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

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

|X|   QUARTERLY  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

                                       OR

|_|   TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_________TO____________

                        Commission File Number 000-29053

                                 TERABEAM, INC.
             (Exact name of registrant as specified in its charter)

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

                                2115 O'NEL DRIVE
                               SAN JOSE, CA 95131
                    (Address of principal executive offices)

                                 (408) 731-2700
              (Registrant's telephone number, including area code)

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

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]

      Indicate  by check mark  whether  the  registrant  is a shell  company (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]

      As of October 31, 2005,  there were 21,408,910  shares of the registrant's
common stock outstanding.

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

<PAGE>
                                 TERABEAM, INC.
                                      INDEX

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

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

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

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

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

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

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

        Item 2.      Management's Discussion and Analysis of Financial Condition and Results of
                     Operations ....................................................................    18

        Item 3.      Quantitative and Qualitative Disclosures about Market Risk ....................    28

        Item 4.      Controls and Procedures .......................................................    28

PART II.         OTHER INFORMATION

        Item 1.      Legal Proceedings .............................................................    30

        Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds ...................    31

        Item 6.      Exhibits.......................................................................    31

SIGNATURE ..........................................................................................    32
</TABLE>


                                       2
<PAGE>

                         PART I - FINANCIAL INFORMATION

      This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by federal securities laws. Forward-looking statements are predictions
that relate to future events or our future performance and are subject to known
and unknown risks, uncertainties, assumptions, and other factors that may cause
actual results, outcomes, levels of activity, performance, developments, or
achievements to be materially different from any future results, outcomes,
levels of activity, performance, developments, or achievements expressed,
anticipated, or implied by these forward-looking statements. Forward-looking
statements should be read in light of the cautionary statements and important
factors described in this Form 10-Q, including Part I, Item 2 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Safe
Harbor for Forward-Looking Statements. We undertake no obligation to update or
revise any forward-looking statement to reflect events, circumstances, or new
information after the date of this Form 10-Q or to reflect the occurrence of
unanticipated or any other subsequent events.

Item 1.  Financial Statements.


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                                                           September 30,    December 31,
                                                                                2005             2004
                                                                           -------------    -------------
                                                                            (unaudited)
<S>                                                                        <C>              <C>
Assets

Current assets:

   Cash and cash equivalents                                               $       8,743    $      35,368

   Investment securities - available-for-sale                                        263            5,369

   Accounts receivable, net                                                        8,973            2,972

   Refundable income taxes                                                            --              151

   Inventory                                                                       9,252            7,442

   Prepaid expenses                                                                1,131              253
                                                                           -------------    -------------
     Total current assets                                                         28,362           51,555

Property and equipment, net                                                        4,152            2,511

Other Assets:

   Restricted cash                                                                 5,076            5,136

   Goodwill                                                                        6,663            6,072

   Intangible assets, net                                                         20,924           11,919

   Deposits                                                                          388               91
                                                                           -------------    -------------
     Total other assets                                                           33,051           23,218
                                                                           -------------    -------------
     Total assets                                                          $      65,565    $      77,284
                                                                           =============    =============
Liabilities and Stockholders' Equity

Current liabilities:

   Accounts payable and accrued expenses                                   $      11,810    $       6,965

   Deferred revenue                                                                1,673              159

   Current maturities of notes payable                                               135            2,899
                                                                           -------------    -------------
     Total current liabilities                                                    13,618           10,023

Notes payable, net of current maturities                                              97            1,270
                                                                           -------------    -------------
     Total liabilities                                                            13,715           11,293

Commitments and contingencies

Stockholders' Equity

Preferred stock, $0.01 par value; authorized 4,500,000, none issued at
September 30, 2005 and December 31, 2004                                              --               --

Common stock, $0.01 par value, 100,000,000 shares authorized, 21,408,910
issued and outstanding at September 30, 2005 and 22,845,847 issued with
22,345,847 outstanding at December 31, 2004                                          214              228

   Additional paid-in capital                                                     56,580           59,637

   Retained earnings                                                              (4,933)           7,277

   Treasury stock                                                                     --           (1,155)

   Accumulated other comprehensive income:

   Net unrealized gain (loss) on available-for-sale securities                       (11)               4
                                                                           -------------    -------------
     Total stockholders' equity                                                   51,850           65,991
                                                                           -------------    -------------
     Total liabilities and stockholders' equity                            $      65,565    $      77,284
                                                                           =============    =============
</TABLE>

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


                                       4
<PAGE>

                                 TERABEAM, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                 For the Three Months Ended         For the Nine Months Ended
                                                                        September 30,                      September 30,
                                                                 ---------------------------       ---------------------------
                                                                    2005             2004             2005             2004
                                                                 ----------       ----------       ----------       ----------
<S>                                                              <C>              <C>              <C>              <C>
Revenues                                                         $   18,147       $    6,370       $   31,909       $   17,120

Cost of goods sold                                                   10,503            3,682           17,509           10,426

Restructuring provision for excess and obsolete inventory             2,143               --            2,143               --
                                                                 ----------       ----------       ----------       ----------
   Gross profit                                                       5,501            2,688           12,257            6,694

Operating expenses:

   Selling costs                                                      3,800              879            5,831            1,799

   Restructuring charges                                                944               --              944               --

   Restructuring charge for impairment of intangible assets           4,664               --            4,664               --

   General and administrative                                         3,342            3,381            8,627            7,288

   Research and development                                           2,788            1,069            4,438            2,038
                                                                 ----------       ----------       ----------       ----------
       Total operating expenses                                      15,538            5,329           24,504           11,125
                                                                 ----------       ----------       ----------       ----------
Operating income (loss)                                             (10,037)          (2,641)         (12,247)          (4,431)

Other income (expenses):

   Interest income                                                      122              360              612              410

   Interest expense                                                      (4)             (76)            (140)            (139)

   Other income (loss)                                                   10                6             (106)             509
                                                                 ----------       ----------       ----------       ----------
       Total other income (expenses)                                    128              290              366              780
                                                                 ----------       ----------       ----------       ----------
Income (loss) before income taxes                                    (9,909)          (2,351)         (11,881)          (3,651)

   Benefit (provision) for income taxes                                  (3)              --               11               (2)
                                                                 ----------       ----------       ----------       ----------
Income (loss) before minority interest                               (9,912)          (2,351)         (11,870)          (3,653)

    Minority interest in net income of Merry Fields                    (101)              --             (101)              --
                                                                 ----------       ----------       ----------       ----------
Net income (loss)                                                  ($10,013)         ($2,351)        ($11,971)         ($3,653)
                                                                 ==========       ==========       ==========       ==========

   Weighted average shares - basic and diluted                       21,163           26,218           21,932           18,788
                                                                 ----------       ----------       ----------       ----------
     EPS, basic and diluted                                          ($0.47)          ($0.09)          ($0.55)          ($0.19)
                                                                 ==========       ==========       ==========       ==========
</TABLE>

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


                                       5
<PAGE>

                                 TERABEAM, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005
                        (in thousands, except share data)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                                        Accumulated
                                            Common Stock       Additional                                  Other
                                        --------------------    Paid-in        Retained     Treasury   Comprehensive
                                          Shares     Amount     Capital        Earnings      Stock     (Loss) Income      Total
                                        ----------  --------   ----------     ----------   ----------  --------------   ----------
<S>                                     <C>         <C>         <C>           <C>          <C>         <C>              <C>
Balances, January 1, 2005               22,345,847  $    228    $ 59,637      $    7,277      ($1,155) $            4   $   65,991

Treasury stock retired                  (1,033,750)      (15)     (3,207)                       1,155                       (2,067)

Exercise of stock options and warrants      96,813         1         130                                                       131

Deconsolidation of subsidiary                                         20            (239)                                     (219)

Comprehensive income:

   Net income (loss)                                                             (11,971)                                  (11,971)

