Eagle Broadband (EAGB) 10-Q 2007 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 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  o Non-accelerated filer  x

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

As of January 9, 2006, the registrant had 21,266,162 shares of common stock outstanding.

EAGLE BROADBAND, INC.

FORM 10-Q

FOR THE QUARTER ENDED NOVEMBER 30, 2006

TABLE OF CONTENTS

PART I-FINANCIAL INFORMATION

Item 1.Financial Statements.

EAGLE BROADBAND, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)	November 30, 2006 (Unaudited)			August 31, 2006 (Audited)
ASSETS
Current Assets
Cash and cash equivalents	$	1,117		$	3,139
Accounts receivable, net		828			516
Inventories		685			734
Assets held for sale		—			899
Prepaid expenses		314			322
Total Current Assets		2,944			5,610
Property and Equipment
Operating equipment		19,223			18,691
Less: accumulated depreciation		(7,552	)		(7,347	)
Total Property and Equipment		11,671			11,344
Other Assets
Goodwill		4,095			4,095
Contract rights, net		380			389
Customer relationships, net		126			129
Other intangible assets, net		189			197
Other assets		75			—
Total Other Assets		4,865			4,810
Total Assets	$	19,480		$	21,764
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Notes payable & current portion of long-term debt	$	3,592		$	3,990
Accounts payable		6,220			6,147
Accrued expenses		1,802			1,929
Accrued expenses - related party		2,516			2,430
Compound embedded derivative		1,197			1,564
Deferred revenue		123			163
Total Current Liabilities		15,450			16,223
Long-Term Liabilities
Long-term debt, net of current portion		268			1,443
Compound embedded derivative		1,901			2,153
Warrant liability		79			82
Total Long-Term Liabilities		2,248			3,678
Total Liabilities		17,698			19,901
Commitments and Contingencies		—			—
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,
18,103,204 and 12,092,758 issued and outstanding at November, 30, 2006 and August 31, 2006, respectively		18			12
Additional paid in capital		246,274			242,900
Accumulated deficit		(244,510	)		(241,049	)
Total Shareholders’ Equity		1,782			1,863
Total Liabilities and Shareholders’ Equity	$	19,480		$	21,764

See accompanying notes to consolidated financial statements.

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands)	For the three months ended November 30,
	2006			2005
Net Sales
Structured wiring	$	432		$	422
Broadband services		137			250
Products		399			622
Other		—			38
Total Sales		968			1,332
Costs of Goods Sold
Direct labor and related costs		173			293
Products and integration service		438			255
Structured wiring labor and materials		407			289
Broadband services costs		22			62
Depreciation and amortization		58			229
Total Costs of Goods Sold		1,098			1,128
Gross Profit (Loss)		(130	)		204
Operating Expenses
Salaries and related costs		757			1,144
Advertising and promotion		55			31
Depreciation and amortization		167			344
Other support costs		1,379			1,056
Research and development		(14	)		105
Total Operating Expenses		2,344			2,680
Loss from Continuing Operations		(2,474	)		(2,476	)
Other Income/(Expenses)
Interest income		11			8
Interest expense		(695	)		(2	)
Derivative expense		(159	)		—
Loss on extinguishment of debt		(144	)		—
Total Other Income (Expense)		(987	)		6
Net Loss from Continuing Operations		(3,461	)		(2,470	)
Loss from discontinued operations		—			(164	)
Net Loss	$	(3,461	)	$	(2,634	)
Basic and diluted income (loss) per Common Share:
Loss from continuing operations	$	(0.23	)	$	(0.30	)
Loss from discontinued operations	$	—		$	(0.02	)
Net loss	$	(0.23	)	$	(0.32	)

See accompanying notes to consolidated financial statements.

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock						Additional Paid in					Total Shareholders’
(Shares and dollars in thousands)	Shares		Value		Preferred Stock		Capital		Retained Earnings			Equity
Shareholders’ Equity at August 31, 2005		8,235	$	8		—	$	237,212	$	(214,116	)	$	23,104
Net loss for the year ended August 31, 2006		—		—		—		—		(26,933	)		(26,933	)
Stock issued for services and compensation		151		—		—		244		—			244
Stock issued for retirement of debt and accrued liabilities		1,060		1		—		957		—			958
Proceeds from sale of common stock, net		1,722		2		—		1,593		—			1,595
Stock-based compensation		—		—		—		642		—			642
Reclassification of stock payable, net		425		—		—		2,008		—			2,008
Incentive shares to Dutchess for note		500		1		—		244		—			245
Shareholders’ Equity at August 31, 2006		12,093	$	12		—	$	242,900	$	(241,049	)	$	1,863
Net loss for the three months ended November 30, 2006		—		—		—		—		(3,461	)		(3,461	)
Stock issued for services and compensation		169		—		—		110		—			110
Stock issued for retirement of debt		2,713		3		—		1,134		—			1,137
Proceeds from sale of common stock, net		3,128		3		—		1,866		—			1,869
Stock-based compensation		—		—		—		264		—			264
Shareholders’ Equity at November 30, 2006		18,103	$	18		—	$	246,274	$	(244,510	)	$	1,782

See accompanying notes to consolidated financial statements.

