UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




**FORM
      10-Q**




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


For
      the
      quarterly period ended February 28, 2006




or




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


For
      the
      transition period from
              
to




Commission
      File Number 001-15649




**EAGLE
      BROADBAND, INC.**


(Exact
      name of registrant as specified in its charter)




TEXAS
              (State
                or other jurisdiction of incorporation or organization)
            76-0494995
              (I.R.S.
                Employer Identification Number)




101
      COURAGEOUS DRIVE


LEAGUE
      CITY, TEXAS 77573


(Address
      of principal executive offices) (Zip Code)




(281)
      538-6000


(Registrant’s
      telephone number, including area code)




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




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




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




As
      of
      April 7, 2006, the registrant had 303,330,506 shares of common stock
      outstanding.







**EAGLE
                BROADBAND, INC.**
              **FORM
                10-Q**
              **FOR
                THE QUARTER ENDED FEBRUARY 28, 2006**
              
              **TABLE
                OF CONTENTS****PAGE****PART
              I-FINANCIAL
              INFORMATION**
            2**Item
                1. Financial Statements**
            2Consolidated
                Balance Sheets
            2Consolidated
                Statements of
                Operations
            3Consolidated
                Statements
                of****Shareholders’
                Equity
            4Consolidated
                Statements of Cash
                Flows
            5**Item
                2. Management’s Discussion and Analysis
                of Financial Condition and Results of
                Operations**
            19**Item
                4. Controls and
                Procedures**
            28**PART
              II-OTHER
              INFORMATION**
            29**Item
                1. Legal
                Proceedings**
            29**Item
                6. Exhibits**
            30




1




**PART
      I-FINANCIAL INFORMATION**




**Item
      1.**  **Financial
      Statements** ***.***


**EAGLE
      BROADBAND, INC.**


**CONSOLIDATED
      BALANCE SHEETS**





February
                28, 2006
            
            August
                31, 2005**ASSETS**
            
            
            (Unaudited)
            
            
            
            (Audited)**Current
                Assets**Cash
                and Cash Equivalents
            
            $
            1,142
            
            
            $
            4,020Cash
                in Restricted Account
            
            
            203
            
            
            
            203Accounts
                Receivable, net
            
            
            1,356
            
            
            
            1,890Inventories
            
            
            515
            
            
            
            802Net
                Investment in Direct Financing Leases- current portion
            
            
            524
            
            
            
            525Other
                Assets
            
            
            —
            
            
            
            298Prepaid
                Expenses
            
            
            723
            
            
            
            632**Total
                Current Assets**
            
            
            **4,463**
            
            
            
            **8,370****Property
                and Equipment**Operating
                Equipment
            
            
            31,861
            
            
            
            32,298Less:
                Accumulated Depreciation
            
            
            (9,635
            )
            
            
            (8,994
            )**Total
                Property and Equipment**
            
            
            **22,226**
            
            
            
            **23,304****Other
                Assets**Net
                Investment in Direct Financing Leases (net of current
                portion)
            
            
            659
            
            
            
            853Goodwill,
                net
            
            
            4,095
            
            
            
            4,095Contract
                Rights, net
            
            
            2,777
            
            
            
            2,921Customer
                Relationships, net
            
            
            791
            
            
            
            831Other
                Intangible Assets, net
            
            
            809
            
            
            
            859Other
                Assets
            
            
            5
            
            
            
            680**Total
                Other Assets**
            
            
            **9,136**
            
            
            
            **10,239****Total
                Assets**
            
            **$**
            **35,825**
            
            
            **$**
            **41,913****LIABILITIES
                AND SHAREHOLDERS’ EQUITY****Current
                Liabilities**Accounts
                Payable
            
            $
            6,388
            
            
            $
            6,640Stock
                Payable
            
            
            —
            
            
            
            2,008Accrued
                Expenses
            
            
            4,561
            
            
            
            9,477Compound
                Embedded Derivative
            
            
            525
            
            
            
            —Notes
                Payable & Current Portion of Long Term Debt
            
            
            1,337
            
            
            
            61Deferred
                revenue
            
            
            224
            
            
            
            623**Total
                Current Liabilities**
            
            
            **13,035**
            
            
            
            **18,809****Long-Term
                Liabilities**Long
                Term Debt
            
            
            3,511
            
            
            
            —Compound
                Embedded Derivative
            
            
            182
            
            
            
            —Warrant
                Liability
            
            
            280
            
            
            
            —**Total
                Long-Term Liabilities**
            
            
            **3,973**
            
            
            
            **—****Total
                Liabilities**
            
            
            **17,008**
            
            
            
            **18,809****Shareholders’
                Equity**Preferred
                Stock, $0.001 par value, 5,000,000 shares authorized, none
                issued
            —
            
            
            
            —Common
                Stock - $0.001 par value, 350,000,000 shares authorized,303,086,275
                and 288,211,275 issued and outstanding at February 28, 2006 and August
                31,
                2005, respectively
            
            
            303
            
            
            
            288Additional
                Paid in Capital
            
            
            239,336
            
            
            
            236,932Accumulated
                Deficit
            
            
            (220,822
            )
            
            
            (214,116
            )**Total
                Shareholders’ Equity**
            
            
            **18,817**
            
            
            
            **23,104****Total
                Liabilities and Shareholders’ Equity**
            
            **$**
            **35,825**
            
            
            **$**
            **41,913**





See
      accompanying notes to consolidated financial statements.


2


**EAGLE
      BROADBAND, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


(Unaudited)





For
                the three months ended February 28,
            
            
            For
                the six months
              ended
                February 28,2006
            
            2005
            
            
            2006
            
            2005**Net
                Sales**Structured
                wiring
            $
            463
            
            $
            369
            
            
            $
            885
            
            $
            632Broadband
                services
            
            1,105
            
            
            524
            
            
            
            1,957
            
            
            1,740Products
            
            158
            
            
            1,754
            
            
            
            780
            
            
            1,779Other
            
            40
            
            
            36
            
            
            
            78
            
            
            60**Total
                Sales**
            
            **1,766**
            
            
            **2,683**
            
            
            
            **3,700**
            
            
            **4,211****Costs
                of Goods Sold**Direct
                Labor and Related Costs
            
            407
            
            
            522
            
            
            
            906
            
            
            784Products
                and Integration Service
            
            (2
            )
            
            2,164
            
            
            
            254
            
            
            2,203Impairment
                Slow Moving & Obsolete Inventory
            
            107
            
            
            —
            
            
            
            107
            
            
            —Structured
                Wiring Labor and Materials
            
            431
            
            
            332
            
            
            
            720
            
            
            506Broadband
                Services Costs
            
            319
            
            
            339
            
            
            
            464
            
            
            1,258Depreciation
                and Amortization
            
            201
            
            
            286
            
            
            
            430
            
            
            576Other
                Manufacturing Costs
            
            81
            
            
            —
            
            
            
            81
            
            
            —Total
                Costs of Goods Sold
            
            1,544
            
            
            3,643
            
            
            
            2,962
            
            
            5,327**Gross
                Profit**
            
            **222**
            
            
            **(960**
            **)**
            
            
            **738**
            
            
            **(1,116**
            **)****Operating
                Expenses**Salaries
                and Related Costs
            
            1,318
            
            
            3,144
            
            
            
            2,868
            
            
            3,544Advertising
                and Promotion
            
            14
            
            
            40
            
            
            
            45
            
            
            50Depreciation
                and Amortization
            
            333
            
            
            804
            
            
            
            694
            
            
            1,645Other
                Support Costs
            
            2,015
            
            
            2,658
            
            
            
            3,126
            
            
            5,606Research
                and Development
            
            130
            
            
            232
            
            
            
            234
            
            
            375Impairment
                Costs
            
            —
            
            
            1,050
            
            
            
            —
            
            
            1,050**Total
                Operating Expenses**
            
            **3,810**
            
            
            **7,928**
            
            
            
            **6,967**
            
            
            **12,270****Loss
                from Operations**
            
            **(3,588**
            **)**
            
            **(8,888**
            **)**
            
            
            **(6,229**
            **)**
            
            **(13,386**
            **)****Other
                Income/(Expenses)**Interest
                Income
            
            3
            
            
            5
            
            
            
            12
            
            
            9Interest
                Expense
            
            (278
            )
            
            (443
            )
            
            
            (280
            )
            
            (545
            )Derivative
                Income
            
            20
            
            
            —
            
            
            
            20
            
            
            —Loss
                on Sale of Assets
            
            (229
            )
            
            —
            
            
            
            (229
            )
            
            —Loss
                on Sale of Marketable Securities
            
            —
            
            
            —
            
            
            
            —
            
            
            (900
            )**Total
                Other Income (Expense)**
            
            **(484**
            )
            
            **(438**
            **)**
            
            
            **(477**
            **)**
            
            **(1,436**
            **)****Net
                Loss**
            
            **(4,072**
            **)**
            
            **(9,326**
            **)**
            
            
            **(6,706**
            **)**
            
            **(14,822**
            **)****Net
                Loss per Common Share**Basic
            
            (0.01
            )
            
            (0.04
            )
            
            
            (0.02
            )
            
            (0.07
            )Diluted
            
            (0.01
            )
            
            (0.04
            )
            
            
            (0.02
            )
            
            (0.07
            )





See
      accompanying notes to consolidated financial statements.


