EAGLE WIRELESS INTERNATIONAL INC - 10-Q Quarterly Report

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

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FORM 10-Q

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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____

COMMISSION FILE NUMBER: 000-23163

EAGLE BROADBAND, INC.
(Exact name of registrant as specified in its charter)

TEXAS 76-0494995
(State or other jurisdiction) (IRS Employer
of incorporation or organization Identification No.)

101 COURAGEOUS DRIVE
LEAGUE CITY TEXAS 77573-3925
(Address of principal executive offices, including zip code)

(281) 538-6000
(Registrant's telephone number, including area code)

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Indicate by check mark whether the registrant (i) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (ii) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

As of May 31, 2002, there were 67,050,000 shares of common stock outstanding.

EAGLE BROADBAND, INC., AND SUBSIDIARIES
INDEX

EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

3

EAGLE BROADBAND, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands)

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

4

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EAGLE BROADBAND, INC. AND SUBSIDIARIES
CONSOLIDTED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands)
(Unaudited)
- --------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

5

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EAGLE BROADBAND, INC. AND SUBSIDIARIES
CONSOLIDTED STATEMENTS OF CASH FLOWS
(in thousands)
- --------------------------------------------------------------------------------

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

6

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

NOTE 1 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES:

Eagle Broadband, Inc., (formerly Eagle Wireless International, Inc.) (the
Company), incorporated as a Texas corporation on May 24, 1993 and
commenced business in April of 1996. The Company is a worldwide supplier
of broadband products and services, providing telecommunications equipment
with related software, broadband products, and fiber and cable as used by
service providers in the paging and other personal communications markets.
The Company designs, manufactures, markets and services its products under
the Eagle Broadband, Inc. and BroadbandMagic, Inc. names. These products
include transmitters, receivers, controllers, software, convergent set-top
boxes, fiber, cable, and other equipment used in commercial and personal
communications systems and radio and telephone systems. Additionally, the
Company provides cable television, telephone, security, Internet
connectivity, and related services under a bundled digital services
package, commonly known as "BDS," through single source billing. Also
provided is last mile cable and fiber installation services as well as
comprehensive IT products and services.

A) Consolidation

At May 31, 2002, the Company's subsidiaries are: AtlanticPacific
Communications, Inc. (APC); EToolz, Inc. (ETI); Eagle Wireless
International, Inc. (EWI); BroadbandMagic, Inc. (BBM); ClearWorks.Net,
Inc. (.NET); ClearWorks Communications, Inc. (COMM); ClearWorks Home
Systems, Inc. (HSI); Contact Wireless, Inc. (CWI); DSS Security, Inc.
(DSS); United Computing Group, Inc. (UCG); and Link Two Communications,
Inc. (LINK II). 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 has $6,983,000 and $23,843,000 invested in interest bearing
accounts and marketable securities (Note 9) at May 31, 2002 and August 31,
2001, respectively.

C) 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:

Expenditures for maintenance and repairs are charged against income as
incurred whereas major improvements are capitalized.

D) 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:

7

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

E) Revenue Recognition

The Company designs, manufactures, markets and services its products and
services under the Eagle Broadband, Inc.; BroadbandMagic, Inc.,;
ClearWorks Communications, Inc.; ClearWorks Home Systems, Inc.; Eagle
Wireless International, Inc., AtlanticPacific Communications, Inc.; Link
Two Communications, Inc.; United Computing Group, Inc.; Contact
Wireless, Inc.; and DSS Security, Inc., names.

EAGLE WIRELESS INTERNATIONAL, INC.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial
and personal communication systems, radio and telephone systems.
Revenues from these products are recognized when the product is shipped.

BROADBANDMAGIC, INC.
BroadbandMagic, Inc. designs, manufactures and markets the convergent
set-top boxes. Products are sent principally to commercial customers for a
pre-sale test period of ninety days. Upon the end of the pre-sale test
period, the customer either returns the product or accepts the product, at
which time the Company recognizes the revenue.

