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

                                  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 MARCH 31, 2005

                                       OR

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

                        Commission File Number 000-29053

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

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

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

                                 (703) 205-0600
              (Registrant's telephone number, including area code)

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

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

      As of April 30, 2005, there were 22,412,724 shares of the registrant's
common stock outstanding.

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

<PAGE>

                               YDI WIRELESS, INC.
                                      INDEX

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

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

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

                        Consolidated Statements of Operations for the three months
                          ended March 31, 2005 and 2004 (unaudited) ...................      5

                        Consolidated Statement of Changes in Stockholders' Equity for
                          the three months ended March 31, 2005 (unaudited) ...........      6

                        Consolidated Statements of Cash Flows for the three months
                          ended March 31, 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 ............................................     12

       Item 3.       Quantitative and Qualitative Disclosures about Market Risk .......     19

       Item 4.       Controls and Procedures ..........................................     19

PART II.         OTHER INFORMATION

       Item 1.       Legal Proceedings ................................................     22

       Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds ......     23

       Item 6.       Exhibits..........................................................     23

       SIGNATURE ......................................................................     23
</TABLE>


                                       2
<PAGE>

                         PART I - FINANCIAL INFORMATION

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

Item 1. Financial Statements.


                                       3
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                    March 31,  December 31,
                                                                                       2005        2004
                                                                                   ------------------------
                                                                                   (unaudited)
<S>                                                                                  <C>         <C>
Assets
Current assets:
   Cash and cash equivalents .....................................................   $ 34,984    $ 35,368
   Investment securities - available-for-sale ....................................      3,584       5,369
   Accounts receivable, net ......................................................      2,884       2,972
   Refundable income taxes .......................................................          2         151
   Inventory .....................................................................      7,533       7,442
   Prepaid expenses ..............................................................        499         253
                                                                                     --------    --------

       Total current assets ......................................................     49,486      51,555

Property and equipment, net ......................................................      2,456       2,511

Other Assets:
   Restricted cash ...............................................................      5,138       5,136
   Goodwill ......................................................................      5,830       6,072
   Intangible assets, net ........................................................     11,717      11,919
   Deposits ......................................................................         97          91
                                                                                     --------    --------

       Total other assets ........................................................     22,782      23,218
                                                                                     --------    --------

       Total assets ..............................................................   $ 74,724    $ 77,284
                                                                                     ========    ========

Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable and accrued expenses .........................................   $  5,364    $  6,965
   Deferred revenue ..............................................................        148         159
   Current maturities of notes payable ...........................................      2,779       2,899
                                                                                     --------    --------

       Total current liabilities .................................................      8,291      10,023

Notes payable, net of current maturities .........................................      1,345       1,270
                                                                                     --------    --------

       Total liabilities .........................................................      9,636      11,293

Commitments and contingencies

Stockholders' Equity
   Preferred stock, $0.01 par value; authorized 4,500,000, none issued at March
     31, 2005 and December 31, 2004 ..............................................         --          --
   Common stock, $0.01 par value, 100,000,000 shares authorized, 22,412,724 issued
     and outstanding at March 31, 2005 and 22,845,847 issued with 22,345,847
     outstanding  at December 31, 2004 ...........................................        224         228
   Additional paid-in capital ....................................................     58,559      59,637
   Retained earnings .............................................................      6,307       7,277
   Treasury stock ................................................................         --      (1,155)
   Accumulated other comprehensive income:
     Net unrealized gain (loss) on available-for-sale securities .................         (2)          4
                                                                                     --------    --------

       Total stockholders' equity ................................................     65,088      65,991
                                                                                     --------    --------

       Total liabilities and stockholders' equity ................................   $ 74,724    $ 77,284
                                                                                     ========    ========
</TABLE>

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


                                       4
<PAGE>

                               YDI WIRELESS, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
                                   (unaudited)

                                                       Three Months Ended
                                                            March 31,
                                                  -----------------------------
                                                       2005             2004
                                                  ------------     ------------

Revenues .....................................    $      6,597     $      6,017

Cost of goods sold ...........................           3,319            3,551
                                                  ------------     ------------

    Gross profit .............................           3,278            2,466

Operating expenses:
    Selling costs ............................             997              440
    General and administrative ...............           2,508            1,727
    Research and development .................             771              492
                                                  ------------     ------------

       Total operating expenses ..............           4,276            2,659
                                                  ------------     ------------

Operating income (loss) ......................            (998)            (193)

Other income (expenses):
    Interest income ..........................             221               24
    Interest expense .........................             (66)             (29)
    Other income (loss) ......................            (118)             503
                                                  ------------     ------------

       Total other income (expenses) .........              37              498
                                                  ------------     ------------

Income (loss) before income taxes ............            (961)             305

    Benefit (provision) for income taxes .....              (9)              (2)
                                                  ------------     ------------

Net income (loss) ............................    $       (970)    $        303
                                                  ============     ============

Weighted average shares - basic ..............      22,401,229       14,234,405
                                                  ============     ============
    EPS, basic ...............................    $      (0.04)    $       0.02
                                                  ============     ============

