**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549




x ANNUAL
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 For
        the
        fiscal year ended August 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)




Securities
      registered pursuant to Section 12(b) of the Act:




**Title
                of Each Class**
            
            **Name
                of Each Exchange on Which Registered**Common
                Stock, par value $0.001 per share
            
            American Stock Exchange




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. o Yes x No




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act. o Yes x No




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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K. o




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




The
      aggregate market value of the voting stock held by non-affiliates of the
      registrant on February 28, 2006, the last business day of the registrant’s most
      recently completed second fiscal quarter, based on the closing price on that
      date on the American Stock Exchange, was $39,102,377.




As
      of
      November 10, 2006, the registrant had 18,088,204 shares of common stock
      outstanding.




**Documents
      Incorporated by Reference:**




The
      registrant is incorporating by reference in Part III of this Form 10-K certain
      information contained in the registrant’s proxy statement for its annual meeting
      of shareholders, which proxy statement will be filed by the registrant on or
      before December 29, 2006.







**EAGLE
      BROADBAND, INC.**


**FORM
      10-K**


**FOR
      THE FISCAL YEAR ENDED AUGUST 31, 2006**




**TABLE
      OF CONTENTS**




**PART
                I****Item
                1. *Business*****Item
                1A.*****Risk
                Factors*****Item
                2.*****Properties*****Item
                3.*****Legal
                Proceedings*****Item
                4.*****Submission
                of Matters to a Vote of Security
                Holders*****PART
                II****Item
                5. *Market
                for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                Purchases of Equity
                Securities*****Item
                6.*****Selected
                Financial Data*****Item
                7.*****Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations*****Item
                7A.*****Quantitative
                and Qualitative Disclosures About Market
                Risk.*****Item
                8.*****Financial
                Statements and Supplementary Data*****Item
                9.*****Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosure*****Item
                9A.*****Controls
                and Procedures*****Item
                9B.*****Other
                Information*****PART
                III****Item
                10. *Directors
                and Executive Officers of the
                Registrant*****Item
                11.*****Executive
                Compensation*****Item
                12.*****Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters*****Item
                13.*****Certain
                Relationships and Related
                Transactions*****Item
                14.*****Principal
                Accounting Fees and Services*****PART
                IV****Item
                15. *Exhibits,
                Financial Statement Schedules*****INDEX
                TO EXHIBITS****Financial
              Statements**









This
      annual report contains forward-looking statements. These statements relate
      to
      future events or future financial performance and involve known and unknown
      risks, uncertainties and other factors that may cause Eagle’s or Eagle’s
      industry’s actual results, levels of activity, performance or achievements to be
      materially different from any future results, levels of activity, performance
      or
      achievements expressed or implied by the forward-looking statements.




In
      some
      cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” or the negative of these terms or other comparable
      terminology. These statements are only predictions. 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:




·
            our
                ability to continue as a going
                concern;




·
            our
                ability to develop and introduce innovative
                products;




·
            our
                ability to gain and maintain market acceptance for our new products
                and to
                satisfy consumer preferences;




·
            our
                ability to protect our existing intellectual property rights and
                to
                adequately secure and enforce rights for new proprietary
                technology;




·
            cancellation
                or lack of market acceptance of our recurring-revenue
                contracts;




·
            risks
                of competition in our existing and future
                markets;




·
            our
                relationships with our suppliers and
                employees;




·
            the
                failure to obtain or maintain or delays in obtaining any necessary
                regulatory approvals or licenses for our
                products;




·
            our
                liquidity constraints and ability to obtain financing and working
                capital
                on favorable terms; and




·
            the
                other risks described in “Risk Factors” or elsewhere in this annual
                report.




Any
      forward-looking statements should be considered in light of these factors.
      We
      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. We are 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.









**PART
      I**




**Item
      1.*****Business.***




Eagle
      Broadband, Inc. (the “company” or “Eagle”), was incorporated in the State of
      Texas in 1993 under the name Wager-Data, Inc., but did not conduct any
      substantive business operations until 1996, when its name was changed to Eagle
      Telecom International, Inc. At that time the company was a supplier of
      telecommunications equipment and related software used by service providers
      in
      the paging and other wireless personal communications markets. In 1997, the
      company’s name was changed to Eagle Wireless International, Inc. In 2001, the
      company acquired Clearworks.net, Inc., and the company began offering broadband
      products and services. In 2002, the company acquired D.S.S. Security, Inc.,
      and
      began providing security monitoring services. Also in 2002, the company changed
      its name to Eagle Broadband, Inc. In 2003, the company exited the wireless
      and
      paging business and began focusing on providing bundled digital services,
      satellite communications products, project management and enterprise management
      products and services.




In
      2005,
      the company implemented a corporate restructuring designed to reduce costs,
      focus company resources to drive revenue growth and position the company to
      better compete in the IPTV, broadband, hospitality and communications markets.
      In early 2006, the company exited the security monitoring business, and the
      company is now a provider of Internet protocol television (IPTV), satellite
      communications and information technology products and services. The company’s
      product offerings are:




·
            IPTVCompleteTM,
                delivering almost 250 channels of digital television and music content
                via
                IP to many market sectors, such as multi-dwelling unit operators
                (e.g.,
                condominiums), triple-play operators (Internet data, phone and television,
                all over IP) and telephone companies, including Eagle’s MediaPro standard
                and 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




·
            IT
                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.




**Recent
      Developments**




In
      September 2006, our super-headend facility in Miami, Florida, became
      operational. Almost 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-style 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 Eagle’s IPTVComplete, which is a closed IP network
      solution.




Eagle
      currently has three models of set-top boxes selling into the hospitality
      markets: the feature-rich IP5000HD, which has a successful history delivering
      high-definition television in luxury hotels; the IP3000SD, designed for
      cost-competitive standard-definition television situations; and the newest
      IP3000HD, described above. All three models of set-top boxes are currently
      being
      readied with additional software capabilities for deployment into the IPTV
      marketplace.




In
      addition, in an effort to execute the strategy of focusing on business
      opportunities in IPTV, in the last six months the company exited residential
      security monitoring, entered into an operations agreement with a third party
      to
      operate the majority of Eagle’s traditional cable business, successfully closed
      two financing agreements, and materially reduced operating expenses and
      headcount.




Due
      to an
      unexpected change in Eagle’s delivery arrangement for 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 fiscal 2006, is
      now
      anticipated to begin by December 2006. This change in circumstances was directly
      addressed by Eagle constructing its own super-headend facility in Miami. During
      the third quarter of fiscal 2006, the company successfully delivered over 100
      channels of IPTV content via fiber in an extensive field trial to a third party
      in Miami. This field trial demonstrated that our IPTV technology works and
      established that Eagle can successfully deliver a complete IPTV solution over
      fiber optic cable. In recent months, Eagle has connected its new super-headend
      to its first IPTV customer, ANEW Broadband in Miami, and expects to deliver
      IPTVComplete to ANEW Broadband’s subscribers by December 2006.




**Product
      and Service Categories**




**IPTV
      Solutions**




*IPTVCompleteTM
      Television Solution*




IPTVComplete
      is a turnkey television service that provides new and incumbent broadband
      providers with a fast, low-cost way to quickly and easily launch and deliver
      high-quality entertainment services to their customers over their fiber or
      DSL
      broadband networks. IPTVComplete leverages Eagle’s cable-style channel content
      rights, expertise in delivering video services and its IP set-top boxes to
      provide what we believe to be a unique, turnkey combination of television
      content and set-top boxes. IPTVComplete provides all of the components broadband
      service providers need to deliver a competitive bundle of television and
      interactive entertainment services.




*MediaPro
      IP Set-Top Boxes*




Eagle
      designs, manufactures and markets a complete line of advanced MediaPro IP
      set-top boxes. Either standalone or in conjunction with various third-party
      middleware software, Eagle’s advanced MediaPro IP set-top boxes deliver a full
      range of high quality, standard and high definition entertainment and
      information services that can generate higher margin revenues for telecom
      service providers, hotel and casino owners, hospitals, apartment/condominium
      owners, municipalities, real estate developers and schools. MediaPro IP set-top
      boxes also enable incumbent and competitive telecommunications service
      providers, especially triple-play operators, to cost effectively deploy IP-based
      broadband and television services to their customers.




The
      MediaPro line of IP set-top boxes delivers full computing and video
      functionality in a compact footprint with a very quiet, fan-less design that
      enables a wide range of on-demand, IP-based applications including high-speed
      Internet access, streaming IP video, digital audio/music, video-on-demand,
      3D
      gaming, video conferencing and more. Eagle’s set-top box software platform
      delivers high definition streaming video, superior digital audio, easier
      navigation of hotel and community services (e.g., concierge, local restaurants
      and events, etc.), advanced content and system security for a wide variety
      of
      hardware platforms.




In
      hospitality applications, Eagle’s set-top boxes work with the Verimatrix
      conditional access system. When used with IPTVComplete, these same IP set-top
      boxes employ Minerva Networks IPTV middleware and Latens conditional access
      solutions. Eagle is a reseller of Minerva IPTV middleware.




IP
      set-top box and related software product revenues are reported under the
      category “Products” on our Consolidated Statements of Operations.




**Satellite
      Communications Solutions**




*SatMAX* *®* *Satellite-Based Voice and Data Communications*




Eagle’s
      SatMAX non-line-of-sight repeater system is a patented, non-line-of-sight
      communications technology that enables users of the Iridium satellite network
      to
      establish reliable voice and data communications to and from any location where
      the user is unable to gain line of sight to an orbiting Iridium satellite such
      as below deck on ships, within buildings, underground bunkers or from other
      obstructed areas. The technology provides global communications that enhance
      user productivity, mobility, problem solving, field-to-headquarters
      collaboration and emergency backup/response for a wide range of mission-critical
      and everyday communications needs. By extending coverage indoors to areas not
      traditionally served by satellite networks, the SatMAX system extends the
      customer’s usage area, while enhancing the utility and overall value for both
      new and existing Iridium aviation, government, military, homeland security
      and
      commercial enterprise customers. Eagle recently introduced a portable version
      of
      the SatMAX unit, the SatMAX Alpha Emergency Communications System, which is
      designed for disaster recovery, crisis management and emergency
      preparedness.




SatMAX
      revenues are reported under the category “Products” on our Consolidated
      Statements of Operations.




**IT
      Services**




Our
      IT
      Services division partners with Intel, IBM, Cisco, HP, Microsoft, AT&T,
      Sprint, COVAD and others to provide voice and data circuits, network
      infrastructure design and installation, remote network management, IT
      integration, on-site hardware and software support services, and national IT
      project management services including design, engineering, construction and
      documentation. Our IT Services teams install fiber networks and data cabling
      to
      commercial, industrial and government clients throughout the United States,
      Mexico, Canada, Puerto Rico and Guam. Services include:




·
            Municipal
                wireless network construction




·
            Multi-site
                rollout installation




·
            Comprehensive
                IT project management services




·
            On-site
                contract IT staffing




·
            Structured
                cabling for commercial and industrial
                sites




·
            Network
                hardware configuration and
                installation




·
            Fully
                managed contract IT services




·
            VoIP
                system configuration and
                installation




·
            IP
                surveillance and access control
                systems




·
            Disaster
                planning and recovery services




·
            Remote
                data storage




·
            Remote
                network management




IT
      services revenues are reported under the category “Structured Wiring” on our
      Consolidated Statements of Operations.




**Service
      and Support**




The
      company provides service and support to customers on an ongoing basis including
      installation, project management of turnkey systems, training, and service
      or
      extended warranty contracts. The company believes that providing reliable
      service is critical to meeting its customers’ needs, and helps the company win
      business with new customers and retain and expand business with existing
      customers. The company is able to generate additional revenues from these
      installation, system optimization, warranty and post-warranty services while
      enhancing relationships with customers.




Eagle
      offers warranty and maintenance program for all of its hardware, software and
      service products and maintains 24/7 customer service and support facilities.
      In
      addition to providing repair or replacement of Eagle-manufactured equipment
      under the company’s standard warranty, Eagle provides support for select
      third-party products. The standard warranty is valid on all products for the
      period of one year from the later of the date of shipment or the installation
      by
      an Eagle qualified technician.




Service
      and support services revenues are reported under the category “Other” on our
      Consolidated Statements of Operations.




**Customers**




IPTV,
      IP
      set-top box, satellite communications and broadband products and services are
      sold to a broad range of customers, including residential, commercial,
      enterprise, military, government and service provider customers.




The
      IPTVComplete video solution is sold to new and incumbent broadband providers
      including telephone companies, fiber broadband providers, multiple dwelling
      unit
      (MDU) operators, triple-play providers and real estate developers. MediaPro
      IP
      set-top boxes are sold to a range of customers nationwide, including hotel
      and
      casino owners, telephone companies and other broadband providers, hospitals,
      apartment and condominium owners, triple-play operators, real estate developers,
      corporations and schools.




SatMAX
      systems are sold to a variety of federal, state and local government agencies,
      the U.S. military and corporations.




IT
      Services sells its structured wiring and project management services to a wide
      range of customers including telecommunications, hospitality, industrial and
      petrochemical, oil and gas companies and government sectors.




**Marketing
      and Sales**




Eagle’s
      products and services are marketed through direct sales and reseller/channel
      partners and are regularly promoted and demonstrated at industry trade shows.
      In
      addition, Eagle executives have recently become sought after as public speakers
      at IPTV trade shows. To keep investors, prospects and other interested parties
      well informed of new happenings at Eagle, the company maintains a detailed
      web
      site at www.eaglebroadband.com. Furthermore, Eagle’s CEO, Dave Micek, has been
      presenting Eagle’s business activities to investment groups in different regions
      of the country through a series of presentations over the past
      year.




IPTVComplete
      and IP set-top boxes are marketed directly by Eagle’s sales staff and agents.
      SatMAX systems are marketed through Eagle’s sales staff and select resellers and
      channel partners to corporate, commercial aviation, government, and military
      customers. IT services are marketed through Eagle’s sales and customer service
      staff.




**Research
      and Development**




Because
      the company markets products and services in highly competitive markets
      characterized by rapid product obsolescence and change, we believe that a strong
      commitment to, and ongoing investment in, research and development is essential
      to the continued growth and future success of our products. One of the key
      components of our development strategy is maintaining close working
      relationships between our sales, marketing, product development, and internal
      manufacturing staffs and our customers, which helps ensure that the products
      we
      develop and bring to market meet real customer needs.




Eagle’s
      product development resources are focused on enhancing our current product
      offerings. We have strategic relationships with third-party suppliers and
      manufacturers, allowing the company to utilize the most advanced technology
      in
      the IPTVComplete, IP set-top-box and SatMAX product lines. We will continue
      to
      incur research and development expenses with respect to our IPTVComplete, IP
      set-top-box and satellite communications product lines during the current fiscal
      year.




Research
      and development expenditures incurred by us for the fiscal years ended August
      31, 2006, 2005 and 2004 were $830,000, $776,000, and $557,000,
      respectively.




**Manufacturing**




The
      company currently subcontracts and/or provides limited manufacturing of its
      satellite communications products at its facilities in League City, Texas.
      Some
      subassemblies are manufactured for us by subcontractors at various locations
      throughout the world. Our manufacturing expertise resides in assembling
      subassemblies and final systems that are configured to customer specifications.
      The components and assemblies used in our products include electronic components
      such as resistors, capacitors, transistors and semiconductors such as field
      programmable gate arrays, digital signal processors and microprocessors, and
      mechanical materials such as cabinets in which the systems are
      built.




Substantially
      all of the components and parts used in our products are available from multiple
      sources. In those instances where components are purchased from a single source,
      the supplier is reviewed for stability and performance. We also strive to have
      secondary suppliers, as well. Additionally, as necessary, we purchase sufficient
      quantities of components that have long-lead requirements in the world market.
      We ensure that all products are tested for quality and reliability prior to
      shipment to the customer.




We
      have
      determined that the most cost effective manufacturing method for our IP set-top
      box product line is to contract with offshore production facilities. We have
      established relationships with manufacturers in Asia capable of producing a
      wide
      range of products, some of which are ISO-9001 certified.




**Competition**




Industry
      experts project the IPTV market to grow rapidly over the next three to five
      years as telephone companies and other broadband providers face increasing
      competitive pressure and look for solutions to help them meet the demand from
      their customers for high-quality video and entertainment services. Because
      the
      IPTV market is expected to be lucrative for technology companies providing
      products and services that enable broadband providers to deliver IPTV services,
      it has attracted a large number of both new and established companies that
      are
      competing for the different aspects of the IPTV business, including AT&T,
      SES Americom, Intelsat, Minerva Networks, Latens, Siemens, Verimatrix,
      PurDigital, Optical Entertainment Networks, Interactive Television Networks,
      Amino, Tut Systems and Auroras. These companies include providers of video
      infrastructure (e.g., video headends, etc.), content, distribution and customer
      premise equipment (e.g., set-top boxes). In certain cases, the company may
      compete with these technology providers, in other cases we may partner with
      them
      and utilize their products and services to provide our IPTV solution. Eagle
      believes that its IPTVComplete solution is unique in providing a turnkey,
      end-to-end IPTV solution providing Eagle with a competitive advantage; however,
      other companies offer competitive solutions that could affect sales of Eagle’s
      IPTV solutions.




Eagle
      competes with many established companies in the set-top-box business, including
      Cisco, Motorola, Amino and a number of smaller companies. The market for IP
      set-top boxes is projected to continue to grow, fueled by increasing demand
      from
      hospitality operators, broadband providers and business enterprises. The
      projected growth has attracted both established companies as well as new
      entrants offering set-top box solutions. The company was first-to-market with
      its high-definition MediaPro set-top box, which provided the company with a
      competitive advantage in the marketplace, and was first-to-market with its
      IP3000HD H.264 high-definition set-top box. Because of increased demand for
      IP
      set-top boxes in the residential IPTV market, competition is expected to
      increase; however, the company believes it is well positioned to win business
      from both new and existing set-top box customers.




The
      market for satellite communications services continues to grow as demand from
      government, military and commercial customers is fueled by the post-9/11
      emphasis on reliable communications to enhance public safety and security,
      an
      increase in the number and severity of natural disasters (e.g., hurricanes,
      etc.), as well as ongoing military operations. The company’s SatMAX satellite
      communications system is a patented, non-line-of-sight communications system
      that was designed to meet these needs. We are not currently aware of other
      companies in the U.S. that offer products that can provide similar, fully
      wireless, non-line-of-sight satellite-based voice and data communications
      services, providing the company with a unique competitive advantage. However,
      the satellite communications market has many large and small companies that
      provide satellite communications products and services.




IT
      Services competes with many established companies in fiber and cable
      installation, structured wiring and project management services areas. The
      use
      of the subcontractors located across the nation allows us to complete large
      projects in a cost-effective and efficient manner.




**Proprietary
      Information**




The
      company protects its proprietary technology through a combination of trade
      secrets, non-disclosure agreements, patent applications, copyright filings,
      trademarks, technical measures, and common law remedies with respect to its
      proprietary technology. We have received patents on our SatMAX and MediaPro
      set-top box products. Any protections may not preclude competitors from
      developing products with features similar to our products. The laws of some
      foreign countries in which we sell or may sell our products may not protect
      our
      proprietary rights in the products to the same extent as do the laws of the
      United States. Although we believe that our products and technology do not
      infringe on the proprietary rights of others, there can be no assurance that
      third parties will not assert infringement claims against us in the future.
      If
      litigation results in our inability to use technology, we might be required
      to
      expend substantial resources to develop alternative technology. There can be
      no
      assurance that we could successfully develop alternative technology on
      commercially acceptable terms.




**Regulation**




Several
      of our products operate on radio frequencies. Radio frequency transmissions
      and
      emissions, and certain equipment used in connection therewith, are regulated
      in
      the United States and internationally. Regulatory approvals generally must
      be
      obtained by us in connection with the manufacture and sale of our products
      and
      by customers to operate our products. There can be no assurance that appropriate
      regulatory approvals will continue to be obtained or that approvals required
      with respect to products being developed for the IPTV, set-top box, satellite
      communications and/or broadband services markets will be obtained. The enactment
      by federal, state, local or international governments of new laws or regulations
      or a change in the interpretation of existing regulations could affect the
      markets for our products. Although recent deregulation of international
      telecommunications industries along with recent radio frequency spectrum
      allocations made by the FCC have increased the demand for our products, there
      can be no assurance that the trend toward deregulation and current regulatory
      developments favorable to the promotion of new and expanded IPTV, broadband
      and
      communications services will continue or that future regulatory changes will
      have a positive impact on the company.




**Employees**




As
      of
      November 1, 2006, we had 44 employees and retained independent contractors
      as
      necessary. We believe our employee relations are good. We also enter into
      independent contractual relationships with various individuals, from time to
      time, as needed.




**Item
      1A.*****Risk
      Factors.***




***Our
      independent registered public accounting firm has rendered a report expressing
      substantial doubt as to our ability to continue as a going
      concern.***




Our
      accompanying audited financial statements have been prepared on a going concern
      basis and do not include any adjustments that might result if we cease to
      continue as a going concern. As a result of the recurring losses from operations
      and liquidity deficiency that we have experienced, our independent registered
      public accounting firm has concluded that there is substantial doubt as to
      our
      ability to continue as a going concern. They have discussed this uncertainty
      in
      their report on our audited financial statements. Uncertainty about our ability
      to continue as a going concern may create a concern among our current and future
      vendors and lenders, which may make it more difficult for us to meet our
      obligations.




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




From
      inception through August 31, 2006, we have incurred an accumulated deficit
      in
      the amount of $241,049,000. For the year ended August 31, 2006, we incurred
      losses from operations in the amount of $26,933,000. 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 August 31, 2006, we had approximately
      $3,139,000 in cash, cash equivalents and securities available for sale, and
      a
      working capital deficit of approximately $10,613,000. Our net cash used by
      operations for the year ended August 31, 2006, was approximately
      $9,217,000.