EAGLE BROADBAND, INC. engages independent agents for sales principally in
foreign countries and certain geographic regions in the United States.
Under the terms of these one-year agreements the distributor or sales
agents provide the companies with manufacturing business sales leads. The
transactions from these distributors and agents are subject to the
Company's approval prior to sale. The distributorship or sales agent
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 sales agents and distributors are not a significant
portion of total sales in any of the periods presented.

CLEARWORKS COMMUNICATIONS, INC.
ClearWorks Communications, 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.

CLEARWORKS HOME SYSTEMS, INC.
ClearWorks Home Systems, Inc. sells and installs structured wiring, audio
and visual components to homes. This subsidiary 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.

ATLANTICPACIFIC COMMUNICATIONS, INC.
AtlanticPacific Communications, 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 earned.

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

LINK TWO COMMUNICATIONS, INC.
Link Two Communications, Inc. provides customers with one- and two-way
messaging systems over a national high-speed wireless broadband network.
The revenue from these services is recognized as it is earned from the
customer.

CONTACT WIRELESS, INC.
Contact Wireless, Inc., provides customers with paging and mobile
telephone products and related monthly services. Revenue from product
sales is recorded at the time of shipment. Revenue for the mobile phone
and paging service is billed monthly as the service is provided.

DSS SECURITY, INC.
DSS Security, Inc., provides monthly security monitoring services to
residential customers. The customers are billed three months in advance of
service usage. The revenues are deferred at the time of billing and
ratably

8

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

recognized over the prepayment period as service is provided.

UNITED COMPUTING GROUP, INC.
United Computing Group, 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 as earned.

F) Research and Development Costs

For the months ended May 31, 2002 and 2001, the Company performed research
and development activities for internal projects related to its convergent
set-top boxes, wireless residential network, commercial and military
communications, and multi-media entertainment centers. Research and
development costs of $85,000 and $42,000 were expensed for the three
months ended May 31, 2002, and 2001, respectively. Research and
development costs of $349,000 and $729,000 were expensed for the nine
months ended May 31, 2002 and 2001.

No research and development services were performed for outside parties
for the three and nine months ended May 31, 2002 and 2001.

G) 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.

H) 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:

I) Impairment of Long Lived and Identifiable Intangible Assets

The Company evaluates the carrying value of long-lived assets and
identifiable intangible assets for potential impairment on an ongoing
basis. 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 to be 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:

1) Quoted market prices in active markets.
2) Estimate based on prices of similar assets.
3) Estimate based on valuation techniques.

As of May 31, 2002 and 2001, no impairment existed.

J) Intangible Assets

Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at the dates of acquisition and is being
amortized using the straight-line method over twenty (20) years for
AtlanticPacific Communications, Inc. and twenty-five (25) years for
Bundled Digital Services contract rights. Other intangible assets consist
of patents and licenses, which are being amortized using the straight-line
method over ten (10) years

9

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

and twenty (20) years, respectively.

K) Advertising Costs

Beginning in fiscal 2000, advertising costs have been capitalized and
amortized on the basis of contractual agreements entered into by the
Company. These contracts are amortized over the life of the individual
contracts or expensed in the period incurred. For the nine months ended
May 31, 2002, the Company has expensed $381,000 where $0 in costs has been
deferred.

L) 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.

M) 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.

N) Marketable Securities

In May 1993, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," effective for fiscal years
beginning after December 15, 1993. This statement considers debt
securities that the Company has both the positive intent and ability to
hold to maturity are carried at amortized cost. Debt securities that the
company does not have the positive intent and ability to hold to maturity
and all marketable equity securities are classified as available-for-sale
or trading securities and are carried at fair market value. Unrealized
holding gains and losses on securities classified as trading are reported
in earnings. Unrealized holding gains and losses on securities classified
as available-for-sale were previously carried as a separate component of
stockholders' equity. SFAS No. 115 as amended by Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130, "Other Comprehensive Income." Management determines the appropriate
classification of marketable equity and debt securities at the time of
purchase and re-evaluates such designation as of each balance sheet date.

