include all adjustments which, in the opinion of management,
      are
      necessary to present fairly the financial position and results of operations
      for
      the periods then ended. All such adjustments are of a normal recurring nature.
      These consolidated financial statements should be read in conjunction with
      the
      consolidated financial statements and notes thereto included in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2005 filed with
      the
      Securities and Exchange Commission.




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




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




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




Subsequent
      to March 31, 2006, the Company announced the retention of an outside consulting
      firm to explore a variety of possible strategic alternatives for our Ricochet
      services business. Given the recent interests that have been expressed in
      Ricochet, we believe that now is an appropriate time to consider various
      alternatives. These alternatives may include the divestiture of Ricochet, an
      investment in Ricochet, strategic relationships with Ricochet, sale of some
      or
      all of the assets of Ricochet, and a number of other possible alternatives.
      There can be no assurance that any transaction or other corporate action
      regarding Ricochet will result from this exploration of alternatives. Further,
      there can be no assurance whatsoever concerning the type, form, structure,
      nature, results, timing, or terms and conditions of any such potential action,
      even if such an action does result from this exploration.


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 8


Summarized
      information for the business segments as of March 31, 2006 and 2005 and for
      the
      quarters then ended is as follows:




($000’s)




**March
      31, 2006:**




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







**March
      31, 2005:**




**Equipment**
            
            **Services**
            
            **Total**Assets
            
            $
            70,839
            
            $
            3,885
            
            $
            74,724Revenue
            
            $
            5,908
            
            $
            689
            
            $
            6,597Operating
                income (loss)
            
            $
            (407
            )
            $
            (591
            )
            $
            (998
            )





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




**2.**  **Stock
      Based
      Compensation**




Prior
      to
      2006, the Company accounted for its stock-based compensation under the
      recognition and measurement principles of APB Opinion No. 25, Accounting
      for Stock Issued to Employees and related interpretations (“APB 25”). Under APB
      25, no stock-based compensation cost was reflected in net income for grants
      of
      stock prior to fiscal year 2006 because the Company grants stock options with
      an
      exercise price equal to or greater than the market value of the underlying
      common stock on the date of grant.




Effective
      January 1, 2006 the Company adopted Statement of Financial Accounting Standards
      No. 123 (Revised 2004) Share-Based Payment (“SFAS 123R”), which requires
      the measurement and recognition of compensation cost at fair value for all
      share-based payments, including stock options. Stock-based compensation for
      the
      first quarter of 2006 includes compensation expense, recognized over the
      applicable vesting periods, for new share-based awards and for share-based
      awards granted prior to, but not yet vested, as of December 31, 2005 (modified
      prospective application). Stock-based compensation for the three-month periods
      ended March 31, 2006 and 2005 totaled approximately $252,000 and $724,000,
      respectively, and is included in cost of goods sold and operating expenses
      in
      the condensed consolidated statements of operations only for the period ended
      March 31, 2006.




For
      the
      quarter ended March 31, 2006, the operating loss, the loss before income taxes
      and the net loss were all $252,000 higher and the basic and diluted loss per
      share were $0.01 higher due to the adoption of SFAS 123R. Net cash used in
      operating activities and net cash provided by financing activities were not
      changed by the adoption of SFAS 123R.




The
      fair
      value of each option grant has been estimated as of the date of grant using
      the
      Black-Scholes options pricing model with the following weighted average
      assumptions for 2006 and 2005: risk-free interest rate of 4.51% and 3.58%,
      expected life of 4 years and 5 years, volatility, calculated using historical
      volatility, of 284% and 111% and dividend rate of zero percent, respectively.
      Using these assumptions, the weighted average fair value of the stock options
      granted in the first quarter of 2006 was $3.74, and the weighted average fair
      value of the stock options granted in 2005 was $2.38. The fair value of the
      stock options


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 9




granted
      will be amortized as compensation expense over the vesting period of the
      options. Estimates of fair value are not intended to predict actual future
      events or the value ultimately realized by employees who receive equity awards,
      and subsequent events are not indicative of the reasonableness of the original
      estimates of fair value made by the Company under SFAS No. 123R.




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




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






**Three
                months ended March 31,**
              **2005****(unaudited)**Net
                income (loss) attributable to common stockholders, as
                reported:
            
            $
            (970
            )Less:
                Total stock based employee compensation expense determined under
                the fair
                value based method for all awards
            
            
            724Pro
                forma net income (loss) attributable to common
                stockholders
            
            $
            (1,694
            )Basic
                and diluted net loss per common share, as reported
            
            $
            (0.04
            )Basic
                and diluted net loss per common share, pro forma
            
            $
            (0.08
            )




**3.**  **Comprehensive
      Loss**




The
      Company reports comprehensive income in accordance with SFAS No. 130, “Reporting
      Comprehensive Income.” During the three months ended March 31, 2006, and 2005,
      the Company had comprehensive losses of $4.5 million and $1.0 million,
      respectively, including approximately $12,000 and $(6,000), respectively, of
      unrealized gains (losses) on available-for-sale investments, net of income
      taxes
      of $0 for each period.




**4.**  **Inventory**




(in
                thousands)**March
                31,**
            
            **December
                31,****2006**
            
            **2005****(unaudited)**Raw
                materials
            
            $
            4,742
            
            $
            4,737Work
                in process
            
            
            511
            
            
            437Finished
                goods
            
            
            14,449
            
            
            13,86319,702
            
            
            19,037Allowance
                for excess and obsolescence
            
            
            (8,877
            )
            
            (8,967
            )Net
                Inventory
            
            $
            10,825
            
            $
            10,070





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 10




**5.****Goodwill**




Goodwill
      consisted of the following (in thousands):




**March
                31,**
            
            **December
                31,****Acquisition**
            
            **2006**
            
            **2005**KarlNet
            
            $
            2,491
            
            $
            2,491Terabeam
            
            
            3,322
            
            
            3,322Old
                Proxim
            
            
            1,654
            
            
            1,567Goodwill
            
            $
            7,467
            
            $
            7,380





Old
      Proxim goodwill was increased by approximately $87,000 during the first quarter
      of 2006 due to changes in the purchase price allocation.




Goodwill
      is tested for impairment at least annually at the reporting unit level, and
      more
      frequently if an event occurs or circumstances change that would more likely
      than not reduce the fair value of a reporting unit below its carrying amount.




