EAGLE BROADBAND, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Eagle Broadband, Inc.

Houston, Texas

We have audited the accompanying consolidated balance sheets of Eagle Broadband, Inc. as of August 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended August 31, 2005. These financial statements are the responsibility of Eagle Broadband, Inc.’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eagle Broadband, Inc. as of August 31, 2005 and 2004, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the Standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of August 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 18, 2005 expressed an unqualified opinion thereon.

/s/ Lopez, Blevins, Bork and Associates, LLP

Lopez, Blevins, Bork and Associates, LLP

Houston, Texas

November 18, 2005

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Eagle Broadband, Inc.

Houston, Texas

We have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting in Item 9A, that Eagle Broadband, Inc. maintained effective internal control over financial reporting as of August 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Eagle Broadband, Inc. maintained effective internal control over financial reporting as of August 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Eagle Broadband, Inc. maintained, in all material respects, effective internal control over financial reporting as of August 31, 2005, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Eagle Broadband, Inc. as of August 31, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended August 31, 2005 and our report dated November 18, 2005 expressed an unqualified opinion thereon.

/s/ Lopez, Blevins, Bork and Associates, LLP

Lopez, Blevins, Bork and Associates, LLP

Houston, Texas

November 18, 2005

F-2

EAGLE BROADBAND, INC.

CONSOLIDATED BALANCE SHEETS

	(Thousands of dollars) August 31,
	2005			2004

ASSETS

Current Assets
Cash and Cash Equivalents	$	4,020		$	2,051
Cash in Restricted Account		203			—
Securities Available for Sale		—			551
Accounts Receivable, net		1,890			1,470
Inventories		802			403
Net investment in direct financing leases		525			291
Other Assets		298			—
Prepaid Expenses		632			327
Total Current Assets		8,370			5,093

Property and Equipment
Operating Equipment		32,298			36,415
Less: Accumulated Depreciation		(8,994	)		(7,837	)
Total Property and Equipment		23,304			28,578

Other Assets
Net investment in direct financing leases		853			623
Goodwill, net		4,095			4,095
Contract rights, net		2,921			21,678
Customer relationships, net		831			5,431
Other Intangible assets, net		859			4,034
Other Assets		680			679
Total Other Assets		10,239			36,540

Total Assets	$	41,913		$	70,211


Current Liabilities
Accounts Payable	$	6,640		$	4,445
Stock Payable		2,008			—
Accrued Expenses		9,477			9,647
Notes Payable		61			5,920
Deferred revenue		623			96
Total Current Liabilities		18,809			20,108

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, 288,211,275 and 205,508,662 issued and outstanding at August 31, 2005 and 2004, respectively		288			206
Additional Paid in Capital		236,932			208,051
Accumulated Deficit		(214,116	)		(157,106	)
Accumulated Comprehensive Income (Loss)		—			(1,048	)
Total Shareholders’ Equity		23,104			50,103

Total Liabilities and Shareholders’ Equity	$	41,913		$	70,211

See accompanying notes to consolidated financial statements.

F-3

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	(Thousands of dollars, except per share amounts) For the years ended August 31,
	2005			2004			2003
Net Sales
Structured wiring	$	1,343		$	678		$	3,692
Broadband services		4,348			5,525			2,809
Products		2,770			6,190			3,342
Other		131			97			1,750
Total Sales		8,592			12,490			11,593

Costs of Goods Sold
Direct Labor and Related Costs		1,613			1,244			2,195
Products and Integration Service		3,077			5,372			2,773
Impairment Slow Moving & Obsolete Inventory		300			1,300			2,627
Structured Wiring Labor and Materials		1,031			448			1,774
Broadband Services Costs		1,729			2,856			903
Depreciation and Amortization		1,158			1,141			456
Other Manufacturing Costs		—			26			56
Total Costs of Goods Sold		8,908			12,387			10,784
Gross Profit		(316	)		103			809

Operating Expenses
Salaries and Related Costs		5,734			13,146			6,102
Advertising and Promotion		80			29			247
Depreciation and Amortization		3,267			3,956			4,776
Other Support Costs		17,666			13,367			12,737
Research and Development		776			557			411
Impairment, Write-Downs & Restructuring Costs		28,515			—			7,611
Total Operating Expenses		56,038			31,055			31,884

Loss from Operations		(56,354	)		(30,952	)		(31,075	)

Other Income/(Expenses)
Interest Income		36			32			68
Interest Expense		(768	)		(8,325	)		(5,494	)
Gain (Loss) on Sale of Assets		(16	)		240			—
Gain (Loss) on Sale of Marketable Securities		(899	)		—			—
Gain (Loss) on Extinguishment of Debt		991			—			—
Total Other Income (Expense)		(656	)		(8,053	)		(5,426	)

Net Loss		(57,010	)		(39,005	)		(36,501	)

Other Comprehensive Loss
Unrealized Holding Loss		—			(321	)		(71	)
Total Other Comprehensive Loss		—			(321	)		(71	)

Comprehensive Losses	$	(57,010	)	$	(39,326	)	$	(36,572	)

Net Loss per Common Share
Basic		(0.24	)		(0.21	)		(0.38	)
Diluted		(0.24	)		(0.21	)		(0.38	)
Comprehensive Loss		(0.24	)		(0.21	)		(0.38	)

See accompanying notes to consolidated financial statements.

F-4

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Common Stock														Accumulated			Total
(Shares and dollars in thousands)	Shares			Value			Preferred Stock		Additional Paid in Capital			Retained Earnings			Comprehensive Income			Shareholders' Equity
Shareholders’ Equity at September 1, 2002		73,051		$	73			—	$	158,731		$	(81,600	)	$	(656	)	$	76,548

Net Loss		—			—			—		—			(36,501	)		—			(36,501	)

New Stock Issued
For Services and Compensation		7,437			7			—		1,813			—			—			1,820
For Property and Other Assets		14,938			15			—		3,032			—			—			3,047
For Retirement of Debt and Liabilities		50,816			51			—		13,827			—			—			13,878
For Employee Stock Option Plan		1,647			2			—		180			—			—			182

Syndication Costs		—			—			—		(368	)		—			—			(368	)

Treasury Stock		(442	)		(1	)		—		(198	)		—			—			(199	)

Unrealized Holding Loss		—			—			—		—			—			(71	)		(71	)

Shareholders’ Equity at August 31, 2003		147,447			147			—		177,017			(118,101	)		(727	)		58,336

Net Loss		—			—			—		—			(39,005	)		—			(39,005	)

New Stock Issued
For Services and Compensation		11,016			12			—		6,335			—			—			6,347
For Retirement of Debt and Liabilities		47,046			47			—		13,294			—			—			13,341
Stock-Based Compensation		—			—			—		4,493			—			—			4,493
Beneficial Conversion Features on
Convertible Debentures		—			—			—		6,912			—			—			6,912

Unrealized Holding Loss		—			—			—		—			—			(321	)		(321	)

Shareholders’ Equity at August 31, 2004		205,509			206			—		208,051			(157,106	)		(1,048	)		50,103

Net Loss		—			—			—		—			(57,010	)		—			(57,010	)

New Stock Issued
For services and compensation		5,119			5			—		2,339			—			—			2,344
For retirement of debt and accrued liabilities		27,663			27			—		13,334			—			—			13,361
Proceeds from sale of common stock, net of expenses		45,795			46			—		11,263			—			—			11,309
Proceeds from exercise of options		4,125			4			—		1,945			—			—			1,949

Unrealized Holding Loss		—			—			—		—			—			1,048			1,048

Shareholders’ Equity at August 31, 2005		288,211		$	288			—	$	236,932		$	(214,116	)	$	—		$	23,104

See accompanying notes to consolidated financial statements.