Weighted average shares - diluted ............      22,401,229       14,793,965
                                                  ============     ============
    EPS, diluted .............................    $      (0.04)    $       0.02
                                                  ============     ============

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


                                       5
<PAGE>

                               YDI WIRELESS, INC.
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                    FOR THE THREE MONTHS ENDED MARCH 31, 2005
                        (in thousands, except share data)

<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>         <C>
Balances, January 1, 2005 ........   22,345,847   $    228    $ 59,637    $  7,277    $ (1,155)   $      4    $ 65,991
Treasury stock retired ...........           --         (5)     (1,150)         --       1,155          --          --
Exercise of stock options and
  warrants .......................       66,877          1          72          --          --          --          73
 Comprehensive income:
   Net income  (loss) ............           --         --          --        (970)         --          --        (970)
   Unrealized (loss) on
    investments ..................           --         --          --          --          --          (6)         (6)
                                     ----------   --------    --------    --------    --------    --------    --------

     Total comprehensive income ..           --         --          --        (970)         --          (6)       (976)
                                     ----------   --------    --------    --------    --------    --------    --------

Balances, March 31, 2005
  (unaudited) ....................   22,412,724   $    224    $ 58,559    $  6,307    $     --    $     (2)   $ 65,088
                                     ==========   ========    ========    ========    ========    ========    ========
</TABLE>

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


                                       6
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                                                       March 31,
                                                                  --------------------
                                                                    2005        2004
                                                                  --------    --------
<S>                                                               <C>         <C>
Cash flows from operating activities:
   Net income (loss) ..........................................   $   (970)   $    303
     Depreciation and amortization ............................        503          69
     Loss on write-down of investments available-for-sale .....        112          26
     Bad debt allowance (recovery) ............................        (90)        105
     Inventory allowance ......................................         59          --
     Changes in assets and liabilities affecting operations:
       Restricted cash ........................................         (2)         --
       Accounts receivable ....................................        178        (449)
       Refundable income taxes ................................        149          75
       Inventory ..............................................       (150)       (443)
       Deposits ...............................................         (6)         14
       Prepaid expenses .......................................       (245)        (78)
       Accounts payable and accrued expenses ..................     (1,359)        489
       Deferred revenue .......................................        (11)         --
                                                                  --------    --------

            Net cash provided by (used in) operating activities     (1,832)        111
                                                                  --------    --------

Cash flows from investing activities:
   Sale of securities .........................................      1,908         609
   Purchase of securities .....................................       (241)         --
   Proceeds on disposal of assets held for sale ...............         --          22
   Purchase of property and equipment .........................        (50)         --
   Investment in capitalized software .........................       (197)         --
                                                                  --------    --------

       Net cash provided by (used in) investing activities ....      1,420         631
                                                                  --------    --------

Cash flows from financing activities:
   Distributions to Merry Fields members ......................         --         (50)
   Exercise of stock options and warrants .....................         73         197
   Repayment of notes payable .................................        (45)        (62)
                                                                  --------    --------

       Net cash provided by (used in) financing activities ....         28          85
                                                                  --------    --------

Net increase (decrease) in cash and cash equivalents ..........       (384)        827
Cash and cash equivalents, beginning of period ................     35,368       8,990
                                                                  --------    --------

Cash and cash equivalents, end of period ......................   $ 34,984    $  9,817
                                                                  ========    ========

Supplemental disclosure of cash flow information:
   Cash paid for interest .....................................   $     66    $     29
                                                                  ========    ========
   Income taxes paid ..........................................   $      9    $      2
                                                                  ========    ========
</TABLE>

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


                                       7
<PAGE>

                               YDI WIRELESS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Presentation

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

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

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

      Summarized information for our Equipment and Services businesses for the
first quarter ended March 31, 2005 is as follows:

                                         Equipment      Services      Total
Assets..............................   $     70,839   $     3,885   $    74,724
Revenue.............................   $      5,908   $       689   $     6,597
Operating income (loss) ............   $       (379)  $      (591)  $      (970)

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

2.    Stock Based Compensation

      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 $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):


                                       8
<PAGE>
<TABLE>
<CAPTION>
                                                                           March 31,
                                                                   --------------------------
                                                                       2005           2004
                                                                   -----------    -----------
                                                                   (unaudited)    (unaudited)
<S>                                                                <C>            <C>
Net income (loss) attributable to common stockholders, as
    reported: ..................................................   $      (970)   $       303
Less: Total stock based employee compensation expense determined
    under the fair value based method for all awards ...........           724             75
                                                                   -----------    -----------

Pro forma net income (loss) attributable to common stockholders    $    (1,694)   $       228
                                                                   ===========    ===========

Basic net income (loss) per common share, as reported ..........   $     (0.04)   $      0.02
                                                                   ===========    ===========
Basic net income (loss) per common share, pro forma ............   $     (0.08)   $      0.02
                                                                   ===========    ===========
Diluted net income (loss) per common share, as reported ........   $     (0.04)   $      0.02
                                                                   ===========    ===========
Diluted net income (loss) per common share, pro forma ..........   $     (0.08)   $      0.02
                                                                   ===========    ===========
</TABLE>

3.    Comprehensive Income (Loss)

      The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income." During the three months ended March 31, 2005,
and 2004, the Company had comprehensive income (loss) of $(976) and $49,
respectively, including approximately $(6) and $(254) (unaudited), respectively,
of unrealized (losses) gains on available-for-sale investments, net of income
taxes of $0, and $0.