   Unrealized gains on investments                                                                                (15)         (15)
                                        ----------  --------    --------      ----------   ----------  --------------   ----------
     Total comprehensive income                                                  (11,971)                         (15)     (11,986)
                                        ----------  --------    --------      ----------   ----------  --------------   ----------
Balances, September 30, 2005
(unaudited)                             21,408,910  $    214    $ 56,580         ($4,933)  $        0            ($11)  $   51,850
                                        ==========  ========    ========      ==========   ==========  ==============   ==========
</TABLE>

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


                                       6
<PAGE>

                                 TERABEAM, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                   For the Nine Months Ended
                                                                         September 30,
                                                                   -------------------------
                                                                       2005           2004
                                                                   ----------     ----------
<S>                                                                  <C>             <C>
Cash flows from operating activities:

   Net income (loss)                                                 ($11,971)       ($3,653)

     (Gain) loss on disposal of securities                               --              (10)

     Loss on disposal of property and equipment                          --                6

       Depreciation and amortization                                    1,997            645

       Loss on write-down of investments available-for-sale               112             --

       Bad debt allowance (recovery)                                      292            296

       Restructuring charge for impairment of intangible assets         4,664             --

       Restructuring provision for excess and obsolete inventory        2,143             --

       Changes in assets and liabilities affecting operations:

          Restricted cash                                                  60            700

          Accounts receivable                                          (1,487)           115

          Refundable income taxes                                         151             75

          Inventory                                                     1,045           (408)

          Deposits                                                       (159)             2

          Prepaid expenses                                               (706)            95

          Accounts payable and accrued expenses                          (374)          (380)

          Deferred revenue                                              1,514            167
                                                                   ----------     ----------

            Net cash provided by (used in) operating activities        (2,719)        (2,350)
                                                                   ----------     ----------

Cash flows from investing activities:

   Cash received from acquisitions                                        384         10,252

   Cash used in acquisitions                                          (24,300)        (4,800)

   Sale of securities                                                   5,220         17,065

   Purchase of securities                                                (241)          (415)

   Proceeds on disposal of assets held for sale                           169            915

   Purchase of property and equipment                                    (114)           (28)

   Investment in capitalized software                                    (382)          (322)
                                                                   ----------     ----------

       Net cash provided by (used in) investing activities            (19,264)        22,667
                                                                   ----------     ----------
Cash flows from financing activities:

   Distributions to Merry Fields members                                   --            (50)

   Repurchase of common stock                                          (2,067)            --

   Exercise of stock options and warrants                                 131            356

   Purchase of treasury stock                                              --         (6,500)

   Repayment of notes payable                                          (2,706)          (118)
                                                                   ----------     ----------

       Net cash provided by (used in) financing activities             (4,642)        (6,312)
                                                                   ----------     ----------

Net increase (decrease) in cash and cash equivalents                  (26,625)        14,005

Cash and cash equivalents, beginning of period                         35,368          8,990
                                                                   ----------     ----------

Cash and cash equivalents, end of period                           $    8,743     $   22,995
                                                                   ==========     ==========

Supplemental disclosure of cash flow information:
   Cash paid for interest                                          $      160     $      123
                                                                   ==========     ==========
   Income taxes paid                                               $       --     $        2
                                                                   ==========     ==========
   Stock issued for acquisitions                                   $       --     $   59,648
                                                                   ==========     ==========
</TABLE>

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


                                       7
<PAGE>

                                 TERABEAM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

      The consolidated financial statements of Terabeam, Inc. (the "Company" or
"Terabeam") for the three month and nine month periods ended September 30, 2005
and 2004 are unaudited and include all adjustments which, in the opinion of
management, are necessary to present fairly the financial position and results
of operations for the periods then ended. All such adjustments are of a normal
recurring nature. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2004
filed with the Securities and Exchange Commission.

      Effective November 7, 2005, the Company changed its corporate name from
"YDI Wireless, Inc." to "Terabeam, Inc." This name change was effected by means
of a "short-form" statutory merger of the Company's wholly owned subsidiary
Terabeam, Inc. with and into the Company with the Company being the surviving
corporation in the merger under the new name of Terabeam, Inc. The Company also
changed its ticker symbol to "TRBM" in connection with that change of corporate
name.

      Merry Fields, LLC ("Merry Fields") was formed by shareholders of a Company
predecessor, Young Design, Inc., under the laws of the State of Delaware in
August 2000. Merry Fields owns the property and land leased to Terabeam for its
Falls Church, Virginia operation subject to a loan and mortgage. In accordance
with FIN 46R, through June 30, 2005, Merry Fields was a variable interest entity
and YDI Wireless, Inc. was determined to be the primary beneficiary of Merry
Fields. During the quarter ended September 30, 2005, YDI Wireless, Inc. ceased
to guarantee the Merry Fields note payable and is no longer the primary
beneficiary of Merry Fields. Through June 30, 2005, the financial statements of
Merry Fields were consolidated with the financial statements of YDI Wireless,
Inc. Effective with the quarter ended September 30, 2005, the financial
statements of Merry Fields are no longer consolidated with the financial
statements of YDI Wireless, Inc.

      On July 27, 2005, Terabeam Wireless, 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 dated as of
July 18, 2005. Under the terms of the asset purchase agreement, Terabeam
acquired most of the domestic and foreign operations of Old Proxim for a
purchase price of approximately $25,200,000, subject to certain adjustments,
liability assumptions, and deductions. At the closing, Terabeam assumed
specified obligations of Old Proxim, including specified employee-related
obligations. The purchase price after adjustments was approximately $24,300,000.

      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.

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

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


                                       8
<PAGE>

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

<TABLE>
<CAPTION>
      Nine Months Ended September 30, 2005 (000's):

                                                    Equipment   Services     Total
<S>                                                 <C>         <C>        <C>
    Assets .......................................  $  62,316   $  3,249   $ 65,565
    Revenue ......................................  $  29,882   $  2,027   $ 31,909
    Operating income (loss) ......................  $ (10,562)  $ (1,685)  $(12,247)

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

                                                    Equipment   Services     Total
    Assets .......................................  $  62,316   $  3,249   $ 65,565
    Revenue ......................................  $  17,500   $    647   $ 18,147
    Operating income (loss) ......................  $  (9,439)  $   (598)  $(10,037)
</TABLE>

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

2.    Stock Based Compensation

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

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

<TABLE>
<CAPTION>
                                                                              Three Months Ended
                                                                                  September 30,
                                                                           -------------------------
                                                                               2005          2004
                                                                           -----------   -----------
                                                                           (unaudited)   (unaudited)
<S>                                                                        <C>           <C>
      Net income (loss) attributable to common stockholders, as reported:  $   (10,013)  $    (2,351)
      Less:  Total stock based employee compensation expense determined
          under the fair value based method for all awards ..............         (220)         (284)
                                                                           -----------   -----------

      Pro forma net income (loss) attributable to common stockholders ...  $   (10,233)  $    (2,635)
                                                                           ===========   ===========

      Basic and diluted net income (loss) per common share, as reported .  $     (0.47)  $     (0.09)
                                                                           ===========   ===========

      Basic and diluted net income (loss) per common share, pro forma ...  $     (0.48)  $     (0.10)
                                                                           ===========   ===========
</TABLE>


                                       9
<PAGE>

<TABLE>
<CAPTION>
                                                                              Nine Months Ended
                                                                                  September 30,
                                                                           -------------------------
                                                                               2005          2004
                                                                           -----------   -----------
                                                                           (unaudited)   (unaudited)
<S>                                                                        <C>           <C>
      Net income (loss) attributable to common stockholders, as reported:  $   (11,971)  $    (3,653)
      Less:  Total stock based employee compensation expense determined .
          under the fair value based method for all awards ..............       (1,006)         (298)
                                                                           -----------   -----------

      Pro forma net income (loss) attributable to common stockholders ...  $   (12,977)  $    (3,951)
                                                                           ===========   ===========

      Basic and diluted net income (loss) per common share, as reported .  $     (0.55)  $     (0.19)
                                                                           ===========   ===========

      Basic and diluted net income (loss) per common share, pro forma ...  $     (0.59)  $     (0.21)
                                                                           ===========   ===========
</TABLE>

3.    Proxim Acquisition

      The primary reasons for the acquisition of the operations of Old Proxim
were a) to acquire Old Proxim's distribution system and to have the opportunity
to expand on their strong channel partnerships, b) to expand our product line to
be able to offer best-of-breed telco and enterprise wireless solutions from
Wi-Fi through wireless Gigabit Ethernet, and c) to bring together two
organizations that we believe will allow us to accelerate product development
and improve our position in the market.