3


**EAGLE
      BROADBAND, INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


(Unaudited)


Common
                Stock
            
            Preferred
                Stock
            
            Additional
                Paid in Capital
            
            Retained
                Earnings
            
            Accumulated
                Comprehensive Income
            
            Total
                Shareholders’ Equity**(*****Shares
                and dollars in thousands*****)**
            
            Shares
            
            Value**Shareholders’
                Equity at August 31, 2004**
            
            **205,509**
            
            **$**
            **206**
            
            **—**
            
            **$**
            **208,051**
            
            **$**
            **(157,106**
            **)**
            **$**
            **(1,048**
            **)**
            **$**
            **50,103**Net
                Loss for the year ended August 31, 2005
            
            —
            
            
            —
            
            —
            
            
            —
            
            
            (57,010
            )
            
            —
            
            
            (57,010
            )**New
                Stock Issued:**For
                services and compensation
            
            5,119
            
            
            5
            
            —
            
            
            2,339
            
            
            —
            
            
            —
            
            
            2,344For
                retirement of debt and accrued liabilities
            
            27,663
            
            
            27
            
            —
            
            
            13,334
            
            
            —
            
            
            —
            
            
            13,361Proceeds
                from sale of common stock, net
            
            45,795
            
            
            46
            
            —
            
            
            11,263
            
            
            —
            
            
            —
            
            
            11,309Proceeds
                from exercise of options
            
            4,125
            
            
            4
            
            —
            
            
            1,945
            
            
            —
            
            
            —
            
            
            1,949Unrealized
                Holding Loss
            
            —
            
            
            —
            
            —
            
            
            —
            
            
            —
            
            
            1,048
            
            
            1,048**Shareholders’
                Equity at August 31, 2005**
            
            **288,211**
            
            **$**
            **288**
            
            **—**
            
            **$**
            **236,932**
            
            **$**
            **(214,116**
            **)**
            **$**
            **—**
            
            **$**
            **23,104**Net
                Loss for the six months endedFebruary
                28, 2006
            
            —
            
            
            —
            
            —
            
            
            —
            
            
            (6,706
            )
            
            —
            
            
            (6,706
            )**New
                Stock Issued:**Proceeds
                from sale of common stock, net
            
            14,875
            
            
            15
            
            —
            
            
            1,993
            
            
            —
            
            
            —
            
            
            2,008Stock
                based compensation
            
            —
            
            
            —
            
            —
            
            
            411
            
            
            —
            
            
            —
            
            
            411**Shareholders’
                Equity at February 28, 2006**
            
            **303,086**
            
            **$**
            **303**
            
            **—**
            
            **$**
            **239,336**
            
            **$**
            **(220,822**
            **)**
            **$**
            **—**
            
            **$**
            **18,817**




See
      accompanying notes to consolidated financial statements.




4




**EAGLE
      BROADBAND, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


(Unaudited)


For
                the six months
              ended
                February 28,2006
            
            2005**Cash
                Flows from Operating Activities**Net
                Loss
            
            $
            (6,706
            )
            $
            (14,822
            )Adjustments
                to Reconcile Net Loss to Net Cash:Impairment
                Costs
            
            
            —
            
            
            1,050Loss
                on Sale of Assets
            
            
            229
            
            
            1,048Adjustments
                to Cost of Sales
            
            
            24
            
            
            —Stock
                for Compensation Expense
            
            
            411
            
            
            —Depreciation
                and Amortization
            
            
            1,124
            
            
            2,221Stock
                issued for Interest Expense
            
            
            —
            
            
            474Stock
                issued for Services Rendered
            
            
            —
            
            
            5,220Provision
                for Bad Debt
            
            
            494
            
            
            20(Increase)/Decrease
                in Accounts Receivable
            
            
            40
            
            
            (786
            )(Increase)/Decrease
                in Inventories
            
            
            287
            
            
            (1,368
            )(Increase)/Decrease
                in Other Assets
            
            
            675
            
            
            —(Increase)/Decrease
                in Prepaid Expenses
            
            
            (91
            )
            
            (159)Increase/(Decrease)
                in Accounts Payable
            
            
            (253
            )
            
            1,084Increase/(Decrease)
                in Accrued Expenses
            
            
            (133
            )
            
            2,671Total
                Adjustment
            
            
            2,807
            
            
            11,475**Net
                Cash Used for Operating Activities**
            
            
            **(3,899**
            **)**
            
            **(3,347**
            **)****Cash
                Flows from Investing Activities**Purchase
                of Property and Equipment
            
            
            (54
            )
            
            (530
            )Purchase
                of Marketable Securities
            
            
            —
            
            
            551Proceeds
                from the Sale of Assets
            
            
            233
            
            
            —Gross
                Equipment Purchase for Direct Financing Leases
            
            
            —
            
            
            (641
            )Principal
                Collections on Direct Financing Leases
            
            
            195
            
            
            76Purchase
                of Other Intangible Assets
            
            
            —
            
            
            (2
            )Purchase
                of Other Assets
            
            
            —
            
            
            (1
            )**Net
                Cash Provided (Used) for Investing Activities**
            
            
            **374**
            
            
            **(547**
            **)****Cash
                Flows from Financing Activities**Payments
                on Notes Payable
            
            
            (103
            )
            
            (220
            )Proceeds
                from Note Payable
            
            
            750
            
            
            —Proceeds
                from Sale of Common Stock, net
            
            
            —
            
            
            7,504**Net
                Cash Provided by Financing Activities**
            
            
            **647**
            
            
            **7,284**Net
                Increase/(Decrease) in Cash
            
            
            (2,878
            )
            
            3,390Cash
                at the beginning of the period
            
            
            4,020
            
            
            2,051**Cash
                at the end of the period**
            
            **$**
            **1,142**
            
            **$**
            **5,441****Supplemental
                Disclosure of Cash Flow Information**Net
                Cash Paid During the Year for:Interest
            
            $
            14
            
            $
            43Income
                taxes
            
            $
            —
            
            $
            —




See
      accompanying notes to consolidated financial statements.


5


**Eagle
      Broadband, Inc. and Subsidiaries**


**Notes
      to the Consolidated Financial Statements February 28, 2006
      (Unaudited)**




**NOTE
      1 - Basis of Presentation and Significant Accounting
      Policies**




The
      Balance Sheet of the Company as of February 28, 2006, the related Statements
      of
      Operations for the three months and six months ended February 28, 2006 and
      2005,
      and the Statements of Cash Flows for the six months ended February 28, 2006
      and
      2005, included in the financial statements have been prepared by the Company
      without audit. In the opinion of management, the accompanying financial
      statements include all adjustments (consisting of normal, recurring adjustments)
      necessary to summarize fairly the Company’s financial position and results of
      operations. The results of operations for the three months and six months ended
      February 28, 2006, are not necessarily indicative of the results of operations
      for the full year or any other interim period. The information included in
      this
      Form 10-Q should be read in conjunction with Management’s Discussion and
      Analysis and Financial Statements and notes thereto included in the Company’s
      August 31, 2005, Form 10-K.




**NOTE
      2 - Related Party Transactions**




Dr.
      H.
      Dean Cubley, a director and former officer of the Company, is the holder of
      a
      promissory note with a remaining principal amount of $1,924,000. The note is
      currently in default and is accruing interest under the terms of the original
      agreement. The note was issued upon the modification of outstanding options
      for
      2,000,000 common shares and reflects a guaranteed compensation of the modified
      options equivalent to $1.75 less the option strike price. Interest of $329,090
      and $154,922 has been accrued as of February 28, 2006 and August 31, 2005,
      respectively. The note payable and accrued interest are included in the Balance
      Sheet as accrued expenses.




Dr.
      Cubley is a director of ERF Wireless, Inc. ERF Wireless acted as a third-party
      construction subcontractor for Eagle during the period ended February 28, 2006.
      Purchases totaled $131,000 for the six-month period ended February 28,
      2006.




**NOTE
      3 - Accounts Receivable**




Accounts
      receivable consist of the following (in thousands):




February
                28, 2006
            
            August
                31, 2005Accounts
                Receivable
            
            $
            1,571
            
            $
            4,578Allowance
                for Doubtful Accounts
            
            
            (215
            )
            
            (2,688
            )Accounts
                Receivable, net
            
            $
            1,356
            
            $
            1,890




**NOTE
      4 - Property and Equipment and Intangible Assets**




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




February
                28, 2006
            
            August
                31, 2005Automobile
            
            $
            123
            
            $
            123Headend
                Facility and Fiber Infrastructure
            
            
            24,031
            
            
            24,154Furniture
                and Fixtures
            
            
            520
            
            
            520Leasehold
                Improvements
            
            
            183
            
            
            183Office
                Equipment
            
            
            1,040
            
            
            1,027Manufacturing
                and Operating Equipment
            
            
            5,964
            
            
            6,291Total
                Property, Plant and Equipment
            
            $
            31,861
            
            $
            32,298Less
                Accumulated Depreciation
            
            
            (9,635
            )
            
            (8,994
            )Net
                Property, Plant and Equipment
            
            $
            22,226
            
            $
            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 $39,000 and $12,000 for the three months
      ended February 28, 2006 and 2005, respectively, whereas it did not have any
      major improvements for the same time periods. Eagle expensed repairs and
      maintenance of $68,000 and $24,000 for the six months ended February 28, 2006
      and 2005, respectively, whereas it did not have any major improvements for
      the
      same time periods.