4.    Inventory

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

    (in thousands)
                                              March 31,      December 31,
                                                2005             2004
                                            -------------    -------------
                                             (unaudited)
    Raw materials .......................   $       1,865    $       1,968
    Work in process .....................             199              124
    Finished goods ......................           6,128            5,950
                                            -------------    -------------
                                                    8,192            8,042
    Allowance for excess and obsolescence            (659)            (600)
                                            -------------    -------------
    Net Inventory .......................   $       7,533    $       7,442
                                            =============    =============

5.    Earnings per share

                                                          March 31,
                                                  --------------------------
                                                      2005           2004
                                                  -----------    -----------
                                                  (unaudited)    (unaudited)
Numerator (in thousands):

     Net income (loss) ........................   $      (970)   $       303
                                                  ===========    ===========

Denominator- weighted average shares:

     Denominator for basic earnings per share .    22,401,229     14,234,405

     Dilutive effect of stock options .........            --        559,560
                                                  -----------    -----------

     Denominator for diluted earnings per share    22,401,229     14,793,965
                                                  ===========    ===========

     Basic earnings (loss) per share ..........         (0.04)   $      0.02
                                                  ===========    ===========

     Diluted earnings (loss) per share ........   $     (0.04)   $      0.02
                                                  ===========    ===========

      For the three-month periods ended March 31, 2005 and 2004, stock options
and warrants to purchase approximately 538,000 and 323,000, respectively, shares
of common stock were outstanding, but were not included in the computation of
diluted net income per share because the exercise price of the stock options was
greater than the average share price of the Company's stock for the applicable
period so the effect would have been anti-dilutive.

                                       9
<PAGE>

6.    Concentrations

      During the three months ended March 31, 2005 and 2004, one customer
accounted for 11% of sales, but in each period ending it was a different
customer.

      The Company maintains its cash, cash equivalent, and restricted cash
balances in several banks. The balances are insured by the Federal Deposit
Insurance Corporation up to $100,000 per bank. At March 31, 2005 and 2004, the
uninsured portion totaled approximately $39.3 million and $9.6 million,
respectively.

7.    Acquisitions

      On May 13, 2004, YDI acquired KarlNet and as part of the definitive
agreement for the acquisition of KarlNet there were provisions within the
agreement that provided for various contingent consideration after the initial
acquisition date. YDI will pay up to an additional $2.5 million over the two
years following closing based on achievement of certain milestones and
compliance with other conditions. As of March 31, 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.

8.    Convertible debt

      The Company assumed convertible notes as part of the Terabeam acquisition.
The convertible notes' aggregate principal amount totals $2.5 million. The notes
mature in July 2005, with interest only payments at an annual rate of 6.75% in
quarterly installments. At the discretion of holders of the notes, the notes are
convertible into shares of the Company's common stock beginning in July 2004,
based on a value of $27.27 per share of common stock or 91,675 shares. If the
conversion option is not elected prior to July 12, 2005, the holders will
receive the principal of $2.5 million in cash on the maturity date. The Company
has classified the convertible notes as a short-term liability on the
accompanying balance sheet as of March 31, 2005.

9.    Restricted cash

      As part of the Terabeam acquisition, YDI Wireless acquired restricted
cash. As of March 31, 2005, the restricted cash amounted to $5.1 million which
consisted of $0.1 as collateral for letters of credit relating to lease
obligations and $5.0 million held in an indemnification trust for the benefit of
former Terabeam directors and officers. This trust was established by Terabeam
in January 2002, and the funds are managed by an unrelated trustee. To date, no
claims have been asserted against the trust funds. The trust expires in 2007 and
any remaining funds will be distributed to the Company.

10.   Investment securities

      Other income (loss) for the three months ended March 31, 2005 included a
loss of $112,000 due to a decline in value deemed to be other than temporary on
our investment securities - available for sale due to rising interest rates and
a decline in one of our equity positions during the period.

11.   Contingencies

      During the period from June 12 to September 13, 2001, four purported
securities class action lawsuits were filed against Telaxis 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


                                       10
<PAGE>

public offering registration statement concerning the underwriters' alleged
activities in connection with the underwriting of Telaxis' shares to the public.
The amended complaint seeks, among other things, unspecified damages and costs
associated with the litigation. These lawsuits have been assigned along with, we
understand, approximately 1,000 other lawsuits making substantially similar
allegations against approximately 300 other publicly-traded companies and their
public offering underwriters to a single federal judge in the U.S. District
Court for the Southern District of New York for consolidated pre-trial purposes.
We believe the claims against us are without merit and have defended the
litigation vigorously. The litigation process is inherently uncertain, however,
and there can be no assurance that the outcome of these claims will be favorable
for us.