      The financial statements present the effects of the Old Proxim acquisition
under the purchase method of accounting in accordance with FASB Statement 141,
Business Combinations. Under the purchase method of accounting, the purchase
price is allocated to the identifiable tangible and intangible assets acquired
and liabilities assumed based on their estimated fair values with the remainder
allocated to goodwill. We are in the process of reviewing and finalizing certain
contingent liabilities related to the purchase. The preliminary purchase price
allocation recorded on July 27, 2005 and included in the accompanying balance
sheet at September 30, 2005 is as follows (000's):

                Cash ..............................   $    384
                Accounts receivable ...............      5,027
                Inventory .........................      4,998
                Other current assets ..............        171
                Property and equipment ............      3,483
                Other long term assets ............        117
                Identifiable intangible assets ....     14,800
                Goodwill ..........................        565
                Accounts payable ..................       (844)
                Other accrued liabilities .........     (4,401)
                                                      --------
                Total adjusted purchase price .....   $ 24,300
                                                      ========

      The amount allocated to identifiable intangible assets was determined by
an independent appraisal. The identifiable tangible assets acquired on July 27,
2005 and included in the accompanying balance sheet at September 30, 2005 were:


                                                        (000's)    Useful Life
                                                        -------    -----------
Trademarks and trade names..........................      2,100    Indefinite
Developed technology................................      5,600       8 years
Customer contracts and related relationships........      7,100       6 years


                                       10
<PAGE>

Pro forma financial information

      The pro forma financial information has been prepared to give effect to
the completed acquisition of substantially all of the assets and certain
liabilities of Old Proxim. The unaudited pro forma financial information
presents the effects of the Old Proxim acquisition under the purchase method of
accounting in accordance with FASB Statement 141, Business Combinations.

      The following unaudited pro forma results of operations for the three
months and nine months ended September 30, 2005 assume the acquisition of Old
Proxim to have occurred as of January 1, 2005. The unaudited pro forma results
of operations for the three months and nine months ended September 30, 2004
assume the acquisition of Old Proxim to have occurred as of January 1, 2004.

      The unaudited pro forma condensed combined results of operations are
provided for illustrative purposes only and are not necessarily indicative of
the operating results that actually would have occurred if the acquisition had
been consummated as of the date indicated, nor are they necessarily indicative
of future operating results or financial position. These unaudited pro forma
condensed combined results of operations should be read in conjunction with the
historical consolidated financial statements and related notes of Terabeam and
Old Proxim included in this filing or otherwise available.

Pro Forma Results of Operations for the Nine Months ended September 30, 2005 and
2004

<TABLE>
<CAPTION>
                          Nine Months   Jan - Jul                  Pro forma    Nine Months   Nine Months                 Pro forma
                           Terabeam    Old Proxim    Pro forma    Nine Months    Terabeam     Old Proxim     Pro forma   Nine Months
                             2005         2005      Adjustments      2005          2004          2004       Adjustments     2004
                             ----         ----      -----------      ----          ----          ----       -----------     ----
<S>                        <C>          <C>           <C>          <C>            <C>          <C>             <C>        <C>
Revenue                     31,909       42,162                     74,071        17,120        89,640                    106,760

Loss before
extraordinary items
and cumulative effect
of accounting changes      (11,971)     (35,641)      11,536       (36,076)       (3,653)      (25,756)        8,255      (21,154)

Net loss                   (11,971)     (35,641)      11,536       (36,076)       (3,653)      (25,756)        8,255      (21,154)

Weighted average shares                                             21,932                                                 18,788

Earnings per share                                                   (1.64)                                                 (1.13)
</TABLE>

Pro forma Adjustments for the nine months ended September 30, 2005:

The pro forma adjustments reflect Old Proxim expenses related to assets,
liabilities and agreements not acquired by Terabeam in the Asset Purchase
Agreement. The net expense eliminated was $11.5 million and includes charges for
impairment and amortization of intangible assets, royalty charges, and loss on a
debt/equity exchange, offset by depreciation and amortization expense for assets
acquired.

Pro forma Adjustments for the nine months ended September 30, 2004:

The pro forma adjustments reflect Old Proxim expenses related to assets,
liabilities and agreements not acquired by Terabeam in the Asset Purchase
Agreement. The net expense eliminated was $8.3 million and includes royalty
charges, amortization of intangible assets, restructuring charges, and certain
interest and litigation expenses, offset by depreciation and amortization
expense for assets acquired.


                                       11
<PAGE>

Pro Forma Results of Operations for the Three Months ended September 30, 2005
and 2004

<TABLE>
<CAPTION>
                         Three Months      Jul                    Pro forma    Three Months  Three Months                Pro forma
                          Terabeam     Old Proxim    Pro forma   Three Months   Terabeam     Old Proxim     Pro forma   Three Months
                            2005          2005      Adjustments      2005          2004          2004      Adjustments      2004
                         -----------   -----------  -----------  -----------   -----------   -----------   -----------  -----------
<S>                        <C>           <C>            <C>        <C>            <C>           <C>           <C>          <C>
Revenue                     18,147         2,230                    20,377         6,370        31,526                     37,896

Loss before
extraordinary items
and cumulative
effect of accounting
changes                    (10,013)      (11,101)       9,006      (12,108)       (2,351)       (1,505)       (3,390)      (7,246)

Net loss                   (10,013)      (11,101)       9,006      (12,108)       (2,351)       (1,505)       (3,390)      (7,246)

Weighted Average shares                                             21,163                                                 26,218

Earnings per share                                                   (0.57)                                                 (0.28)
</TABLE>

Pro forma Adjustments for the three months ended September 30, 2005:

The pro forma adjustments reflect Old Proxim expenses related to assets,
liabilities and agreements not acquired by Terabeam in the Asset Purchase
Agreement. The net expense eliminated was $9.0 million and includes charges for
royalty charges, amortization of intangible assets, and loss on a debt/equity
exchange, offset by depreciation and amortization expense for assets acquired.

Pro forma Adjustments for the three months ended September 30, 2004:

The pro forma adjustments reflect Old Proxim expenses and income adjustments
related to assets, liabilities and agreements not acquired by Terabeam in the
Asset Purchase Agreement. The net benefit eliminated was $3.4 million and
included a royalty benefit, an adjustment to interest, and depreciation and
amortization expense for assets acquired; offset by charges for the amortization
of intangible assets and certain litigation expenses.

4.    Comprehensive Income (Loss)

      The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." During the nine months ended September 30,
2005, and 2004, the Company had comprehensive income (loss) of $(11,986,000) and
$(4,348,000), respectively, including approximately $(15,000) and $(695,000)
(unaudited), respectively, of unrealized (losses) gains on available-for-sale
investments, net of income taxes of $0 and $0, respectively.

5.    Inventory and Restructuring Provision for Excess and Obsolete Inventory

      During the quarter ended September 30, 2005, the Company recorded a $2.1
million restructuring provision for excess and obsolete inventory as part of the
Company's restructuring activities. The excess inventory charges were due
principally to management's decision to discontinue certain older Terabeam
product lines subsequent to the acquisition of the Old Proxim product lines and
distribution channels.


                                       12
<PAGE>

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

                                              September 30,     December 31,
                                                   2005             2004
                                              -------------    -------------
                                               (unaudited)
      Raw materials .......................   $       5,500    $       1,968
      Work in process .....................             760              124
      Finished goods ......................          13,828            5,950
                                              -------------    -------------
                                                     20,088            8,042
      Allowance for excess and obsolescence         (10,836)            (600)
                                              -------------    -------------
      Net Inventory .......................   $       9,252    $       7,442
                                              =============    =============

      The net increase in inventory is principally due to the inventory acquired
in the Old Proxim asset purchase.