6


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




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




February
                28, 2006
            
            August
                31, 2005Goodwill
            
            $
            4,095
            
            $
            4,095Contract
                Rights
            
            $
            11,847
            
            $
            11,847Accumulated
                Amortization
            
            
            (9,070
            )
            
            (8,926
            )$
            2,777
            
            $
            2,921Customer
                Relationships
            
            $
            3,067
            
            $
            3,067Accumulated
                Amortization
            
            
            (2,276
            )
            
            (2,236
            )$
            791
            
            $
            831Other
                Intangible Assets
            
            $
            3,937
            
            $
            3,937Accumulated
                Amortization
            
            
            (3,128
            )
            
            (3,078
            )$
            809
            
            $
            859Total
                Intangible Assets
            
            $
            22,946
            
            $
            22,946Total
                Accumulated Amortization
            
            
            (14,474
            )
            
            (14,240
            )Net
                of Amortization
            
            $
            8,472
            
            $
            8,706




**NOTE
      5 - Notes Payable & Long-Term Debt**




The
      following table lists the Company’s note obligations as of February 28, 2006,
      and August 31, 2005 (in thousands):




Annual
                Interest Rate
            
            Due
                Date
            
            February
                28, 2006
            
            August
                31, 2005Notes
                Payable & Long-Term Debt:Dutchess
                Convertible Note, net of discount of $797,966
            12%
            
            April
                07
            
            
            24
            
            
            —Tail
                Wind Non-Convertible Promissory Note and Convertibles Notes, net
                of
                discount of $189,451
            0%
            
            March
                08
            
            
            4,711
            
            
            —Notes
                Payable
            Various
            
            Various
            
            
            113
            
            
            61Total
                Debt
            
            
            
            
            $
            4,848
            
            $
            61Less
                current maturities
            
            
            
            
            
            (1,337
            )
            
            (61
            )Total
                long-term debt
            
            
            
            
            $
            3,511
            
            $
            —




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.”




8


DUTCHESS
      NOTE




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




The
      note
      bears interest at 12%, provides for monthly interest and principal payments
      and
      matures on February 10, 2011. The note is convertible at the option of the
      holder into common stock of the Company at a price of $0.09 per share, subject
      to standard anti-dilution provisions relating to splits, reverse splits and
      other transactions, plus a reset provision whereby the conversion price may
      be
      adjusted downward to a lower price per share based on the lowest closing best
      bid between February 1, 2006 and the date of filing the registration statement
      covering the resale of the underlying shares. The note is subject to automatic
      conversion 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% penalty. The Company has the right to repurchase
      the note at 133% of the face amount.




The
      notes
      are secured by all assets of the Company, excluding the assets of D.S.S.
      Security, Inc., and certain lease agreements 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 $483,779 and $338,721 for years 2006, and 2007, respectively.




The
      following tables summarize the fair market value of the derivative instruments
      and convertible debt activity for Dutchess for the period February 10, 2006
      to
      February 28, 2006:




Description
            
            Note
                Payable
            
            Warrant
                Liabilities
            
            Compound
                Derivative Liability
            
            TotalFair
                value issuance at inception
            
            $
            —
            
            $
            281,492
            
            $
            524,438
            
            $
            805,930Marked-to-market
                activityFeb
                10, 2006 to Feb 28, 2006
            
            
            24,534
            
            
            (677
            )
            
            152
            
            
            24,009Fair
                value at February 28, 2006
            
            $
            24,534
            
            $
            280,815
            
            $
            524,590
            
            $
            829,939









Notional
                balance of Convertible Notes at inception
            $
            822,500Adjustments:Fair
                market value of derivative liability-with compound embedded
                derivatives
            
            (524,438
            )Fair
                market value related to warrants
            
            (281,492
            )Financing
                cost
            
            (72,500
            )Convertible
                Notes, as adjusted
            $
            (55,930
            )




For
      the
      six months ended February 28, 2006 the Company recorded a net credit to
      derivative expense of $525 and convertible debt interest expense of $32,685.
      The
      excess discount to the convertible note of $55,930 was expensed to interest
      expense upon the issuance of the Dutchess convertible note for total convertible
      interest expense of $88,615.




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
      and issued two convertible notes and a non-convertible promissory note totaling
      $4,900,000.




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.




9


The
      convertible note was 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 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
      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 $77,109, $99,204 and $25,058 for years 2006, 2007 and 2008,
      respectively.




The
      following tables summarize the fair market value of the derivative instruments
      and convertible debt activity for Tailwind Convertible Notes for the period
      February 10, 2006 to February 28, 2006:




Description
            
            Tail
                Wind Note
            
            Compound
                Derivative Liability
            
            TotalFair
                value issuance at inception
            
            $
            4,698,629
            
            $
            201,371
            
            $
            4,900,000Marked-to-market
                activityFeb
                10, 2006 to Feb 28, 2006
            
            
            11,920
            
            
            (19,606
            )
            
            (7,686)Fair
                value at February 28, 2006
            
            $
            4,710,549
            
            $
            181,765
            
            $
            4,892,314






Notional
                balance of Convertible Notes at inception
            $
            4,900,000Adjustments:Fair
                market value of derivative liability-with compound embedded
                derivatives
            
            (201,371
            )Convertible
                Notes balance, as adjusted
            $
            4,698,629




For
      the
      six months ended February 28, 2006 the Company recorded a net credit to
      derivative expense of $19,606 and convertible debt interest expense of
      $11,920.




CHANGE
      IN
      FAIR VALUE OF DERIVATIVE LIABILITIES




For
      the
      period from inception of the Dutchess convertible note and warrants (February
      10, 2006) through February 28, 2006, the change in fair value of the derivative
      liabilities includes the following:




Derivative
                Liability-Compound Embedded Derivatives within Dutchess Convertible
                Note
            $
            152Derivative
                Liability-Compound Embedded Derivatives within Common Stock
                Warrants
            
            (677)Derivative
                Liability-Compound Embedded Derivatives within Tail Wind Convertible
                Notes
            
            (19,606)Net
                decrease in fair value of derivative liabilities
            $
            (20,131)




**NOTE
      6 - Income Taxes**




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






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




February
                28,2006
            
            August
                31,2005U.S.
                Federal statutory tax rate
            
            34%
            
            34%U.S.
                valuation difference
            
            (34%)
            
            (34%)Effective
                U.S. tax rate
            
            0%
            
            0%Foreign
                tax valuation
            
            0%
            
            0%Effective
                tax rate
            
            0%
            
            0%




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




10


February
                28, 2006
            
            August
                31, 2005Computed
                expected tax benefit
            
            $
            (2,269)
            
            $
            (19,360)Increase
                (decrease) in valuation allowance
            
            
            2,269
            
            
            19,360Income
                tax expense
            
            $
            —
            
            $
            —




The
      tax
      effects of temporary differences that give rise to significant portions of
      the
      deferred tax assets and deferred tax liabilities at February 28, 2006, and
      August 31, 2005, are presented below (in thousands) and include the balances
      of
      the merged company ClearWorks.net., Inc.




February
                28, 2006
            
            August
                31, 2005Deferred
                tax assets:Net
                operating loss carry forwards
            
            $
            (73,115)
            
            $
            (70,846)Less
                valuation allowance
            
            
            73,115
            
            
            70,846Net
                deferred tax assets
            
            $
            —
            
            $
            —




The
      valuation allowance for deferred tax assets of February
      28, 2006 ,
      and
      August 31, 2005, was $73,115,000 and $70,846,000, respectively. As of February
      28, 2006, the Company has net operating loss carry-forwards of $185,058,000,
      which is available to offset future federal taxable income, if any, with
      expirations from 2021 to 2023.






**NOTE
      7 - Stock Options and Warrants**




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 2,741,667 shares of the Company’s common stock at an
      exercise price of $0.09
      per
      share ,
      subject
      to a reset provision whereby the exercise price would be adjusted downward
      in
      the event the Company issued its common stock to others at a price below $0.09
      per share. This
      reset provision represents an embedded derivative, which has not been bifurcated
      from the host warrant contract (as both are derivatives) and has a derivative
      liability at its fair value at date of inception utilizing the Black-Scholes
      method with a probability weighted exercise price. This fair value model
      comprises multiple probability-weighted scenarios under various assumptions
      reflecting the economics of the warrant, such as risk free interest rate,
      expected volatility, and likelihood of reset events. The assumptions used at
      February 10, 2006 were a risk-free interest rate of 4.59%, volatility of 85%,
      expected term of 5 years, dividend yield of 0.00% and a probability weighted
      exercise price of $.086. The common stock warrant and the embedded warrant
      price
      reset provision were initially fair valued at $281,492 at February 10, 2006.
      At
      inception, the amount of the value assigned was applied as a discount to the
      notional amount of the Convertible Note. See Note 5 for valuation and
      marked-to-market activity.






STOCK-BASED
      COMPENSATION






In
      July
      1996, the Board of Directors adopted, and the Company’s shareholders approved,
      the 1996 Incentive Stock Option Plan under which 400,000 shares of the Company’s
      common stock have been reserved for issuance. In June 2004, the Board of
      Directors adopted, and the Company’s shareholders approved, the June 2004
      Compensatory Stock Option Plan under which 10,000,000 shares of the
      Company’s common stock has been reserved for issuance. In June
      2005, the Board of Directors adopted, and the Company’s shareholders approved,
      the 2005 Employee Stock Option Plan under which 30,000,000 shares of the
      Company’s common stock has been reserved for issuance. 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. As of February 28, 2006, options issued to employees covering
      15,563,778 shares were outstanding, of which 5,238,986 were
      exercisable.