**6.**  **Intangibles**




*Schedule
      of Non-Amortizable Assets*




**March
                31,**
            
            **December
                31,****2006**
            
            **2005****(in
                thousands)**Trade
                names - indefinite useful life
            
            
            2,250
            
            
            2,250$
            2,250
            
            $
            2,250




*Schedule
      of Amortizable Assets*




**March
                31,**
            
            **December
                31,****2006**
            
            **2005****(in
                thousands)**Capitalized
                software - placed in service
            
            $
            1,225
            
            $
            1,225Patents,
                customer relationships and other technologies with identifiable useful
                lives
            
            
            24,031
            
            
            24,03125,256
            
            
            25,256Less:
                accumulated amortization
            
            
            (4,665
            )
            
            (3,689
            )Amortizable
                intangible assets, net
            
            $
            20,591
            
            $
            21,567








Amortization
      is computed using the straight-line method over the estimated useful life,
      based
      on the Company’s assessment of technological obsolescence of the respective
      assets. Amortization expense for the quarter ended March 31, 2006 totaled
      approximately $1.0 million. The weighted average estimated useful life is 6.2
      years. There is no estimated residual value.


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 11


**7.  Earnings
      per
      share**




**March
                31,****2006**
            
            **2005****(unaudited)**
            
            **(unaudited)**Numerator
                (in thousands):Net
                income (loss)
            
            $
            (4,483
            )
            $
            (970
            )Denominator-
                weighted average shares:Denominator
                for basic earnings per share
            
            
            21,462,335
            
            
            22,401,229Dilutive
                effect of stock options
            
            
            -
            
            
            -Denominator
                for diluted earnings per share
            
            
            21,462,335
            
            
            22,401,229Basic
                earnings (loss) per share
            
            $
            (0.21
            )
            $
            (0.04
            )Diluted
                earnings (loss) per share
            
            $
            (0.21
            )
            $
            (0.04
            )




At
      March
      31, 2006 and 2005, stock options and warrants to purchase shares of common
      stock
      were outstanding, but were not included in the computation of diluted earnings
      for the three month period ended March 31, 2006 because there was a net loss
      for
      each of the applicable periods and the effect would have been
      anti-dilutive.




**8.**  **Concentrations**




During
      the three months ended March 31, 2006, there was one customer who accounted
      for
      approximately 12% of consolidated sales and, in the corresponding quarter of
      2005, a different customer accounted for approximately 11% of
      sales.




The
      Company maintains its cash, cash equivalent, and restricted cash balances in
      several banks. The balances are insured by the Federal Deposit Insurance
      Corporation up to $100,000 per bank. At March 31, 2006 and 2005, the uninsured
      portion totaled approximately $18.2 million and $39.3 million,
      respectively.




**9.**  **KarlNet**




On
      May
      13, 2004, Terabeam acquired KarlNet. The definitive acquisition agreement
      contained provisions that provided for certain contingent consideration after
      the initial acquisition date. Terabeam may pay up to an additional $2.5 million
      over the two years following closing based on achievement of certain milestones
      and compliance with other conditions. Although the Company has received a letter
      from sellers demanding payment of the first $1.0 million contingent payment,
      it
      is the Company’s position that, as of March 31, 2006, 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.**  **Restricted
      cash**




As
      part
      of the Terabeam acquisition in 2004, the Company acquired restricted cash.
      As of
      March 31, 2006, the restricted cash amounted to $5.1 million which consisted
      of
      $0.1 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,
      the funds are managed by an unrelated trustee, and no claims have been asserted
      against the trust funds. In March 2006, the beneficiaries of that
      indemnification trust agreed to the early termination of that trust. Subsequent
      to quarter end, in April 2006, that indemnification trust was terminated and
      the
      net trust proceeds of approximately $5.0 million (after payments to the
      beneficiaries) were distributed to the Company and currently are held as
      unrestricted cash of the Company.






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 12




**11.****Patent License Agreement - License Agreement
      Payable**




On
      February 24, 2006, Terabeam, Inc. and its subsidiaries entered into a settlement
      agreement with Symbol Technologies, Inc. and its subsidiaries (“Symbol”)
      resolving all outstanding litigation between the companies.




Under
      the
      terms of the settlement agreement, Terabeam and Symbol entered into a patent
      license agreement, dated February 24, 2006, and Terabeam executed two patent
      assignments, each dated February 24, 2006, in favor of Symbol. Under the terms
      of the patent license agreement, the companies have agreed to cross license
      specified patents, and Terabeam has agreed to pay to Symbol fixed license fees
      totaling $4.3 million. $600,000 was paid in March 2006; $250,000 is scheduled
      to
      be paid quarterly for the second, third, and fourth quarters of 2006 and each
      of
      the four quarters of 2007; $300,000 is scheduled to be paid quarterly for each
      of the four quarters of 2008; and $375,000 is scheduled to be paid quarterly
      for
      the first two quarters of 2009. The amounts may be prepaid at any time without
      penalty. The parties also released each other from any patent infringement
      claims arising prior to February 24, 2006 to the extent such infringement would
      have been licensed under the patent license agreement. Also pursuant to the
      terms of the patent license agreement, Terabeam and Symbol have agreed not
      to
      sue one another for patent infringement with respect to one another’s products
      for three years. Under the terms of the patent assignments executed by Terabeam,
      Terabeam has assigned to Symbol specified patents and patent
      applications.





The
      Company recorded a $3.9 million intangible asset related to the license at
      December 31, 2005 based on the present value of the scheduled payments, and
      will
      amortize the intangible asset over the useful life of the patents through 2014.
      The amortization expense recorded for the quarter ended March 31, 2006 totaled
      approximately $105,000. The Company also recorded a license payable equal to
      the
      present value of the scheduled payments. License agreements payable consisted
      of
      the following at March 31 (in thousands):




**March
                31**
              **2006**
            
            **December
                31**
              **2005**License
                Agreement Payable
            
            
            3,340
            
            
            3,937Current
                portion
            
            
            (597
            )
            
            (981
            )Long
                term portion
            
            $
            2,743
            
            $
            2,956




**12.**  **Recent
      Accounting Pronouncements**




In
      September 2005, the Financial Accounting Standards Board (FASB) issued a
      Proposed Statement of Financial Accounting Standards which amends FASB Statement
      No. 128, “Earnings per Share.” The proposed statement would be effective in
      the second quarter of 2006 and is intended to clarify guidance on the
      computation of earnings per share for certain items such as mandatorily
      convertible instruments, the treasury stock method, and contingently issuable
      shares. We have evaluated the proposed statement as presently drafted and have
      determined that if adopted in its current form it would not have a significant
      impact on the computation of our earnings per share.