6.    Restructuring Charges for Severance and Excess Facilities

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

      During the quarter ended September 30, 2005, and subsequent to the Old
Proxim acquisition, the Company recorded restructuring charges of approximately
$944,000. These charges consisted of operating lease commitments related to
facilities which were closed during the quarter, and severance payments to
Terabeam employees laid off subsequent to the Old Proxim acquisition.

7.    Restructuring Provision for Impairment of Intangibles

      During the quarter ended September 30, 2005, and subsequent to the Old
Proxim acquisition, the restructuring of the Company and the Company's product
lines affected the carrying value of certain intangible assets, and the Company
recorded a charge for the impairment of intangible assets in the accompanying
financial statements totaling $4.7 million. These charges consisted of:

            o     A $3.6 million impairment charge related to the Terabeam trade
                  name in accordance with the guidance contained in the
                  Financial Accounting Standards Board Statement of Financial
                  Accounting Standard No. 142, "Goodwill and Other Intangible
                  Assets". Subsequent to the Old Proxim acquisition, the Company
                  chose to sell its wireless equipment products under the go to
                  market name of Proxim Wireless. Since there will be no future
                  revenue stream based on the Terabeam name, an independent
                  third party valuation determined that the fair value of the
                  Terabeam trade name was de minimis at September 30, 2005.

            o     A $1.1 million charge related to the write off of certain
                  software development costs that had been previously
                  capitalized under Financial Accounting Standards Board
                  Statement of Financial Accounting Standard No. 86, "Accounting
                  for the Costs of Computer Software to Be Sold, Leased, or
                  Otherwise Marketed". The Company abandoned development of its
                  Logan software development project after acquiring similar
                  software in the Proxim acquisition due to market timing
                  issues.


                                       13
<PAGE>

8.    Earnings per share

<TABLE>
<CAPTION>
                                                              Three Months Ended            Nine Months Ended
                                                                 September 30,                  September 30,
                                                        ----------------------------    ----------------------------
                                                            2005            2004            2005            2004
                                                        ------------    ------------    ------------    ------------
                                                                (unaudited)                       (unaudited)
<S>                                                     <C>             <C>             <C>             <C>
      Numerator:

           Net income (loss) ........................   $    (10,013)   $     (2,351)   $    (11,971)   $     (3,653)
                                                        ============    ============    ============    ============

      Denominator- weighted average shares:

           Denominator for basic earnings per share .         21,163          26,218          21,932          18,788

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

           Denominator for diluted earnings per share         21,163          26,218          21,932          18,788
                                                        ============    ============    ============    ============

           Basic earnings (loss) per share ..........   $      (0.47)   $      (0.09)   $      (0.55)   $      (0.19)
                                                        ============    ============    ============    ============

           Diluted earnings (loss) per share ........   $      (0.47)   $      (0.09)   $      (0.55)   $      (0.19)
                                                        ============    ============    ============    ============
</TABLE>

      At September 30, 2005 and 2004, 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 and nine month periods ended
September 30, 2005 and 2004 because there was a net loss for each of the
applicable periods, and the effect would have been anti-dilutive.

9.    Concentrations

      During the nine months ended September 30, 2005 no one customer accounted
for more than 10% of total sales, and there were no customers accounting for
more than 10% of sales in the corresponding period of 2004. For the quarter
ended September 30, 2005, there were two distributors acquired from Old Proxim
that accounted for 16% and 11% of total sales, respectively. There were no
customers accounting for more than 10% of sales in the corresponding period of
2004.

      The Company maintains its cash, cash equivalent, and restricted cash
balances in several banks. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000 per bank. At September 30, 2005 the
uninsured portion totaled approximately $13.2 million.

10.   KarlNet

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


                                       14
<PAGE>

11.   Convertible debt repayment

      The Company assumed convertible notes as part of the Terabeam acquisition.
The convertible notes' aggregate principal amount totaled $2.5 million. The
notes matured in July 2005, and the Company paid the full principal amount of
$2.5 million in cash during the quarter ended September 30, 2005.

12.   Restricted cash

      As part of the 2004 acquisition of Terabeam Corporation, the Company
acquired restricted cash. As of September 30, 2005, the restricted cash amounted
to approximately $5.1 million which consisted of approximately $0.1 million as
collateral for letters of credit relating to lease obligations and $5.0 million
held in an indemnification trust for the benefit of former Terabeam Corporation
directors and officers. This trust was established by Terabeam Corporation in
January 2002, and the funds are managed by an unrelated trustee. To date, no
claims have been asserted against the trust funds. The trust expires at the end
of 2007 and any remaining funds will be distributed to the Company.

13.   Investment securities

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

14.   Recent Accounting Pronouncements

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

15.   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


                                       15
<PAGE>

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

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

      In June 2003, we elected to participate in a proposed settlement agreement
with the plaintiffs in this litigation. We understand that a large majority of
the other issuer defendants have also elected to participate in this proposed
settlement. If ultimately approved by the court, this proposed settlement would
result in the dismissal, with prejudice, of all claims in the litigation against
us and against the other issuer defendants who elect to participate in the
proposed settlement, together with the current or former officers and directors
of participating issuers who were named as individual defendants. The proposed
settlement does not provide for the resolution of any claims against the
underwriter defendants. The proposed settlement provides that the insurers of
the participating issuer defendants will guarantee that the plaintiffs in the
cases brought against the participating issuer defendants will recover at least
$1 billion. 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.
Therefore, the potential exposure of each participating issuer defendant should
decrease as the number of participating issuer defendants increases. We
currently expect that our insurance proceeds will be sufficient for these
purposes and that we will not otherwise be required to contribute to the
proposed settlement.

      Consummation of the proposed settlement is conditioned upon obtaining
approval by the court. On September 1, 2005, the court preliminarily approved
the proposed settlement, directed that notice of the terms of the proposed
settlement be provided to class members, and scheduled a fairness hearing, at
which objections to the proposed settlement will be heard. Thereafter, the court
will determine whether to grant final approval to the proposed settlement.

      If the proposed settlement described above is not consummated, we intend
to continue to defend the litigation vigorously. Moreover, if the proposed
settlement is not consummated, we believe that the underwriters may have an
obligation to indemnify us for the legal fees and other costs of defending these
suits. While there can


                                       16
<PAGE>

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. ("Symbol") filed a
lawsuit in the United States District Court for the District of Delaware against
YDI Wireless, Inc., Proxim Wireless Corporation, and Terabeam Corporation. The
suit alleges that certain products of YDI Wireless, 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 is asserting against YDI Wireless,
Proxim Wireless, and Terabeam Corporation. In this suit, Symbol is seeking an
injunction preventing YDI Wireless, Proxim Wireless, and Terabeam Corporation
from infringing its patents and monetary damages. Symbol has not yet served the
lawsuit on YDI Wireless, Proxim Wireless, or Terabeam Corporation so those
companies do not yet have any obligation to make a responsive filing to this
lawsuit. We have ongoing discussions with Symbol relating to this lawsuit and
the allegations in this lawsuit. If we are unable to negotiate a resolution of
these matters on terms acceptable to us, we intend to vigorously defend against
this lawsuit.

   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.


                                       17
<PAGE>

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

Overview

      The Company operates in two business segments - providing wireless
broadband equipment and providing Internet service. The Company's equipment
business is conducted through its Proxim Wireless Corporation subsidiary and its
service business is conducted through its Ricochet Networks, Inc. subsidiary.

      The Company recently significantly expanded its wireless equipment
business. Effective July 27, 2005 the Company, through its wholly owned
subsidiary Proxim Wireless Corporation, purchased 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 dated as of July 18, 2005. Under the terms of the
asset purchase agreement, the Company acquired and assumed most of the domestic
and foreign operations of Old Proxim for an adjusted cash purchase price of
approximately $24,300,000. At the closing, the Company assumed specified
obligations of Old Proxim, including specified employee-related obligations.
Subsequent to the acquisition, we moved our corporate headquarters to Proxim's
San Jose, CA facility. The financial results of the operations acquired from Old
Proxim from and after the date of acquisition are included in the financial
results reported herein.

