Eagle Broadband (EAGB) 10-Q 2006 Q3 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 May 31, 2006

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 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer.

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

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 July 14, 2006, the registrant had 10,437,344 shares of common stock outstanding.

EAGLE BROADBAND, INC. FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2006 TABLE OF CONTENTS
	PAGE
PART I-FINANCIAL INFORMATION	2
Item 1. Financial Statements	2
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Shareholders’ Equity	4
Consolidated Statements of Cash Flows	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4. Controls and Procedures	31
PART II-OTHER INFORMATION	29
Item 1. Legal Proceedings	29
Item 4. Subission of Matters to a Vote of Security Holders	32
Item 6. Exhibits	32

-1-

PART I-FINANCIAL INFORMATION

Item 1.Financial Statements.

EAGLE BROADBAND, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)	May 31, 2006 (Unaudited)			August 31, 2005 (Audited)
ASSETS
Current Assets
Cash and Cash Equivalents	$	261		$	4,020
Cash in Restricted Account		—			203
Accounts Receivable, net		559			1,890
Inventories		590			802
Net Investment in Direct Financing Leases- current portion		524			525
Other Assets		—			298
Prepaid Expenses		589			632
Total Current Assets		2,523			8,370
Property and Equipment
Operating Equipment		31,861			32,298
Less: Accumulated Depreciation		(9,991	)		(8,994	)
Total Property and Equipment		21,870			23,304
Other Assets
Net Investment in Direct Financing Leases (net of current portion)		558			853
Goodwill		4,095			4,095
Contract Rights, net		2,706			2,921
Customer Relationships, net		769			831
Other Intangible Assets, net		785			859
Other Assets		4			680
Total Other Assets		8,917			10,239
Total Assets	$	33,310		$	41,913
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts Payable	$	6,542		$	6,640
Stock Payable		—			2,008
Accrued Expenses		4,010			9,477
Compound Embedded Derivative		223			—
Notes Payable & Current Portion of Long Term Debt		875			61
Deferred revenue		191			623
Total Current Liabilities		11,841			18,809
Long-Term Liabilities
Long Term Debt		2,827			—
Compound Embedded Derivative		340			—
Warrant Liability		142			—
Total Long-Term Liabilities		3,309			—
Total Liabilities		15,150			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,
9,647,893 and 8,234,608 issued and outstanding at May 31, 2006 and August 31, 2005, respectively		10			8
Additional Paid in Capital		241,459			237,212
Accumulated Deficit		(223,309	)		(214,116	)
Total Shareholders’ Equity		18,160			23,104
Total Liabilities and Shareholders’ Equity	$	33,310		$	41,913

See accompanying notes to consolidated financial statements.

-2-

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands)	For the three months ended May 31,						For the nine months ended May 31,
	2006			2005			2006		2005
Net Sales
Structured wiring	$	491		$	369		$	1,376	$	1,002
Broadband services		198			1,797			2,155		3,537
Products		138			774			919		2,553
Other		32			36			110		96
Total Sales		859			2,976			4,560		7,188
Costs of Goods Sold
Direct Labor and Related Costs		189			516			1,128		1,300
Products and Integration Service		343			799			799		3,002
Impairment Slow Moving & Obsolete Inventory		—			300			107		300
Structured Wiring Labor and Materials		394			270			1,114		776
Broadband Services Costs		22			207			251		1,465
Depreciation and Amortization		206			291			636		867
Total Costs of Goods Sold		1,154			2,383			4,035		7,710
Gross Margin		(295	)		593			525		(522	)
Operating Expenses
Salaries and Related Costs		993			1,194			3,861		4,737
Advertising and Promotion		42			(5	)		85		45
Depreciation and Amortization		267			805			961		2,451
Other Support Costs		545			3,382			3,675		8,989
Research and Development		223			197			538		572
Impairment Costs		—			—			—		1,050
Total Operating Expenses		2,070			5,573			9,120		17,844
Loss from Operations		(2,365)			(4,980)			(8,595)		(18,366)
Other Income/(Expenses)
Interest Income		3			17			15		25
Interest Expense		(285)			(17)			(565)		(562)
Derivative Income		161			—			181		—
Other Income (Expense)		(60)			—			(60)		—
Gain (Loss) on Sale of Assets		81			(5)			(147)		144
Gain (Loss) on Extinguishment of Debt		(22)			1,034			(22)		1,034
Total Other Income (Expense)		(122)			1,029			(598)		641
Net Loss	$	(2,487)		$	(3,951)		$	(9,193)	$	(17,725)
Other Comprehensive Loss:
Unrealized holding gain (loss)		—			—			—		(1,048)
Total Other Comprehensive Loss		—			—			—		(1,048)
Comprehensive Loss	$	(2,487)		$	(3,951)		$	(9,193)	$	(18,773)
Net Loss per Common Share
Basic		(0.28)			(0.70)			(1.07)		(2.85)
Diluted		(0.28)			(0.70)			(1.07)		(2.85)
Comprehensive Loss		(0.28)			(0.70)			(1.07)		(2.85)

See accompanying notes to consolidated financial statements.

-3-

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock			Preferred Stock	Additional Paid in Capital		Retained Earnings		Accumulated Comprehensive Income		Total Shareholders’ Equity
(Shares and dollars in thousands)	Shares	Value
Shareholders’ Equity at August 31, 2004	5,872	$	6	—	$	208,251	$	(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	146		—	—		2,344		—		—		2,344
For retirement of debt and accrued liabilities	790		1	—		13,361		—		—		13,362
Proceeds from sale of common stock, net	1,308		1	—		11,307		—		—		11,308
Proceeds from exercise of options	119		—	—		1,949		—		—		1,949
Unrealized Holding Loss	—		—	—		—		—		1,048		1,048
Shareholders’ Equity at August 31, 2005	8,235	$	8	—	$	237,212	$	(214,116)	$	—	$	23,104
Net Loss for the nine months ended May 31, 2006	—		—	—		—		(9,193)		—		(9,193)
New Stock Issued:
For services and compensation	12		—			21						21
For retirement of debt and accrued liabilities	634		1			1,347						1,348
Reclass of stock payable	425					2,008						2,008
Proceeds from sale of common stock, net	342		1			335						336
Stock based compensation	—		—	—		536		—		—		536
Unaudited
Shareholders’ Equity at May 31, 2006	9,648	$	10	—	$	241,459	$	(223,309)	$	—	$	18,160

See accompanying notes to consolidated financial statements.

-4-

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	For the nine months ended May 31,
		Unaudited		Unaudited
	2006			2005
Cash Flows from Operating Activities
Net Loss	$	(9,193	)	$	(18,773	)
Adjustments to Reconcile Net Loss to Net Cash
Impairment, write downs and cost		—			1,050
Gain/(Loss) on Sale of Assets		148			904
Amortization of Debt Discount		377			—
Gain/(Loss) on Extinguishment of Debt		22			(1,034	)
Adjustments to Cost of Sales		24			—
Adjustment to Settlement Expense		(576	)		—
Depreciation and Amortization		1,598			3,318
Derivative Income		(181	)		—
Stock issued for Interest Expense		—			546
Stock issued for Services Rendered		557			1,479
Provision for Bad Debt		495			23
Decrease in Restricted Cash		203			—
(Increase)/Decrease in Accounts Receivable		837			(1,376	)
(Increase)/Decrease in Inventories		212			(481	)
(Increase)/Decrease in Other Assets		675			(1,003	)
(Increase)/Decrease in Prepaid Expenses		43			(19	)
Increase/(Decrease) in Accounts Payable		(98	)		1,803
Increase/(Decrease) in Accrued Expenses		(181	)		4,363
Total Adjustment		4,155			9,573
Net Cash Used for Operating Activities		(5,038	)		(9,200	)
Cash Flows from Investing Activities
Purchase of Property and Equipment		(54	)		(1,248	)
Purchase of Marketable Securities		—			695
Proceeds from the Sale of Assets		234			—
Gross Equipment Purchase for Direct Financing Leases		—			(803	)
Principal Collections on Direct Financing Leases		296			206
Purchase of Other Intangible Assets		—			(4	)
Sale of Other Assets		—			3
Net Cash Provided (Used) for Investing Activities		476			(1,151	)
Cash Flows from Financing Activities
Payments on Notes Payable		(282	)		(212	)
Proceeds from Notes Payable		750			—
Proceeds from Exercise of Options		—			1,949
Proceeds from Sale of Common Stock, net		335			9,439
Net Cash Provided by Financing Activities		803			11,176
Net Increase/(Decrease) in Cash		(3,759	)		825
Cash at the beginning of the period		4,020			2,051
Cash at the end of the period	$	261		$	2,876
Supplemental Disclosure of Cash Flow Information
Net Cash Paid During the Year for:
Interest	$	47		$	33
Income taxes	$	—		$	—

See accompanying notes to consolidated financial statements.