F-5

EAGLE BROADBAND, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	(Thousands of dollars) For the year ended August 31,
	2005			2004			2003
Cash Flows from Operating Activities
Net Loss	$	(57,010	)	$	(39,005	)	$	(36,501	)

Adjustments to Reconcile Net Loss to Net Cash:
Impairment and write-downs		28,815			1,300			10,238
Loss on sale of assets		16			611			—
Loss on sale of marketable securities		899			—			—
Gain on extinguishment of debt		(991	)		—			—
Interest for beneficial conversion value		—			6,912			91
Depreciation and amortization		4,425			5,097			5,232
Stock issued for interest expense		568			108			2,477
Stock issued for services rendered		1,776			10,841			1,820
Provision for bad debt		568			2,643			2,177
(Increase)/decrease in accounts receivable		(988	)		(1,750	)		124
(Increase)/decrease in inventories		(699	)		1,496			(910	)
(Increase) in other assets		(1,003	)		—			—
(Increase)/decrease in prepaid expenses		(305	)		341			(311	)
Increase/(decrease) in accounts payable		2,195			(1,016	)		921
Increase in stock payable		2,008			—			—
Increase in accrued expenses		7,899			8,929			8,557
Total Adjustment		45,183			35,512			30,416
Net Cash Used for Operating Activities		(11,827	)		(3,493	)		(6,085	)

Cash Flows from Investing Activities
Purchase of Property and Equipment		(804	)		(729	)		(2,121	)
Increase in Restricted Cash		(203	)		—			—
Increase/(Decrease) in Deferred Costs		—			334			—
Increase/(Decrease) in Intangible Costs		(4	)		(40	)		—
Proceeds from the sale of Marketable Securities		700			842			434
Proceeds from Sale of Assets		367			—			—
(Increase)/Decrease in Other Assets		(1	)		(452	)		411
Gross Equipment Purchase for Direct Financing Leases		(971	)		(1,212	)		—
Principal Collections on Direct Financing Leases		305			41			—
Net Cash Used for Investing Activities		(611	)		(1,216	)		(1,276	)

Cash Flows from Financing Activities
Increase/(Decrease) in Notes Payable & Long-Term Debt		1,149			5,936			7,297
Proceeds from Sale of Common Stock, Net		11,309			—			182
Proceeds from exercise of option		1,949			—			—
Syndication costs		—			—			(368	)
Acquisition of Treasury Stock		—			—			(199	)
Net Cash Provided by Financing Activities		14,407			5,936			6,912

Net Increase/(Decrease) in Cash		1,969			1,227			(449	)
Cash at the Beginning of the Year		2,051			824			1,273
Cash at the End of the Year	$	4,020		$	2,051		$	824

Supplemental Disclosure of Cash Flow Information
Net Cash Paid During the Year for:
Interest	$	70		$	1,305		$	3,288
Income taxes	$	—		$	—		$	—

See Note 9-Supplemental Non-Cash Disclosure and Consolidated Statements of Changes in Shareholders’ Equity.

See accompanying notes to consolidated financial statements.

F-6

Eagle Broadband, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements August 31, 2005

NOTE 1 - Basis of Presentation and Significant Accounting Policies

Eagle Broadband, Inc. (the “Company” or “Eagle”), incorporated as a Texas corporation on May 24, 1993, and commenced business in April of 1996. The Company is a provider of broadband, Internet Protocol (IP) and communications technology and services. The Company’s product offerings include IPTVComplete™, the MediaPro line of standard and high definition IP set-top boxes; and the SatMAX™ satellite communications system that provides civilian government, military, homeland security and corporate customers with non-line-of-sight, satellite voice and data communications from any location on Earth.

A) Consolidation

At August 31, 2005, 2004, and 2003, the Company’s consolidated subsidiaries were: Eagle Broadband Services, Inc., EBI Funding Corporation, Etoolz, Inc., Atlantic Pacific Communications, Inc., Eagle Wireless International, Inc., Clearworks.net, Inc., Clearworks Communications, Inc., Clearworks Home Systems, Inc., D.S.S. Security, Inc., United Computing Group, Inc., and Link-Two Communications, Inc.

As of August 31, 2005, the Company’s active subsidiaries were: Eagle Broadband Services, Inc., D.S.S. Security, Inc., operating as Eagle Broadband Security, EBI Funding Corporation, and Etoolz, Inc. Additionally, Eagle has a number of inactive subsidiaries that had results in one or more of the periods included in the financial statements covered by this report. These inactive subsidiaries include: Clearworks Communications, Inc., Clearworks.net, Inc., Clearworks Home Systems, Inc., Contact Wireless, Inc., United Computing Group, Inc., Atlantic Pacific Communications, 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.

B) Cash and Cash Equivalents

The Company considers all highly liquid financial instruments with original maturities to be cash equivalents. The Company maintains cash deposits in banks which from time to time exceed the amount of deposit insurance available. Management periodically assesses the financial condition of the institutions and believes that any potential credit loss is minimal.

The Company had $4,020,000 and $2,051,000 of cash and cash equivalents invested in interest bearing accounts at August 31, 2005 and August 31, 2004, respectively.

In conjunction with the Company’s agreement with a third-party provider, the Company has an irrevocable Letter of Credit secured with restricted cash of $203,000 as of August 31, 2005.

C) Allowance Method Used to Record Bad Debts

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

F-7

D) Property and Equipment

Property and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated by using the straight-line method for financial reporting and accelerated methods for income tax purposes. The recovery classifications for these assets are listed as follows:

			Years
Headend Facility and Fiber Infrastructure			20
Manufacturing Equipment			3-7
Furniture and Fixtures			2-7
Office Equipment			5
Leasehold Improvements			Life of lease
Property and Equipment			5
Vehicles			5

Expenditures for maintenance and repairs are charged against income as incurred whereas major improvements are capitalized. Eagle has acquired all of its property and equipment with either cash or stock and has not capitalized any interest expenses in its capital assets.

E) Impairment of Long-Lived Assets

The Company reviews long-lived assets for indicators of impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the review indicates that the carrying amount of the asset may not be recoverable, the potential impairment is measured based on a projected discounted cash flow method using a discount rate that is considered to be commensurate with the risk inherent in the company’s current business model. For purposes of recognition and measurement of an impairment loss, a long-lived asset is grouped with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. During the year ended August 31, 2005, the Company recorded an impairment loss of $4,279,405. (See Note 5.)

For the year ended August 31, 2004, management assessed long-lived assets for indicators of impairment and determined no impairment charge was required for fixed assets.

At August 31, 2003, management determined that a $7,611,000 non-cash impairment charge was necessary against realigned operations and the discontinued sale of low margin commodity products, residential and commercial structured wiring operations and the withdrawal from its Austin area BDS development based on the lack of demand for BDS services resulting from a slower build out of the development than originally projected in conjunction with local market competition. Included in the impairment was the write down of goodwill associated with the Comtel acquisition of $1,878,000.

The impairment loss for long-lived assets has been allocated on a pro-rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group has not reduced the carrying amount of that asset below its fair value. The adjusted carrying amount of the long lived assets is its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset.

F) Inventories

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

	August 31,
	2005		2004
Raw Materials	$	126	$	294
Work in Process		676		108
Finished Goods		—		1
	$	802	$	403

In the year ended August 31, 2005, the company had an impairment charge of $300,000 related to a partial impairment of inventory on hand as of August 31, 2004. Management had reasonably identified prospects for this inventory at August 31, 2004, which did not materialize as planned in fiscal 2005.

F-8

G) Revenue Recognition

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

Eagle adopted EITF 00-21, “Revenue Arrangements with Multiple Deliverables,” in the fourth quarter of fiscal 2003. The impact of adopting EITF 00-21 did not have a material effect 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 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 consist of billings in advance for cable, Internet, security and telephone services, which generally are between one and three months of services. Eagle’s deferred revenues also consist of revenues deferred in conjunction with a twelve-month holdback provision for two contracts executed in fiscal 2005 with Alarm Security Group LLC for purchases of security contracts. Eagle had deferred revenues of $623,000 and $96,000 as of August 31, 2005 and 2004, respectively.

Eagle Broadband, Inc.

Eagle designs, manufactures and markets various hardware, software and systems, along with other equipment used in the delivery of broadband, video entertainment and communications services. Revenues from these products are recognized when the product is shipped. Eagle Broadband Inc.’s international product revenues are reported under the category “Products” on Eagle’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “Eagle” within Note 20-Industry Segments.

The Company designs, manufactures and markets a complete line of MediaPro IP set-top boxes. Eagle recognizes revenue when set-top boxes are shipped to the customer. The Company’s set-top box revenues are reported under the category “Products” on Eagle’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “Eagle” within Note 20-Industry Segments. Revenue from software consists of software licensing. There is no post-contract customer support. Software revenue is allocated to the license using vendor specific objective evidence of fair value (“VSOE”) or, in the absence of VSOE, the residual method. The price charged when the element is sold separately generally determines VSOE. In the absence of VSOE of a delivered element, Eagle allocates revenue to the fair value of the undelivered elements and the residual revenue to the delivered elements. Eagle recognizes revenue allocated to software licenses at the inception of the license.

The Company engages independent agents, resellers and distributors for sales principally in foreign countries and certain geographic regions in the United States. Under the terms of these agreements, these third parties provide the Company with sales leads. The transactions from these third parties are subject to Eagle’s approval prior to sale. In certain circumstances, the sales agent or reseller/distributor receives commissions based on the amount of the sales invoice from the companies to the customer. The sale is recognized at the time of shipment to the customer. These transactions are not a significant portion of total sales in any of the periods presented. Eagle’s Broadband, Inc., revenues are reported under the category “Products” on the company’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “Eagle” within Note 20-Industry Segments.