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)	For the three months ended November 30,
	2006			2005
Cash Flows from Operating Activities
Net Loss	$	(3,461	)	$	(2,634	)
Adjustments to Reconcile Net Loss to Net Cash
Stock for compensation expense		110			266
Depreciation and amortization		225			590
Loss on extinguishment of debt		144			—
Amortization of debt discount		392			—
Derivative expense		159			—
Provision for bad debt		2			—
Stock issued for services and compensation		264			—
Change in Assets and Liabilities:
Increase in accounts receivable		(314	)		(368	)
Decrease in inventories		49			95
(Increase)/decrease in prepaid expenses		8			(372	)
Increase/(decrease) in accounts payable		73			(2,140	)
Increase/(decrease) in accrued expenses		(81	)		1,708
Total Adjustment		1,031			(221	)
Net Cash Used for Operating Activities		(2,430	)		(2,855	)
Cash Flows from Investing Activities
Purchase of property and equipment		(532	)		(2	)
(Increase)/decrease in other assets		(75	)		675
Principal collections on direct financing leases		—			104
Proceeds on the sale of direct financing leases		899			—
Net Cash Provided by Investing Activities		292			777
Cash Flows from Financing Activities
Proceeds from/(payments on) notes payable and long-term debt		(1,753	)		91
Proceeds from sale of common stock, net		1,869			—
Net Cash Provided by Financing Activities		116			91
Net decrease in cash		(2,022	)		(1,987	)
Cash at the beginning of the period		3,139			4,020
Cash at the end of the period	$	1,117		$	2,033
Supplemental Disclosure of Cash Flow Information
Net cash paid during the period for:
Interest	$	209		$	1
Income taxes	$	—		$	—
Non-cash investing and financing disclosures
Common stock issued for retirement of debt	$	1,137		$	—

See accompanying notes to consolidated financial statements.

Eagle Broadband, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements November 30, 2006 (Unaudited)

NOTE 1 - Basis of Presentation

The Consolidated Balance Sheet of the company as of November 30, 2006, the related Consolidated Statements of Operations for the three months ended November 30, 2006 and 2005, the Consolidated Statements of Changes in Shareholders’ Equity as of November 30, 2006 and the Consolidated Statements of Cash Flows for the three months ended November 30, 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 ended November 30, 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, 2006, Form 10-K.

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.

In accordance with the provisions of SFAS No.144, Accounting for the Impairment or Disposal of Long-Lived Assets, the results of operations of the disposed assets and the losses related to the sale of the security monitoring business component have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of operations. See Note 11 - Discontinued Operations.

NOTE 2 - Related Party Transactions

H. Dean Cubley, a former director of the company, is the holder of a promissory note with a remaining principal amount of $1,924,000. The note is allegedly in default and the company is accruing interest under the terms of the original agreement. The note was issued upon the modification of outstanding options for 57,143 common shares and reflects a guaranteed compensation of the modified options equivalent to $61.25 less the option strike price. Interest payable was $592,000 and $506,000 has been accrued as of November 30, 2006 and August 31, 2006, respectively. In August 2006, Mr. Cubley filed a lawsuit against the company for non-payment of the note. (See Note 7 - Legal Proceedings.) The note payable and accrued interest are classified in the Balance Sheet as Accrued Expenses - Related Party.

NOTE 3 - Inventories

Inventories are valued at the lower of cost or market. The cost is determined by using the FIFO method. Inventories consist of the following items, in thousands:

	November, 30 2006		August 31, 2006
Raw Materials	$	294	$	288
Work in Process		140		169
Finished Goods		251		277
	$	685	$	734

NOTE 4 - Notes Payable and Long-Term Debt

The following table lists the company’s note obligations as of November 30, 2006, and August 31, 2006 (in thousands):

	Annual Interest Rate		Due Date		November 30, 2006			August 31, 2006
Notes payable & long-term debt:					(Unaudited)			(Audited)
Dutchess convertible note and warrant, net of discount of $73,996 at November 30, 2006 and $334,593 at August 31, 2006		12%		May 2007	$	250		$	480
Dutchess promissory note, net of discount of $2,740,487 at November 30, 2006 and $4,288,389 at August 31, 2006				July 2008		3,677			3,835
Tail Wind non-convertible promissory note and convertibles notes, net of discount of $65,320 at November 30, 2006 and $149,618 at August 31, 2006		0%		March 2008		3,050			4,625
Note with related party		25%		August 2006		—			200
Notes payable		Various		Various		60			92
Less compound embedded derivative and warrant liability						(3,177	)		(3,799	)
Total debt	��				$	3,860		$	5,433
Less current maturities						(3,592	)		(3,990	)
Total long-term debt					$	268		$	1,443

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.”

NOTE 5 - Stock Options and Warrants

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 November 30, 2006, 140,408 shares of common stock have been issued under the Plan, and options issued under the Plan covering 328,857 shares were outstanding, of which 226,762 were exercisable.

The weighted average fair value of the options granted during the quarter ended November 30, 2006, is estimated at $0.51 on the date of grant. The fair values of the options granted during the quarter ended November 30, 2006, were determined using a Black-Scholes option-pricing model with the following assumptions: dividend yield of 0%, volatility of 75%, risk-free interest rate of 4.45% and an expected life of 5 years.

