UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549




**FORM
      10-Q**




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


For
      the
      quarterly period ended May 31, 2006




or




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


For
      the
      transition period from
              
to




Commission
      File Number 001-15649




**EAGLE
      BROADBAND, INC.**


(Exact
      name of registrant as specified in its charter)




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




101
      COURAGEOUS DRIVE


LEAGUE
      CITY, TEXAS 77573


(Address
      of principal executive offices) (Zip Code)




(281)
      538-6000


(Registrant’s
      telephone number, including area code)




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.




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




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




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







**EAGLE
                  BROADBAND, INC.**
                **FORM
                  10-Q**
                **FOR
                  THE QUARTER ENDED MAY 31, 2006**
                
                **TABLE
                  OF CONTENTS****PAGE****PART
                I-FINANCIAL INFORMATION**
              2**Item
                  1. Financial Statements**
              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**
              20**Item
                  4. Controls and
                  Procedures**
              31**PART
                II-OTHER
                INFORMATION**
              29**Item
                  1. Legal
                  Proceedings**
              29**Item
                  4. Subission of Matters to a Vote of
                  Security Holders**
              32**Item
                  6.
                  Exhibits**
              32


-1-




**PART
      I-FINANCIAL INFORMATION**




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




**EAGLE
      BROADBAND, INC.**


**CONSOLIDATED
      BALANCE SHEETS**




***(Dollars
                in thousands*****)**
            
            May
                31, 2006
              (Unaudited)
            
            August
                31, 2005
              (Audited)**ASSETS****Current
                Assets**Cash
                and Cash Equivalents
            
            $
            261
            
            
            $
            4,020Cash
                in Restricted Account
            
            
            —
            
            
            
            203Accounts
                Receivable, net
            
            
            559
            
            
            
            1,890Inventories
            
            
            590
            
            
            
            802Net
                Investment in Direct Financing Leases- current portion
            
            
            524
            
            
            
            525Other
                Assets
            
            
            —
            
            
            
            298Prepaid
                Expenses
            
            
            589
            
            
            
            632**Total
                Current Assets**
            
            
            **2,523**
            
            
            
            **8,370****Property
                and Equipment**Operating
                Equipment
            
            
            31,861
            
            
            
            32,298Less:
                Accumulated Depreciation
            
            
            (9,991
            )
            
            
            (8,994
            )**Total
                Property and Equipment**
            
            
            **21,870**
            
            
            
            **23,304****Other
                Assets**Net
                Investment in Direct Financing Leases (net of current
                portion)
            
            
            558
            
            
            
            853Goodwill
            
            
            4,095
            
            
            
            4,095Contract
                Rights, net
            
            
            2,706
            
            
            
            2,921Customer
                Relationships, net
            
            
            769
            
            
            
            831Other
                Intangible Assets, net
            
            
            785
            
            
            
            859Other
                Assets
            
            
            4
            
            
            
            680**Total
                Other Assets**
            
            
            **8,917**
            
            
            
            **10,239****Total
                Assets**
            
            **$**
            **33,310**
            
            
            **$**
            **41,913****LIABILITIES
                AND SHAREHOLDERS’ EQUITY****Current
                Liabilities**Accounts
                Payable
            
            $
            6,542
            
            
            $
            6,640Stock
                Payable
            
            
            —
            
            
            
            2,008Accrued
                Expenses
            
            
            4,010
            
            
            
            9,477Compound
                Embedded Derivative
            
            
            223
            
            
            
            —Notes
                Payable & Current Portion of Long Term Debt
            
            
            875
            
            
            
            61Deferred
                revenue
            
            
            191
            
            
            
            623**Total
                Current Liabilities**
            
            
            **11,841**
            
            
            
            **18,809****Long-Term
                Liabilities**Long
                Term Debt
            
            
            2,827
            
            
            
            —Compound
                Embedded Derivative
            
            
            340
            
            
            
            —Warrant
                Liability
            
            
            142
            
            
            
            —**Total
                Long-Term Liabilities**
            
            
            **3,309**
            
            
            
            **—****Total
                Liabilities**
            
            
            **15,150**
            
            
            
            **18,809****Shareholders’
                Equity**Preferred
                Stock, $0.001 par value, 5,000,000 shares authorized, none
                issued
            
            
            —
            
            
            
            —Common
                Stock - $0.001 par value, 350,000,000 shares authorized,9,647,893
                and 8,234,608 issued and outstanding at May 31, 2006 and August 31,
                2005,
                respectively
            
            
            10
            
            
            
            8Additional
                Paid in Capital
            
            
            241,459
            
            
            
            237,212Accumulated
                Deficit
            
            
            (223,309
            )
            
            
            (214,116
            )**Total
                Shareholders’ Equity**
            
            
            **18,160**
            
            
            
            **23,104****Total
                Liabilities and Shareholders’ Equity**
            
            **$**
            **33,310**
            
            
            **$**
            **41,913**




See
      accompanying notes to consolidated financial statements.