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

      In June 2003, we elected to participate in a proposed settlement agreement
with the plaintiffs in this litigation. We understand that a large majority of
the other issuer defendants have also elected to participate in this proposed
settlement. If ultimately approved by the court, this proposed settlement would
result in the dismissal, with prejudice, of all claims in the litigation against
us and against the other issuer defendants who elect to participate in the
proposed settlement, together with the current or former officers and directors
of participating issuers who were named as individual defendants. The proposed
settlement does not provide for the resolution of any claims against the
underwriter defendants. The proposed settlement provides that the insurers of
the participating issuer defendants will guarantee that the plaintiffs in the
cases brought against the participating issuer defendants will recover at least
$1 billion. This means there will be no monetary obligation to the plaintiffs if
they recover $1 billion or more from the underwriter defendants. In addition, we
and the other participating issuer defendants will be required to assign to the
plaintiffs certain claims that the participating issuer defendants may have
against the underwriters of their IPOs.

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

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


                                       11
<PAGE>

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

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

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

Overview

      We are a designer and manufacturer of broadband wireless equipment and
systems in the licensed-free wireless products communications industry. Our
point-to-point (PTP) and point-to-multipoint (PTM) systems are primarily used by
wireless operators to connect their base stations to other base stations and to
existing wire line networks. We continually invest in the development and
introduction of wireless products in the marketplace in an effort to provide
customers with the best price/performance ratio for license-free wireless
communications. During 2004 and 2003, we made a strategic decision to expand our
product suite to include high bandwidth PTP backhaul products that would
complement our 802.11b PTM TeraStar(TM) and TeraStar(TM) Turbo product
offerings. Therefore, rather than design such backhaul products on our own, we
purchased inventory as well as license rights to manufacture and sell what we
call our TeraBridge(TM) products. In addition, through our acquisition of
Terabeam Corporation, we also acquired our high-end GigaLink(R) millimeter wave
product suite and our TeraOptic(TM) free space optics (FSO) product. These
products continue to give us a broad product line within this large market
segment. Our PTP products primarily enable service providers, businesses, and
other enterprises to expand or establish private networks by bridging data
traffic among multiple facilities. In addition, our enhanced PTM systems, known
as our TeraMax(TM) product suite, enables service providers, businesses, and
other enterprises to connect multiple facilities within a geographic area to a
central hub. We also believe that our diverse and expanding customer base as
well as our market and industry experience makes us a strong competitor in the
wireless communications market. In addition, we are an experienced designer of
turnkey long distance wireless systems for applications such as wireless
Internet, wireless video, wireless local area networks (LANs), wireless wide
area networks (WANs), and private wireless networks.

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

      For the quarter ended March 31, 2005, the revenue and operating loss for
our equipment business were $5.9 million and $379,000, respectively, and the
revenue and operating loss for our services business were $689,000 and $591,000,
respectively. As of March 31, 2005, assets of our equipment business were $70.8
million and assets of our services business were approximately $3.9 million.
Thus, our services business constituted approximately 10% of our overall revenue
and approximately 59% of our operating loss for that quarter.

      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.


                                       12
<PAGE>

Critical Accounting Policies

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

   Revenue Recognition

      For our equipment business, we recognize revenue when a formal purchase
commitment has been received, shipment has been made to the customer, collection
is probable and, if contractually required, a customer's acceptance has been
received. For our services business, we recognize revenue when the customer pays
for and then has access to our network for the current fiscal period. Any funds
the customer pays for future fiscal periods are treated as deferred revenue and
recognized in the future fiscal periods for which the customer has access to our
network.

   Asset Impairment

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

   Accounts Receivable Valuation

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

   Inventory Valuation

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

   Goodwill

      Goodwill is the excess of the cost of an acquired entity over the net
amounts assigned to assets acquired and liabilities assumed. Goodwill is not
amortized but is tested for impairment at least annually at the reporting unit
level, and more frequently if an event occurs or circumstances change that would
more likely than not reduce the fair value of a reporting unit below its
carrying amount. As of March 31, 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.
Intangible assets with finite lives are reviewed for impairment. An impairment
loss on such assets is


                                       13
<PAGE>

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

      Our intangible assets include purchased technology and various assets
acquired in business combination transactions. Assets acquired in business
combination transactions include existing hardware technologies, trade names,
existing software technologies, customer relationships and patents. Some of
these assets have finite useful lives and some have indefinite useful lives. As
of March 31, 2005, no impairment losses have been recognized on any of the
intangible assets we owned.

   Capitalized Software

      We have capitalized software costs of approximately $1.2 million, net of
amortization, related to software products available for sale. We are amortizing
those costs over the expected lives of the products. The annual amortization
will be the straight-line method over the remaining estimated economic life of
the product including the period being reported on. In addition, we capitalize
software costs for projects from the time the project is determined to be
technologically feasible until the project is salable. When the project becomes
salable, we will cease capitalizing costs and begin amortizing costs previously
capitalized over the expected salable life of the project. Approximately
$879,000 of software related costs are not being amortized since the software
has not been placed in service as of the March 31, 2005. Approximately $198,000
was capitalized in software costs during the first quarter of 2005. Prior to the
KarlNet acquisition on May 13, 2004, we had no internally developed software
capitalized costs.