Option and warrant activity, including employees and third parties, was as follows for the three months ended November 30, 2006:

	Shares			Weighted Average Exercise Price
Outstanding at beginning of period		474,040		$	20.95
Granted		348,917			0.61
Assumed through acquisitions		—			—
Exercised		—			—
Forfeited/cancelled		(4,693	)		10.87
Outstanding at end of period		818,264		$	12.09
Exercisable at end of period		710,454		$	12.48

information about options and warrants outstanding was as follows at November 30, 2006:

Range of Exercise Prices	Number Outstanding	Avg. Remaining Contractual Life in Years	Average Exercise Price	Number Exercisable	Average Exercise Price
$0.60 - $1.00	449,872	4.26	$     0.62	449,872	$     0.62
$1.00 - $9.45	276,322	3.23	$     6.45	181,444	$     6.34
$14.00 - $45.85	69,213	2.45	$   26.46	56,281	$   25.56
$262.50	22,857	1.65	$ 262.50	22,857	$ 262.50
	818,264	3.68	$   12.09	710,454	$   12.48

NOTE 6 - Risk Factors

Financial instruments that potentially subject the company to concentrations of credit risk consist principally of trade accounts receivable. The company controls credit risk associated with its receivables through credit checks and approvals, credit limits, and monitoring procedures. Generally, the company requires no collateral from its customers. Four customers comprise 18%, 14%, 11% and 11%, respectively, of outstanding receivables at November 30, 2006. Two customers comprise 34% and 13%, respectively, of outstanding accounts receivable at August 31, 2006.

For the three months ended November 30, 2006, substantially all of the company’s business activities have remained within the United States. Approximately 22% of the company’s revenues and receivables have been created solely in the state of Texas, 0% in the international market, and the approximate 78% remainder relatively evenly over the rest of the nation during the three months ended November 30, 2006; whereas approximately 30% of the company’s revenues and receivables were created solely in the state of Texas, 0% in the international market, and the approximate 70% remainder relatively evenly over the rest of the nation during the three months ended November 30, 2005.

The company maintains cash deposits in banks which from time to time exceed the amount of deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any potential credit loss is minimal.

NOTE 7 - Commitments and Contingent Liabilities

Leases

For the three months ended November 30, 2006 and 2005, rental expenses of approximately $76,000 and $77,000, respectively, were incurred. Future minimum rental payments under the company’s primary office lease are as follows:

	August 31,	Amount
For the nine months ending	2007	$	231,230
For the year ending	2008		325,316
For the year ending	2009		243,987
	Total	$	800,533

Legal Proceedings

In August 2006, Eagle became a defendant in H. Dean Cubley vs. Eagle Broadband, Inc. Mr. Cubley, a former director of the company, filed a lawsuit against the company seeking to enforce a promissory note entered into by the company in December 2003, in lieu of the issuance of shares for stock options then held by Mr. Cubley, who was at the time Chairman of the Board of the company. The lawsuit seeks recovery of the principal balance of approximately $1.9 million plus $541,000 in interest. The company has asserted defenses, including a defense that the execution of the promissory note by the company was induced by misrepresentations. The company believes Mr. Cubley’s claims are without merit and intends to vigorously defend the lawsuit. The company has accrued $2.4 million in connection with this claim.

In May 2006, Eagle 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) both parties are excused from performance due to the existence of a force majeure event or (ii) the company is excused from performance due to GlobeCast’s prior breach of the agreement. GlobeCast denies that the agreement was unenforceable, that Eagle’s alleged failure to perform is excused and that there was a failure of any of the conditions precedent under the agreement. GlobeCast also asserts that Eagle owes GlobeCast at least $250,000 for Eagle’s alleged failure to pay GlobeCast in accordance with the agreement, and, in the alternative, owes GlobeCast at least $1.5 million under a claim for restitution. The company believes that its claims are meritorious and intends to vigorously pursue them, and that GlobeCast’s claims lack merit and intends to vigorously defend itself against them. The company has accrued $250,000 in connection with this lawsuit.

In September 2005, the State of Texas filed a lawsuit against United Computing Group, Inc., and H. Dean Cubley, individually, for unpaid sales and use tax, interest and penalties in the amount of $568,637 for the time period of March 1998 through December 2001. The company has accrued $560,000 in connection with this lawsuit.

In July 2003, Eagle became a defendant in Cornell Capital Partners, L.P., vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), in the United States District Court for the District of New Jersey. The suit presents claims for breach of contract, state and federal securities fraud and negligent misrepresentation. Cornell also alleged that Eagle 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 $1.3 million. Eagle asserted counterclaims against Cornell for fraud and breach of contract in the amount of $2 million. In March 2006, the court ruled in favor of Cornell on certain claims, granting Cornell’s motion for partial summary judgment on its breach of contract claim and denying all of Eagle’s counterclaims. The court ruled in favor of Eagle on other claims, granting Eagle’s motion for summary judgment on Cornell’s claims of common law fraud, state and federal securities fraud, and negligent misrepresentation. The company has accrued $750,000 in settlement expense against this lawsuit.

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

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.