-2-


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


-3-




**EAGLE
      BROADBAND, INC.**


**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’
EQUITY**




Common
                Stock
            
            Preferred
                Stock
            
            Additional
                Paid in Capital
            
            Retained
                Earnings
            
            Accumulated
                Comprehensive Income
            
            Total
                Shareholders’ Equity**(*****Shares
                and dollars in thousands*****)**
            
            Shares
            
            Value**Shareholders’
                Equity at August 31, 2004**
            
            **5,872**
            
            **$**
            **6**
            
            **—**
            
            **$**
            **208,251**
            
            **$**
            **(157,106)**
            
            **$**
            **(1,048)**
            
            **$**
            **50,103**Net
                Loss for the year ended August 31, 2005
            
            —
            
            
            —
            
            —
            
            
            —
            
            
            (57,010)
            
            
            —
            
            
            (57,010)**New
                Stock Issued:**For
                services and compensation
            
            146
            
            
            —
            
            —
            
            
            2,344
            
            
            —
            
            
            —
            
            
            2,344For
                retirement of debt and accrued liabilities
            
            790
            
            
            1
            
            —
            
            
            13,361
            
            
            —
            
            
            —
            
            
            13,362Proceeds
                from sale of common stock, net
            
            1,308
            
            
            1
            
            —
            
            
            11,307
            
            
            —
            
            
            —
            
            
            11,308Proceeds
                from exercise of options
            
            119
            
            
            —
            
            —
            
            
            1,949
            
            
            —
            
            
            —
            
            
            1,949Unrealized
                Holding Loss
            
            —
            
            
            —
            
            —
            
            
            —
            
            
            —
            
            
            1,048
            
            
            1,048**Shareholders’
                Equity at August 31, 2005**
            
            **8,235**
            
            **$**
            **8**
            
            **—**
            
            **$**
            **237,212**
            
            **$**
            **(214,116)**
            
            **$**
            **—**
            
            **$**
            **23,104**Net
                Loss for the nine months ended
              May
                31, 2006
            
            —
            
            
            —
            
            —
            
            
            —
            
            
            (9,193)
            
            
            —
            
            
            (9,193)**New
                Stock Issued:**For
                services and compensation
            
            12
            
            
            —
            
            
            
            
            21
            
            
            
            
            
            
            
            
            21For
                retirement of debt and accrued liabilities
            
            634
            
            
            1
            
            
            
            
            1,347
            
            
            
            
            
            
            
            
            1,348Reclass
                of stock payable
            
            425
            
            
            
            
            
            
            
            2,008
            
            
            
            
            
            
            
            
            2,008Proceeds
                from sale of common stock, net
            
            342
            
            
            1
            
            
            
            
            335
            
            
            
            
            
            
            
            
            336Stock
                based compensation
            
            —
            
            
            —
            
            —
            
            
            536
            
            
            —
            
            
            —
            
            
            536**Unaudited****Shareholders’
                Equity at May 31, 2006**
            
            **9,648**
            
            **$**
            **10**
            
            **—**
            
            **$**
            **241,459**
            
            **$**
            **(223,309)**
            
            **$**
            **—**
            
            **$**
            **18,160**




See
      accompanying notes to consolidated financial statements.




-4-




**EAGLE
      BROADBAND, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**
 ***(Dollars
                  in thousands*****)**
              
              For
                  the nine monthsended
                  May 31,Unaudited
              
              
              Unaudited2006
              
              2005**Cash
                  Flows from Operating Activities**Net
                  Loss
              
              $
              (9,193
              )
              
              $
              (18,773
              )Adjustments
                  to Reconcile Net Loss to Net CashImpairment,
                  write downs and cost
              
              
              —
              
              
              
              1,050Gain/(Loss)
                  on Sale of Assets
              
              
              148
              
              
              
              904Amortization
                  of Debt Discount
              
              
              377
              
              
              
              —Gain/(Loss)
                  on Extinguishment of Debt
              
              
              22
              
              
              
              (1,034
              )Adjustments
                  to Cost of Sales
              
              
              24
              
              
              
              —Adjustment
                  to Settlement Expense
              
              
              (576
              )
              
              
              —Depreciation
                  and Amortization
              
              
              1,598
              
              
              
              3,318Derivative
                  Income
              
              
              (181
              )
              
              
              —Stock
                  issued for Interest Expense
              
              
              —
              
              
              
              546Stock
                  issued for Services Rendered
              
              
              557
              
              
              
              1,479Provision
                  for Bad Debt
              
              
              495
              
              
              
              23Decrease
                  in Restricted Cash
              
              
              203
              
              
              
              —(Increase)/Decrease
                  in Accounts Receivable
              
              
              837
              
              
              
              (1,376
              )(Increase)/Decrease
                  in Inventories
              
              
              212
              
              
              
              (481
              )(Increase)/Decrease
                  in Other Assets
              
              
              675
              
              
              
