Eagle Broadband 10Q 2006 Q1 Quarterly report

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 November 30, 2005

¨ 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 001-15649

EAGLE BROADBAND, INC.

(Exact name of registrant as specified in its charter)

TEXAS

(State or other jurisdiction of incorporation or organization)

76-0494995

(I.R.S. Employer Identification Number)

101 COURAGEOUS DRIVE

LEAGUE CITY, TEXAS 77573

(Address of principal executive offices) (Zip Code)

(281) 538-6000

(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. x Yes o No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). x Yes o No

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

As of January 6, 2006, the registrant had 303,086,275 shares of common stock outstanding.

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EAGLE BROADBAND, INC.

FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 30, 2005

TABLE OF CONTENTS

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PART I-FINANCIAL INFORMATION

Item 1. Financial Statements.

EAGLE BROADBAND, INC.

CONSOLIDATED BALANCE SHEETS

	November 30, 2005			August 31, 2005
ASSETS
Current Assets
Cash and Cash Equivalents	$	2,033		$	4,020
Cash in Restricted Account		203			203
Accounts Receivable, net		2,258			1,890
Inventories		707			802
Net investment in direct financing leases		524			525
Other Assets		298			298
Prepaid Expenses		1,004			632
Total Current Assets		7,027			8,370

Property and Equipment
Operating Equipment		32,246			32,298
Less: Accumulated Depreciation		(9,467	)		(8,994	)
Total Property and Equipment		22,779			23,304

Other Assets
Net investment in direct financing leases		750			853
Goodwill, net		4,095			4,095
Contract rights, net		2,849			2,921
Customer relationships, net		811			831
Other Intangible assets, net		834			859
Other Assets		5			680
Total Other Assets		9,344			10,239

Total Assets	$	39,150		$	41,913

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts Payable	$	4,500		$	6,640
Stock Payable		—			2,008
Accrued Expenses		11,243			9,477
Notes Payable		152			61
Deferred revenue		511			623
Total Current Liabilities		16,406			18,809

Shareholders’ Equity
Preferred Stock - $0.001 par value
5,000,000 shares authorized, none issued		—			—
Common Stock - $0.001 par value
350,000,000 shares authorized, 303,086,275 and 288,211,275 issued and outstanding at November 30, 2005 and August 31, 2005, respectively		303			288
Additional Paid in Capital		239,191			236,932
Accumulated Deficit		(216,750	)		(214,116	)
Total Shareholders’ Equity		22,744			23,104

Total Liabilities and Shareholders’ Equity	$	39,150		$	41,913

See accompanying notes to consolidated financial statements.

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EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	For the three months ended November 30,
	2005			2004
Net Sales
Structured wiring	$	422		$	262
Broadband services		852			1,216
Products		622			26
Other		38			24
Total Sales		1,934			1,528

Costs of Goods Sold
Direct Labor and Related Costs		500			262
Products and Integration Service		255			38
Structured Wiring Labor and Materials		289			175
Broadband Services Costs		144			920
Depreciation and Amortization		229			290
Other Manufacturing Costs		—			16
Total Costs of Goods Sold		1,417			1,685
Gross Profit		517			(157	)

Operating Expenses
Salaries and Related Costs		1,550			399
Advertising and Promotion		30			10
Depreciation and Amortization		361			841
Other Support Costs		1,111			2,949
Research and Development		105			143
Total Operating Expenses		3,157			4,342

Loss from Operations		(2,640	)		(4,499	)

Other Income/(Expenses)
Interest Income		8			4
Interest Expense		(2	)		(102	)
Gain (Loss) on Sale of Assets		—			149
Total Other Income (Expense)		6			51

Net Loss		(2,634	)		(4,448	)

Other Comprehensive Loss
Unrealized Holding Gain		—			1,048
Total Other Comprehensive Loss		—			1,048

Comprehensive Loss	$	(2,634	)	$	(3,400	)

Net Loss per Common Share
Basic		(0.01	)		(0.02	)
Diluted		(0.01	)		(0.02	)
Comprehensive Loss		(0.01	)		(0.02	)

See accompanying notes to consolidated financial statements.

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EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock										Accumulated			Total
				Preferred		Additional Paid		Retained			Comprehensive			Shareholders’
(*Shares and dollars in thousands*)	Shares		Value	Stock		in Capital		Earnings			Income			Equity

Shareholders’ Equity at August 31, 2004	205,509	$	206	__	$	208,051	$	(157,106	)	$	(1,048	)	$	50,103

Net Loss for the year ended August 31, 2005	—		—	—		—		(57,010	)		—			(57,010	)

New Stock Issued:
For services and compensation	5,119		5	—		2,339		—			—			2,344
For retirement of debt and accrued liabilities	27,663		27	—		13,334		—			—			13,361
Proceeds from sale of common stock, net	45,795		46	—		11,263		—			—			11,309
Proceeds from exercise of options	4,125		4	—		1,945		—			—			1,949

Unrealized Holding Loss	—		—	—		—		—			1,048			1,048

Shareholders’ Equity at August 31, 2005	288,211	$	288	—	$	236,932	$	(214,116	)	$	—		$	23,104


Net Loss for the three months ended November 30, 2005	—		—	—		—		(2,634	)		—			(2,634	)

New Stock Issued:
Proceeds from sale of common stock, net	14,875		15	—		1,993		—			—			2,008
Stock based compensation	—		—	—		266		—			—			266

Shareholders’ Equity at November 30, 2005	303,086	$	303	—	$	239,191	$	(216,750	)	$	—		$	22,744

See accompanying notes to consolidated financial statements.

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EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the three months ended November 30,
	2005			2004
Cash Flows from Operating Activities
Net Loss	$	(2,634	)	$	(4,448	)

Adjustments to Reconcile Net Loss to Net Cash:
Stock for compensation expense		266			—
Depreciation and amortization		590			1,131
Stock issued for interest expense		—			96
Stock issued for services rendered		—			1,423
Provision for bad debt		—			19
(Increase)/decrease in accounts receivable		(368	)		88
(Increase)/decrease in inventories		95			(1,238	)
(Increase)/decrease in prepaid expenses		(372	)		(79	)
Increase/(decrease) in accounts payable		(2,140	)		481
Increase in accrued expenses		1,708			1,657
Total Adjustment		(2,229	)		3,578
Net Cash Used for Operating Activities		(2,855	)		(870	)

Cash Flows from Investing Activities
(Purchase)/Disposal of Property and Equipment		2			(144	)
Increase/(Decrease) in Intangible Costs		—			(3	)
Increase/(Decrease) in Marketable Securities		—			551
(Increase)/Decrease in Other Assets		675			—
Gross Equipment Purchase for Direct Financing Leases		—			(641	)
Principal Collections on Direct Financing Leases		104			49
Net Cash Used for Investing Activities		777			(188	)

Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable & Long-Term Debt		91			(519	)
Net Cash Provided by Financing Activities		91			(519	)

Net Increase/(Decrease) in Cash		(1,987	)		(1,577	)
Cash at the beginning of the period		4,020			2,051
Cash at the end of the period	$	2,033		$	474

Supplemental Disclosure of Cash Flow Information
Net Cash Paid During the Year for:
Interest	$	1		$	6
Income taxes	$	—		$	—

See accompanying notes to consolidated financial statements.

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Eagle Broadband, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements November 30, 2005 (Unaudited)

NOTE 1 - Basis of Presentation and Significant Accounting Policies

The balance sheet of the Company as of November 30, 2005, the related statements of operations for the three months ended November 30, 2005 and 2004, and the statements of cash flows for the three months ended November 30, 2005 and 2004, included in the financial statements have been prepared by the Company without audit. In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal, recurring adjustments) necessary to summarize fairly the Company’s financial position and results of operations. The results of operations for the three months ended November 30, 2005, are not necessarily indicative of the results of operations for the full year or any other interim period. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and Financial Statements and notes thereto included in the Company’s August 31, 2005, Form 10-K.