-5-

Eagle Broadband, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements May 31, 2006 (Unaudited)

NOTE 1 - Basis of Presentation and Significant Accounting Policies

The Consolidated Balance Sheet of the Company as of May 31, 2006, the related Consolidated Statements of Operations for the three months and nine months ended May 31, 2006 and 2005, the Consolidated Statements of Shareholders’ Equity as of May 31, 2006 and the Consolidated Statements of Cash Flows for the nine months ended May 31, 2006 and 2005, 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 and nine months ended May 31, 2006, 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.

Reverse Stock Split

On May 12, 2006, the Company effected a 1-for-35 reverse stock split. In these Notes to the Consolidated Financial Statements, all previously reported stock information has been adjusted to reflect the effect of the reverse stock split.

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 $417,617 and $154,922 has been accrued as of May 31, 2006 and August 31, 2005, respectively. The note payable and accrued interest are included in the Balance Sheet as accrued expenses.

Dr. Cubley is a director of ERF Wireless, Inc. ERF Wireless acted as a third-party construction subcontractor for Eagle for the nine-month period ended May 31, 2006. Purchases totaled $131,000 for the nine-month period ended May 31, 2006.

In April 2006, the Company entered into a Consulting Agreement with Lorne Persons, Jr., a member of the Company’s Board of Directors, pursuant to which Mr. Persons will direct the sales and marketing efforts for the Company’s SatMAX^® product line. For these consulting services, Mr. Persons will be paid $14,500 per quarter, which is to be paid in Company common stock, unless the Company and Mr. Persons agree otherwise.

NOTE 3 - Accounts Receivable

Accounts receivable consist of the following (in thousands):

	May 31, 2006			August 31, 2005
Accounts Receivable	$766			$4,578
Allowance for Doubtful Accounts		(207	)		(2,688	)
Accounts Receivable, net	$	559		$	1,890

-6-

NOTE 4 - Property and Equipment and Intangible Assets

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

		May 31, 2006			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		1,040			1,027
Manufacturing and Operating Equipment		5,964			6,291
Total Property, Plant and Equipment	$	31,861		$	32,298
Less Accumulated Depreciation		(9,991	)		(8,994	)
Net Property, Plant and Equipment	$	21,870		$	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 $2,000 and $32,000 for the three months ended May 31, 2006 and 2005, respectively, whereas it did not have any major improvements for the same time periods. Eagle expensed repairs and maintenance of $70,000 and $55,000 for the nine months ended May 31, 2006 and 2005, respectively, whereas it did not have any major improvements for the same time periods.

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):

		May 31, 2006			August 31, 2005
Goodwill	$	4,095		$	4,095
Contract Rights	$	11,847		$	11,847
Accumulated Amortization		(9,141	)		(8,926	)
	$	2,706		$	2,921
Customer Relationships	$	3,067		$	3,067
Accumulated Amortization		(2,298	)		(2,236	)
	$	769		$	831
Other Intangible Assets	$	3,937		$	3,937
Accumulated Amortization		(3,152	)		(3,078	)
	$	785		$	859
Total Intangible Assets	$	22,946		$	22,946
Total Accumulated Amortization		(14,591	)		(14,240	)
Net of Amortization	$	8,355		$	8,706

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NOTE 5 - Notes Payable & Long-Term Debt

The following table lists the Company’s note obligations as of May 31, 2006, and August 31, 2005 (in thousands):

	Annual Interest Rate	Due Date	May 31, 2006			August 31, 2005
Notes Payable & Long-Term Debt:
Dutchess Convertible Note & Warrant, net of discount of $594,290	12%	May 07	$	144			—
Tail Wind Non-Convertible Promissory Note and Convertibles Notes, net of discount of $109,600	0%	March 08		3,404			—
Notes Payable	Various	Various		154			61
Total Debt			$	3,702		$	61
Less current maturities				(875	)		(61	)
Total long-term debt			$	2,827		$	—

The convertible notes and warrants issued during the second quarter of 2006 have been accounted for in accordance with SFAS 133 and EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.”

DUTCHESS NOTE

On February 10, 2006, the Company entered into a purchase agreement with Dutchess Private Equities Fund, L.P., pursuant to which the Company sold an $822,500, 12% convertible note due February 10, 2011.

The note bears interest at 12%, provides for monthly interest and principal payments and matures on February 10, 2011. The note is convertible at the option of the holder into common stock of the Company at a price of $3.15 per share, subject to standard anti-dilution provisions relating to splits, reverse splits and other transactions. The note is subject to automatic redemption in the event the Company receives financing from a third party in excess of $750,000. The holder has the right to cause the notes to be converted into common stock. If the holder does not convert the note, the Company must pay the notes in cash and pay a 25% redemption fee.

The notes are secured by all assets of the Company, excluding a certain lease agreement with a third party. In order to induce Dutchess to purchase the note, an officer of the Company provided a first priority security interest in all stock options granted to date to this officer.

The convertible note was determined to include free standing warrants and various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price, reset provision and the Company’s optional early redemption right and cash payment penalty (compound embedded derivative liability). At the date of issuance (February 10, 2006) the convertible note, warrant liabilities and compound embedded derivative liability were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. At inception, the fair value of this single compound embedded derivative’s was bifurcated from the host debt contract and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the Convertible Note. The derivative liability will be marked-to-market each quarter with the change in fair value recorded in the income statement. The Company uses the effective interest method to record interest expense and related debt accretion which will be $312,408 and $510,092 for fiscal years 2006 and 2007, respectively.

-8-

The following table summarizes the fair market value of the derivative instruments and convertible debt activity for Dutchess for the period February 10, 2006 to May 31, 2006:

Description	Note Payable		Warrant Liabilities		Compound Derivative Liability		Total
Fair value issuance at inception	$	—	$	281,492	$	524,438	$	805,930
Marked-to-market activity Feb 10, 2006 to Feb 28, 2006		24,534		(677)		152		24,009
Marked-to-market activity Mar 1, 2006 to May 31, 2006		120,165		(138,955)		(301,850)		(320,640)
Fair value at May 31, 2006	$	144,699	$	141,860	$	222,740	$	509,299

For the nine months ended May 31, 2006 the Company recorded a net credit to derivative expense of $386,429 and convertible debt interest expense of $13,059. The excess discount to the convertible note of $55,930 was expensed to interest expense upon the issuance of the Dutchess convertible note for total convertible interest expense of $205,496. The Company issued 6,500 shares of common stock on May 22, 2006, to convert $20,415 of the principal amount due under the convertible debenture with Dutchess.

TAIL WIND NOTES

On February 15, 2006, the Company entered into a Settlement Agreement with The Tail Wind Fund Ltd., pursuant to which the Company made a cash payment of $100,000, issued two convertible notes in the aggregate amount of $2,750,000, issued a $400,000 non-convertible promissory note and entered into a stock payment obligation of $1,750,000.

To satisfy the $1,750,000 stock payment obligation, the Company issued 627,240 shares of common stock on May 18, 2006. The Settlement Agreement provides that if the closing price of our common stock on the date the stock was issued is greater than the closing price on the date the registration statement registering such shares is declared effective, then a price reduction amount will be added to the original principal amount of one of the convertible notes. As of May 31, 2006, the price reduction amount increased the convertible note by $413,979 with a corresponding decrease to Additional Paid in Capital.

The convertible notes bear no interest and mature on March 1, 2008. The convertible notes are convertible into common stock of the Company at a conversion price equal to the daily volume weighted average price of the stock for the ten trading days immediately preceding the conversion date. On the maturity date, the Company has the option to pay any principal amount balance then outstanding in cash or convert such balance into its common stock at a conversion price equal to 95% of the daily volume weighted average price of the stock for the ten trading days immediately preceding the maturity date.