In
      February 2006, the FASB issued Statement of Financial Accounting Standards
      No. 155, “Accounting for Certain Hybrid Financial Instruments - an
      amendment of FASB Statements No. 133 and 140” which is effective for fiscal
      years beginning after September 15, 2006. The statement was issued to clarify
      the application of FASB Statement No. 133 to beneficial interests in
      securitized financial assets and to improve the consistency of accounting for
      similar financial instruments, regardless of the form of the instruments. The
      provisions of SFAS 155 are not expected to have an impact recorded at
      adoption.





In
      March
      2006, the FASB issued Statement of Financial Accounting Standards No. 156,
“Accounting for Servicing of Financial Assets - an amendment of FASB Statement
      No. 140” which is effective for fiscal years beginning after
      September 15, 2006. This statement was issued to simplify the accounting
      for servicing rights and to reduce the volatility that results from using
      different measurement attributes. We have evaluated the new statement and have
      determined that it will not have a significant impact on the determination
      or
      reporting of our financial results.


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 13





**13.**
            **Commitments
                and Contingencies**




IPO
      Litigation




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




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




In
      June
      2003, we elected to participate in a proposed settlement agreement with the
      plaintiffs in this litigation. We understand that virtually all of the other
      non-bankrupt issuer defendants have also elected to participate in this proposed
      settlement. If ultimately approved by the court, this proposed settlement would
      result in the dismissal, with prejudice, of all claims in the litigation against
      us and against the other issuer defendants who have elected to participate
      in
      the proposed settlement, together with the current or former officers and
      directors of participating issuers who were named as individual defendants.
      The
      proposed settlement does not provide for the resolution of any claims against
      the underwriter defendants. The proposed settlement provides that the insurers
      of the participating issuer defendants will guarantee that the plaintiffs in
      the
      cases brought against the participating issuer defendants will recover at least
      $1 billion. If recoveries totaling $1 billion or more are obtained by the
      plaintiffs from the underwriter defendants, however, the monetary obligations
      to
      the plaintiffs under the proposed settlement will be satisfied. In addition,
      we
      and the other participating issuer defendants will be required to assign to
      the
      plaintiffs certain claims that the participating issuer defendants may have
      against the underwriters of their IPOs.




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




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 14


Consummation
      of the proposed settlement is conditioned upon obtaining approval by the court.
      On September 1, 2005, the court preliminarily approved the proposed settlement
      and directed that notice of the terms of the proposed settlement be provided
      to
      class members. Thereafter the court held a fairness hearing on April 24, 2006,
      at which objections to the proposed settlement were heard. After the fairness
      hearing, the court took under advisement whether to grant final approval to
      the
      proposed settlement.







If
      the
      proposed settlement described above is not consummated, we intend to continue
      to
      defend the litigation vigorously. Moreover, if the proposed settlement is not
      consummated, we believe that the underwriters may have an obligation to
      indemnify us for the legal fees and other costs of defending these suits. While
      there can be no assurance as to the ultimate outcome of these proceedings,
      we
      currently believe that the final result of these actions will have no material
      effect on our consolidated financial condition, results of operations, or cash
      flows.





Symbol
      Technologies Litigation





On
      or
      about October 28, 2005, Symbol Technologies, Inc. filed a lawsuit in the United
      States District Court for the District of Delaware against Terabeam, Inc. (then
      named YDI Wireless, Inc.), Proxim Wireless Corporation, and Terabeam
      Corporation. The suit alleged that certain products of Terabeam, Inc., Proxim
      Wireless, and Terabeam Corporation infringe three of Symbol’s patents, including
      one patent previously transferred to it by Proxim Corporation. Symbol had
      successfully sued Proxim Corporation alleging that certain of Proxim
      Corporation’s products infringed the two Symbol patents that Symbol was
      asserting against Terabeam, Inc., Proxim Wireless, and Terabeam Corporation.
      In
      this suit, Symbol was seeking an injunction preventing Terabeam, Inc., Proxim
      Wireless, and Terabeam Corporation from infringing its patents and monetary
      damages.





On
      February 24, 2006, Terabeam, Inc. and its subsidiaries entered into a settlement
      agreement with Symbol and its subsidiaries resolving all outstanding litigation
      between the companies. In connection with that settlement agreement, Symbol
      was
      required to file a dismissal of its lawsuit previously filed against Terabeam.
      The dismissal will initially be without prejudice but will become a dismissal
      with prejudice by its terms 90 days after Terabeam completes the payments
      contemplated under the patent license agreement (as discussed below).





Under
      the
      terms of the settlement agreement, Terabeam and Symbol entered into a patent
      license agreement, dated February 24, 2006, and Terabeam executed two patent
      assignments, each dated February 24, 2006, in favor of Symbol.





Under
      the
      terms of the patent license agreement, the companies have agreed to cross
      license specified patents, and Terabeam has agreed to pay to Symbol fixed
      license fees totaling $4.3 million. $600,000 was paid on or before March 3,
      2006; $250,000 is scheduled to be paid quarterly for the second, third, and
      fourth quarters of 2006 and each of the four quarters of 2007; $300,000 is
      scheduled to be paid quarterly for each of the four quarters of 2008; and
      $375,000 is scheduled to be paid quarterly for the first two quarters of 2009.
      The amounts may be prepaid at any time without penalty. The parties also
      released each other from any patent infringement claims arising prior to
      February 24, 2006 to the extent such infringement would have been licensed
      under
      the patent license agreement. Also pursuant to the terms of the patent license
      agreement, Terabeam and Symbol have agreed not to sue one another for patent
      infringement with respect to one another’s products for three
      years.





Under
      the
      terms of the patent assignments executed by Terabeam, Terabeam has assigned
      to
      Symbol specified patents and patent applications.





General





We
      are
      subject to potential liability under contractual and other matters and various
      claims and legal actions which are pending or may be asserted against us or
      our
      subsidiaries, including claims arising from excess leased facilities. These
      matters may arise in the ordinary course and conduct of our business. While
      we
      cannot predict the outcome of such claims and legal actions with certainty,
      we
      believe that such matters should not result in any liability which would have
      a
      material adverse affect on our business.