NOTE 2 - Related Party Transactions

Dr. H. Dean Cubley, a director and former officer of the company, is the holder of a promissory note with a remaining principal amount of $1,924,000. The note is currently in default and is accruing interest under the terms of the original agreement. The note was issued upon the modification of outstanding options for 2,000,000 common shares and reflects a guaranteed compensation of the modified options equivalent to $1.75 less the option strike price. Interest of $243,449 and $154,922 has been accrued as of November 30, 2005 and August 31, 2005, respectively. The note payable and accrued interest are included in the Balance Sheets as accrued expenses.

Dr. Cubley is a director of ERF Wireless, Inc. ERF Wireless acted as a third-party construction subcontractor for Eagle during the quarter ended November 30, 2005. Purchases totaled $92,900 during the quarter ended November 30, 2005.

NOTE 3 - Accounts Receivable

Accounts receivable consist of the following (in thousands):

	November 30, 2005			August 31, 2005
Accounts receivable	$	2,412		$	4,578
Allowance for doubtful accounts		(154	)		(2,688	)
Accounts receivable, net	$	2,258		$	1,890

NOTE 4 - Property, Plant and Equipment and Intangible Assets

Components of property, plant and equipment are as follows (in thousands):

	November 30, 2005			August 31, 2005
Automobile	$	123		$	123
Headend facility and fiber infrastructure		24,031			24,154
Furniture and fixtures		520			520
Leasehold improvements		183			183
Office equipment		1,093			1,027
Manufacturing and operating equipment		6,296			6,291
Total property, plant and equipment	$	32,246		$	32,298
Less accumulated depreciation		(9,467	)		(8,994	)
Net property, plant and equipment	$	22,779		$	23,304

Eagle expenses repairs and maintenance against income as incurred, whereas major improvements are capitalized. Eagle defines major improvements as those assets acquired that extend the life of the underlying base asset, while defining other improvements that do not extend the life as repairs and maintenance. Eagle expensed repairs and maintenance of $29,000 and $12,000 for the three months ended November 30, 2005 and 2004, respectively, whereas it did not have any major improvements for the same time periods.

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Eagle’s headend facilities and fiber infrastructure consist primarily of digital computing and telecommunications equipment that comprise the Company’s main headend facility at its headquarters, wireless headend equipment, a digital headend facility and a fiber backbone in the master planned communities in which it operates and a fiber ring connecting the various master planned communities in the Houston area. The Company determined that twenty-year straight-line depreciation method is appropriate for its headend facilities and fiber infrastructure based on industry standards for these asset types.

Components of intangible assets are as follows (in thousands):

	November 30, 2005			August 31, 2005
Goodwill	$	4,095		$	4,095

Contract Rights	$	11,847		$	11,847
Accumulated amortization		(8,998	)		(8,926	)
	$	2,849		$	2,921

Customer Relationships	$	3,067		$	3,067
Accumulated amortization		(2,256	)		(2,236	)
	$	811		$	831

Other intangible assets	$	3,937		$	3,937
Accumulated amortization		(3,103	)		(3,078	)
	$	834		$	859

Total intangible assets	$	22,946		$	22,946
Total accumulated amortization		(14,358	)		(14,240	)
Net of amortization	$	8,589		$	8,706

NOTE 5 - Notes Payable

The following table lists the Company’s note obligations as of November 30, 2005, and August 31, 2005 (in thousands):


	Annual Interest Rate	Due Date		November 30, 2005		August 31, 2005
Notes Payable:
Other	Various	Various		152		61
Total Notes Payable			$	152	$	61
Less current portion				152		61
Total long-term debt			$	—	$	—

NOTE 6 - Assets Held for Sale

For the year ended August 31, 2005, and the quarter ended November 30, 2005, the Company has security contracts of $298,000 that are considered an Asset Held for Sale. These contracts are classified in other current assets. The Company intends to sell the remainder of these contracts during fiscal 2006.

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NOTE 7 - Income Taxes

The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” Implementation of SFAS 109 did not have a material cumulative effect on prior periods nor did it result in a change to the current year’s provision.

The effective tax rate for the Company is reconcilable to statutory tax rates as follows:

	November 30, 2005		August 31, 2005
U.S. Federal statutory tax rate		34%		34%
U.S. valuation difference		(34%)		(34%)
Effective U.S. tax rate		0%		0%
Foreign tax valuation		0%		0%
Effective tax rate		0%		0%

Income tax expense (benefit) attributable to income from continuing operations differed from the amounts computed by applying the U.S. Federal income tax rate of 34% to pretax income from continuing operations as a result of the following (in thousands):

	November 30, 2005			August 31, 2005
Computed expected tax benefit	$	(887	)	$	(19,360	)
Increase in valuation allowance		887			19,360
Income tax expense	$	—		$	—

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at November 30, 2005, and August 31, 2005, are presented below (in thousands) and include the balances of the merged company ClearWorks.net., Inc.

	November 30, 2005			August 31, 2005
Deferred tax assets:
Net operating loss carry forwards	$	(71,733	)	$	(70,846	)
Less valuation allowance		71,733			70,846
Net deferred tax assets	$	—		$	—

The valuation allowance for deferred tax assets of November 30, 2005, and August 31, 2005, was $71,733,000 and $70,846,000, respectively. As of November 30, 2005, the Company has net operating loss carry-forwards of $210,981,000, which is available to offset future federal taxable income, if any, with expirations from 2021 to 2023.

NOTE 8 - Stock Options and Warrants

In July 1996, the Board of Directors adopted, and the Company’s shareholders approved, the 1996 Incentive Stock Option Plan under which 400,000 shares of the Company’s common stock have been reserved for issuance. In June 2004, the Board of Directors adopted, and the Company’s shareholders approved, the June 2004 Compensatory Stock Option Plan under which 10,000,000 shares of the Company’s common stock has been reserved for issuance. In June 2005, the Board of Directors adopted, and the Company’s shareholders approved, the 2005 Employee Stock Option Plan under which 30,000,000 shares of the Company’s common stock has been reserved for issuance. As of November 30, 2005, options issued to employees covering 12,403,818 shares were outstanding, of which 4,524,287 were exercisable.

The Company has adopted FASB Statement 123R “Accounting for Stock-Based Compensation” effective September 1, 2005, for the fiscal year ending August 31, 2006. SFAS 123R supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.” As permitted under SFAS 123R, the Company adopted the modified prospective method on September 1, 2005. In accordance with the “modified prospective” method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. (See Recent Accounting Pronouncements and Note 17-Supplemental Non-Cash Disclosures.)

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The weighted average fair value of the individual options issued and granted during the three months ended November 30, 2005 is estimated as $0.77 on the date of grant. The fair values were determined using a Black-Scholes option-pricing model with the following assumptions:

	November 30,
	2005		��	2004
Dividend yield		0.00%			0.00%
Volatility		90%			91%
Risk-free interest rate		3.50%			4.00%
Expected life		5 years			5 years

Prior to September 1, 2005, the Company followed APB 25, “Accounting for Stock Issued to Employees.” Accordingly, since employee stock options are granted at market price on the date of grant, no compensation expense is recognized. However, SFAS 123 requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock options granted under the fair value method of that statement. In accordance with the provisions of SFAS 123R, the pro forma effect on net loss as if the fair value of stock-based compensation had been recognized as compensation expense on a straight-line basis over the vesting period of the stock option or purchase right was as follows for the three months ended November 30, 2004:

	Three months ended November 30, 2004
Net loss, as reported	$	(4,448	)
Add: Stock-based employee compensation included in reported net earnings/(loss), net of related tax effects		—
Less: Stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects		(61	)
Pro forma net earnings/(loss)	$	(4,509	)

Net loss per share:
As reported	$	(0.02	)
Pro forma	$	(0.02	)

Diluted net loss per share:
As reported	$	(0.02	)
Pro forma	$	(0.02	)

Option and warrant activity was as follows for the three months ended November 30, 2005:

	Shares			Weighted-Average Exercise Price
Outstanding at beginning of period		13,454,745		$	0.83
Granted		1,543,750			0.21
Assumed through acquisitions		—			—
Exercised		—			—
Forfeited/cancelled		(34,150	)		2.00
Outstanding at end of period		14,964,345		$	0.77
Exercisable at end of period		7,084,814			1.25

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Information about options and warrants outstanding was as follows at November 30, 2005:

Range of Exercise Prices	Number Outstanding		Avg. Remaining Contractual Life in Years		Average Exercise Price		Number Exercisable		Average Exercise Price
$0.00 - $0.50		10,167,161		3.91		0.21		3,914,369		0.24
$0.51 - $1.00		3,522,644		3.26		0.77		2,145,905		0.76
$1.01 - $7.50		1,274,540		2.23		5.21		1,024,540		6.15
		14,964,345		3.61		0.77		7,084,814		1.25

NOTE 9 - Risk Factors

For the three months ended November 30, 2005, substantially all of the Company’s business activities have remained within the United States and have been extended to the wireless infrastructure, fiber, cabling, computer services and broadband industries. Approximately, 30% of the Company's revenues and receivables have been created solely in the state of Texas, 0% in the international market, and the approximate 70% remainder relatively evenly over the rest of the nation during the three months ended November 30, 2005; whereas approximately, 71% of the Company's revenues and receivables were created solely in the state of Texas, 0% in the international market, and the approximate 29% remainder relatively evenly over the rest of the nation during the three months ended November 30, 2004. Through the normal course of business, the Company generally does not require its customers to post any collateral.

NOTE 10 - Foreign Operations

Although the Company is based in the United States, certain of its products are sold in international markets. Presently, international sales total 0% and 0% for the three months ended November 30, 2005 and 2004, respectively.

NOTE 11 - Commitments and Contingent Liabilities

Leases

For the three months ended November 30, 2005 and 2004, rental expenses of approximately $77,000 and $94,000, respectively, were incurred.

The Company renewed its primary office lease space in League City, Texas, for $24,983 per month with South Shore Harbor Development, Ltd. The renewal lease commenced on June 1, 2004, and expires on May 31, 2009. The lessor agreed to grant the Company a one-time option to terminate the lease at 36 months by paying an unamortized leasing commission of $35,000 and a penalty of 1½ months rent of $37,000 for a combined total of $72,000.

	August 31,		Amount
For the nine months ending		2006	$	224,852
For the year ending		2007		306,180
For the year ending		2008		325,316
For the year ending		2009		243,987
		Total	$	1,100,335

Legal Proceedings

In December 2000, Clearworks.net, Inc. became a defendant in State of Florida Department of Environmental Protection vs. Reco-Tricote, Inc., and Southeast Tire Recycling, Inc., currently known as Clearworks.net, Inc., in the Circuit Court of the Tenth Judicial Circuit in and for Polk County, Florida. The Florida DEP included Clearworks in a lawsuit presenting claims for recovery costs and penalties for a waste tire processing facility. The suit seeks recovery of costs and penalties in a sum in excess of $1 million, attorneys’ fees and cost of court. Clearworks denies the claims against it and intends to vigorously contest all claims in this case and to enforce its indemnification rights against the principals of Southeast Tire Recycling. The Company has not accrued any expenses against this lawsuit, as the outcome cannot be predicted at this time.

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In July 2003, Eagle became a defendant in Cornell Capital Partners, L.P., vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), in the United States District Court for the District of New Jersey. The suit presents claims for breach of contract, state and federal securities fraud and negligent misrepresentation. The plaintiff has also alleged that Eagle has defaulted on a convertible debenture for failing to timely register the shares of common stock underlying the convertible debenture and is seeking to accelerate the maturity date of the debenture. In November 2003, the principal balance of the debenture was repaid, although the suit remains outstanding. Cornell claims damages of approximately $1 million. The Company denies the claims and intends to vigorously defend this lawsuit and the claims against it. Eagle has asserted counterclaims against Cornell for fraud and breach of contract in the amount of $2 million. The company has accrued $416,000 in expenses against this lawsuit, although the outcome cannot be predicted at this time.

In June 2004, The Tail Wind Fund Ltd. sued Link-Two Communications, Inc., and Eagle Broadband, Inc., Civil Action 04-CV-05776, in the United States District Court for the Southern District of New York. Tail Wind claims breach of contract seeking $25 million. The Company is currently in negotiations with Tail Wind to settle this lawsuit and believes it can be settled out of court. As of November 30, 2005, and August 31, 2005, the Company has accrued $5 million in expenses against this lawsuit.

In October 2005, the Company and Enron Corp. agreed to a dismissal of all adversary proceedings and claims against each other in the proceedings filed against the Company by Enron in September 2003. In November 2005, the Bankruptcy Court entered orders confirming dismissal of such proceedings and claims.

In October 2005, the Company filed a lawsuit in the Superior Court of California, Santa Clara County, Civil Action 1-05-CV-050179, against certain individuals whose identities are unknown, for unfair business practices and defamation. The Company believes these individuals have deliberately posted false and misleading information on the Yahoo! Finance message board for the purpose of injuring the Company in several ways including, but not limited to, deflating the price of the Company’s stock and reaping profits from their illegal activities. The Company is seeking to enjoin these individuals from continuing such conduct, in addition to the full measure of damages and other remedies permitted by law.

In December 2005, the Company sued Neva Holdings, LLC (“Neva”) and other entities affiliated with Neva, Civil Action 05-CV-1525, in the United States District Court for the District of Nevada, for breach of the Termination Agreement entered into in August 2005 between the Company and Neva. The Company is seeking to recover payments in excess of $800,000 for hardware and equipment delivered and services rendered pursuant to the Termination Agreement, in addition to attorneys’ fees and pre- and post-judgment interest.

The Company is involved in lawsuits, claims and proceedings, including those identified above, which arise in the ordinary course of business. In accordance with SFAS No. 5, “Accounting for Contingencies,” Eagle makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The Company believes it has adequate provisions for any such matters. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, the Company believes that it has valid defenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies.

We intend to vigorously defend these and other lawsuits and claims against us. However, we cannot predict the outcome of these lawsuits, as well as other legal proceedings and claims with certainty. An adverse resolution of pending litigation could have a material adverse effect on our business, financial condition and results of operations. The Company is subject to legal proceedings and claims that arise in the ordinary course of business. The Company’s management does not expect that the results in any of these legal proceedings will have adverse affect on the Company’s financial condition or results of operations.

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NOTE 12 - Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per-share amounts):

	For the three months ended November 30, 2005
	Income (Numerator)			Shares (Denominator)		Per Share Amount
Net loss	$	(2,634	)		—	$	—
Basic EPS:
Income available to common shareholders		(2,634	)		290,336		(0.01	)
Effect of dilutive securities warrants		—			—		—
Diluted EPS:
Income available to common stockholders and assumed conversions	$	(2,634	)		290,336	$	(0.01	)

	For the three months ended November 30, 2004
		Income (Numerator)			Shares (Denominator)		Per Share Amount
Net loss	$	(4,448	)		—	$	—
Basic EPS:
Income available to common shareholders		(4,448	)		209,418		(0.02	)
Effect of dilutive securities warrants		—			—		—
Diluted EPS:
Income available to common stockholders and assumed conversions	$	(4,448	)		209,418	$	(0.02	)

For the three months ended November 30, 2005 and 2004, dilutive securities existed. (See Note 8.) The weighted average shares outstanding on a fully diluted basis as of November 30, 2005, and August 31, 2005, were approximately 295,009,000 and 242,566,000, respectively.

NOTE 13 - Retirement Plans

During October 1997, the Company initiated a 401(k) plan for its employees, funded through the contributions of its participants. Prior to March 2003, the Company matched the participant’s contribution up to 3% of their salary. Subsequent to March 2003, the plan was amended and the Company match became elective. For the three months ended November 30, 2005 and 2004, employee contributions were approximately $21,495 and $27,989, respectively. The Company matched $0 and $0, respectively, for those same periods.