The convertible notes were determined to include various embedded derivative liabilities. The derivative liabilities are the conversion feature, conversion price, reset provision and the registration rights (compound embedded derivative liability). At the date of issuance (February 15, 2006) the convertible notes and compound embedded derivative liability were measured at fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. At inception, the fair value of this single compound embedded derivative’s was bifurcated from the host debt contract and recorded as a derivative liability which resulted in a reduction of the initial notional carrying amount of the convertible notes. The derivative liability will be marked-to-market each quarter with the change in fair value recorded in the income statement. The Company uses the effective interest method to record interest expense and related debt accretion which will be $52,691, $98,697 and $49,983 for fiscal years 2006, 2007 and 2008, respectively.

-9-

The following table summarizes the fair market value of the derivative instruments and convertible debt activity for Tail Wind Convertible Notes for the period February 15, 2006 to May 31, 2006:

Description		Tail Wind Note			Compound Derivative Liability			Total
Fair value issuance at inception	$	4,698,629		$	201,371		$	4,900,000
Marked-to-market activity Feb 10, 2006 to Feb 28, 2006		11,290			(19,606	)		(7,686	)
Marked-to-market activity Mar 1, 2006 to May 31, 2006		79,851			158,523			238,374
Issuance of shares for stock payment obligation		(1,750,000	)		—			(1,750,000	)
Note Payments Mar 1, 2006 to May 31, 2006		(50,000	)		—			(50,000	)
Price reduction for shares issued through May 31, 2006		413,969			—			413,969
Fair value at May 31, 2006	$	3,404,369		$	340,288		$	3,744,657

For the nine months ended May 31, 2006 the Company recorded a net debit to derivative expense of $205,688 and convertible debt interest expense of $22,177.

CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITIES

For the period from inception of the Dutchess convertible note and warrants and Tail Wind, the change in fair value of the derivative liabilities from February 10, 2006 through May 31, 2006, includes the following:

Derivative Liability-Compound Embedded Derivatives within Dutchess Convertible Note	$	(246,797	)
Derivative Liability-Compound Embedded Derivatives within Common Stock Warrants		(139,632	)
Derivative Liability-Compound Embedded Derivatives within Dutchess for effect of conversion and payments		(54,901	)
Derivative Liability-Compound Embedded Derivatives within Tail Wind Convertible Notes		138,917
Net decrease in fair value of derivative liabilities	$	302,413

NOTE 6 - 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:

	May 31, 2006	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%

-10-

ncome 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):

	May 31, 2006			August 31, 2005
Computed expected tax benefit	$	(3,104	)	$	(19,360	)
Increase (decrease) in valuation allowance		3,104			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 May 31, 2006, and August 31, 2005, are presented below (in thousands) and include the balances of the merged company ClearWorks.net., Inc.

	May 31, 2006			August 31, 2005
Deferred tax assets:
Net operating loss carry forwards	$	(73,950	)	$	(70,846	)
Less valuation allowance		73,950			70,846
Net deferred tax assets	$	—		$	—

The valuation allowance for deferred tax assets of May 31, 2006, and August 31, 2005, was $73,950,000 and $70,846,000, respectively. As of May 31, 2006, the Company has net operating loss carry-forwards of $187,380,000, which is available to offset future federal taxable income, if any, with expirations from 2021 to 2023.

NOTE 7 - Stock Options and Warrants (See Note 1)

DUTCHESS WARRANTS

On February 10, 2006, the Company entered into a five-year warrant agreement (the “Warrant”) with Dutchess Private Equities Fund, L.P., granting Dutchess the right to purchase up to 78,333 shares (see Note 1) of the Company’s common stock at an exercise price of $3.15 per share, subject to a reset provision whereby the exercise price would be adjusted downward in the event the Company issued its common stock to others at a price below $3.15 per share. This reset provision represents an embedded derivative, which has not been bifurcated from the host warrant contract (as both are derivatives) and has a derivative liability at its fair value at date of inception utilizing the Black-Scholes method with a probability weighted exercise price. This fair value model comprises multiple probability-weighted scenarios under various assumptions reflecting the economics of the warrant, such as risk free interest rate, expected volatility, and likelihood of reset events. The assumptions used at February 10, 2006 were a risk-free interest rate of 4.59%, volatility of 85%, expected term of 5 years, dividend yield of 0.00% and a probability weighted exercise price of $.086. The common stock warrant and the embedded warrant price reset provision were initially fair valued at $281,492 at February 10, 2006. At inception, the amount of the value assigned was applied as a discount to the notional amount of the Convertible Note. See Note 5 for valuation and marked-to-market activity.

STOCK-BASED COMPENSATION

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 have been reserved for issuance. In February 2006, the Executive Committee of the Board of Directors of the Company voted to amend the Plan to reduce the shares available for issuance under the Plan from 30,000,000 to 20,000,000. On May 12, the Company effected a 1-for-35 reverse stock split, which reduced the number of shares available for issuance under the Plan to 571,429. As of May 31, 2006, 6,978 shares have been issued under the Plan, and options issued under the Plan covering 422,344 shares were outstanding, of which 172,233 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)

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The weighted average fair value of the individual options issued and granted during the nine months ended May 31, 2006 is estimated as $4.60 on the date of grant. The fair values were determined using a Black-Scholes option-pricing model with the following weighted average assumptions:

	May 31,
	2006		2005
Dividend yield		0.00%		0.00%
Volatility		97%		91%
Risk-free interest rate		3.5%		4.00%
Expected life		5 years		4.5 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 was recognized under APB 25. SFAS 123R 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 nine months ended May 31, 2006:

	Nine months ended May 31, 2005
Net loss, as reported	$	(18,773	)
Add: Stock-based employee compensation included in reported net earnings/(loss), net of related tax effects		(61	)
Less: Stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects		—
Pro forma net earnings/(loss)	$	(18,834	)
Net loss per share:
As reported	$	(2.85	)
Pro forma	$	(2.85	)
Diluted net loss per share:
As reported	$	(2.85	)
Pro forma	$	(2.85	)

Option and warrant activity including employees and third parties was as follows for the nine months ended May 31, 2006 (see Note 1):

	Shares			Weighted Average Exercise Price
Outstanding at beginning of period		384,428			$	29.19
Granted		259,163				4.60
Assumed through acquisitions		—				—
Exercised		—				—
Forfeited/cancelled		(69,758	)			27.53
Outstanding at end of period		573,833			$	18.14
Exercisable at end of period		323,722			$	26.52

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Information about options and warrants outstanding was as follows at May 31, 2006:

Range of Exercise Prices	Number Outstanding	Avg. Remaining Contractual Life in Years	Average Exercise Price	Number Exercisable	Average Exercise Price
$0.97 - $5.00	237,535	4.15	$ 3.77	137,384	$ 3.08
$5.00 - $20.00	253,720	3.54	$ 7.19	119,339	$ 7.75
$20.00 - $50.00	59,721	2.74	$ 28.29	44,142	$ 28.06
$50.00 - $262.50	22,857	1.90	$ 262.50	22,857	$ 262.50
	573,833	3.64	$ 18.14	323,722	$ 26.52

NOTE 8 - Risk Factors

For the nine months ended May 31, 2006, substantially all of the Company’s business activities have remained within the United States. Approximately 27% of the Company’s revenues and receivables have been created solely in the state of Texas, 0% in the international market, and the approximate 73% remainder relatively evenly over the rest of the nation during the nine months ended May 31, 2006; whereas approximately 33% of the Company’s revenues and receivables were created solely in the state of Texas, 1% in the international market, and the approximate 66% remainder relatively evenly over the rest of the nation during the nine months ended May 31, 2005. Through the normal course of business, the Company generally does not require its customers to post any collateral.

Financial instruments that potentially subject the Company to concentrations of credit risk are cash in banks and uncollateralized accounts receivable. As of May 31, 2006 and August 31, 2005, the Company had $58,160 and $4,318,000, respectively, of uninsured deposits at financial institutions. Credit had been extended to customers of $766,000 and $4,578,000 as of May 31, 2006 and August 31, 2005, respectively.

Although the Company is based in the United States, certain of its products are sold in international markets. Presently, international sales total 0% and 1% for the nine months ended May 31, 2006 and 2005, respectively.