      Proxim Wireless is a global pioneer in scaleable broadband wireless
networking systems for enterprises, government and service providers. From Wi-Fi
to wireless Gigabit Ethernet - our WLAN, mesh, point-to-multipoint and
point-to-point products are available through our extensive global channel
network with over 4,000 VARs, backed by superior support. Proxim systems have
enabled enterprise wireless LANs, education networks, municipal networks, public
safety communication systems, wireless ISPs, cellular networks and landing
systems for military aircraft.

      Proxim is a member of the Wi-Fi Alliance and a Principal Member of the
WiMAX Forum.

      Our products are categorized as follows:

      o     Wireless LAN:

            o     ORiNOCO(R): enterprise-class Wi-Fi access points and clients

            o     EtherAnt: entry-level, outdoor Wi-Fi client enabling fast,
                  cost-effective wireless Internet service provider (WISP)
                  networks

      o     Point-to-Multipoint:

            o     TeraMax(TM): data-optimized systems featuring OFDM, adaptive
                  dynamic polling and power over Ethernet

            o     Tsunami(TM): high-performance, multi-service systems with
                  OFDM, adaptive dynamic polling, and a path to WiMAX
                  certification

      o     Point-to-Point:

            o     Tsunami, QuickBridge TeraBridge, TeraOptic: enterprise-class
                  systems providing extended range and capacity up to 860 Mbps
                  aggregate

            o     Lynx, GigaLink(R): carrier-class systems providing the
                  performance of fiber at a fraction of the cost, with capacity
                  up to Gigabit Ethernet.

      We also have had a wireless Internet service provider business since the
acquisition of Ricochet Networks in June 2004. Our services business is
currently operated in the United States in Denver and Aurora, Colorado and San
Diego, California. We are actively considering the expansion of the Ricochet(R)
network, particularly in those cities where Ricochet infrastructure has
previously been deployed. In addition to our current model of providing


                                       18
<PAGE>

high speed mobile wireless Internet services to primarily individuals, we are
considering offering those services to various municipal departments and
personnel for mobile communications, especially homeland security, fire, safety,
health and welfare requirements. Finally, we are exploring opportunities to
offer the Ricochet services on a wholesale level to parties interested in
reselling our services on a private label or co-labeled basis.

      For the nine months ended September 30, 2005, the revenue and operating
loss for our equipment business were approximately $29.9 million and $10.6
million, respectively, and the revenue and operating loss for our services
business were approximately$2.0 million and $1.7 million, respectively. As of
September 30, 2005, assets of our equipment business were approximately $62.3
million and assets of our services business were approximately $3.2 million.
Thus, our services business constituted approximately 6.3% of our overall
revenue and approximately 14.0% of our operating loss for that period.

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

Critical Accounting Policies

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

   Revenue Recognition

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

      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.


                                       19
<PAGE>

   Accounts Receivable Valuation

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

   Inventory Valuation

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

   Goodwill

      Goodwill is the excess of the cost of an acquired entity over the net
amounts assigned to assets acquired and liabilities assumed. Goodwill is not
amortized but is tested for impairment at least annually at the reporting unit
level, and more frequently if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount. As of September 30, 2005, no impairment losses have been
recognized on any of our acquired goodwill.

   Intangible Assets

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

      Our intangible assets include purchased technology and various assets
acquired in business combination transactions. Assets acquired in business
combination transactions include existing hardware technologies, trade names,
existing software technologies, customer relationships and patents. Some of
these assets have finite useful lives and some have indefinite useful lives.
During the quarter ended September 30, 2005, and subsequent to the acquisition
of Old Proxim, we recognized an impairment write off of $3.6 million related to
the Terabeam trade name.

   Capitalized Software

      We capitalize software costs for projects from the time the project is
determined to be technologically feasible until the project is salable. During
the quarter ended September 30, 2005, and subsequent to the acquisition of Old
Proxim, we wrote off approximately $1.1 million of capitalized software costs
because the Company abandoned development of the Logan software project after
acquiring similar software in the Old Proxim acquisition due to market timing
issues.

Results of Operations

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

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


                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                                                        September 30,
                                                                         (unaudited)
                                                                     ------------------

                                                                       2005        2004
                                                                       ----        ----
<S>                                                                     <C>         <C>
       Sales .......................................................    100%        100%
       Cost of goods sold ..........................................     58          58
       Restructuring provision for excess and obsolete inventory ...     12          --
                                                                       ----        ----

       Gross profit ................................................     30          42
       Operating expenses:
           Selling costs ...........................................     21          14
           Restructuring charges ...................................      5          --
           Restructuring charges for impairment of intangible assets     26          --
           General and administrative ..............................     18          53
           Research and development ................................     15          17
                                                                       ----        ----

               Total operating expenses ............................     85          84

                                                                       ----        ----

       Operating (loss) income .....................................    (55)        (42)
       Other income (expenses) .....................................      1           5
       Income taxes ................................................     --          --
       Minority interest in net income of Merry Fields .............     (1)         --
                                                                       ----        ----

       Net income ..................................................    (55)%       (37)%
                                                                       ====        ====
</TABLE>

   Sales

      Sales for the quarter ended September 30, 2005 were $18.1 million as
compared to $6.4 million for the same period in 2004 for an increase of $11.7
million, or about 183%. The primary reason for the increase in sales was the
acquisition of the Old Proxim product lines and distribution channels on July
27, 2005. Due to the acquisition taking place during the quarter, we did not
recognize a full quarter of sales from the Old Proxim products.

      In the most recent quarter, our service business made up just over 3.5% of
our total consolidated revenue, totaling $647,000 from just under 8,000
subscribers. There was a small decrease in paying subscribers during the third
quarter of 2005.

      For the quarters ending September 30, 2005 and 2004 international sales,
excluding Canada, approximated 41% and 14%, respectively, of total sales based
on revenues recognized for the quarter. The reason for the increase in
international sales as a percent of sales is because a significant percentage of
the sales from Old Proxim acquired products were ultimately to international
customers.

   Cost of goods sold and gross profit

      Cost of goods sold and gross profit for the quarter ended September 30,
2005 were $12.6 million and $5.5 million, respectively. Of the $12.6 million
cost of goods sold, $2.1 million was a restructuring provision for excess and
obsolete inventory. For the same period in 2004, costs of goods sold and gross
profit were $3.7 million and $2.7 million, respectively. Gross profit margin, as
a percentage of sales, for the quarter ended September 30, 2005 was 30% with the
restructuring provision and 42% without restructuring charges, as compared to
42% for the quarter ended September 30, 2004.

      Gross margins in our services business were approximately 35% of service
net revenue in the third quarter. Those gross margins have increased as we have
added additional subscribers to our operating networks, and we believe we have
the opportunity to increase our service gross margin by continuing to add new
subscribers given the relatively low incremental cost of adding subscribers to
those networks.

   Sales and Marketing Expenses

      Sales and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, customer and technical support as well
as field support. Sales and marketing expenses for the quarter ended


                                       21
<PAGE>

September 30, 2005 were $3.8 million, an increase of $2.9 million over $0.9
million for the same period in 2004. This increase was due primarily to the
following factors: 1) an increase of approximately $2.7 million during the
quarter due to the acquisition of Old Proxim sales and distribution channels,
and 2) increased sales and marketing headcount, increased salaries and increased
travel by sales personnel as compared to the prior fiscal year.

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

   General and Administrative Expenses

      General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for real estate leases, information
systems, finance, legal, and administration of a public company. General and
administrative expenses were $3.3 million for the quarter ended September 30,
2005 compared to $3.4 million for the quarter ended September 30, 2004 resulting
in a decrease of about 1% from the prior year's reporting period. There was an
increase of approximately $1.0 million during the quarter due to the additional
expenses incurred as a result of the acquisition of Old Proxim, which was offset
by a reduction in costs as compared the prior fiscal year at Terabeam. During
the third quarter of 2004, there were significant costs related to the
acquisition of Terabeam Corporation, Karlnet, and Ricochet.