              (1,003
              )(Increase)/Decrease
                  in Prepaid Expenses
              
              
              43
              
              
              
              (19
              )Increase/(Decrease)
                  in Accounts Payable
              
              
              (98
              )
              
              
              1,803Increase/(Decrease)
                  in Accrued Expenses
              
              
              (181
              )
              
              
              4,363Total
                  Adjustment
              
              
              4,155
              
              
              
              9,573**Net
                  Cash Used for Operating Activities**
              
              
              **(5,038**
              **)**
              
              
              **(9,200**
              **)****Cash
                  Flows from Investing Activities**Purchase
                  of Property and Equipment
              
              
              (54
              )
              
              
              (1,248
              )Purchase
                  of Marketable Securities
              
              
              —
              
              
              
              695Proceeds
                  from the Sale of Assets
              
              
              234
              
              
              
              —Gross
                  Equipment Purchase for Direct Financing Leases
              
              
              —
              
              
              
              (803
              )Principal
                  Collections on Direct Financing Leases
              
              
              296
              
              
              
              206Purchase
                  of Other Intangible Assets
              
              
              —
              
              
              
              (4
              )Sale
                  of Other Assets
              
              
              —
              
              
              
              3**Net
                  Cash Provided (Used) for Investing Activities**
              
              
              **476**
              
              
              
              **(1,151**
              **)****Cash
                  Flows from Financing Activities**Payments
                  on Notes Payable
              
              
              (282
              )
              
              
              (212
              )Proceeds
                  from Notes Payable
              
              
              750
              
              
              
              —Proceeds
                  from Exercise of Options
              
              
              —
              
              
              
              1,949Proceeds
                  from Sale of Common Stock, net
              
              
              335
              
              
              
              9,439**Net
                  Cash Provided by Financing Activities**
              
              
              **803**
              
              
              
              **11,176**Net
                  Increase/(Decrease) in Cash
              
              
              (3,759
              )
              
              
              825Cash
                  at the beginning of the period
              
              
              4,020
              
              
              
              2,051**Cash
                  at the end of the period**
              
              **$**
              **261**
              
              
              $
              2,876**Supplemental
                  Disclosure of Cash Flow Information**Net
                  Cash Paid During the Year for:Interest
              
              $
              47
              
              
              $
              33Income
                  taxes
              
              $
              —
              
              
              $
              —


See
      accompanying notes to consolidated financial statements.


-5-


**Eagle
      Broadband, Inc. and Subsidiaries**


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




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




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




*Reverse
      Stock Split*




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




**NOTE
      2 - Related Party Transactions**




Dr.
      H.
      Dean Cubley, a director and former officer of the Company, is the holder of
      a
      promissory note with a remaining principal amount of $1,924,000. The note is
      currently in default and is accruing interest under the terms of the original
      agreement. The note was issued upon the modification of outstanding options
      for
      2,000,000 common shares and reflects a guaranteed compensation of the modified
      options equivalent to $1.75 less the option strike price. Interest of $417,617
      and $154,922 has been accrued as of May 31, 2006 and August 31, 2005,
      respectively. The note payable and accrued interest are included in the Balance
      Sheet as accrued expenses.




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




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




**NOTE
      3 - Accounts Receivable**




Accounts
      receivable consist of the following (in thousands):




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




-6-




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




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




May
                31, 2006
            
            
            August
                31, 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
            
            
            (9,991
            )
            
            
            (8,994
            )Net
                Property, Plant and Equipment
            
            $
            21,870
            
            
            $
            23,304




Eagle
      expenses repairs and maintenance against income as incurred, whereas major
      improvements are capitalized. Eagle defines major improvements as those assets
      acquired that extend the life of the underlying base asset, while defining
      other
      improvements that do not extend the life as repairs and maintenance. Eagle
      expensed repairs and maintenance of $2,000 and $32,000 for the three months
      ended May 31, 2006 and 2005, respectively, whereas it did not have any major
      improvements for the same time periods. Eagle expensed repairs and maintenance
      of $70,000 and $55,000 for the nine months ended May 31, 2006 and 2005,
      respectively, whereas it did not have any major improvements for the same time
      periods.




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




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




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




-7-




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




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




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




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




DUTCHESS
      NOTE




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




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




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




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




-8-




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




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




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




TAIL
      WIND
      NOTES




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




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




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




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




-9-




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




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




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




CHANGE
      IN
      FAIR VALUE OF DERIVATIVE LIABILITIES




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




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




**NOTE
      6 - Income Taxes**




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




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




May
                31,2006
            
            August
                31,2005U.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%




-10-




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




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




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




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




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




DUTCHESS
      WARRANTS




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




STOCK-BASED
      COMPENSATION




In
      June
      2005, the Board of Directors adopted, and the Company’s shareholders approved,
      the 2005 Employee Stock Option Plan under which 30,000,000 shares of the
      Company’s common stock have been reserved for issuance. In February 2006, the
      Executive Committee of the Board of Directors of the Company voted to amend
      the
      Plan to reduce the shares available for issuance under the Plan from 30,000,000
      to 20,000,000. On May 12, the Company effected a 1-for-35 reverse stock split,
      which reduced the number of shares available for issuance under the Plan to
      571,429. As of May 31, 2006, 6,978 shares have been issued under the Plan,
      and
      options issued under the Plan covering 422,344 shares were outstanding, of
      which
      172,233 were exercisable.