NOTE 9 - Commitments and Contingent Liabilities

Leases

For the nine months ended May 31, 2006 and 2005, rental expenses of approximately $227,000 and $345,000, 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 three months ending	2006	$	74,949
For the year ending	2007		306,180
For the year ending	2008		325,316
For the year ending	2009		243,987
	Total	$	950,432

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

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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.

In July 2003, Eagle became a defendant in Cornell Capital Partners, L.P., vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860, in the United States District Court for the District of New Jersey. The suit presents claims for breach of contract, common law fraud, 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. Eagle asserted counterclaims against Cornell for fraud and breach of contract in the amount of $2 million. On March 28, 2006, the court ruled in favor of the plaintiff on certain claims, granting the plaintiff’s motion for partial summary judgment on its breach of contract claim and all of Eagle’s counterclaims. The court ruled in favor of Eagle on other claims, granting Eagle’s motion for summary judgment on plaintiff’s claims for common law fraud, state and federal securities fraud, and negligent misrepresentation. The Company has accrued $750,000 in expenses against this lawsuit.

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.

In May 2006, the Company filed a demand for arbitration before JAMS in Los Angeles, California, in connection with an agreement between the Company and GlobeCast North America Incorporated. The Company is seeking an arbitral award declaring that either (i) the agreement is unenforceable, (ii) both parties are excused from performance due to the existence of a force majeure event, or (iii) the Company is excused from performance due to GlobeCast’s prior breach of the agreement. In June 2006, GlobeCast filed a complaint in the Circuit Court of the Eleventh Judicial District in and for Miami-Dade County, Florida (Case No. 06-11822), seeking damages in excess of $1,000,000 it alleges are due under the agreement and raising a number of the same issues that are the subject of the pending arbitration. The Company intends to vigorously prosecute the California arbitration and defend its right to have all disputes between the parties resolved by binding arbitration, however, the Company cannot control the outcome and the extent of the losses, if any, that may be incurred.

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 10 - Earnings per Share (See Note 1)

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

	For the nine months ended May 31, 2006
	Income (Numerator)			Shares(Denominator)		Per Share Amount
Net loss	$	(9,193	)		—	$	—
Basic EPS:
Income available to common shareholders		(9,193	)		8,606		(1.07	)
Effect of dilutive securities warrants		—			—		—
Diluted EPS:
Income available to common stockholders and assumed conversions	$	(9,193	)		8,606	$	(1.07	)

	For the nine months ended May 31, 2005
		Income (Numerator)		Shares(Denominator)		Per Share Amount
Net loss	$	(18,773	)	—	$	—
Basic EPS:
Income available to common shareholders		(18,773	)	6,584		(2.85	)
Effect of dilutive securities warrants		—		—		—
Diluted EPS:
Income available to common stockholders and assumed conversions	$	(18,773	)	6,584	$	(2.85	)

For the nine months ended May 31, 2006 and 2005, dilutive securities existed. (See Note 7.)

NOTE 11 - 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 nine months ended May 31, 2006 and 2005, employee contributions were approximately $93,744 and $91,254, respectively. The Company matched $0 for both periods.

NOTE 12 - Major Customer

The Company had gross revenues of $859,000 and $2,976,000 for the three months ended May 31, 2006 and 2005, respectively. The three-month period ended May 31, 2006, included $180,895, or 21% the quarter’s total sales, for sales of turnkey VOIP systems to a third party. The same period included sales of $104,000 or 12% of the quarter’s total sales, for the sale of broadband and cable services to a third party. Additionally, the same period included sales of $94,550 or 11% of the quarter’s total sales, for the sale of set-top boxes to a third party.

The three-month period ended May 31, 2005, included gross revenues of $1,390,000, or 47% of the quarter’s total sales, from Alarm Security Group LLC.

The Company had gross sales of $4,560,000 and $7,188,000 for the nine months ended May 31, 2006 and 2005, respectively. The nine-month period ended May 31, 2006, included $1,189,000, or 26% of the period’s total sales, for sales of security contracts to a third party by the company’s security-monitoring subsidiary, D.S.S. Security, Inc. The same period included $623,550 or 14% of the period’s sales, for the sale of set-top boxes and other products to a third party.

The nine-month period ended May 31, 2005, included $756,000, or 11% of the period’s total sales, from Sweetwater Security Capital, L.L.C., that were executed with the Company’s security-monitoring service subsidiary, D.S.S. Security, Inc. Additionally, the nine months ended May 31, 2005, included $1,957,000, or 27% of the nine months total sales, from General Dynamics.

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NOTE 13 - 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 satellite 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 nine months ended May 31, 2006

		APC/HSI			EBS/DSS			UCG			Eagle			Other		Elim.			Consol
Revenue	$	—		$	2,155		$	—		$	2,405		$	—	$	—		$	4,560
Segment Loss		—			(1,772	)		(2	)		(6,821	)		—		—			(8,595	)
Total Assets		(8,917	)		(17,319	)		(3,098	)		89,436			16,320		(43,112	)		33,310
Capital Expenditures		—			4			—			50			—		—			54
Depreciation		1			1,007			2			588			—		—			1,598

For the nine months ended May 31, 2005

		APC/HSI			EBS/DSS			UCG			Eagle			Other			Elim.			Consol
Revenue	$	21		$	3,537		$	—		$	3,630		$	—		$	—		$	7,188
Segment Loss		(98	)		(2,534	)		(3	)		(14,660	)		(1,071	)		—			(18,366	)
Total Assets		8			30,529			30			129,253			55,885			(144,730	)		70,975
Capital Expenditures		—			1,156			—			92			—			—			1,248
Depreciation		31			1,192			2			2,072			21			—			3,318

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Reconciliation of Segment Loss from Operations to Net Loss

	Nine Months Ended May 31,
		2006		2005
Total segment loss from operations	$	(8,595	)	$	(18,366	)
Total other income (expense)		(598	)		(407	)
Net loss	$	(9,193	)	$	(18,773	)

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 14 - Unaudited Quarterly Financial Data (See Note 1)

		Nov. 30			Feb. 28			May 31			Aug. 31
Year Ended August 31, 2006
Revenues	$	1,934		$	1,766			859
Net earnings (loss)		(2,634	)		(4,072	)		(2,487	)
Basic loss per share		(0.32	)		(0.48	)		(0.28	)
Diluted loss per share		(0.32	)		(0.48	)		(0.28	)
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		(0.73	)		(1.47	)		(0.70	)		(5.70	)
Diluted loss per share		(0.73	)		(1.47	)		(0.70	)		(5.70	)
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		(1.75	)		(1.75	)		(0.70	)		(2.80	)
Diluted loss per share		(1.75	)		(1.75	)		(0.70	)		(2.80	)

NOTE 15 - Supplemental Non-Cash Disclosures (See Note 1)

Stock Issued in lieu of cash ($ in thousands)	Nine months ended May 31,
	2006		2005
Settlements including Legal	$	—	$	784
Interest Expense		—		546
Professional Fees		21		502
Salary and Compensation		—		151
Other Services Rendered		—		42
Accrued Liabilities		—		7,607
Notes Payable		1,347		5,094
Stock Payable		2,008		—
Stock issued in lieu of cash	$	3,376	$	14,726

During the nine months ended May 31, 2006, the Company converted accrued liabilities of $4,900,000 to current and long-term debt for the Tail Wind settlement (see Note 5). The Company issued 627,240 shares of common stock to satisfy a note payable of $1,750,000 with Tail Wind. The Settlement Agreement provides that if the closing price of our common stock on the date the stock was issued is greater than the closing price on the date the registration statement registering such shares is declared effective; then a price reduction amount will be added to the original principal amount of one of the convertible notes. As of May 31, 2006, a price reduction amount increased one of the convertible notes by $413,979 with a corresponding decrease to Additional Paid in Capital. The Company issued 6,500 shares of common stock on May 22, 2006, to convert $20,415 of the principal amount due under the convertible debenture with Dutchess. During this same period, stock payable of $2,008,215 was relieved to issue 425,000 shares sold to investors in August 2005.