      Our services business general and administrative expenses were just over
98% of services net revenue in the third quarter. The primary expenses in this
category are employee salary and benefit costs, depreciation and amortization,
facility rental expense, and professional fees. We do not expect these costs to
decrease significantly; however, we expect they will begin to decline as a
percentage of services revenue as more new subscribers or revenue opportunities
are added to our operating networks.

   Research and Development Expenses

      Research and development expenses consist primarily of personnel salaries
and fringe benefits and related costs associated with our product development
efforts. These include costs for development of products and components, test
equipment and related facilities. Research and development expenses increased to
$2.8 million for the quarter ended September 30, 2005 from $1.1 million for the
quarter ended September 30, 2004, an approximate increase of $1.7 million or
approximately 154%. This increase was due primarily to an increase of
approximately $1.9 million during the quarter due to the acquisition of the Old
Proxim engineering and research and development infrastructure. Those Proxim
increases were offset by decreases in Terabeam's research and development
expenses. Synergies between the product lines of Old Proxim and the Company
allowed us to discontinue certain redundant research and development efforts and
reduce the Terabeam workforce in this area.

      Our services business research and development expenses were approximately
20% of services net revenue in the third quarter. These expenses primarily
consist of employee salary and benefit costs. We expect these expenses to remain
relatively stable in the short-term, but we expect they will begin to decline as
a percentage of services revenue as more new subscribers are added to our
operating networks.

   Other income (expenses)

      Other income and expenses totaled approximately $128,000 in the third
quarter 2005, as compared to $290,000 in the corresponding quarter of 2004. This
was principally due to a decrease in interest income of because the cash and
investments we acquired as a result of the Terabeam acquisition in 2004 were
substantially reduced by the cash used for the Old Proxim acquisition during the
third quarter of 2005.

   For the nine months ended September 30, 2005 and 2004:

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


                                       22
<PAGE>

<TABLE>
<CAPTION>
                                                                     Nine Months Ended
                                                                        September 30,
                                                                        (unaudited)
                                                                     -----------------

                                                                       2005     2004
                                                                       ----     ----
<S>                                                                     <C>      <C>
       Sales .......................................................    100%     100%
       Cost of goods sold ..........................................     55       61
       Restructuring provision for excess and obsolete inventory ...      7       --
                                                                       ----     ----

       Gross profit ................................................     38       39
       Operating expenses:
           Selling costs ...........................................     18       11
           Restructuring charges ...................................      3       --
           Restructuring charges for impairment of intangible assets     15       --
           General and administrative ..............................     27       42
           Research and development ................................     14       12
                                                                       ----     ----

               Total operating expenses ............................     77       65

                                                                       ----     ----

       Operating (loss) income .....................................    (39)     (26)
       Other income (expenses) .....................................      1        5
       Income taxes ................................................      0       --
       Minority interest in net income of Merry Fields .............      0       --
                                                                       ----     ----

       Net income ..................................................    (38)%    (21)%
                                                                       ====     ====
</TABLE>

   Sales

      Sales for the nine months ended September 30, 2005 were $31.9 million as
compared to $17.1 million for the same period in 2004 for an increase of $14.8
million or 87%. The primary reason for the increase in sales was the acquisition
of the Old Proxim product lines and distribution channels on July 27, 2005. Due
to the acquisition taking place during the third quarter, we have recognized
less than two months of revenue from Old Proxim products.

      In nine months ended September 30, 2005, our service business made up just
over 6.3% of our total consolidated revenue, totaling of $2.0 million from just
under 8,000 subscribers. This represents an increase of approximately 3.7% from
the number of subscribers when we acquired Ricochet(R) network on June 25, 2004.
We continue our efforts to increase the number of subscribers.

      For the nine months ending September 30, 2005 and 2004, international
sales, excluding Canada, approximated 29% and 13%, respectively, of total sales.
The reason for the increase in international sales as a percent of sales is
because a significant percentage of the sales from Old Proxim products were
ultimately to international customers.

   Cost of goods sold and gross profit

      Cost of goods sold and gross profit for the nine months ended September
30, 2005 were $19.7 million and $12.3 million, respectively. Of the $19.7
million cost of goods sold, $2.1 million was a restructuring provision for
excess and obsolete inventory. For the same period in 2004, costs of goods sold
and gross profit were $10.4 million and $6.7 million, respectively. Gross profit
margin, as a percentage of sales, for the nine months ended September 30, 2005
was 38% with the restructuring provision and 45% without restructuring charges
as compared to 39% for the nine months ended September 30, 2004. Gross profits
remained relatively unchanged from last year's first three quarters primarily
due to the offset of the following positive and negative factors. The primary
positive impacts were: 1) the significant increase in revenues from relatively
higher margin new products acquired from Old Proxim 2) our maintaining or
increasing our product prices wherever competition or market conditions would
allow; 3) our ability to offer more feature-rich products without significant
additional cost due in large part to our acquisition of KarlNet; and 4) our
increased offshore manufacturing of mechanical components. Those positive
impacts were roughly offset by the $2.1 million inventory restructuring
provision in the most recent quarter.

      Gross margins in our services business were approximately 30% of service
net revenue in the first nine months of the fiscal year. Those gross margins
have increased as we have added additional subscribers to our


                                       23
<PAGE>

operating networks, and we believe we have the opportunity to increase our
service gross margin by continuing to add new subscribers given the relatively
low incremental cost of adding subscribers to those networks.

   Sales and Marketing Expenses

      Sales and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, customer and technical support as well
as field support. Sales and marketing expenses for the nine months ended
September 30, 2005 were $5.8 million, an increase of $4.0 million over $1.8
million for the same period in 2004. This increase was due primarily to the
following factors: 1) an increase of approximately $2.7 million during the
quarter due to the acquisition of Proxim sales and distribution channels and. 2)
increased sales and marketing headcount, increased salaries and increased travel
by sales personnel as compared to the prior fiscal year.

      Our service business sales and marketing expenses were approximately 10%
of service net revenues for the nine month period. We are making efforts to
promote this service in our San Diego and Denver markets focused on both
retaining existing subscribers and obtaining new subscribers. We believe
customer acquisition and retention costs and employee salary and benefit costs
will continue to be the significant sales and marketing costs for our services
business.

   General and Administrative Expenses

      General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for real estate leases, information
systems, finance, legal, and administration of a public company. General and
administrative expenses were $8.6 million for the nine months ended September
30, 2005 compared to $7.3 million for the nine months ended September 30, 2004
resulting in an increase of about 18% or $1.3 million from the prior year's
reporting period. The principal reason was an increase of approximately $1.0
million during the last quarter due to the additional expenses incurred as a
result of the acquisition of Old Proxim.

      Our services business general and administrative expenses were over 83% of
services net revenue in the first nine months of 2005. The primary expenses in
this category are employee salary and benefit costs, depreciation and
amortization, facility rental expense, and professional fees. We do not expect
these costs to decrease significantly; however, we expect they will begin to
decline as a percentage of services revenue as more new subscribers are added to
our operating networks.

   Research and Development Expenses

      Research and development expenses consist primarily of personnel salaries
and fringe benefits and related costs associated with our product development
efforts. These include costs for development of products and components, test
equipment and related facilities. Research and development expenses increased to
$4.4 million for the nine months ended September 30, 2005 from $2.0 million for
the nine months ended September 30, 2004, an approximate increase of $2.4
million, or 120%. This increase was due primarily to the following factors: 1)
an increase of approximately $1.9 million during the quarter due to the
acquisition of the Old Proxim engineering and research and development
infrastructure. and 2) an increase in Terabeam research and development during
the first six months of 2005 that was primarily due to the addition of research
and development engineering personnel through our 2004 acquisitions. These first
half increases were offset in the third quarter by decreases in Terabeam
research and development expenses. Synergies between the product lines of Old
Proxim and the Company allowed us to discontinue certain redundant research and
development efforts and reduce the Terabeam workforce in this area.

      Our services business research and development expenses were just over 20%
of services net revenue in the first nine months of 2005. These expenses
primarily consist of employee salary and benefit costs. We expect these expenses
to remain relatively stable in the short-term, but we expect they will begin to
decline as a percentage of services revenue as more new subscribers are added to
our operating networks.