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




11


The
      weighted average fair value of the individual options issued and granted during
      the six months ended February 28, 2006
      is estimated as $0.14 on the date of grant. The fair values were determined
      using a Black-Scholes option-pricing model with the following weighted average
      assumptions:




February
                28,2006
            
            2005Dividend
                yield
            
            
            0.00%
            
            
            
            0.00%Volatility
            
            
            79%
            
            
            
            91%Risk-free
                interest rate
            
            
            3.50%
            
            
            
            4.00%Expected
                life
            
            
            5
                years
            
            
            
            5
                years




Prior
      to
      September 1, 2005, the Company followed APB 25, “Accounting for Stock Issued to
      Employees.” Accordingly, since employee stock options are granted at market
      price on the date of grant, no compensation expense was recognized under APB
      25.
      SFAS 123R requires presentation of pro forma net income and earnings per share
      as if the Company had accounted for its employee stock options granted under
      the
      fair value method of that statement. In accordance with the provisions of SFAS
      123R, the pro forma effect on net loss as if the fair value of stock-based
      compensation had been recognized as compensation expense on a straight-line
      basis over the vesting period of the stock option or purchase right was as
      follows for the six months ended February 28, 2005:




Six
                months ended February 28, 2005Net
                loss, as reported
            $
            (14,822)Add:
                Stock-based employee compensation included in reported net
                earnings/(loss), net of related tax effects
            
            —Less:
                Stock-based employee compensation expense determined under fair-value
                based method for all awards, net of related tax effects
            
            (61)Pro
                forma net earnings/(loss)
            $
            (14,883)Net
                loss per share:As
                reported
            $
            (0.07)Pro
                forma
            $
            (0.07)Diluted
                net loss per share:As
                reported
            $
            (0.07)Pro
                forma
            $
            (0.07)




Option
      and warrant activity including employees and third parties was as follows for
      the six months ended February 28, 2006:




Shares
            
            Weighted
                Average Exercise PriceOutstanding
                at beginning of period
            
            
            13,454,745
            
            $
            0.83Granted
            
            
            7,995,417
            
            
            0.13Assumed
                through acquisitions
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —Forfeited/cancelled
            
            
            (584,190
            )
            
            0.80Outstanding
                at end of period
            
            
            20,865,972
            
            $
            0.56Exercisable
                at end of period
            
            
            10,541,180
            
            $
            0.86




12


Information
      about options and warrants outstanding was as follows at February 28,
      2006:




Range
                of Exercise Prices
            
            Number
                Outstanding
            
            Avg.
                Remaining Contractual Life in Years
            
            Average
                Exercise Price
            
            Number
                Exercisable
            
            Average
                Exercise Price$0.09
                - $0.15
            
            7,243,444
            
            4.58
            
            $
                0.11
            
            3,758,444
            
            $
                0.09$0.16
                - $0.50
            
            9,375,384
            
            3.70
            
            $
                0.22
            
            3,844,618
            
            $
                0.25$0.51
                - $1.50
            
            3,447,144
            
            2.79
            
            $
                0.85
            
            2,138,118
            
            $
                0.81$1.51
                - $7.50
            
            800,000
            
            2.15
            
            $
                7.50
            
            800,000
            
            $
                7.5020,865,972
            
            3.79
            
            $
                0.56
            
            10,541,180
            
            $
                0.86




**NOTE
      8 - Risk Factors**




For
      the
      six months ended February
      28, 2006 ,
      substantially all of the Company’s business activities have remained within the
      United States. Approximately 4% of the Company’s revenues and receivables have
      been created solely in the state of Texas, 0% in the international market,
      and
      the approximate 96% remainder relatively evenly over the rest of the nation
      during the six months ended February 28, 2006; whereas approximately 45% of
      the
      Company’s revenues and receivables were created solely in the state of Texas, 1%
      in the international market, and the approximate 54% remainder relatively evenly
      over the rest of the nation during the six months ended February 28, 2005.
      Through the normal course of business, the Company generally does not require
      its customers to post any collateral.




Financial
      instruments that potentially subject the Company to concentrations of credit
      risk are cash in banks and uncollateralized accounts receivable. As of February
      28, 2006 and August 31, 2005, the Company had $1,148,000 and $4,318,000,
      respectively, of uninsured deposits at financial institutions. Credit had been
      extended to customers of $1,571,000 and $4,578,000 as of February 28, 2006
      and
      August 31, 2005, respectively.




Although
      the Company is based in the United States, certain of its products are sold
      in
      international markets. Presently, international sales total 0% and 1% for the
      six months ended February 28, 2006 and 2005, respectively.




**NOTE
      9 - Commitments and Contingent Liabilities**




**Leases**




For
      the
      six months ended February 28, 2006 and 2005, rental expenses of approximately
      $153,000 and $177,000, 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.




August
                31,
            
            AmountFor
                the six months ending
            2006
            
            $
            149,898For
                the year ending
            2007
            
            
            306,180For
                the year ending
            2008
            
            
            325,316For
                the year ending
            2009
            
            
            243,987Total
            
            $
            1,025,381




**Legal
      Proceedings**




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




13


In
      July
      2003, Eagle became a defendant in Cornell Capital Partners, L.P., vs. Eagle
      Broadband, Inc., et al., Civil Action No. 03-1860, in the United States District
      Court for the District of New Jersey. The suit presents claims for breach of
      contract, common law fraud, state and federal securities fraud, and negligent
      misrepresentation. The plaintiff has also alleged that Eagle has defaulted
      on a
      convertible debenture for failing to timely register the shares of common stock
      underlying the convertible debenture and is seeking to accelerate the maturity
      date of the debenture. In November 2003, the principal balance of the debenture
      was repaid, although the suit remains outstanding. Cornell claims damages of
      approximately $1 million. Eagle asserted counterclaims against Cornell for
      fraud
      and breach of contract in the amount of $2 million. On March 28, 2006, the
      court
      ruled in favor of the plaintiff on certain claims, granting the plaintiff’s
      motion for partial summary judgment on its breach of contract claim and all
      of
      Eagle’s counterclaims. The court ruled in favor of Eagle on other claims,
      granting Eagle’s motion for summary judgment on plaintiff’s claims for common
      law fraud, state and federal securities fraud, and negligent misrepresentation.
      The Company has accrued $750,000 in expenses against this lawsuit.




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




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




In
      February 2006, the Company entered into a settlement agreement with The Tail
      Wind Fund Ltd. (“Tail Wind”) to settle a lawsuit filed in June 2004 by Tail Wind
      against the Company and its subsidiary, Link-Two Communications, Inc. The
      settlement agreement settles the lawsuit for an aggregate amount of $5 million,
      payable in a combination of cash, stock, a non-convertible promissory note
      and
      convertible notes.




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.




14


**NOTE
      10 - Earnings per Share**




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




For
                the six months ended February 28, 2006Income(Numerator)
            
            Shares(Denominator)
            
            Per
                Share AmountNet
                loss
            
            $
            (6,706)
            
            
            —
            
            $
            —Basic
                EPS:Income
                available to common shareholders
            
            
            (6,706)
            
            
            296,676
            
            
            (0.02)Effect
                of dilutive securities warrants
            
            
            —
            
            
            —
            
            
            —Diluted
                EPS:Income
                available to common stockholders and assumed conversions
            
            $
            (6,706)
            
            
            296,676
            
            $
            (0.02)





For
                the six months ended February 28, 2005Income(Numerator)
            
            Shares(Denominator)
            
            Per
                Share AmountNet
                loss
            
            $
            (14,822)
            
            
            —
            
            $
            —Basic
                EPS:Income
                available to common shareholders
            
            
            (14,822)
            
            
            218,613
            
            
            (0.07)Effect
                of dilutive securities warrants
            
            
            —
            
            
            —
            
            
            —Diluted
                EPS:Income
                available to common stockholders and assumed conversions
            
            $
            (14,822)
            
            
            218,613
            
            $
            (0.07)




For
      the
      six months
      ended February 28, 2006 and
      2005, dilutive securities existed. (See Note 7.)




**NOTE
      11 - Retirement Plans**




During
      October 1997, the Company initiated a 401(k) plan for its employees, funded
      through the contributions of its participants. Prior to March 2003, the Company
      matched the participant’s contribution up to 3% of their salary. Subsequent to
      March 2003, the plan was amended and the Company match became elective. For
      the
      six months ended February
      28, 2006 and
      2005, employee contributions were approximately $65,000 and $64,000,
      respectively. The Company matched $0 for both periods.




**NOTE
      12 - Major Customer**




The
      Company had gross revenues of $1,766,000 and $2,683,000 for the three months
      ended February 28, 2006 and February 28, 2005, respectively. The three-month
      period ended February 28, 2006, included $806,000, or 46% of the quarter’s total
      sales, for sales of security contracts to a third party by the Company’s
      security-monitoring service subsidiary, D.S.S. Security, Inc.




The
      three-month period ended February 28, 2005, included $1,729,000, or 64% of
      the
      quarter’s total sales, from General Dynamics.




The
      Company had gross sales of $3,700,000 and $4,211,000 for the six months ended
      February 28, 2006 and February 28, 2005, respectively. The six-month period
      ended February 28, 2006, included $1,189,000, or 32 % of the period’s total
      sales, for sales of security contracts to a third party by the Company’s
      security-monitoring service subsidiary, D.S.S. Security, Inc. The same period
      included $529,000 for the sale of set-top boxes and other products to a third
      party, or 14% of the period’s sales.




The
      six-month period ended February 28, 2005, included $880,000, or 21% of the
      period’s total sales, from Sweetwater Security Capital, L.L.C., that were
      executed with the Company’s security-monitoring service subsidiary, D.S.S.
      Security, Inc. Additionally, the six months ended February 28, 2005, included
      $1,729,000, or 41% of the six months total sales, from General
      Dynamics.




15


**NOTE
      13 - Industry Segments**




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




**Eagle:**




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




**EBS/DSS:**




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




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




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




**APC/HSI:**




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




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




**UCG:**




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




**Other:**




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




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




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




For
      the
      six months ended February
      28, 2006




APC/HSI
            
            EBS/DSS
            
            UCG
            
            Eagle
            
            Other
            
            Elim.
            