NOTE 8 - Earnings per Share

The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for net income for the three months ended November 30, 2006 and 2005 (in thousands, except per share amounts):

	For the three months ended November 30,
	2006				2005
	Net Income /(Loss)		Shares	Per Share	Net Income /(Loss)		Shares	Per Share
Continuing Operations:							(1)
Basic EPS
Income available to common shareholders	$	(3,461)	15,142	(0.23)	$	(2,470)	8,295	(0.30)
Effective of dilutive securities		—	—	—		—	—	—
Diluted EPS	$	(3,461)	15,142	(0.23)	$	(2,470)	8,295	(0.30)
Discontinued Operations:
Basic EPS
Income available to common shareholders	$	—	15,142	—	$	(164)	8,295	(0.02)
Effective of dilutive securities		—	—	—		—	—	—
Diluted EPS	$	—	15,142	—	$	(164)	8,295	(0.02)
Total:
Basic EPS
Income available to common shareholders	$	(3,461)	15,142	(0.23)	$	(2,634)	8,295	(0.32)
Effective of dilutive securities		—	—	—		—	—	—
Diluted EPS	$	(3,461)	15,142	(0.23)	$	(2,634)	8,295	(0.32)

(1)The number of shares and per share amounts have been restated to reflect the impact of the May 12, 2006 one-for-thirty five reverse stock split.

NOTE 9 - Major Customer

The company had gross sales of $968,000 and $1,332,000 for the three months ended November 30, 2006 and 2005, respectively. The company had three customers that represented approximately 14%, 12%, and 10%, respectively, of the gross sales for the three months ended November 30, 2006, and had two customers that represented 33% and 10%, respectively, of the gross sales for the three months ended November 30, 2005.

NOTE 10 - Industry Segments

This summary reflects the company’s current and past operating segments, as described below. All have ceased operations except Eagle Broadband, Inc. and Eagle Broadband Services, 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) was 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 ceased 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 ceased 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 ceased operations.)

UCG:

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

Other:

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

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

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

For the three months ended November 30, 2006

	APC/HSI			EBS/DSS			UCG			Eagle			Other		Elim.			Consol
Revenue	$	—			137			—			831			—		—			968
Segment Loss		—			(182	)		—			(2,292	)		—		—			(2,474	)
Total Assets		(8,918	)		(28,132	)		(3,099	)		86,421			16,320		(43,112	)		19,480
Capital Expenditures		—			—			—			532			—		—			532
Depreciation and amortization		—			178			1			46			—		—			225

For the three months ended November 30, 2005

	APC/HSI			EBS/DSS			UCG			Eagle			Other		Elim.			Consol
Revenue	$	—			250			—			1,082			—		—			1,332
Segment Loss		1			(630	)		(1	)		(1,846	)		—		—			(2,476	)
Total Assets		(8,975	)		(16,280	)		(3,778	)		94,989			16,305		(43,111	)		39,150
Capital Expenditures		—			—			—			2			—		—			2
Depreciation and amortization		—			325			1			247			—		—			573

Reconciliation of Segment Loss from Operations to Net Loss

	Three Months Ended November 30,
	2006			2005
Total segment loss from operations	$	(2,474	)	$	(2,476	)
Total other income (expense)		(987	)		6
Net loss	$	(3,461	)	$	(2,470	)

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 11 - Discontinued Operations

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 following table reports the results of the component of Eagle’s operations reported as discontinued operations:

	Three months ended November 30, 2006
	2006			2005
Broadband services revenues:
Sale of security contracts	$	—	$	383
Security monitoring revenue		—		220
Total revenue from discontinued operations		—		603
Cost of goods sold for security contracts sold		—		290
Operating expenses		—		477
Net income (loss) on discontinued operations	$	—	$	(164	)

In accordance with the provisions of Statement of Financial Accounting Standard, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the results of operations of the disposed assets and the losses related to this sale have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of operations.

NOTE 12 - Financial Condition and Going Concern

The company has incurred a loss for the three months ended November 30, 2006, of $3,461,000 and has an accumulated deficit at November 30, 2006, of $244,510,000. 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.

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 $5,000,000 equity line of credit to help fund working capital requirements.

Management will continue to direct all efforts to the delivery of the IPTVComplete solution to the market. During the year ended August 31, 2006, 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 during the current fiscal year. However, there can be no assurance that the company will be successful in achieving its objectives.

NOTE 13 - Subsequent Events

In November 2006, the company received notice from the American Stock Exchange (the “Amex”) that the company is not currently satisfying certain of the Exchange’s continued listing standards in Section 1003 of the Amex Company Guide concerning shareholders equity and losses from continuing operations. The company has been afforded the opportunity to submit a plan of compliance to Amex that demonstrates the company’s ability to satisfy Section 1003 of the Company Guide by May 29, 2008. The company submitted such a plan on January 5, 2007. With Amex’s acceptance of the plan, the company expects to continue its listing during the plan period of up to 18 months, during which time the company will be subject to periodic review to determine whether it is making progress consistent with the plan. If Amex does not accept the company’s plan, or if accepted, the company is not in compliance with the continued listing standards at the end of the plan period or the company does not make progress consistent with the plan during such period, then Amex may initiate delisting proceedings.