NOTE 14 - Major Customer

The Company had gross revenues of $1,934,000 and $1,528,000 for the three months ended November 30, 2005 and 2004, respectively. The three-month period ended November 30, 2005, included $383,350, or 20% of the quarter’s total sales, for sales of security contracts to a third party by the Company’s security-monitoring service subsidiary, D.S.S. Security, Inc. The same three-month period ended November 30, 2005 also included $436,220 for the sale of set-top boxes and other products to a third party, or 23% of the quarter’s total sales.

The three-month period ended November 30, 2004, included $753,000 or 49% of the quarter’s total sales, from Sweetwater Security Capital, LLC, that were executed with the Company’s security monitoring service subsidiary, D.S.S. Security, Inc.

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NOTE 15 - Industry Segments

This summary reflects the Company’s current and past operating segments, as described below. All have discontinued operations except Eagle Broadband, Inc., Eagle Broadband Services, Inc., and D.S.S. Security, Inc.

Eagle:

Eagle Broadband, Inc. (Eagle) is a provider of broadband, Internet Protocol (IP) and communications technology and equipment with related software and broadband products (including past subsidiaries Eagle Wireless International, Inc.; and Etoolz, Inc., for this summary).

EBS/DSS:

Eagle Broadband Services, Inc. (EBS) provides broadband services to residential and business customers in select communities.

D.S.S. Security, Inc. (DSS) is a wholesale security monitoring company.

Clearworks Communications, Inc. provided solutions to consumers by implementing technology both within the residential community and home, through the installation of fiber optic backbones to deliver voice, video and data solutions directly to consumers. (Has discontinued operations.)

APC/HSI:

Atlantic Pacific Communications, Inc. (APC) specialized in providing professional data and voice cable and fiber optic installations through project management services on a nationwide basis for multiple site-cabling installations for end users and resellers. (Has discontinued operations.)

Clearworks Home Systems, Inc. (HSI) specialized in providing fiber optic and copper based structured wiring solutions and audio and visual equipment to single-family and multi-family dwelling units. (Has discontinued operations.)

UCG:

United Computing Group, Inc. (UCG) was a computer hardware and software reseller. (Has discontinued operations.)

Other:

Link-Two Communications, Inc. (Link II) was a developer and marketer of messaging systems. (Has discontinued operations.)

Clearworks.net, Inc. (.NET) is inactive with exception of debt related expenses. (Has discontinued operations.)

Contact Wireless, Inc. was a paging, cellular, and mobile services provider and reseller whose assets were sold October 10, 2003. (Has discontinued operations.)

For the three months ended November 30, 2005

	APC/HSI			EBS/DSS			UCG			Eagle			Other		Elim.			Consol
Revenue		0			852			0			1,082			0		0			1,934
Segment Loss		1			(794	)		(1	)		(1,846	)		0		0			(2,640	)
Total Assets		(8,975	)		(16,280	)		(3,778	)		94,989			16,305		(43,111	)		39,150
Capital Expenditures		0			0			0			2			0		0			2
Depreciation		0			341			1			248			0		0			590

For the three months ended November 30, 2004

	APC/HSI			EBS/DSS			UCG		Eagle			Other			Elim.			Consol
Revenue	$	21		$	1,216		$	—	$	291		$	—		$	—		$	1,528
Segment Loss		(35	)		(839	)		—		(3,604	)		(21	)		—			(4,499	)
Total Assets		30			28,579			32		125,551			56,935			(142,367	)		68,760
Capital Expenditures		—			70			—		74			—			—			144
Depreciation		10			397			1		702			21			—			1,131

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Reconciliation of Segment Loss from Operations to Net Loss

	Three Months Ended November 30,
	2005			2004
Total segment loss from operations		(2,640	)	$	(4,499	)
Total other income (expense)		6			51
Net loss		(2,634	)	$	(4,488	)

The accounting policies of the reportable segments are the same as those described in the section titled Critical Accounting Policies. The Company evaluates the performance of its operating segments based on income before net interest expense, income taxes, depreciation and amortization expense, accounting changes and non-recurring items.

NOTE 16 - Unaudited Quarterly Financial Data

	Nov. 30			Feb. 28			May 31			Aug. 31
Year Ended August 31, 2006
Revenues	$	1,934
Net earnings (loss)		(2,634	)
Basic loss per share		(0.01	)
Diluted loss per share		(0.01	)
Year Ended August 31, 2005
Revenues	$	1,528		$	2,683		$	2,976		$	1,405
Net earnings (loss)		(4,448	)		(9,326	)		(3,951	)		(39,285	)
Basic loss per share		(0.02	)		(0.04	)		(0.02	)		(0.14	)
Diluted loss per share		(0.02	)		(0.04	)		(0.02	)		(0.14	)
Year Ended August 31, 2004
Revenues	$	2,397		$	3,744		$	5,091		$	1,258
Net earnings (loss)		(8,461	)		(9,398	)		(4,373	)		(16,773	)
Basic loss per share		(0.05	)		(0.05	)		(0.02	)		(0.08	)
Diluted loss per share		(0.05	)		(0.05	)		(0.02	)		(0.08	)

NOTE 17 - Supplemental Non-Cash Disclosures

During the three months ended November 30, 2005, the company did not issue any stock in lieu of cash payments. The Company adopted SFAS 123R, “Accounting for Share-Based Payment”, during the quarter ended November 30, 2005, and has recorded a $266,000 non-cash charge to approximate the fair value of share-based compensation meeting the criteria outlined in the provisions of SFAS 123R. Stock payable of $2,008,215 was relieved during the current quarter to issue 14,875,000 shares sold to investors in August 2005. (See Note 18.)

Non-Cash Settlements ($ in thousands)		Three months ended November 30,
		2005		2004
Interest Expense	$	—	$	100
Professional Fees		—		294
Salary and Compensation		—		94
Accrued Liabilities		—		3,631
Notes Payable		—		1,184
Total Non-Cash Settlements	$	—		5,303

NOTE 18 - Equity Financing

In August 2005, the Company entered into a purchase agreement with certain investors for the sale of 30 million shares of its common stock at a price of $0.135 per share, and received total gross proceeds of $4,050,000. On August 26, 2005, the American Stock Exchange approved for listing 15,125,000 of these shares and notified the Company that shareholder approval was required for the issuance of the remaining 14,875,000 shares. On September 2, 2005, the Company voluntarily placed the funds received for the 14,875,000 shares

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($2,008,125) into an escrow account pending the shareholder vote. On September 8, 2005, the Company sent a revised proxy statement to its shareholders adding a fourth proposal to be voted on at its 2005 annual meeting of shareholders, which was scheduled to be held September 20, 2005, to approve the issuance of the 14,875,000 shares. On September 15, 2005, the Company announced its plan to adjourn the 2005 annual meeting until October 18, 2005, to allow shareholders adequate time to receive the revised proxy statement and consider the added proposal. At the October 18, 2005 meeting, shareholders approved the issuance of the 14,875,000 shares, and on October 19, 2005, the escrowed funds were released to the Company. On October 21, 2005, the Company applied for listing the 14,875,000 shares with the American Stock Exchange and received approval on November 17, 2005. The Company paid a placement agent a cash commission of 7% of the gross dollar proceeds, and agreed to issue such agent a five-year warrant to purchase 843,750 shares of Eagle common stock at an exercise price of $0.24 per share, expiring on August 31, 2010.

NOTE 19 - Subsequent Events

In November 2005, the Company entered into an agreement with a third party, under which the Company has agreed to lease the network and infrastructure used to deliver its bundled digital services for ten years. The Company’s obligation to lease the network and infrastructure is contingent upon the third party obtaining the financing necessary to fund the payments due under the agreement by December 31, 2005. As of December 31, 2005, the third party had not obtained such financing; however, the Company and the third party are negotiating to extend the December 31, 2005 deadline.