Results of Operations

For the three months ended March 31, 2005 and 2004

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

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

          Sales ................................      100%       100%
          Cost of goods sold ...................       50         59
                                                   ------     ------

          Gross profit .........................       50         41
          Operating expenses
              Selling costs ....................       15          7
              General and administrative .......       38         29
              Research and development .........       12          8
                                                   ------     ------

                 Total operating expenses ......       65         44
                                                   ------     ------

          Operating (loss) income ..............      (15)        (3)
          Other income (expenses) ..............       --          8
          Income taxes .........................       --         --
                                                   ------     ------

          Net income ...........................      (15)%        5%
                                                   ======     ======

   Sales

      Sales for the three months ended March 31, 2005 were $6.6 million as
compared to $6.0 million for the same period in 2004 for an increase of $0.6
million or 10%. The three primary reasons for the increase in our revenue were a
full quarter of combined operations with the three companies we acquired in the
second quarter of 2004, the introduction and sale of new TeraMax(TM)
point-to-multipoint products and related peripherals, and results


                                       14
<PAGE>

from our strategic focus on increasing our sales to international markets,
established carriers, and government entities. The companies we acquired in 2004
contributed positively to our revenue through enhanced equipment sales with
improved software, service revenue, and higher-frequency and higher-data rate
products and components. We are pleased with the early sales levels of our
TeraMax(TM) products, which we believe is a feature-rich product that can
address the needs of larger operators. We continue to maintain our pricing
levels as much as possible across all our product lines and focus our sales
efforts on the additional features and benefits of our products. While this may
have a negative impact on our revenue, this decision is consistent with our goal
of expanding our customer base to include larger customers who demand premium
quality and support. We believe that larger customers tend to consider product
functionality and quality, customer service support, field and technical
support, and on-going training as important factors in their purchasing decision
rather than simply focusing on price. We also believe our marketing and branding
efforts are bearing fruit and more wireless equipment customers are beginning to
recognize the product offerings and other capabilities we offer. In the past
quarter, we began sales to several new large customers that sell to various
government agencies. We continue to see intense competition and pricing pressure
in our industry across all of our product lines, especially at the lower
bandwidths. We continue to monitor this competition so that we can react as we
deem appropriate.

      In the most recent quarter, our service business made up just over 10% of
our total consolidated revenue of $6.6 million from over 8,000 subscribers. This
represents an increase of just under 20% from the number of subscribers when we
acquired Ricochet(R) network on June 25, 2005. We continue our efforts to
increase the number of subscribers.

      For the quarters ending March 31, 2005 and 2004, international sales,
excluding Canada, approximated 17% and 18%, respectively, of total sales. The
reason for the decline in international sales as a percent of sales is the fact
that all of our services business is domestic and in the first quarter of 2004
there was no comparable services revenues. International sales are up in dollar
terms from the year ago comparable quarter.

   Cost of goods sold and gross profit

      Cost of goods sold and gross profit for the three months ended March 31,
2005 were $3.3 million and $3.3 million, respectively. For the same period in
2004, costs of goods sold and gross profit were $3.6 million and $2.5 million,
respectively. Gross profit margin, as a percentage of sales, for the three
months ended March 31, 2005 and 2004 was 50% and 41%, respectively. Gross
profits improved significantly from last year's first quarter primarily due to
the following factors: 1) our maintaining or even increasing our product prices
wherever competition or market conditions would allow; 2) our ability to offer
more feature-rich products without significant additional cost due in large part
to our acquisition of KarlNet last year; 3) the introduction of our newest
point-to-multipoint product TeraMax(TM); and 4) our increased offshore
manufacturing of mechanical components.

      Gross margins in our services business were approximately 24% of service
net revenue in the first quarter. Those gross margins have increased as we have
added additional subscribers to our operating networks, and we believe we have
the opportunity to increase our service gross margin by continuing to add
additional subscribers to those operating networks given the relatively low
incremental cost of adding subscribers to those networks.

   Sales and Marketing Expenses

      Sales and marketing expenses consist primarily of employee salaries and
associated costs for selling, marketing, customer and technical support as well
as field support. Sales and marketing expenses for the three months ended March
31, 2005 were $1.0 million, an increase of $0.6 million (approximately 127%)
over $0.4 million for the same period in 2004. This increase was due primarily
to the following factors: 1) increased sales headcount as well as increased
salaries for more experienced sales personnel amounted to nearly $300,000; 2)
increased travel by sales, attendance at tradeshows and more being spent on
sales collateral for products, brands and new company identity amounted to
approximately nearly $100,000; 3) increased personnel for enhanced customer,
technical and sales engineering support amounted to nearly $80,000; and 4)
increased personnel in marketing as well as addition of more experienced
marketing support people amounted to $60,000. We are also continuing to have our
products certified by selected in-country regulatory authorities, such as those
in the Asia Pacific, Latin America, Europe, Middle East, and Africa regions to
improve our products' acceptance in these regions. This process has


                                       15
<PAGE>

been slower to mature than we had hoped, but our focus on hiring good,
experienced international salespeople to help the expansion continues to be one
of the top priorities.