The Company sells and installs structured wiring, audio and visual components to homes. Eagle 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 audio and visual components to the homebuyers. For consistency with prior period reporting, Eagle’s residential structured wiring revenues are reported under the category “Structured Wiring” on Eagle’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “APC/HSI” within Note 20-Industry Segments.

F-9

Eagle Broadband Services, Inc. (BDS)

Eagle Broadband Services, Inc. provides bundled digital services to business and residential customers, primarily in the Texas market. Revenue is derived from fees charged for the delivery of bundled digital services, which includes telephone, long distance, Internet, security monitoring and cable services. This subsidiary recognizes revenue and the related costs at the time the services are rendered. Installation fees are recognized upon completion and acceptance. The revenues are reported under the category “Broadband Services” on the Company’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “EBS/DSS” within Note 20-Industry Segments.

Eagle Broadband Services, Inc. provides project planning, installation, project management, testing and documentation of fiber and cable to commercial and industrial clients throughout the United States. The revenue from the fiber and cable installation and services is recognized upon percentage of completion of the project. Most projects are completed in less than one month, therefore, matching revenue and expense in the period incurred. Service, training and extended warranty contract revenues are recognized as services are completed. For consistency with prior period reporting, Eagle’s communications services revenues are reported under the category “Structured Wiring” on Eagle’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “APC/HSI” within Note 20-Industry Segments.

Eagle Broadband Services, Inc. provides business-to-business hardware and software network solutions and network monitoring services. The revenue from the hardware and software sales is recognized at the time of shipment. The monitoring services recognition policy is to record revenue on completion. For consistency with prior period reporting, Eagle’s technology services product revenues are reported under the category “Products” while the services components are reported under the category “Other” on Eagle’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “UCG” within Note 20-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 and resells and bundles and sells contracts from its own portfolio to independent third-party companies. Security monitoring customers are billed three months in advance of service usage. The revenues are deferred at the time of billing and ratably recognized over the prepayment period as service is provided. Installation fees are recognized upon completion and acceptance. Revenues from the sale of security monitoring contracts, both purchased and owned, are recognized upon contract execution except for reserves, hold backs or retentions, which are deferred until the contract provisions are fulfilled. Eagle’s security services revenues are reported under the category “Broadband Services” on Eagle’s Consolidated Statements of Operations included as page F-4 of this report and also under the category “EBS/DSS” within Note 20-Industry Segments.

Etoolz, Inc.

Etoolz, Inc. provides research and development support for all Eagle companies and does not currently provide billable services to independent third parties.

H) Research and Development Costs

Research and development expenditures are generally charged to operations as incurred. The Company performed research and development activities for internal projects related to its SatMAX non-line-of-sight communications system, IP set-top boxes and its multimedia entertainment centers. Research and development costs of $776,000, $557,000, and $411,000 were expensed for the years ended August 31, 2005, 2004, and 2003, respectively. No research and development services were performed for outside parties for the years ended August 31, 2005, 2004, and 2003.

I) Income Taxes

The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”, which requires a change from the deferral method to assets and liability method of accounting for income taxes. Timing differences exist between book income and tax income, which relate primarily to depreciation methods.

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J) Net Earnings per Common Share

Net earnings per common share are shown as both basic and diluted. Basic earnings per common share are computed by dividing net income less any preferred stock dividends (if applicable) by the weighted average number of shares of common stock outstanding. Diluted earnings per common share are computed by dividing net income less any preferred stock dividends (if applicable) by the weighted average number of shares of common stock outstanding, plus any dilutive common stock equivalents. The components used for the computations are shown as follows, in thousands:

	2005		2004		2003
Weighted Average Number of Common Shares Outstanding Including:
Basic Common Stock Equivalents		241,234		185,046		95,465
Fully Diluted Common Stock Equivalents		241,234		185,046		95,465

K) Impairment of Other Intangible Assets

Our other intangible assets primarily include contract rights, customer relationships and other intangibles of licenses and permits and other acquired contracts. These intangible assets include the Company rights to deliver bundled digital services such as, Internet, telephone, cable television and security monitoring services to residential and business users. The Company evaluates the recoverability of identifiable intangible assets whenever events or changes in circumstances indicate that an intangible asset’s carrying amount may not be recoverable. An impairment loss would be deemed necessary when the estimated non-discounted future cash flows are less than the carrying net amount of the asset. If an asset were deemed impaired, the asset’s recorded value would be reduced to fair market value. In determining the amount of the charge to be recorded, the following methods would be utilized to determine fair market value: (i) quoted market prices in active markets, (ii) an estimate based on prices of similar assets, and (iii) an estimate based on valuation techniques. During the year ended August 31, 2005, the Company recorded an impairment loss of $23,912,668 related to intangible assets (see Note 6).

L) Impairment of Goodwill

Goodwill represents the excess of the cost of companies acquired over the fair value of their net assets at the dates of acquisition. Under current accounting pronouncement, the Company is required to annually assess the carrying value of goodwill associated with each of its distinct business units that comprise its business segments of the Company to determine if impairment in value has occurred. The Company updated its assessment as of August 31, 2005 and concluded that based on a valuation model incorporating expected future cash flows in consideration of historical cash flows and results to date, no impairment charge to goodwill was necessary. (See Note 6.)

M) Advertising Costs

Advertising costs are expensed when incurred. For the years ended August 31, 2005, 2004, and 2003, the Company expensed $80,000, $29,000, and $247,000, respectively.

N) Deferred Syndication Costs

Deferred syndication costs consist of those expenditures incurred that are directly attributable to fundraising and the collection thereto. Upon successful collection of the funds, all expenses incurred will be reclassified to additional paid in capital and treated as syndication costs; netted against the funds raised.

O) Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent asset and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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P) Marketable Securities

The Company adopted the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and SFAS No. 130, “Accounting for Other Comprehensive Income.” The Company had securities available for sale that included shares of common stock and bonds. These investments have a fair market value of $0 and of $551,000 and are included in the Balance Sheet category “Securities Available for Sale” as of August 31, 2005 and 2004, respectively. (See Note 11.)

Q) Other Comprehensive Income

In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, “Other Comprehensive Income,” effective for fiscal years beginning after December 15, 1997. This statement considers the presentation of unrealized holding gains and losses attributable to debt and equity securities classified as available for sale. As stated, any unrealized holding gains or losses affiliated with these securities are carried below net income under the caption “Other Comprehensive Income.” For the fiscal years ended August 31, 2005, 2004 and 2003, other comprehensive loss was $0, $321,000, and $71,000, respectively.

R) Reclassification

The Company has reclassified certain assets, costs and expenses for the years ended August 31, 2005, 2004 and 2003, to facilitate comparisons.

S) Supporting Costs in Selling, General and Administrative Expenses

Other support costs for the years ended August 31, 2005, 2004, and 2003 are as follows, in thousands:

	2005		2004		2003

Auto Related	$	43	$	22	$	19
Bad Debt		568		2,643		2,177
Delivery and Postage		42		47		95
Fees		276		288		418
Insurance and Office		922		425		437
Professional and Contract Labor		11,532		6,818		6,129
Rent		418		507		1,183
Repairs and Maintenance		64		43		47
Travel		453		237		377
Taxes		2,794		1,474		170
Telephone and Utilities		428		794		1,394
Other		126		69		291
Total	$	17,666	$	13,367	$	12,737

T) Recent Pronouncements

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 (“SFAS 145”), “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which requires that the extinguishment of debt not be considered an extraordinary item under APB Opinion No. 30 (“APB 30”), “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” unless the debt extinguishment meets the “unusual in nature and infrequent of occurrence” criteria in APB 30. SFAS 145 is effective for fiscal years beginning after May 15, 2002, and, upon adoption, companies must reclassify prior period items that do not meet the extraordinary item classification criteria in APB 30. The Company adopted SFAS 145 and related rules as of August 31, 2002. The adoption of SFAS 145 had no effect on the Company’s financial position or results of operations.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146 (“SFAS 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” which nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that costs associated with an exit or disposal activity be recognized only when the liability is incurred (that is, when it meets the definition of a liability in the FASB’s conceptual framework). SFAS 146 also establishes fair value as the objective for initial measurement of liabilities related to exit or disposal activities. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS 146 in the first quarter of fiscal 2003.

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In January 2003, FASB issued Interpretation No. 46 (FIN 46), an interpretation of Accounting Research Bulletin No. 51, which requires the Company to consolidate variable interest entities for which it is deemed to be the primary beneficiary and disclose information about variable interest entities in which it has a significant variable interest. FIN 46 became effective immediately for variable interest entities formed after January 31, 2003 and effective for periods ending after December 15, 2003, for any variable interest entities formed prior to February 1, 2003. The Company does not believe that this Interpretation will have a material impact on its consolidated financial statements.