   Other income (expenses)

      Other income and expenses totaled approximately $366,000 in the first nine
months of 2005 as compared to $780,000 million for the corresponding period of
2004. There were a number of significant factors in this category.


                                       24
<PAGE>

First, for the nine months ended September 30, 2005 compared to the same period
in 2004, interest income increased by approximately $202,000 because of the
investments and cash we acquired as a result of the Terabeam acquisition.
Second, we took a permanent write-down of certain bond and stock holdings in the
amount of approximately $112,000 during the first half of 2005. Additionally,
during the first nine months of 2004, we realized a gain of approximately
$500,000 from the sale of legacy Telaxis intellectual property.

Liquidity and Capital Resources

      At September 30, 2005, we had cash, cash equivalents, and investments
available-for-sale of $9.0 million. This excludes restricted cash of $5.1
million. For the nine months ended September 30, 2005, cash used by operations
was approximately $2.7 million. Cash used by operations includes net loss of
$11.9 million offset by $44,000 in changes in assets and liabilities affecting
operations, and by $9.2 million of non-cash items. The non-cash items include
approximately $6.8 million in one time restructuring charges related to the Old
Proxim acquisition.

      For the nine months ended September 30, 2005, cash used by investing
activities was $19.3 million. Approximately $24.3 million was used to complete
the Old Proxim acquisition, offset by the sale of several fixed income
investments maturing during the second quarter of 2005.

      Cash used in financing activities was $4.6 million for the nine months
ended September 30, 2005. In May 2005 we repurchased 1,000,000 shares of common
stock for an aggregate purchase price of $2. 0 million. This stock had
originally been issued in a private placement in May 2004 as part of the
consideration paid to the stockholders of KarlNet, Inc. in connection with
Terabeam's acquisition of KarlNet. During the third quarter, we paid the
principal balance totaling $2.5 million on certain convertible notes payable
related to the 2004 acquisition of Terabeam Corporation.

      Our long-term financing requirements depend upon our growth strategy,
which relates primarily to our desire to increase revenue both domestically as
well as internationally. We expended approximately $24.3 million during the
quarter to purchase substantially all of the operations of Proxim Corporation.
Although this acquisition significantly reduced cash on hand, this acquisition
has dramatically increased both our domestic and international revenue. Due to
recent nature of this acquisition, management is currently determining the scope
of our expected day-to-day normal operations and therefore evaluating whether
there will be a requirement over the next twelve months for external financing
to fund those normal operations. One significant constraint to our equipment
business growth is the rate of new product introduction. New products or product
lines may be designed and developed internally or acquired from existing
suppliers to reduce the time to market and inherent risks of new product
development. We will need to use some of our current capital to fund the
expected future operating losses in our services business given the significant
numbers of new subscribers we would have to add for that business to be
profitable. We may also use some of our current capital or raise additional
capital for our services business if we decide to expand the geographic areas in
which we offer service. The recent lawsuit filed by Symbol could result in our
having to pay a lump sum damage or settlement amount and/or ongoing royalties on
sales of certain of our products, which could negatively impact our financial
condition and results of operations. Our current funding levels may have to be
supplemented through new bank debt financing, public debt or equity offerings,
or other means due to a number of factors, including our acquisition of Old
Proxim's operations and our desired rate of future growth.

Safe Harbor for Forward-Looking Statements

   General Overview

      This Quarterly Report on Form 10-Q contains forward-looking statements as
defined by federal securities laws that are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, intentions, projections, developments, future
events, performance or products, underlying assumptions, and other statements,
which are other than statements of historical facts. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "intends," "plans," "anticipates,"


                                       25
<PAGE>

"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.

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

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

   Specific Cautionary Statements relating to Symbol Litigation

      On or about October 28, 2005, Symbol Technologies, Inc. filed a lawsuit
against YDI Wireless, Inc., Proxim Wireless Corporation, and Terabeam
Corporation. The suit alleges that certain products of YDI Wireless, 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 is asserting
against YDI Wireless, Proxim Wireless, and Terabeam Corporation. This matter is
in the very early stages of litigation and, accordingly, we can make no
predictions as to any outcome or impacts of this lawsuit. The results of any
litigation matters are inherently uncertain. In the event of any adverse
decision in the described legal action, or any other related litigation with
third parties that could arise in the future with respect to patents or other
intellectual property rights relevant to our products, we could be required to
pay damages and other expenses (including the possibility of having to pay
treble damages for alleged intentional infringement of Symbol's patents), to
cease the manufacture, use, and sale of infringing products, to expend
significant resources to develop non-infringing technology, or to obtain
licenses to the infringing technology. Any of these results could have a
material adverse impact on our financial condition,


                                       26
<PAGE>

operating results, and ability to compete in the market. Even if we are
successful in defending against this lawsuit, the defense may be expensive,
lengthy, and time-consuming.

   Cautionary Statements of General Applicability

      In addition to other factors and matters discussed elsewhere in this Form
10-Q, in our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those expressed, anticipated, or implied in the forward-looking
statements include, without limitation, a severe worldwide slowdown in the
telecommunications equipment market and in the United States in particular; the
downturn and ongoing uncertainty in the telecommunications industry and larger
economy; developments in our relatively new industry and in the larger economy;
the intense competition in the telecommunications equipment and services
industries and resulting pressures on our pricing, gross margins, and general
financial performance; the impact, availability, pricing, and success of
competing technologies and products; difficulties in distinguishing our products
from competing technologies and products; difficulties or delays in obtaining
customers; dependence on a limited number of significant customers; lack of or
delay in market acceptance and demand for our current and contemplated products;
difficulties or delays in obtaining raw materials, subassemblies, or other
components for our products at the times, in the quantities, and at the prices
we desire or expect; difficulties, costs, and delays associated with replacing,
if possible at all, any components in our products that the manufacturers of
which have ceased to manufacture and supply (end of life components);
difficulties, costs, and delays associated with replacing, if possible at all,
any components in our products which are obtained for a sole or limited number
of suppliers and which become unavailable to us on terms we desire or expect for
any reason; risks arising from and relating to our 2004 acquisitions of Ricochet
Networks, Inc., Terabeam Corporation, and KarlNet, Inc. (including without
limitation resolution of any remaining contingent payment obligations;
management distraction due to those acquisitions; the ability of the companies
to integrate in a cost-effective, timely manner without material liabilities or
loss of desired employees or customers; the risk that the expected synergies and
other benefits of the transactions will not be realized at all or to the extent
expected; the risk that cost savings from the transactions may not be fully
realized or may take longer to realize than expected; reactions, either positive
or negative, of investors, competitors, customers, suppliers, employees, and
others to the transactions; and the risk that those transactions will, or could,
expose us to lawsuits or other liabilities); the expense of defending and
settling and the outcome of pending and any future stockholder litigation,
including without limitation, our possible exposure under the contemplated
settlement of that litigation; the expense of defending and settling and the
outcome of pending and any future litigation against us; our recent focus on
certain aspects of our current business; difficulties or delays inherent in
entering new markets and business areas; difficulties or delays in developing
and establishing new products, product lines, and business lines; difficulties
or delays in developing, manufacturing, and supplying products with the
contemplated or desired features, performance, price, cost, and other
characteristics; difficulties in estimating costs of developing and supplying
products; difficulties in developing, manufacturing, and supplying products in a
timely and cost-effective manner; difficulties or delays in developing improved
products when expected or desired and with the additional features contemplated
or desired; our limited ability to predict our future financial performance; the
expected fluctuation in our quarterly results; the expected fluctuation in
customer demand and commitments; difficulties in attracting and retaining
qualified personnel; our dependence on key personnel; inability to protect our
proprietary technology; the potential for intellectual property infringement,
warranty, product liability, and other claims; failure of our customers to sell
broadband connectivity solutions that include our products; difficulties in our
customers or ultimate end users of our products obtaining sufficient funding;
cancellation of orders without penalties; difficulties in complying with
existing governmental regulations and developments or changes in governmental
regulation; difficulties or delays in obtaining any necessary governmental or
regulatory permits, waivers, or approvals; our dependence on third-party
distributors, value added resellers, resellers, and other sales channels as well
as suppliers and manufacturers; difficulties in obtaining satisfactory
performance from third-party distributors, value added resellers, resellers, and
other sales channels as well as manufacturers and suppliers; our expected
continued losses from the operation of our services business; difficulties in
attracting and retaining subscribers for our services business; difficulties in
expanding our services business and costs and management issues associated with
any expansion; diversion of management time and other company resources to our
services business; risks associated with foreign sales such as collection,
currency and political risk; investment risk resulting in the decrease in value
of our investments; difficulties in collecting our accounts receivable; the
expected volatility and possible stagnation or decline in our stock price,
particularly due to the number of shares of our stock we issued in connection
with the acquisitions we made in the second quarter of 2004 and the relatively
low number of shares that trade on a daily basis; future stock sales by our
current stockholders, including our current and former directors and management;
future direct or indirect stock