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




-11-




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




May
                31,2006
            
            2005Dividend
                yield
            
            
            0.00%
            
            
            
            0.00%Volatility
            
            
            97%
            
            
            
            91%Risk-free
                interest rate
            
            
            3.5%
            
            
            
            4.00%Expected
                life
            
            
            5
                years
            
            
            
            4.5
                years




Prior
      to
      September 1, 2005, the Company followed APB 25, “Accounting for Stock Issued to
      Employees.” Accordingly, since employee stock options are granted at market
      price on the date of grant, no compensation expense was recognized under APB
      25.
      SFAS 123R requires presentation of pro forma net income and earnings per share
      as if the Company had accounted for its employee stock options granted under
      the
      fair value method of that statement. In accordance with the provisions of SFAS
      123R, the pro forma effect on net loss as if the fair value of stock-based
      compensation had been recognized as compensation expense on a straight-line
      basis over the vesting period of the stock option or purchase right was as
      follows for the nine months ended May 31, 2006:




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




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




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




-12-




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




Range
                of Exercise Prices
            
            Number
                Outstanding
            
            Avg.
                Remaining Contractual Life in Years
            
            Average
                Exercise Price
            
            Number
                Exercisable
            
            Average
                Exercise Price$0.97
                - $5.00
            
            237,535
            
            4.15
            
            $
                3.77
            
            137,384
            
            $
                3.08$5.00
                - $20.00
            
            253,720
            
            3.54
            
            $
                7.19
            
            119,339
            
            $
                7.75$20.00
                - $50.00
            
            59,721
            
            2.74
            
            $
                28.29
            
            44,142
            
            $
                28.06$50.00
                - $262.50
            
            22,857
            
            1.90
            
            $
                262.50
            
            22,857
            
            $
                262.50573,833
            
            3.64
            
            $
                18.14
            
            323,722
            
            $
                26.52




**NOTE
      8 - Risk Factors**




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




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




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




**NOTE
      9 - Commitments and Contingent Liabilities**




**Leases**




For
      the
      nine months ended May 31, 2006 and 2005, rental expenses of approximately
      $227,000 and $345,000, respectively, were incurred.




The
      Company renewed its primary office lease space in League City, Texas, for
      $24,983 per month with South Shore Harbor Development, Ltd. The renewal lease
      commenced on June 1, 2004, and expires on May 31, 2009. The lessor agreed to
      grant the Company a one-time option to terminate the lease at 36 months by
      paying an unamortized leasing commission of $35,000 and a penalty of 11⁄2 months
      rent of $37,000 for a combined total of $72,000.




August
                31,
            
            AmountFor
                the three months ending
            2006
            
            $
            74,949For
                the year ending
            2007
            
            
            306,180For
                the year ending
            2008
            
            
            325,316For
                the year ending
            2009
            
            
            243,987Total
            
            $
            950,432




**Legal
      Proceedings**




In
      December 2000, Clearworks.net, Inc. became a defendant in State of Florida
      Department of Environmental Protection vs. Reco-Tricote, Inc., and Southeast
      Tire Recycling, Inc., currently known as Clearworks.net, Inc., in the Circuit
      Court of the Tenth Judicial Circuit in and for Polk County, Florida. The Florida
      DEP included Clearworks in a lawsuit presenting claims for recovery costs and
      penalties for a waste tire processing facility. The suit seeks recovery of
      costs
      and penalties in a sum in excess of $1 million, attorneys’ fees and cost of
      court. Clearworks denies the claims against it and intends to vigorously contest
      all claims in this case and to enforce




-13-




its
      indemnification rights against the principals of Southeast Tire Recycling.
      The
      Company has not accrued any expenses against this lawsuit, as the outcome cannot
      be predicted at this time.




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




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




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




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




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




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




-14-




**NOTE
      10 - Earnings per Share (See Note 1)**




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




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





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




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




**NOTE
      11 - Retirement Plans**




During
      October 1997, the Company initiated a 401(k) plan for its employees, funded
      through the contributions of its participants. Prior to March 2003, the Company
      matched the participant’s contribution up to 3% of their salary. Subsequent to
      March 2003, the plan was amended and the Company match became elective. For
      the
      nine months ended May 31 ,
      2006 and
      2005, employee contributions were approximately $93,744 and $91,254,
      respectively. The Company matched $0 for both periods.