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 15







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




**Overview**




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




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




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




Subsequent
      to March 31, 2006, we announced the retention of an outside consulting firm
      to
      explore a variety of possible strategic alternatives for our Ricochet services
      business. Given the recent interests that have been expressed in Ricochet,
      we
      believe that now is an appropriate time to consider various alternatives. These
      alternatives may include the divestiture of Ricochet, an investment in Ricochet,
      strategic relationships with Ricochet, sale of some or all of the assets of
      Ricochet, and a number of other possible alternatives. There can be no assurance
      that any transaction or other corporate action regarding Ricochet will result
      from this exploration of alternatives. Further, there can be no assurance
      whatsoever concerning the type, form, structure, nature, results, timing, or
      terms and conditions of any such potential action, even if such an action does
      result from this exploration.




**Critical
      Accounting Policies**




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




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 16


*Revenue
      Recognition*




Product
      revenue is generally recognized upon shipment when persuasive evidence of an
      arrangement exists, the price is fixed or determinable, and collectibility
      is
      reasonably assured. The Company grants certain distributors limited rights
      of
      return and price protection on unsold products. Since certain conditions of
      SFAS
      48 *Revenue
      Recognition When Right of Return Exists* are not
      met for sales to these distributors, revenue is deferred until the product
      is
      sold to an end customer. Generally, the Company has no obligation to provide
      any
      modification or customization upgrades, enhancements or other post-sale customer
      support. Revenue from services, such as pre-installation diagnostic testing
      and
      product repair services, is recognized over the period for which the services
      are performed, which is typically less than one month. Revenue from enhanced
      service contracts is recognized over the contract period, which ranges from
      one
      to three years.




For
      our
      services business, we recognize revenue when the customer pays for and then
      has
      access to our network for the current fiscal period. Any funds the customer
      pays
      for future fiscal periods are treated as deferred revenue and recognized in
      the
      future fiscal periods for which the customer has access to our
      network.




*Asset
      Impairment*




The
      Company periodically evaluates the carrying value of long-lived assets when
      events and circumstances warrant such a review. The carrying value of a
      long-lived asset is considered impaired when the anticipated undiscounted cash
      flow from such asset is separately identifiable and is less than the carrying
      value. In that event, a loss is recognized based on the amount by which the
      carrying value exceeds the fair market value of the long-lived asset. Fair
      market value is determined primarily using the anticipated cash flows discounted
      at a rate commensurate with the risk involved.




*Accounts
      Receivable Valuation*




We
      maintain an allowance for doubtful accounts for estimated losses resulting
      from
      the inability or unwillingness of our customers to make required payments.
      If
      the financial condition of our customers were to deteriorate resulting in an
      impairment of their ability to make payments, additional allowances may be
      required.




*Inventory
      Valuation*




Inventory
      is stated at the lower of cost or market, cost being determined on a first-in,
      first-out basis. Provisions are made to reduce excess or obsolete inventory
      to
      its estimated net realizable value. The process for evaluating the value of
      excess and obsolete inventory often requires us to make subjective judgments
      and
      estimates concerning future sales levels, quantities, and prices at which such
      inventory will be able to be sold in the normal course of business, particularly
      where we have made last-time-buys of components. Accelerating the disposal
      process or incorrect estimates of future sales may necessitate future
      adjustments to these provisions.




*Goodwill*




Goodwill
      is the excess of the cost of an acquired entity over the net amounts assigned
      to
      assets acquired and liabilities assumed. Goodwill is not amortized but is tested
      for impairment at least annually at the reporting unit level, and more
      frequently if an event occurs or circumstances change that would more likely
      than not reduce the fair value of a reporting unit below its carrying amount.




*Intangible
      Assets*




Intangible
      assets are accounted for in accordance with SFAS No. 142 “Goodwill and Other
      Intangible Assets.” Intangible assets with finite lives are amortized over the
      estimated useful lives using the straight-line method. An impairment loss on
      such assets is recognized if the carrying amount of an intangible asset is
      not
      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




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carrying
      amount. If the carrying amount of an intangible asset with an indefinite useful
      life exceeds its fair value, an impairment loss is recognized in an amount
      equal
      to that excess. For either type of intangible asset, after an impairment loss
      is
      recognized, the adjusted carrying amount of the intangible asset becomes its
      new
      accounting basis. Subsequent reversal of a previously recognized impairment
      loss
      is prohibited.




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






**Results
      of Operations**




**For
      the three months ended March 31, 2006 and 2005**




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




**2006**
            
            **2005**Sales
            
            
            100
            %
            
            100
            %Cost
                of goods sold
            
            
            59
            
            
            50Gross
                profit
            
            
            41
            
            
            50Operating
                expensesSelling
                costs
            
            
            23
            
            
            15General
                and administrative
            
            
            18
            
            
            38Research
                and development
            
            
            26
            
            
            12Total
                operating expenses
            
            
            67
            
            
            65Operating
                (loss) income
            
            
            (26
            )
            
            (15
            )Other
                income (expenses)
            
            
            2
            
            
            -Income
                taxes
            
            
            -
            
            
            -Net
                income
            
            
            (24
            )%
            
            (15
            )%




*Sales*




Sales
      for
      the three months ended March 31, 2006 were $18.5 million as compared to $6.6
      million for the same period in 2005 for an increase of $11.9 million or 181%.
      This increase is primarily due to the acquisition of the Old Proxim operations
      in July 2005.




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




For
      the
      quarters ending March 31, 2006 and 2005, international sales, excluding Canada,
      approximated 51% and 17%, respectively, of total sales. The reason for the
      large
      increase in international sales as a percent of sales is because a significant
      percentage of the sales from the Old Proxim operations were ultimately made
      to
      international customers.




*Cost
      of goods sold and gross profit*




Cost
      of
      goods sold and gross profit for the three months ended March 31, 2006 were
      $10.9
      million and $7.6 million, respectively. For the same period in 2005, costs
      of
      goods sold and gross profit were $3.3 million and $3.3 million, respectively.
      Gross profit margin, as a percentage of sales, for the three months ended March
      31, 2006 and 2005 was 41% and 50%, respectively. The decrease in gross margin
      percentage was primarily due to the product mix in the current quarter compared
      to the first quarter of the prior year. In addition, due to lower than
      expected




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 18


revenue
      results for the quarter, certain fixed manufacturing costs were not fully
      absorbed and contributed to a reduction in gross profit margins.