O) 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 to these securities are carried below net income under the
caption "Other Comprehensive Income."

P) Reclassification

The Company has reclassified certain assets costs and expenses for the
three and nine months ended May 31, 2001 to facilitate comparison to the
three and nine months ended May 31, 2002.

10

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

Q) Supporting Costs in Selling, General and Administrative Expenses

Other support cost for the nine months ended May 31, 2002 and 2001 are as
follows, in thousands:

R) Recent Pronouncements

In July 2001, the FASB issued Statement No. 141, Business Combinations,
("SFAS 141") and Statement No. 142, Goodwill and Other Intangible Assets
("SFAS 142"). SFAS 141 requires that the purchase method of accounting be
used for all business combinations completed after June 30, 2001. SFAS 141
also specifies that intangible assets acquired in a purchase method
business combination must meet certain criteria to be recognized and
reported apart from goodwill. SFAS 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead they will be tested for impairment at least annually in accordance
with the provisions of SFAS 142. SFAS 142 will also require that
intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values and
reviewed for impairment in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. The Company is required to adopt the provisions of SFAS 141,
for acquisitions initiated after June 30, 2001, and SFAS 142 effective
September 1, 2002. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized
until the Company's adoption of SFAS No. 142 on September 1, 2002. In
connection with the transitional goodwill impairment evaluation, SFAS 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To the
extent an indication exists that the goodwill and intangible assets may be
impaired, the Company must measure the impairment loss, if any. Any
transitional impairment loss will be recognized as the cumulative effect
of a change in accounting principle in the Company's statement of
earnings. Based on current goodwill and intangible asset balances, the
Company will have approximately $106,880 of non-amortized goodwill and
intangibles as of September 1, 2002, which will be subject to the
transition provisions of SFAS 141 and SFAS 142.

Amortization expense related to goodwill and intangibles was approximately
$3,008,000 and $1,459,000 for the nine months ended May 31, 2002 and 2001,
respectively.

The impact of the adoption of SFAS 141 and 142 is not currently known; the
company will assess the impairment of its goodwill and intangible assets
no later than August 31, 2002.

The impact of other significant matters that might result from the
adoption of SFAS 141 and 142 is not currently known, but will be assessed
prior to the issuance of the Company's August 31, 2002, 10-K filing.

On October 3, 2001, the FASB issued the Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 addresses financial accounting and

11

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

reporting for the disposal of long-lived assets. FAS 144, becomes
effective for financial statements issued for fiscal years beginning
after December 15, 2001, and interim periods within those fiscal years.
The Company does not expect the pronouncement to have a material impact
on its consolidated financial position, consolidated results of
operations or consolidated cash flows.

NOTE 2 - ACCOUNTS RECEIVABLE:

Accounts receivable consist of the following, in thousands:

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS:

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

Components of intangible assets are as follows, in thousands:

NOTE 4 - BUSINESS COMBINATIONS:

On February 1, 2001, the Company completed the purchases of
ClearWorks.Net, Inc., ClearWorks Communications, Inc., ClearWorks
Structured Wiring Services, Inc., ClearWorks Integration Services, Inc.,
United Computing Group, Inc., Link Two Communications, Inc., and LD
Connect, Inc., (collectively, ClearWorks) by acquiring all the outstanding
common stock for a total purchase price of approximately $99.8 million.
The acquisition was accounted for using the purchase method of accounting.
ClearWorks is a communications carrier providing broadband data, video and
voice communication services to residential and commercial customers,
currently within Austin and Houston, Texas. These services are provided
over fiber-optic networks ("Fiber-To-The-Home" or "FTTH"), which the
Company designs, constructs, owns and operates inside large residential
master-planned communities and office complexes. ClearWorks also provides
information technology staffing personnel, network engineering, vendor
evaluation of network hardware, implementation of network hardware and
support of private and enterprise networks, as well as, developing
residential, commercial and education accounts for deployment of
structured wiring solutions. The results of operations for ClearWorks are
included in the accompanying financial statements since the date of
acquisition. The Company acquired the net assets of ClearWorks for
$99,797,000 through the issuance of 29,410,000 shares of its common stock
valued at $91,172,000 and a cash total of $8,625,000. Prior to the merger,
the Company provided to ClearWorks, working capital and