We
      currently have an investment agreement with Dutchess Private Equities Fund,
      L.P.
      (“Dutchess”), commonly referred to as an equity line of credit. Under that
      agreement, Dutchess is committed to purchase up to $5,000,000 of our common
      stock over the 36-month term of the investment agreement. As of November 7,
      2006, we have drawn down $3,463,803 of the $5,000,000 commitment, leaving
      $1,536,197 available under the equity line.




Though
      we
      have been successful at raising 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. We will need to continue to rely upon financing from
      external sources to fund our operations for the foreseeable future. If we are
      unable to raise sufficient capital from external sources to fund our operations,
      we will need to sell assets to meet working capital needs or curtail
      operations.




***Our
      current levels of debt could impact our operations in the
      future.***




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. On February 15, 2006, the company
      entered into a settlement agreement with The Tail Wind Fund Ltd., pursuant
      to
      which the company issued two convertible notes in the aggregate amount of
      $2,750,000 and issued a $400,000 non-convertible promissory note. On July 24,
      2006, the company entered into a promissory note agreement with Dutchess Private
      Equities Fund, L.P., pursuant to which the company sold a $5,500,000, 12%
      promissory note due July 24, 2008. For the year ending August 31, 2006, the
      company has timely satisfied all of its debt obligations, but will require
      cash
      principal and interest payments of $4,120,000 to satisfy debt obligations in
      the
      upcoming fiscal year. The company anticipates satisfying certain debt
      obligations of approximately $2,800,000 in common stock during the upcoming
      fiscal year. See Note 8-Notes Payable and Long Term Debt; Note 23-Subsequent
      Events; and Management’s Discussion and Analysis-Contractual
      Obligations.




***Our
      business strategy focuses on the marketing and sale of three core product
      offerings, any of which may not be commercially
      successful.***




Two
      of
      our three core product offerings are in emerging markets that are highly
      competitive and subject to rapid technological obsolescence. Therefore, there
      can be no assurances that the company will be successful in marketing these
      products, or that customers will ultimately purchase our products. Failure
      to
      have commercial success from the sale of these products will negatively impact
      our financial condition.




***Volatility
      of the stock market.***




There
      have been significant fluctuations in the market price for the company’s common
      stock. Factors such as variations in the company’s revenues, earnings and cash
      flow and announcements of innovations or acquisitions by the company or its
      competitors could cause the market price of the common stock to fluctuate
      substantially. In addition, the stock market has experienced price and volume
      fluctuations that have particularly affected companies in the technology market,
      resulting in changes in the market price of the stock of many companies which
      may not have been directly related to the operating performance of those
      companies. Such broad market fluctuations may adversely affect the market price
      of the company’s common stock.




***We
      have been named a defendant in certain lawsuits, which if determined adversely,
      could harm our ability to fund operations.***




Eagle
      and
      its subsidiaries have been named as defendants in certain lawsuits in which
      the
      plaintiffs are seeking substantial damages, including the
      following:




·
            H.
                Dean Cubley v. Eagle Broadband, Inc. In August 2006, Mr. Cubley,
                a former
                director of the company, filed a lawsuit against the company for
                non-payment of a promissory note issued by the company in December
                2003 in
                the original principal amount of $2,680,000. The lawsuit seeks to
                enforce
                the note, which was issued 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.




·
            Cornell
                Capital Partners, LP v. Eagle Broadband, Inc. In July 2003, Cornell
                Capital sued Eagle Broadband alleging breach of contract, common
                law
                fraud, 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.




·
            State
                of Texas, et al. v. United Computing Group, Inc. and H. Dean Cubley,
                individually. In September 2005, 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.




·
            State
                of Florida Dept. of Environmental Protection v. Reco-Tricote, Inc.,
                and
                Southeast Tire Recycling Inc., currently known as Clearworks.net,
                Inc. The
                Florida EPA sued Clearworks.net 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 $1,000,000, attorneys’ fees and
                court costs. Clearworks denies the claims and intends to vigorously
                contest all claims in this case and to enforce its indemnification
                rights
                against the principals of Southeast Tire
                Recycling.




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 any one pending lawsuit
      could substantially harm our ability to fund operations.




***Our
      future revenues are not predictable.***




Historical
      revenues should not be viewed as indicative of any future revenues since future
      revenues will be dependant upon the market acceptance of our core product
      offerings of IPTVComplete,
      SatMAX and IT Services.




***Our
      business is subject to many factors that could cause quarterly or annual
      operating results to fluctuate and our stock price to be
      volatile.***




Our
      quarterly and annual operating results have fluctuated in the past and may
      fluctuate significantly in the future due to a variety of factors, many of
      which
      are outside of our control. If our quarterly or annual operating results do
      not
      meet the expectations of investors, the trading price of our common stock could
      decline. Some of the factors that could affect our quarterly or annual operating
      results include:




·
            the
                timing and amount of, or cancellation or rescheduling of, orders
                for our
                products;




·
            our
                ability to develop, introduce, ship and support certain
                products;




·
            announcements,
                new product introductions and reductions in price of products offered
                by
                our competitors;




·
            our
                ability to control costs;




·
            the
                loss of one or more of our major customers or a significant reduction
                in
                orders from those customers;




·
            increased
                competition, particularly from larger, better capitalized
                competitors;




·
            fluctuations
                in demand for our products and services;
                and




·
            market
                conditions specifically and economic conditions
                generally.




***We
      rely heavily on third-party suppliers for the material components for our
      products and supply shortages could cause delays in manufacturing and delivering
      products which could reduce our revenues.***




We
      rely
      upon unaffiliated suppliers for the material components and parts used to
      assemble our products. Most parts and components purchased from suppliers are
      available from multiple sources. We have not experienced significant supply
      shortages in the past and we believe that we will be able to continue to obtain
      most required components and parts from multiple suppliers. However, the lack
      of
      availability of certain components could require a major redesign of our
      products and could result in production and delivery delays, which could reduce
      revenues from product sales.




***Because
      our industry is rapidly evolving, if we are unable to adapt or adjust our
      products to new technologies, our ability to compete and operate profitably
      could be significantly impaired.***




The
      design, development and manufacturing of IP, broadband, entertainment and
      communications products are highly competitive and characterized by rapid
      technology changes. We compete with products and technologies from a number
      of
      other companies. Development by others of new or improved products or
      technologies may make our products obsolete or less competitive. While we
      believe that our products are based on advanced technologies, our products
      may
      become obsolete in the future or we may not be able to develop a commercial
      market for our products in response to future technology advances and
      developments. The inability to develop new products or adapt our current
      products to new technologies could impact our financial condition.




***Approximately
      22% of our total assets are comprised of intangible assets including goodwill,
      contract rights, customer relationships and other intangible assets which are
      subject to review on a periodic basis to determine whether an impairment on
      these assets is required. An impairment would not only greatly diminish our
      assets, but would also require us to record a significant charge against our
      earnings.***




We
      are
      required under generally accepted accounting principles to review our intangible
      assets for impairment when events or changes in circumstances indicate the
      carrying value may not be recoverable. Goodwill is required to be tested for
      impairment at least annually. At the fiscal year ended August 31, 2006,
      management determined an impairment charge of approximately $3,427,000 existed
      for the intangible assets of contract rights, customer relationships and other
      intangible assts primarily attributable to the BDS assets acquired in the
      January 2001 merger of Clearworks.net, Inc. At the fiscal year ended August
      31,
      2005, management determined an impairment charge of approximately $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. At the fiscal year ended August
      31,
      2004, management assessed the fair value of the intangible assets and concluded
      that the goodwill and other intangible assets valuations were at an amount
      greater than the current carrying and other intangible assets
      value.




***Our
      business relies on our use of proprietary technology. Asserting, defending
      and
      maintaining intellectual property rights is difficult and costly and the failure
      to do so could harm our ability to compete and to fund our
      operations.***




We
      rely,
      to a significant extent, on trade secrets, confidentiality agreements and other
      contractual provisions to protect our proprietary technology. In the event
      we
      become involved in defending or pursuing intellectual property litigation,
      such
      action may increase our costs and divert management’s time and attention from
      our business. In addition to costly litigation and diversion of management’s
      time, any potential intellectual property litigation could force us to take
      specific actions, including:




·
            cease
                selling products that use the challenged intellectual
                property;




·
            obtain
                from the owner of the infringed intellectual property a license to
                sell or
                use the relevant technology, which license may not be available on
                reasonable terms, or at all; or




·
            redesign
                those products that use infringing intellectual
                property.




***We
      compete with many companies that are larger and possess greater capital
      resources than we do, and our growth and profitability are dependent on our
      ability to compete with these entities.***




We
      face
      competition from many entities with significantly greater financial resources,
      well-established brand names, and larger customer bases. We may become subject
      to severe price competition for our products and services as companies seek
      to
      enter our industry or current competitors attempt to gain market share. We
      expect competition to intensify in the future and expect significant competition
      from other companies and technology providers. If we are unable to make or
      keep
      our products competitively priced and attain a market share in the markets
      in
      which our products compete, our sales may suffer which could impact our
      financial condition.




***A
      system failure could delay or interrupt our ability to provide products or
      services and could increase our costs and reduce our
      revenues.***




Certain
      parts of our operations are dependent upon our ability to support a complex
      network infrastructure. Many of our customers are dependent on an uninterrupted
      supply of services. Any damage or failure that causes interruptions in our
      operations could result in loss of these customers. To date, we have not
      experienced any significant interruptions or delays which have affected our
      ability to provide products and services to our clients. Because our
      headquarters and infrastructure are located in hurricane-prone areas, there
      is a
      likelihood that our operations may be effected by hurricanes, tropical storms,
      tornados or flooding. The occurrence of a natural disaster, operational
      disruption or other unanticipated problem could cause interruptions in the
      services we provide and impair our ability to generate revenue and achieve
      profitability.




***Our
      industry is highly regulated, and new government regulation could hurt our
      ability to timely introduce new products and
      technologies.***




Our
      broadband and communications products are regulated by federal, state and local
      governments. Our customers are generally required to obtain regulatory approvals
      in connection with providing television services. For example, the cable and
      satellite television industry is regulated by Congress and the Federal
      Communications Commission, and various legislative and regulatory proposals
      under consideration from time to time may affect the way we design our products.
      New laws or regulations may harm our ability to timely introduce new products
      and technologies, which could decrease our revenues by shortening the life
      cycle
      of a product.




**Item
      2.*****Properties.***




Our
      headquarters are located in League City, Texas, and include approximately 25,000
      square feet of leased office, production, and storage space. The lease expires
      in May 2009. We believe that our rental rates are at market prices. We insure
      our facilities in an amount that we believe is adequate and customary in the
      industry.




**Item
      3.*****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.




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




No
      matters were submitted to a vote of security holders during the fourth quarter
      of the company’s fiscal year.









**PART
      II**




**Item
      5.*****Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
      of Equity Securities.***




Shares
      of
      Eagle common stock are listed on the American Stock Exchange under the symbol
      EAG. On November 10, 2006, our common stock closed at $0.75 per share. We are
      authorized to issue 350,000,000 shares of common stock, of which 18,088,204
      were
      issued and outstanding at November 10, 2006. At November 10, 2006, there were
      approximately 1,100 holders of record and 30,000 beneficial holders of Eagle
      common stock.




The
      table
      set forth below, for the periods indicated, lists the reported high and low
      sale
      prices per share of Eagle common stock on the American Stock
      Exchange.




High
            
            LowFiscal
                Year 20061st
                Quarter ended November 30, 2005
            6.30
            
            5.252nd
                Quarter ended February 28, 2006
            4.90
            
            3.153rd
                Quarter ended May 31, 2006
            4.55
            
            1.404th
                Quarter ended August 31, 2006
            1.88
            
            0.48Fiscal
                Year 20051st
                Quarter ended November 30, 2004
            31.50
            
            20.652nd
                Quarter ended February 28, 2005
            28.70
            
            12.603rd
                Quarter ended May 31, 2005
            14.00
            
            6.654th
                Quarter ended August 31, 2005
            10.50
            
            5.25




Eagle
      has
      never paid any cash dividends on its common stock and does not anticipate paying
      cash dividends within the next two years.




**Recent
      Sales of Unregistered Securities**




In
      August
      2006, the company issued 100,000 shares to Seacoast Financial LLC pursuant
      to a
      Consulting Agreement. The issuance of these shares was exempt from registration
      pursuant to Section 4(2) of the Securities Act. No sales commissions were
      paid.




In
      June
      2006, the company issued 25,000 shares of common stock to Friedland Corporate
      Investor Services LLC pursuant to an Agreement for Services. The issuance of
      these shares was exempt from registration pursuant to Section 4(2) of the
      Securities Act. No sales commissions were paid.




**Item
      6.*****Selected
      Financial Data.***




The
      data
      that follows should be read in conjunction with the company’s consolidated
      financial statements and the notes included in Item 8 and Item 7, “Management’s
      Discussion and Analysis.” Included in the data that follows is a “non-GAAP
      financial measure” referred to as “Adjusted Net Loss,” which represents our net
      loss before impairment charges, loss from discontinued operations, other
      income/(expense) and depreciation. The SEC defines a “non-GAAP financial
      measure” as a numerical measure of historical or future financial performance,
      financial positions or cash flows that excludes amounts, or is subject to
      adjustments that effectively exclude amounts, included in the most directly
      comparable measure calculated and presented in accordance with GAAP in financial
      statements, and vice versa for measures that include amounts, or is subject
      to
      adjustments that effectively include amounts, that are excluded from the most
      directly comparable measure so calculated and presented. For these purposes,
      “GAAP” refers to generally accepted accounting principles in the United
      States.




Non-GAAP
      financial measures are provided as additional information to investors in order
      to provide them with an alternative method for assessing our financial condition
      and operating results. These measures are not in accordance with, or a
      substitute for, GAAP, and may be different from or inconsistent with non-GAAP
      financial measures used by other companies. Pursuant to the requirements of
      Regulation G, whenever we refer to a non-GAAP financial measure, we will also
      generally present the most directly comparable financial measure calculated
      and
      presented in accordance with GAAP, along with a reconciliation of the
      differences between the non-GAAP financial measure we reference with such
      comparable GAAP financial measure.




Management
      believes that Adjusted Net Loss is useful in analyzing operating performance,
      but should be used only in conjunction with results reported in accordance
      with
      GAAP. Because Adjusted Net Loss excludes some, but not all, items affecting
      net
      loss and may vary among companies, the Adjusted Net Loss presented by Eagle
      may
      not be comparable to similarly titled measures of other companies.




*($
                  in thousands)*
              
              Year
                  Ended August 31,**Results
                  of Operations Data:**
              
              2006
              
              2005
              
              2004
              
              2003
              
              2002Net
                  Sales
              
              
              $
              3,941
              
              
              $
              5,242
              
              
              $
              8,062
              
              
              $
              10,582
              
              
              $
              29,376Operating
                  Expenses
              
              
              
              24,341
              
              
              
              54,586
              
              
              
              29,915
              
              
              
              31,149
              
              
              
              83,504Operating
                  Income (Loss)
              
              
              
              (24,983
              )
              
              
              (57,124
              )
              
              
              (31,008
              )
              
              
              (31,351
              )
              
              
              (76,832
              )Other
                  Income (Expense), Net
              
              
              
              (1,293
              )
              
              
              (638
              )
              
              
              (8,026
              )
              
              
              (5,426
              )
              
              
              (265
              )Loss
                  from Continuing Operations
              
              
              
              (26,276
              )
              
              
              (57,762
              )
              
              
              (39,034
              )
              
              
              (36,777
              )
              
              
              (77,097
              )Income
                  (Loss) from Discontinued Operations
              
              
              
              (657
              )
              
              
              752
              
              
              
              29
              
              
              
              276
              
              
              
              124Net
                  Loss
              
              
              $
              (26,933
              )
              
              $
              (57,010
              )
              
              $
              (39,005
              )
              
              $
              (36,501
              )
              
              $
              (76,973
              )Earnings
                  Per Share (Basic) from Continuing Operations (1)
              
              
              
              (2.88
              )
              
              
              (8.38
              )
              
              
              (7.37
              )
              
              
              (13.84
              )
              
              
              (42.15
              )Earnings
                  Per Share (Basic) from Discontinued Operations (1)
              
              
              
              (0.07
              )
              
              
              0.11
              
              
              
              0.01
              
              
              
              0.10
              
              
              
              0.07**Other
                  Operating and Financial Data:**Adjusted
                  Net Loss (2)
              
              
              $
              (9,017
              )
              
              $
              (23,942
              )
              
              $
              (24,667
              )
              
              $
              (18,508
              )
              
              $
              (5,770
              )Cash
                  Used by Operating Activities
              
              
              $
              (9,217
              )
              
              $
              (13,135
              )
              
              $
              (3,493
              )
              
              $
              (6,085
              )
              
              $
              (797
              )Cash
                  Provided (Used) by Investing Activities
              
              
              $
              536
              
              
              $
              (611
              )
              
              $
              (1,216
              )
              
              $
              (1,276
              )
              
              $
              (13,668
              )Cash
                  Provided (Used) by Financing Activities
              
              
              $
              7,800
              
              
              $
              16,415
              
              
              $
              5,936
              
              
              $
              6,912
              
              
              $
              (2,342
              )**Balance
                  Sheet Data:**Total
                  Assets
              
              
              $
              21,764
              
              
              $
              41,913
              
              
              $
              70,211
              
              
              $
              77,366
              
              
              $
              89,151Long-Term
                  Debt
              
              
              $
              3,678
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              1,272Total
                  Stockholders’ Equity
              
              
              $
              1,863
              
              
              $
              23,104
              
              
              $
              50,103
              
              
              $
              58,336
              
              
              $
              76,548
 ————————————
  (1)  Adjusted
        for the effect of a 1-for-35 reverse stock split effected on May 12,
        2006.
  (2)  Reconciliation
        of Adjusted Net Loss to Net Loss:
  Adjusted
                  Net Loss
              
              $
              (9,017
              )
              
              $
              (23,942
              )
              
              $
              (24,667
              )
              
              $
              (18,508
              )
              
              $
              (5,770
              )Loss
                  from Discontinued Operations
              
              
              (657
              )
              
              
              752
              
              
              
              29
              
              
              
              276
              
              
              
              124Other
                  Income (Expense)
              
              
              (1,293
              )
              
              
              (638
              )
              
              
              (8,026
              )
              
              
              (5,426
              )
              
              
              (265
              )Impairment
                  - Slow Moving Inventory
              
              
              (107
              )
              
              
              (300
              )
              
              
              (1,300
              )
              
              
              —
              
              
              
              —Depreciation
                  Expense
              
              
              (2,090
              )
              
              
              (4,367
              )
              
              
              (5,041
              )
              
              
              (5,232
              )
              
              
              (6,397
              )Impairment
                  Expense
              
              
              (13,769
              )
              
              
              (28,515
              )
              
              
              —
              
              
              
              (7,611
              )
              
              
              (64,665
              )Net
                  Loss
              
              $
              (26,933
              )
              
              $
              (57,010
              )
              
              $
              (39,005
              )
              
              $
              (36,501
              )
              