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-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R’s effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after December 15, 2005. SFAS 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application. The Company intends to adopt SFAS 123R prospectively commencing in the second quarter of the fiscal year ending August 31, 2006, and it will have a significant impact on the consolidated statement of operations as the Company will be required to expense the fair value of stock option grants and stock purchases under employee stock purchase plan. It is expected that the adoption of SFAS 123R will cause the Company to record as expense each quarter a non-cash accounting charge approximating the fair value of such share-based compensation meeting the criteria outlined in the provisions of SFAS 123R.

U) Product Warranties

The Company warrants its products against defects in design, materials and workmanship generally for six months to a year. Other warranties from our vendors which are incorporated in our products are passed on to the customer at the completion of the sale. Provision for estimated warranty costs is made in the period in which such costs become probable. Historically, Eagle has not incurred any material warranty costs and, accordingly, Eagle has not accrued for these costs at August 31, 2005 and 2004. Eagle provides for the estimated cost of product warranties at the time it recognizes revenue. Eagle engages in product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers; however, ongoing product failure rates, material usage and service delivery costs incurred in correcting a product failure, as well as specific product class failures outside of Eagle’s baseline experience, affect the estimated warranty obligation. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.

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V) Beneficial Conversion Values:

Beneficial conversion values are calculated at the difference between the conversion price and the fair value of the common stock into which the debt is convertible, multiplied by the number of shares into which the debt is convertible. The beneficial conversion value is charged to interest expense because the debt is convertible at the date of issuance. The value is limited to the total proceeds received.

W) Direct Financing Leases

Income from direct financing lease transactions is reported using the financing method of accounting, in which the company investment in the leased property is reported as a receivable from the lessee to be recovered through future rentals. The income portion of each rental payment is calculated so as to generate a constant rate of return on the net receivable outstanding. All of our financing leases are for products related to the multi media industry. The term of our leases is typically 48 months and open ended leases, meaning that potential residual risk, or the difference between the fair market value of the equipment and the amount owed to us, lies with the customer.

NOTE 2 - Related Party Transactions

In February 2004, compensation for certain officers and key employees under incentive clauses of their employment contracts (i) includes a non-cash expense of $4,493,000 incurred on the issuance of promissory notes upon the modification of outstanding options for 4,200,000 common shares and (ii) reflects a guaranteed compensation of the modified options equivalent to $1.75 less the option strike price, which was an additional $4,074,000 accrued in August 2004. The amount of the accrual varies at each quarter end depending on the stock market value fluctuation or upon exercise of options subject to employment agreements.

In June 2005, the Company entered into note exchange agreements with Jonathan Hayden, Billie Mize, John Nagel and David Weisman in which the Company issued 7,954,085 shares of its common stock to fully satisfy the Company’s outstanding guarantee obligations in the amount of $2,086,251, and any remaining obligations under the promissory notes. The note exchange agreements also fully satisfy the Company’s contingent guarantee obligation with respect to unexercised options held by Mr. Hayden and Mr. Nagel.

Dr. H. Dean Cubley, a director and former officer of the company, did not enter into the note exchange agreement. The remaining principal amount of $1,924,000 is currently in default and is accruing interest under the terms of the original agreement.

For the year ended August 31, 2005, accrued interest payable and interest expense was $154,922.

NOTE 3 - Accounts Receivable

Accounts receivable consist of the following (in thousands):

		Year Ended August 31,
		2005			2004

Accounts receivable	$	4,578		$	3,866
Allowance for doubtful accounts		(2,688	)		(2,396	)
Accounts receivable, net	$	1,890		$	1,470

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NOTE 4 - Property, Plant and Equipment and Intangible Assets

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

		Year Ended August 31,
		2005			2004
Automobile	$	123		$	143
Headend facility and fiber infrastructure		24,154			27,146
Furniture and fixtures		520			516
Leasehold improvements		183			133
Office equipment		1,027			1,023
Manufacturing and operating equipment		6,291			7,454
Total property, plant and equipment	$	32,298		$	36,415
Less accumulated depreciation		(8,994	)		(7,837	)
Net property, plant and equipment	$	23,304			28,578

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 $65,000, $43,000 and $47,000 for the years ended August 31, 2005, 2004 and 2003, 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):

	Year Ended August 31,
		2005			2004
Goodwill	$	4,095		$	4,095

Contract Rights	$	11,847		$	28,691
Accumulated amortization		(8,926	)		(7,013	)
	$	2,921		$	21,678

Customer Relationships	$	3,067		$	7,189
Accumulated amortization		(2,236	)		(1,758	)
	$	831		$	5,431

Other intangible assets	$	3,937		$	6,839
Accumulated amortization		(3,078	)		(2,805	)
	$	859		$	4,034

Total intangible assets	$	22,946		$	46,814
Total accumulated amortization		(14,240	)		(11,576	)
Net of amortization	$	8,706		$	35,238

NOTE 5 - Impairment of Long-Lived Assets

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

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

During the second quarter of 2005, the Company also determined an impairment loss existed primarily for Link-Two Communications, Inc.’s assets. Management determined that the value of the assets was nominal after a review of the marketplace and recorded an impairment loss of $1,050,000.

NOTE 6 - Impairment of Goodwill and Other Intangible Assets

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

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

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

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

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

NOTE 7 - Assets Held for Sale

The Company entered into an agreement to repurchase security contracts for $1,003,316. Under the terms of the agreement, $985,000 of the $1,003,316 was offset against a receivable the Company had from the seller. These contracts are considered an asset held for sale and are included in other current assets. The company resold approximately 63% of the contracts during the fourth quarter of 2005 and recognized a loss on sale of assets of $15,735 as of August 31, 2005. The Company determined the fair value of the contracts as of August 31, 2005 was $298,000 and recorded an impairment charge of $322,792 to record the contracts at fair value as of August 31, 2005. The Company intends to sell the remainder of these contracts during fiscal 2006.

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NOTE 8 - Notes Payable

The following table lists the Company’s note obligations as of August 31, 2005, and August 31, 2004 (in thousands):


	Annual			Year Ended August 31,
	Interest	Due
	Rate	Date		2005		2004

Notes Payable:
Investor group	8%	Demand	$	—	$	4,888
Q-Series bonds	12%	Various		—		744
Other	Various	Various		61		288
Total Notes Payable			$	61	$	5,920
Less current portion				61		5,920
Total long-term debt			$	—	$	—

Between October 30, 2003, and November 5, 2003, the Company sold approximately $4.1 million of convertible debt securities to 36 accredited investors. The securities consisted of $25,000, 12% five-year bonds. The bonds are due and payable upon maturity at the end of the five-year period. Interest on the bonds is payable at the rate of 12% per annum, and is payable semiannually. The bondholder may require the Company to convert the bond (including any unpaid interest) into shares of the Company’s common stock at any time during the first year but not thereafter. The conversion rates vary from $0.50 to $0.75 per share. During the years ended August 31, 2005 and 2004, all of the bonds were redeemed and converted for stock.

Eagle entered into a Securities Purchase Agreement dated June 2, 2004, with four accredited investors, pursuant to which Eagle agreed to sell, and the investors agreed to purchase, debentures in the principle amount of $4,888,400 bearing interest at the rate of 8% per annum, maturing in June 2007, convertible into an aggregate of 5,360,088 shares of Eagle common stock, together with five-year warrants to purchase an aggregate of 1,340,022 shares of Eagle common stock at an exercise price of $1.265 per share. During the year ended August 31, 2005, all of the bonds were redeemed and converted for stock.

NOTE 9 - Supplemental Non-Cash Disclosures

During the year ended August 31, 2005, the company issued stock in lieu of cash as payment for the following:

	Non-Cash Settlements ($ in thousands)
Settlements including Legal	$	1,041
Interest Expense		568
Professional Fees		570
Salary and Compensation		165
Accrued Liabilities		7,345
Notes Payable		7,007
Total Non-Cash Settlements	$	16,696

NOTE 10 - Lines of Credit

On July 16, 2002, the Company entered into a $20,000,000 line of credit with Cornell Capital Partners, LP (CCP). The Company has not drawn on the line of credit and currently has no plans to do so. One of the issues of the litigation between CCP and the Company is whether the Company owes CCP a commitment fee for this line of credit. Cornell contends that the Company owes $592,500; the Company denies the liability. (See Note 16 – Legal Proceedings.)

NOTE 11 - Securities Available for Sale

As discussed in Note 1, the Company adopted the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and SFAS No. 130, “Accounting for Other Comprehensive Income.” As of August 31, 2005, the Company had no marketable equity securities.