12

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

materials totaling $8,625,000. During February 2001, ClearWorks repaid
these advances through the issuance of 7,346,000 shares of its common
stock, which converted into 5,877,000 Eagle Broadband, Inc., common
stock shares. These shares were converted to Treasury shares at this
date. The Company allocated (in thousands) the acquisition costs to
current assets of $11,708, property, plant and equipment of $6,570,
intangible assets of $96,920 (which consist of $74,513 in contract
rights and $22,407 in licenses), other assets of $79 and assumed
liabilities of accounts payable and accrued expenses of $10,784, banks
lines of credit and notes of $4,696 for a total acquisition of $99,797.
The allocation of the purchase price is based on the fair value of
assets and liabilities assumed as determined either by independent third
parties or management's estimates, based on existing contracts, recent
purchases of assets and underlying loan documents.

On January 1, 2000, the Company acquired AtlanticPacific Communications,
Inc. in a business combination accounted for as a purchase. APC is
primarily engaged in the nationwide sales and installation of fiber and
cable to commercial enterprises. The Company issued 518,919 shares of
common stock valued at $2,044,541 to acquire the net assets of APC. The
Company allocated (in thousands) the acquisition costs to current assets
of $395, property, plant and equipment of $125, intangible assets of
$3,663, other assets of $1 and assumed liabilities of accounts payable and
accrued expenses of $1,760, bank lines of credit and notes of $380 for a
total acquisition of $2,044. The allocation of the purchase price is based
on the fair value of assets and liabilities assumed as determined by
independent third parties or management's estimates, based on existing
contracts, recent purchases of assets and underlying loan documents.

Concurrently with the closing of this acquisition, the Company entered
into a two-year agreement with the former principals of APC. These
principals may earn up to 3,000,000 shares of common stock based on APC
accumulated sales goals. Under the terms of the agreement, the Company
will issue an additional 500,000 shares for $10,000,000 in accumulated
sales, 1,000,000 shares for $30,000,000 in accumulated sales and 1,500,000
shares for $60,000,000 in accumulated sales. These sales have to be
achieved within a two-year period commencing January 1, 2000. In addition,
the principals must maintain a "Gross Profit Margin" of 25% and an "EBITDA
Profit" of 10%. These contingencies and attainment thereof are considered
remote and, accordingly, have been excluded from the determination of the
acquisition price.

On January 1, 2000, the Company acquired Comtel in a business combination
accounted for as a purchase. Comtel is primarily engaged in the sales and
installation of fiber and cable to commercial enterprises in Texas and
Louisiana. The Company issued 300,000 shares of common stock valued at
$1,182,000 to acquire the net assets of Comtel. The Company allocated (in
thousands) the acquisition costs to current assets of $968, property,
plant and equipment of $67, intangible assets of $1,879, and assumed
liabilities of accounts payable and accrued expenses of $1,459, bank lines
of credit and notes of $273 for a total acquisition of $1,182. The
allocation of the purchase price is based on the fair value of assets and
liabilities assumed as determined by independent third parties or
management's estimates, based on existing contracts, recent purchases of
assets and underlying loan documents.