In December 2006, the company entered into an agreement with Connex Services, Inc. (“Connex”), pursuant to which the company acquired all of Connex’s customers effective January 2, 2007. Connex is a Houston-based IT services company providing national and international project management services for data, voice, fiber-optic, wireless, hospitality systems, access control, audio and satellite installations. The acquired customer base consists of more that 50 clients, currently generating revenue at a rate of $600,000 annually. Connex received 1,203,774 shares of unregistered common stock of the company. In accordance with the agreement, on December 22, 2006, the company filed a registration statement with the SEC to register 754,717 of those shares for resale by Connex, which registration statement was declared effective by the SEC on January 10, 2007.

In December 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 April 12, 2007. The proceeds were used for working capital requirements.

In December 2006, the company issued a total of 1,170,630 shares of common stock to The Tail Wind Fund Ltd. in connection with conversions of one of the convertible notes held by Tail Wind, reducing the balance of such note by $600,000.

In January 2007, the company entered into a private equity credit agreement with Brittany Capital Management Limited (“Brittany”) for a $5,000,000 equity line of credit. The company has agreed to file a registration statement to register shares for resale by Brittany that it may purchase from us under this agreement.

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 Internet protocol (IP), information technology services and satellite communications products and services. The company’s product offerings are:

· IPTVComplete™, delivering over 250 channels of digital television and music content via IP to many market sectors, such as to multi-dwelling unit operators (e.g., condominiums), triple-play operators (Internet data, phone and television, all over IP) or telephone companies, including our MediaPro standard or high-definition set-top boxes for both hospitality and IPTV customers;

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

· SatMAX^®, our patented satellite telephony extension technology for indoor applications for enterprise, military and other government customers, especially in portable first responder situations with our Alpha “SatMAX in a Suitcase” model.

In December 2006, the company entered into an agreement with Connex Services, Inc. (“Connex”), pursuant to which the company acquired all of Connex’s customers effective January 2, 2007. Connex is a Houston-based IT services company providing national and international project management services for data, voice, fiber-optic, wireless, hospitality systems, access control, audio and satellite installations. The acquired customer base consists of more that 50 clients, currently generating revenue at a rate of $600,000 annually. Connex received 1,203,774 shares of unregistered common stock of the company. In accordance with the purchase agreement, on December 22, 2006, the company filed a registration statement with the SEC to register 754,717 of those shares for resale by Connex, which registration statement was declared effective by the SEC on January 10, 2007.

In September 2006, our super-headend facility in Miami, Florida, became operational. Over 250 channels of digital television and music content are now streaming in IP format from NewCom International’s Florida teleport to the NAP of the Americas for distribution over fiber to our IPTV customers. The “light-up” of this facility gives us the operational capability to collect and digitize a wide range of television content from up to 30 satellites over North America plus other Latin-content satellites over the Atlantic Ocean. Using 21 signal feeds from seven satellite dishes, our new super-headend facility currently delivers a broad range of cable channel content.

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. This set-top box also supports the H.264 standard for MPEG-4 and, therefore, can be used by specialty content owners to deliver their IPTV content over the open Internet, which is a different approach than that used by IPTVComplete, which is a closed IP network solution.

During fiscal year 2006, the company 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.

As of November 30, 2006, the company’s active subsidiaries were Eagle Broadband Services, Inc. and EBI Funding Corp. 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 intercompany transactions and balances have been eliminated in consolidation.

We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from year to year, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. The discussion also provides information about the financial results of the various segments of our business to provide a better understanding of how those segments and their results affect the financial condition and results of operations of the company as a whole. This discussion should be read in conjunction with our financial statements and accompanying notes for the three months ended November 30, 2006.

Results of Operations

Three Months Ended November 30, 2006, Compared to Three Months Ended November 30, 2005

The following table sets forth summarized consolidated financial information for the three months ended November 30, 2006 and 2005:

Condensed Financial Information

($ in thousands)	Three Months Ended November 30,
	2006			2005			$ Change			% Change
Net sales	$	968		$	1,332		$	(364	)		(27	%)
Cost of goods sold		1,098			1,128			(30	)		(3	%)
Gross profit		(130	)		204			(334	)
Percent of sales		(13.4%	)		15.3	%
Operating expenses		2,344			2,680			(336	)		(13	%)
Loss from operations		(2,474	)		(2,476	)		2			—
Other income (expense)		(987	)		6			(993	)		(16550	%)
Loss from continuing operations		(3,461	)		(2,470	)		(991	)		40	%
Loss from discontinued operations		—			(164	)		164			(100	%)
Net Loss	$	(3,461	)	$	(2,634	)	$	(827	)		31	%

Overview

For the three months ended November 30, 2006, the results of operations reflects a continued emphasis on management’s strategy to focus on business opportunities in its three main operating divisions: IPTV solutions, satellite communications and information technology services. For the quarter ended November 30, 2006, the company’s consolidated operations generated net sales of $968,000, with a corresponding negative gross profit of $130,000. The overall decrease in net sales for the three months ended November 30, 2006, as compared to the three months ended November 30, 2005, was primarily attributable to sales in the prior quarter of $436,000 to a major customer and no similar sales to this customer in the current quarter. The company exited the residential security monitoring business in February 2006, and management anticipated replacing the recurring revenues from security monitoring with recurring revenues for delivery of the IPTVComplete solution. Due to unforeseen delivery complications, this did not occur for the quarter ended November 30, 2006. Management anticipates the revenue stream from IPTVComplete to begin occurring in the second quarter of the current fiscal year.