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At August 31, 2004, the securities available for sale include 580,000 shares of Burst.com with a cost basis of $127,832 and a fair market value of $551,000. The Company recognized a loss of $899,347 on the sale of these securities for the year ended August 31, 2005. The Company’s marketable equity securities are classified as available-for-sale.

NOTE 12 - Income Taxes

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

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

	Year Ended August 31,
	2005			2004			2003
U.S. Federal statutory tax rate		34	%		34	%		34	%
U.S. valuation difference		(34	%)		(34	%)		(34	%)
Effective U.S. tax rate		0	%		0	%		0	%
Foreign tax valuation		0	%		0	%		0	%
Effective tax rate		0	%		0	%		0	%

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

	Year Ended August 31,
		2005			2004			2003

Computed expected tax benefit	$	(19,360	)	$	(13,262	)	$	(12,410	)
Increase in valuation allowance		19,360			13,262			12,410
Income tax expense	$	—		$	—		$	—

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at August 31, 2005, and August 31, 2004, are presented below (in thousands) and include the balances of the merged company ClearWorks.net., Inc.

	Year Ended August 31,
	2005			2004
Deferred tax assets:
Net operating loss carry forwards	$	(70,846	)	$	(51,486	)
Less valuation allowance		70,846			51,486
Net deferred tax assets	$	—		$	—

The valuation allowance for deferred tax assets of August 31, 2005, and August 31, 2004, was $70,846,000 and $51,486,000, respectively. As of August 31, 2005 and 2004, the Company has net operating loss carry-forwards of $208,372,000 and $151,430,000, respectively, which are available to offset future federal taxable income, if any, with expirations from 2021 to 2023.

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NOTE 13 - Stock Options and Warrants

In July 1996, the Board of Directors adopted, and the Company’s shareholders approved, the 1996 Incentive Stock Option Plan under which 400,000 shares of the Company’s common stock have been reserved for issuance. In June 2004, the Board of Directors adopted, and the Company’s shareholders approved, the June 2004 Compensatory Stock Option Plan under which 10,000,000 shares of the Company’s common stock has been reserved for issuance. In June 2005, the Board of Directors adopted, and the Company’s shareholders approved, the 2005 Employee Stock Option Plan under which 30,000,000 shares of the Company’s common stock has been reserved for issuance. As of August 31, 2005, options issued to employees covering 11,737,968 shares were outstanding, of which 3,762,132 were exercisable.

The Company has elected to follow APB 25, “Accounting for Stock Issued to Employees.” Accordingly, since employee stock options are granted at market price on the date of grant, no compensation expense is recognized. However, SFAS 123 requires presentation of pro forma net income and earnings per share as if the Company had accounted for its employee stock options granted under the fair value method of that statement. The weighted average fair value of the individual options issued and granted during the year ended August 31, 2005, is estimated as $0.41 on the date of grant. Management estimates the average fair value for options granted during fiscal 2005 to be comparable to those granted in fiscal 2004. The impact on net loss is minimal; therefore, the pro forma disclosure requirements prescribed by SFAS 123 are not significant to the Company. The fair values were determined using a Black-Scholes option-pricing model with the following assumptions:

	Year Ended August 31,
	2005		2004
Dividend yield		0.00%		0.00%
Volatility		83%		91%
Risk-free interest rate		3.50%		4.00%
Expected life		5		5

The pro forma effect on net loss as if the fair value of stock-based compensation had been recognized as compensation expense on a straight-line basis over the vesting period of the stock option or purchase right was as follows for the years ended August 31, 2005, and August 31, 2004:

	Year Ended August 31,
		2005			2004			2003
Net loss, as reported	$	(57,010	)	$	(39,005	)	$	(36,501	)
Add: Stock-based employee compensation included in reported net earnings/(loss), net of related tax effects		18			—			—
Less: Stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects		(2,007	)		(9	)		(20	)
Pro forma net earnings/(loss)	$	(58,999	)	$	(39,014	)	$	(36,521	)

Net loss per share:
As reported	$	(0.24	)	$	(0.21	)	$	(0.38	)
Pro forma	$	(0.24	)	$	(0.21	)	$	(0.38	)

Diluted net loss per share:
As reported	$	(0.24	)	$	(0.21	)	$	(0.38	)
Pro forma	$	(0.24	)	$	(0.21	)	$	(0.38	)

Option and warrant activity was as follows for the year ended August 31, 2005:

	Shares			2005 Weighted-Average Exercise Price
Outstanding at beginning of year	6,837,779		$	1.30
Granted	11,445,118			0.41
Assumed through acquisitions	—			—
Exercised	(4,125,000	)		0.46
Forfeited/cancelled	(703,152	)		0.74
Outstanding at end of year	13,454,745			0.83
Exercisable at year end	5,478,909			1.56

F-19

Information about options and warrants outstanding was as follows at August 31, 2005:

Range of Exercise Prices	Number Outstanding	Avg. Remaining Contractual Life in Years	Average Exercise Price	Number Exercisable	Average Exercise Price
$0.00 - $0.50	8,623,411	4.00	0.21	2,300,355	0.25
$0.50 - $1.00	3,522,644	3.51	0.77	2,119,864	0.76
$1.01 - $7.50	1,308,690	2.42	5.12	1,058,690	6.01
	13,454,745	3.72	0.83	5,478,909	1.56

NOTE 14 - Concentrations

For the years ended August 31, 2005, 2004 and 2003, substantially all of the Company’s business activities have remained within the United States and have been extended to the wireless infrastructure, fiber, cabling, computer services and broadband industries. Approximately 21% of the Company’s revenues and receivables were generated in the state of Texas, 0% in the international market, and the approximate 79% remainder relatively evenly over the rest of the nation during the year ended August 31, 2005. Approximately 83% of the Company’s revenues and receivables were generated in the state of Texas, 0% in the international market, and the approximate17% remainder relatively evenly over the rest of the nation for the year ended August 31, 2004. Approximately 74% of the Company’s revenues and receivables were generated in the state of Texas, 0% in the international market, and the approximate 26% remainder relatively evenly over the rest of the nation for the year ended August 31, 2003. Through the normal course of business, the Company generally does not require its customers to post any collateral.

NOTE 15 - Foreign Operations

Although the Company is based in the United States, certain of its products are sold in international markets. Presently, international sales total 0% for the years ended August 31, 2005, 2004 and 2003.

NOTE 16 - Commitments and Contingent Liabilities

Leases

For the years ended August 31, 2005, 2004 and 2003, rental expenses of approximately $418,000, $507,000 and $1,183,000, respectively, were incurred.

The Company renewed its primary office lease space in League City, Texas, for $24,983 per month with South Shore Harbor Development, Ltd. The renewal lease commenced on June 1, 2004, and expires on May 31, 2009. The lessor agreed to grant the Company a one-time option to terminate the lease at 36 months by paying an unamortized leasing commission of $35,000 and a penalty of 1½ months rent of $37,000 for a combined total of $72,000.

Year Ended August 31,		Amount
2006	$	299,801
2007		306,180
2008		325,316
2009		243,987
Total	$	1,175,284

LLV Broadband, LLC Agreement

In August 2005, the Company and Neva Holdings, LLC (“Neva”), executed an agreement whereby the parties agreed to terminate the Restated Limited Liability Company Agreement (“LLC Agreement”) that the parties entered into on November 23, 2004. The termination of the agreement provides for the Company’s withdrawal as a member of LLV Broadband, LLC (“LLC”), and complete release from any future obligations under the LLC Agreement. The terms and conditions of the LLC Agreement called for the Company to participate in the construction, development and operation of a system for the provision of a range of broadband, entertainment and communications services to the commercial, recreational and residential buildings located within the Lake Las Vegas Resort and surrounding geographical areas. Under the terms of the LLC Agreement, the Company was required to make a capital contribution of between $3 million and $5 million to fund ongoing development and operating activities. The parties initially estimated that the LLC’s gross revenues would be approximately $15.5 million over a six-year period through the year 2010. As a result of the termination, the Company will not be required to make any additional capital contributions to the LLC and will not recognize any revenues from the LLC. The Company will not incur any early termination penalties associated with the termination of the LLC Agreement.

F-20

The service agreement entered into by the Company and the LLC in July 2003 remained in effect until November 4, 2005. Under this agreement, the Company provided video content, network monitoring and billing services to the LLC according to a previously agreed-to fee arrangement until November 4, 2005.