**NOTE
      12 - Major Customer**




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




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




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




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




-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
      nine months ended May 31 ,
      2006




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




For
      the
      nine months
      ended May 31, 2005




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




-16-




Reconciliation
      of Segment Loss from Operations to Net Loss




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




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






**NOTE
      14 - Unaudited Quarterly Financial Data (See Note 1)**




Nov.
                30
            
            
            Feb.
                28
            
            
            May
                31
            
            
            Aug.
                31Year
                Ended August 31, 2006Revenues
            
            $
            1,934
            
            $
            1,766
            
            
            859Net
                earnings (loss)
            
            
            (2,634
            )
            
            (4,072
            )
            
            (2,487
            )Basic
                loss per share
            
            
            (0.32
            )
            
            (0.48
            )
            
            (0.28
            )Diluted
                loss per share
            
            
            (0.32
            )
            
            (0.48
            )
            
            (0.28
            )Year
                Ended August 31, 2005Revenues
            
            $
            1,528
            
            $
            2,683
            
            $
            2,976
            
            $
            1,405Net
                earnings (loss)
            
            
            (4,448
            )
            
            (9,326
            )
            
            (3,951
            )
            
            (39,285
            )Basic
                loss per share
            
            
            (0.73
            )
            
            (1.47
            )
            
            (0.70
            )
            
            (5.70
            )Diluted
                loss per share
            
            
            (0.73
            )
            
            (1.47
            )
            
            (0.70
            )
            
            (5.70
            )Year
                Ended August 31, 2004Revenues
            
            $
            2,397
            
            $
            3,744
            
            $
            5,091
            
            $
            1,258Net
                earnings (loss)
            
            
            (8,461
            )
            
            (9,398
            )
            
            (4,373
            )
            
            (16,773
            )Basic
                loss per share
            
            
            (1.75
            )
            
            (1.75
            )
            
            (0.70
            )
            
            (2.80
            )Diluted
                loss per share
            
            
            (1.75
            )
            
            (1.75
            )
            
            (0.70
            )
            
            (2.80
            )




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




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




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




-17-




**NOTE
      16 - Equity Financing (See Note 1)**




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




In
      August
      2005, the Company entered into a purchase agreement with certain investors
      for
      the sale of 857,143 shares of its common stock at a price of $4.725 per share,
      and received total gross proceeds of $4,050,000. On August 26, 2005, the
      American Stock Exchange approved for listing 432,143 of these shares and
      notified the Company that shareholder approval was required for the issuance
      of
      the remaining 425,000 shares. On September 2, 2005, the Company voluntarily
      placed the funds received for the 425,000 shares ($2,008,125) into an escrow
      account pending the shareholder vote. At the October 18, 2005 meeting,
      shareholders approved the issuance of the 425,000 shares, and on October 19,
      2005, the escrowed funds were released to the Company. On October 21, 2005,
      the
      Company applied for listing the 425,000 shares with the American Stock Exchange
      and received approval on November 17, 2005. The Company paid a placement agent
      a
      cash commission of 7% of the gross dollar proceeds, and agreed to issue such
      agent a five-year warrant to purchase 24,107 shares of Eagle common stock at
      an
      exercise price of $8.40 per share, expiring on August 31, 2010.




**NOTE
      17 - Exit Activities**




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




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




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




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




**NOTE
      18 - Financial Condition and Going Concern**




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




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




-18-




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




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




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




**NOTE
      19 - Subsequent Events**




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




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


-19-




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




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




**Executive
      Overview**




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




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




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




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




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




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




As
      of May
      31, 2006, the Company’s active subsidiaries were: Eagle Broadband Services,
      Inc., EBI Funding Corp. and Etoolz, Inc. Additionally, Eagle has a number of
      inactive subsidiaries that had results in one or more of the periods included
      in
      the financial statements covered by this report. These inactive subsidiaries
      include: D.S.S. Security, Inc., Clearworks Communications, Inc., Clearworks.net,
      Inc., Clearworks Home Systems, Inc., Contact Wireless, Inc., United Computing
      Group, Inc., Atlantic Pacific Communications, Inc., and Link Two Communications,
      Inc. Eagle has incorporated certain ongoing operations of the inactive
      subsidiaries into the active subsidiaries listed above including Atlantic
      Pacific Communications, Inc. and Clearworks Communications, Inc. The
      consolidated financial statements include the accounts of the Company and its
      subsidiaries. All significant inter-company transactions and balances have
      been
      eliminated in consolidation.




We
      intend
      for this discussion to provide the reader with information that will assist
      in
      understanding our financial statements, the changes in certain key items in
      those financial statements from year to year, and the primary factors that
      accounted for those changes, as well as how certain accounting principles affect
      our financial statements. The discussion also provides information about the
      financial results of the various segments of our business to provide a better
      understanding of how those segments and their results




-20-




affect
      the financial condition and results of operations of the Company as a whole.
      This discussion should be read in conjunction with our financial statements
      and
      accompanying notes for the nine months ended May 31, 2006.