*Sales
      and Marketing Expenses*




Sales
      and
      marketing expenses consist primarily of employee salaries and associated costs
      for selling, marketing, customer and technical support as well as field support.
      Sales and marketing expenses for the three months ended March 31, 2006 were
      $4.3
      million, an increase of $3.3 million over $1.0 million for the same period
      in
      2005. This increase was due primarily to increased headcount and increased
      sales
      related expenses due to the acquisition of the Old Proxim sales and distribution
      channels in the third quarter of 2005.




*General
      and Administrative Expenses*




General
      and administrative expenses consist primarily of employee salaries, benefits
      and
      associated costs for information systems, finance, legal, and administration
      of
      a public company. General and administrative expenses were $3.3 million for
      the
      three months ended March 31, 2006 compared to $2.5 million for the three months
      ended March 31, 2005 resulting in an increase of about 33% or over $0.8 million
      from the prior year’s reporting period. The increase is principally a result of
      additional headcount and related general and administrative expenses due to
      the
      acquisition of Old Proxim’s operations. However, general and administrative
      expenses as a percentage of sales during the first quarter of 2006 were reduced
      to 18% as compared to 38% in the first quarter of 2005.




*Research
      and Development Expenses*




Research
      and development expenses consist primarily of personnel salaries and fringe
      benefits and related costs associated with our product development efforts.
      These include costs for development of products and components, test equipment
      and related facilities. Research and development expenses increased to $4.9
      million for the three months ended March 31, 2006 from $0.8 million for the
      three months ended March 31, 2005, an approximate increase of $4.1 million
      or
      534%. The increase in research and development was primarily due to the addition
      of research and development engineering personnel through the acquisition of
      Old
      Proxim’s operations as well as additional prototype material and other related
      support costs required for our new product development, certification, and
      introduction efforts.




*Other
      income (expenses)*




Other
      income and expenses totaled approximately $386,000 in the first quarter 2006
      compared to $37,000 for the corresponding quarter of 2005. There was decrease
      in
      interest income of $133,000 due to the cash to acquire Old Proxim’s operations.
      This decrease was offset by gains on the settlement of certain old Terabeam
      Corporation leases during the first quarter of 2006, and because there was
      a
      permanent write-down in the first quarter of 2005 of certain bond and stock
      holdings totaling approximately $112,000.






**Liquidity
      and Capital Resources**




At
      March
      31, 2006, we had cash, cash equivalents, and investments available-for sale
      of
      $12.8 million. This excludes restricted cash of $5.1 million. For the quarter
      ended March 31, 2006, cash used by operations was approximately $1.5 million.
      We
      currently are meeting our working capital needs through cash on hand as well
      as
      internally generated cash from operations and other activities. Cash used by
      operations includes a net loss of $4.5 million offset by $1.5 in changes in
      assets and liabilities affecting operations and by $1.5 million of non-cash
      items.





For
      the quarter
      ended March 31, 2006, cash used in investing activities was approximately
      $201,000 which was principally related to the purchase of property and
      equipment.




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Cash
      provided by financing activities was approximately $55,000 for the quarter
      ended
      March 31, 2006 and resulted from the exercise of employee stock options during
      this period.




We
      believe that cash flow from operations, along with our cash on hand (including
      the previously-restricted $5.0 million recently released from the
      indemnification trust), should be sufficient to meet the operating cash
      requirements over the next twelve month period as currently contemplated. Our
      long-term financing requirements depend upon our growth strategy, which relates
      primarily to our desire to increase revenue both domestically as well as
      internationally. However, although the acquisition of Old Proxim’s operations in
      2005 significantly increased both our domestic and international revenue, we
      incurred operating losses totaling $4.5 million in the first quarter of 2006.
      For the remainder of 2006, we must attempt to increase revenues and adjust
      operating expenses to levels that will produce positive cash flows and return
      us
      to operating profitability. Due to the recent nature of the Old Proxim operation
      acquisition and the large fluctuations in quarterly revenue we have experienced
      since the acquisition, management is closely following revenue trends and
      operating expenses, and reviewing its long term business strategy to evaluate
      whether there will be a requirement for external financing to fund our
      operations. One significant constraint to our equipment business growth is
      the
      rate of new product introduction. New products or product lines may be designed
      and developed internally or acquired from existing suppliers to reduce the
      time
      to market and inherent risks of new product development. We will also need
      to
      use some of our current capital to fund the expected future operating losses
      in
      our services business given the significant numbers of new subscribers we would
      have to add for that business to be profitable. We may also use some of our
      current capital or raise additional capital for our services business if we
      decide to expand the geographic areas in which we offer service. Our current
      resources may have to be supplemented through new bank debt financing, public
      debt or equity offerings, or other means due to a number of factors, including
      our acquisition of Old Proxim’s operations and our desired rate of future
      growth.





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




**Disclosures
      About Market Risk**




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




As
      of
      March 31, 2006, we had cash and cash equivalents of $12.5 million and restricted
      cash of $5.1 million. All these funds were on deposit in short-term accounts
      with several national banking organizations. Therefore, we do not expect that
      an
      increase in interest rates would materially reduce the value of these funds.
      The
      primary risk to loss of principal is the fact that these balances are only
      insured by the Federal Deposit Insurance Corporation up to $100,000 per bank.
      At
      March 31, 2006, the uninsured portion totaled approximately $17.5 million.
      Although an immediate increase in interest rates would not have a material
      effect on our financial condition or results of operations, declines in interest
      rates over time would reduce our interest income.




In
      the
      past three years, all sales to international customers were denominated in
      United States dollars and, accordingly, we were not exposed to foreign currency
      exchange rate risks. However, we may make sales denominated in foreign
      currencies in the future. Additionally, we import from other countries. Our
      sales and product supply may therefore be subject to volatility because of
      changes in political and economic conditions in these countries.




We
      presently do not use any derivative financial instruments to hedge our exposure
      to adverse fluctuations in interest rates, foreign exchange rates, and
      fluctuations in commodity prices or other market risks; nor do we invest in
      speculative financial instruments.




Due
      to
      the nature of our 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.




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**Item
      4.    Controls and
      Procedures.**




*Disclosure
      controls and procedures*




Based
      on
      their evaluation as of March 31, 2006, our Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures (as
      defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
      of
      1934, as amended) were effective as of that date to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in SEC’s rules and forms. In coming to this conclusion, our
      Chief Executive Officer and Chief Financial Officer considered the matters
      described under the next heading and elsewhere in this Form 10-Q.