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NOTE 16 - Equity Financing (See Note 1)

In February 2006, the Company entered into an investment agreement with Dutchess Private Equities Fund, L.P. (“Dutchess”), which was amended in March 2006. The nature of the investment agreement is commonly known as an equity line of credit. The maximum amount the Company may raise under the equity line is $5,000,000, provided we register enough shares to raise this amount. The Company is not obligated to request the entire $5,000,000. Over a period of 36 months, we may periodically deliver new issue shares of our common stock to Dutchess, which then delivers cash to us based on a price per share tied to the current market price of our common stock. The actual number of shares that we may issue subject to the investment agreement is not determinable as it is based on the market price of our common stock from time to time. As of May 31, 2006, the Company issued 342,857 shares of common stock for proceeds of $334,800.

In August 2005, the Company entered into a purchase agreement with certain investors for the sale of 857,143 shares of its common stock at a price of $4.725 per share, and received total gross proceeds of $4,050,000. On August 26, 2005, the American Stock Exchange approved for listing 432,143 of these shares and notified the Company that shareholder approval was required for the issuance of the remaining 425,000 shares. On September 2, 2005, the Company voluntarily placed the funds received for the 425,000 shares ($2,008,125) into an escrow account pending the shareholder vote. At the October 18, 2005 meeting, shareholders approved the issuance of the 425,000 shares, and on October 19, 2005, the escrowed funds were released to the Company. On October 21, 2005, the Company applied for listing the 425,000 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 24,107 shares of Eagle common stock at an exercise price of $8.40 per share, expiring on August 31, 2010.

NOTE 17 - Exit Activities

On February 28, 2006, the Company entered into an asset purchase agreement with a third party to acquire the assets of D.S.S. Security, Inc. for a purchase price of $1,400,000. The purchase price allocated $400,000 to an accounts receivable balance for contracts purchased in prior quarters and $1,000,000 to customer contracts. In connection with the sale, the Company recognized a loss of the sale of fixed assets of $163,000, bad debt expense of $373,000, and a loss of $104,000 for security contracts that were classified on the Balance Sheet as of August 31, 2005 as Other Assets.

To ensure a smooth transition to the purchaser and no disruptions in service for security monitoring customers, the Company agreed to provide the use of the existing central station (which was not included as part of the acquired assets) , all associated monitoring equipment and assets and the employees necessary to provide monitoring services for 24/7 monitoring through 12:01 a.m. on April 1, 2006.

Eagle also agreed to a non-competition period whereby until the six-year anniversary of the Closing date, the Company would not engage in (i) the design, merchandising, distribution, service, installation or sale of any of any products or goods designed, merchandised, distributed, serviced, installed or sold in connection with the security business prior to the Closing Date or (ii) the provision of any services or the design, manufacture, merchandising, distribution, service, sale or installation of any products or goods that are similar to, may be used as substitutes for, are in competition with or may detract from any of the products, within the State of Texas. Eagle is not prevented from providing the following managed services to third parties: (i) security-related computer hardware installation, (ii) IP surveillance computer hardware and software and (iii) cabling installation.

The Company incurred approximately $31,000 for severance and accrued vacation related to employees terminated in connection with this transaction. These costs are included in the consolidated statement of income under the categories of salaries and related costs and other support costs. Eagle does not expect to incur any additional future period costs related to this transaction.

NOTE 18 - Financial Condition and Going Concern

The Company has incurred a loss for the nine months ended May 31, 2006, of $9,193,000 and has an accumulated deficit at May 31, 2006, of $223,309,000. Because of its losses, the Company will require additional working capital to develop its business operations. The Company intends to raise additional working capital through private placements, public offerings and/or bank financing.

There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations or (2) obtain additional financing through either private placements, public offerings and/or bank financing necessary to support the Company’s working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company.

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These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

Management is pursuing additional financing and is evaluating all financing options currently available to the Company. The Company currently has available a three-year, $5,000,000 equity line of credit to help fund working capital requirements (see Liquidity & Capital Resources).

Management will continue to direct all efforts to the delivery of the IPTVComplete solution to the market. Within the last six months, the Company has exited the residential security monitoring business, entered into an operations agreement with a third party to operate the majority of Eagle’s traditional cable business, and materially reduced operating expenses and headcount. In continued efforts to improve the operating position of the company, management is implementing further cost cutting efforts which are expected to further reduce operating expenses over the next six months. However, there can be no assurance that the Company will be successful in achieving its objectives.

NOTE 19 - Subsequent Events

In June 2006, the Company entered into a short-term promissory note with Ron Persons, the brother of Lorne Persons, Jr., a member of the Company’s Board of Directors. The note has a principal balance of $250,000 and an annual interest rate of 25%. The note is to be paid in full by August 31, 2006. The proceeds were used for working capital requirements.

During June and July 2006, the Company issued 750,522 shares of common stock to Dutchess under the equity line of credit and received proceeds of $879,634 therefrom.

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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 the 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 products and services. The Company’s business activities are focused on the following core areas:

· IPTVComplete™, delivering over 200 channels of digital television content via IP to many market sectors, such as to multi-dwelling unit operators (e.g., condominiums) or telephone companies, including Eagle’s MediaPro standard or high-definition set-top boxes for both hospitality and IPTV customers;

· SatMAX^®, Eagle’s patented satellite telephony extension technology for indoor applications for enterprise, military and other government customers, especially in portable First Responder situations with Eagle’s new Alpha “SatMAX in a Suitcase” model; and

· Managed Services, through which Eagle provides various IP and satellite-related technology implementations to a broad cross section of markets, including remote network management, structured cabling and IT integration services.

To execute the strategy of focusing on business opportunities in these core areas, the Company is pursuing raising additional capital for future operations and building the head-end infrastructure needed for Eagle’s IPTVComplete solution. In the last six months, the Company has exited the residential security monitoring business, entered into an operations agreement with a third party to operate the majority of Eagle’s traditional cable business, and materially reduced operating expenses and headcount. In continued efforts to improve the operating position of the company, management is implementing further cost cutting efforts which are expected to further reduce operating expenses over the next six months. In June 2006, the Company brought to market a new high definition set-top box, the IP3000HD. The IP3000HD is a highly capable, yet inexpensive solution for both hospitality markets and IPTV customers.

Due to the occurrence of an unexpected change involving the delivery of IPTVComplete during the third quarter of fiscal 2006, the expected recurring IPTV revenue stream, which had been anticipated to begin during the fourth quarter of the current fiscal year, is now anticipated to occur in the first quarter of the next fiscal year. This change in circumstances is being directly addressed with Eagle proceeding independently to build its own super head-end this summer in Miami. Eagle has contracted for signal delivery co-location space at the NAP of the Americas in Miami and is currently arranging for a teleport as part of building its own super head-end. During the third quarter, the Company successfully delivered in an extensive field trial of over 100 channels of IPTV content via fiber to a third party in Miami. This field trial demonstrated that our IPTV technology works and establishes that Eagle can successfully deliver a complete IPTV solution over fiber optic cable.

As of May 31, 2006, the Company’s active subsidiaries were: Eagle Broadband Services, Inc., EBI Funding Corp. 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: D.S.S. Security, Inc., 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

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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 nine months ended May 31, 2006.

Results of Operations

Three and Nine Months Ended May 31, 2006, Compared to Three and Nine Months Ended May 31, 2005

The following table sets forth summarized consolidated financial information for the three and nine months ended May 31, 2006 and 2005:

Condensed Financial Information

	Three months ended May 31,							Nine months ended May 31,
	2006		2005		$ Change		% Change	2006		2005		$ Change		% Change
Net Sales	$	859	$	2,976	$	(2,117)	(71%)	$	4,560	$	7,188	$	(2,628)	(37%)
Cost of Goods Sold		1,154		2,383		(1,229)	(52%)		4,035		7,710		(3,675)	(48%)
Gross Profit		(295)		593		(888)			525		(522)		1,047
Percent of Sales		(34%)		20%					12%		(7%)
Operating Expenses		2,070		5,573		(3,503)	(63%)		9,120		17,844		(8,724)	(49%)
Loss from Operations		(2,365)		(4,980)		2,615	(53%)		(8,595)	(18,366)			9,771	(53%)
Other Income (Expense)		(122)		1,029		(1,151)	(112%)		(598)		(407)		(191)	47%
Net Loss	$	(2,487)	$	(3,951)	$	1,464	(37%)	$	(9,193)	$                  (18,773)		$	9,580	(51%)

Overview

For the three months ended May 31, 2006, the Company’s business operations reflected a continued emphasis on its strategy to focus on business opportunities in its three main operating divisions: IPTV solutions, satellite communications and broadband services. For the quarter ended May 31, 2006, the Company’s consolidated operations generated net sales of $859,000 with a corresponding negative gross profit of $295,000. The overall decrease in net sales for the three months ended May 31, 2006, as compared to the three months ended May 31, 2005, was primarily attributable to a prior year sale of $1,390,000 of security monitoring contracts to a major customer. The Company exited the residential security monitoring business as of February 28, 2006, and anticipated replacing the recurring revenues from security monitoring with recurring revenues for delivery of the IPTVComplete solution. Due to unforeseen complications, this did not occur for the quarter ended May 31, 2006. Management anticipates the revenue stream from IPTVComplete to begin occurring in the first quarter of the upcoming fiscal year.