              $
              (76,973
              )
  **Item
        7.*****Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations.***
  This
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations (MD&A) should be read in conjunction with the other sections of
        this annual report on Form 10-K, including Part I, “Item 1: Business”; Part I,
“Item 1A: Risk Factors”; Part II, “Item 6: Selected Financial Data”; and Part
        II, “Item 8: Financial Statements and Supplementary Data.” The various sections
        of this MD&A contain a number of forward-looking statements, all of which
        are based on our current expectations and could be affected by the uncertainties
        and risk factors described throughout this filing.
  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 year ended August 31, 2006.
  As
        of
        August 31, 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 inter-company transactions and balances have
        been
        eliminated in consolidation.
  **Executive
        Overview**
  Eagle
        Broadband, Inc. (the “company” or “Eagle”), is a provider of Internet protocol
        (IP), broadband and satellite communications products and services. The
        company’s product offerings are:
  ·
            IPTVCompleteTM,
                delivering almost 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) and 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  ·
            IT
                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.  In
        focusing on business opportunities in these core areas, the company achieved
        the
        following strategic objectives during the past year, with the majority of
        these
        objectives occurring in the last six months of the fiscal year:
  ·
            Significantly
                added to the company’s extensive inventory of IPTV studio content
                contracts.  ·
            Brought
                to market a new high definition set-top box, the IP3000HD, which
                is a
                highly capable, yet inexpensive solution for both hospitality markets
                and
                IPTV customers.  ·
            Introduced
                the SatMAX Alpha Emergency Communications System, aportable
                Iridium-based satellite phone emergency communications system designed
                for
                disaster recovery, crisis management and emergency
                preparedness.  ·
            Continued
                to realign staff and resources to maximize efficiencies and better
                serve
                our customers and partners, resulting in a reduction of operating
                expenses
                by 55%.  ·
            Exited
                residential security monitoring, when management determined that
                this
                component of the monitoring business was not synergistic with the
                company’s core competencies.  ·
            Entered
                into an operations agreement with a third party to operate the majority
                of
                Eagle’s traditional cable business, thereby significantly reducing
                operating expenses and headcount.  ·
            Entered
                into an equity line of credit for up to $5,000,000 with Dutchess
                Private
                Equities Fund, L.P.  ·
            Secured
                over $4 million of traditional, non-convertible debt financing to
                enable
                the company to quickly proceed with building its Miami super-headend
                to
                provide IPTVComplete to the southeastern region of the United
                States.  For
        the
        upcoming year, the company anticipates:
  ·
            Capital
                expenditures during the first quarter of approximately $500,000 to
                complete Eagle’s super-headend in Miami. This super-headend is currently
                operational and is delivering over 200 channels of IPTV
                content.  ·
            Devoting
                significant sales efforts to attain market leadership with the new
                IP3000HD that supports MPEG4/H.264 standards, especially in the emerging
                world of open Internet, specialty content
                IPTV.  ·
            Delivering
                IPTVComplete to customers in the Miami area no later than December
                2006.  ·
            Signing
                additional customers both within and beyond Florida, each with their
                own
                base of subscribers.  ·
            Continuing
                to negotiate and sign IPTV content
                contracts.  ·
            Reducing
                our debt obligations through the issuance of common stock. (See Note
                23-Subsequent Events)  ·
            Focusing
                significant IT Services sales efforts on securing large municipal
                WiFi
                contracts.  ·
            Closely
                monitoring gross margin performance for all core businesses to ensure
                the
                company is on track towards attaining
                profitability.  **Strategy
        and Growth**
  We
        have
        devoted considerable resources to obtain our extensive portfolio of IPTV
        studio
        content contracts. It has taken Eagle several years to negotiate all of these
        agreements, and there are very few companies with as extensive a portfolio
        of
        IPTV studio content contracts as Eagle holds. As a result, management believes
        that Eagle is uniquely positioned to take advantage of early market
        opportunities in the rapidly growing IPTV market. Eagle has already demonstrated
        the ability to deliver almost 250 channels of television and music content
        from
        its newly constructed super-headend in Miami, and management is continually
        evaluating possible locations for future super-headend sites that would provide
        Eagle a more cost efficient way of delivering IPTV throughout the continental
        U.S. than long-haul transport over fiber.
  We
        believe that consistent growth of both revenues and operating earnings can
        be
        achieved through internally developed products and services, and through
        acquisitions. Management believes that good value target companies are present
        in the marketplace and that business combinations with these entities would
        help
        us achieve our growth potential in addition to providing synergies that would
        improve profitability. Our consolidated statements of operations for the
        last
        two fiscal years reflect losses under generally accepted accounting principles,
        but since operating expenses for those years contain significant non-cash
        charges related to past corporate transactions, these reported results may
        not
        fully represent the financial health of the business.
  **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. The significant
        accounting policies are described in the company’s Consolidated Financial
        Statements (See Note 1 in Notes to Consolidated 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.
  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. (See Note
        5-Impairment of Long-Lived Assets.)
  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. (See Note
        5-Impairment of Long-Lived Assets.)
  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. (See Note
        5-Impairment of Long-Lived Assets.)
  During
        the fourth quarter of 2005, the company had an additional impairment charge
        of
        $323,000 on assets held for sale. (See Note 7-Assets Held for
        Sale.)
  **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.
  **Results
        of Operations**
  **Fiscal
        Year Ended August 31, 2006, Compared to Fiscal Year Ended August 31,
        2005**
  The
        following table sets forth summarized consolidated financial information
        for the
        fiscal years ended August 31, 2006 and 2005:
  *($
                  in thousands)*
              
              Year
                  Ended August 31,2006
              
              2005
              
              $
                  Change
              
              %
                  ChangeNet
                  Sales
              
              $
              3,941
              
              
              $
              5,242
              
              
              $
              (1,301
              )
              
              
              (25
              %)Cost
                  of Goods Sold
              
              
              4,583
              
              
              
              7,780
              
              
              
              (3,197
              )
              
              
              (41
              %)Gross
                  Profit
              
              
              (642
              )
              
              
              (2,538
              )
              
              
              1,896
              
              
              
              (75
              %)Percent
                  of Sales
              
              
              (16.3
              %)
              
              
              (48.4
              %)Operating
                  Expenses
              
              
              24,341
              
              
              
              54,586
              
              
              
              (30,245
              )
              
              
              (55
              %)Loss
                  from Operations
              
              
              (24,983
              )
              
              
              (57,124
              )
              
              
              32,141
              
              
              
              (56
              %)Other
                  Income (Expense)
              
              
              (1,293
              )
              
              
              (638
              )
              
              
              (655
              )
              
              
              103
              %Loss
                  from Continuing Operations
              
              
              (26,276
              )
              
              
              (57,762
              )
              
              
              31,486
              
              
              
              (55
              %)Income
                  (Loss) from Discontinued Operations
              
              
              (657
              )
              
              
              752
              
              
              
              (1,409
              )
              
              
              (187
              %)Net
                  Loss
              
              $
              (26,933
              )
              
              $
              (57,010
              )
              
              $
              30,077
              
              
              
              (53
              %)
  For
        the
        year ended August 31, 2006, the company’s consolidated operations generated net
        sales from continuing operations of $3,941,000 compared to prior year net
        sales
        of $5,242,000. The decrease in net sales is primarily attributable to a
        one-time prior year sale of $1,065,000 to a major customer. No such similar
        sale
        occurred for the year ended August 31, 2006. Sales from discontinued operations
        for the year ended August 31, 2006, were $1,656,000, of which $1,189,000
        were
        for the sale of residential security monitoring contracts. For the year ended
        August 31, 2005, sales from discontinued operations were $3,350,000, of which
        $2,362,000 were from the sale of residential security monitoring contracts.
        There were no associated fixed costs in either period for the residential
        security monitoring contracts sold.
  The
        company had anticipated replacing the recurring revenue from residential
        security monitoring with recurring revenue from IPTV delivery beginning in
        the
        fourth quarter of the year ending August 31, 2006. However, due to an unexpected
        change in Eagle’s delivery arrangement for IPTVComplete during the third
        quarter, the expected recurring IPTV revenue stream is now anticipated to
        begin
        by December 2006. Eagle promptly addressed this unforeseen change by
        constructing its own super-headend facility in Miami. During the third quarter,
        the company successfully delivered over 100 channels of IPTV content via
        fiber
        in an extensive field trial to a third party in Miami. This field trial
        demonstrated that our IPTV technology works and established that Eagle can
        successfully deliver a complete IPTV solution over fiber optic cable. In
        recent
        months, Eagle has connected its new super-headend to its first IPTV customer,
        ANEW Broadband in Miami, and expects to deliver IPTVComplete to ANEW Broadband’s
        subscribers by December 2006.
  Management
        does not expect the downward trend in the company’s revenues to continue. The
        last 18 months have been a transition period for the company, and management
        believes the company is positioned to reverse this trend. Being one of the
        few
        companies with extensive contractual rights to deliver live television content
        via IP, and one that has actually demonstrated the capability to deliver
        such
        content, management expects Eagle’s revenues to steadily increase as we proceed
        to deliver IPTVComplete to our customers. Concurrently, management believes
        that
        set-top box sales will grow proportionally with the rollout of IPTVComplete,
        as
        the company now has the capability to ship set-top boxes in large
        volume.
  For
        the
        year ended August 31, 2006, the company’s gross profit margin was a negative
        $642,000, or 16.3% of
        sales, compared to a negative gross profit margin of $2,538,000, or 48.4%
        of
        sales, for the prior year. The negative gross profit margin is attributable
        to
        fixed costs of $842,000 for the depreciation of the company’s broadband network
        in the current year, and for certain fixed costs for the implementation of
        IPTV
        delivery, which had no associated generation of IPTV revenue due to the
        unexpected delay encountered this year. (See Note 1-Basis of Presentation
        and Significant Accounting Policies.)
  The
        company has reported its broadband service revenues for residential security
        monitoring as discontinued operations for the fiscal year ended August 31,
        2006.
        The net loss on discontinued operations of $657,000 included broadband service
        revenues for residential security contracts sold of $1,189,000 and recurring
        revenue for residential security monitoring of $467,000. (See Note
        21-Discontinued Operations and Exit Activities.)
  The
        company incurred a net loss after discontinued operations of $26,933,000
        for the
        fiscal year ended August 31, 2006. Key components of the loss include a
        $13,876,000 non-cash impairment charges and $3,646,000 of additional non-cash
        charges. (See Note 5-Impairment of Long-Lived Assets, Note 6-Impairment of
        Goodwill and Other Intangible Assets.) The company’s net loss after discontinued
        operations for the fiscal year ended August 31, 2005 was $57,010,000, and
        included approximately $28,815,000 non-cash impairment charges and $7,261,000
        of
        additional non-cash charges.
  Management
        does not expect net losses of this magnitude to continue. In addition to
        the
        expected revenue increases discussed above, management has significantly
        reduced
        the company’s operating expenses from previous years and expects this trend to
        continue. Also, management is continuously searching for and evaluating
        potential merger and acquisition opportunities that will be synergistic with
        the
        company’s product offerings.
  *Sales
        Information*
  Set
        forth
        below is a table presenting summarized sales information for our business
        products and services for the fiscal years ended August 31, 2006 and
        2005:
  *($
                  in thousands)*
              
              Year
                  Ended August 31,2006
              
              
              %
                  of Total
              
              
              
              2005
              
              
              %
                  of Total
              
              
              
              $Change
              
              
              %
                  ChangeStructured
                  Wiring
              
              $
              1,376
              
              
              35
              %
              
              $
              1,343
              
              
              26
              %
              
              $
              33
              
              
              2
              %Broadband
                  Services
              
              
              928
              
              
              24
              %
              
              
              998
              
              
              20
              %
              
              
              (70
              )
              
              (7
              %)Products
              
              
              1,484
              
              
              38
              %
              
              
              2,770
              
              
              53
              %
              
              
              (1,286
              )
              
              (46
              %)Other
              
              
              153
              
              
              3
              %
              
              
              131
              
              
              1
              %
              
              
              22
              
              
              17
              %Total
              
              $
              3,941
              
              
              100
              %
              
              $
              5,242
              
              
              100
              %
              
              $
              (1,301
              )
              
              (25
              %)
  For
        the
        fiscal year ended August 31, 2006, net sales from continuing operations
        decreased to $3,941,000 from $5,242,000 for the year ended August 31, 2005.
        The
        overall decrease of 25% was attributable to a $1,286,000 decrease in product
        sales and a decrease of $70,000 of broadband services, offset by an increase
        of
        $33,000, or 2%, in structured wiring sales and a 17% increase of $22,000
        in
        other product sales. The $1,301,000 decrease in sales of the company’s products
        for the year ended August 31, 2006, was primarily attributable to a one-time
        prior year sale of $1,065,000 to a major customer.
  *Cost
        of Goods Sold*
  The
        following table sets forth summarized cost of goods sold information for
        the
        fiscal years ended August 31, 2006 and 2005:
  *($
                  in thousands)*
              Year
                  Ended August 31,2006
              
              2005
              
              
              $
                  Change
              
              
              %
                  ChangeDirect
                  Labor and Related Costs
              $
              955
              
              
              $
              1,049
              
              
              $
              (94
              )
              
              
              (9
              %)Products
                  and Integration Services
              
              1,433
              
              
              
              3,077
              
              
              
              (1,644
              )
              
              
              (53
              %)Impairment
                  Slow Moving & Obsolete Inventory
              
              107
              
              
              
              300
              
              
              
              (193
              )
              
              
              (64
              %)Structured
                  Wiring Labor and Material
              
              1,114
              
              
              
              1,031
              
              
              
              83
              
              
              
              8
              %Broadband
                  Services Costs
              
              132
              
              
              
              1,165
              
              
              
              (1,033
              )
              
              
              (89
              %)Depreciation
                  and Amortization
              
              842
              
              
              
              1,158
              
              
              
              (316
              )
              
              
              (27
              %)Total
                  Cost of Goods Sold
              $
              4,583
              
              
              $
              7,780
              
              
              $
              (3,197
              )
              
              
              (41
              %)
  For
        the
        year ended August 31, 2006, cost of goods sold decreased by $3,197,000, or
        41%,
        to $4,583,000 from $7,780,000 as compared to the fiscal year ended August
        31,
        2005. The decrease of $3,197,000 in cost of goods sold is primarily attributable
        to (i) direct labor costs decreasing $94,000 for a reduction in force,
        (ii) product and integration service costs decreasing $1,644,000 due to a
        delay in bringing the company’s IP3000HD to market, (iii) a $1,033,000 decrease
        in broadband service costs associated with the material decrease in fixed
        costs
        associated with the delivery of broadband services, as the company discontinued
        operations in residential security monitoring and entered into an operating
        agreement with a third party to operate a portion
        of the company’s fiber-optic network, which  assumed
        responsibility for payment of all expenses associated with the operation
        of this
        portion of the network and (iv) a decrease of $316,000 in depreciation expense
        for assets impaired in a prior year .
  *Operating
        Expenses*
  The
        following table sets forth summarized operating expense information for the
        fiscal years ended August 31, 2006 and 2005:
  *($
                  in thousands)*
              Year
                  Ended August 31,2006
              
              2005
              
              $
                  Change
              
              
              %
                  ChangeSalaries
                  and Related Costs
              $
              3,733
              
              
              $
              4,675
              
              
              $
              (942
              )
              
              
              (20
              %)Advertising
                  and Promotion
              
              160
              
              
              
              73
              
              
              
              87
              
              
              
              
              %Depreciation
                  and Amortization
              
              1,248
              
              
              
              3,202
              
              
              
              (1,954
              )
              
              
              (61
              %)Research
                  and Development
              
              830
              
              
              
              776
              
              
              
              54
              
              
              
              7
              %Other
                  Support Costs
              
              4,601
              
              
              
              17,345
              
              
              
              (12,744
              )
              
              
              (73
              %)Impairment,
                  Write-Downs & Restructuring Costs
              
              13,769
              
              
              
              28,515
              
              
              
              (14,746
              )
              
              
              (52
              %)Total
                  Operating Expenses
              $
              24,341
              
              
              $
              54,586
              
              
              $
              (30,245
              )
              
              
              (55
              %)
  The
        following table breaks out “Other support costs” information as presented in the
        preceding table for the fiscal years ended August 31, 2006 and
        2005:
  *($
                  in thousands)*
              Year
                  Ended August 31,2006
              
              
              2005
              
              $
                  Change
              
              
              %
                  ChangeAuto
                  Related
              $
              42
              
              
              
              $
              40
              
              
              $
              2
              
              
              
              5
              %Bad
                  Debt (Recovery)
              
              (739
              )
              
              
              
              579
              
              
              
              (1,318
              )
              
              
              (228
              %)Delivery
                  and Postage
              
              172
              
              
              
              
              36
              
              
              
              136
              
              
              
              378
              %Fees
              
              173
              
              
              
              
              268
              
              
              
              (95
              )
              
              
              (35
              %)Insurance
                  and Office
              
              420
              
              
              
              
              810
              
              
              
              (390
              )
              
              
              (48
              %)Professional
                  and Contract Labor
              
              2,976
              
              
              
              
              11,504
              
              
              
              (8,528
              )
              
              
              (74
              %)Rent
              
              326
              
              
              
              
              415
              
              
              
              (89
              )
              
              
              (21
              %)Repairs
                  and Maintenance
              
              78
              
              
              
              
              59
              
              
              
              19
              
              
              
              32
              %Travel
              
              325
              
              
              
              
              422
              
              
              
              (97
              )
              
              
              (23
              %)Taxes
              
              95
              
              
              
              
              2,722
              
              
              
              (2,627
              )
              
              
              (97
              %)Telephone
                  and Utilities
              
              297
              
              
              
              
              371
              
              
              
              (74
              )
              
              
              (20
              %)Other
              
              436
              
              
              
              
              119
              
              
              
              317
              
              
              
              266
              %Total
                  Other Support Costs
              $
              4,601
              
              
              
              $
              17,345
              
              
              $
              (12,744
              )
              
              
              (73
              %)
  For
        the
        fiscal year ended August 31, 2006, operating expenses decreased by 55% to
        $24,341,000, as compared to $54,586,000 for the fiscal year ended August
        31,
        2005. The decreases that occurred, as evidenced by the immediately preceding
        tables, are discussed below:
  ·
            A
                $942,000 decrease in salaries and related costs. The decrease is
                primarily
                attributable to reductions in the workforce that occurred throughout
                the
                year ended August 31, 2006.  ·
            A
                $1,954,000 decrease in depreciation and amortization, due principally
                to a
                reduction in the cost basis of certain assets impaired for the prior
                year
                with a corresponding decrease to depreciation and amortization,
                disposition of assets and the completion of depreciation of certain
                capital assets.  ·
            A
                $54,000 increase in research and development expenses, primarily
                for
                product development and engineering activities associated with the
                company’s set-top box product line.  ·
            A
                $12,744,000 decrease in other support costs, the components of which
                are
                set forth in the table above. The decrease is attributable to (i)
                a
                decrease of $1,318,000 for bad debt recovery for a receivable reserved
                in
                a prior year, (ii) a decrease of $390,000 to insurance and office
                expenses, (iii) a decrease of $8,528,000 in professional fees as
                the
                company’s costs for corporate compliance, consulting and legal fees
                decreased significantly for the current fiscal year and (iv) a decrease
                of
                $2,627,000 in taxes as the company accrued in the prior year for
                a sales
                tax assessment of $1,320,000 and an accrual in the prior year of
                $640,000
                for property taxes for which the assessment was materially reduced
                for the
                year ending August 31, 2006. These decreases were offset by increases
                of
                $136,000 for delivery and postage and $317,000 increase to other
                expenses.  ·
            A
                $14,746,000 decrease in impairment charges as the company recorded
                an
                impairment charge of $28,515,000 for the fiscal year ended August
                31, 2005
                as compared to an impairment charge of $13,769,000 for the fiscal
                year
                ended August 31, 2006. The impairment charges for the fiscal year
                ended
                August 31, 2006, primarily consist of (i) an impairment charge of
                $3,427,830 for the intangible assets of contract rights, customers
                relationships and other intangible assets primarily attributable
                to the
                BDS communities acquired in the January 2001 merger of Clearworks.net,
                Inc., and (ii) an impairment charge of $10,341,262 for certain
                Houston-area communities where broadband infrastructure had been
                installed. (See Note 5-Impairment of Long Live Assets and Note
                6-Impairment of Goodwill and Other Intangible Assets for additional
                details.)  **Net
        Loss**
  Net
        loss
        after discontinued operations for the fiscal year ended August 31, 2006 and
        2005, was $26,933,000 and $57,010,000, respectively.
  **Fiscal
        Year Ended August 31, 2005, Compared to Fiscal Year Ended August 31,
        2004**
  The
        following table sets forth summarized consolidated financial information
        for the
        fiscal years ended August 31, 2005 and 2004:
  *($
                  in thousands)*
              
              Year
                  Ended August 31,2005
              
              
              
              2004
              
              
              $Change
              
              
              %
                  ChangeNet
                  Sales
              
              $
              5,242
              
              
              $
              8,062
              
              
              $
              (2,820
              )
              
              (35
              %)Cost
                  of Goods Sold
              
              
              7,780
              
              
              
              9,155
              
              
              
              (1,375
              )
              
              (15
              %)Gross
                  Profit
              
              
              (2,538
              )
              
              
              (1,093
              )
              
              
              (1,445
              )
              
              (132
              %)Percent
                  of Sales
              
              
              (48.4
              %)
              
              
              (13.5
              %)Operating
                  Expenses
              
              
              54,586
              
              
              
              29,915
              
              
              
              24,671
              
              
              82
              %Loss
                  from Operations
              
              
              (57,124
              )
              
              
              (31,008
              )
              
              
              (26,116
              )
              
              84
              %Other
                  Income (Expense)
              
              
              (638
              )
              
              
              (8,026
              )
              
              
              7,388
              
              
              (92
              %)Loss
                  from Continuing Operations
              
              
              (57,762
              )
              
              
              (39,034
              )
              
              
              (18,728
              )
              
              48
              %Income
                  from Discontinued Operations
              
              
              752
              
              
              
              29
              
              
              
              723
              
              
              2,493
              %Net
                  Loss
              
              
              (57,010
              )
              
              
              (39,005
              )
              
              
              (18,005
              )
              
              46
              %Unrealized
                  Holding Gain (Loss)
              
              
              1,048
              
              
              
              (321
              )
              
              
              321
              
              
              (100
              %)Comprehensive
                  Loss
              
              $
              (55,962
              )
              
              $
              (39,326
              )
              
              $
              (16,636
              )
              
              42
              %
  *Sales
        Information*
  Set
        forth
        below is a table presenting the revenue derived from our business for the
        fiscal
        years ended August 31, 2005 and 2004:
  *($
                  in thousands)*
              
              Year
                  Ended August 31,2005
              
              
              
              %
                  of Total
              
              
              2004
              
              
              
              %
                  of Total
              
              
              $Change
              
              %
                  ChangeStructured
                  Wiring
              
              $
              1,343
              
              
              
              26
              %
              
              
              $
              678
              
              
              
              8
              %
              
              
              $
              665
              
              
              
              98
              %Broadband
                  Services
              
              
              998
              
              
              
              20
              %
              
              
              
              1,097
              
              
              
              14
              %
              
              
              
              (99
              )
              
              
              (9
              %)Products
              
              
              2,770
              
              
              
              53
              %
              
              
              
              6,190
              
              
              
              77
              %
              
              
              
              (3,420
              )
              
              
              (55
              %)Other
              
              
              131
              
              
              
              1
              %
              
              
              
              97
              
              
              
              1
              %
              
              
              
              34
              
              
              
              35
              %Total
              
              $
              5,242
              
              
              
              100
              %
              
              
              $
              8,062
              
              
              
              100
              %
              
              
              $
              (2,820
              )
              