The company’s operating loss for the three months ended November 30, 2006, was basically unchanged from the three-month period ended November 30, 2005. However, in the three-month period ended November 30, 2005, the company recognized a credit to bad debt expense of approximately $900,000 due to the collection of a receivable in November 2005 of an account previously deemed uncollectible. Without this credit, the operating loss for that three-month period, would have been approximately $3.4 million, compared to $2.5 million for the current three-month period. The primary reason for this decline in operating loss was due to a reduction in operating expenses of approximately $1.2 million when compared to operating expenses for the prior three-month period excluding the $900,000 credit to bad debt expense. This operating expense reduction was partially offset by a $334,000 reduction in gross profit. The primary reason for the negative gross profit was due to low margins in IT services and product sales, a lower than expected volume of product sales and the absorption of product warranty costs during the quarter.

The company’s net loss from continuing operations for the three months ended November 30, 2006, was $3,461,000, which includes $695,000 in interest expense, $392,000 of which was a non-cash charge, and other non-cash charges of $144,000 of losses on the retirement of debt with stock, $225,000 of depreciation and amortization expense and $159,000 of derivative expense. The net loss from continuing operations for the prior three-month period was $2,470,000. During this prior period, the company did not incur any losses on debt retirement or derivative expense, and only $2,000 in interest expense.

Sales Information

Set forth below is a table presenting summarized sales information for our business segments for the three months ended November 30, 2006 and 2005:

($ in thousands)	Three months ended November 30,
	2006		% of Total			2005		% of Total			$ Change			% Change
Structured wiring	$	432		45	%	$	422		32	%	$	10			2	%
Broadband services		137		14	%		250		19	%		(113	)		(45	%)
Products		399		41	%		622		47	%		(223	)		(36	%)
Other		—		—			38		2	%		(38	)		(100	%)
Total	$	968		100	%	$	1,332		100	%	$	(364	)		(27	%)

For the three months ended November 30, 2006, net sales decreased to $968,000 from $1.3 million in the three-month period ended November 30, 2005. This 27% decrease was attributable to a decrease in product sales and broadband services. The decrease in product sales reflects sales in the prior quarter of $436,000 to a major customer and no similar sales to this customer in the current quarter. The decrease of $113,000 in broadband services is primarily attributable to management’s decision to contract with a third party to operate a majority of the company’s bundled services business. The company expects sales from its IPTVComplete service to begin in the second quarter of fiscal 2007.

Cost of Goods Sold

The following table sets forth summarized cost of goods sold information for the three ended November 30, 2006 and 2005:

($ in thousands)	Three Months Ended November 30,
	2006		2005		$ Change		% Change
Direct labor and related costs	$	173	$	293	$	(120)	(41%)
Products and integration services		438		255		183	72%
Structured wiring labor and material		407		289		118	41%
Broadband services costs		22		62		(40)	(65%)
Depreciation and amortization		58		229		(171)	(75%)
Total cost of goods sold	$	1,098	$	1,128	$	(30)	(3%)

For the three months ended November 30, 2006, cost of goods sold was relatively unchanged from the prior three-month period. Direct labor and related costs and broadband services and costs decreased by an aggregate of $160,000 due to workforce reductions and reductions in other costs primarily related to management’s decision to contract with a third party to operate a majority of the company’s bundled services business. These reductions were offset by increases of $183,000 in products and integration services and $118,000 in structured wiring labor and materials. These increases were due to product warranty costs incurred during the quarter, higher than expected costs in structured wiring, and an increase in product costs. Depreciation expenses decreased by $171,000 due to the impairment of long-lived assets in the year ended August 31, 2006.

Operating Expenses

The following table sets forth summarized operating expense information for the three months ended November 30, 2006 and 2005:

($ in thousands)	Three Months Ended November 30,
	2006			2005		$ Change			% Change
Salaries and related costs	$	757		$	1,144	$	(387	)		(34	%)
Advertising and promotion		55			31		24			77	%
Depreciation and amortization		167			344		(177	)		(51	%)
Research and development		(14	)		105		(119	)		(113	%)
Other support costs		1,379			1,056		323			31	%
Total Operating Expenses	$	2,344		$	2,680	$	(336	)		(13	%)

The following table breaks out “Other support costs” information as presented in the preceding table for the three months ended November 30, 2006 and 2005:

($ in thousands)	Three Months Ended November 30,
	2006		2005			$ Change			% Change
Auto related	$	10	$	19		$	(9	)		(47	%)
Bad debt (recovery)		2		(904	)		906			(100	%)
Delivery and postage		6		155			(149	)		(96	%)
Fees		11		7			4			57	%
Insurance and office		105		93			12			13	%
Professional and contract labor		842		989			(147	)		(15	%)
Rent		76		89			(13	)		(15	%)
Repairs and maintenance		6		29			(23	)		(79	%)
Travel		78		82			(4	)		(5	%)
Taxes		3		167			(164	)		(98	%)
Telephone and utilities		72		135			(63	)		(47	%)
Other		168		195			(27	)		(13	%)
Total Other Support Costs	$	1,379	$	1,056		$	323			31	%

For the three months ended November 30, 2006, operating expenses decreased by 13% to $2,344,000, as compared to $2,680,000 for the three months ended November 30, 2005. Excluding the previously mentioned credit to bad debt expense related to the collection of receivables in November 2005 that were previously deemed uncollectible, operating expenses decreased about 35%, declining from approximately $3.6 million to approximately $2.3 million. The primary reasons for this reduction are discussed below:

· Salaries and related costs declined $387,000 due to a significant reduction in the company’s workforce.