            ConsolRevenue
            $
            —
            
            $
            1,957
            
            $
            —
            
            $
            1,743
            
            $
            —
            
            $
            —
            
            $
            3,700Segment
                Loss
            
            —
            
            
            (1,315)
            
            
            (1)
            
            
            (4,914)
            
            
            —
            
            
            —
            
            
            (6,229)Total
                Assets
            
            (8,917)
            
            
            (16,713)
            
            
            (3,097)
            
            
            91,343
            
            
            16,320
            
            
            (43,111)
            
            
            35,825Capital
                Expenditures
            
            —
            
            
            4
            
            
            —
            
            
            50
            
            
            —
            
            
            —
            
            
            54Depreciation
            
            —
            
            
            678
            
            
            1
            
            
            445
            
            
            —
            
            
            —
            
            
            1,124




For
      the
      six months
      ended February 28, 2005




APC/HSI
              
              EBS/DSS
              
              UCG
              
              Eagle
              
              Other
              
              Elim.
              
              ConsolRevenue
              $
              21
              
              $
              1,740
              
              $
              —
              
              $
              2,450
              
              $
              —
              
              $
              —
              
              $
              4,211Segment
                  Loss
              
              (45)
              
              
              (2,069)
              
              
              (1)
              
              
              (10,200)
              
              
              (1,071)
              
              
              —
              
              
              (13,386)Total
                  Assets
              
              18
              
              
              (29,025)
              
              
              31
              
              
              132,039
              
              
              55,885
              
              
              (143,683)
              
              
              72,981Capital
                  Expenditures
              
              —
              
              
              439
              
              
              —
              
              
              91
              
              
              —
              
              
              —
              
              
              530Depreciation
              
              20
              
              
              790
              
              
              1
              
              
              1,389
              
              
              21
              
              
              —
              
              
              2,221




16


Reconciliation
      of Segment Loss from Operations to Net Loss




Six
                Months EndedFebruary
                28,2006
            
            2005Total
                segment loss from operations
            
            $
            (6,229)
            
            $
            (13,386)Total
                other income (expense)
            
            
            (477)
            
            
            (1,436)Net
                loss
            
            $
            (6,706)
            
            $
            (14,822)




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




**NOTE
      14 - Unaudited Quarterly Financial Data**




Nov.
                30
            
            Feb.
                28
            
            May
                31
            
            Aug.
                31Year
                Ended August 31, 2006Revenues
            $
            1,934
            
            $
            1,766Net
                earnings (loss)
            
            (2,634)
            
            
            (4,072)Basic
                loss per share
            
            (0.01)
            
            
            (0.01)Diluted
                loss per share
            
            (0.01)
            
            
            (0.01)Year
                Ended August 31, 2005Revenues
            $
            1,528
            
            $
            2,683
            
            $
            2,976
            
            $
            1,405Net
                earnings (loss)
            
            (4,448)
            
            
            (9,326)
            
            
            (3,951)
            
            
            (39,285)Basic
                loss per share
            
            (0.02)
            
            
            (0.04)
            
            
            (0.02)
            
            
            (0.14)Diluted
                loss per share
            
            (0.02)
            
            
            (0.04)
            
            
            (0.02)
            
            
            (0.14)Year
                Ended August 31, 2004Revenues
            $
            2,397
            
            $
            3,744
            
            $
            5,091
            
            $
            1,258Net
                earnings (loss)
            
            (8,461)
            
            
            (9,398)
            
            
            (4,373)
            
            
            (16,773)Basic
                loss per share
            
            (0.05)
            
            
            (0.05)
            
            
            (0.02)
            
            
            (0.08)Diluted
                loss per share
            
            (0.05)
            
            
            (0.05)
            
            
            (0.02)
            
            
            (0.08)




**NOTE
      15 - Supplemental Non-Cash Disclosures**




Non-Cash
                Activities
              *($
                in thousands)*
            Six
                months ended February 28,2006
            
            2005Settlements
                including Legal
            $
            —
            
            $
            420Interest
                Expense
            
            —
            
            
            495Professional
                Fees
            
            —
            
            
            517Salary
                and Compensation
            
            —
            
            
            146Accrued
                Liabilities
            
            —
            
            
            7,837Notes
                Payable
            
            —
            
            
            5,219Stock
                Payable
            
            2,008
            
            
            —Total
                Non-Cash Settlements
            $
            2,008
            
            $
            14,634




During
      the six months ended February 28, 2006, the Company converted accrued
      liabilities of $5,128,000 to current and long-term debt. During this same
      period, stock payable of $2,008,215 was relieved to issue 14,875,000 shares
      sold
      to investors in August 2005.




17


**NOTE
      16 - 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.




In
      August
      2005, the Company entered into a purchase agreement with certain investors
      for
      the sale of 30 million shares of its common stock at a price of $0.135 per
      share, and received total gross proceeds of $4,050,000. On August 26, 2005,
      the
      American Stock Exchange approved for listing 15,125,000 of these shares and
      notified the Company that shareholder approval was required for the issuance
      of
      the remaining 14,875,000 shares. On September 2, 2005, the Company voluntarily
      placed the funds received for the 14,875,000 shares ($2,008,125) into an escrow
      account pending the shareholder vote. At the October 18, 2005 meeting,
      shareholders approved the issuance of the 14,875,000 shares, and on October
      19,
      2005, the escrowed funds were released to the Company. On October 21, 2005,
      the
      Company applied for listing the 14,875,000 shares with the American Stock
      Exchange and received approval on November 17, 2005. The Company paid a
      placement agent a cash commission of 7% of the gross dollar proceeds, and agreed
      to issue such agent a five-year warrant to purchase 843,750 shares of Eagle
      common stock at an exercise price of $0.24 per share, expiring on August 31,
      2010.




**NOTE
      17 - Exit Activities**




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




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




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




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




**NOTE
      18 - Subsequent Events**




In
      March
      2006, the agreement between Eagle and GlobeCast North America to distribute
      Eagle’s IPTVComplete service using GlobeCast’s satellite distribution network
      was terminated. As a result, Eagle’s obligation to share the monthly satellite
      transponder costs has ceased as of March 31, 2006. However, Eagle is obligated
      to pay 50% of the termination liability for the early termination of the
      agreement between GlobeCast and the transponder provider. This obligation,
      in
      the amount of $202,500, is secured by an irrevocable letter of credit of
      $202,500. Eagle and GlobeCast are currently negotiating a new agreement to
      distribute Eagle’s IP-based video content using GlobeCast’s fiber-based
      network.




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




18


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




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




**Executive
      Overview**




Eagle
      Broadband, Inc. (the “Company” or “Eagle”), is a provider of broadband, Internet
      protocol (IP) and satellite communications products and services. The Company’s
      business activities are focused on the following core areas:




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




·
            SatMAXTM,
                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
                “SatMAXTM in a suitcase” model; and




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




As
      of
      February 28, 2006, the Company’s active subsidiaries were: Eagle Broadband
      Services, Inc., D.S.S. Security, Inc., operating as Eagle Broadband Security,
      EBI Funding Corporation and Etoolz, Inc. Additionally, Eagle has a number of
      inactive subsidiaries that had results in one or more of the periods included
      in
      the financial statements covered by this report. These inactive subsidiaries
      include: Clearworks Communications, Inc., Clearworks.net, Inc., Clearworks
      Home
      Systems, Inc., Contact Wireless, Inc., United Computing Group, Inc., Atlantic
      Pacific Communications, Inc., and Link Two Communications, Inc. Eagle has
      incorporated certain ongoing operations of the inactive subsidiaries into the
      active subsidiaries listed above including Atlantic Pacific Communications,
      Inc.
      and Clearworks Communications, Inc. The consolidated financial statements
      include the accounts of the Company and its subsidiaries. All significant
      inter-company transactions and balances have been eliminated in
      consolidation.




We
      intend
      for this discussion to provide the reader with information that will assist
      in
      understanding our financial statements, the changes in certain key items in
      those financial statements from year to year, and the primary factors that
      accounted for those changes, as well as how certain accounting principles affect
      our financial statements. The discussion also provides information about the
      financial results of the various segments of our business to provide a better
      understanding of how those segments and their results affect the financial
      condition and results of operations of the Company as a whole. This discussion
      should be read in conjunction with our financial statements and accompanying
      notes for the six months ended February 28, 2006.




19


**Results
      of Operations**




**Three
      and Six Months Ended February 28, 2006, Compared to Three and Six Months Ended
      February 28, 2005**




The
      following table sets forth summarized consolidated financial information for
      the
      three and six months ended February 28, 2006 and 2005:




**Condensed
      Financial Information**




Three
                months ended
              February
                28,
            
            
            
            
            
            
            Six
                months ended
              February
                28,2006
            
            2005
            
            $
                Change
            
            %
                Change
            
            2006
            
            2005
            
            $
                Change
            
            %
                ChangeNet
                Sales
            
            $
            1,766
            
            $
            2,683
            
            $
            (917)
            
            (34%)
            
            $
            3,700
            
            $
            4,211
            
            $
            (511)
            
            (12%)Cost
                of Goods Sold
            
            
            1,544
            
            
            3,643
            
            
            (2,099)
            
            (58%)
            
            
            2,962
            
            
            5,327
            
            
            (2,365)
            
            (44%)Gross
                Profit
            
            
            222
            
            
            (960)
            
            
            1,182
            
            
            
            
            738
            
            
            (1,116)
            
            
            1,854Percent
                of Sales
            
            
            13%
            
            
            (36%)
            
            
            
            
            
            
            
            20%
            
            
            (27%)Operating
                Expenses
            
            
            3,810
            
            
            7,928
            
            
            (4,118)
            
            (52%)
            
            
            6,967
            
            
            12,270
            
            
            (5,303)
            
            (43%)Loss
                from Operations
            
            
            (3,588
            )
            
            (8,888)
            
            
            5,300
            
            (60%)
            
            
            (6,229
            )
            (13,386)
            
            
            7,157
            
            (53%)Other
                Income (Expense)
            
            
            (484
            )
            
            (438)
            
            
            46
            
            11%
            
            
            (477
            )
            
            (1,436)
            
            
            959
            
            (67%)Net
                Loss
            
            $
            (4,072
            )
            $
            (9,326)
            
            $
            5,254
            
            (56%)
            
            $
            (6,706
            )
            $ 
                 (14,822)
            
            $
            8,116
            
            (55%)




**Overview**




For
      the
      three months ended February 28, 2006, the Company’s business operations
      reflected a continued emphasis on its strategy to focus on business
      opportunities in its three main operating divisions: IPTV solutions, satellite
      communications and broadband services. For the quarter ended February 28, 2006,
      the Company’s consolidated operations generated net sales of $1,766,000 with a
      corresponding gross profit of $222,000. The overall decrease in net sales for
      the three months ended February 28, 2006, as compared to the three months ended
      February 28, 2005, was primarily attributable to a prior
      year sale of set-top boxes of $1,066,000 to a major customer.