              
              (35
              %)
  For
        the
        fiscal year ended August 31, 2005, net sales decreased to $5,242,000 from
        $8,062,000 for the year ended August 31, 2004. The overall decrease of 35%
        was
        attributable to a $3,420,000 decrease in product sales and a decrease of
        $99,000
        of broadband services, offset by an increase of $665,000, or 98%, in structured
        wiring sales. The $3,420,000 decrease in sales of the company’s products for the
        year ended August 31, 2005, was primarily attributable to a decrease in prior
        year product sales of $3,788,000 from a major customer. The increase of $665,000
        in structured wiring sales is primarily attributable to increased sales efforts
        to pursue commercial structured wiring and cabling opportunities.
  *Cost
        of Goods Sold*
  The
        following table sets forth summarized cost of goods sold information for
        the
        fiscal years ended August 31, 2005 and 2004:
  *($
                  in thousands)*
              Year
                  Ended August 31,2005
              
              2004
              
              $
                  Change
              
              %
                  ChangeDirect
                  Labor and Related Costs
              $
              1,049
              
              
              $
              501
              
              
              $
              548
              
              
              
              109
              %Products
                  and Integration Services
              
              3,077
              
              
              
              5,372
              
              
              
              (2,295
              )
              
              
              (43
              %)Impairment
                  Slow Moving & Obsolete Inventory
              
              300
              
              
              
              1,300
              
              
              
              (1,000
              )
              
              
              (77
              %)Structured
                  Wiring Labor and Material
              
              1,031
              
              
              
              448
              
              
              
              583
              
              
              
              130
              %Broadband
                  Services Costs
              
              1,165
              
              
              
              367
              
              
              
              798
              
              
              
              217
              %Depreciation
                  and Amortization
              
              1,158
              
              
              
              1,141
              
              
              
              17
              
              
              
              1
              %Other
                  Manufacturing Costs
              
              —
              
              
              
              26
              
              
              
              (26
              )
              
              
              (100
              %)Total
                  Cost of Goods Sold
              $
              7,780
              
              
              $
              9,155
              
              
              $
              (1,375
              )
              
              
              (15
              %)
  For
        the
        year ended August 31, 2005, cost of goods sold decreased by $1,375,000, or
        15%,
        to $7,780,000 from $9,155,000 as compared to the fiscal year ended August
        31,
        2004. The decrease of $1,375,000 in cost of goods sold is primarily attributable
        to (i) a decrease in impairment of slow moving inventory of $1,000,000 and
        (ii) a decrease in product costs associated with a prior year product sales
        to a
        major customer. The increase of $583,000 in structured wiring cost is primarily
        attributable to increased personnel costs needed to expand the company’s
        commercial customer base and pursue additional structured wiring
        opportunities.
  *Operating
        Expenses*
  The
        following table sets forth summarized operating expense information for the
        fiscal years ended August 31, 2005 and 2004:
  *($
                    in thousands)*
                Year
                    Ended August 31,2005
                
                2004
                
                
                
                $Change
                
                
                %
                    ChangeSalaries
                    and Related Costs
                $
                4,675
                
                
                $
                12,332
                
                
                $
                (7,657
                )
                
                
                (62
                %)Advertising
                    and Promotion
                
                73
                
                
                
                19
                
                
                
                54
                
                
                
                284
                %Depreciation
                    and Amortization
                
                3,202
                
                
                
                3,900
                
                
                
                (698
                )
                
                
                (18
                %)Research
                    and Development
                
                776
                
                
                
                557
                
                
                
                219
                
                
                
                39
                %Other
                    Support Costs
                
                17,345
                
                
                
                13,107
                
                
                
                4,238
                
                
                
                32
                %Impairment,
                    write-downs & restructuring costs
                
                28,515
                
                
                
                —
                
                
                
                28,515
                
                
                
                —Total
                    Operating Expenses
                $
                54,586
                
                
                $
                29,915
                
                
                $
                24,671
                
                
                
                82
                %
  The
        following table breaks out other support costs information for the fiscal
        years
        ended August 31, 2005 and 2004:
  *($
                  in thousands)*
              Year
                  Ended August 31,2005
              
              2004
              
              
              $Change
              
              %
                  ChangeAuto
                  Related
              $
              40
              
              
              $
              14
              
              
              $
              26
              
              
              
              186
              %Bad
                  Debt
              
              579
              
              
              
              2,632
              
              
              
              (2,053
              )
              
              
              (78
              %)Delivery
                  and Postage
              
              36
              
              
              
              37
              
              
              
              (1
              )
              
              
              (3
              %)Fees
              
              268
              
              
              
              268
              
              
              
              —
              
              
              
              —Insurance
                  and Office
              
              810
              
              
              
              365
              
              
              
              445
              
              
              
              122
              %Professional
                  and Contract Labor
              
              11,504
              
              
              
              6,808
              
              
              
              4,696
              
              
              
              69
              %Rent
              
              415
              
              
              
              474
              
              
              
              (59
              )
              
              
              (12
              %)Repairs
                  and Maintenance
              
              59
              
              
              
              41
              
              
              
              18
              
              
              
              44
              %Travel
              
              422
              
              
              
              223
              
              
              
              199
              
              
              
              89
              %Taxes
              
              2,722
              
              
              
              1,454
              
              
              
              1,268
              
              
              
              87
              %Telephone
                  and Utilities
              
              371
              
              
              
              719
              
              
              
              (348
              )
              
              
              (48
              %)Other
              
              119
              
              
              
              72
              
              
              
              47
              
              
              
              65
              %Total
                  Other Support Costs
              $
              17,345
              
              
              $
              13,107
              
              
              $
              4,238
              
              
              
              32
              %
  For
        the
        fiscal year ended August 31, 2005, operating expenses increased by 82% to
        $54,586,000, as compared to $29,915,000 for the fiscal year ended August
        31,
        2004. The increases that occurred, as evidenced by the immediately preceding
        tables, are discussed below.
  ·
            A
                $7,657,000 decrease in salaries and related costs. The decrease is
                primarily attributable to (i) a prior year non-cash expense of $4,493,000
                incurred on the issuance of promissory notes upon the modification
                of
                outstanding options for 4,200,000 common shares and (ii) a guaranteed
                compensation of the modified options equivalent to $1.75 less the
                option
                strike price, which was an additional $4,074,000 accrued in August
                2004.
                In June 2005, the company entered into note exchange agreements whereby
                the note holders representing $2,086,000 agreed to accept 227,257
                shares
                of the company’s common stock to fully satisfy such debt obligation. The
                remaining principal amount of $1,924,000 is currently in default
                and is
                accruing interest according to the terms of the original agreement.
                (See
                Note 2-Related Party Transactions.)  ·
            A
                $698,000 decrease in depreciation and amortization, due principally
                to
                disposition of assets and the completion of depreciation of certain
                capital assets.  ·
            A
                $219,000 increase in research and development expenses, primarily
                for
                product development and engineering activities associated with the
                company’s IPTV, set-top box and satellite communications product
                lines.  ·
            A
                $4,238,000 increase in other support costs, the components of which
                are
                set forth in the table above. The increase of $1,268,000 in taxes
                is
                attributable to a state sales tax assessment that is pending while
                under
                review, a $4,696,000 increase in professional fees that included
                cost
                associated with corporate compliance, auditors fees and consulting,
                and
                litigation, and $445,000 attributable to general liability and officer
                and
                director insurance coverage. These increases are offset by decreases
                of
                $2,053,000 in bad debt, $59,000 in rent expense and $348,000 in telephone
                and utilities.  ·
            A
                $28,515,000 increase in impairment primarily consisting of (i) an
                impairment charge of $23,912, 668 for the intangible assets of contract
                rights, customers relationships and other intangible assets primarily
                attributable to the BDS communities acquired in the January 2001
                merger of
                Clearworks.net, Inc., and (ii) an impairment charge of $3,229,405
                for
                certain Houston-area communities where broadband infrastructure had
                been
                installed. (See Note 5-Impairment of Long Live Assets and Note
                6-Impairment of Goodwill and Other Intangible Assets for additional
                details.)  **Net
        Loss**
  Net
        loss
        after discontinued operations for the fiscal year ended August 31, 2005 and
        2006, was $57,010,000 and $39,005,000, respectively.
  **Changes
        in Cash Flow**
  The
        company’s operating activities decreased net cash used to $9,217,000 in the year
        ended August 31, 2006, compared to use of net cash of $13,135,000 in the
        year
        ended August 31, 2005. The decrease in net cash used by operating activities
        was
        primarily attributable to fund the company’s net operating loss, net of
        $17,522,000 non-cash charges combined with $194,000 of cash provided by
        fluctuations in working capital requirements consisting of the combination
        of
        accounts receivable, inventory, other assets, prepaid expenses, accounts
        payable, derivative liability and accrued expenses. The company’s investing
        activities provided net cash of $536,000 in the year ended August 31, 2006,
        compared to use of net cash $611,000 in the year ended August 31, 2005. The
        increase was due primarily to proceeds from sale of assets held for sale
        and
        direct finance leasing. The company’s financing activities provided net cash
        proceeds of $7,800,000 in the year ended August 31, 2006, compared to
        $16,415,000 of cash provided in the year ended August 31, 2005. The decrease
        resulted from net proceeds of $1,595,000 from the sale of 1.72 million shares
        of
        common stock to certain accredited investors and $6,633,000 gross proceeds
        received from debt financing as compared to the prior year receiving net
        proceeds of $11,309,000 from the sale of 1.31 million shares of common stock
        to
        certain accredited investors.
  **Liquidity
        and Capital Resources**
  At
        August
        31, 2006, the company’s current assets totaled $5,610,000 (including cash and
        cash equivalents of $3,139,000). Total current liabilities were $16,223,000,
        which gave the company a negative working capital of $10,613,000. The company
        has funded operations through a combination of utilizing cash on hand, issuing
        common stock to settle current liabilities and raising additional capital
        through the sale of its securities.
  In
        order
        to preserve cash, the company has historically used company stock to retire
        certain liabilities on a negotiated basis. During the year ended August 31,
        2006, the company retired $958,000 in debt with stock versus cash. The company
        expects to continue its practice of retiring certain liabilities as may be
        negotiated through a combination of cash and the issuance of shares of the
        company’s common stock. At this time, the company is not able to quantify the
        amount of common stock that may need to be issued to retire current or future
        debts, and there is no assurance that this strategy will be successful in
        the
        future.
  Historically,
        the company has financed operations through the sale of debt and equity
        securities. During the year ended August 31, 2006, the company raised $1,595,000
        cash through the issuance of common stock through our equity line of credit.
        The
        company currently does not have credit facilities available with financial
        institutions or other third parties and historically we have relied upon
        best
        efforts third-party funding. Though we have been successful at raising
        additional capital on a best efforts basis in the past, we can provide no
        assurance that we will be successful in any future best-efforts financing
        endeavors. The company will continue to rely upon financing from external
        sources to fund its operations for the foreseeable future and it will likely
        need to raise additional capital to fund working capital requirements in
        the
        third quarter of 2006. If we are unable to raise sufficient capital from
        external sources to fund our operations for the foreseeable future, the company
        may need to sell assets to meet working capital needs or curtail certain
        operations.
  The
        company has experienced recurring losses from operations in each of the last
        three fiscal years, as well as continued negative cash flow from operations
        for
        the year ended August 31, 2006. The company’s recent operating performance and
        liquidity deficiencies, the uncertainties underlying the business climate,
        and
        the uncertainty related to the financial impact of the changes in strategic
        direction, raise substantial doubt about the company’s ability to continue as a
        going concern and, therefore, its ability to realize its assets and discharge
        its liabilities in the normal course of business. As a result of these
        operational issues, the company is in the process of implementing initiatives
        intended to increase sales, improve gross margin and reduce certain operating
        expenses. Several of the planned initiatives are in progress, including,
        but not
        limited to:
  ·
            Capital
                expenditures during the first quarter of fiscal 2007 will be approximately
                $500,000 to complete Eagle’s super-headend in
                Miami.  ·
            Devoting
                significant sales efforts to attain market leadership with the new
                IP3000HD that supports MPEG4/H.264 standards, especially in the emerging
                world of open Internet, specialty content
                IPTV.  ·
            Delivery
                of IPTVComplete to customers in the Miami area no later than December
                2006.  ·
            Signing
                additional customers both within and beyond Florida, each with their
                own
                base of subscribers.  ·
            Reducing
                our debt obligations through the issuance of common
                stock.  ·
            Focusing
                significant IT Services sales efforts directed to secure large municipal
                WiFi contracts.  ·
            Closely
                monitoring gross margin performance for all core businesses to ensure
                the
                company is on track towards attaining
                profitability.  **Contractual
        Obligations**
  The
        following table sets forth contractual obligations to be settled in cash
        as of
        August 31, 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)
              
              $
              7,036
              
              $
              4,120
              
              $
              2,916
              
              $
              —
              
              $
              —Operating
                  Lease Obligations
              
              
              875
              
              
              306
              
              
              569
              
              
              —
              
              
              —Total
              
              $
              7,911
              
              $
              4,426
              
              $
              3,485
              
              $
              —
              
              $
              —
  The
        company’s contractual obligations consist of long-term debt and interest as set
        forth in Note 8 - Notes
        Payable and Long-Term Debt to the company’s financial statements, certain
        obligations for office space operating leases requiring future minimal
        commitments under non-cancelable leases (see Note 14 - Commitments
        and Contingent Liabilities to the company’s financial statements). Contractual
        obligations does not include approximately $2,800,000 of debt obligations
        that
        the company intends to settle in stock (see Note 23-Subsequent
        Events).
  **Off-Balance
        Sheet Arrangements**
  As
        of
        August 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.
  **Item
        7A.*****Quantitative
        and Qualitative Disclosures About Market Risk.***
  None.
  **Item
        8.*****Financial
        Statements and Supplementary Data.***
  Eagle’s
        financial statements as of August 31, 2006 and 2005, and for each of the
        years
        in the three-year period ended August 31, 2006, together with the Report
        of our
        Independent Registered Public Accounting Firm are included in this Annual
        Report
        on Form 10-K on the pages indicated below.
 PageReport
                  of Independent Registered Public Accounting Firm
              F-1Consolidated
                  Balance Sheets
              F-2Consolidated
                  Statements of Operations
              F-3Consolidated
                  Statements of Changes in Shareholders’ Equity
              F-4Consolidated
                  Statements of Cash Flows
              F-5Notes
                  to Consolidated Financial Statements
              F-6
  **Item
        9.*****Changes
        in and Disagreements With Accountants on Accounting and Financial
        Disclosure.***
  None.
  **Item
        9A.*****Controls
        and Procedures*****.**
  **Evaluation
        of Disclosure 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 such term is defined in Rules 13a-15(be) or Rule 15d-15(e) under the
        Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end
        of the quarter ended August 31, 2006. Based on such evaluation, such officers
        have concluded that the company’s disclosure controls and procedures are
        effective in alerting them on a timely basis to material information relating
        to
        the company (including its consolidated subsidiaries) required to be included
        in
        the company’s periodic filings under the Exchange Act. Our Principal Accounting
        Officer, instead of our Chief Financial Officer, evaluated the effectiveness
        of
        our disclosure controls and procedures as of August 31, 2006, and certifies
        to
        such effect pursuant to Section 302 and 906 of the Sarbanes-Oxley Act of
        2002.
        Our prior Chief Financial Officer resigned in January 3, 2006. From January
        3,
        2006 to the date hereof, our Principal Accounting Officer has performed the
        function of our Chief Financial Officer.
  **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 the quarter ended
        August 31, 2006, that has materially affected, or is reasonably likely to
        materially affect, the company’s internal controls over financial
        reporting.
  **Item
        9B.*****Other
        Information*****.**
  None.
  **PART
        III**
  **Item
        10.*****Directors
        and Executive Officers of the Registrant.***
  The
        information appearing in our 2007
        Proxy Statement under the headings “Election of Directors,” “Executive Officers”
and “Section 16(a) Beneficial Ownership Reporting Compliance is
        incorporated by reference.
  *Code
        of Ethics for the*  *Chief
        Executive Officer and Chief Financial Officer*
  Eagle
        maintains a Code of Ethics for the chief executive officer and chief financial
        officer. The Code incorporates our guidelines designed to deter wrongdoing
        and
        to promote honest and ethical conduct and compliance with applicable laws
        and
        regulations. It also incorporates our expectations of our employees that
        enable
        us to provide accurate and timely disclosure in our filings with the Securities
        and Exchange Commission and other public communications. The full text of
        the
        Code is published on our web site at www.eaglebroadband.com/coe.asp .
  **Item
        11.*****Executive
        Compensation.***
  The
        information appearing in our 2007 Proxy Statement under the headings “Executive
        Compensation,” “Director Compensation,” “Employment Contracts,” “Report of the
        Compensation Committee on Executive Compensation,” “Stock Price Performance
        Graph” and “Compensation Committee Interlocks and Insider Participation” is
        incorporated by reference .
  **Item
        12.*****Security
        Ownership of Certain Beneficial Owners and Management and Related Stockholder
        Matters.***
  The
        information appearing in our 2007 Proxy Statement under the headings “Security
        Ownership of Certain Beneficial Owners and Management” and “Equity Compensation
        Plan Information” is incorporated by reference.
  **Item
        13.*****Certain
        Relationships and Related Transactions.***
  The
        information appearing in our 2007 Proxy Statement under the heading “Certain
        Relationships and Related Transactions” is incorporated by
        reference.
  **Item
        14.*****Principal
        Accounting Fees and Services*****.**
  The
        information appearing in our 2007 Proxy Statement under the headings “Audit
        Committee Report” and “Ratification of Selection of Independent Registered
        Public Accounting Firm” is incorporated by reference.
  **PART
        IV**
  **Item
        15.*****Exhibits,
        Financial Statement Schedules.***
  1.  Financial
        Statements: See Part II, Item 8, “Financial Statements and Supplementary
        Data.”
  2.  Financial
        Statement Schedule: See “Schedule II-Valuation and Qualifying Accounts” on page
        F-30 of this Form 10-K.
  3.  Exhibits:
        The exhibits listed in the accompanying Index to Exhibits are filed or
        incorporated by reference as part of this Form 10-K.
  
  **INDEX
        TO EXHIBITS**
  Exhibit
                  Number
              
              Description3.1
              
              Amended
                  and Restated Articles of Incorporation (Incorporated by reference
                  to
                  Exhibit 3.1 of Form S-1, file no. 333-134108, filed May 15,
                  2006).3.2
              
              Amended
                  and Restated Bylaws (Incorporated by reference to Exhibit 3.1 of
                  Form 8-K
                  filed February 10, 2006).10.1
              
              Securities
                  Purchase Agreement between Eagle Broadband, Inc., and the Purchasers
                  identified on the signature pages thereto, dated August 2005 (Incorporated
                  by reference to Exhibit 10.1 of Form 8-K, filed August 18,
                  2005).10.2
              
              Registration
                  Rights Agreement between Eagle Broadband, Inc., and the Purchasers
                  identified on the signature pages thereto (Incorporated by reference
                  to
                  Exhibit 10.2 of Form 8-K, filed August 18, 2005).10.3
              
              Securities
                  Purchase Agreement between Eagle Broadband, Inc., and the Purchasers
                  identified on the signature pages thereto (Incorporated by reference
                  to
                  Exhibit 10.1 of Form 8-K, filed February 18, 2005).10.4
              
              2005
                  Employee Stock Option Plan (Incorporated by reference to Exhibit
                  10.10 of
                  Form S-1/A, file no. 333-127895, filed October 28,
                  2005).10.5
              
              Amended
                  2005 Employee Stock Option Plan (Incorporated by reference to Exhibit
                  10.1
                  of Post-Effective Amendment No. 1 to Form S-8, file no. 333-130108,
                  filed
                  February 16, 2006).10.6
              
              Amended
                  and Restated Employment Agreement dated May 12, 2005, between Eagle
                  Broadband, Inc. and David Micek (Incorporated by reference to Exhibit
                  10.12 of Form S-1/A, file no. 333-127895, filed October 28,
                  2005).10.7
              
              Employment
                  Agreement dated April 18, 2006, between Eagle Broadband, Inc. and
                  Brian
                  Morrow (Incorporated by reference to Exhibit 10.25 of Form S-1,
                  file no.
                  333-134108, filed May 15, 2006).10.8
              
              Amended
                  and Restated Employment Agreement dated April 27, 2006, between
                  Eagle
                  Broadband, Inc. and Richard Sanger, Jr. (Incorporated by reference
                  to
                  Exhibit 10.16 of Form S-1, file no. 333-134108, filed May 15,
                  2006).10.9
              
              Settlement
                  Agreement dated February 15, 2006, between Eagle Broadband, Inc.,
                  Link-Two
                  Communications, Inc. and The Tail Wind Fund Ltd. (Incorporated
                  by
                  reference to Exhibit 10.17 of Form S-1, file no. 333-132635, filed
                  March
                  22, 2006).10.10
              
              Investment
                  Agreement dated March 20, 2006, between Eagle Broadband, Inc. and
                  Dutchess
                  Private Equities Fund, L.P. (Incorporated by reference to Exhibit
                  10.18 of
                  Form S-1, file no. 333-132635, filed March 22, 2006).10.11
              
              Registration
                  Rights Agreement dated March 20, 2006, between Eagle Broadband,
                  Inc. and
                  Dutchess Private Equities Fund, L.P. (Incorporated by reference
                  to Exhibit
                  10.19 of Form S-1, file no. 333-132635, filed March 22,
                  2006).10.12
              
              Subscription
                  Agreement dated February 10, 2006, between Eagle Broadband, Inc.
                  and
                  Dutchess Private Equities Fund, L.P. (Incorporated by reference
                  to Exhibit
                  10.20 of Form S-1, file no. 333-132635, filed March 22,
                  2006).10.13
              
              Debenture
                  Agreement dated March 20, 2006, between Eagle Broadband, Inc. and
                  Dutchess
                  Private Equities Fund, L.P. (Incorporated by reference to Exhibit
                  10.21 of
                  Form S-1, file no. 333-132635, filed March 22, 2006).10.14
              