**Results
      of Operations**




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




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




**Condensed
      Financial Information**


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




**Overview**




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




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




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




-21-




Sales
      Information




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




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




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




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




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




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




-22-




*Cost
      of Goods Sold*




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




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




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




For
      the
      nine months ended May 31, 2006, cost of goods sold decreased by 48% to
      $4,035,000 from $7,710,000 during the nine months ended May 31, 2005. The
      Company’s overall gross profit percentage of 12% for the nine months ended May
      31, 2006 represents a significant improvement as compared to an overall negative
      gross profit percentage of 7% for the nine months ended May 31, 2005. The
      substantial improvement in gross profit percentage is primarily attributable
      to
      a decrease in product and integration service costs and broadband service costs
      as the Company continued to realign staff and resources to concentrate on the
      three core offerings of the Company: IPTV solutions, satellite communications
      and providing solutions to broadband and service provider partners.




*Operating
      Expenses*




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




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




-23-




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




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




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




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




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




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




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




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




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




-24-




·
            A
                $1,490,000 decrease in depreciation and amortization expense for
                long-lived assets and intangibles that had impairment charges recorded
                for
                the year ended August 31, 2005, thus decreasing the depreciable basis
                and
                related depreciation expense for the nine months ended May 31, 2006,
                as
                compared to the nine months ended May 31,
                2005.




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




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




**Net
      Loss**




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




**Changes
      in Cash Flow**




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




**Liquidity
      and Capital Resources**




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




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




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




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




-25-




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




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




**Contractual
      Obligations**




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




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




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




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




**Off-Balance
      Sheet Arrangements**




As
      of May
      31, 2006, we did not have any significant off-balance-sheet arrangements, as
      defined in Item 303(a)(4)(ii) of SEC Regulation S-K.




**CRITICAL
      ACCOUNTING POLICIES**




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




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




**Impairment
      Assessment**




Statement
      of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other
      Intangible Assets” requires that goodwill and intangible assets be tested for
      impairment at the reporting unit level (operating segment or one level below
      an
      operating segment) on an annual basis and between annual tests in certain
      circumstances. The carrying amount of an intangible asset is not recoverable
      if
      it




-26-




exceeds
      the sum of the undiscounted cash flows expected to result from the use and
      eventual disposition of the asset. That assessment shall be based on the
      carrying amount of the asset at the date it is tested for
      recoverability.




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




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




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




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




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




**Impairment
      of Long-Lived Assets**




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




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




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




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




**Revenue
      Recognition**




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




Eagle
      adopted EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” in the
      fourth quarter of fiscal year 2003. The impact of adopting EITF 00-21 did not
      have a material effect on Eagle’s results of operations. Eagle’s contracts that
      contain multiple elements as of August 31, 2004, or prior were immaterial.
      When
      elements such as hardware, software and consulting services are contained in
      a
      single arrangement, or in related arrangements with the same customer, Eagle
      allocates revenue to each element based on its relative fair value, provided
      that such element meets the criteria for treatment as a separate unit of
      accounting. The price




-27-




charged
      when the element is sold separately generally determines fair value. In the
      absence of fair value for a delivered element, Eagle allocates revenue first
      to
      the fair value of the undelivered elements and allocates the residual revenue
      to
      the delivered elements. In the absence of fair value for an undelivered element,
      the arrangement is accounted for as a single unit of accounting, resulting
      in a
      delay of revenue recognition for the delivered elements until the undelivered
      elements are fulfilled. Eagle limits the amount of revenue recognition for
      delivered elements to the amount that is not contingent on the future delivery
      of products or services or subject to customer-specified return or refund
      privileges.




**Deferred
      Revenues**




Revenues
      that are billed in advance of services being completed are deferred until the
      conclusion of the period of the service for which the advance billing relates.
      Deferred revenues are included on the balance sheet as a current liability
      until
      the service is performed and then recognized in the period in which the service
      is completed. Eagle’s deferred revenues historically have consisted primarily of
      billings in advance for cable, Internet, security and telephone services, which
      generally are for between one and three months of services. The Company has
      deferred revenue from the sale of security monitoring contracts, both purchased
      and owned until the contract provisions are fulfilled. Eagle had deferred
      revenues of $191,000 as of May 31, 2006. As of August 31, 2005, the Company
      had
      deferred revenues of $623,000, which included revenues deferred for a
      twelve-month holdback provision for security contracts sold to a major customer
      during fiscal year 2005.




**Eagle
      Broadband, Inc.**




Eagle
      designs, manufactures and markets various hardware, software and systems, along
      with other equipment used in the delivery of broadband, video entertainment
      and
      communications services. Revenues from these products are recognized when the
      product is shipped. Eagle Broadband Inc.’s international product revenues are
      reported under the category “Products” on Eagle’s Consolidated Statements of
      Operations and also under the category “Eagle” within Note 13-Industry
      Segments.