Legal Proceedings

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

In July 2003, Eagle became a defendant in Cornell Capital Partners, L.P., vs. Eagle Broadband, Inc., et al., Civil Action No. 03-1860 (KSH), in the United States District Court for the District of New Jersey. The suit presents claims for breach of contract, state and federal securities fraud and negligent misrepresentation. 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. The Company denies the claims and intends to vigorously defend this lawsuit and the claims against it. Eagle has asserted counterclaims against Cornell for fraud and breach of contract in the amount of $2 million. The company has accrued $416,000 in expenses against this lawsuit, although the outcome cannot be predicted at this time.

In September 2003, Enron sued United Computing Group in Enron Corp., et al., vs. United Computing Group, Inc., in the United States Bankruptcy Court for the Southern District of New York to avoid and recover a transfer in the amount of approximately $1.5 million. In October 2005, the parties agreed to a dismissal of all adversary proceedings and claims against each other, and in November 2005, the Bankruptcy Court entered orders confirming dismissal of such proceedings and claims.

In June 2004, The Tail Wind Fund Ltd. sued Link-Two Communications, Inc., and Eagle Broadband, Inc., Civil Action 04-CV-05776, in the United States District Court for the Southern District of New York. Tail Wind claims breach of contract seeking $25 million. The Company is currently in negotiations with Tail Wind to settle this lawsuit and believes it can be settled out of court. For the year ended August 31, 2004, the Company had accrued $500,000 in expenses for this lawsuit. As of August 31, 2005, the Company has accrued an additional $4.5 million in expenses against this lawsuit for a total accrued liability of $5 million. This amount is included on the Consolidated Balance Sheet as of August 31, 2005, as part of accrued expenses.

In November 2004, Palisades Master Fund L.P. sued Eagle Broadband, Inc., and David Weisman, Civil Action 04603626, in New York County, New York Supreme Court, seeking an injunction setting a conversion price on certain convertible debt and warrants at $0.4456 per share of Eagle common stock and damages in excess of $3.1 million. In April 2005, the parties entered into a confidential settlement agreement ending this lawsuit.

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.

F-21

NOTE 17 - Earnings per Share

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

	For the year ended August 31, 2005
		Income (Numerator)		Shares (Denominator)		Per Share Amount

Net loss	$	(57,010	)	—	$	—
Basic EPS:
Income available to common shareholders		(57,010	)	241,234		(0.24	)
Effect of dilutive securities warrants		—		—		—
Diluted EPS:
Income available to common stockholders and assumed conversions	$	(57,010	)	241,234	$	(0.24	)

	For the year ended August 31, 2004
		Income (Numerator)		Shares (Denominator)		Per Share Amount

Net loss	$	(39,005	)	—	$	—
Basic EPS:
Income available to common shareholders		(39,005	)	185,046		(0.21	)
Effect of dilutive securities warrants		—		—		—
Diluted EPS:
Income available to common stockholders and assumed conversions	$	(39,005	)	185,046	$	(0.21	)

	For the year ended August 31, 2003
		Income (Numerator)		Shares (Denominator)		Per Share Amount

Net loss	$	(36,501	)	—	$	—
Basic EPS:
Income available to common shareholders		(36,501	)	95,465		(0.38	)
Effect of dilutive securities warrants		—		—		—
Diluted EPS:
Income available to common stockholders and assumed conversions	$	(36,501	)	95,465	$	(0.38	)

For the years ended August 31, 2005 and 2004, dilutive securities existed. (See Note 13.) The weighted average shares outstanding on a fully diluted basis as of August 31, 2005 and 2004, were approximately 242,566,000 and 185,452,000, respectively.

NOTE 18 - Retirement Plans

During October 1997, the Company initiated a 401(k) plan for its employees, funded through the contributions of its participants. Prior to March 2003, the Company matched the participant’s contribution up to 3% of their salary. Subsequent to March 2003, the plan was amended and the Company match became elective. For the years ended August 31, 2005 and 2004, employee contributions were approximately $116,860 and $109,000, respectively. The Company matched $0 and $0, respectively, for these periods.

F-22

NOTE 19 - Major Customer

The Company had gross revenues of $8,592,000 and $12,490,000 for the years ended August 31, 2005 and 2004, respectively. The fiscal year ended August 31, 2005, included $2,128,000, or 25% of the fiscal year total sales, for sales of security contracts to Alarm Security Group, LLC by the Company’s security-monitoring service subsidiary, D.S.S. Security, Inc. Also during this period, Eagle Broadband, Inc. had product sales of $1,957,000, or 23% of sales, to a major customer. The fiscal year ended August 31, 2004, included $3,103,937, or 25% of the fiscal year total sales, for sales of security contracts to Sweetwater Security Capital, LLC, by the Company’s security-monitoring service subsidiary, D.S.S. Security, Inc. Also during this period, Eagle Broadband, Inc. had product sales of $3,806,806, or 30% of sales, to a major customer.

NOTE 20 - 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 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 year ended August 31, 2005

	APC/HSI			EBS/DSS			UCG			Eagle			Other			Elim.			Consol
Revenue		21			4,348			—			4,223			—			—			8,592
Segment Loss		(113	)		(7,148	)		(658	)		(45,601	)		(2,834	)		—			(56,354	)
Total Assets		(8,921	)		(14,526	)		(3,072	)		95,204			16,339			(43,111	)		41,913
Capital Expenditures		—			723			—			92			—			—			814
Depreciation		40			5,154			2			25,111			1,583			—			31,890

F-23

For the year ended August 31, 2004

	APC/HSI			EBS/DSS			UCG			Eagle			Other			Elim.			Consol
Revenue		678			5,525			445			5,761			81			—			12,490
Segment Loss		(827	)		(2,483	)		(58	)		(27,534	)		(50	)		—			(30,952	)
Total Assets		148			28,204			32			127,896			56,956			(142,768	)		70,468
Capital Expenditures		—			729			—			—			—			—			729
Depreciation		176			1,565			66			3,192			98			—			5,097

For the year ended August 31, 2003

	APC/HSI			EBS/DSS			UCG			Eagle			Other			Elim.			Consol
Revenue		4,220			2,809			2,433			1,803			328			—			11,593
Segment Loss		(4,500	)		(6,083	)		(2,279	)		(17,849	)		(364	)		—			(31,075	)
Total Assets		8,929			31,316			114			97,948			83,852			(144,793	)		77,366
Capital Expenditures		11			6,254			1			—			158			—			6,424
Depreciation		372			1,351			72			3,184			253			—			5,232

Reconciliation of Segment Loss from Operations to Net Loss

	Year Ended August 31,
	2005			2004			2003
Total segment loss from operations	$	(56,354	)	$	(30,952	)	$	(31,075	)
Total other income (expense)		(656	)		(8,053	)		(5,426	)
Net loss	$	(57,010	)	$	(39,005	)	$	(36,501	)

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 21 - Unaudited Quarterly Financial Data

	Nov. 30			Feb. 28			May 31			Aug. 31
Year Ended August 31, 2005
Revenues		1,528			2,683			2,976			1,405
Net earnings (loss)		(4,448	)		(9,326	)		(3,951	)		(39,285	)
Basic loss per share		(0.02	)		(0.04	)		(0.02	)		(0.14	)
Diluted loss per share		(0.02	)		(0.04	)		(0.02	)		(0.14	)
Year Ended August 31, 2004
Revenues		2,397			3,744			5,091			1,258
Net earnings (loss)		(8,461	)		(9,398	)		(4,373	)		(16,773	)
Basic loss per share		(0.05	)		(0.05	)		(0.02	)		(0.08	)
Diluted loss per share		(0.05	)		(0.05	)		(0.02	)		(0.08	)
Year Ended August 31, 2003
Revenues		4,618			3,063			1,947			1,965
Net earnings (loss)		(1,533	)		(2,012	)		(3,833	)		(29,123	)
Basic loss per share		(0.02	)		(0.03	)		(0.05	)		(0.28	)
Diluted loss per share		(0.02	)		(0.03	)		(0.05	)		(0.28	)

F-24

NOTE 22 - Equity Financing

On February 14, 2005, the Company completed the sale of 20 million shares of its common stock to certain investors at a price of $0.41 per share. The net proceeds to the Company from this offering after placement agent fees and offering expenses were $7,504,000.

On April 15, 2005, the Company additionally completed the sale of 10 million shares of its common stock to certain investors at a price of $0.2035 per share. The net proceeds to the Company from this offering after placement agent fees were $1,935,000.

In August 2005, the Company entered into a purchase agreement with certain investors for the sale of 30 million shares of its common stock at a price of $0.135 per share. As of August 31, 2005, 15,125,000 of the 30 million shares were issued. The remaining 14,875,000 shares were not issued due to notification from the AMEX to obtain shareholder approval. (See Note 24-Subsequent Events.) The net proceeds to the Company from this offering after placement agent fees were $3,766,500.