              Debenture
                  Registration Rights Agreement dated February 10, 2006, between
                  Eagle
                  Broadband, Inc. and Dutchess Private Equities Fund, L.P. (Incorporated
                  by
                  reference to Exhibit 10.22 of Form S-1, file no. 333-132635, filed
                  March
                  22, 2006).10.15
              
              Security
                  Agreement dated February 10, 2006, between Eagle Broadband, Inc.
                  and
                  Dutchess Private Equities Fund, L.P. (Incorporated by reference
                  to Exhibit
                  10.23 of Form S-1, file no. 333-132635, filed March 22,
                  2006).10.16
              
              Warrant
                  Agreement dated February 10, 2006, between Eagle Broadband, Inc.
                  and
                  Dutchess Private Equities Fund, L.P. (Incorporated by reference
                  to Exhibit
                  10.24 of Form S-1, file no. 333-132635, filed March 22,
                  2006).10.17
              
              Employment
                  Resignation Agreement and Release dated January 3, 2006, between
                  Eagle
                  Broadband, Inc. and Eric Blachno (Incorporated by reference to
                  Exhibit
                  10.14 of Form S-1, file no. 333-132635, filed March 22,
                  2006).10.18
              
              Consulting
                  Agreement dated April 1, 2006, between Eagle Broadband, Inc. and
                  Lorne
                  Persons, Jr. (Incorporated by reference to Exhibit 10.18 of Form
                  S-1, file
                  no. 333-136232, filed August 1, 2006).10.19
              
              Promissory
                  Note dated July 24, 2006, between Eagle Broadband, Inc., Dutchess
                  Private
                  Equities Fund, L.P. and Dutchess Private Equities Fund, II, L.P.
                  (Incorporated by reference to Exhibit 10.19 of Form S-1, file no.
                  333-136232, filed August 1, 2006).10.20
              
              Form
                  of Indemnification Agreement dated September 18, 2006, between
                  Eagle
                  Broadband, Inc. and each director of Eagle Broadband, Inc. (Incorporated
                  by reference to Exhibit 10.20 of Form S-3, file no. 333-138344,
                  filed
                  November 1, 2006).10.21
              
              Restricted
                  Stock Agreement dated September 18, 2006, between Eagle Broadband,
                  Inc.
                  and Brian Morrow (Incorporated by reference to Exhibit 10.21 of
                  Form S-3,
                  file no. 333-138344, filed November 1, 2006).21.1
              
              List
                  of Subsidiaries (Incorporated by reference to Exhibit 21.1 of Form
                  S-3,
                  file no. 333-138344, filed November 1, 2006).23.1
              
              Consent
                  of LBB & Associates, Ltd., LLP, (formerly Lopez, Blevins, Bork and
                  Associates, LLP), Independent Registered Public Accounting
                  Firm.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 Section 13 or 15(d) 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:
        November 17, 2006
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the registrant and in
        the
        capacities and on the dates indicated.
  Signature
              
              Title
              
              Date/s/
                  DAVID MICEK
              
              Chief
                  Executive Officer and Director
              
              November
                  17, 2006David
                  Micek
              
              *Principal
                  Executive Officer*/s/
                  JULIET MARKOVICH
              
              Corporate
                  Controller & Principal Accounting Officer
              
              November
                  17, 2006Juliet
                  Markovich
              
              *Principal
                  Accounting Officer*/s/
                  ROBERT BACH
              
              Director
              
              November
                  17, 2006Robert
                  Bach/s/
                  GLENN GOERKE
              
              Director
              
              November
                  17, 2006Glenn
                  Goerke/s/
                  LORNE PERSONS, JR.
              
              Director
              
              November
                  17, 2006Lorne
                  Persons, Jr./s/
                  C. J. REINHARTSEN
              
              Director
              
              November
                  17, 2006C.
                  J. Reinhartsen/s/
                  JAMES YARBROUGH
              
              Director
              
              November
                  17, 2006James
                  Yarbrough
  
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
        FIRM**
  To
        the
        Board of Directors
 Eagle
        Broadband, Inc.
 Houston,
        Texas
  We
        have
        audited the accompanying consolidated balance sheets of Eagle Broadband,
        Inc. as
        of August 31, 2006 and 2005, and the related consolidated statements of
        operations, shareholders’ equity, and cash flows for each of the three years
        ended August 31, 2006. These financial statements are the responsibility
        of
        Eagle Broadband, Inc.’s management. Our responsibility is to express an opinion
        on these financial statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Eagle Broadband, Inc.
        as of
        August 31, 2006 and 2005, and the results of its operations and its cash
        flows
        for each of the three years ended August 31, 2006, in conformity with accounting
        principles generally accepted in the United States of America.
  The
        accompanying financial statements have been prepared assuming that Eagle
        Broadband, Inc. will continue as a going concern. As discussed in Note 22
        to the
        financial statements, Eagle Broadband, Inc. has negative working capital
        of
        $10,613,000 and has incurred losses of $26,933,000 and $57,010,000 during
        the
        years ended August 31, 2006 and 2005, respectively. Eagle Broadband, Inc.
        will
        require additional working capital to develop its business and until Eagle
        Broadband, Inc. either (1) achieves a level of revenues adequate to generate
        sufficient cash flows from operations; or (2) obtains additional financing
        necessary to support its working capital requirements. These conditions raise
        substantial doubt about Eagle Broadband Inc.’s ability to continue as a going
        concern. Management’s plans regarding this matter are described in Note 22. The
        accompanying financial statements do not include any adjustments that might
        result from the outcome of these uncertainties.
  /s/
        LBB & Associates Ltd., LLP
 LBB
&
        Associates Ltd., LLP
  Houston,
        Texas
  October
        26, 2006
  
  **EAGLE
        BROADBAND, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
  *(Thousands
                  of dollars)*
                August
                  31,2006
              
              2005**ASSETS****Current
                  Assets**Cash
                  and cash equivalents
              $
              3,139
              
              
              $
              4,020Cash
                  in restricted account
              
              —
              
              
              
              203Accounts
                  receivable, net
              
              516
              
              
              
              1,890Inventories
              
              734
              
              
              
              802Net
                  investment in direct financing leases
              
              —
              
              
              
              525Assets
                  held for sale
              
              899
              
              
              
              298Prepaid
                  expenses
              
              322
              
              
              
              632**Total
                  Current Assets**
              
              **5,610**
              
              
              
              **8,370****Property
                  and Equipment**Operating
                  equipment
              
              18,691
              
              
              
              32,298Less:
                  accumulated depreciation
              
              (7,347
              )
              
              
              (8,994
              )**Total
                  Property and Equipment**
              
              **11,344**
              
              
              
              **23,304****Other
                  Assets**Net
                  investment in direct financing leases
              
              —
              
              
              
              853Goodwill
              
              4,095
              
              
              
              4,095Contract
                  rights, net
              
              389
              
              
              
              2,921Customer
                  relationships, net
              
              129
              
              
              
              831Other
                  intangible assets, net
              
              197
              
              
              
              859Other
                  assets
              
              —
              
              
              
              680**Total
                  Other Assets**
              
              **4,810**
              
              
              
              **10,239****Total
                  Assets**
              **$**
              **21,764**
              
              
              **$**
              **41,913****LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  Liabilities**Accounts
                  payable
              $
              6,147
              
              
              $
              6,640Stock
                  payable
              
              —
              
              
              
              2,008Accrued
                  expenses
              
              1,929
              
              
              
              7,398Accrued
                  expenses - related party
              
              2,430
              
              
              
              2,079Notes
                  payable & current portion of long term debt
              
              3,990
              
              
              
              61Compound
                  embedded derivative
              
              1,564
              
              
              
              —Deferred
                  revenue
              
              163
              
              
              
              623**Total
                  Current Liabilities**
              
              **16,223**
              
              
              
              **18,809****Long-Term
                  Liabilities**Long-term
                  debt
              
              1,443
              
              
              
              —Compound
                  embedded derivative
              
              2,153
              
              
              
              —Warrant
                  liability
              
              82
              
              
              
              —**Total
                  Long-Term Liabilities**
              
              **3,678**
              
              
              
              **—****Total
                  Liabilities**
              
              **19,901**
              
              
              
              **18,809****Commitments
                  and Contingent Liabilities**
              
              —
              
              
              
              —**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,
                  12,092,758and
                  8,234,608 issued and outstanding at August 31, 2006 and 2005,
                  respectively
              
              12
              
              
              
              8Additional
                  paid in capital
              
              242,900
              
              
              
              237,212Accumulated
                  deficit
              
              (241,049
              )
              
              
              (214,116
              )**Total
                  Shareholders’ Equity**
              
              **1,863**
              
              
              
              **23,104****Total
                  Liabilities and Shareholders’ Equity**
              **$**
              **21,764**
              
              
              **$**
              **41,913**
  See
        accompanying notes to consolidated financial statements.
   
  **EAGLE
        BROADBAND, INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
  (*Thousands
                  of dollars, except per share amounts)*
                For
                  the years ended August 31,2006
              
              
              2005
              
              2004**Net
                  Sales**Structured
                  wiring
              $
              1,376
              
              
              $
              1,343
              
              
              $
              678Broadband
                  services
              
              928
              
              
              
              998
              
              
              
              1,097Products
              
              1,484
              
              
              
              2,770
              
              
              
              6,190Other
              
              153
              
              
              
              131
              
              
              
              97**Total
                  Sales**
              
              **3,941**
              
              
              
              **5,242**
              
              
              
              **8,062****Costs
                  of Goods Sold**Direct
                  labor and related costs
              
              955
              
              
              
              1,049
              
              
              
              501Products
                  and integration service
              
              1,433
              
              
              
              3,077
              
              
              
              5,372Impairment
                  slow moving & obsolete inventory
              
              107
              
              
              
              300
              
              
              
              1,300Structured
                  wiring labor and materials
              
              1,114
              
              
              
              1,031
              
              
              
              448Broadband
                  services costs
              
              132
              
              
              
              1,165
              
              
              
              367Depreciation
                  and amortization
              
              842
              
              
              
              1,158
              
              
              
              1,141Other
                  manufacturing costs
              
              —
              
              
              
              —
              
              
              
              26**Total
                  Costs of Goods Sold**
              
              **4,583**
              
              
              
              **7,780**
              
              
              
              **9,155****Gross
                  Profit**
              
              **(642**
              **)**
              
              
              **(2,538**
              **)**
              
              
              **(1,093**
              **)****Operating
                  Expenses**Salaries
                  and related costs
              
              3,733
              
              
              
              4,675
              
              
              
              12,332Advertising
                  and promotion
              
              160
              
              
              
              73
              
              
              
              19Depreciation
                  and amortization
              
              1,248
              
              
              
              3,202
              
              
              
              3,900Other
                  support costs
              
              4,601
              
              
              
              17,345
              
              
              
              13,107Research
                  and development
              
              830
              
              
              
              776
              
              
              
              557Impairment,
                  write-downs & restructuring costs
              
              13,769
              
              
              
              28,515
              
              
              
              —**Total
                  Operating Expenses**
              
              **24,341**
              
              
              
              **54,586**
              
              
              
              **29,915****Loss
                  from Continuing Operations**
              
              **(24,983**
              **)**
              
              
              **(57,124**
              **)**
              
              
              **(31,008**
              **)****Other
                  Income/(Expenses)**Interest
                  income
              
              27
              
              
              
              36
              
              
              
              32Interest
                  expense
              
              (1,172
              )
              
              
              (766
              )
              
              
              (8,298
              )Derivative
                  income
              
              70
              
              
              
              —
              
              
              
              —Other
                  income (expense)
              
              (52
              )
              
              
              —
              
              
              
              —Gain
                  (loss) on sale of assets
              
              (56
              )
              
              
              —
              
              
              
              240Gain
                  (loss) on sale of marketable securities
              
              —
              
              
              
              (899
              )
              
              
              —Gain
                  (loss) on extinguishment of debt
              
              (110
              )
              
              
              991
              
              
              
              —**Total
                  Other Income (Expense)**
              
              **(1,293**
              **)**
              
              
              **(638**
              **)**
              
              
              **(8,026**
              **)****Net
                  Loss from Continuing Operations**
              
              **(26,276**
              **)**
              
              
              **(57,762**
              **)**
              
              
              **(39,034**
              **)**Income
                  (Loss) from Discontinued Operations (including loss on disposal
                  of
                  $187,000, $16,000 and $0 for 2006, 2005 and 2004,
                  respectively)
              
              (657
              )
              
              
              752
              
              
              
              29**Net
                  Loss**
              
              **(26,933**
              **)**
              
              
              **(57,010**
              **)**
              
              
              **(39,005**
              **)****Other
                  Comprehensive Gain (Loss)**Unrealized
                  holding gain (loss)
              
              —
              
              
              
              1,048
              
              
              
              (321
              )**Total
                  Other Comprehensive Gain (Loss)**
              
              —
              
              
              
              **1,048**
              
              
              
              **(321**
              **)****Comprehensive
                  Losses**
              **$**
              **(26,933**
              **)**
              
              **$**
              **(55,962**
              **)**
              ****
              **$**
              **(39,326**
              **)****Basic
                  and diluted income (loss) per Common Share:**Loss
                  from Continuing Operations
              
              (2.88
              )
              
              
              (8.38
              )
              
              
              (7.37
              )Income
                  (Loss) from Discontinued Operations
              
              (0.07
              )
              
              
              0.11
              
              
              
              0.01Comprehensive
                  loss
              
              (2.95
              )
              
              
              (8.12
              )
              
              
              (7.42
              )
  See
        accompanying notes to consolidated financial statements.
  **EAGLE
        BROADBAND, INC.**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY**
 **FOR
        THE YEARS ENDED AUGUST 31, 2006, 2005 & 2004**
  **(*****Shares
                  and dollars in thousands*****)**
              
              Common
                  Stock
                Shares
                  Value
              
              Preferred
                  Stock
              
              Additional
                  Paid in Capital
              
              Retained
                  Earnings
              
              Accumulated
                  Comprehensive Income
              
              Total
                  Shareholders’ Equity**Shareholders’
                  Equity at September 1, 2003**
              
              
              **4,213**
              
              **$**
              **4**
              
              
              
              **—**
              
              
              **$**
              **177,160**
              
              
              **$**
              **(118,101**
              **)**
              
              **$**
              **(727**
              **)**
              
              **$**
              **58,336**Net
                  Loss
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (39,005
              )
              
              
              —
              
              
              
              (39,005
              )**New
                  Stock Issued**For
                  services and compensation
              
              
              315
              
              
              1
              
              
              
              —
              
              
              
              6,346
              
              
              
              —
              
              
              
              —
              
              
              
              6,347For
                  retirement of debt and liabilities
              
              
              1,344
              
              
              1
              
              
              
              —
              
              
              
              13,340
              
              
              
              —
              
              
              
              —
              
              
              
              13,341Stock-based
                  compensation
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              4,493
              
              
              
              —
              
              
              
              —
              
              
              
              4,493Beneficial
                  conversion features onconvertible
                  debentures
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              6,912
              
              
              
              —
              
              
              
              —
              
              
              
              6,912Unrealized
                  Holding Loss
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (321
              )
              
              
              (321
              )**Shareholders’
                  Equity at August 31, 2004**
              
              
              **5,872**
              
              
              **6**
              
              
              
              **—**
              
              
              
              **208,251**
              
              
              
              **(157,106**
              **)**
              
              
              **(1,048**
              **)**
              
              
              **50,103**Net
                  Loss
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (57,010
              )
              
              
              —
              
              
              
              (57,010
              )**New
                  Stock Issued**For
                  services and compensation
              
              
              146
              
              
              —
              
              
              
              —
              
              
              
              2,344
              
              
              
              —
              
              
              
              —
              
              
              
              2,344For
                  retirement of debt and accrued liabilities
              
              
              790
              
              
              1
              
              
              
              —
              
              
              
              13,361
              
              
              
              —
              
              
              
              —
              
              
              
              13,362Proceeds
                  from sale of common stock, net
              
              
              1,308
              
              
              1
              
              
              
              —
              
              
              
              11,307
              
              
              
              —
              
              
              
              —
              
              
              
              11,308Proceeds
                  from exercise of options
              
              
              119
              
              
              —
              
              
              
              —
              
              
              
              1,949
              
              
              
              —
              
              
              
              —
              
              
              
              1,949Unrealized
                  Holding Gain
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,048
              
              
              
              1,048**Shareholders’
                  Equity at August 31, 2005**
              
              
              **8,235**
              
              
              **8**
              
              
              
              **—**
              
              
              
              **237,212**
              
              
              
              **(214,116**
              **)**
              
              
              **—**
              
              
              
              **23,104**Net
                  Loss
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (26,933
              )
              
              
              —
              
              
              
              (26,933
              )**New
                  Stock Issued**For
                  services and compensation
              
              
              151
              
              
              —
              
              
              
              —
              
              
              
              244
              
              
              
              —
              
              
              
              —
              
              
              
              244For
                  retirement of debt and accrued liabilities
              
              
              1,060
              
              
              1
              
              
              
              —
              
              
              
              957
              
              
              
              —
              
              
              
              —
              
              
              
              958Proceeds
                  from sale of common stock, net
              
              
              1,722
              
              
              2
              
              
              
              —
              
              
              
              1,593
              
              
              
              —
              
              
              
              —
              
              
              
              1,595Stock-based
                  compensation
              
              
              —
              
              
              —
              
              
              
              —
              
              
              
              642
              
              
              
              —
              
              
              
              —
              
              
              
              642Reclassification
                  of stock payable, net
              
              
              425
              
              
              —
              
              
              
              —
              
              
              
              2,008
              
              
              
              —
              
              
              
              —
              
              
              
              2,008Incentive
                  shares to Dutchess for Note
              
              
              500
              
              
              1
              
              
              
              —
              
              
              
              244
              
              
              
              —
              
              
              
              —
              
              
              
              245**Shareholders’
                  Equity at August 31, 2006**
              
              
              **12,093**
              
              **$**
              **12**
              
              
              
              **—**
              
              
              **$**
              **242,900**
              
              
              **$**
              **(241,049**
              **)**
              
              **$**
              **—**
              
              
              **$**
              **1,863**
  See
        accompanying notes to consolidated financial statements.
   
  **EAGLE
        BROADBAND, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
  (*Thousands
                  of dollars)*
                For
                  the year ended August 31,2006
              
              2005
              
              2004**Cash
                  Flows from Operating Activities**Net
                  Loss
              $
              (26,933
              )
              
              $
              (57,010
              )
              
              $
              (39,005
              )Adjustments
                  to Reconcile Net Loss to Net Cash:Impairment
                  and write-downs
              
              13,876
              
              
              
              28,815
              
              
              
              1,300Loss
                  on sale of assets
              
              242
              
              
              
              16
              
              
              
              611Interest
                  for beneficial conversion value
              
              —
              
              
              
              —
              
              
              
              6,912Loss
                  on sale of marketable securities
              
              —
              
              
              
              899
              
              
              
              —Amortization
                  of debt discount
              
              450
              
              
              
              —
              
              
              
              —Gain
                  on extinguishment of debt
              
              110
              
              
              
              (991
              )
              
              
              —Adjustments
                  to cost of sales
              
              26
              
              
              
              —
              
              
              
              —Stock
                  for services and compensation
              
              489
              
              
              
              1,776
              
              
              
              10,841Depreciation
                  and amortization
              
              2,123
              
              
              
              4,425
              
              
              
              5,097Derivative
                  income
              
              (70
              )
              
              
              —
              
              
              
              —Stock
                  issued for interest expense
              
              —
              
              
              
              568
              
              
              
              108Stock
                  option expense
              
              642
              
              
              
              —
              
              
              
              —Provision
                  (recovery) for bad debt
              
              (366
              )
              
              
              568
              
              
              
              2,643Change
                  in Assets and Liabilities:(Increase)/decrease
                  in accounts receivable
              
              1,740
              
              
              
              (988
              )
              
              
              (1,750
              )(Increase)/decrease
                  in inventories
              
              (39
              )
              
              
              (699
              )
              
              
              1,496(Increase)/decrease
                  in other assets
              
              684
              
              
              
              (1,003
              )
              
              
              —(Increase)/decrease
                  in prepaid expenses
              
              310
              
              
              
              (305
              )
              
              
              341Increase/(decrease)
                  in accounts payable
              
              (493
              )
              
              
              2,195
              
              
              
              (1,016
              )Increase/(decrease)
                  in derivative liability
              
              (1,465
              )
              
              
              —
              
              
              
              —Increase/(decrease)
                  in accrued expenses
              
              (543
              )
              
              
              7,899
              
              
              
              8,929Total
                  Adjustment
              
              17,716
              
              
              
              43,175
              
              
              
              35,512**Net
                  Cash Used for Operating Activities**
              
              **(9,217**
              **)**
              
              
              **(13,835**
              **)**
              
              
              **(3,493**
              **)****Cash
                  Flows from Investing Activities**Purchase
                  of property and equipment
              
              (286
              )
              
              
              (804
              )
              
              
              (729
              )(Increase)/decrease
                  in restricted cash
              
              203
              
              
              
              (203
              )
              
              
              —Increase/(decrease)
                  in deferred costs
              
              —
              
              
              
              —
              
              
              
              334Increase/(decrease)
                  in intangible costs
              
              —
              
              
              
              (4
              )
              
              
              (40
              )Proceeds
                  from the sale of marketable securities
              
              —
              
              
              
              700
              
              
              
              842Proceeds
                  from sale of assets
              
              234
              
              
              
              367
              
              
              
              —(Increase)/decrease
                  in other assets
              
              —
              
              
              
              (1
              )
              
              
              (452
              )Gross
                  equipment purchase for direct financing leases
              
              —
              
              
              
              (971
              )
              
              
              (1,212
              )Principal
                  collections on direct financing leases
              
              385
              
              
              
              305
              
              
              
              41**Net
                  Cash Provided by (Used in) Investing Activities**
              
              **536**
              
              
              
              **(611**
              **)**
              
              
              **(1,216**
              **)****Cash
                  Flows from Financing Activities**Payments
                  on notes payable & long term debt
              
              (428
              )
              
              
              —
              
              
              
              —Proceeds
                  from note payable & long term debt
              
              6,633
              
              
              
              1,149
              
              
              
              5,936Proceeds
                  from sale of common stock, net
              
              1,595
              
              
              
              11,309
              
              
              
              —Proceeds
                  from exercise of option
              
              —
              
              
              
              1,949
              
              
              
              —Increase
                  in stock payable
              
              —
              
              
              
              2,008
              
              
              
              —**Net
                  Cash Provided by Financing Activities**
              
              **7,800**
              
              
              
              **16,415**
              
              
              
              **5,936**Net
                  increase/(decrease) in cash
              
              (881
              )
              
              
              1,969
              
              
              
              1,227Cash
                  at the beginning of the year
              
              4,020
              
              
              
              2,051
              
              
              
              824**Cash
                  at the End of the Year**
              **$**
              **3,139**
              
              
              **$**
              **4,020**
              ****
              ****
              **$**
              **2,051****Supplemental
                  Disclosure of Cash Flow Information**Net
                  cash paid during the year for:Interest
              $
              122
              
              
              $
              70
              
              
              $
              1,305Income
                  taxes
              $
              —
              
              
              $
              —
              
              
              $
              —
  See
        Note
        9-Supplemental Non-Cash Financing and Investing Disclosure and Consolidated
        Statements of Changes in Shareholders’ Equity.
 See
        accompanying notes to consolidated financial statements.
  