The Company incurred a net loss of $2,487,000 for the three months ended May 31, 2006.

The Company’s net loss for the three months ended May 31, 2006, included $1,182,000 in salary expense, $473,000 in depreciation and amortization expenses, $223,000 in research and development expenses, and $545,000 in other support costs including shared monthly satellite transponder costs associated with the delivery of the Company’s IPTVComplete service.

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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 May 31, 2006 and 2005:

($ in thousands)	Three months ended May 31,
Business Segment	2006		% of Total	2005		% of Total	$ Change		% Change
Structured Wiring	$	491	57%	$	369	13%	$	122	33%
Broadband Services		198	23%		1,797	60%		(1,599)	(89%)
Products		138	16%		774	26%		(636)	(82%)
Other		32	4%		36	1%		(4)	(11%)
Total	$	859	100%	$	2,976	100%	$	(2,117)	(71%)

Set forth below is a table presenting summarized sales information for our business segments for the nine months ended May 31, 2006 and 2005:

($ in thousands)	Nine months ended May 31,
Business Segment	2006		% of Total	2005		% of Total	$ Change		% Change
Structured Wiring	$	1,376	30%	$	1,002	14%	$	374	37%
Broadband Services		2,155	48%		3,537	49%		(1,382)	(39%)
Products		919	20%		2,553	36%		(1,634)	(64%)
Other		110	2%		96	1%		14	15%
Total	$	4,560	100%	$	7,188	100%	$	(2,628)	(37%)

For the three months ended May 31, 2006, net sales decreased to $859,000 from $2,976,000 compared to the three month period ended May 31, 2005. The overall decrease of 71% was attributable to a $636,000 decrease in the Company’s product sales, an increase of $122,000 in structured wiring operations, a $1,599,000 decrease in the Company’s broadband services sales, and a $4,000 decrease in other sales. The $636,000 decrease in product sales was primarily attributable to a prior year sale totaling $323,000 by two major customers for set-top boxes. The decrease of $1,599,000 in broadband services is primarily attributable to the prior year sale of security monitoring contracts of $1,390,000 with a major customer that was executed with the Company’s broadband services division. The $122,000 increase in structured wiring sales is attributable to the Company’s increased sales force pursuing commercial structured wiring and cabling opportunities.

For the nine months ended May 31, 2006, net sales decreased to $4,560,000 from $7,188,000 during the nine-month period ended May 31, 2005. The overall decrease of 37% was primarily attributable to a prior year sale of set-top boxes of $1,065,000 to a major customer. The $374,000 increase in structured wiring sales is attributable to the Company’s focused efforts to pursue commercial structured wiring and cabling opportunities. The $1,382,000 decrease in broadband services is primarily attributable to the sale of the Company’s security-monitoring service subsidiary, D.S.S. Security, Inc., and a prior year security systems sale to Sweetwater Capital LLC of $756,000 along with the prior year sale of security monitoring contracts of $1,390,000 with a major customer that was executed with the Company’s broadband services division. The $1,634,000 decrease in product sales is primarily attributable to a prior year sale of $1,065,000 for set top boxes to a major customer.

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Cost of Goods Sold

The following table sets forth summarized cost of goods sold information for the three and nine months ended May 31, 2006 and 2005:

	Three months ended May 31,									Nine months ended May 31,
($ in thousands)		2006		2005		$ Change		% Change			2006		2005		$ Change		% Change
Direct Labor and Related Costs	$	189	$	516	$	(327	)	(63	%)	$	1,128	$	1,300	$	(172	)	(13	%)
Products and Integration Services		343		799		(456	)	(57	%)		799		3,002		(2,203	)	(73	%)
Impairment Slow Moving & Obsolete Inventory		—		300		(300	)	(100	%)		107		300		(193	)	(64	%)
Structured Wiring Labor and Material		394		270		124		46	%		1,114		776		338		44	%
Broadband Services Costs		22		207		(185	)	(89	%)		251		1,465		(1,214	)	(83	%)
Depreciation and Amortization		206		291		(85	)	(29	%)		636		867		(231	)	(27	%)
Other Manufacturing Costs		—		—		—		—			—		—		—		—
Total Cost of Goods Sold	$	1,154	$	2,383	$	(1,229	)	(52	%)	$	4,035	$	7,710	$	(3,675	)	(48	%)

For the three months ended May 31, 2006, cost of goods sold decreased by 52% to $1,154,000 from $2,383,000 for the three months ended May 31, 2005. The overall decrease of $1,229,000 was primarily attributable to a reduction in labor costs associated with retail security monitoring, along with a prior year’s cost of $759,000 for design and expedite changes. The Company’s overall negative gross profit percentage was 34% for the three months ended May 31, 2006, compared to an overall gross profit percentage of 20% for the three months ended May 31, 2005.

For the nine months ended May 31, 2006, cost of goods sold decreased by 48% to $4,035,000 from $7,710,000 during the nine months ended May 31, 2005. The Company’s overall gross profit percentage of 12% for the nine months ended May 31, 2006 represents a significant improvement as compared to an overall negative gross profit percentage of 7% for the nine months ended May 31, 2005. The substantial improvement in gross profit percentage is primarily attributable to a decrease in product and integration service costs and 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.

Operating Expenses

The following table sets forth summarized operating expense information for the three and nine months ended May 31, 2006 and 2005:

	Three months ended May 31,										Nine months ended May 31,
($ in thousands)		2006		2005			$ Change		% Change			2006		2005		$ Change		% Change
Salaries and Related Costs	$	993	$	1,194		$	(201	)	(17	%)	$	3,861	$	4,737	$	(876	)	(18	%)
Advertising and Promotion		42		(5	)		47		940	%		85		45		40		89	%
Depreciation and Amortization		267		805			(538	)	(67	%)		961		2,451		(1,490	)	(61	%)
Research and Development		223		197			26		13	%		538		572		(34	)	(6	%)
Other Support Costs		545		3,382			(2,837	)	(84	%)		3,675		8,989		(5,314	)	(59	%)
Impairment, write-downs, and restructuring costs		—		—			—		—			—		1,050		(1,050	)	(100	%)
Total Operating Expenses	$	2,070	$	5,573		$	(3,503	)	(63	%)	$	9,120	$	17,844	$	(8,724	)	(49	%)

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The following table breaks out “Other support costs” information as presented in the preceding table for the three and nine months ended May 31, 2006 and 2005:

	Three months ended May 31,										Nine months ended May 31,
($ in thousands)		2006			2005		$ Change		% Change			2006			2005		$ Change		% Change
Auto Related	$	4		$	14	$	(10	)	(71	%)	$	34		$	28	$	6		21	%
Bad Debt		—			3		(3	)	(100	%)		(410	)		23		(433	)	(1,883	%)
Delivery and Postage		7			7		—		—			169			35		134		383	%
Fees		140			144		(4	)	(3	%)		152			245		(93	)	(38	%)
Insurance and Office		101			318		(217	)	(68	%)		299			733		(434	)	(59	%)
Professional and Contract Labor		(70	)		1,787		(1,857	)	(104	%)		2,031			5,741		(3,710	)	(65	%)
Rent		75			116		(41	)	(35	%)		255			345		(90	)	(26	%)
Repairs and Maintenance		2			32		(30	)	(94	%)		70			55		15		27	%
Travel		92			113		(21	)	(19	%)		272			313		(41	)	(13	%)
Taxes		135			755		(620	)	(82	%)		80			1,080		(1,000	)	(93	%)
Telephone and Utilities		42			93		(51	)	(55	%)		322			310		12		4	%
Other		17			—		17					401			81		320		395	%
Total Other Support Costs	$	545		$	3,382	$	(2,837	)	(84	%)	$	3,675		$	8,989	$	(5,314	)	(59	)%

For the three months ended May 31, 2006, operating expenses significantly decreased by 63% to $2,070,000, as compared to $5,573,000 for the three months ended May 31, 2005. The primary fluctuations that occurred as evidenced by the two preceding tables immediately above are discussed below:

· A $2,837,000 decrease in other support costs as the Company continued to focus efforts on reducing operational overhead and controlling expenditures. The components of the decrease set forth on the table included immediately above were primarily due to (i) a $1,857,000 decrease in professional fees and contract labor which includes legal, accounting and consulting fees (ii) a $620,000 decrease in taxes due to a decrease in assessed property taxes with certain taxing authorities and (iii) a $217,000 decrease in insurance and office expenses.