The
      Company designs, manufactures and markets a complete line of MediaPro IP set-top
      boxes. Eagle recognizes revenue when set-top boxes are shipped to the customer.
      The Company’s set-top box revenues are reported under the category “Products” on
      Eagle’s Consolidated Statements of Operations and also under the category
“Eagle” within Note 13-Industry Segments. Revenue from software consists of
      software licensing. There is no post-contract customer support. Software revenue
      is allocated to the license using vendor specific objective evidence of fair
      value (“VSOE”) or, in the absence of VSOE, the residual method. The price
      charged when the element is sold separately generally determines VSOE. In the
      absence of VSOE of a delivered element, the Company allocates revenue to the
      fair value of the undelivered elements and the residual revenue to the delivered
      elements. Eagle recognizes revenue allocated to software licenses at the
      inception of the license.




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




The
      Company sells and installs structured wiring and related customer premise
      equipment in residential customers’ homes. The Company recognizes revenue and
      the related costs at the time the services are performed. Revenue is derived
      from the billing of structured wiring to homes and the sale of customer premise
      equipment to the homebuyers. For consistency with prior period reporting,
      Eagle’s residential structured wiring revenues are reported under the category
“Structured Wiring” on Eagle’s Consolidated Statements of Operations and also
      under the category “Eagle” within Note 13-Industry Segments.




Eagle
      provides project planning, installation, project management, testing and
      documentation of fiber and cable to commercial and industrial clients throughout
      the United States. The revenue from the fiber and cable installation and
      services is recognized upon percentage of completion of the project. Most
      projects are completed in less than one month, therefore, matching revenue
      and
      expense in the period incurred. Service, training and extended warranty contract
      revenues are recognized as services are completed. For consistency with prior
      period reporting, Eagle’s communications services revenues are reported under
      the category “Structured Wiring” on Eagle’s Consolidated Statements of
      Operations and also under the category “Eagle” within Note 13-Industry
      Segments.




Eagle
      provides business-to-business hardware and software network solutions and
      network monitoring services. The revenue from the hardware and software sales
      is
      recognized at the time of shipment. The monitoring services recognition policy
      is to record revenue on completion. For consistency with prior period reporting,
      Eagle’s technology services product revenues are reported under the category
“Structured Wiring” while the services components are reported under the
      category “Other” on Eagle’s Consolidated Statements of Operations and also under
      the category “Eagle” within Note 13-Industry Segments.




-28-




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




Eagle
      Broadband Services, Inc. provides broadband bundled digital services to business
      and residential customers, primarily in the Texas market. Revenue is derived
      from fees charged for the delivery of bundled digital services, which can
      include telephone, long distance, Internet, security monitoring and cable
      services. This subsidiary recognizes revenue and the related costs at the time
      the services are rendered. Installation fees are recognized upon completion
      and
      acceptance. The revenues are reported under the category “Broadband Services” on
      the Company’s Consolidated Statements of Operations and also under the category
“EBS/DSS” within Note 13-Industry Segments.




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




D.S.S.
      Security, Inc. provides security monitoring services to residential and
      commercial customers, purchases, bundles and resells contracts from its own
      portfolio to independent third-party companies. Security monitoring customers
      are billed three months in advance of service usage. The revenues are deferred
      at the time of billing and ratably recognized over the prepayment period as
      service is provided. Installation fees are recognized upon completion and
      acceptance. Revenues from the sale of security monitoring contracts, both
      purchased and owned, are recognized upon contract execution except for reserves,
      hold backs or retentions, which are deferred until the contract provisions
      are
      fulfilled. Eagle’s security services revenues are reported under the category
“Broadband Services” on Eagle’s Consolidated Statements of Operations and also
      under the category “EBS/DSS” within Note 13-Industry Segments.




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




**Receivables**




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




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




**Allowance
      for Doubtful Accounts**




The
      Company’s allowance for doubtful accounts totaled $207,000 and $2,688,000 for
      the three months ended May 31, 2006 and the year ended August 31, 2005,
      respectively. These allowances for doubtful accounts amounts represented 27%
      and
      59% of the gross accounts receivable balances for the quarter ended May 31,
      2006
      and the year ended August 31, 2005. They represented 61% and 82% of the
      Company’s greater than 90-day accounts for the quarter ended May 31, 2006, and
      the year August 31, 2005. The decrease in the allowance for doubtful accounts
      from August 31, 2005 to May 31, 2006, was attributable to (i) the collection
      of
      a receivable previously included in the allowance and (ii) the direct write
      off
      of a receivable previously deemed uncollectible in a prior year.