  **Eagle
        Broadband, Inc. and Subsidiaries**
 **Notes
        to the Consolidated Financial Statements August 31, 2006**
  **NOTE
        1 - Basis of Presentation and Significant Accounting
        Policies**
  Eagle
        Broadband, Inc. (the “company” or “Eagle”), incorporated as a Texas corporation
        on May 24, 1993, and commenced business in April of 1996. The company’s product
        offerings include IPTVCompleteTM, the MediaPro line of standard and high
        definition IP set-top boxes, IT Services and the SatMAX ® satellite communications system that provides civilian government, military,
        homeland security and corporate customers with non-line-of-sight, satellite
        voice and data communications.
  (A)
        Consolidation
  The
        consolidated financial statements include the accounts and transactions of
        the
        company and its subsidiaries. At
        August
        31, 2006, 2005, and 2004, the company’s consolidated subsidiaries were: Eagle
        Broadband Services, Inc., EBI Funding Corp., Etoolz, Inc., Atlantic Pacific
        Communications, Inc., Eagle Wireless International, Inc., Clearworks.net,
        Inc.,
        Clearworks Communications, Inc., Clearworks Home Systems, Inc., D.S.S. Security,
        Inc., United Computing Group, Inc., and Link-Two Communications,
        Inc.
  As
        of
        August 31, 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: Clearworks Communications, Inc., Clearworks.net, Inc., Clearworks
        Home
        Systems, Inc., Contact Wireless, Inc., United Computing Group, Inc., D.S.S.
        Security, Inc., Atlantic Pacific Communications, 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.
  The
        consolidated financial statements have been prepared in conformity with
        accounting principles generally accepted in the United States of
        America.
  (B)
        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.
  (C)
        Discontinued Operations
  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 21 “Discontinued
        Operations and Exit Activities”.
  (D)
        Use
        of Estimates
  The
        preparation of financial statements in conjunction with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Valuation reserves for inventory, accounts
        receivable, sales returns, deferred tax assets and projections of undiscounted
        future cash flows used to evaluate the recoverability of long-lived asset
        carrying values are significant examples of the use of such estimates. 
Actual results could differ from those estimates.
  (E)
        Cash
        and Cash Equivalents
  The
        company considers all highly liquid financial instruments with original
        maturities of three months or less to be cash equivalents. Cash equivalents
        consist of bank overnight investments. 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.
  The
        company had $3,139,000 and $4,020,000 of cash and cash equivalents at August
        31,
        2006 and August 31, 2005, respectively. Cash equivalents consisted of bank
        overnight investments of $2,400,000 at August 31, 2006.
  In
        conjunction with the company’s agreement with a third-party provider, the
        company had an irrevocable Letter of Credit secured with restricted cash
        of
        $203,000 as of August 31, 2005. In accordance with the agreement, for the
        year
        ended August 31, 2006, the third-party secured the funds in the restricted
        cash
        account resulting in a $0 balance in restricted cash as of August 31,
        2006.
  (F)
        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.
  (G)
        Property and Equipment
  Property
        and equipment are carried at cost, less accumulated depreciation. Depreciation
        is calculated by using the straight-line method for financial reporting and
        accelerated methods for income tax purposes. The recovery classifications
        for
        these assets are listed as follows:
  YearsHeadend
                  Facility and Fiber Infrastructure
              20Manufacturing
                  Equipment
              3-7Furniture
                  and Fixtures
              2-7Office
                  Equipment
              5Leasehold
                  Improvements
              Life
                  of leaseProperty
                  and Equipment
              5Vehicles
              5
  Expenditures
        for maintenance and repairs are charged against income as incurred whereas
        major
        improvements are capitalized. Eagle has acquired all of its property and
        equipment with either cash or stock and has not capitalized any interest
        expenses in its capital assets.
  (H)
        Impairment of Long-Lived Assets
  The
        company reviews long-lived assets for indicators of impairment whenever events
        or changes in circumstances indicate that the carrying value may not be
        recoverable. If the review indicates that the carrying amount of the asset
        may
        not be recoverable, the potential impairment is measured based on a projected
        discounted cash flow method using a discount rate that is considered to be
        commensurate with the risk inherent in the company’s current business model. 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. During
        the
        years ended August 31, 2006,  2005
        and
        2004, the company recorded impairment losses of $10,341,262, $4,279,000 and
        $0,
        respectively, related to tangible long-lived assets.
  The
        impairment loss for long-lived assets has been allocated on a pro-rata basis
        using the relative carrying amounts of those assets, except that the loss
        allocated to an individual long-lived asset of the group has not reduced
        the
        carrying amount of that asset below its fair value. The adjusted carrying
        amount
        of the long lived assets is its new cost basis. For a depreciable long-lived
        asset, the new cost basis shall be depreciated (amortized) over the remaining
        useful life of that asset.
  (I)
        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:
  August
                  31,2006
              
              2005Raw
                  Materials
              
              $
              288
              
              $
              126Work
                  in Process
              
              
              169
              
              
              676Finished
                  Goods
              
              
              277
              
              
              —$
              734
              
              $
              802
  In
        the
        year ended August 31, 2006 and 2005, the company had an impairment charges
        for
        obsolete inventory of $107,000 and $300,000, respectively.
  (J)
        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.
  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.
  *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, which is over the course of the next fiscal year.
  *Eagle
        Broadband, Inc.*
  Eagle
        designs, manufactures and markets various hardware, software and systems,
        along
        with other equipment used in the delivery of broadband, video entertainment
        and
        communications services. Revenues from these products are recognized when
        the
        product is shipped. Eagle Broadband Inc.’s international product revenues are
        reported under the category “Products” on Eagle’s Consolidated Statements of
        Operations included as page F-4 of this report and also under the category
        “Eagle” within Note 18-Industry Segments.
  The
        company designs, manufactures and markets a complete line of MediaPro IP
        set-top
        boxes. Eagle recognizes revenue when set-top boxes are shipped to the customer.
        The company’s set-top box revenues are reported under the category “Products” on
        Eagle’s Consolidated Statements of Operations included as page F-4 of this
        report and also under the category “Eagle” within Note 19-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,
        Eagle
        allocates revenue to the fair value of the undelivered elements and the residual
        revenue to the delivered elements. Eagle recognizes revenue allocated to
        software licenses at the inception of the license.
  The
        company engages independent agents, resellers and distributors for sales
        principally in foreign countries and certain geographic regions in the United
        States. Under the terms of these agreements, these third parties provide
        the
        company with sales leads. The transactions from these third parties are subject
        to Eagle’s approval prior to sale. In certain circumstances, the sales agent or
        reseller/distributor receives commissions based on the amount of the sales
        invoice from the companies to the customer. The sale is recognized at the
        time
        of shipment to the customer. These transactions are not a significant portion
        of
        total sales in any of the periods presented. Eagle’s Broadband, Inc., revenues
        are reported under the category “Products” on the company’s Consolidated
        Statements of Operations included as page F-4 of this report and also under
        the
        category “Eagle” within Note 18-Industry Segments.
  The
        company sells and installs structured wiring, audio and visual components
        to
        commercial, industrial and government clients. Eagle recognizes revenue and
        the
        related costs in accordance with EITF 00-21, “Revenue Arrangements with Multiple
        Deliverables”. 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.
        Revenue is derived from the billing of structured wiring to commercial,
        industrial and government agencies. For consistency with prior period reporting,
        Eagle’s residential structured wiring revenues are reported under the category
        “Structured Wiring” on Eagle’s Consolidated Statements of Operations included as
        page F-4 of this report and also under the category “APC/HSI” within Note
        18-Industry Segments.
  *Eagle
        Broadband Services, Inc.*
  Eagle
        Broadband Services, Inc. provides 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 includes
        Internet, security monitoring and cable services. This subsidiary recognizes
        revenue and the related costs at the time the services are rendered.
        Installation fees are recognized upon completion and acceptance. The revenues
        are reported under the category “Broadband Services” on the company’s
        Consolidated Statements of Operations included as page F-4 of this report
        and
        also under the category “EBS/DSS” within Note 18-Industry Segments.
  Eagle
        Broadband Services, Inc. provides project planning, installation, project
        management, testing and documentation of fiber and cable to commercial and
        industrial clients throughout the United States. The revenue from the fiber
        and
        cable installation and services is recognized upon percentage of completion
        of
        the project. Most projects are completed in less than one month, therefore,
        matching revenue and expense in the period incurred. Service, training and
        extended warranty contract revenues are recognized as services are completed.
        For consistency with prior period reporting, Eagle’s communications services
        revenues are reported under the category “Structured Wiring” on Eagle’s
        Consolidated Statements of Operations included as page F-4 of this report
        and
        also under the category “APC/HSI” within Note 18-Industry Segments.
  Eagle
        Broadband Services, Inc. provides business-to-business hardware and software
        network solutions and network monitoring services. The revenue from the hardware
        and software sales is recognized at the time of shipment. The monitoring
        services recognition policy is to record revenue on completion. For consistency
        with prior period reporting, Eagle’s technology services product revenues are
        reported under the category “Products” while the services components are
        reported under the category “Other” on Eagle’s Consolidated Statements of
        Operations included as page F-4 of this report and also under the category
“UCG”
within Note 18-Industry Segments.
  *D.S.S.
        Security, Inc. (d/b/a Eagle Broadband Security)* (See
        Note 21)
  D.S.S.
        Security, Inc. provided security monitoring services to residential and
        commercial customers, purchased, resold, bundled and sold contracts from
        its own
        portfolio to independent third-party companies. Security monitoring customers
        were billed three months in advance of service usage. The revenues were deferred
        at the time of billing and ratably recognized over the prepayment period
        as
        service was provided. Installation fees were recognized upon completion and
        acceptance. Revenues from the sale of security monitoring contracts, both
        purchased and owned, were recognized upon contract execution except for
        reserves, hold backs or retentions, which were deferred until the contract
        provisions are fulfilled. During the current fiscal year, Eagle exited
        residential security monitoring. The results of operations for this segment
        have
        been classified as discontinued operations for all periods presented in the
        accompanying consolidated statement of operations.
  (K)
        Research and Development Costs
  Research
        and development expenditures are generally charged to operations as incurred.
        The company performed research and development activities for internal projects
        related to its SatMAX non-line-of-sight communications system, IP set-top
        boxes
        and its multimedia entertainment centers. Research and development costs
        of
        $830,000, $776,000, and $557,000, were expensed for the years ended August
        31,
        2006, 2005, and 2004, respectively.
  (L)
        Interest Expense
  The
        company capitalizes interest cost incurred for funds used to construct capital
        assets. The capitalized interest is recorded as part of the asset to which
        it
        relates and is amortized over the asset’s estimated useful life. Interest
        expense capitalized was $5,050 for the year ended August 31, 2006.
  (M)
        Income Taxes
  Income
        taxes are computed using the asset and liability method. Under the asset
        and
        liability method, deferred income tax assets and liabilities are determined
        based on the differences between the financial reporting and tax bases of
        assets
        and liabilities and are measured using the currently enacted tax rates and
        laws.
        A valuation allowance is provided for the amount of deferred tax assets that,
        based on available evidence, are not expected to be realized.
  (N)
        Net
        Earnings per Common Share
  Net
        earnings per common share are shown as both basic and diluted. Basic earnings
        per common share are computed by dividing net income less any preferred stock
        dividends (if applicable) by the weighted average number of shares of common
        stock outstanding. Diluted earnings per common share are computed by dividing
        net income less any preferred stock dividends (if applicable) by the weighted
        average number of shares of common stock outstanding, plus any dilutive common
        stock equivalents. The components used for the computations are shown as
        follows, in thousands:
  2006
              
              2005
              
              2004Weighted
                  Average Number of CommonShares
                  Outstanding Including:Basic
                  Common Stock Equivalents
              
              9,125
              
              6,892
              
              5,287Fully
                  Diluted Common Stock Equivalents
              
              9,125
              
              6,892
              
              5,287
  (O)
        Impairment of Other Intangible Assets
  Our
        other
        intangible assets primarily include contract rights, customer relationships
        and
        other intangibles of licenses and permits and other acquired contracts. These
        intangible assets include the company rights to deliver bundled digital services
        such as, Internet, telephone, cable television and security monitoring services
        to residential and business users. The company evaluates the recoverability
        of
        identifiable intangible assets whenever events or changes in circumstances
        indicate that an intangible asset’s carrying amount may not be recoverable. An
        impairment loss would be deemed necessary when the estimated non-discounted
        future cash flows are less than the carrying net amount of the asset. If
        an
        asset were deemed impaired, the asset’s recorded value would be reduced to fair
        market value. In determining the amount of the charge to be recorded, the
        following methods would be utilized to determine fair market value: (i) quoted
        market prices in active markets, (ii) an estimate based on prices of similar
        assets, and (iii) an estimate based on valuation techniques. For the years
        ended August 31, 2006 and 2005, the company recorded impairment losses of
        $3,427,830 and $23,912,668, respectively, related to intangible assets. (See
        Note 6)
  (P)
        Impairment of Goodwill
  Goodwill
        represents the excess of the cost of companies acquired over the fair value
        of
        their net assets at the dates of acquisition. Under current accounting
        pronouncement, the company is required to annually assess the carrying value
        of
        goodwill associated with each of its distinct business units that comprise
        its
        business segments of the company to determine if impairment in value has
        occurred. (See Note 6.)
  (Q)
        Advertising Costs
  Advertising
        costs are expensed when incurred. For the years ended August 31, 2006, 2005,
        and
        2004, the company expensed $73,000, $80,000, and $29,000,
        respectively.
  (R)
        Deferred Syndication Costs
  Deferred
        syndication costs consist of those expenditures incurred that are directly
        attributable to fundraising and the collection thereto. Upon successful
        collection of the funds, all expenses incurred will be reclassified to
        additional paid in capital and treated as syndication costs; netted against
        the
        funds raised.
  (S)
        Warrants
  The
        company accounts for warrants in accordance with FASB Statement of Financial
        Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial
        Instruments with Characteristics of both Liabilities and Equity.”  At the
        date of issuance, a fair value is ascribed to the warrants based on a valuation
        using the Black-Scholes model.  The value of warrants outstanding at the
        end of each fiscal quarter is marked to market based on a valuation using
        the
        Black-Scholes model.  The change in the value of warrants from the previous
        reporting period is recognized as a component of interest expense.
  (T)
        Use
        of Estimates
  The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and assumptions
        that
        affect the reported amounts of assets and liabilities and disclosure of
        contingent asset and liabilities at the date of the financial statements
        and the
        reported amounts of revenues and expenses during the reporting period. Actual
        results could differ from those estimates.
  (U)
        Fair
        Value of Financial Instruments
  Financial
        instruments that are subject to fair disclosure requirements are carried
        in the
        financial statements at amounts that approximate fair value and include cash
        and
        cash equivalents, accounts receivable and accounts payable. Fair values are
        based on assumptions concerning the amount and timing of estimated future
        cash
        flows and assumed discount rates reflecting varying degrees of
        risk.
  (V)
        Marketable Securities
  The
        company adopted the provisions of SFAS No. 115, “Accounting for Certain
        Investments in Debt and Equity Securities” and SFAS No. 130, “Accounting for
        Other Comprehensive Income.” The company had securities available for sale that
        included shares of common stock and bonds.
  (W)
        Other
        Comprehensive Gain (Loss)
  The
        company accounts for unrealized holding gains and losses in accordance with
        SFAS
        No. 130, “Other Comprehensive Income.” This statement considers the presentation
        of unrealized holding gains and losses attributable to debt and equity
        securities classified as available for sale. As stated, any unrealized holding
        gains or losses affiliated with these securities are carried below net income
        under the caption “Other Comprehensive Income.” For the fiscal years ended
        August 31, 2006, 2005 and 2004, other comprehensive gain (loss) was $0,
        $1,048,000 and $(321,000), respectively.
  (X)
        Reclassification
  The
        company has reclassified certain assets, costs and expenses for the years
        ended
        August 31, 2006, 2005, and 2004, to facilitate comparisons. These
        reclassifications have no effect on net loss.
  (Y)
        Recent Pronouncements
  In
        September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
        No.
        157 defines fair value and establishes a framework for measuring fair value
        in
        generally accepted accounting principles, and expands disclosures about fair
        value measurement. This statement applies under other accounting pronouncements
        that require or permit fair value measurements and does not require any new
        fair
        value measurements. SFAS No. 157 is effective for the fiscal year beginning
        after November 15, 2007. The company is currently assessing the impact that
        SFAS
        No. 157 will have on the consolidated financial statements.
  In
        June
        2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty
        in
        Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
        clarifies the accounting for uncertainty in income taxes recognized in a
        company’s financial statements and prescribes a recognition threshold and
        measurement attribute for the financial statement recognition and measurement
        of
        a tax position expected to be taken in a tax return. The Interpretation also
        provides guidance on de-recognition, classification, interest and penalties,
        accounting in interim periods, disclosure and transition. FIN 48 is effective
        for fiscal years beginning after December 15, 2006. Currently, there would
        be no
        effect of this interpretation on the company’s financial position and results of
        operations.
  In
        February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
        Financial Instruments - An Amendment of FASB Statement No. 133 and 140. SFAS
        155
        permits hybrid financial instruments containing an embedded derivative that
        would otherwise require bifurcation to be carried at fair value, with changes
        in
        fair value recognized in earnings. The election can be made on an
        instrument-by-instrument basis. In addition, SFAS 155 provides that beneficial
        interests in securitized financial assets be analyzed to determine if they
        are
        freestanding or contain an embedded derivative. SFAS 155 applies to all
        financial instruments acquired, issued or subject to a re-measurement event
        after adoption of SFAS 155. SFAS 155 is effective for all financial instruments
        acquired or issued after the beginning of an entity’s first fiscal year that
        begins after September 15, 2006, with earlier adoption permitted. The company
        has adopted the provisions of SFAS 155 for the fiscal year ending August
        31,
        2006.
  In
        March
        2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial
        Assets, an Amendment of FASB No. 140. SFAS 156 requires that all separately
        recognized servicing assets and servicing liabilities be initially measured
        at
        fair value, if practicable. The statement permits, but does not require,
        the
        subsequent measurement of servicing assets and liabilities at fair value.
        SFAS
        No. 156 is effective as of the beginning of the first fiscal year that begins
        after September 15, 2006, with earlier adoption permitted. The company does
        not
        believe the adoption of SFAS 156 will have a significant effect on its financial
        statements.
  In
        June
        2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections,
        a
        Replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 replaces APB
        Opinion No. 20, Accounting Changes and SFAS No 3, Reporting Accounting Changes
        in Interim. Financial Statements and changes the requirement for the accounting
        for and reporting of a change in accounting principles. SFAS No. 154 applies
        to
        all voluntary changes in accounting principles. It also applies to changes
        required by an accounting pronouncement in the unusual instance that the
        pronouncement does not include specific transition provisions. When a
        pronouncement includes specific transition provisions, those provisions should
        be followed. The provisions of SFAS No. 154 will be effective for accounting
        changes made in fiscal year beginning after December 15, 2005. We do not
        presently expect to make any accounting changes that would be affected by
        the
        adoption of SFAS No. 154 that will have a material impact on the company's
        financial condition or operations in the foreseeable future.
  (Z)
        Product Warranties
  The
        financial statements include a product warranty reserve of $75,000 and $0
        as of
        August 31, 2006 and 2005, respectively. It is based on estimates of future
        costs
        associated with fulfilling the warranty obligation. The estimates are derived
        from historical cost experience. The company warrants its products against
        defects in design, materials and workmanship generally for six months to
        a year.
        Other warranties from our vendors which are incorporated in our products
        are
        passed on to the customer at the completion of the sale. Provision for estimated
        warranty costs is made in the period in which such costs become
        probable.
  (AA)
        Beneficial Conversion Values
  Beneficial
        conversion values are calculated at the difference between the conversion
        price
        and the fair value of the common stock into which the debt is convertible,
        multiplied by the number of shares into which the debt is convertible. The
        beneficial conversion value is charged to interest expense because the debt
        is
        convertible at the date of issuance. The value is limited to the total proceeds
        received.
  (BB)
        Direct Financing Leases
  Income
        from direct financing lease transactions is reported using the financing
        method
        of accounting, in which the company investment in the leased property is
        reported as a receivable from the lessee to be recovered through future rentals.
        The income portion of each rental payment is calculated so as to generate
        a
        constant rate of return on the net receivable outstanding. All of our financing
        leases are for products related to the multi media industry. The term of
        our
        leases is typically 48 months and open ended leases, meaning that potential
        residual risk, or the difference between the fair market value of the equipment
        and the amount owed to us, lies with the customer. Subsequent to year end,
        the
        company sold its leases to a third party. (See Note 23 - Subsequent
        Events)
  (CC)
        Derivative Financial Instruments
  The
        company accounts for all derivative financial instruments in accordance with
        SFAS No. 133 and SFAS No. 155. 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.
  (DD)
        Stock-Based Compensation
  Effective
        September 1, 2005, the company elected to account for stock-based compensation
        using a fair value based method in accordance with SFAS123r. The fair values
        are
        determined using a Black-Scholes option-pricing model.
  **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
        of
        $489,826 and $154,922 has been accrued as of August 31, 2006 and 2005,
        respectively. In August 2006, Mr. Cubley filed a lawsuit against the company
        for
        non-payment of the note. (See Note 14 - Legal Proceedings.) The note payable
        and
        accrued interest are classified in the Balance Sheet as Accrued Expenses
        -
        Related Party.
  Mr.
        Cubley is Chairman of the Board of Directors for ERF Wireless, Inc. ERF Wireless
        acted as a third-party construction subcontractor for Eagle for the year
        ended
        August 31, 2006. Purchases totaled $131,000 for the year ended August 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
        directs the sales and marketing efforts for the company’s SatMAX ® product
        line. For these consulting services, Mr. Persons is paid $14,500 per quarter,
        which is paid in company common stock, unless the company and Mr. Persons
        agree
        otherwise.
  In
        June
        2006, the company entered into a short term promissory note agreement with
        a
        brother of one of the directors. The note was for $250,000 at an annual interest
        rate of 25%. The note was paid in full on September 2, 2006. (See Note 23
        -
        Subsequent Events).
  During
        the current fiscal year, certain members of the Board of Directors agreed
        to
        take restricted stock in lieu of cash for a portion of their director fees.
        In
        March 2006, Messrs. Bach, Goerke, Reinhartsen and Yarbrough entered into
        Restricted Stock Agreements with the company and received restricted stock
        in
        lieu of fees payable in the amounts of $3,750, $4,875, $18,125 and $5,000,
        respectively. In June 2006, Messrs. Bach and Reinhartsen entered into Restricted
        Stock Agreements with the company and received restricted stock in lieu of
        fees
        payable in the amounts of $3,750 and $8,125, respectively.
  In
        June
        2005, the company entered into note exchange agreements with Jonathan Hayden,
        Billie Mize, John Nagel and David Weisman in which the company issued 227,260
        shares of its common stock to fully satisfy the company’s outstanding guarantee
        obligations in the amount of $2,086,251, and any remaining obligations under
        the
        promissory notes. The note exchange agreements also fully satisfy the company’s
        contingent guarantee obligation with respect to unexercised options held
        by Mr.
        Hayden and Mr. Nagel.
  **NOTE
        3 - Accounts Receivable**
  Accounts
        receivable consist of the following (in thousands):
  Year
                  Ended August 31,2006
              