· A $177,000 decrease in depreciation and amortization expense for long-lived assets and intangibles. These assets had impairment charges recorded for the year ended August 31, 2006, thus decreasing the depreciable basis and related depreciation expense for the quarter ended November 30, 2006.

· Delivery and postage expenses were significantly lower as the prior quarter reflects higher than normal delivery costs associated with warranty work.

· A $147,000 decrease in professional and contract labor due to a reduction in legal, accounting and consultant fees.

· A $164,000 reduction in taxes due to a decrease in property tax valuations relating to the impairment of long-lived assets.

· Telephone and utilities declined $63,000 related to workforce reductions and a corresponding reduction in office space requirements.

The $14,000 credit amount in research and development expense is related to the reversal of an accrual of approximately $78,000 from the prior quarter. Research and development expense for the current quarter was approximately $64,000.

Changes in Cash Flow

Eagle’s operating activities used net cash of $2,430,000 in the three months ended November 30, 2006, compared to $2,855,000 in the three months ended November 30, 2005. The decrease in net cash used by operating activities was primarily attributable to a decrease in the company’s operating expenses. Eagle’s investing activities provided net cash of $292,000 in the three months ended November 30, 2006, compared to cash provided of $777,000 in the three months ended November 30, 2005. The decrease was due to capital expenditures of $532,000 primarily for the completion of the super-headend in Miami, Florida, which was offset by the sale of equipment leases for $899,000. Eagle’s financing activities provided net cash of $116,000 in the three months ended November 30, 2006, compared to $91,000, of cash provided in the three months ended November 30, 2005. During the first quarter, the company raised approximately $1.9 million under its equity credit line, which was offset by paying down approximately $1.8 million of notes payable.

Liquidity and Capital Resources

In February 2006, the company entered into a series of agreements with Dutchess Private Equities Fund, L.P. (“Dutchess”), pursuant to which Dutchess provides a $5,000,000 equity line of credit for the company. Under this agreement, the company makes drawdown requests on the equity line, and Dutchess purchases a number of shares at a price equal 93% of the market price of our stock to fund the drawdown requests. The company has been using the equity line to provide funding for working capital requirements. As of January 9, 2007, the company has drawn down approximately $3.8 million and issued approximately 5.6 million shares to Dutchess pursuant to the equity line.

In March 2006, we filed a registration statement with the SEC to register 351,429 shares for resale by Dutchess pursuant to the equity line. This registration statement was declared effective by the SEC on April 27, 2006. In May and August 2006, we filed registration statements to register an additional 2,000,000 and 2,500,000 shares, respectively, for resale by Dutchess. These registration statements were declared effective by the SEC on May 25 and August 16, 2006, respectively. In November 2006, we filed a registration statement to register an additional 2,800,000 shares for resale by Dutchess; however, the SEC only allowed the company to register an additional 925,000 shares, and that registration statement, as amended, was declared effective by the SEC on December 15, 2006. In addition to this limitation, the SEC required the company to represent that it would not seek to register additional shares for resale by Dutchess for at least six months.

To provide additional capital during this six-month period, the company recently entered into an agreement with Brittany Capital Management Limited (“Brittany”) for a $5,000,000 equity line of credit. Under this agreement, the company may request drawdowns by delivering a “put notice” to Brittany stating the dollar amount of shares we intend to sell to Brittany. The purchase price Brittany is required to pay for the shares is equal to 93% of the “market price.” The “market price” is equal to the lowest closing best bid price during the pricing period. The pricing period is the five-trading-day period beginning on the day Brittany receives a drawdown request. The amount we may request in a given drawdown is the lesser of (i) 200% of the average daily U.S. market trading volume of our common stock for the three trading days prior to the request multiplied by the average of the three daily closing best bid prices immediately preceding our request, or (ii) $500,000 The company has agreed to file a registration statement to register shares for resale by Brittany that it may purchase from us under this new equity line of credit. In addition to this new equity line, the company is considering options for short-term debt financing.

Historically, we have relied upon third-party funding. Though we have been successful at raising additional capital on this basis in the past, we can provide no assurance that we will be successful in any future 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 to be settled in cash as of November 30, 2006:

(Thousands of dollars) Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Debt Obligations (Current & Long Term)	$	6,722	$	2,841	$	3,881	$	—	$	—
Operating Lease Obligations		801		231		570		—		—
Total	$	7,523	$	3,072	$	4,451	$	—	$	—

The company’s contractual obligations consist of long-term debt and interest as set forth in Note 4 to the company’s financial statements, Notes Payable and Long-Term Debt, and certain obligations for office space operating leases requiring future minimal commitments under non-cancelable leases set forth in Note 7-Commitments and Contingent Liabilities. Contractual obligations does not include approximately $600,000 of debt obligations that the company intends to settle in stock. (See Note 13-Subsequent Events.)

Off-Balance Sheet Arrangements

As of November 30, 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

The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to this management’s discussion and analysis. 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. Management believes it has exercised proper judgment in determining these estimates based on the facts and circumstances available to its management at the time the estimates were made. 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.