· A $201,000 decrease in salaries and related costs due to a reduction in headcount to 52 employees for the three months ended May 31, 2006, as compared to 112 employees for the three months ended May 31, 2005.

· A $538,000 decrease in depreciation and amortization expense for long-lived assets and intangibles. These assets had impairment charges recorded for the year ended August 31, 2005, thus decreasing the depreciable basis and related depreciation expense for the quarter ended May 31, 2006.

For the nine months ended May 31, 2006, operating expenses significantly decreased by 49% to $9,120,000 as compared to $17,844,000 for the nine months ended May 31, 2005. The primary fluctuations that occurred as evidenced by the two preceding tables immediately above are discussed below:

· A $5,314,000 decrease in other support costs as the Company continued to focus efforts on reducing operational overhead and controlling expenditures. The components of the decrease were primarily due to (i) a $433,000 decrease in bad debt expense for collection of receivables deemed uncollectible in prior years, (ii) a $93,000 decrease in fees, primarily due to a $68,000 decrease in license and permit fees, (iii) a $3,710,000 decrease in professional fees and contract labor which includes legal, accounting and consulting fees, (iv) a $1,000,000 decrease in assessed property taxes with certain taxing authorities and (v) a decrease of $320,000 for insurance and office expenses. These decreases were offset by (i) an increase of $453,000 in other expenses, which included costs associated with a purchase obligation to share monthly satellite transponder costs associated with the delivery of the Company’s IPTVComplete service and (ii) a 134,000 increase in delivery and postage, which is attributable to the expensing of $150,000 of prior year delivery charges that had previously been capitalized, offset by a reduction of about $16,000 in current year delivery and postage charges.

· An impairment charge of $1,050,000 was recorded for the nine months ended May 31, 2005 for Link-Two Communications assets. No similar charge was required for the nine months ended May 31, 2006.

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· A $1,490,000 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 nine months ended May 31, 2006, as compared to the nine months ended May 31, 2005.

· A $876,000 decrease in salaries and related costs primarily due to the reduction in headcount from 112 employees at May 31, 2005, to 52 employees at May 31, 2006. The decrease was offset for the nine months ended May 31, 2006, for non-cash charges of $536,000 for compensation expense in accordance with the provisions of SFAS 123R and a non-cash charge of $611,000 to expense prepaid commissions related to security contracts sold to a third party.

· A $34,000 decrease in research and development costs primarily due to product development and engineering activities in the Company’s IPTV, set top box and satellite communication product lines.

Net Loss

Net loss for the three months ended May 31, 2006, was $2,487,000 compared to a net loss of $3,951,000 during the three months ended May 31, 2005. For the nine months ended May 31, 2006, the Company’s net loss was $9,193,000 as compared to a net loss of $18,773,000 for the nine months ended May 31, 2005.

Changes in Cash Flow

Eagle’s operating activities used net cash of $5,038,000 in the nine months ended May 31, 2006, compared to use of net cash of $9,200,000 in the nine months ended May 31, 2005. The decrease in net cash used by operating activities was primarily attributable to fund the Company’s net operating loss, net of non-cash charges, totaling $2,464,000 combined with $1,691,000 of cash used by fluctuations in working capital requirements consisting of the combination of accounts receivable, inventory, other assets, prepaid expenses, accounts payable and accrued expenses. Eagle’s investing activities provided net cash of $476,000 in the nine months ended May 31, 2006, compared to cash used of $1,151,000 in the nine months ended May 31, 2005. The increase was due primarily to proceeds from the sale of assets and an increase in amounts collected for direct financing leases. Eagle’s financing activities provided net cash of $803,000 in the nine months ended May 31, 2006, compared to $11,176,000, of cash provided in the nine months ended May 31, 2005. The decrease was primarily due to a significant decrease in equity funding transactions for the nine months ended May 31, 2006 as compared to the same period in the prior year.

Liquidity and Capital Resources

Current assets for the nine months ended May 31, 2006, totaled $2,523,000 (includes cash and cash equivalents of $261,000) as compared to $8,370,000 reported for the year ended August 31, 2005.

In March 2006, the Company entered into an operating agreement with 186KMPS Partners LLP (“186KMPS”). Pursuant to the agreement, 186KMPS assumed operation of the portion of the Company’s fiber-optic network that serves homes in Harris County and Fort Bend County, Texas. Beginning April 1, 2006, 186KMPS was responsible for payment of all ongoing expenses associated with the operation of the network. Therefore, the Company will incur significantly less capital expenditures for broadband fiber infrastructure as a result of this agreement. During the initial five-year term of the agreement, 186KMPS will pay the Company an aggregate amount of at least $875,000 for the operation and use of the network. The aggregate amount of such payments may be higher depending upon the amount of subscriber revenues received by 186KMPS during the term of the agreement. The agreement may be extended for up to three additional five-year terms at the option of 186KMPS.

In February 2006, the Company entered into a series of agreements with Dutchess Private Equities Fund, L.P. (“Dutchess”), pursuant to which Dutchess will provide a three-year, $5,000,000 equity line of credit for the Company. Under this agreement, the Company may make drawdown requests on the equity line, and Dutchess is obligated to purchase a number of shares at a price equal 93% of the market price of our stock to fund the drawdown requests. The Company is currently using the equity line to provide funding for working capital requirements. To date, the Company has drawn down $1,214,434, and 1,093,379 shares have been issued to Dutchess pursuant to the equity line. The sale by Dutchess into the public market of the shares issued under the equity line of credit could depress the market price of our common stock.

In March 2006, the Company was advised by the American Stock Exchange that it deemed a reverse split to be appropriate in order to increase the price of the Company’s common stock. On April 18, 2006, the Company’s shareholders voted to approve a 1-for-35 reverse stock split, which was effected by the Company on May 12, 2006. One result of effecting the reverse split is that the number of shares outstanding were reduced, while the number of authorized shares remained unchanged. A portion of these authorized and unissued shares will be needed by the Company to draw down the equity line.

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On March 22, 2006, a registration statement was filed with the SEC to register 351,429 shares (see Note 1) to be issued pursuant to the equity line. This registration statement was declared effective by the SEC on April 27, 2006. On May 15, 2006, a registration statement was filed with the SEC to register an additional 2,000,000 shares to be issued pursuant to the equity line. This registration statement was declared effective by the SEC on May 25, 2006.

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. If we are unable to timely utilize the equity line or raise additional financing, we will need to curtail operations or sell assets. The Company will continue to rely upon financing from external sources to fund its operations for the foreseeable future, and it will need to raise additional financing to fund working capital requirements.

Contractual Obligations

The following table sets forth contractual obligations as of May 31, 2006:

(Thousands of dollars) Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Notes Payable Obligations	$	1,574	$	1,574	$	—	$	—	$	—
Long-Term Debt		2,900		—		2,900		—		—
Operating Lease Obligations		950		228		722		—		—
Purchase Obligations and Commitments		—		—		—		—		—
Total	$	5,424	$	1,802	$	3,622	$	—	$	—

The Company’s contractual obligations consist of long term debt, derivative liabilities (current and long term), warrant liabilities (non-current) and current notes payable as set forth in Note 5-Notes Payable to the Company’s financial statements. The Company has certain obligations for office space operating leases requiring future minimal commitments under non-cancelable leases (see Note 9-Commitments and Contingent Liabilities to the Company’s financial statements).