              2005Accounts
                  receivable
              
              $
              668
              
              
              $
              4,578Allowance
                  for doubtful accounts
              
              
              (152
              )
              
              
              (2,688
              )Accounts
                  receivable, net
              
              $
              516
              
              
              $
              1,890Allowance
                  for doubtful accountspercentage
                  of accounts receivable
              
              
              23
              %
              
              
              59
              %
  **NOTE
        4 - Property, Plant and Equipment and Intangible Assets**
  Components
        of property, plant and equipment are as follows (in thousands):
  Year
                  Ended August 31,2006
              
              2005Automobile
              
              $
              123
              
              
              $
              123Headend
                  facility and fiber infrastructure
              
              
              10,743
              
              
              
              24,154Furniture
                  and fixtures
              
              
              520
              
              
              
              520Leasehold
                  improvements
              
              
              183
              
              
              
              183Office
                  equipment
              
              
              1,042
              
              
              
              1,027Manufacturing
                  and operating equipment
              
              
              6,080
              
              
              
              6,291Total
                  property, plant and equipment
              
              $
              18,691
              
              
              $
              32,298Less
                  accumulated depreciation
              
              
              (7,347
              )
              
              
              (8,994
              )Net
                  property, plant and equipment
              
              $
              11,344
              
              
              
              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 $79,000, $65,000 and $43,000 for the
        years
        ended August 31, 2006, 2005 and 2004, respectively.
  Eagle’s
        super-headend facility 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.
  In
        August
        2006, the company began building a super-headend facility in Miami, Florida,
        and
        capitalized expenses of $269,000 related to the facility. The company will
        begin
        depreciating these assets when they are operational which is anticipated
        to
        occur during the first quarter of the upcoming fiscal year.
  Components
        of intangible assets are as follows (in thousands):
  Year
                  Ended August 31,2006
              
              2005Goodwill
              
              $
              4,095
              
              
              $
              4,095Contract
                  Rights
              
              $
              9,603
              
              
              $
              11,847Accumulated
                  amortization
              
              
              (9,214
              )
              
              
              (8,926
              )$
              389
              
              
              $
              2,921Customer
                  Relationships
              
              $
              2,447
              
              
              $
              3,067Accumulated
                  amortization
              
              
              (2,318
              )
              
              
              (2,236
              )$
              129
              
              
              $
              831Other
                  intangible assets
              
              $
              3,374
              
              
              $
              3,937Accumulated
                  amortization
              
              
              (3,177
              )
              
              
              (3,078
              )$
              197
              
              
              $
              859Total
                  intangible assets
              
              $
              19,519
              
              
              $
              22,946Total
                  accumulated amortization
              
              
              (14,709
              )
              
              
              (14,240
              )Net
                  of amortization
              
              $
              4,810
              
              
              $
              8,706
  **NOTE
        5 - Impairment of Long-Lived Assets**
  Statement
        of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the
        Impairment or Disposal of Long-Lived Assets” requires that long-lived assets
        (asset groups) shall be tested for recoverability whenever events or change
        in
        circumstances indicate that its carrying amount may not be recoverable. The
        company’s market capitalization as of year ended August 31, 2006 has been 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 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.
  The
        company’s market capitalization as of year ended 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 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.’s 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.
  **NOTE
        6 - Impairment of Goodwill and Other Intangible Assets**
  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 erosion of
        contracts, customers, and subscribers 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 related to 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 $23,912,668 existed for the
        intangible assets of contract rights, customer relationships and other
        intangible assets related to the January 2001 merger of Clearworks.net,
        Inc.
  Eagle
        assessed the fair value of goodwill as of August 31, 2006 and 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.
  **NOTE
        7 - Assets Held for Sale**
  During
        the fourth quarter of the current fiscal year, the company decided to sell
        its
        direct financing leases to a third party. Subsequent to year end, the leases
        were sold. (See Note 23 - Subsequent Events.) The company determined the
        fair
        value of these assets was $899,000 as of August 31, 2006, and recorded a
        loss on
        sale of assets of $94,000 to adjust the leases to their fair value as of
        August
        31, 2006. The leases are classified as Assets Held for Sale on the Consolidated
        Balance Sheets as of August 31, 2006. For the year ended August 31, 2005,
        these
        leases were classified on the Consolidated Balance Sheets as Net Investments
        in
        Direct Financing Leases - Current & Long Term Assets. The results of
        operations for the leases are reported under the industry segment of
        Eagle.
  During
        the year ended August 31, 2005, the company entered into an agreement to
        repurchase security contracts for $1,003,316. Under the terms of the agreement,
        $985,000 of the $1,003,316 was offset against a receivable the company had
        from
        the seller. These contracts were classified as Assets Held for Sale on the
        Consolidated Balance Sheets as of August 31, 2005. The company resold
        approximately 63% of the contracts during the fourth quarter of 2005 and
        recognized a loss on sale of assets of $15,735 as of August 31, 2005. The
        company determined the fair value of the contracts as of August 31, 2005
        was
        $298,000 and recorded an impairment charge of $322,792 to record the contracts
        at fair value as of August 31, 2005. The company sold these contracts at
        a loss
        of $104,000 during the current fiscal year. The loss is reflected in
        discontinued operations.
  **NOTE
        8 - Notes Payable and Long Term Debt**
  At
        August
        31, 2006, current and long-term debt totaled $ 9,232,000. Of this total,
        $5,554,000 matures within one year. The amounts of long term debt maturing
        after
        August 31, 2007 are: 2008 - $3,678,000, 2009 - $0, 2010 - $0, 2011 - $0 and
        2012
        - $0.
  The
        following table lists the company’s note obligations as of August 31, 2006, and
        August 31, 2005 (in thousands):
  Annual
                  Interest Rate
              
              Due
                  Date
              
              August
                  31, 2006
              
              August
                  31, 2005Notes
                  Payable & Long-Term Debt:Dutchess
                  Convertible Note and Warrant, net of discount of $334,593
              12%
              
              May
                  2007
              
              $
              480
              
              $
              —Dutchess
                  Promissory Note, net of discount of $4,288,389
              
              
              July
                  2008
              
              
              3,835
              
              
              —Tail
                  Wind Non-Convertible Promissory Note and Convertibles Notes, net
                  of
                  discount of $149,618
              0%
              
              March
                  2008
              
              
              4,625
              
              
              —Note
                  with Related Party
              25%
              
              August
                  2006
              
              
              200
              
              
              —Notes
                  Payable
              Various
              
              Various
              
              
              92
              
              
              61Total
                  Debt
              
              
              
              
              $
              9,232
              
              $
              61Less
                  current maturities
              
              
              
              
              
              (5,554
              )
              
              (61
              )Total
                  long-term debt
              
              
              
              
              $
              3,678
              
              
              —
  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
        CONVERTIBLE 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 $333,594 for fiscal year 2007.
   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
        August 31, 2006:
  Description
              
              Note
                  Payable
              
              Warrant
                  Liabilities
              
              Compound
                  Derivative Liability
              
              TotalFair
                  value issuance at inception
              
              $
              —
              
              
              $
              281,492
              
              
              $
              524,438
              
              
              $
              805,930Change
                  in fair valueFeb
                  10, 2006 to Aug 31, 2006
              
              
              488,907
              
              
              
              (199,731
              )
              
              
              (329,118
              )
              
              
              (39,942
              )Conversions
                  and paymentsFeb
                  10, 2006 to Aug 31, 2006
              
              
              (286,028
              )
              
              
              —
              
              
              
              —
              
              
              
              (286,028
              )Fair
                  value at August 31, 2006
              
              $
              202,879
              
              
              $
              81,761
              
              
              $
              195,320
              
              
              $
              479,960
  For
        the
        year ended August 31, 2006, the company recorded derivative income of $390,839,
        interest expense of $289,182 and a loss on the retirement of debt of $110,845.
        Interest expense included the excess discount to the convertible note at
        inception of $55,930. 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.
  DUTCHESS
        PROMISSORY NOTE
  On
        July
        24, 2006, the company entered into a promissory note agreement with Dutchess
        Private Equities Fund, L.P., pursuant to which the company sold a $5,500,000,
        12% promissory note due July 24, 2008. The company issued 500,000 shares
        of
        unregistered restricted common stock to Dutchess as an incentive for the
        investment.
  The
        note
        bears interest at 12%, provides for monthly interest and principal payments
        of
        $250,000 beginning October 31, 2006, and matures on July 24, 2008. If any
        portion of the face amount of the note remains unpaid upon maturity, Dutchess
        has the right to increase such amount by five percent (5%) as an initial
        penalty
        and an additional two percent (2%) per month paid, pro rata for partial periods,
        compounded daily, as liquidated damages. In the event of default, Dutchess
        may
        either (i) convert the note to a three-year convertible debenture or (ii)
        accelerate the payments due under the note. The note is secured by all of
        the
        assets of the company, excluding a certain lease agreement we have with a
        third
        party. As additional collateral, Dutchess has the right to execute puts under
        the company’s equity line of credit and apply the proceeds therefrom to payments
        due under the note.
  The
        promissory note was determined to include 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 (July 24, 2006) the promissory note 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 promissory 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 $1,956,854 and
        $2,331,535 for fiscal years 2007 and 2008, respectively.
  Description
              
              Note
                  Payable
              
              Compound
                  Derivative Liability
              
              TotalFair
                  value issuance at inception
              
              $
              1,038,402
              
              
              $
              3,011,598
              
              
              $
              4,050,000Change
                  in fair valueJul
                  24, 2006 to Aug 31, 2006
              
              
              173,209
              
              
              
              (387,736
              )
              
              
              (214,527
              )Fair
                  value at May 31, 2006
              
              $
              1,211,611
              
              
              $
              2,623,862
              
              
              $
              3,835,473
  For
        the
        year ended August 31, 2006, the company recorded derivative income of $387,736
        and interest expense of $173,209 for the Dutchess Promissory Note.
  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.
        The registration statement was declared effective on June 28, 2006, and the
        price reduction amount increased the convertible note by $1,041,219, with
        a
        corresponding decrease to Additional Paid in Capital.
  The
        company issued 48,914 shares of common stock on August 11, 2006 to convert
        $31,218 of the principal amount due under the convertible notes with Tail
        Wind.
        The company issued 376,854 shares of common stock on August 29, 2006 to convert
        $200,000 of the principal amount due under the convertible notes with Tail
        Wind.
  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 $98,697
        and
        $50,921 for fiscal years 2007 and 2008, respectively.
  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 August 31, 2006:
  Description
              
              Tail
                  Wind Note
              
              Compound
                  Derivative Liability
              
              TotalFair
                  value issuance at inception
              
              $
              4,698,629
              
              
              $
              201,371
              
              
              $
              4,900,000Change
                  in fair value Feb 10, 2006 to Aug 31, 2006
              
              
              51,753
              
              
              
              696,900
              
              
              
              748,653Issuance
                  of shares for notes
              
              
              (1,750,000
              )
              
              
              —
              
              
              
              (1,750,000
              )Price
                  reduction liability
              
              
              1,041,219
              
              
              
              —
              
              
              
              1,041,219Conversions
              
              
              (231,218
              )
              
              
              —
              
              
              
              (231,218
              )Payments
                  Feb 10, 2006 to Aug 31, 2006
              
              
              (83,333
              )
              
              
              —
              
              
              
              (83,333
              )Fair
                  value at August 31, 2006
              
              $
              3,727,050
              
              
              $
              898,271
              
              
              $
              4,625,321
  For
        the
        year ended August 31, 2006, the company recorded derivative expense of $708,862,
        interest expense of $43,940 and a gain on retirement of debt of
        $800.
  **NOTE
        9 - Supplemental Non-Cash Financing and Investing
        Disclosures**
  Non-Cash
                  Settlements
              For
                  the years ended August 31,*($
                  in thousands)*
              2006
              
              2005
              
              2004Stock
                  issued for retirement of debt and accrued liabilities
              $
              958
              
              $
              13,362
              
              $
              13,341Stock
                  Payable
              
              2,008
              
              
              —
              
              
              —Conversion
                  of accrued liabilities to debt
              
              4,900
              
              
              —
              
              
              —Total
                  Non-Cash Settlements
              $
              7,866
              
              $
              13,362
              
              $
              13,341
  During
        the year ended August 31, 2006, the company converted accrued liabilities
        of
        $4,900,000 to current and long-term debt for the Tail Wind Settlement. (See
        Note
        8 - Notes Payable and Long Term Debt.) During
        this same period stock payable of $2,008,215 was relieved to issue 425,000
        shares sold to investors in August 2005.
  During
        the years ended August 31, 2006, 2005 and 2004, the company issued stock
        in lieu
        of cash as payment for debt and accrued liabilities totaling $958,000,
        $13,362,000 and $13,341,000, respectively.
  **NOTE
        10 - Securities Available for Sale**
  The
        company follows the provisions of SFAS No. 115, “Accounting for Certain
        Investments in Debt and Equity Securities” and SFAS No. 130, “Accounting for
        Other Comprehensive Income.” As of August 31, 2006 and 2005, the company had no
        marketable equity securities. The company recognized a loss of $899,347 on
        the
        sale of these securities for the year ended August 31, 2005.
  **NOTE
        11 - 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:
  Year
                  Ended August 31,2006
              
              2005
              
              2004U.S.
                  Federal statutory tax rate
              
              
              34
              %
              
              34
              %
              
              34
              %U.S.
                  valuation difference
              
              
              (34
              %)
              
              (34
              %)
              
              (34
              %)Effective
                  U.S. tax rate
              
              
              0
              %
              
              0
              %
              
              0
              %Foreign
                  tax valuation
              
              
              0
              %
              
              0
              %
              
              0
              %Effective
                  tax rate
              
              
              0
              %
              
              0
              %
              
              0
              %
  Income
        tax expense (benefit) attributable to income from continuing operations differed
        from the amounts computed by applying the U.S. Federal income tax rate of
        34% to
        pretax income from continuing operations as a result of the following (in
        thousands):
  Year
                  Ended August 31,2006
              
              2005
              
              2004Computed
                  expected tax benefit
              $
              (9,142
              )
              
              $
              (19,360
              )
              
              $
              (13,262
              )Increase
                  in valuation allowance
              
              9,142
              
              
              
              19,360
              
              
              
              13,262Income
                  tax expense
              $
              —
              
              
              $
              —
              
              
              $
              —
  The
        tax
        effects of temporary differences that give rise to significant portions of
        the
        deferred tax assets and deferred tax liabilities at August 31, 2006, and
        August
        31, 2005, are presented below (in thousands) and include the balances of
        the
        merged company ClearWorks.net., Inc.
  Year
                  Ended August 31,2006
              
              2005Deferred
                  tax assets:Net
                  operating loss carry forwards
              
              $
              (79,988
              )
              
              $
              (70,846
              )Less
                  valuation allowance
              
              
              79,988
              
              
              
              70,846Net
                  deferred tax assets
              
              $
              —
              
              
              $
              —
  The
        valuation allowance for deferred tax assets of August 31, 2006, and August
        31,
        2005, was $79,988,000 and $70,846,000, respectively. As of August 31, 2006,
        the
        company has a net operating loss carry-forward of $205,273,000, which is
        available to offset future federal taxable income, if any, with expirations
        from
        2022 to 2024.
  **NOTE
        12 - 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 August 31, 2006, 13,295 shares have been issued under the
        Plan,
        and options issued under the Plan covering 322,551 shares were outstanding,
        of
        which 194,331 were exercisable.
  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 issues
        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 $0.086 (pre-reverse split). 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. The assumptions
        used
        at August 31, 2006 were a risk-free interest rate of 4.70%, volatility of
        120%,
        expected term of 4.45 years, dividend yield of 0.00% and a probability weighted
        exercise price of $0.030. See Note 8 for valuation and marked-to-market
        activity.
  For
        the
        fiscal years ended August 31, 2005 and 2004, the company had elected to follow
        APB 25, “Accounting for Stock Issued to Employees.” Accordingly, since employee
        stock options are granted at market price on the date of grant, no compensation
        expense is recognized. However, SFAS 123 requires presentation of pro forma
        net
        income and earnings per share as if the company had accounted for its employee
        stock options granted under the fair value method of that statement. The
        weighted average fair value of the individual options issued and granted
        during
        the year ended August 31,
        2005
        is estimated as $14.35 (post reverse split) on the date of grant. Management
        estimates the average fair value for options granted during fiscal 2005 to
        be
        comparable to those granted in fiscal 2004. The impact on net loss is minimal;
        therefore, the pro forma disclosure requirements prescribed by SFAS 123 are
        not
        significant to the company. The fair values were determined using a
        Black-Scholes option-pricing model with the following assumptions:
  Year
                  Ended August 31,2006
              
              2005
              
              2004Dividend
                  yield
              0.00%
              
              0.00%
              
              0.00%Volatility
              90%
              
              83%
              
              91%Risk-free
                  interest rate
              3.5%
              
              3.5%
              
              4.0%Expected
                  life
              5
              
              5
              
              5
  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
        years ended August 31, 2005 and 2004:
  2005
              
              2004Net
                  loss, as reported
              $
              (57,010
              )
              
              $
              (39,005
              )Add:
                  Stock-based employee compensation included in reported net
                  earnings/(loss), net of related tax effects
              
              18
              
              
              
              —Less:
                  Stock-based employee compensation expense determined under fair-value
                  based method for all awards, net of related tax effects
              
              (2,007
              )
              
              
              (9
              )Pro
                  forma net earnings/(loss)
              $
              (58,999
              )
              
              $
              (39,014
              )Net
                  loss per share:As
                  reported
              $
              (8.27
              )
              
              $
              (7.38
              )Pro
                  forma
              $
              (8.27
              )
              
              $
              (7.38
              )Diluted
                  net loss per share:As
                  reported
              $
              (8.27
              )
              
              $
              (7.38
              )Pro
                  forma
              $
              (8.27
              )
              
              $
              (7.38
              )
  Option
        and warrant activity was as follows for the year ended August 31,
        2006:
  Shares
              
              
              Weighted-Average
                  Exercise PriceOutstanding
                  at beginning of year
              
              384,428
              
              
              $
              29.19Granted
              
              259,163
              
              
              