In January 2006, the Company entered into an agreement with Eric Blachno, pursuant to which Mr. Blachno resigned as the company’s Chief Financial Officer effective as of January 3, 2006. Under the agreement, Mr. Blachno will receive severance payments over a six-month period equal to six months salary. In connection with entering into the agreement, the Employment Agreement between Mr. Blachno and the Company dated November 4, 2004, was terminated. The severance payments provided for in the Agreement will be made in lieu of all compensation, bonuses, benefits and claims Mr. Blachno may have had under the Employment Agreement. The Company has engaged the same accounting consulting firm it engaged to complete its Sarbanes-Oxley 404 compliance project to assist the management team during the CFO transition.

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

The following discussion and analysis should be read in conjunction with the Financial Statements and Notes thereto appearing elsewhere in this Form 10-Q. Information included herein relating to projected growth and future results and events constitutes forward-looking statements. Actual results in future periods may differ materially from the forward-looking statements due to a number of risks and uncertainties, including but not limited to fluctuations in the construction, technology, communications and industrial sectors; the success of the Company��s restructuring and cost reduction plans; the success of the Company’s competitive pricing; the Company’s relationship with its suppliers; relations with the Company’s employees; the Company’s ability to manage its operating costs; the continued availability of financing and working capital to fund business operations; governmental regulations, risks associated with regional, national, and world economies; and ability to enter into strategic, profitable business relationships relating to our products and services. Any forward-looking statements should be considered in light of these factors. Eagle cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither Eagle nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. Eagle is under no duty to update any of the forward-looking statements after the date of this report to conform its prior statements to actual results.

Executive Overview

Eagle Broadband, Inc. (the “company” or “Eagle”), is a provider of broadband, Internet protocol (IP) and satellite communications technology and services. The company is focused on the following core areas: IPTV Complete™, MediaPro IP set-top boxes, and SatMAX™ satellite communications technology. The company’s product offerings include IPTVComplete, a fast, low-cost way for broadband providers to deliver competitive IP video services; the MediaPro line of standard and high definition IP set-top boxes that enable broadband providers and hotel operators to maximize revenues by delivering advanced interactive entertainment services; and the SatMAX satellite communications system that provides civilian government, military, homeland security and corporate customers with reliable, non-line-of-sight, satellite-based voice and data communications from any location on Earth.

As of November 30, 2005, the company’s active subsidiaries were: Eagle Broadband Services, Inc., D.S.S. Security, Inc., operating as Eagle Broadband Security, EBI Funding Corporation and Etoolz, Inc. Additionally, Eagle has a number of inactive subsidiaries that had results in one or more of the periods included in the financial statements covered by this report. These inactive subsidiaries include: Clearworks Communications, Inc., Clearworks.net, Inc., Clearworks Home Systems, Inc., Contact Wireless, Inc., United Computing Group, Inc., Atlantic Pacific Communications, Inc., and Link Two Communications, Inc. Eagle has incorporated certain ongoing operations of the inactive subsidiaries into the active subsidiaries listed above including Atlantic Pacific Communications, Inc. and Clearworks Communications, Inc. The consolidated financial statements include the accounts of the company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the company as a whole. This discussion should be read in conjunction with our financial statements and accompanying notes for the three months ended November 30, 2005.

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Results of Operations

Three Months Ended November 30, 2005, Compared to Three Months Ended November 30, 2004

The following table sets forth summarized consolidated financial information for the three months ended November 30, 2005 and 2004:

Condensed Financial Information

	Three Months Ended November 30,
($ in thousands)	2005			2004			$ Change			% Change
Net Sales	$	1,934		$	1,528		$	406			27%
Cost of Goods Sold		1,417			1,685			(268	)		(16%)
Gross Profit		517			(157	)		674
Percent of Sales		27%			(10%)

Operating Expenses		3,157			4,342			(1,185	)		(27%)
Loss from Operations		(2,640	)		(4,499	)		1,859			(41%)
Other Income (Expense)		6			51			(45	)		(88%)
Net Loss		(2,634	)		(4,448	)		1,814			(41%)
Unrealized Holding Loss		—			1,048			(1,048	)		(100%)
Comprehensive Loss	$	(2,634	)	$	(3,400	)	$	766			(23%)

For the three months ended November 30, 2005, the company’s business operations reflected an increase in broadband, security, and managed services. For the quarter ended November 30, 2005, the company’s consolidated operations generated net sales of $1,934,000 with a corresponding gross profit of $517,000. The overall increase of 27% in net sales for the three months ended November 30, 2005 as compared to the three months ended November 30, 2004 was primarily attributable to increased sales of IP set-top boxes, IPTVComplete and SatMAX units.

The company incurred a net loss of $2,634,000 for the three months ended November 30, 2005. The loss was attributable primarily to $1,151,000 in salaries and related costs and $991,000 for professional fess including legal, consulting and accounting, and direct labor costs of $500,000.

The company’s net loss for the three months ended November 30, 2005, included approximately $590,000 in depreciation and amortization expenses and $150,000 in other support costs for shared monthly satellite transponder costs associated with the delivery of the company’s IPTVComplete service. The net loss included $321,000 for salary expenses for prepaid commissions related to security contracts sold to a third party in November 2005, and a $266,000 non-cash charge to approximate the fair value of share-based compensation meeting the criteria outlined in the provisions of SFAS 123R.

The company’s net loss for the three months ended November 30, 2005 included a decrease in bad debt expense of $904,000 for the collection of receivables that had been deemed uncollectible from prior years.

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Sales Information

Set forth below is a table presenting summarized sales information for our business segments for the three months ended November 30, 2005 and 2004:

($ in thousands)	Three Months Ended November 30,
Business Segment	2005		% of Total		2004		% of Total		$ Change			% Change
Structured Wiring	$	422		22%	$	262		17%	$	160			61%
Broadband Services		852		44%		1,216		80%		(364	)		(30%)
Products		622		32%		26		2%		596			2,292%
Other		38		2%		24		1%		14			59%
Total	$	1,934		100%	$	1,528		100%	$	406			27%

For the three months ended November 30, 2005, net sales increased to $1,934,000 from $1,528,000, compared to the three-month period ended November 30, 2004. The overall increase of 27% was attributable to a $596,000 increase in the company’s product sales, an increase of $262,000 in structured wiring operations, a decrease of $364,000 in the company’s broadband services sales; and a $14,000 increase in other sales. The $596,000 increase in product sales includes sales of IP set-top boxes, IPTVComplete and SatMAX units.

The decrease of $364,000 in broadband services is primarily attributable to the decline in recurring security monitoring sales resulting from the sales of certain security monitoring contracts in the company’s portfolio to Alarm Security Group, LLC. The $262,000 increase in structured wiring sales corresponded to the company’s previously announced strategy to provide solutions to broadband and service provider partners within the BDS model. The $14,000 increase in other sales was primarily attributable to financing income lease payments for products related to the multimedia industry.

Cost of Goods Sold

The following table sets forth summarized cost of goods sold information for the three months ended November 30, 2005 and 2004:

	Three Months Ended November 30,
($ in thousands)	2005		2004		$ Change			% Change
Direct Labor and Related Costs	$	500	$	262	$	238			91%
Products and Integration Services		255		38		217			571%
Structured Wiring Labor and Material		289		175		114			65%
Broadband Services Costs		144		920		(776	)		(84%)
Depreciation and Amortization		229		290		(61	)		(21%)
Total Cost of Goods Sold	$	1,417	$	1,685	$	(268	)		(16%)

For the three months ended November 30, 2005, cost of goods sold decreased by 16% to $1,417,000 from $1,685,000 as compared to the three months ended November 30, 2004. The overall decrease of $268,000 was primarily attributable to the company’s decrease in base broadband services provided. The company’s overall gross profit percentage was 27% for the three months ended November 30, 2005, compared to an overall negative gross profit percentage of 10% for the three months ended November 30, 2004. This substantial increase in gross profit percentage is primarily attributable to (i) a decrease in depreciation expense for BDS assets and (ii) a decrease in broadband service costs as the company continued to realign staff and resources to concentrate on the three core offerings of the company: IPTV solutions, satellite communications and providing solutions to broadband and service provider partners.