                                       27
<PAGE>

sales by Robert Fitzgerald, our chief executive officer and second largest
stockholder; future stock sales by Mobius Venture Capital, our largest
stockholder, particularly now given the resignation of Gary E. Rieschel, a
former Mobius representative from our board of directors and the expiration of
the lockup agreement previously in force with Mobius; the effect of our
anti-takeover defenses; and risks, impacts, and effects associated with any
acquisitions, investments, or other strategic transactions we may evaluate or in
which we may be involved. Many of these and other risks and uncertainties are
described in more detail in our annual report on Form 10-K for the year ended
December 31, 2004 filed with the Securities and Exchange Commission.

   Possible Implications of Cautionary Statements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Disclosures About Market Risk

      The following discusses our exposure to market risks related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are exposed to risks and
uncertainties, many of which are out of our control. Actual results could vary
materially as a result of a number of factors, including those discussed above
in "Safe Harbor for Forward-Looking Statements."

      As of September 30, 2005, we had cash and cash equivalents of $8.7 million
and restricted cash of $5.1 million. All these funds are on deposit in
short-term accounts with several national banking organizations. Therefore, we
do not expect that an increase in interest rates would materially reduce the
value of these funds. The primary risk to loss of principal is the fact that
these balances are only insured by the Federal Deposit Insurance Corporation up
to $100,000 per bank. At September 30, 2005, the uninsured portion totaled
approximately $13.3 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 will 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. 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.

Item 4. Controls and Procedures.

   Disclosure controls and procedures

      Based on their evaluation as of September 30, 2005, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were effective as of that date to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC's rules and forms. In coming to this
conclusion, our Chief Executive Officer and Chief Financial Officer considered
the matters described under the next heading.


                                       28
<PAGE>

   Internal control over financial reporting

      Under current SEC regulations, we are not currently required to evaluate
or provide a report on our internal control over financial reporting. However,
we continue our analysis and action plans on that subject to better prepare us
for the time when we will be required to evaluate and provide a report on our
internal control over financial reporting. As reported in our annual report on
Form 10-K for the year ended December 31, 2004, in connection with its annual
audit and review procedures, our independent auditor considered and provided
input to us relating to our internal control over financial reporting. Our
auditor expressed concern that certain of our internal control procedures
regarding the reliability of financial reporting and the preparation of our
financial statements had two material weaknesses: weaknesses in our
period-ending financial reporting processes and weaknesses in the review and
approval of the accounting function. Upon discovery of these concerns, our
auditors performed additional audit procedures relating to our financial
statements for the years ended December 31, 2004 and 2003 before rendering their
unqualified audit opinion. During the nine months ended September 30, 2005, we
have made numerous changes in response to the auditor's comments, and we believe
that we have made significant progress in improving our internal control over
financial reporting.

      We acquired the Old Proxim business, including the related accounting and
financial systems, during the quarter ended September 30, 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 numerous 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 plans are in place to integrate
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 early 2006.

   Changes in internal control over financial reporting

      There was no change in our internal control over financial reporting
during our third quarter ended September 30, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over our
financial reporting other than the changes described above under the preceding
heading "Internal Control over Financial Reporting." We expect we will continue
to make 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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<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

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

      In June 2003, we elected to participate in a proposed settlement agreement
with the plaintiffs in this litigation. We understand that a large majority of
the other issuer defendants have also elected to participate in this proposed
settlement. If ultimately approved by the court, this proposed settlement would
result in the dismissal, with prejudice, of all claims in the litigation against
us and against the other issuer defendants who elect to participate in the
proposed settlement, together with the current or former officers and directors
of participating issuers who were named as individual defendants. The proposed
settlement does not provide for the resolution of any claims against the
underwriter defendants. The proposed settlement provides that the insurers of
the participating issuer defendants will guarantee that the plaintiffs in the
cases brought against the participating issuer defendants will recover at least
$1 billion. 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.
Therefore, the potential exposure of each participating issuer defendant should
decrease as the number of participating issuer defendants increases. We


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<PAGE>

currently expect that our insurance proceeds will be sufficient for these
purposes and that we will not otherwise be required to contribute to the
proposed settlement.

      Consummation of the proposed settlement is conditioned upon obtaining
approval by the court. On September 1, 2005, the court preliminarily approved
the proposed settlement, directed that notice of the terms of the proposed
settlement be provided to class members, and scheduled a fairness hearing, at
which objections to the proposed settlement will be heard. Thereafter, the court
will determine whether to grant final approval to the proposed settlement.

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

   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 YDI
Wireless, Inc., Proxim Wireless Corporation, and Terabeam Corporation. The suit
alleges that certain products of YDI Wireless, 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 is asserting against YDI Wireless, Proxim
Wireless, and Terabeam Corporation. In this suit, Symbol is seeking an
injunction preventing YDI Wireless, Proxim Wireless, and Terabeam Corporation
from infringing its patents and monetary damages. Symbol has not yet served the
lawsuit on YDI Wireless, Proxim Wireless, or Terabeam Corporation so those
companies do not yet have any obligation to make a responsive filing to this
lawsuit. We have ongoing discussions with Symbol relating to this lawsuit and
the allegations in this lawsuit. If we are unable to negotiate a resolution of
these matters on terms acceptable to us, we intend to vigorously defend against
this vigorously.

   General
   -------

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

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

      We issued 998 shares of common stock at $2.08 per share in September 2005
to a warrant holder upon the exercise of warrants on a cashless basis (we
withheld 3,298 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.

Item 6. Exhibits.

      See Exhibit Index.


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<PAGE>

                                    SIGNATURE

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

                               Terabeam, Inc.


Date:November 14, 2005         By:      /s/ Patrick L. Milton
                                   -------------------------------------------
                                   Patrick L. Milton,
                                   Chief Financial Officer and Treasurer
                                   (principal financial and accounting officer)


                                       32
<PAGE>

                                  EXHIBIT INDEX

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

      3.1   Certificate of Ownership and Merger as filed with the Delaware
            Secretary of State on November 3, 2005 (incorporated by reference to
            Exhibit 3.1 to the Form 8-K filed by the registrant with the SEC on
            November 4, 2005).

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

      10.2  Letter Agreement, dated September 30, 2005, between YDI Wireless,
            Inc. and Kevin J. Duffy (incorporated by reference to Exhibit 10.2
            to the Form 8-K filed by the registrant with the SEC on October 26,
            2005).

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

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

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

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

      10.7  Lease, dated as of May 10, 2005, by and between CarrAmerica Realty
            Operating Partnership, L.P. and Proxim Corporation (incorporated by
            reference to Exhibit 10.9 to the Form 10-Q filed by the registrant
            with the SEC on August 15, 2005).

      10.8  Letter Agreement, dated August 5, 2005, between the Registrant and
            Thomas C. Bennett (incorporated by reference to Exhibit 10.1 to the
            Form 8-K filed by the registrant with the SEC on August 10, 2005).

      10.9  Lease Agreement, dated October 7, 2005, between YDI Wireless, Inc.
            and Adom Realty Trust (incorporated by reference to Exhibit 10.1 to
            the Form 8-K filed by the registrant with the SEC on October 26,
            2005).

      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).


                                       33