On March 17, 2000, the Company acquired ETI in a business combination
accounted for as a purchase. ETI specializes in the development of leading
edge, innovative, commercial, industrial and military technologies. The
Company issued 50,000 shares of common stock valued at $437,500 to acquire
the net assets of ETI. The Company allocated (in thousands) the
acquisition costs to property, plant and equipment of $13, intangible
assets of $424, for a total acquisition of $437. The allocation of the
purchase price is based on the fair value of assets and liabilities
assumed as determined by independent third parties or management's
estimates, based on existing contracts, recent purchases of assets and
underlying loan documents.

Effective January 1, 2002, the Company acquired the assets of DSS
Security, Inc. and Contact Wireless in a business combination accounted
for as a purchase. DSS Security, Inc. provides security monitoring to
business and residential customers. Contact Wireless sells and services
mobile phones and one- and two-way messaging devices. The Company paid
cash of $450,000 and issued a short-term note payable of $130,000 for the
assets of Contact Wireless for a total purchase price of $580,000.
Additionally, the Company acquired DSS Security, Inc., for $2,002,147. In
this transaction, the Company issued 2,002,147 shares of its common stock
with a guaranteed value of $1 per share. The Company allocated $51,595 to
the fair value of the property and equipment and $1,950,552 to intangible
assets. The intangible assets include, among other things, approximately
4,000 current customers being billed monthly for wireless messaging
services. The allocation of the purchase price is based on the fair value
of the assets acquired based on management's estimates and existing
contracts.

13

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

NOTE 5 - NOTES PAYABLE:

The following table lists the Company's note obligations as of May 31,
2002 and August 31, 2001, in thousands:

NOTE 6 - CAPITAL LEASE OBLIGATIONS:

The Company leases equipment from various companies under capital leases
with varying expiration dates. The assets and liabilities under the
capital lease are recorded at the lower of the present value of the
minimum lease payments or the fair value of the asset. The assets are
depreciated over the estimated useful life with the value and depreciation
being included as a component of Property and Equipment under operating
equipment.

Minimum future lease payment under capital lease as of May 31, 2002 and
August 31, 2001 for each of the next five years and in the aggregate are,
in thousands:

Future obligations under the lease terms are as follows:

NOTE 7 - LINE OF CREDIT:

On September 29, 2000, AtlanticPacific Communications, Inc. (a wholly
owned subsidiary of the Company) entered into a one year $900,000 line of
credit agreement with Southwest Bank of Texas (SWBT). This note bears
interest at SWBT's prime rate plus .25%, which is payable monthly with
principal due September 28, 2001. AtlanticPacific Communications, Inc.'s
accounts receivable are pledged as collateral with Eagle Wireless
International, Inc. the guarantor. This line of credit was repaid to
Southwest Bank of Texas in the six months ended February 28, 2002;
therefore, there is not a current balance outstanding.

The Company, through its subsidiary United Computing Group, Inc. (UCG),
maintains a $3,000,000 line of credit with IBM Credit Corporation (IBM)
bearing a variable rate of interest. At May 31, 2002, a balance of
$1,012,000 existed. During July 2002, UCG entered into a loan agreement
with a bank to provide working capital to repay the IBM credit line and
fund ongoing operations. The new credit facility is secured by UCG
accounts receivable and guaranteed by Eagle Broadband, Inc.

14

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

NOTE 8 - CONVERTIBLE DEBENTURES:

On December 13, 1999, ClearWorks.Net, Inc. closed a private placement
transaction with Candlelight Investors, LLC, ("Candlelight"), a Delaware
limited liability company. In the private placement, ClearWorks received
from Candlelight a total of $3,000,000 in exchange for $3,000,000 total
face value 6% convertible debentures due December 13, 2001, together with
warrants to purchase up to 210,000 shares of common stock. ClearWorks
determined the warrants to have a total value of $215,000 on the date of
issuance and recorded this amount as a discount against the convertible
debentures.