In March 2006, the agreement between Eagle and GlobeCast North America to distribute Eagle’s IPTVComplete service using GlobeCast’s satellite distribution network was terminated. As a result, Eagle’s obligation to share the monthly satellite transponder costs has ceased as of March 31, 2006. However, Eagle was obligated to pay 50% of the termination liability for the early termination of the agreement between GlobeCast and the transponder provider. This obligation, in the amount of $202,500, was secured by an irrevocable letter of credit of $202,500 and was shown as restricted cash on the Balance Sheet as of August 31, 2005. This obligation was paid during the quarter ended May 31, 2006 (see Note 9).

Off-Balance Sheet Arrangements

As of May 31, 2006, 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

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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.

For the quarter ending May 31, 2006, 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 their 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 May 31, 2006, 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., and EBI Funding Corporation names.

Eagle adopted EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” in the fourth quarter of fiscal year 2003. The impact of adopting EITF 00-21 did not have a material effect on 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

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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. Eagle had deferred revenues of $191,000 as of May 31, 2006. As of August 31, 2005, the Company had deferred revenues of $623,000, which included revenues deferred for a twelve-month holdback provision for security contracts sold to a major customer during fiscal year 2005.

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 and also under the category “Eagle” within Note 13-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 and also under the category “Eagle” within Note 13-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 and also under the category “Eagle” within Note 13-Industry Segments.

The Company sells and installs structured wiring and related customer premise equipment in residential customers’ homes. The 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 and also under the category “Eagle” within Note 13-Industry Segments.

Eagle 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 and also under the category “Eagle” within Note 13-Industry Segments.

Eagle 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 “Structured Wiring” while the services components are reported under the category “Other” on Eagle’s Consolidated Statements of Operations and also under the category “Eagle” within Note 13-Industry Segments.

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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 and also under the category “EBS/DSS” within Note 13-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 and also under the category “EBS/DSS” within Note 13-Industry Segments.

On February 28, 2006, the Company entered into an asset purchase agreement with a third party to acquire the assets of D.S.S. Security, Inc. for a purchase price of $1,400,000. The purchase price allocated $400,000 to an accounts receivable balance for contracts purchased in prior quarters and $1,000,000 to customer contracts. In connection with the sale, the Company recognized a loss of the sale of fixed assets of $163,000, bad debt expense of $373,000, and a loss of $104,000 for security contracts that were classified on the Balance Sheet as of August 31, 2005 as Other Assets.

Receivables

For the nine months ended May 31, 2006, Eagle accounts receivable decreased to $559,000 from $1,890,000 at August 31, 2005. The majority of this decrease was due to the collection of a receivable for assets sold during the second quarter of the current fiscal year.

The Company’s accounts receivable aging, as measured by days sales outstanding (DSO), totaled 41 days at May 31, 2006, and 47 days at August 31, 2005, on an adjusted basis after recording the write-offs and reserves. The decrease in DSO from 47 days at August 31, 2005, to 41 days at May 31, 2006, was primarily attributable to more aggressive collection efforts.

Allowance for Doubtful Accounts

The Company’s allowance for doubtful accounts totaled $207,000 and $2,688,000 for the three months ended May 31, 2006 and the year ended August 31, 2005, respectively. These allowances for doubtful accounts amounts represented 27% and 59% of the gross accounts receivable balances for the quarter ended May 31, 2006 and the year ended August 31, 2005. They represented 61% and 82% of the Company’s greater than 90-day accounts for the quarter ended May 31, 2006, and the year August 31, 2005. The decrease in the allowance for doubtful accounts from August 31, 2005 to May 31, 2006, 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 May 31, 2006, Eagle’s inventory totaled $590,000 as compared to $802,000 at August 31, 2005. The majority of this decrease is for sales of set-top

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boxes that occurred for the nine months ended May 31, 2006. The Company outsources production as needed based on contract orders from customers.

Derivative Financial Instruments

The Company accounts for all derivative financial instruments in accordance with SFAS No. 133. Derivative financial instruments are recorded as liabilities in the consolidated balance sheet, measured at fair value.

In connection with the sale of debt or equity instruments, we may sell options or warrants to purchase our common stock. In certain circumstances, these options or warrants may be classified as derivative liabilities, rather than as equity. Additionally, the debt or equity instruments may contain embedded derivative instruments, such as embedded derivative features, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

Derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income in the period in which the changes occur. For options, warrants and bifurcated embedded derivative features that are accounted for as derivative instrument liabilities, we estimate fair value using either quoted market prices of financial instruments with similar characteristics or other valuation techniques. The valuation techniques require assumptions related to the remaining term of the instruments and risk-free rates of return, our current common stock price and expected dividend yield, and the expected volatility of our common stock price over the life of the option. We have estimated the future volatility of our common stock price based on not only the history of our stock price but also the experience of other entities considered comparable to us. The fair value of the derivative liabilities are subject to the changes in the trading value of the Company’s common stock. As a result, the Company’s financial statements may fluctuate from quarter-to-quarter based on factors, such as the price of the Company’s stock at the balance sheet date, the amount of shares converted by note holders and/or exercised by warrant holders. Consequently, our financial position and results of operations may vary from quarter-to-quarter based on conditions other than our operating revenues and expenses.

Under SFAS No. 133, all derivative financial instruments held by the Company are not designated as hedges.

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.

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

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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 May 31, 2006. 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 of the fiscal quarter ended May 31, 2006, 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.

In May 2006, the Company filed a demand for arbitration before JAMS in Los Angeles, California, in connection with an agreement between the Company and GlobeCast North America Incorporated. The Company is seeking an arbitral award declaring that either (i) the agreement is unenforceable, (ii) both parties are excused from performance due to the existence of a force majeure event, or (iii) the Company is excused from performance due to GlobeCast’s prior breach of the agreement. In June 2006, GlobeCast filed a complaint in the Circuit Court of the Eleventh Judicial District in and for Miami-Dade County, Florida (Case No. 06-11822), seeking damages in excess of $1,000,000 it alleges are due under the agreement and raising a number of the same issues that are the subject of the pending arbitration. The Company intends to vigorously prosecute the California arbitration and defend its right to have all disputes between the parties resolved by binding arbitration, however, the Company cannot control the outcome and the extent of the losses, if any, that may be incurred.

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

At the Company’s Annual Shareholders’ Meeting on April 18, 2006, the shareholders elected each of the director nominees, approved an amendment to the Articles of Incorporation to effect a 1-for-35 reverse stock split of all outstanding shares of the Company’s common stock, approved the issuance of more than 20% of our outstanding stock in connection with a financing transaction with Dutchess Private Equities Fund, L.P., approved the issuance of more than 20% of our outstanding stock in connection with a settlement agreement with the Tail Wind Fund Ltd., and ratified the selection of our independent registered public accounting firm.

	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	238,655,303	25,047,293
H. Dean Cubley	236,238,348	27,416,248
Glenn Goerke	238,617,003	25,085,593
David Micek	239,049,631	24,652,965
Lorne Persons, Jr.	238,706,045	24,996,551
C. J. (Jim) Reinhartsen	238,580,063	25,122,533
James Yarbrough	238,604,568	25,098,028

	Number of Shares
	Voted For	Voted Against	Abstain	Broker Non-Votes (1)
2.To approve an amendment to the Articles of Incorporation to effect a 1-for-35 reverse stock split of all outstanding shares of the Company’s common stock	250,740,676	12,319,310	642,610	—
3.To approve the issuance of more than 20% of our outstanding stock in connection with a financing transaction with Dutchess Private Equities Fund, L.P.	55,869,746	10,423,007	1,132,249	196,277,594
4.To approve the issuance of more than 20% of our outstanding stock in connection with a settlement agreement with the Tail Wind Fund Ltd.	56,533,913	9,531,908	1,359,181	196,277,594
5.To ratify selection of independent registered public accounting firm	259,467,829	3,053,154	1,181,613	—

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 3 and 4. Significantly fewer shares voted on each of Proposals 3 and 4 than voted on Proposal 1, the election of directors, Proposal 2, the approval of an amendment to the Company’s Articles of Incorporation, and Proposal 5, 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 3 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.

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: July 17, 2006

By: /s/ JULIET MARKOVICH

Juliet Markovich

Corporate Controller and Principal Accounting Officer

Date: July 17, 2006

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