*Internal
      control over financial reporting*




Under
      current SEC regulations, we are not currently required to evaluate or provide
      a
      report on our internal control over financial reporting. However, we continue
      our analysis and action plans on that subject to better prepare us for the
      time
      when we will be required to evaluate and provide a report on our internal
      control over financial reporting. In connection with its 2005 annual audit
      and
      review procedures, our independent auditors considered and provided input to
      us
      relating to our internal control over financial reporting, and reported no
      material weaknesses in our internal control over financial reporting.




We
      acquired the Old Proxim business, including the related accounting and financial
      systems, during the third quarter of 2005. We have moved our corporate
      headquarters to the Old Proxim offices in San Jose, CA, and we are in the
      process of integrating the accounting and financial systems of the two
      companies. The process of maintaining and integrating the two systems has
      necessitated certain changes and additions to our accounting and internal
      control systems. As we integrate Terabeam’s accounting and reporting systems
      into Old Proxim’s Oracle systems, several areas have already been impacted. We
      have integrated certain Terabeam finished good products into Oracle for better
      inventory and billing control purposes, moved the processing of all
      non-inventory transactions to headquarters for enhanced control with the review
      and approval process afforded by Oracle, and integrated order processing and
      payroll processing to the corporate headquarters. Other accounting and financial
      reporting integration issues are being reviewed with a goal to complete the
      integration process between now and the end of 2006. The acquisition of Proxim
      has caused us to review our internal control processes. We are in the process
      of
      completing this review, and we will determine and implement any necessary
      revisions to our internal controls resulting from the integration of the two
      company’s accounting and financial systems.




*Changes
      in internal control over financial reporting*




There
      was
      no change in our internal control over financial reporting during our first
      quarter ended March 31, 2006 that has materially affected, or is reasonably
      likely to materially affect, our internal control over our financial reporting
      other than the changes described above under the preceding heading “Internal
      Control over Financial Reporting.” We expect we will continue to make revisions
      and improvements to our internal control over financial reporting, particularly
      as we continue to integrate the accounting and financial systems of Old Proxim
      and Terabeam.









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**PART
      II - OTHER INFORMATION**





**Item
      1.** **Legal
      Proceedings.**




IPO
      Litigation




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




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




In
      June
      2003, we elected to participate in a proposed settlement agreement with the
      plaintiffs in this litigation. We understand that virtually all of the other
      non-bankrupt issuer defendants have also elected to participate in this proposed
      settlement. If ultimately approved by the court, this proposed settlement would
      result in the dismissal, with prejudice, of all claims in the litigation against
      us and against the other issuer defendants who have elected to participate
      in
      the proposed settlement, together with the current or former officers and
      directors of participating issuers who were named as individual defendants.
      The
      proposed settlement does not provide for the resolution of any claims against
      the underwriter defendants. The proposed settlement provides that the insurers
      of the participating issuer defendants will guarantee that the plaintiffs in
      the
      cases brought against the participating issuer defendants will recover at least
      $1 billion. If recoveries totaling $1 billion or more are obtained by the
      plaintiffs from the underwriter defendants, however, the monetary obligations
      to
      the plaintiffs under the proposed settlement will be satisfied. In addition,
      we
      and the other participating issuer defendants will be required to assign to
      the
      plaintiffs certain claims that the participating issuer defendants may have
      against the underwriters of their IPOs.




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




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Consummation
      of the proposed settlement is conditioned upon obtaining approval by the court.
      On September 1, 2005, the court preliminarily approved the proposed settlement
      and directed that notice of the terms of the proposed settlement be provided
      to
      class members. Thereafter the court held a fairness hearing on April 24, 2006,
      at which objections to the proposed settlement were heard. After the fairness
      hearing, the court took under advisement whether to grant final approval to
      the
      proposed settlement.







If
      the
      proposed settlement described above is not consummated, we intend to continue
      to
      defend the litigation vigorously. Moreover, if the proposed settlement is not
      consummated, we believe that the underwriters may have an obligation to
      indemnify us for the legal fees and other costs of defending these suits. While
      there can be no assurance as to the ultimate outcome of these proceedings,
      we
      currently believe that the final result of these actions will have no material
      effect on our consolidated financial condition, results of operations, or cash
      flows.





Symbol
      Technologies Litigation





On
      or
      about October 28, 2005, Symbol Technologies, Inc. filed a lawsuit in the United
      States District Court for the District of Delaware against Terabeam, Inc. (then
      named YDI Wireless, Inc.), Proxim Wireless Corporation, and Terabeam
      Corporation. The suit alleged that certain products of Terabeam, Inc., Proxim
      Wireless, and Terabeam Corporation infringe three of Symbol’s patents, including
      one patent previously transferred to it by Proxim Corporation. Symbol had
      successfully sued Proxim Corporation alleging that certain of Proxim
      Corporation’s products infringed the two Symbol patents that Symbol was
      asserting against Terabeam, Inc., Proxim Wireless, and Terabeam Corporation.
      In
      this suit, Symbol was seeking an injunction preventing Terabeam, Inc., Proxim
      Wireless, and Terabeam Corporation from infringing its patents and monetary
      damages.





On
      February 24, 2006, Terabeam, Inc. and its subsidiaries entered into a settlement
      agreement with Symbol and its subsidiaries resolving all outstanding litigation
      between the companies. In connection with that settlement agreement, Symbol
      was
      required to file a dismissal of its lawsuit previously filed against Terabeam.
      The dismissal will initially be without prejudice but will become a dismissal
      with prejudice by its terms 90 days after Terabeam completes the payments
      contemplated under the patent license agreement (as discussed below).





Under
      the
      terms of the settlement agreement, Terabeam and Symbol entered into a patent
      license agreement, dated February 24, 2006, and Terabeam executed two patent
      assignments, each dated February 24, 2006, in favor of Symbol.





Under
      the
      terms of the patent license agreement, the companies have agreed to cross
      license specified patents, and Terabeam has agreed to pay to Symbol fixed
      license fees totaling $4.3 million. $600,000 was paid on or before March 3,
      2006; $250,000 is scheduled to be paid quarterly for the second, third, and
      fourth quarters of 2006 and each of the four quarters of 2007; $300,000 is
      scheduled to be paid quarterly for each of the four quarters of 2008; and
      $375,000 is scheduled to be paid quarterly for the first two quarters of 2009.
      The amounts may be prepaid at any time without penalty. The parties also
      released each other from any patent infringement claims arising prior to
      February 24, 2006 to the extent such infringement would have been licensed
      under
      the patent license agreement. Also pursuant to the terms of the patent license
      agreement, Terabeam and Symbol have agreed not to sue one another for patent
      infringement with respect to one another’s products for three
      years.