During the year ended August 31, 2005, the Company entered into an agreement with a former employee whereby the Company utilized his services as a settlement consultant. Under the agreement, the consultant received approximately 15.5 million shares of the Company’s common stock that were liquidated by the consultant and the proceeds were used to discharge certain obligations of the Company. The consultant settled approximately $6.5 million in liabilities. In connection with this agreement, the company incurred fees of approximately $1.7 million. The settlement consultant also made cash advances to the company of approximately $1.4 million which was repaid in stock. Fees and interest incurred by the Company associated with the advances were approximately $362,000.

NOTE 23 - Exit Activities

During the fiscal year ended August 31, 2003, we implemented cost reductions in various operating segments. In the aggregate, the Company reduced its overall personnel by 114 headcount or a 50% reduction for the fiscal year ended August 31, 2003 as compared to the fiscal year ended August 31, 2002. The predominate reduction in headcount related to the Company’s Atlantic Pacific/Homes Systems structured wiring and commercial cabling segment with headcount reductions of nine, six and 57 personnel in the first three quarters of fiscal 2003; aggregating an overall headcount reduction of 72 or 71% of this segment’s workforce. Additionally, the Company reduced its United Computing Group computer hardware sales segment by 18, nine, and two personnel in the first three quarters of fiscal 2003; aggregating an overall reduction of 29 or 59% of this segment’s workforce. These two operating segments accounted for 101 of the 114 headcount reductions affected in fiscal 2003. Specifically, certain components of these operating segments, i.e., home systems structured wiring, commercial cabling and computer hardware sales, were not expected to provide significant long-term revenues and profitability, and therefore were reduced. Following the series of cost reduction activities implemented during the first three quarters of fiscal 2003, Eagle’s management assessed the viability of continued financial investment in these unprofitable segments in the fourth quarter of fiscal 2003 and into early first quarter of fiscal 2004 and made further reductions. In conjunction with the appointment of Mr. Weisman as our new Chief Executive Officer in early October 2003, the Company completed the final consolidation of the United Computing Group segment into other Eagle operations while further reducing the Atlantic Pacific/Home Systems operations to an outsource commercial cabling and structured wiring operation that project manages affiliate contractors.

Additionally, in conjunction with the appointment of Mr. Weisman as Chief Executive Officer, the Company made certain decisions during the preparation of its Form 10-K in our first quarter of fiscal 2004 that affected the value of certain assets as of August 31, 2003. These decisions included:

A revised collection assessment of certain accounts receivables from these and other down-sized Eagle business segments.

The decision to no longer pursue new commercial structured cabling opportunities on a direct basis versus the outsource model, thereby resulting in the impairment of goodwill from its Atlantic Pacific operations.

The decision to no longer pursue Home Systems structured wiring opportunities on a direct standalone model basis outside its BDS model, thereby resulting in the impairment of its Home Systems inventory.

The decision to withdraw from certain unprofitable BDS projects, namely its Austin area BDS developments thereby impairing certain assets including property, plant and equipment.

The decision to settle numerous existing and threatened legal proceedings versus continuing the timing consuming and costly process of defending such proceedings, thereby resulting in the accrual of numerous reserves for such settlements.

The decisions to consolidate its operating segments into its corporate lease space, thereby resulting in reserves for property lease settlements.

F-25

The decision to negotiate the settlement of certain sales tax liabilities that resulted from a sales tax audit of United Computing Group operations for periods that preceded the acquisition date of this subsidiary.

Accordingly, Eagle incurred certain asset impairments and operating charges in the fourth quarter associated with these decisions. These asset impairment charges, allowances, write-offs and reserves included the following:

Accounts receivable write-offs and reserves aggregating $2,177,000, of which $1,348,000 was attributable to the decisions affecting the Company’s Atlantic Pacific/Home Systems operations, $15,000 attributable to the decisions affecting its United Computing Group operations and $814,000 attributable to the Company’s Eagle, EBS and Other segment operations.

Inventory impairment charges of $2,627,000, of which $501,000 was attributable to the decisions affecting the Company’s Atlantic Pacific/Home Systems operations and $74,000 attributable to the decisions affecting its United Computing Group operations. Additionally, the Company recorded an impairment charge of $1,125,000 for slow-moving and obsolete inventory in its Eagle operations. This charge primarily resulted from a major client’s decision to upgrade from a 400 MHz chip to a 500 MHz chip for the Company’s IP set top box.

Litigation settlement costs and reserves of $3,650,000 against certain of the legal proceedings previously discussed in Item 3. Legal Proceedings. Additionally, the Company recorded charges aggregating $2,274,000 to settle threatened and existing legal proceeding associated with prior financing transactions, including the Kaufman litigation.

Lease settlement costs and reserves of $171,000 were attributable to the decision to consolidate various operating segments into its corporate lease space; thereby resulting in reserves for early exit of such leases.

Impairment, write-downs and restructuring costs aggregating $7,611,000, of which $1,878,000 was attributable to an impairment of goodwill in the Company’s Atlantic Pacific operations following the Company’s decision to no longer pursue commercial cabling opportunities on a direct basis versus an outsource model. These costs were also comprised of $3,412,000 in impairment of property and equipment following the Company’s decision to withdraw from certain unprofitable BDS projects, namely in the Austin area, and $323,000 of impairment of property and equipment from the Company’s Atlantic Pacific/Home Systems operations following the decision to no longer pursue structured wiring opportunities on a direct standalone basis outside of its BDS model. Additionally, the aggregate total included a $553,000 charge for certain sales tax liabilities that resulted from an audit of the Company’s United Computing Group operations for time periods that preceded the acquisition date of this operation.

Eagle incurred approximately $96,000 for severance and accrued vacation related to employees terminated in fiscal 2003. Eagle does not expect to incur any additional future period costs associated with such restructuring activities other than those accrued for and recorded in the fourth quarter of fiscal 2003.

An analysis of accrued costs and amounts charged against the provision follows:

	Beginning Balance 8/31/2003		Period Costs (Additional)		Payments		Ending Balance 8/31/2004

Accrued Exit Expenses:
Severance	$	—	$	—	$	—	$	—
Terminated Lease Costs		171,000		—		—		171,000
	$	171,000	$	—	$	—	$	171,000

For the year ended August 31, 2003, the Company incurred exit costs of $267,000 which are principally severance and lease termination costs. The total expected exit costs for severance and terminated leases are $96,000 and $171,000, respectively. These costs are included in the consolidated statement of income under the categories of salaries and related costs and other support costs.

F-26

These period and accumulated costs are included in the segment reporting as follows:

	APC/HSI		EBS/DSS		UCG		Eagle		Other		Total
Severance	$	37,000	$	24,000	$	14,000	$	21,000	$	—	$	96,000
Terminated Lease Costs		50,000		—		44,000		—		7,700		101,700
Total	$	87,000	$	24,000	$	58,000	$	21,000	$	7,700	$	197,700

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

PART I			4

ITEM 1. BUSINESS			4

ITEM 2. PROPERTIES			9

ITEM 3. LEGAL PROCEEDINGS			9

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			9

PART II			10

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY *SECURITIES*			10

ITEM 6. *SELECTED FINANCIAL DATA*			11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			11

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			23

ITEM 8. FINANCIAL STATEMENTS AND SUPPLMENTARY DATA			23

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE			23

ITEM 9A. CONTROLS AND PROCEDURES			23

ITEM 9B. OTHER INFORMATION			25

PART III			25

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT			25

ITEM 11. EXECUTIVE COMPENSATION			26

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS			27

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS			27

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES			27

PART IV			27

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES			27

INDEX TO EXHIBITS			28

Financial Statements			F-1

	High		Low
Fiscal Year 2005
1st Quarter ended November 30, 2004		0.90		0.59
2nd Quarter ended February 28, 2005		0.82		0.36
3rd Quarter ended May 31, 2005		0.40		0.19
4th Quarter ended August 31, 2005		0.30		0.15

Fiscal Year 2004
1st Quarter ended November 30, 2003		1.77		0.43
2nd Quarter ended February 28, 2004		2.05		1.18
3rd Quarter ended May 31, 2004		1.55		0.79
4th Quarter ended August 31, 2004		1.19		0.75

Exhibit Number		Description

3.1		Restated Articles of Incorporation.

3.2		Amended and Restated Bylaws (Incorporated by reference to Exhibit 3.2 of Form 10-KSB for the fiscal year ended August 31, 2001, filed November 16, 2001).

4.1		Purchase Agreement by and between Eagle Broadband, Inc. and Investors dated October 2, 2003, including registration rights and security agreement attached as an exhibit thereto (Incorporated by reference to Exhibit 10.1 of Form S-3, file no. 333-109481, filed October 3, 2003).\

4.2		Q-Series Bond Agreement (Incorporated by reference to Exhibit 10.3 of Form S-3, file no. 333-106074, filed June 12, 2003).