      Our service business sales and marketing expenses were approximately 13%
of service net revenues for the first quarter. We are making significant efforts
to promote this service in our San Diego and Denver markets focused on both
retaining existing subscribers and obtaining new subscribers. We believe
customer acquisition and retention costs and employee salary and benefit costs
will continue to be the significant sales and marketing costs for our services
business.

   General and Administrative Expenses

      General and administrative expenses consist primarily of employee
salaries, benefits and associated costs for real estate leases, information
systems, finance, legal, and administration of a public company. General and
administrative expenses were $2.5 million for the three months ended March 31,
2005 compared to $1.7 million for the three months ended March 31, 2004
resulting in an increase of about 45% or over $700,000 from the prior year's
reporting period. The increase is a result of the three acquisitions that we
made during the second quarter of 2004 offset by reductions we were able to
achieve from the prior year's quarter. The increase is comprised primarily of
the following factors: 1) increased depreciation and amortization expense
amounted to approximately $430,000; 2) increased personnel being hired or
acquired through the acquisitions along with related fringe benefits amounted to
just under $150,000; 3) increases in general property and casualty insurance,
travel and other miscellaneous expenses amounted to approximately $100,000; 4)
increased rents and related expenses amounted to about $70,000; and 5) increased
accounting and professional and consultant fees amounted to nearly $60,000.
These increases were offset by a sizable decrease in bad debt expense and
reduction in expenses in numerous other expense categories.

      Our services business general and administrative expenses were just over
77% of services net revenue in the first quarter. The primary expenses in this
category are employee salary and benefit costs, depreciation and amortization,
facility rental expense, and professional fees. While we monitor these costs
very closely, we do not expect these costs to decrease significantly. However,
we expect they will begin to decline as a percentage of services revenue as more
new subscribers are added to our operating networks.

   Research and Development Expenses

      Research and development expenses consist primarily of personnel salaries
and fringe benefits and related costs associated with our product development
efforts. These include costs for development of products and components, test
equipment and related facilities. Research and development expenses increased to
$0.8 million for the three months ended March 31, 2005 from $0.5 million for the
three months ended March 31, 2004, an approximate increase of $300,000 or just
over 57%. The increase in research and development was primarily due to the
addition of research and development engineering personnel through our
acquisitions as well as additional prototype material and other related support
costs required for our new product development efforts.

      Our services business research and development expenses were just over 20%
of services net revenue in the first 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 $37,000 in the first
quarter 2005. There were a number of significant factors in this category.
First, for the three months ended March 31, 2005 compared to the same period in
2004, interest income increased to approximately $221,000 from $24,000 because
of the investments and cash and cash equivalents we acquired as a result of the
Terabeam acquisition. Second, we took a permanent write-down of certain bond and
certain stock holdings in the amount of approximately $112,000. During the first
quarter of 2004, we realized a gain of approximately $500,000 from the sale of
legacy Telaxis intellectual property.


                                       16
<PAGE>

Liquidity and Capital Resources

      At March 31, 2005, we had cash, cash equivalents, and investments
available-for-sale of $38.6 million. This excludes restricted cash of $5.1
million. For the three months ended March 31, 2005, cash used by operations was
$1.8 million. We see no immediate requirement over the next twelve months for
external financing to fund our day-to-day normal operations, which includes
sales and marketing, research and development, and general and administrative
expenses on our equipment and services businesses.

      For the three months ended March 31, 2005, cash provided by investing
activities was $1.4 million. The majority of this amount was due to several
fixed income investments maturing during the first quarter of 2005.

      Cash used in financing activities was $28,000 for the three months ended
March 31, 2005. Debt repayments accounted for cash usage of $45,000. Stock
options and warrant exercises accounted for cash provided of $73,000 in cash
proceeds. Finally, the treasury stock repurchased in December 2004 was retired
resulting in an offset adjustment to the treasury stock account.

      During the first quarter of 2005 and 2004, Merry Fields distributed to its
members $0 and $50,000, respectively. The distributed amounts were Merry Fields'
funds generated from YDI rental payments to Merry Fields. Although Merry Fields
is a separate legal entity from YDI, its financial statements are consolidated
with YDI's for financial reporting purposes, which is why this Merry Fields
distribution appears on YDI's financial statements.

      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. One significant constraint to our equipment business
growth is the rate of new product introduction. These new products or product
lines may be designed and developed internally or acquired from existing
suppliers to reduce the time to market and inherent risks of new product
development. We will need to use some of our current capital to fund the
expected future operating losses in our services business given the significant
numbers of new subscribers we would have to add for that business to be
profitable. We may also use some of our current capital or raise additional
capital for our services business if we decide to expand the geographic areas in
which we offer service. Our current funding levels may have to be supplemented
through new bank debt financing, public debt or equity offerings, or other
means, depending upon our desired rate of future growth.

Safe Harbor for Forward-Looking Statements

   General Overview

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

      You should read forward-looking statements carefully because they may
discuss our future expectations, contain projections of our future results of
operations or of our financial position, or state other forward-looking
information. However, there may be events in the future that we are not able to
accurately predict or control.