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Operating Expenses

The following table sets forth summarized operating expense information for the three months ended November 30, 2005 and 2004:

	Three Months Ended November 30,
($ in thousands)	2005		2004		$ Change			% Change
Salaries and Related Costs	$	1,550	$	399	$	1,151			288%
Advertising and Promotion		30		10		20			200%
Depreciation and Amortization		361		841		(480	)		(57%)
Research and Development		105		143		(38	)		(27%)
Other Support Costs		1,111		2,949		(1,838	)		(62%)
Total Operating Expenses	$	3,157	$	4,342	$	(1,185	)		(27%)

The following table breaks out “Other support costs” information as presented in the preceding table for the three months ended November 30, 2005 and 2004:

	Three Months Ended November 30,
	2005			2004		$ Change			% Change
($ in thousands)
Auto Related		19			3		16			533%
Bad Debt		(904	)		19		(923	)		(4,858%)
Delivery and Postage		155			13		142			1,092%
Fees		8			36		(28	)		(78%)
Insurance and Office		104			83		21			25%
Professional and Contract Labor		991			2,290		(1,229	)		(57%)
Rent		92			94		(2	)		(2%)
Repairs and Maintenance		29			12		17			142%
Travel		82			88		(6	)		(7%)
Taxes		167			132		35			27%
Telephone and Utilities		163			156		7			4%
Other		205			23		182			791%
Total Other Support Costs	$	1,111		$	2,949	$	(1,838	)		(62%)

For the three months ended November 30, 2005, operating expenses decreased by 27% to $3,157,000 as compared to $4,342,000 for the three months ended November 30, 2004. The primary fluctuations that occurred as evidenced by the two preceding tables immediately above are discussed below:

A $1,838,000 decrease in other support costs, the components of which are set forth on the table included immediately above, that was primarily due to (i) a $923,000 decrease in bad debt expense for the collection of receivables deemed uncollectible in prior years that were collected in November 2005 and (ii) a $1,229,000 decrease in professional fees and contract labor, including a decrease of $1,040,000 in consulting fees, $145,000 decrease in accounting fees and $172,000 decrease in legal fees. These decreases were offset by a $142,000 increase in delivery fees for warranty product and a $182,000 increase in other fees that included costs associated with a purchase obligation to share monthly satellite transponder costs associated with the delivery of the company’s IPTVComplete service.

A $1,151,000 increase in salaries and related costs that included an increase of $90,000 for Board of Directors compensation, a non-cash charge of $266,000 for compensation expense in accordance with the provisions of SFAS 123R, and a non-cash charge of $321,000 to expense prepaid commissions related to security contracts sold to a third party in November 2005. Salaries and related costs for the period ending November 30, 2004, were reduced for a market to market adjustment of $336,000 related to guaranteed compensation. No similar adjustment was required for the period ending November 30, 2005.

·	A $480,000 decrease in depreciation and amortization expense for long-lived assets and intangibles that had impairment charges recorded for the year ended August 31, 2005, thus decreasing the depreciable basis and related depreciation expense for the quarter ended November 30, 2005.

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Net Loss

Net loss for the three months ended November 30, 2005, was $2,634,000, compared to a net loss of $4,448,000 during the three months ended November 30, 2004.

Changes in Cash Flow

Eagle’s operating activities used net cash of $2,855,000 in the three months ended November 30, 2005, compared to use of net cash of $870,000 in the three months ended November 30, 2004. The increase in net cash used by operating activities was primarily attributable to fund an increase in the company’s net operating loss, net of non-cash charges, totaling $856,000 combined with $1,077,000 of cash provided by fluctuations in working capital requirements consisting of the combination of accounts receivable, inventory, prepaid expenses, accounts payable and accrued expenses. Eagle’s investing activities provided net cash of $777,000 in the three months ended November 30, 2005, compared to cash used of $188,000 in the three months ended November 30, 2004. The increase was due primarily to the release of a $675,000 surety bond for a completed project. Eagle’s financing activities provided net cash of $91,000 in the three months ended November 30, 2005, compared to $519,000, of cash used in the three months ended November 30, 2004. The increase was due to the execution of a short-term note payable for insurance. (See Note 18-Equity Financing.)

Liquidity and Capital Resources

Current assets for the three months ended November 30, 2005, totaled $7,027,000 (includes cash and cash equivalents of $2,236,000) as compared to $8,370,000 reported for the year ended August 31, 2005. During the three months ended November 30, 2005, net proceeds of $2,008,215 were released from escrow to Eagle for the sale of 14,875,000 shares sold to investors in August 2005. The funds were voluntarily placed in escrow by the Company on September 2, 2005 pending approval by shareholders for issuance of such shares. The shareholders approved the issuance at the annual meeting on October 18, 2005.

The company anticipates that it will incur significantly less capital expenditures for broadband fiber infrastructure as a result of an emphasis of the sale of its BDS services to municipalities, real estate developers, hotels, multi-tenant units and service providers that own or will build a their own fiber networks. Historically, the company built out these networks, thereby incurring significant capital expenditures. The company incurred approximately $2,000 in capital expenditures during the three months ended November 30, 2005. The company currently intends to continue its nationwide expansion into the delivery of bundled digital services using partnerships and joint marketing agreements funded through cash in amounts equal to or exceeding expenditures in fiscal 2005 as well as through equity securities.

The company expects that certain of its liabilities listed on the balance sheet under the headings Accounts Payable, Accrued Liabilities and Notes Payable will be retired by issuing stock versus cash during the next 12 months. The company has historically used stock for retirement of certain liabilities on a negotiated basis. Eagle expects to continue its practice of retiring certain liabilities as may be negotiated through a combination of cash and the issuance of shares of Eagle common stock. The company cannot quantify the amount of common stock expected to be issued to retire such debts at this time and as such will report these results on a quarterly basis.

Historically, we have financed operations through the sale of debt and equity securities. During the year ended August 31, 2005, we raised $13,958,000 cash through the issuance of common stock upon the exercise of derivative securities. We do not have any significant credit facilities available with financial institutions or other third parties and historically we have relied upon best efforts third-party funding. Though we have been successful at raising additional capital on a best efforts basis in the past, we can provide no assurance that we will be successful in any future best-efforts financing endeavors. The company will continue to rely upon financing from external sources to fund its operations for the foreseeable future and it will likely need to raise additional capital to fund working capital requirements in the third quarter of 2006. If we are unable to either obtain financing from external sources or generate internal liquidity from operations in the future, we may need to curtail operations or sell assets.

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Contractual Obligations

The following table sets forth contractual obligations as of November 30, 2005:

(Thousands of dollars) Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Notes Payable Obligations	$	152	$	152	$	—	$	—	$	—
Operating Lease Obligations		1,100		225		875		—		—
Purchase Obligations and Commitments		2,850		450		1,800		600		—
Total	$	4,102	$	827	$	2,675	$	600	$	—

The company’s contractual obligations consist of current notes payable as set forth in Note 5-Notes Payable to the company’s financial statements, certain obligations for office space operating leases requiring future minimal commitments under non-cancelable leases (see Note 11-Commitments and Contingent Liabilities to the company’s financial statements), and a purchase obligation to share monthly satellite transponder costs associated with the delivery of the company’s IPTVComplete service.

Off-Balance Sheet Arrangements

As of November 30, 2005, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

CRITICAL ACCOUNTING POLICIES

Management strives to report the financial results of the company in a clear and understandable manner, even though in some cases accounting and disclosure rules are complex and require us to use technical terminology. In preparing our consolidated financial statements, we follow accounting principles generally accepted in the United States. These principles require us to make certain estimates and apply judgments that affect our financial position and results of operations as reflected in our financial statements. These judgments and estimates are based on past events and expectations of future outcomes. Actual results may differ from our estimates.

Management continually reviews its accounting policies, how they are applied and how they are reported and disclosed in our financial statements. Following is a summary of our more significant accounting policies and how they are applied in the preparation of the financial statements.