              4.60Assumed
                  through acquisitions
              
              —
              
              
              
              —Exercised
              
              —
              
              
              
              —Forfeited/cancelled
              
              (169,551
              )
              
              
              14.13Outstanding
                  at end of year
              
              474,040
              
              
              $
              20.95Exercisable
                  at year end
              
              345,820
              
              
              $
              25.30
  Information
        about options and warrants outstanding was as follows at August 31,
        2006:
  Range
                  of Exercise Prices
              
              Number
                  Outstanding
              
              Avg.
                  Remaining Contractual Life in Years
              
              Average
                  Exercise Price
              
              Number
                  Exercisable
              
              Average
                  Exercise Price$0.9765
                  - $5.775
              
              158,098
              
              3.69
              
              $   
                  3.42
              
              154,913
              
              $   
                  3.38$6.65
                  - $9.45
              
              222,750
              
              3.28
              
              $   
                  6.92
              
              111,838
              
              $   
                  7.09$14.00
                  - $45.85
              
              70,335
              
              2.43
              
              $ 
                  26.32
              
              56,212
              
              $ 
                  25.49$262.50
              
              22,857
              
              1.65
              
              $262.50
              
              22,857
              
              $262.50474,040
              
              3.21
              
              $ 
                  20.95
              
              345,820
              
              $ 
                  25.30
  **NOTE
        13 - Concentrations**
  For
        the
        years ended August 31, 2006, 2005 and 2004, substantially all of the company’s
        business activities have remained within the United States and have been
        extended to the wireless infrastructure, fiber, cabling, computer services
        and
        broadband industries. Approximately 74% of the company’s revenues and
        receivables were generated in the state of Texas, with the remaining 26%
        spread
        relatively evenly over the rest of the nation for the year ended August 31,
        2006. Approximately 21% of the company’s revenues and receivables were generated
        in the state of Texas, with the remaining 79% spread relatively evenly over
        the
        rest of the nation during the year ended August 31, 2005. Approximately 83%
        of
        the company’s revenues and receivables were generated in the state of Texas,
        with the remaining 17% spread relatively evenly over the rest of the nation
        for
        the year ended August 31, 2004. Through the normal course of business, the
        company generally does not require its customers to post any
        collateral.
  **NOTE
        14 - Commitments and Contingent Liabilities**
  **Leases**
  For
        the
        years ended August 31, 2006, 2005 and 2004, rental expenses of approximately
        $326,000, $418,000 and $507,000, 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 11⁄2 months
        rent of $37,000 for a combined total of $72,000.
  Year
                  Ended August 31,
              
              Amount2007
              
              $
              306,1802008
              
              
              325,3162009
              
              
              243,987Total
              
              $
              875,483
  **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. (See Note 2 - Related Party
        Transactions.)
  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
        15 - 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
        years
        ended August 31, 2006, 2005 and 2004 (in thousands, except per share
        amounts):
  For
                    the years ended August 31,2006
                
                
                2005
                
                2004Net
                    Income/(Loss)
                Shares
                Per
                    Share
                
                Net
                    Income/(Loss)
                
                Shares
                
                
                Per
                    Share
                
                
                Net
                    Income/(Loss)
                
                Shares
                
                
                Per
                    Share**Continuing
                    Operations:**
                
                
                
                
                (1)
                
                
                
                
                
                
                
                
                
                (1)
                
                
                
                
                
                
                
                
                
                (1)Basic
                    EPSIncome
                    available to common shareholders
                $
                (26,276
                )
                
                9,125
                
                $
                (2.88
                )
                
                $
                (57,762
                )
                
                6,892
                
                $
                (8.38
                )
                
                $
                (39,034
                )
                
                5,287
                
                $
                (7.38
                )Effective
                    of dilutive securities
                
                —
                
                
                —
                
                
                —
                
                
                
                —
                
                
                —
                
                
                —
                
                
                
                —
                
                
                —
                
                
                —Diluted
                    EPS
                $
                (26,276
                )
                
                9,125
                
                $
                (2.88
                )
                
                $
                (57,762
                )
                
                6,892
                
                $
                (8.38
                )
                
                $
                (39,034
                )
                
                5,287
                
                $
                (7.38
                )**Discontinued
                    Operations:**Basic
                    EPSIncome
                    available to common shareholders
                $
                (657
                )
                
                9,125
                
                $
                (0.07
                )
                
                $
                752
                
                
                6,892
                
                $
                0.11
                
                
                $
                29
                
                
                5,287
                
                $
                0.01Effective
                    of dilutive securities
                
                —
                
                
                —
                
                
                —
                
                
                
                —
                
                
                —
                
                
                —
                
                
                
                —
                
                
                —
                
                
                —Diluted
                    EPS
                $
                (657
                )
                
                9,125
                
                $
                (0.07
                )
                
                $
                752
                
                
                6,892
                
                $
                0.11
                
                
                $
                29
                
                
                5,287
                
                $
                0.01**Total:**Basic
                    EPSIncome
                    available to common shareholders
                $
                (26,933
                )
                
                9,125
                
                $
                (2.95
                )
                
                $
                (57,010
                )
                
                6,892
                
                $
                (8.27
                )
                
                $
                (39,005
                )
                
                5,287
                
                $
                (7.37
                )Effective
                    of dilutive securities
                
                —
                
                
                —
                
                
                —
                
                
                
                —
                
                
                —
                
                
                —
                
                
                
                —
                
                
                —
                
                
                —Diluted
                    EPS
                $
                (26,933
                )
                
                9,125
                
                $
                (2.95
                )
                
                $
                (57,010
                )
                
                6,892
                
                $
                (8.27
                )
                
                $
                (39,005
                )
                
                5,287
                
                $
                (7.37
                )
  (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.
  For
        the
        years ended August 31, 2006, 2005 and 2004, dilutive securities existed.
        The
        effect of the dilutive securities for the year ended August 31, 2006, would
        have
        been 7,054,710 shares of common stock issued assuming all debt instruments
        were
        converted and all options and warrants were exercised.
  **NOTE
        16 - 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
        years ended August 31, 2006, 2005 and 2004, employee contributions were
        approximately $124,000, $117,000 and $109,000, respectively. The company
        matched
        $0 for these periods.
  **NOTE
        17 - Major Customer**
  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. Two customers comprise 34% and 13%, respectively,
        of outstanding accounts receivable at August 31, 2006.
  The
        company had gross revenues of $3,941,000 and $5,242,000 for the years ended
        August 31, 2006 and 2005, respectively. The fiscal year ended August 31,
        2006,
        included $857,000, or 22% of the fiscal year total sales, for product sold
        to a
        major customer. During the same period, the company provided broadband services
        of $580,000, or 15% of total sales, to a major customer.
   The
        fiscal year ended August 31, 2005, included product sales of $1,957,000,
        or 37%
        of sales, to a major customer.
  **NOTE
        18 - Industry Segments**
  This
        summary reflects the company’s current and past operating segments, as described
        below. All have discontinued operations except Eagle Broadband, Inc. and
        Eagle
        Broadband Services, Inc.
  **Eagle:**
  Eagle
        Broadband, Inc. (Eagle) is a provider of broadband, Internet Protocol (IP)
        and
        communications technology and equipment with related software and broadband
        products (including past subsidiaries Eagle Wireless International, Inc.;
        and
        Etoolz, Inc., for this summary).
  **EBS/DSS:**
  Eagle
        Broadband Services, Inc. (EBS) provides broadband services to residential
        and
        business customers in select communities.
  D.S.S.
        Security, Inc. (DSS) was a security monitoring company. (Has discontinued
        operations.)
  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. was a developer and marketer of messaging systems. (Has
        discontinued operations.)
  Clearworks.net,
        Inc. 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
        year ended August 31, 2006
  APC/HIS
              
              EBS/DSS
              
              UCG
              
              Eagle
              
              Other
              
              Elim.
              
              ConsolRevenue
              
              $
              —
              
              $
              927
              
              $
              —
              
              $
              3,013
              
              $
              —
              
              $
              —
              
              $
              3,941Segment
                  Loss
              
              
              —
              
              
              (11,858
              )
              
              —
              
              
              (13,125
              )
              
              —
              
              
              —
              
              
              (24,983
              )Total
                  Assets
              
              
              (8,918
              )
              
              (27,957
              )
              
              (3,099
              )
              
              88,530
              
              
              16,320
              
              
              (43,111
              )
              
              21,764Capital
                  Expenditures
              
              
              —
              
              
              19
              
              
              —
              
              
              267
              
              
              —
              
              
              —
              
              
              286Depreciation
                  & Amortization
              
              
              1
              
              
              11,697
              
              
              2
              
              
              4,159
              
              
              —
              
              
              —
              
              
              15,859
  For
        the
        year ended August 31, 2005
  APC/HSI
              
              EBS/DSS
              
              UCG
              
              Eagle
              
              Other
              
              Elim.
              
              ConsolRevenue
              
              $
              21
              
              $
              998
              
              $
              —
              
              $
              4,223
              
              $
              —
              
              $
              —
              
              $
              5,242Segment
                  Loss
              
              
              (113
              )
              
              (7,918
              )
              
              (658
              )
              
              (45,601
              )
              
              (2,834
              )
              
              —
              
              
              (57,124
              )Total
                  Assets
              
              
              (8,921
              )
              
              (14,526
              )
              
              (3,072
              )
              
              95,204
              
              
              16,339
              
              
              (43,111
              )
              
              41,913Capital
                  Expenditures
              
              
              —
              
              
              723
              
              
              —
              
              
              92
              
              
              —
              
              
              —
              
              
              814Depreciation
                  & Amortization
              
              
              40
              
              
              5,089
              
              
              2
              
              
              25,111
              
              
              1,583
              
              
              —
              
              
              31,825
  For
        the
        year ended August 31, 2004
  APC/HSI
              
              
              EBS/DSS
              
              
              UCG
              
              
              Eagle
              
              
              Other
              
              
              Elim.
              
              ConsolRevenue
              
              $
              678
              
              $
              1,097
              
              $
              445
              
              $
              5,761
              
              $
              81
              
              $
              —
              
              $
              8,062Segment
                  Loss
              
              
              (827
              )
              
              (2,539
              )
              
              (58
              )
              
              (27,534
              )
              
              (50
              )
              
              —
              
              
              (31,008
              )Total
                  Assets
              
              
              148
              
              
              28,204
              
              
              32
              
              
              127,896
              
              
              56,956
              
              
              (142,768
              )
              
              70,468Capital
                  Expenditures
              
              
              —
              
              
              729
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              729Depreciation
                  & Amortization
              
              
              176
              
              
              1,509
              
              
              66
              
              
              3,192
              
              
              98
              
              
              —
              
              
              5,041
  Reconciliation
        of Segment Loss from Operations to Net Loss
  Year
                  Ended August 31,2006
              
              2005
              
              2004Total
                  segment loss from continuing operations
              $
              (24,983
              )
              
              $
              (57,124
              )
              
              $
              (31,008
              )Total
                  other income (expense)
              
              (1,293
              )
              
              
              (638
              )
              
              
              (8,026
              )Income
                  (Loss) from discontinued operations
              
              (657
              )
              
              
              752
              
              
              
              29Net
                  loss
              $
              (26,933
              )
              
              $
              (57,010
              )
              
              $
              (39,005
              )
  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
        19 - Unaudited Quarterly Financial Data**
  Nov
                  30
              
              
              
              Feb
                  28
              
              
              
              May
                  31
              
              
              
              Aug
                  31Year
                  Ended August 31, 2006Revenues
              $
              1,331
              
              
              $
              771
              
              
              $
              801
              
              
              $
              1,038Net
                  earnings (loss)
              
              (2,634
              )
              
              
              (4,072
              )
              
              
              (2,487
              )
              
              
              (17,740
              )Loss
                  from Continuing Operations
              
              (2,470
              )
              
              
              (3,597
              )
              
              
              (2,469
              )
              
              
              (17,740
              )Loss
                  from Discontinued Operations
              
              (164
              )
              
              
              (475
              )
              
              
              (17
              )
              
              
              —Basic
                  & Diluted loss per share(Continuing
                  Operations)
              
              (0.30
              )
              
              
              (0.42
              )
              
              
              (0.28
              )
              
              
              (1.68
              )Basic
                  & Diluted loss per share(Discontinued
                  Operations)
              
              (0.02
              )
              
              
              (0.06
              )
              
              
              (0.00
              )
              
              
              (0.00
              )Year
                  Ended August 31, 2005Revenues
              $
              976
              
              
              $
              1,922
              
              
              $
              1,401
              
              
              $
              943Net
                  earnings (loss)
              
              (4,448
              )
              
              
              (9,326
              )
              
              
              (3,951
              )
              
              
              (39,285
              )Loss
                  from Continuing Operations
              
              (4,222
              )
              
              
              (9,055
              )
              
              
              (5,041
              )
              
              
              (39,444
              )Loss
                  from Discontinued Operations
              
              (226
              )
              
              
              (271
              )
              
              
              1,090
              
              
              
              159Basic
                  & Diluted loss per share(Continuing
                  Operations)
              
              (0.70
              )
              
              
              (1.45
              )
              
              
              (0.77
              )
              
              
              (5.72
              )Basic
                  & Diluted loss per share(Discontinued
                  Operations)
              
              (0.04
              )
              
              
              (0.04
              )
              
              
              0.17
              
              
              
              0.02Year
                  Ended August 31, 2004Revenues
              $
              1,229
              
              
              $
              1,460
              
              
              $
              4,677
              
              
              $
              696Net
                  earnings (loss)
              
              (8,461
              )
              
              
              (9,398
              )
              
              
              (4,373
              )
              
              
              (16,773
              )Loss
                  from Continuing Operations
              
              (9,143
              )
              
              
              (9,020
              )
              
              
              (4,200
              )
              
              
              (16,671
              )Loss
                  from Discontinued Operations
              
              682
              
              
              
              (378
              )
              
              
              (173
              )
              
              
              (102
              )Basic
                  & Diluted loss per share(Continuing
                  Operations)
              
              (1.89
              )
              
              
              (1.68
              )
              
              
              (0.67
              )
              
              
              (2.78
              )Basic
                  & Diluted loss per share(Discontinued
                  Operations)
              
              0.14
              
              
              
              (0.07
              )
              
              
              (0.03
              )
              
              
              (0.02
              )
  **NOTE
        20 - Equity Financing**
  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 August 31, 2006,
        the
        company issued 1,723,025 shares of common stock for gross proceeds of
        $1,594,816, leaving an amount remaining available to the company of $3,905,184
        under the equity line of credit. (See Note 23-Subsequent Events).
  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
        21 - Discontinued Operations and Exit Activities**
  On
        February 28, 2006, the company entered into an asset purchase agreement with
        a
        third party to acquire certain 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
        on the sale of assets of $187,000 and bad debt expense of $374,000. The results
        of operations for residential security monitoring are reported as a net loss
        from discontinued operations of $657,000 for the year ended August 31, 2006.
        The
        following table reports the results of the component of Eagle’s operations
        reported as discontinued operations:
  Results
                  of Operations for discontinued operations
              Fiscal
                  years ended August 31,2006
              
              2005
              
              2004Broadband
                  services revenues:Sale
                  of security contracts
              $
              1,189,000
              
              
              $
              2,362,000
              
              
              $
              3,178,000Security
                  monitoring revenue
              
              467,000
              
              
              
              988,000
              
              
              
              1,251,000Total
                  revenue from discontinued operations
              
              1,656,000
              
              
              
              3,350,000
              
              
              
              4,429,000Cost
                  of goods sold for security monitoring
              
              579,000
              
              
              
              1,129,000
              
              
              
              1,150,000Cost
                  of goods sold for security contracts sold
              
              —
              
              
              
              —
              
              
              
              1,959,000Operating
                  expenses
              
              1,170,000
              
              
              
              1,451,000
              
              
              
              1,263,000Bad
                  debt expense
              
              374,000
              
              
              
              —
              
              
              
              —Interest
                  expense
              
              3,000
              
              
              
              2,000
              
              
              
              28,000Loss
                  on sale of assets
              
              187,000
              
              
              
              16,000
              
              
              
              —Net
                  income (loss) on discontinued operations
              $
              (657,000
              )
              
              $
              752,000
              
              
              $
              29,000
  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.
  To
        ensure
        a smooth transition to the purchaser and no disruptions in service for
        residential 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, only 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.
  In
        March
        2006, the company entered into an operating agreement with 186KMPS Partners
        LLP
        (“186KMPS”). Pursuant to the agreement, 186KMPS assumed operation of a portion
        of the company’s fiber-optic network that serves homes in Harris County and Fort
        Bend County. 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 the subscriber revenues received by 186KMPS
        during
        the term of the agreement. The agreement may be extended for up to two
        additional five-year terms at the option of 186KMPS. Beginning April 1, 2006,
        KMPS was responsible for payment of all expenses associated with the operation
        of this portion of the network.
  **NOTE
        22 - Financial Condition and Going Concern**
  The
        company’s financial statements have been presented on the basis that it is a
        going concern, which contemplates the realization of assets and the satisfaction
        of liabilities in the normal course of business. The company has negative
        working capital of $10,613,000 and has incurred losses of $26,933,000 and
        $57,010,000 during 2006 and 2005, and there is substantial doubt as to the
        company’s ability to achieve profitable operations.
  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 placement, public offerings and/or
        bank financing necessary to support the company’s working capital requirements.
        No assurance can be given that additional financing will be available, or
        if
        available will be on terms acceptable to the company. If adequate working
        capital is not available, the company may be required to discontinue its
        operations. The financial statements do not include any adjustments that
        might
        be necessary should the company be unable to continue as a going
        concern.
  The
        company is not currently in default on any of its payment obligations, and
        management is addressing the company’s current financial condition and
        obligations by implementing its plans for the upcoming year
        including:
  ·
            Completing
                the Miami super-headend.  ·
            Commencing
                delivery of IPTVComplete to customers in the Miami area no later
                than
                December 2006.  ·
            Devoting
                material sales efforts to attain market leadership with the new IP3000HD
                that supports MPEG4/H.264 standards.  ·
            Focusing
                significant sales efforts on securing large municipal WiFi
                contracts.  ·
            Raising
                additional operating capital through public and/or private debt and
                equity
                offerings.  ·
            Reducing
                debt obligations through the issuance of common
                stock.  ·
            Closely
                monitoring gross margin performance for all core businesses to ensure
                the
                company is on track to attain
                profitability.  ·
            Closely
                monitoring operating expenditures to ensure the company remains within
                its
                expense budget.  **NOTE
        23 - Subsequent Events (Unaudited)**
  In
        September 2006, the company entered into an agreement with a third party
        to buy
        out certain leases with a subsidiary of Eagle Broadband, Inc. The cash
        consideration received was $900,000.
  In
        September 2006, the company entered into a restricted stock agreement with
        Robert Bach, a director of the company, who agreed to take restricted stock
        in
        lieu of cash for a portion of director fees payable to Mr. Bach. Also in
        September 2006, the Board of Directors awarded 75,000 shares of restricted
        stock
        to Brian Morrow, the company’s Chief Operating Officer, the vesting of which is
        tied to the achievement of specific performance goals.
  In
        September 2006, the members of the Board of Directors unanimously voted to
        remove H. Dean Cubley as a director of the company. On August 23, 2006, Mr.
        Cubley filed a lawsuit against the company for non-payment of a note issued
        by
        the company in December 2003. The company believes Mr. Cubley wrongfully
        induced
        the Board to approve the issuance of the note and intends to vigorously defend
        the lawsuit.
  During
        September, October and November 2006, the company issued a total of 3,128,404
        shares of common stock to Dutchess Private Equities Fund, L.P., in connection
        with the equity line of credit. The consideration received by the company
        included $812,538 in cash and a reduction in the balance of the Dutchess
        promissory note by $1,056,449.
  During
        September and October 2006, the company issued a total of 2,458,340 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
        $1,560,000.
  During
        September and October 2006, the company invested approximately $300,000 in
        capital expenditures for the construction of its IPTV super headend in Miami.
        This super headend supports the collection, aggregation and encryption of
        almost
        250 television and music channels at the NewCom International teleport, and
        the
        dissemination of those signals to Eagle’s customers from the NAP of the
        Americas, both locations in the greater Miami area. This facility went live
        at
        the end of September with over 100 channels of content and has grown
        progressively until almost 250 channels are fully operational. The company
        believes that having this super headend fully operational will significantly
        improve its ability to acquire new customers for its IPTV and set-top box
        offerings.
  In
        November 2006, the company filed a registration statement with the Securities
        and Exchange Commission to register the resale of 750,000 shares of common
        stock
        that may be acquired by The Tail Wind Fund Ltd. pursuant to conversions of
        the
        convertible notes held by Tail Wind. Also in November 2006, the company filed
        a
        registration statement to register the resale of 3,431,187 shares of common
        stock that may be acquired by Dutchess Private Equities Fund, L.P. pursuant
        to
        the equity line of credit, the convertible debenture and warrant
        agreement.
  
  **SCHEDULE
        II**
 **VALUATION
        AND QUALIFYING ACCOUNTS**
  Years
        ended August 31, 2006, 2005 and 2004 (amounts in thousands):
  Description
              
              Balance
                  at beginning of period
              
              Additions
                  charged to expenses/revenues
              
              Deductions
              
              
              Balance
                  at end of periodAllowance
                  for Doubtful Accounts2006
              
              $
              2,688
              
              
              $
              (366
              )
              
              $
              (2,170
              )
              
              $
              1522005
              
              $
              2,396
              
              
              $
              568
              
              
              $
              (276
              )
              
              $
              2,6882004
              
              $
              412
              
              
              $
              2,643
              
              
              $
              (659
              )
              
              $
              2,396