                                       17
<PAGE>

Forward-looking statements are only predictions that relate to future events or
our future performance and are subject to substantial known and unknown risks,
uncertainties, assumptions, and other factors that may cause actual results,
outcomes, levels of activity, performance, developments, or achievements to be
materially different from any future results, outcomes, levels of activity,
performance, developments, or achievements expressed, anticipated, or implied by
these forward-looking statements. As a result, we cannot guarantee future
results, outcomes, levels of activity, performance, developments, or
achievements, and there can be no assurance that our expectations, intentions,
anticipations, beliefs, or projections will result or be achieved or
accomplished. In summary, you should not place undue reliance on any
forward-looking statements.

   Cautionary Statements of General Applicability

      In addition to other factors and matters discussed elsewhere in this Form
10-Q, in our other periodic reports and filings made from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to time (including, without limitation, our press releases), some of the
important factors that, in our view, could cause actual results to differ
materially from those expressed, anticipated, or implied in the forward-looking
statements include, without limitation, a severe worldwide slowdown in the
telecommunications equipment market and in the United States in particular; the
downturn and ongoing uncertainty in the telecommunications industry and larger
economy; developments in our relatively new industry and in the larger economy;
the intense competition in the telecommunications equipment and services
industries and resulting pressures on our pricing, gross margins, and general
financial performance; the impact, availability, pricing, and success of
competing technologies and products; difficulties in distinguishing our products
from competing technologies and products; difficulties or delays in obtaining
customers; dependence on a limited number of significant customers; lack of or
delay in market acceptance and demand for our current and contemplated products;
difficulties or delays in obtaining raw materials, subassemblies, or other
components for our products at the times, in the quantities, and at the prices
we desire or expect; risks arising from and relating to our 2004 acquisitions of
Ricochet Networks, Inc., Terabeam Corporation, and KarlNet, Inc. (including
without limitation 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;
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; difficulties in attracting and
retaining qualified personnel; our dependence on key personnel; inability to
protect our proprietary technology; the potential for intellectual property
infringement, warranty, product liability, and other claims; failure of our
customers to sell broadband connectivity solutions that include our products;
difficulties in our customers or ultimate end users of our products obtaining
sufficient funding; cancellation of orders without penalties; difficulties in
complying with existing governmental regulations and developments or changes in
governmental regulation; difficulties or delays in obtaining any necessary
governmental or regulatory permits, waivers, or approvals; our dependence on
third-party suppliers and manufacturers; difficulties in obtaining satisfactory
performance from third-party manufacturers and suppliers; our expected continued
losses from the operation of our services business; difficulties in attracting
and retaining subscribers for our services business; difficulties in expanding
our services business and costs and management issues associated with any
expansion; diversion of management time and other company resources to our
services business; risks associated with foreign sales such as collection,
currency and political risk; investment risk resulting in the decrease in value
of our investments; difficulties in collecting our accounts receivable; future
stock sales by our current stockholders, including our current and former
directors and management; 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

                                       18
<PAGE>

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 March 31, 2005, we had cash and cash equivalents of $35.0 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 March 31, 2005, the uninsured portion totaled
approximately $39.3 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.

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

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

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

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

Item 4. Controls and Procedures.

   Disclosure controls and procedures

      Based on their evaluation as of March 31, 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


                                       19
<PAGE>

reported within the time periods specified in SEC's rules and forms. In coming
to this conclusion, our Chief Executive Officer and Chief Financial Officer
considered the matters described under the next heading.

   Internal control over financial reporting

      Under current SEC regulations, we are not currently required to evaluate
or provide a report on our internal control over financial reporting. However,
we continue our analysis and action plans on that subject to better prepare us
for the time when we will be required to evaluate and provide a report on our
internal control over financial reporting. As reported in our annual report on
Form 10-K for the year ended December 31, 2004, in connection with its annual
audit and review procedures, our independent auditor considered and provided
input to us relating to our internal control over financial reporting. Our
auditor expressed concern that certain of our internal control procedures
regarding the reliability of financial reporting and the preparation of our
financial statements have two material weaknesses. Upon discovery of these
concerns, our auditors performed numerous additional audit procedures relating
to our financial statements for the years ended December 31, 2004 and 2003
before rendering their unqualified audit opinion. During the quarter ended March
31, 2005, we made numerous changes to our internal control over financial
reporting. The following table identifies the material weaknesses identified by
our auditors as well as responsive changes we have made to our internal controls
in the quarter ended March 31, 2005.

<TABLE>
<CAPTION>
           Original Material Weakness Described                           Responsive Changes Made
           ------------------------------------                           -----------------------

  o Weaknesses in period-ending financial reporting
    process

<S>                                                            <C>
         o General. We do not have a well-defined and             o We have created a written, detailed, well-
      organized closing process. The result was a delay        defined, and organized fiscal period end closing
      in producing financial reports and schedules             process checklist. This checklist describes
      needed for the audit process, numerous errors in         required closing procedures as well as the personnel
      various schedules prepared for the audit, the need       responsible for each procedure, the personnel
      for a number of significant and material adjusting       responsible for reviewing each procedure, and dates
      entries that were identified during the audit            for the completion and review of each procedure.
      process, and the incursion of extra audit fees to        We believe we prepared all significant closing
      perform the additional work.                             schedules for the period ended March 31, 2005 within
                                                               the time periods contemplated for the preparation
                                                               and review of our first quarter 2005 financial
                                                               statements. We also believe no material changes were
                                                               made to any of these schedules during the review process.