The
      Company incurred a net loss of $4,072,000 for the three months ended February
      28, 2006.




The
      Company’s net loss for the three months ended February 28, 2006, included
      $1,318,000 in salary expense, bad debt expense of $494,000, $534,000 in
      depreciation and amortization expenses, $1,110,000 in professional services
      for
      legal, consulting, and accounting fees and $150,000 in other support costs
      for
      shared monthly satellite transponder costs associated with the delivery of
      the
      Company’s IPTVComplete service.




*Sales
      Information*




Set
      forth
      below is a table presenting summarized sales information for our business
      segments for the three months ended February 28, 2006 and 2005:




($
                in thousands)
            
            Three
                months ended February 28,Business
                Segment
            
            2006
            
            %
                of Total
            
            2005
            
            %
                of Total
            
            $
                Change
            
            %
                ChangeStructured
                Wiring
            
            $
            463
            
            26%
            
            $
            369
            
            14%
            
            $
            94
            
            26
                %Broadband
                Services
            
            
            1,105
            
            63%
            
            
            524
            
            20%
            
            
            581
            
            111 %Products
            
            
            158
            
            9%
            
            
            1,754
            
            65%
            
            
            (1,596)
            
            (91%)Other
            
            
            40
            
            2%
            
            
            36
            
            1%
            
            
            4
            
            11
                %Total
            
            $
            1,766
            
            100%
            
            $
            2,683
            
            100%
            
            $
            (917)
            
            (34%)




20


Set
      forth
      below is a table presenting summarized sales information for our business
      segments for the six months ended February 28, 2006 and 2005:




($
                in thousands)
            
            Six
                months ended February 28,Business
                Segment
            
            2006
            
            %
                of Total
            
            2005
            
            %
                of Total
            
            $
                Change
            
            %
                ChangeStructured
                Wiring
            
            $
            885
            
            24%
            
            $
            632
            
            15%
            
            $
            253
            
            40%Broadband
                Services
            
            
            1,957
            
            53%
            
            
            1,740
            
            41%
            
            
            217
            
            12%Products
            
            
            780
            
            21%
            
            
            1,779
            
            42%
            
            
            (999
            )
            (56%
            )Other
            
            
            78
            
            2%
            
            
            60
            
            1%
            
            
            18
            
            30%Total
            
            $
            3,700
            
            100%
            
            $
            4,211
            
            100%
            
            $
            (511
            )
            (12%
            )




For
      the
      three months ended February 28, 2006, net sales decreased to $1,766,000 from
      $2,683,000, compared to the three-month period ended February 28, 2005. The
      overall decrease of 34% was attributable to a $1,596,000 decrease in the
      Company’s product sales, an increase of $94,000 in structured wiring operations,
      a $581,000 increase in the Company’s broadband services sales; and a $4,000
      increase in other sales. The $1,596,000 decrease in product sales was primarily
      attributable to a prior year sale of set-top boxes of $1,065,000 to a major
      customer. The increase of $581,000 in broadband services is primarily
      attributable to the sale of security contracts to a third party by the Company’s
      security-monitoring service subsidiary, D.S.S. Security, Inc. The $94,000
      increase in structured wiring sales corresponded to the Company’s decision to
      pursue commercial structured wiring and cabling opportunities on a direct basis
      outside of the BDS model.




For
      the
      six months ended February 28, 2006, net sales decreased to $3,700,000 from
      $4,211,000 during the six-month period ended February 28, 2005. The overall
      decrease of 12% was primarily attributable to a prior year sale of set top
      boxes
      of $1,065,000 to a major customer. The $253,000 increase in structured wiring
      sales is attributable to the Company’s focused efforts to pursue commercial
      structured wiring and cabling opportunities. The $217,000 increase in broadband
      services is primarily attributable to the sale of security contracts to a third
      party customer during the period.




*Cost
      of Goods Sold*




The
      following table sets forth summarized cost of goods sold information for the
      three and six months ended February 28, 2006 and 2005:




Three
                months ended
              February
                28,
            
            
            
            
            
            
            Six
                months ended
              February
                28,*($
                in thousands)*
            
            2006
            
            2005
            
            $
                Change
            
            %
                Change
            
            2006
            
            2005
            
            $
                Change
            
            %
                ChangeDirect
                Labor and Related Costs
            
            $
            407
            
            $
            522
            
            $
            (115)
            
            (22%)
            
            $
            906
            
            $
            784
            
            $
            122
            
            16%Products
                and Integration Services
            
            
            (2
            )
            
            2,164
            
            
            (2,166)
            
            (100%)
            
            
            254
            
            
            2,203
            
            
            (1,949)
            
            (88%)Impairment
                Slow Moving & Obsolete Inventory
            107
            
            
            —
            
            
            107
            
            —
            
            
            107
            
            
            —
            
            
            107
            
            —Structured
                Wiring Labor and Material
            
            
            431
            
            
            332
            
            
            99
            
            30%
            
            
            720
            
            
            506
            
            
            214
            
            42%Broadband
                Services Costs
            
            
            319
            
            
            339
            
            
            (20)
            
            (6%)
            
            
            464
            
            
            1,258
            
            
            (794)
            
            (63%)Depreciation
                and Amortization
            
            
            201
            
            
            286
            
            
            (85)
            
            (30%)
            
            
            430
            
            
            576
            
            
            (146)
            
            (25%)Other
                Manufacturing Costs
            
            
            81
            
            
            —
            
            
            81
            
            —
            
            
            81
            
            
            —
            
            
            81
            
            —Total
                Cost of Goods Sold
            
            $
            1,544
            
            $
            3,643
            
            $
            (2,099)
            
            (58%)
            
            $
            2,962
            
            $
            5,327
            
            $
            (2,365)
            
            (44%)




For
      the
      three months ended February 28, 2006, cost of goods sold decreased by 58% to
      $1,544,000 from $3,643,000 during the three months ended February 28, 2005.
      The
      overall decrease of $2,099,000 was primarily attributable to the Company’s cost
      associated with product sales to General Dynamics from the prior year, as well
      as the Company’s additional costs of $759,000 for design changes and expedite
      charges incurred during the quarter ended February 28, 2005. The Company’s
      overall gross profit percentage was 13% for the three months ended February
      28,
      2006, compared to an overall negative gross profit percentage of 36% for the
      three months ended February 28, 2005. This substantial improvement in gross
      profit percentage is primarily attributable to a decrease in product and
      integration service costs as the Company continued to realign staff and
      resources to concentrate on the three core offerings of the Company: IPTV
      solutions, satellite communications and providing solutions to broadband and
      service provider partners.




For
      the
      six months ended February 28, 2006, cost of goods sold decreased by 44% to
      $2,962,000 from $5,327,000 during the six months ended February 28, 2005. The
      Company’s overall gross profit percentage of 20% for the six months ended
      February 28, 2006 represents a significant improvement as compared to an overall
      negative gross profit percentage of 27% for the six months ended February 28,
      2005. The substantial improvement in gross profit percentage is primarily
      attributable to a decrease in product and integration service costs and
      broadband service costs as the Company continued to realign staff and resources
      to concentrate on the three core offerings of the Company: IPTV solutions,
      satellite communications and providing solutions to broadband and service
      provider partners.