Revenue Recognition

The company’s revenue recognition policy is objective in that it recognizes revenue when products are shipped or services are delivered. Accordingly, there are no estimates or assumptions that have caused deviation from its revenue recognition policy. Additionally, the company has a limited amount of sales returns which would affect its revenue earned.

Eagle accounts for arrangements that contain multiple elements in accordance with EITF 00-21, “Revenue Arrangements with Multiple Deliverables”. When elements such as hardware, software and consulting services are contained in a single arrangement, or in related arrangements with the same customer, Eagle allocates revenue to each element based on its relative fair value, provided that such element meets the criteria for treatment as a separate unit of accounting. The price charged when the element is sold separately generally determines fair value. In the absence of fair value for a delivered element, Eagle allocates revenue first to the fair value of the undelivered elements and allocates the residual revenue to the delivered elements. In the absence of fair value for an undelivered element, the arrangement is accounted for as a single unit of accounting, resulting in a delay of revenue recognition for the delivered elements until the undelivered elements are fulfilled. Eagle limits the amount of revenue recognition for delivered elements to the amount that is not contingent on the future delivery of products or services or subject to customer-specified return or refund privileges.

Allowance Method Used to Record Bad Debts

The company uses the allowance method to account for uncollectible accounts receivable. The company’s estimate is based on historical collection experience and a review of the current status of accounts receivable. 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.

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.

Impairment Assessment

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

The company performed, with the assistance of independent valuation experts, an impairment test of the carrying value of intangible assets. Eagle has intangible assets related to goodwill, contracts, customers and subscribers. For the year ended August 31, 2006, the company determined there had been continued erosion 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.

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, 2006, management determined an impairment charge of $3,427,830 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.

Utilizing a fair value standard as set forth in SFAS 142, as of August 31, 2005, management determined an impairment charge of $23,913,000 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.

Management assessed the fair value of intangibles and concluded that no impairment exists for the quarter ended November 30, 2006.

Eagle assessed the fair value of goodwill as of August 31, 2006 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, 2005 and concluded that the goodwill and other intangible assets valuations remain at an amount greater than the current carrying and other intangible assets 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.

Impairment of Long-Lived Assets

Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that long-lived assets (asset groups) shall be tested for recoverability whenever events or change in circumstances indicate that its carrying amount may not be recoverable. The company’s market capitalization for the years ending August 31, 2006 and 2005, has been below the book value of these assets 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 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, 2006, management determined an impairment of $10,341,262 existed for certain Houston-area communities where broadband infrastructure had been installed.

Utilizing a fair value standard as set forth in SFAS 144 as of August 31, 2005, management determined an impairment of $3,230,000 existed for certain Houston-area communities where broadband infrastructure had been installed.

Management assessed the fair value of long-lived assets and concluded that no impairment exists for the quarter ended November 30, 2006.

Accounting for Stock-Based Compensation

In December 2004, the FASB issued a revision to SFAS 123 (also known as SFAS 123R) that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R’s effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after December 15, 2005. SFAS 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application. The company adopted SFAS 123R prospectively commencing in the first quarter of the fiscal year ending August 31, 2006. The adoption of SFAS 123R will cause the company to record as expense each quarter a non-cash accounting charge approximating the fair value of such share-based compensation meeting the criteria outlined in the provisions of SFAS 123R.

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 and 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.

Discontinued Operations

In accordance with the provisions of Statement of Financial Accounting Standard, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS No. 144”), the results of operations of the disposed assets and the losses related to the sale of the component of residential security monitoring have been classified as discontinued operations for all periods presented in the accompanying consolidated statements of operations.

Item 4.Controls and Procedures.

The company’s Chief Executive Officer and Principal Accounting Officer have evaluated the effectiveness of the company’s disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as of the end of November 30, 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 November 30, 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 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 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 August 2006, the court granted one of the defendant’s motions for attorneys fees and ordered Eagle to pay such defendant’s legal fees of approximately $66,000. Eagle is currently appealing this order, as well as the order granting such defendant’s motion to strike the complaint.

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. In December 2006, the company reached a settlement with all of the defendants.

Item 1A.Risk Factors.

We have a history of operating losses and may never achieve profitability.

From inception through November 30, 2006, we have incurred an accumulated deficit in the amount of $244,510,000. For the quarter ended November 30, 2006, we incurred losses from operations in the amount of $2,474,000. We anticipate that we will incur losses from operations for the foreseeable future. Our future revenues may never exceed operating expenses, thereby making the continued viability of our company dependent upon raising additional capital.

As we have not generated positive cash flow from operations, our ability to continue operations is dependent on our ability to either begin to generate positive cash flow from operations or our ability to raise capital from outside sources.

We have not generated positive cash flow from operations and have relied on external sources of capital to fund operations. At November 30, 2006, we had approximately $1,117,000 in cash, cash equivalents and securities available for sale, and a working capital deficit of approximately $12,506,000. Our net cash used by operations for the year ended November 30, 2006, was approximately $2,430,000.

Item 6.Exhibits.

Exhibit Number	Description
31.1	Certification of Chief Executive Officer and 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

and Principal Accounting Officer

Date: January 16, 2007