The warrants are exercisable at $3.16 per share. The debentures are
convertible at the lower of $3.30 per share or ninety-two percent (92%) of
the average of the three lowest closing bid prices for ClearWorks' common
stock during the 30 days immediately preceding conversion. However, if the
average lowest closing price is less than $1.50 per share, then the
conversion price of the debentures shall be equal to the average lowest
closing price without modification. Because the conversion price of these
debentures was less than the fair value of ClearWorks' common stock on the
date of issuance, ClearWorks has recorded as interest expense the
intrinsic value of the beneficial conversion feature. The intrinsic value
of the beneficial conversion feature was determined to be $650,000.

In connection with the private placement, ClearWorks agreed not to sell
any of its securities until July 4, 2000, unless the securities are (1)
issued in connection with a public offering of at least $15 million, (2)
in connection with an acquisition of additional businesses or assets or
(3) as compensation to employees, consultants, officers or directors.

On April 19, 2000, ClearWorks issued an additional $2,000,000 of 6%
convertible debentures to Candlelight with conversion features similar to
those noted above. Because the conversion price of these debentures was
less than the fair value of ClearWorks' common stock on the date of
issuance, ClearWorks has recorded as interest expense the value of the
beneficial conversion feature. The value of the beneficial conversion
feature exceeded the carrying value of the debentures (net of discount
allocable to detachable warrants discussed below); therefore, the charge
to interest expense was limited to $1,716,000.

The 6% convertible debentures issued on April 19, 2000 were also issued
with detachable warrants, exercisable at $3.16 per share. The warrants can
be converted into 140,000 shares of common stock. ClearWorks determined
the warrants have a total value of $284,000 on the date of issuance and
recorded this amount as a discount against the convertible debentures.
This discount will be amortized to interest expense over the term on the
convertible debenture.

This debenture contained a stipulation that required ClearWorks to
register all underlying shares of common stock by May 19, 2000. This
registration did not occur resulting in a situation of default. As a
result of said default. On December 13, 2000, Candlelight served notice
that the principal and accrued interest of the 6% convertible debenture
dated April 19, 2000 to be repaid in accordance with the terms of the
debenture. As a result of this call and the subsequent lawsuit served by
Candlelight against ClearWorks, all deferred costs and penalties
associated with this debenture have been expensed.

During 2001, the Company merged with ClearWorks.net, Inc., and as a
result, ClearWorks is a wholly owned subsidiary of Eagle. At the date of
merger, Link Two Communications, Inc., also became a subsidiary of Eagle.
Link Two Communications, Inc. entered an agreement with The Tail Wind Fund
Ltd., under which Tail Wind purchased from Link Two Communications, Inc. a
2% convertible note in the initial amount of $5,000,000 (the "First
Note"), and Link Two Communications, Inc. has the ability to require Tail
Wind to purchase additional convertible notes in the amount of $4,000,000
(the "Second Note") and $3,000,000 (the "Third Note"). The conversion
terms of the convertible debentures become effective after ninety days of
the initial closing date. The maturity of the convertible note is August
15, 2002. Link Two Communications, Inc. may require Tail Wind to purchase
the Second Note if: (a) the price of Eagle's common stock is above $5.00
per share for 20 consecutive trading days during calendar 2001, (b) Eagle
has more than $10,000,000 in cash less payments for capital leases that
will become due within the next two years, (c) the registration statement,
registers the conversion shares are current and effective, (d) Eagle does
not reflect a net loss of more than $4,000,000 during any quarter, and (e)
no material adverse event has occurred. Link Two Communications, Inc. may
require Tail Wind to purchase the Third Note if the price of Eagle's
common stock is above $8.00 per share for 20 consecutive trading days
during calendar 2001, and the conditions set forth in (b) through (e) of
the preceding sentence are satisfied. In conjunction with the issuance of
the First Note, Link Two Communications, Inc., issued Tail Wind a warrant,
and if Link Two chooses to issue the Second and Third Notes, it will issue
Tail Wind additional warrants.