Under
      the
      terms of the patent assignments executed by Terabeam, Terabeam has assigned
      to
      Symbol specified patents and patent applications.





General





We
      are
      subject to potential liability under contractual and other matters and various
      claims and legal actions which are pending or may be asserted against us or
      our
      subsidiaries, including claims arising from excess leased facilities. These
      matters may arise in the ordinary course and conduct of our business. While
      we
      cannot predict the outcome of such claims and legal actions with certainty,
      we
      believe that such matters should not result in any liability which would have
      a
      material adverse affect on our business.







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**Item
      1A.** **Risk
      Factors.**




*General
      Overview*




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




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




*Cautionary
      Statements of General Applicability*




In
      addition to other factors and matters discussed elsewhere in this Form 10-Q,
      in
      our other periodic reports and filings made from time to time with the
      Securities and Exchange Commission, and in our other public statements from
      time
      to time (including, without limitation, our press releases), some of the
      important factors that, in our view, could cause actual results to differ
      materially from those expressed, anticipated, or implied in the forward-looking
      statements include, without limitation, the downturn and continuing uncertainty
      in the telecommunications industry and global economy; the intense competition
      in the broadband wireless equipment industry and resulting pressures on our
      pricing, gross margins, and general financial performance; difficulties in
      differentiating our products from competing broadband wireless products and
      other competing technologies; the impact, availability, pricing, and success
      of
      competing technologies and products; possible delays in our customers making
      buying decisions due to the actual or potential availability of new broadband
      connectivity technologies; difficulties in developing products that will address
      a sufficiently broad market to be commercially viable; our developing products
      for portions of the broadband connectivity and access markets that do not grow;
      our inability to keep pace with rapid technological changes and industry
      standards; expected declining prices for our products over time; our inability
      to offset expected price declines with cost savings or new product
      introductions; our inability to recover capital and other investments made
      in
      developing and introducing new products; lack of or delay in market acceptance
      and demand for our current and contemplated products; difficulties or delays
      in
      developing, manufacturing, and supplying products with the contemplated or
      desired features, performance, price, cost, and other characteristics;
      difficulties in estimating costs of developing and supplying products;
      difficulties in developing, manufacturing, and supplying products in a timely
      and cost-effective manner; difficulties or delays in developing improved
      products when expected or desired and with the additional features contemplated
      or desired; our fluctuating financial results, which may be caused at times
      by
      receipt of large orders from customers; our limited ability to predict our
      future financial performance; our possible desire to make limited or no public
      predictions as to our expected future financial performance; the expected
      fluctuation in customer demand and commitments;






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difficulties
      in predicting our future financial performance, in part due to our past and
      possible future acquisition activity; our inability to achieve the contemplated
      benefits of our July 2005 acquisition of Proxim Corporation’s operations and any
      other acquisitions we may contemplate or consummate; management distraction
      due
      to those acquisitions, the ability of the companies to integrate in a
      cost-effective, timely manner without material liabilities or loss of desired
      employees or customers; the risk that the expected synergies and other benefits
      of the transactions will not be realized at all or to the extent expected;
      the
      risk that cost savings from the transactions may not be fully realized or may
      take longer to realize than expected; reactions, either positive or negative,
      of
      investors, competitors, customers, suppliers, employees, and others to the
      transactions; and the risk that those transactions will, or could, expose us
      to
      lawsuits or other liabilities; adverse impacts of purchase accounting treatment
      and amortization and impairment of intangible assets acquired in any
      acquisitions; our general lack of receiving long-term purchase commitments
      from
      our customers; difficulties or delays in obtaining raw materials, subassemblies,
      or other components for our products at the times, in the quantities, and at
      the
      prices we desire or expect, particularly those that are sole source or available
      from a limited number of suppliers; inability to achieve and maintain
      profitability; purchases of excess inventory that ultimately may not be used;
      difficulties or delays in developing alternative sources for limited or sole
      source components; our having to reconfigure our products due to our inability
      to receive sufficient quantities of limited or sole source components; adverse
      impact of stock option and other accounting rules; our reliance on third party
      distributors and resellers in our indirect sales model; our dependence on a
      limited number of significant distributors; our inability to obtain larger
      customers; dependence on continued demand for broadband connectivity and access;
      difficulties in attracting and retaining qualified personnel; our dependence
      on
      key personnel; lack of key man life insurance on our executives or other
      employees; lack of a succession plan; inability of our limited internal
      manufacturing capacity to meet customers’ desires for our products; our
      substantial reliance on contract manufacturers to obtain raw materials and
      components for our products and to manufacture, test, and deliver our products;
      interruptions in our manufacturing operations or the operations of our contract
      manufacturers or other suppliers; the directive on the restriction of the use
      of
      certain hazardous substances in electrical and electronic equipment (the RoHS
      directive) could adversely impact our ability to supply our products in the
      quantities desired; our failing to maintain adequate levels of inventory; our
      failure to effectively manage our growth; difficulties in reducing our operating
      expenses; adverse impacts of the war in Iraq and the war on terrorism generally;
      cancellation of orders without penalties; the potential for intellectual
      property infringement, warranty, product liability, and other claims; risks
      associated with foreign sales such as collection, currency, and political risk;
      limited ability to enforce our rights against customers in foreign countries;
      lack of relationships in foreign countries which may limit our ability to expand
      our international sales and operations; difficulties in complying with existing
      governmental regulations and developments or changes in governmental regulation;
      difficulties or delays in obtaining any necessary governmental or regulatory
      permits, waivers, or approvals; changes in governmental regulations which could
      adversely impact our competitive position; our maintaining tight credit limits
      which could adversely impact our sales; difficulties in our customers or
      ultimate end users of our products obtaining sufficient funding; difficulties
      in
      collecting our accounts receivable; failure or inability to protect our
      proprietary technology and other intellectual property; possible decreased
      ability to protect our proprietary technology and other intellectual property
      in
      foreign jurisdictions; ability of third parties to develop similar and perhaps
      superior technology without violating our intellectual property rights; the
      costs and distraction of engaging in litigation to protect our intellectual
      property rights, even if we are ultimately successful; adverse impacts resulting
      from our recent settlement of litigation initiated by Symbol Technologies,
      Inc.;
      our limited experience in operating our Ricochet® network; adverse impacts on
      our broadband wireless equipment business due to our Ricochet wireless
      communications services business; expected ongoing losses from our Ricochet
      business; our inability to increase and retain subscribers for the Ricochet
      service; the intense competition in the wireless data access market; different
      data access technologies which may be superior to the access afforded by our
      Ricochet business; costs, time, and commitments involved in our possible
      geographic expansion of the Ricochet network; effectively managing any expansion
      of the Ricochet network; difficulties in obtaining roof and other attachment
      rights for our Ricochet network equipment at the times and at the costs and
      other terms we desire; possible insufficient equipment to expand our Ricochet
      network; dependence of our Ricochet network on network connections provided
      by
      third parties; failure of our third-party contractors to adequately maintain
      and
      repair the Ricochet network; possible harmful interference degrading or
      disrupting the service provided by the Ricochet network; costs of complying
      with
      governmental regulations such as Section 404 and other provisions of the
      Sarbanes-Oxley Act; the expense of defending and settling and the outcome of
      pending and any future stockholder litigation, including without limitation,
      our
      possible exposure under the contemplated settlement of that litigation; the
      expense of defending and settling and the outcome of pending and any future
      litigation against us; the expected volatility and possible stagnation or
      decline in our stock price, particularly due to the relatively low number of
      shares that trade on a daily basis; future stock sales by our current
      stockholders,