*Operating
      Expenses*




The
      following table sets forth summarized operating expense information for the three
      and
      six months ended February 28 ,
      2006
      and 2005:




Three
                months ended February 28,
            
            
            
            
            
            
            Six
                months ended February 28,*($
                in thousands)*
            
            2006
            
            2005
            
            $
                Change
            
            %
                Change
            
            2006
            
            2005
            
            $
                Change
            
            %
                ChangeSalaries
                and Related Costs
            
            $
            1,318
            
            $
            3,144
            
            $
            (1,826)
            
            (58%)
            
            $
            2,868
            
            $
            3,544
            
            $
            (676)
            
            (19%)Advertising
                and Promotion
            
            
            14
            
            
            40
            
            
            (26)
            
            (65%)
            
            
            45
            
            
            50
            
            
            (5)
            
            (9%)Depreciation
                and Amortization
            
            
            333
            
            
            804
            
            
            (471)
            
            (59%)
            
            
            694
            
            
            1,645
            
            
            (951)
            
            (58%)Research
                and Development
            
            
            130
            
            
            232
            
            
            (102)
            
            (44%)
            
            
            234
            
            
            375
            
            
            (141)
            
            (38%)Other
                Support Costs
            
            
            2,015
            
            
            2,658
            
            
            (643)
            
            (24%)
            
            
            3,126
            
            
            5,606
            
            
            (2,481)
            
            (44%)Impairment,
                write-downs, and restructuring costs
            
            
            —
            
            
            1,050
            
            
            (1,050)
            
            (100%)
            
            
            —
            
            
            1,050
            
            
            (1,050)
            
            (100%)Total
                Operating Expenses
            
            $
            3,810
            
            $
            7,928
            
            $
            (4,118)
            
            (52%)
            
            $
            6,967
            
            $
            12,270
            
            $
            (5,303)
            
            (43%)




The
      following table breaks out “Other support costs” information as presented in the
      preceding table for the three
      and
      six months ended February 28 ,
      2006
      and 2005:




Three
                months ended February 28,
            
            
            
            
            
            
            Six
                months ended
              February
                28,*($
                in thousands)*
            
            2006
            
            2005
            
            $
                Change
            
            %
                Change
            
            2006
            
            2005
            
            $
                Change
            
            %
                ChangeAuto
                Related
            
            $
            11
            
            $
            10
            
            $
            1
            
            10%
            
            $
            30
            
            $
            14
            
            $
            16
            
            114%Bad
                Debt
            
            
            494
            
            
            1
            
            
            493
            
            49,300%
            
            
            (410
            )
            
            20
            
            
            (430)
            
            (2,150%)Delivery
                and Postage
            
            
            7
            
            
            15
            
            
            (8)
            
            (53%)
            
            
            162
            
            
            28
            
            
            134
            
            479%Fees
            
            
            5
            
            
            64
            
            
            (59)
            
            (92%)
            
            
            13
            
            
            101
            
            
            (88)
            
            (87%)Insurance
                and Office
            
            
            94
            
            
            263
            
            
            (169)
            
            (64%)
            
            
            198
            
            
            415
            
            
            (217)
            
            (52%)Professional
                and Contract Labor
            
            
            1,110
            
            
            1,664
            
            
            (554)
            
            (33%)
            
            
            2,101
            
            
            3,954
            
            
            (1,853)
            
            (47%)Rent
            
            
            88
            
            
            136
            
            
            (48)
            
            (35%)
            
            
            180
            
            
            229
            
            
            (49)
            
            (21%)Repairs
                and Maintenance
            
            
            39
            
            
            12
            
            
            27
            
            225%
            
            
            68
            
            
            24
            
            
            44
            
            183%Travel
            
            
            94
            
            
            112
            
            
            (18)
            
            (16%)
            
            
            176
            
            
            200
            
            
            (24)
            
            (12%)Taxes
            
            
            (222
            )
            
            193
            
            
            (415)
            
            (215%)
            
            
            (55
            )
            
            324
            
            
            (379)
            
            (117%)Telephone
                and Utilities
            
            
            117
            
            
            130
            
            
            (13)
            
            (10%)
            
            
            280
            
            
            216
            
            
            64
            
            30%Other
            
            
            178
            
            
            58
            
            
            120
            
            207%
            
            
            383
            
            
            81
            
            
            302
            
            373%Total
                Other Support Costs
            
            $
            2,015
            
            $
            2,658
            
            $
            (643)
            
            (24%)
            
            $
            3,126
            
            $
            5,606
            
            $
            (2,480)
            
            (44%)




For
      the
      three months ended February 28, 2006, operating expenses significantly decreased
      by 52% to $3,810,000 as compared to $7,928,000 for the three months ended
      February 28, 2005. The primary fluctuations that occurred as evidenced by the
      two preceding tables immediately above are discussed below:




·
            A
                $643,000 decrease in other support costs as the Company continued
                to focus
                efforts on reducing operational overhead and controlling expenditures.
                The
                components of the decrease are set forth on the table included immediately
                above, were primarily due to (i) a $554,000 decrease in professional
                fees
                and contract labor which includes legal, accounting and consulting
                fees
                (ii) a $415,000 decrease in taxes due to decrease in assessed property
                taxes with certain taxing authorities and (iii) a $169,000 decrease
                in
                insurance and office expenses. These decreases were offset by a $493,000
                increase in bad debt and a $120,000 increase in other fees that included
                costs associated with a purchase obligation to share monthly satellite
                transponder costs associated with the delivery of the Company’s
                IPTVComplete service.




·
            A
                $1,826,000 decrease in salaries and related costs due to a reduction
                in
                headcount to 88 employees for the three months ended February 28,
                2006, as
                compared to 113 employees for the three months ended February 28,
                2005.




·
            A
                $471,000 decrease in depreciation and amortization expense for long-lived
                assets and intangibles. These assets had impairment charges recorded
                for
                the year ended August 31, 2005, thus decreasing the depreciable basis
                and
                related depreciation expense for the quarter ended February 28,
                2006.




21


For
      the
      six months ended February 28, 2006, operating expenses significantly decreased
      by 43% to $6,967,000 as compared to $12,270,000 for the six months ended
      February 28, 2005. The primary fluctuations that occurred as evidenced by the
      two preceding tables immediately above are discussed below:




·
            A
                $2,480,000 decrease in other support costs as the Company continued
                to
                focus efforts on reducing operational overhead and controlling
                expenditures. The components of the decrease were primarily due to
                (i) a
                $430,000 decrease in bad debt expense for collection of receivables
                deemed
                uncollectible in prior years (ii) a $1,853,000 decrease in professional
                fees and contract labor which includes legal, accounting and consulting
                fees (iii) a $379,000 decrease in assessed property taxes with certain
                taxing authorities and (iv) a decrease of $217,000 for insurance
                and
                office expenses. These decreases were offset by an increase of $64,000
                for
                telephone and other utilities and $302,000 in other expenses, which
                included costs associated with a purchase obligation to share monthly
                satellite transponder costs associated with the delivery of the Company’s
                IPTVComplete service.




·
            An
                impairment charge of $1,050,000 was recorded for the six months ended
                February 28, 2005 for Link-Two Communications assets. No similar
                charge
                was required for the six months ended February 28,
                2006.




·
            A
                $951,000 decrease in depreciation and amortization expense for long-lived
                assets and intangibles that had impairment charges recorded for the
                year
                ended August 31, 2005, thus decreasing the depreciable basis and
                related
                depreciation expense for the six months ended February 28, 2006,
                as
                compared to the six months ended February 28,
                2005.




·
            A
                $676,000 decrease in salaries and related costs primarily due to
                the
                reduction in headcount from 113 employees at February 28, 2005, to
                88
                employees at February 28, 2006. The decrease was offset for the six
                months
                ended February 28, 2006, for non-cash charges of $411,000 for compensation
                expense in accordance with the provisions of SFAS 123R and a non-cash
                charge of $611,000 to expense prepaid commissions related to security
                contracts sold to a third party.




**Net
      Loss**




Net
      loss
      for the three months ended February 28, 2006, was $4,072,000, compared to a
      net
      loss of $9,326,000 during the three months ended February 28, 2005. For the
      six
      months ended February 28, 2006, the Company’s net loss was $6,706,000 as
      compared to a net loss of $14,822,000 for the six months ended February 28,
      2005.




**Changes
      in Cash Flow**




Eagle’s
      operating activities used net cash of $3,899,000 in the six months ended
      February 28, 2006, compared to use of net cash of $3,347,000 in the six months
      ended February 28, 2005. The increase in net cash used by operating activities
      was primarily attributable to fund the Company’s net operating loss, net of
      non-cash charges, totaling $2,282,000 combined with $525,000 of cash used by
      fluctuations in working capital requirements consisting of the combination
      of
      accounts receivable, inventory, other assets, prepaid expenses, accounts payable
      and accrued expenses. Eagle’s investing activities provided net cash of $374,000
      in the six months ended February 28, 2006, compared to cash used of $547,000
      in
      the six months ended February 28, 2005. The increase was due primarily to assets
      sold during the six months ended February 28, 2006, and an increase in amounts
      collected for direct financing leases. Eagle’s financing activities provided net
      cash of $647,000 in the six months ended February 28, 2006, compared to
      $7,284,000, of cash provided in the six months ended February 28, 2005. The
      decrease was due to a significant decrease in equity funding transactions for
      the six months ended February 28, 2006. For the six months ended February 28,
      2006, the Company received proceeds of $750,000 for a convertible note and
      paid
      $103,000 towards notes payable.




22


**Liquidity
      and Capital Resources**




Current
      assets for the six months ended February 28, 2006, totaled $4,463,000 (includes
      cash and cash equivalents of $1,142,000) as compared to $8,370,000 reported
      for
      the year ended August 31, 2005.




The
      Company anticipates that it will incur significantly less capital expenditures
      for broadband fiber infrastructure as a result of entering into an operating
      agreement with 186KMPS Partners LLP to assume operation of the portion of the
      Company’s fiber-optic network. (See Note 18-Subsequent Events.)




In
      February 2006, the Company entered into a series of agreements with Dutchess
      Private Equities Fund, L.P. (“Dutchess”), pursuant to which Dutchess will
      provide a three-year, $5,000,000 equity line of credit for the Company. Under
      this agreement, the Company may make drawdown requests on the equity line,
      and
      Dutchess is obligated to purchase a number of shares at a price equal 93% of
      the
      market price of our stock to fund the drawdown requests. In March 2006, the
      Company was advised by the American Stock Exchange that it deemed a reverse
      split to be appropriate in order to increase the price of the Company’s common
      stock. The Company’s shareholders will vote on the reverse split proposal at the
      shareholder meeting to be held on April 18, 2006, and management believes that
      shareholder approval for the reverse split will be obtained.