As a result of the merger, Eagle, the parent of Link Two Communications,
Inc., has guaranteed the Link Two

15

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

Communications, Inc. notes issued to Tail Wind and allowed Tail Wind to
convert the above mentioned debt into Eagle common stock at various rates
based on the published market value of Eagle's common stock. The
agreement also permits Tail Wind to convert the Link Two Communications,
Inc. warrant into Eagle warrants to purchase shares of our common stock.
Tail Wind would have a warrant to purchase 1,396,648 shares of our common
stock at an exercise price of $1.83 per share, exercisable between August
2002 and September 2006. If Link Two Communications, Inc. requires Tail
Wind to purchase the Second and Third Note, the additional warrants it
issues will also be convertible into shares of our common stock. The
number of shares that the additional warrants may be converted into will
depend on the price of our common stock, and cannot be determined at this
time. However, the exercise price of the additional warrants may not be
less than $1.83 per share.

The Company has agreed to pre-pay the notes at the rate of a minimum of
$250,000 per month and a maximum of $500,000 per month. The pre-payment
may be in cash or in shares of our common stock at the rate of 90% of the
average of the two lowest market prices of our common stock for the
applicable month. However, the Company may not issue shares of our common
stock for pre-payment purposes if the total number of shares exceeds the
aggregate trading volume of our common stock for the twelve trading days
preceding the date of payment, in which case we must pay the difference in
cash. As the number of shares to be issued for pre-payment purposes is
dependent on the price and trading volume of our common stock, there is no
way to determine the number of shares that may be issued at this time.
Eagle has filed a registration statement for the potential conversion
shares for the note and warrants exercise. As of May 31, 2002, the Company
has paid to Tail Wind $2,000,000 towards the reduction of debt. The
current financial statements have recorded as current maturity for this
debt, $3,000,000.

As part of the above agreements, the Company entered into a registration
rights agreement with Tail Wind, and the Company filed a registration
statement, in order to permit Tail Wind to resell to the public the shares
of common stock that it may acquire upon any conversion of the First Note
and exercise of the warrant associated with the First Note. The Company
has registered for resale 5,000,000 shares of common stock, which
represents 122% of the shares to be issued upon conversion of the First
Note at $1.79 per share and 100% of the exercise of the warrant associated
with the First Note at $1.83 per share. The additional shares registered
is to account for the shares that may be issued for pre-payment as
described in the above paragraph, or upon the exercise of the
anti-dilution rights provided for in the following paragraph. If Link Two
Communications, Inc. chooses to require Tail Wind to purchase the Second
and Third Notes, we will file another registration statement covering the
resale of the shares that may be issued on conversion of the Second and
Third Notes and upon the exercise of the warrants associated with the
Second and Third Notes.

In our agreement with Tail Wind, the Company granted Tail Wind
anti-dilution rights. If the Company sells common stock or securities
exercisable for or convertible into shares of our common stock for less
than $1.79 per share, the Company must reduce the conversion price of the
notes and the exercise price of the warrants to the price the Company sold
the common stock or the exercise or conversion price the Company issued
the convertible securities. The Company has agreed to register for resale
any additional shares that will be issued pursuant to these anti-dilution
rights on a future registration statement, unless such additional shares
are available in the current registration statement. In addition, under
the terms of the agreement, without Tail Wind's approval, the Company may
not issue Tail Wind shares of common stock such that Tail Wind would ever
be considered to beneficially own greater than 4.99% of the outstanding
common stock. In connection with this transaction, Link Two
Communications, Inc. has paid Ladenburg Thalman and Co. a fee of 5% of the
purchase price of the notes. Additionally, the Company has valued the
conversion feature of the convertible debenture and warrants at $1,648,045
and $1,270,995, respectively; the amounts were determined by using the
Black-Scholes calculation. These amounts have been capitalized as part of
the cost of developing the wireless infrastructure. At May 31, 2002, Eagle
and Tail Wind are negotiating the payment terms of this note.