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including
      our current and former directors and management; future actual or potential
      sales of our stock that we issue upon exercise of stock options or stock
      warrants; possible dilution of our existing stockholders if we issue stock
      to
      acquire other companies or product lines or to raise additional capital;
      possible better terms of any equity securities we may issue in the future than
      the terms of our common stock; our limited capital resources and uncertain
      prospects for obtaining additional financing; the possibility that we may raise
      additional capital on terms that we or our stockholders find onerous; investment
      risk resulting in the decrease in value of our investments; and risks, impacts,
      and effects associated with any acquisitions, investments, or other strategic
      transactions we may evaluate or in which we may be involved. Many of these
      and
      other risks and uncertainties are described in more detail in our annual report
      on Form 10-K for the year ended December 31, 2005 filed with the Securities
      and
      Exchange Commission.




*Specific
      Cautionary Statements relating to Possible Ricochet Strategic
      Transaction*




In
      April
      2006, we announced the retention of an outside consulting firm to explore a
      variety of possible strategic alternatives for our Ricochet services business.
      There can be no assurance whatsoever that any transaction or other corporate
      action regarding Ricochet will result from this exploration of alternatives.
      Further, there can be no assurance whatsoever concerning the type, form,
      structure, nature, results, timing, or terms and conditions of any such
      potential action, even if such an action does result from this exploration.
      Other risks associated with this process include our ability to identify
      desirable strategic alternatives for our Ricochet business, as well as our
      ability to execute such alternatives or the transactions associated with such
      alternatives; the level of interest of third parties in pursuing possible
      strategic transactions relating to our Ricochet business; our desire and ability
      (or lack thereof) to continue to explore possible strategic alternatives and
      opportunities relating to our Ricochet business; the desire and ability (or
      lack
      thereof) of us and any relevant third parties to reach mutually acceptable
      definitive documentation to effect a possible strategic transaction and, if
      that
      occurs, whether the conditions to closing would then be satisfied; the time
      and
      costs required to explore and investigate possible transactions and other
      corporate actions; management and board interest in and distraction due to
      exploring and investigating possible transactions and other corporate actions;
      and reactions, either positive or negative, of investors, competitors,
      customers, employees, and others to our exploring possible strategic
      alternatives and opportunities relating to our Ricochet business and to any
      specific strategic alternative or opportunity selected by us. We do not intend
      to make any additional comments regarding this matter unless and until a
      definitive transaction agreement has been reached, the exploration of
      alternatives has been terminated, or there are other definitive developments
      warranting further disclosure.





*Possible
      Implications of Cautionary Statements*




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




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




**Recent
      Sales of Unregistered Securities**




We
      issued
      2,084 shares of common stock at $2.27 per share in early March 2006 to a warrant
      holder upon the exercise of warrants on a cashless basis (we withheld 1,916
      shares of common stock as payment for the aggregate exercise price of the
      warrants). We received no cash proceeds from the issuance of these shares.
      The
      issuance was completed without registration under the Securities Act in reliance
      upon the exemptions contained in Section 4(2) of the Securities Act and/or
      Rule
      506 of Regulation D promulgated under the Securities Act for transactions not
      involving a public offering. This issuance of common stock by us did not involve
      the use of an underwriter, and no commissions were paid in connection with
      this
      issuance.




We
      issued
      67,203 shares of common stock at $2.08 per share in late March 2006 to a warrant
      holder upon the exercise of warrants on a cashless basis (we withheld 75,972
      shares of common stock as payment for the






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          to Index*
 26




aggregate
      exercise price of the warrants). We received no cash proceeds from the issuance
      of these shares. The issuance was completed without registration under the
      Securities Act in reliance upon the exemptions contained in Section 4(2) of
      the
      Securities Act and/or Rule 506 of Regulation D promulgated under the Securities
      Act for transactions not involving a public offering. This issuance of common
      stock by us did not involve the use of an underwriter, and no commissions were
      paid in connection with this issuance.






**Item
      5.** **Other Information.**




On
      January 10, 2006, we issued a press release providing updated guidance for
      our
      expected financial results for the fourth quarter 2005. We inadvertently failed
      to furnish to the Securities and Exchange Commission a Form 8-K relating to
      that
      press release. A copy of that press release is attached as an exhibit to this
      Form 10-Q.




**Item
      6.** **Exhibits.**




See
      Exhibit Index.





**SIGNATURE**





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




Terabeam,
                Inc.Date:
                May 12, 2006
            By:
            /s/ Patrick L. MiltonPatrick
                L. Milton,Chief
                Financial Officer and Treasurer*(principal
                financial and accounting officer)*


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 27


**EXHIBIT
      INDEX**




**Exhibit**
              **Number**
            **Description**31.1
            Certification
                of Chief Executive Officer Pursuant to Rule 13a-14(a).31.2
            Certification
                of Chief Financial Officer Pursuant to Rule 13a-14(a).32.1
            Certification
                Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley
                Act of
                2002 (subsections (a) and (b) of Section 1350 of Chapter 63 of Title
                18 of
                the United States Code).99.1
            Press
                Release dated January 10, 2006.










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28