4.3		Addendum to Q-Series Bond Agreement (Incorporated by reference to Exhibit 10.4 of Form S-3, file no. 333-106074, filed June 12, 2003).

4.4		Form of Subscription Agreement for Q Series Bond, between Eagle Broadband and certain investors (Incorporated by reference to Exhibit 10.5 of Form S-3, file no. 333- 106074, filed June 12, 2003).

10.1		Securities Purchase Agreement between Eagle Broadband, Inc., and the Purchasers identified on the signature pages thereto, dated August 2005 (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed August 18, 2005).

10.2		Registration Rights Agreement between Eagle Broadband, Inc., and the Purchasers identified on the signature pages thereto (Incorporated by reference to Exhibit 10.2 of Form 8-K, filed August 18, 2005).

10.3		Securities Purchase Agreement between Eagle Broadband, Inc., and the Purchasers identified on the signature pages thereto (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed February 18, 2005).

10.4		1996 Incentive Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form S-8, file no. 333-72645, filed February 19, 1999).

10.5		2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of Form S-8, file no. 333-97901, filed August 9, 2002).

10.6		Amendment to the 2002 Stock Incentive Plan (Incorporated by reference to Exhibit 10.2 of Form S-8, file no. 333-102506, filed January 14, 2003).

10.7		2003 Stock Incentive and Compensation Plan (Incorporated by reference to Exhibit 10.1 of Form S-8, file no. 333-103829, filed March 14, 2003).

10.8		Amendment to the 2003 Stock Incentive and Compensation Plan (Incorporated by reference to Exhibit 10.2 of Form S-8, file no. 333-105074, filed May 8, 2003).

10.9		Amendment No. 2 to the 2003 Stock Incentive and Compensation Plan (Incorporated by reference to Exhibit 10.2 of Form S-8, file no. 333-109339, filed October 1, 2003).

10.10		2004 Stock Incentive Plan (Incorporated by reference to Exhibit 10.1 of Form S-8, file no. 333-110309, filed November 6, 2003).

10.11		June 2004 Compensatory Stock Option Plan (Incorporated by reference to Exhibit 10.1 of Form S-8, file no. 333-117690, filed July 27, 2004).

10.12		2005 Employee Stock Option Plan (Incorporated by reference to Exhibit 10.10 of Form S-1/A, file no. 333-127895, filed October 28, 2005).

10.13		Employment Agreement between Eagle Broadband, Inc. and Eric Blachno (Incorporated by reference to Exhibit 10.13 of Form 10-K/A for the fiscal year ended August 31, 2004, filed December 29, 2004).


10.14		Amended and Restated Employment Agreement between Eagle Broadband, Inc. and David Micek (Incorporated by reference to Exhibit 10.12 of Form S-1/A, file no. 333-127895, filed October 28, 2005).

21.1		List of Subsidiaries (Incorporated by reference to Exhibit 21.1 of Form S-1/A, file no. 333-127895, filed October 28, 2005).

23.1		Consent of Lopez, Blevins, Bork and Associates, LLP, Independent Registered Public Accounting Firm.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

(Thousands of dollars, except per share amounts)	Year ended August 31,

Operating Data:	2005			2004			2003			2002			2001

Net Sales	$	8,592		$	12,490		$	11,593		$	29,817		$	28,110
Operating Expenses		56,038			31,055			31,884			83,821			16,582
Operating Income (Loss)		(56,354	)		(30,952	)		(31,075	)		(76,708	)		(8,880	)
Other Income (Expense), Net		(656	)		(8,053	)		(5,426	)		(265	)		2,348
Net Income (Loss)	$	(57,010	)	$	(39,005	)	$	(36,501	)	$	(76,973	)	$	(6,532	)

Earnings Per Share (Basic)		(0.24	)		(0.21	)		(0.38	)		(1.20	)		(0.13	)

Statement of Cash Flows Data:
Cash Used by Operating Activities	$	(11,827	)	$	(3,493	)	$	(6,085	)	$	(797	)	$	(699	)
Cash Used by Investing Activities	$	(611	)	$	(1,216	)	$	(1,276	)	$	(13,668	)	$	(9,721	)
Cash Provided (Used) by Financing Activities	$	14,407		$	5,936		$	6,912		$	(2,342	)	$	(3,846	)

Balance Sheet Data:
Total Assets	$	41,913		$	70,211		$	77,366		$	89,151		$	170,021
Long-Term Debt	$	—		$	—		$	—		$	1,272		$	2,136
Total Stockholders’ Equity	$	23,104		$	50,103		$	58,336		$	76,548		$	148,482

	Year Ended August 31,
($ in thousands)	2005			2004			$ Change			% Change
Net Sales	$	8,592		$	12,490		$	(3,898	)		(31%)
Cost of Goods Sold		8,908			12,387			(3,479	)		(28%)
Gross Profit		(316	)		103			(419	)		(407%)
Percent of Sales		(3.7%	)		0.8	%

Operating Expenses		56,038			31,055			24,983			80%
Loss from Operations		(56,354	)		(30,952	)		(25,402	)		82%
Other Income (Expense)		(656	)		(8,053	)		7,397			(92%)
Net Loss		(57,010	)		(39,005	)		(18,005	)		46%
Unrealized Holding Loss		—			(321	)		321			(100%)
Comprehensive Loss	$	(57,010	)	$	(39,326	)	$	(17,684	)		45%

($ in thousands)	Year Ended August 31,
Business Segment	2005		% of Total		2004		% of Total		$ Change			% Change
Structured Wiring	$	1,343		16%	$	678		5%	$	665			98%
Broadband Services		4,348		51%		5,525		44%		(1,177	)		(21%)
Products		2,770		32%		6,190		50%		(3,420	)		(55%)
Other		131		2%		97		1%		34			35%
Total	$	8,592		100%	$	12,490		100%	$	(3,898	)		(31%)

	Fiscal Year Ended August 31,
($ in thousands)	2004			2003			$ Change			% Change
Net Sales	$	12,490		$	11,593		$	(897	)		8%
Cost of Goods Sold		12,387			10,784			(1,603	)		15%
Gross Profit		103			809			(706	)		(87%)
Percent of Sales		0.8	%		7.0	%

Operating Expenses		31,055			31,884			(829	)		(3%)
Loss from Operations		(30,952	)		(31,075	)		123			0%
Other Income (Expense)		(8,053	)		(5,426	)		(2,627	)		48%
Net Loss		(39,005	)		(36,501	)		(2,504	)		7%
Unrealized Holding Loss		(321	)		(71	)		(250	)		352%
Comprehensive Loss	$	(39,326	)	$	(36,572	)	$	(2,754	)		8%

(Thousands of dollars) Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-Term Debt Obligations	$	61	$	61	$	—	$	—	$	—
Capital (Finance) Lease Obligations		—		—		—		—		—
Operating Lease Obligations		1,175		300		875		—		—
Purchase Obligations and Commitments		3,000		600		1,800		600		—
Total	$	4,236	$	961	$	2,675	$	600	$	—

	Page
Reports of Independent Registered Public Accounting Firm		F-1
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Changes in Shareholders’ Equity		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7


	EAGLE BROADBAND, INC.
	(Registrant)

	By:	/s/ DAVID MICEK
		David Micek President and Chief Executive Officer
		Date: November 29, 2005

Signature	Title	Date

/s/ DAVID MICEK	Chief Executive Officer and Director	November 29, 2005
David Micek	Principal Executive Officer

/s/ ERIC BLACHNO	Chief Financial Officer	November 29, 2005
Eric Blachno	Principal Financial Officer

/s/ JULIET MARKOVICH	Corporate Controller & Principal Accounting Officer	November 29, 2005
Juliet Markovich	Principal Accounting Officer

/s/ ROBERT BACH	Director	November 29, 2005
Robert Bach

/s/ H. DEAN CUBLEY	Director	November 29, 2005
H. Dean Cubley

/s/ GLENN GOERKE	Director	November 29, 2005
Glenn Goerke

/s/ LORNE PERSONS	Director	November 29, 2005
Lorne Persons

/s/ C. J. REINHARTSEN	Director	November 29, 2005
C. J. Reinhartsen

/s/ JAMES YARBROUGH	Director	November 29, 2005
James Yarbrough

Description	Balance at beginning of period		Additions Charged to Expenses/ Revenues		Deductions			Balance at end of period
Allowance for Doubtful Accounts
2005	$	2,396	$	568	$	(276	)	$	2,688
2004	$	412	$	2,643	$	(659	)	$	2,396
2003	$	242	$	2,177	$	(2,007	)	$	412