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

        o Controls over non-routine and non-                     o We now require that at least two experienced
      systematic transactions. We need better control          accounting personnel review the accounting
      over non-routine and non-systematic transactions         treatment of each non-routine and non-systematic
      that are often more complex when it comes to             transaction. We are improving the level of
      accounting and valuation issues. We need to              understanding of accounting principles and related
      better research and carefully document the               compliance in our accounting department and will
</TABLE>


                                       20
<PAGE>

<TABLE>
<S>                                                            <C>
      accounting principles and procedures to be               continue that education process. In order to help in
      followed when these non-routine transactions             this area, we have purchased for our accounting
      occur.                                                   department electronic access to accounting
                                                               principles, standards, and guidance.

        o Review of the allowance for doubtful                   o We believe we are making progress in
      accounts. We currently adjust our allowance for          identifying and taking into account other factors that
      doubtful accounts based on percentages applied           should be considered when calculating our allowance
      to each aging group. While we believe this               for doubtful accounts. We continue to work on this
      provides a reasonable basis to begin evaluating          issue. A related issue we are addressing is the need
      the allowance, we need to assess other factors           to ensure that credits to customers are entered into
      when considering the allowance for doubtful              the system within the same aging group that their
      accounts.                                                invoices are entered.

        o Weaknesses in the review and approval of the
      accounting function

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

        o Journal entry support and approval. Many               o We have implemented a written control
      of our journal entries lacked proper support and         procedure that requires all journal entries to have the
      approval by a responsible employee. Also, many           necessary support and a detailed explanation. We are
      of the explanations accompanying the entries             in the process of establishing and documenting the
      were inadequate.                                         process by which journal entries are approved.
</TABLE>

   Changes in internal control over financial reporting

      There was no change in our internal control over financial reporting
during our first quarter ended March 31, 2005 that has materially affected, or
is reasonably likely to materially affect, our internal control over our
financial reporting other than the changes described above under the preceding
heading "Internal Control over Financial Reporting." We expect we will continue
to make improvements to our internal control over financial reporting.


                                       21
<PAGE>

                           PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

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

      In June 2003, we elected to participate in a proposed settlement agreement
with the plaintiffs in this litigation. We understand that a large majority of
the other issuer defendants have also elected to participate in this proposed
settlement. If ultimately approved by the court, this proposed settlement would
result in the dismissal, with prejudice, of all claims in the litigation against
us and against the other issuer defendants who elect to participate in the
proposed settlement, together with the current or former officers and directors
of participating issuers who were named as individual defendants. The proposed
settlement does not provide for the resolution of any claims against the
underwriter defendants. The proposed settlement provides that the insurers of
the participating issuer defendants will guarantee that the plaintiffs in the
cases brought against the participating issuer defendants will recover at least
$1 billion. This means there will be no monetary obligation to the plaintiffs if
they recover $1 billion or more from the underwriter defendants. In addition, we
and the other participating issuer defendants will be required to assign to the
plaintiffs certain claims that the participating issuer defendants may have
against the underwriters of their IPOs.

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


                                       22
<PAGE>

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

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

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

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

Recent Sales of Unregistered Securities

      We issued 28,768 shares of common stock at $2.08 per share in January 2005
to a warrant holder upon the exercise of warrants on a cashless basis (we
withheld 22,756 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.

                                    SIGNATURE

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

                               YDI Wireless, Inc.


Date:  May 12, 2005           By:    /s/  Patrick L. Milton
                                   --------------------------------------------
                                   Patrick L. Milton,
                                   Chief Financial Officer and Treasurer
                                   (principal financial and accounting officer)



                                       23
<PAGE>

                                 EXHIBIT INDEX

<TABLE>

   Exhibit
   Number                                                     Description
<S>           <C>
    10.1      Policy Statement Concerning the Compensation of Directors of the Registrant who are not Insiders, dated
              February 9, 2005 (1)

    10.2      Employment Agreement between the Registrant and Robert E. Fitzgerald dated as of February 9, 2005 (1)

    10.3      Non-Qualified Stock Option Agreement between the Registrant and Robert E. Fitzgerald dated as of February
              9, 2005 (1)

    10.4      Office Lease by and between Ricochet Networks, Inc. and 1400 Glenarm Place Venture dated as of February 1,
              2005, with related Guaranty by the Registrant in favor of 1400 Glenarm Place Venture (2)

    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).
</TABLE>

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

      (1)   Incorporated herein by reference to the exhibits to Form 8-K filed
            with the SEC on February 15, 2005.

      (2)   Incorporated herein by reference to the exhibits to Form 10-K filed
            with the SEC on March 15, 2005.