Impairment Assessment

Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets” requires that goodwill and intangible assets be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests in certain circumstances. The carrying amount of an intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment shall be based on the carrying amount of the asset at the date it is tested for recoverability.

The company performed, with the assistance of independent valuation experts, an impairment test of the carrying value of intangible assets for the year ended August 31, 2005. Eagle has intangible assets related to goodwill, contracts, customers and subscribers. For the year ended August 31, 2005, the company determined there had been significant erosion of contracts, customers and subscribers primarily attributable to the BDS assets acquired in the January 2001 merger of Clearworks.net, Inc.

The company evaluated and considered two separate methodologies in conducting the analysis and selected the approach assigning the greater value realized from the present value technique or the quoted market approach. The following factors were considered (i) current market conditions, (ii) the company’s current and future financial performance, (iii) intrinsic risks evident in the markets in which the company operates and (iv) the underlying nature of Eagle’s operations and business.

Utilizing a fair value standard as set forth in SFAS 142, as of August 31, 2005, management determined an impairment charge of $23,912,668 existed for the intangible assets of contract rights, customer relationships and other intangible assets primarily attributable to the BDS assets acquired in the January 2001 merger of Clearworks.net, Inc.

Eagle assessed the fair value of goodwill as of August 31, 2005 and concluded that the goodwill valuations remain at an amount greater than the current carrying asset value. Eagle assessed the fair value of the intangible assets as of August 31, 2004 and concluded that the goodwill and other intangible assets valuations remain at an amount greater than the current carrying and other intangible assets value.

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For the quarter ending November 30, 2005, management has determined there are no changes in circumstances since the fiscal year ended August 31, 2005 to indicate testing for impairment at the reporting unit level (operating segment or one level below an operating segment) is required.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that long-lived assets (asset groups) shall be tested for recoverability whenever events or change in circumstances indicate that its carrying amount may not be recoverable. The company’s market capitalization as of year ending August 31, 2005 was below its shareholder equity which indicated the need to test for recoverability. The company performed, with the assistance of independent valuation experts, tests to determine if an impairment loss existed for the year ended August 31, 2005. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets.

These tests took into consideration a number of factors including (i) current market conditions, (ii) the company’s current and future financial performance, (iii) intrinsic risks evident in the markets in which the company operates and (iv) the underlying nature of Eagle’s operations and business. Utilizing a fair value standard as set forth in SFAS 144 as of August 31, 2005, management determined an impairment of $3,229,405 existed for certain Houston-area communities where broadband infrastructure had been installed.

During the second quarter of 2005, the company also determined an impairment loss existed primarily for Link-Two Communications, Inc. assets. Management determined that the value of the assets was nominal after a review of the marketplace and recorded an impairment loss of $1,050,000. During the fourth quarter of 2005, the company had an additional impairment charge of $322,792 on assets held for sale.

For the quarter ending November 30, 2005, management has determined there are no changes in circumstances or events that have occurred subsequent to the fiscal year ended August 31, 2005 to indicate testing for recoverability was required.

Revenue Recognition

The company designs, manufactures, markets and services its products and services under the Eagle Broadband, Inc., Eagle Broadband Services, Inc., D.S.S. Security, Inc. and EBI Funding Corporation, names.

Eagle adopted EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” in the fourth quarter of fiscal 2003. The impact of adopting EITF 00-21 did not have a material effect to Eagle’s results of operations. Eagle’s contracts that contain multiple elements as of August 31, 2004, or prior were immaterial. When elements such as hardware, software and consulting services are contained in a single arrangement, or in related arrangements with the same customer, Eagle allocates revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. The price charged when the element is sold separately generally determines fair value. In the absence of fair value for a delivered element, Eagle allocates revenue first to the fair value of the undelivered elements and allocates the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. Eagle limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or subject to customer-specified return or refund privileges.

Deferred Revenues

Revenues that are billed in advance of services being completed are deferred until the conclusion of the period of the service for which the advance billing relates. Deferred revenues are included on the balance sheet as a current liability until the service is performed and then recognized in the period in which the service is completed. Eagle’s deferred revenues historically have consisted primarily of billings in advance for cable, Internet, security and telephone services, which generally are for between one and three months of services. The company has deferred revenue from the sale of security monitoring contracts, both purchased and owned until the contract provisions are fulfilled. The company has a twelve-month holdback provision for security contracts sold to a major customer during fiscal 2005. Eagle had deferred revenues of $511,000 as of November 30, 2005, which of this total, $411,608 is deferred for security contracts sold to a major customer. As of August 31, 2005, the company had deferred revenues of $623,000.

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Eagle Broadband, Inc.

Eagle designs, manufactures and markets various hardware, software and systems, along with other equipment used in the delivery of broadband, video entertainment and communications services. Revenues from these products are recognized when the product is shipped. Eagle Broadband Inc.’s international product revenues are reported under the category “Products” on Eagle’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “Eagle” within Note 15-Industry Segments.

The company designs, manufactures and markets a complete line of MediaPro IP set-top boxes. Eagle recognizes revenue when set-top boxes are shipped to the customer. The company’s set-top box revenues are reported under the category “Products” on Eagle’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “Eagle” within Note 15-Industry Segments. Revenue from software consists of software licensing. There is no post-contract customer support. Software revenue is allocated to the license using vendor specific objective evidence of fair value (“VSOE”) or, in the absence of VSOE, the residual method. The price charged when the element is sold separately generally determines VSOE. In the absence of VSOE of a delivered element, the company allocates revenue to the fair value of the undelivered elements and the residual revenue to the delivered elements. Eagle recognizes revenue allocated to software licenses at the inception of the license.

The company engages independent agents, resellers and distributors for sales principally in foreign countries and certain geographic regions in the United States. Under the terms of these agreements, these third parties provide the company with sales leads. The transactions from these third parties are subject to Eagle’s approval prior to sale. In certain circumstances, the sales agent or reseller/distributor receives commissions based on the amount of the sales invoice from the companies to the customer. The sale is recognized at the time of shipment to the customer. These transactions are not a significant portion of total sales in any of the periods presented. Eagle’s Broadband, Inc., revenues are reported under the category “Products” on the company’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “Eagle” within Note 15-Industry Segments.

The company sells and installs structured wiring and related customer premise equipment in residential customers’ homes. This company recognizes revenue and the related costs at the time the services are performed. Revenue is derived from the billing of structured wiring to homes and the sale of customer premise equipment to the homebuyers. For consistency with prior period reporting, Eagle’s residential structured wiring revenues are reported under the category “Structured Wiring” on Eagle’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “APC/HSI” within Note 15-Industry Segments.

Eagle Broadband Services, Inc. (BDS)

Eagle Broadband Services, Inc. provides broadband bundled digital services to business and residential customers, primarily in the Texas market. Revenue is derived from fees charged for the delivery of bundled digital services, which can include telephone, long distance, Internet, security monitoring and cable services. This subsidiary recognizes revenue and the related costs at the time the services are rendered. Installation fees are recognized upon completion and acceptance. The revenues are reported under the category “Broadband Services” on the company’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “EBS/DSS” within Note 15-Industry Segments.

Eagle Broadband Services, Inc. provides project planning, installation, project management, testing and documentation of fiber and cable to commercial and industrial clients throughout the United States. The revenue from the fiber and cable installation and services is recognized upon percentage of completion of the project. Most projects are completed in less than one month, therefore, matching revenue and expense in the period incurred. Service, training and extended warranty contract revenues are recognized as services are completed. For consistency with prior period reporting, Eagle’s communications services revenues are reported under the category “Structured Wiring” on Eagle’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “APC/HSI” within Note 15-Industry Segments.

Eagle Broadband Services, Inc. provides business-to-business hardware and software network solutions and network monitoring services. The revenue from the hardware and software sales is recognized at the time of shipment. The monitoring services recognition policy is to record revenue on completion. For consistency with prior period reporting, Eagle’s technology services product revenues are reported under the category “Products” while the services components are reported under the category “Other” on Eagle’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “UCG” within Note 15-Industry Segments.