One
      result of effecting the reverse split is that the number of shares outstanding
      will be reduced, while the number of authorized shares will remain unchanged.
      A
      portion of these authorized and unissued shares will be needed by the Company
      to
      draw down the equity line. The Company currently anticipates the need to utilize
      the equity line over the course of the next six months for the manufacture
      of
      set-top boxes, further development of SatMAX, including the new Alpha “SatMAX in
      a suitcase” model, further launches of IPTVComplete installations, and other
      working capital requirements.




A
      registration statement was filed with the SEC on March 22, 2006, to register
      shares to be issued pursuant to the equity line. The Company is awaiting
      notification from the SEC to declare the registration statement effective.
      Once
      the registration statement is declared effective, the Company will have the
      ability to draw on the line of credit.






Historically,
      we have relied upon best efforts third-party funding. Though we have been
      successful at raising additional capital on a best-efforts basis in the past,
      we
      can provide no assurance that we will be successful in any future best-efforts
      financing endeavors. If we are unable to timely utilize the equity line or
      raise
      additional financing, we may need to curtail operations or sell assets. The
      Company will continue to rely upon financing from external sources to fund
      its
      operations for the foreseeable future, and it will likely need to raise
      additional financing to fund working capital requirements during the quarter
      ending November 30, 2006.




**Contractual
      Obligations**




The
      following table sets forth contractual obligations as of February 28,
      2006:




**Payments
                Due by Period**(*Thousands
                of dollars*)
              **Contractual
                Obligations**
            
            **Total**
            
            **Less
                than****1
                year**
            
            **1-3
                years**
            
            **3-5
                years**
            
            **More
                than**
              **5
                years**Notes
                Payable Obligations
            
            $
            1,514
            
            $
            1,514
            
            $
            —
            
            $
            —
            
            $
            —Long-Term
                Debt
            
            
            4,987
            
            
            —
            
            
            4,987
            
            
            —
            
            
            —Operating
                Lease Obligations
            
            
            1,025
            
            
            303
            
            
            722
            
            
            —
            
            
            —Purchase
                Obligations and Commitments
            
            
            200
            
            
            200
            
            
            —
            
            
            —
            
            
            —**Total
                contractual obligations**
            
            $
            7,727
            
            $
            2,017
            
            $
            5,710
            
            $
            —
            
            $
            —




The
      Company’s contractual obligations consist of long term debt, derivative
      liabilities (current and long term), warrant liabilities (non-current) and
      current notes payable as set forth in Note 5 - Notes
      Payable to the Company’s financial statements. The Company has certain
      obligations for office space operating leases requiring future minimal
      commitments under non-cancelable leases (see Note 9 - Commitments
      and Contingent Liabilities to the Company’s financial statements), and a
      purchase obligation to share monthly satellite transponder costs associated
      with
      the delivery of the Company’s IPTVComplete service. (See Note-18 Subsequent
      Events.)




**Off-Balance
      Sheet Arrangements**




As
      of
      February 28, 2006, we did not have any significant off-balance-sheet
      arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation
      S-K.




23


**CRITICAL
      ACCOUNTING POLICIES**




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




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




**Impairment
      Assessment**




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




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




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




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




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




For
      the
      quarter ending February 28, 2006, management has determined there are no changes
      in circumstances since the fiscal year ended August 31, 2005 to indicate testing
      for impairment at the reporting unit level (operating segment or one level
      below
      an operating segment) is required.




**Impairment
      of Long-Lived Assets**




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




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




24


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




For
      the
      quarter ending February 28, 2006, management has determined there are no changes
      in circumstances or events that have occurred subsequent to the fiscal year
      ended August 31, 2005 to indicate testing for recoverability was
      required.




**Revenue
      Recognition**




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




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




**Deferred
      Revenues**




Revenues
      that are billed in advance of services being completed are deferred until the
      conclusion of the period of the service for which the advance billing relates.
      Deferred revenues are included on the balance sheet as a current liability
      until
      the service is performed and then recognized in the period in which the service
      is completed. Eagle’s deferred revenues historically have consisted primarily of
      billings in advance for cable, Internet, security and telephone services, which
      generally are for between one and three months of services. The Company has
      deferred revenue from the sale of security monitoring contracts, both purchased
      and owned until the contract provisions are fulfilled. Eagle had deferred
      revenues of $224,000 as of February 28, 2006. As of August 31, 2005, the Company
      had deferred revenues of $623,000, which included revenues deferred for a
      twelve-month holdback provision for security contracts sold to a major customer
      during fiscal 2005.




**Eagle
      Broadband, Inc.**




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




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




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




25


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




**Eagle
      Broadband Services, Inc. (BDS)**




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




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




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




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




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




**Receivables**




For
      the
      six months ended February 28, 2006, Eagle accounts receivable decreased to
      $1,356,000 from $1,890,000 at August 31, 2005. The majority of this decease
      was
      due to the collection of a receivable for security contracts previously sold
      in
      prior quarters.




The
      Company’s accounts receivable aging, as measured by days sales outstanding
      (DSO), totaled 52 days at February 28, 2006, and 47 days at August 31, 2005,
      on
      an adjusted basis after recording the write-offs and reserves. The increase
      in
      DSO from 47 days at August 31, 2005, to 52 days at February 28, 2006, was
      primarily attributable to several slow paying customers.




**Allowance
      for Doubtful Accounts**




The
      Company’s allowance for doubtful accounts totaled $215,000 and $2,688,000 for
      the three months ended February 28, 2006 and the year ended August 31, 2005,
      respectively. These allowances for doubtful accounts amounts represented 14%
      and
      59% of the gross accounts receivable balances for the quarter ended February
      28,
      2006 and the year ended August 31, 2005. They represented 47% and 82% of the
      Company’s greater than 90-day accounts for the quarter ended February 28, 2006,
      and the year August 31, 2005. The decrease in the allowance for doubtful
      accounts from August 31, 2005 to February 28, 2006, was attributable to (i)
      the
      collection of a receivable previously included in the allowance and (ii) the
      direct write off of a receivable previously deemed uncollectible in a prior
      year.




26


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




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




**Inventory**




Inventories
      are valued at the lower of cost or market. The cost is determined by using
      the
      first-in first-out method. At February 28, 2006, Eagle’s inventory totaled
      $515,000 as compared to $802,000 at August 31, 2005. The majority of this
      decrease is for sales of set-top boxes that occurred for the six months ended
      February 28, 2006. The Company outsources production as needed based on contract
      orders from customers.




**Derivative
      Financial Instruments**




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




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




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




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




**Recent
      Accounting Pronouncements**




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




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




27


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






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




**Item
      4.****Controls
      and Procedures.**




The
      Company’s Chief Executive Officer and Principal Accounting Officer have
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as
      of
      the end of February 28, 2006. Based on such evaluation, such officers have
      concluded that the Company’s disclosure controls and procedures are
      effective.




**Changes
      in Internal Controls**




There
      has
      been no change in the Company’s internal control over financial reporting
      identified in connection with our evaluation as of the end of the fiscal quarter
      ended February 28, 2006, that has materially affected, or is reasonably likely
      to materially affect, the Company’s internal controls over financial
      reporting.




28


**PART
      II-OTHER INFORMATION**




**Item
      1.**  **Legal
      Proceedings.**




In
      July
      2003, Eagle became a defendant in Cornell Capital Partners, L.P., vs. Eagle
      Broadband, Inc., et al., Civil Action No. 03-1860, in the United States District
      Court for the District of New Jersey. The suit presents claims for breach of
      contract, common law fraud, state and federal securities fraud, and negligent
      misrepresentation. The plaintiff has also alleged that Eagle has defaulted
      on a
      convertible debenture for failing to timely register the shares of common stock
      underlying the convertible debenture and is seeking to accelerate the maturity
      date of the debenture. In November 2003, the principal balance of the debenture
      was repaid, although the suit remains outstanding. Cornell claims damages of
      approximately $1 million. Eagle asserted counterclaims against Cornell for
      fraud
      and breach of contract in the amount of $2 million. On March 28, 2006, the
      court
      ruled in favor of the plaintiff on certain claims, granting the plaintiff’s
      motion for partial summary judgment on its breach of contract claim and all
      of
      Eagle’s counterclaims. The court ruled in favor of Eagle on other claims,
      granting Eagle’s motion for summary judgment on plaintiff’s claims for common
      law fraud, state and federal securities fraud, and negligent misrepresentation.
      The Company has accrued $750,000 in expenses against this lawsuit.




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




In
      February 2006, the Company entered into a settlement agreement with The Tail
      Wind Fund Ltd. (“Tail Wind”) to settle a lawsuit filed in June 2004 by Tail Wind
      against the Company and its subsidiary, Link-Two Communications, Inc. The
      settlement agreement resulted in an aggregate settlement amount of $5 million,
      payable in a combination of cash, stock, a non-convertible promissory note
      and
      convertible notes. Tail Wind claimed the Company breached several agreements
      and
      sought damages of approximately $25 million.




29


**Item
      6.****Exhibits.**




Exhibit
                Number
            
            Description31.1
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.31.2
            
            Certification
                of Principal Accounting Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                of Chief Executive Officer and Principal Accounting Officer pursuant
                to
                Section 906 of the Sarbanes-Oxley Act of
                2002.




**SIGNATURES**




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


**EAGLE
                BROADBAND, INC.**(Registrant)By:
            /s/David
              MicekDavid
              MicekTitle:
              President and Chief Executive OfficerDate:
              April 12, 2006


By:
            /s/Juliet
              MarkovichJuliet
              MarkovichTitle: Corporate
              Controller and Principal Accounting OfficerDate:
              April 12, 2006






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