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




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




**Inventory**




Inventories
      are valued at the lower of cost or market. The cost is determined by using
      the
      first-in first-out method. At May 31, 2006, Eagle’s inventory totaled $590,000
      as compared to $802,000 at August 31, 2005. The majority of this decrease is
      for
      sales of set-top




-29-




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




**Derivative
      Financial Instruments**




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




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




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




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




**Recent
      Accounting Pronouncements**




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




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




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




In
      December 2004, the FASB issued a revision to SFAS 123 (also known as SFAS 123R)
      that amends existing accounting pronouncements for share-based payment
      transactions in which an enterprise receives employee and certain non-employee
      services in exchange for (a) equity instruments of the enterprise or (b)
      liabilities that are based on the fair value of the enterprise’s equity
      instruments or that may be settled by the issuance of such equity instruments.
      SFAS 123R eliminates the ability to account for share




-30-




based
      compensation transactions using APB 25 and generally requires such transactions
      be accounted for using a fair-value-based method. SFAS 123R’s effective date
      would be applicable for awards that are granted, modified, become vested, or
      settled in cash in interim or annual periods beginning after December 15, 2005.
      SFAS 123R includes two transition methods: the modified prospective method
      or
      the modified retrospective method. The Company adopted SFAS 123R commencing
      in
      the first quarter of the fiscal year ending August 31, 2006. The Company adopted
      the modified prospective method on September 1, 2005. In accordance with the
      “modified prospective” method, compensation cost is recognized beginning with
      the effective date (a) based on the requirements of SFAS 123R for all
      share-based payments granted after the effective date and (b) based on the
      requirements of SFAS 123 for all awards granted to employees prior to the
      effective date of SFAS 123R that remain unvested on the effective date. The
      Company does not anticipate that adoption of SFAS 123R will have a material
      impact on its results of operations or its financial position.




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




The
      Company’s Chief Executive Officer and Principal Accounting Officer have
      evaluated the effectiveness of the Company’s disclosure controls and procedures
      (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) as
      of
      the end of May 31, 2006. Based on such evaluation, such officers have concluded
      that the Company’s disclosure controls and procedures are
      effective.




**Changes
      in Internal Controls**




There
      has
      been no change in the Company’s internal control over financial reporting
      identified in connection with our evaluation as of the end of the fiscal quarter
      ended May 31, 2006, that has materially affected, or is reasonably likely to
      materially affect, the Company’s internal controls over financial
      reporting.






**PART
      II-OTHER INFORMATION**




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




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




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




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




Number
                of Shares1.To
                elect seven directors to the Board of Directors to serve until the
                next
                annual meeting of shareholders or until their respective successors
                have
                been elected or appointed
            
            Voted
                For
            
            WithheldRobert
                Bach
            
            238,655,303
            
            25,047,293H.
                Dean Cubley
            
            236,238,348
            
            27,416,248Glenn
                Goerke
            
            238,617,003
            
            25,085,593David
                Micek
            
            239,049,631
            
            24,652,965Lorne
                Persons, Jr.
            
            238,706,045
            
            24,996,551C.
                J. (Jim) Reinhartsen
            
            238,580,063
            
            25,122,533James
                Yarbrough
            
            238,604,568
            
            25,098,028







Number
                of SharesVoted
                For
            
            Voted
                Against
            
            Abstain
            
            Broker
                Non-Votes (1)2.To
                approve an amendment to the Articles of Incorporation to effect a
                1-for-35
                reverse stock split of all outstanding shares of the Company’s common
                stock
            250,740,676
            
            12,319,310
            
            642,610
            
            —3.To
                approve the issuance of more than 20% of our outstanding stock in
                connection with a financing transaction with Dutchess Private Equities
                Fund, L.P.
            55,869,746
            
            10,423,007
            
            1,132,249
            
            196,277,5944.To
                approve the issuance of more than 20% of our outstanding stock in
                connection with a settlement agreement with the Tail Wind Fund
                Ltd.
            56,533,913
            
            9,531,908
            
            1,359,181
            
            196,277,5945.To
                ratify selection of independent registered public accounting
                firm
            259,467,829
            
            3,053,154
            
            1,181,613
            
            —




Pursuant
      to Article 2.28(B) of the Texas Business Corporation Act, the affirmative vote
      of the majority of the votes cast was required to pass each of Proposals 3
      and
      4. Significantly fewer shares voted on each of Proposals 3 and 4 than voted
      on
      Proposal 1, the election of directors, Proposal 2, the approval of an amendment
      to the Company’s Articles of Incorporation, and Proposal 5, the ratification of
      the selection of the Company’s independent registered public accounting firm.
“Broker non-votes” accounted for this difference in voted shares. For certain
      types of “non-routine” proposals, such as Proposals 3 and 4, brokers do not have
      the discretionary authority to vote their clients’ shares, and therefore they
      must refrain from voting on such proposals in the absence of instructions from
      their clients.




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




Exhibit
                Number
            
            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
                Micek
              President
                and Chief Executive OfficerDate:
                July 17, 2006









By:
                /s/ JULIET MARKOVICHJuliet
                Markovich
              Corporate
                Controller and Principal Accounting OfficerDate:
                July 17, 2006








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