D.S.S. Security, Inc. (d/b/a Eagle Broadband Security)

D.S.S. Security, Inc. provides security monitoring services to residential and commercial customers, purchases, bundles and resells contracts from its own portfolio to independent third-party companies. Security monitoring customers are billed three months in advance of service usage. The revenues are deferred at the time of billing and ratably recognized over the prepayment period as service is provided. Installation fees are recognized upon completion and acceptance. Revenues from the sale of security monitoring contracts, both purchased and owned, are recognized upon contract execution except for reserves, hold backs or retentions, which are deferred until the contract provisions are fulfilled. Eagle’s security services revenues are reported under the category “Broadband Services” on Eagle’s Consolidated Statements of Operations included as page F-3 of this report and also under the category “EBS/DSS” within Note 15-Industry Segments.

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Receivables

For the quarter ended November 30, 2005, Eagle accounts receivable increased to $2,258,000 from $1,890,000 at August 31, 2005. The majority of this increase was due to the sale of set-top boxes to a major customer at the end of November in the amount of $236,000 which was collected subsequent to the end of the quarter.

The company’s accounts receivable aging, as measured by days sales outstanding (DSO), totaled 53 days at November 30, 2005, and 47 days at August 31, 2005, on an adjusted basis after recording the write-offs and reserves. The increase in DSO from 47 days at August 31, 2005, to 53 days at November 30, 2005, was primarily attributable to several slow paying customers.

Allowance for Doubtful Accounts

The company’s allowance for doubtful accounts totaled $154,000 and $2,688,000 for the three months ended November 30, 2005 and the year ended August 31, 2005, respectively. These allowances for doubtful accounts amounts represented 6% and 59% of the gross accounts receivable balances for the quarter ended November 30, 2005 and the year ended August 31, 2005. They represented 36% and 82% of the company’s greater than 90-day accounts for the quarter ended November 30, 2005, and the year August 31, 2005. The decrease in the allowance for doubtful accounts from August 31, 2005 to November 30, 2005, was attributable to (i) the collection of a receivable previously included in the allowance and (ii) the direct write off of a receivable previously deemed uncollectible in a prior year.

The company reviews its accounts receivable balances by customer for accounts greater than 90 days old and makes a determination regarding the collectibility of the accounts based on specific circumstances and the payment history that exists with such customers. The company also takes into account its prior experience, the customer’s ability to pay and an assessment of the current economic conditions in determining the net realizable value of its receivables. The company also reviews its allowances for doubtful accounts in aggregate for adequacy following this assessment. Accordingly, the company believes that its allowances for doubtful accounts fairly represent the underlying collectibility risks associated with its accounts receivable.

Earnings are charged with a provision for doubtful accounts based on collection experience and current review of the collectibility of accounts receivable. Accounts receivables deemed uncollectible are charged against the allowance for doubtful accounts.

Inventory

Inventories are valued at the lower of cost or market. The cost is determined by using the first-in first-out method. At November 30, 2005, Eagle’s inventory totaled $707,000 as compared to $802,000 at August 31, 2005. The majority of this decrease is for a sale that occurred during the quarter. At the end of fiscal 2004, management incorporated “just in time” inventory practices to avoid inventory obsolesce. The company continues to outsource production as needed based on contract orders from customers.

Recent Accounting Pronouncements

In April 2004, the Emerging Issues Task Force (“EITF”) issued Statement No. 03-06 “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share” (“EITF 03-06”). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 became effective during the quarter ended June 30, 2004, the adoption of which did not have an impact on the calculation of earnings per share of the company.

In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” (“EITF 04-08”). EITF 04-08 reflects the Task Force’s tentative conclusion that contingently convertible debt should be included in diluted earnings per share computations regardless of whether the market price trigger has been met. If adopted, the consensus reached by the Task Force in this Issue will be effective for reporting periods ending after December 15, 2004. Prior period earnings per share amounts presented for comparative purposes would be required to be restated to conform to this consensus and the company would be required to include the shares issuable upon the conversion of the Notes in the diluted earnings per share computation for all periods during which the Notes are outstanding. Currently, there would be no effect of this proposed statement on our financial position and results of operations.

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In September 2004, the EITF delayed the effective date for the recognition and measurement guidance previously discussed under EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“EITF 03-01”) as included in paragraphs 10-20 of the proposed statement. The proposed statement will clarify the meaning of other-than-temporary impairment and its application to investments in debt and equity securities, in particular investments within the scope of FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method. Currently, there would be no effect of this proposed statement on its financial position and results of operations.

In December 2004, the FASB issued a revision to SFAS 123 (also known as SFAS 123R) that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R’s effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after December 15, 2005. SFAS 123R includes two transition methods: the modified prospective method or the modified retrospective method. The company adopted SFAS 123R commencing in the first quarter of the fiscal year ending August 31, 2006. The Company adopted the modified prospective method on September 1, 2005. In accordance with the “modified prospective” method, compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123R that remain unvested on the effective date. The company does not anticipate that adoption of SFAS 123R will have a material impact on its results of operations or its financial position.

Item 4. Controls and Procedures.

The company’s Chief Executive Officer and Principal Accounting Officer have evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of November 30, 2005. Based on such evaluation, such officers have concluded that the company’s disclosure controls and procedures are effective.

Changes in Internal Controls

There has been no change in the company’s internal control over financial reporting identified in connection with our evaluation as of the end our first fiscal quarter ended November 30, 2005, that has materially affected, or is reasonably likely to materially affect, the company’s internal controls over financial reporting.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

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

At the Company’s Annual Shareholders’ Meeting on October 18, 2005, the shareholders elected each of the director nominees, ratified the selection of our independent registered public accounting firm, approved the 2005 Employee Stock Option Plan, and approved the issuance of 14,875,000 shares of the Company’s common stock.

	Number of Shares
1. To elect seven directors to the Board of Directors to serve until the next annual meeting of shareholders or until their respective successors have been elected or appointed	Voted For	Withheld
Robert Bach	227,198,797	10,724,901
H. Dean Cubley	215,420,639	22,503,059
Glenn Goerke	225,070,852	12,852,846
David Micek	227,409,459	10,514,240
Lorne Persons	225,130,454	12,793,244
C. J. (Jim) Reinhartsen	225,164,608	12,759,090
James Yarbrough	224,992,973	12,930,725

	Number of Shares
	Voted For	Voted Against	Abstain	Broker Non- Votes (1)
2. To approve the 2005 Employee Stock Option Plan	72,669,515	23,481,777	1,523,094	140,249,313
3. To ratify selection of independent registered public accounting firm	229,326,271	6,064,937	2,532,491	—
4. To approve the issuance of 14,875,000 shares of the Company’s common stock	66,326,529	15,568,366	1,813,468	154,215,336

(1)

Pursuant to Article 2.28(B) of the Texas Business Corporation Act, the affirmative vote of the majority of the votes cast was required to pass each of Proposals 2 and 4. Significantly fewer shares voted on each of Proposals 2 and 4 than voted on Proposal 1, the election of directors, and Proposal 3, the ratification of the selection of the Company’s independent registered public accounting firm. “Broker non-votes” accounted for this difference in voted shares. For certain types of “non-routine” proposals, such as Proposals 2 and 4, brokers do not have the discretionary authority to vote their clients’ shares, and therefore they must refrain from voting on such proposals in the absence of instructions from their clients.

Item 6. Exhibits.

Exhibit Number		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

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

	EAGLE BROADBAND, INC.
	(Registrant)

	By: /s/ DAVID MICEK
	David Micek President and Chief Executive Officer Date: January 9, 2005

	By: /s/ JULIET MARKOVICH
	Juliet Markovich Corporate Controller and Principal Accounting Officer Date: January 9, 2005

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Eagle Broadband (EAGB) Inactive 10-Q2006 Q1 Quarterly report

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