NOTE 9 - MARKETABLE SECURITIES:

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." At May 31,
2002, all of the Company's marketable equity securities are classified as
available-for-sale; they were acquired with the intent to dispose of them
within the next year.

At May 31, 2002, the securities had an original basis of $1,867,936
determined by multiplying the number of shares acquired by the fair market
value of those shares. At the May 31, 2002 balance sheet date, the fair
market value of these securities was $1,874,603; determined by multiplying
the number of shares held by the fair market value of those shares at the
balance sheet date. The difference between the cost and fair market value
represents an unrealized holding gain (loss) and is included below current
earnings in "Other Comprehensive Income."

16

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

Other marketable securities, Urbana and Burst.com, with an adjusted cost
basis of $120,000 and fair market value of $330,000 are included in cash
and cash equivalents category and are held for resale.

NOTE 10 - INCOME TAXES:

As discussed in note 1, 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.

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

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)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May
31, 2002 and August 31, 2001 are presented below, in thousands, and
include the balances of the merged company ClearWorks.Net.

17

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

The valuation allowance for deferred tax assets as of May 31, 2002, and
August 31, 2001, was $13,828,000 and $10,956,000, respectively. At May 31,
2002, the Company has net operating loss carryforwards of $40,316,000,
which are available to offset future federal taxable income, if any, with
expirations from 2020 to 2022.

NOTE 11 - ISSUANCE OF COMMON STOCK:

For the three months ended May 31, 2002, the Company issued shares of
common stock. The following table summarizes the shares of common stock
issued, in thousands.

NOTE 12 - PREFERRED STOCK, STOCK OPTIONS AND WARRANTS:

In July 1996, the Board of Directors and majority shareholders adopted an
employee stock option plan under which 400,000 shares of Common Stock have
been reserved for issuance. Since that time, the Board of Directors has
amended the July 1996, employee stock option plan under which 1,000,000
shares of Common Stock have been reserved for issuance. The options
granted for under this plan are to purchase fully paid and non-assessable
shares of the Common Stock, par value $.001 per share at a price equal to
the underlying common stock's market price at the date of issuance. These
options may be redeemed six months after issuance, expire five years from
the date of issuance and contain a cash-less exercise feature. The
underlying shares of common stock were registered for resale under the
Securities Act of 1933 on February 19, 1999. As of May 31, 2002, 416,474
options have been granted pursuant to such plan with 72,499 being
exercised and 10,350 being cancelled.

The Company has issued or has acquired through its acquisitions and
outstanding the following warrants which have not yet been exercised at
May 31, 2002:

39,998 stock purchase warrants issued to Carl A. Chase. Expiration
of warrants is 6,666 on the ending date of each month commencing on
February 28, 2002 and ending on July 31, 2002. The warrants are to
purchase fully paid and non-assessable shares of the common stock,
par value $.001 per share at a purchase price of $0.31 per share.
The shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As of May
31, 2002, all of these warrants have been exercised.

50,000 stock purchase options issued to L.A. Delmonico Consulting,
Inc. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $1.04 per share. The shares of common stock underlying
these warrants have not been registered or issued, under the
Securities Act of 1933. As of May 31, 2002, none of these options
have been registered, issued or exercised.

600,000 stock purchase warrants issued to Paladin Associates
expiring September 1, 2001. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $1.50 per share. 166,667 warrants are
not exercisable until and unless the shares of Common Stock trade at
a minimum of $4.00 per share for twenty-one consecutive trading
days. 166,667 warrants are not exercisable until and unless the
shares of Common Stock trade at a minimum of $6.00 per share for
twenty-one consecutive trading days. 166,666 warrants are not
exercisable until and unless the shares of Common Stock trade at a
minimum of $8.00 per share for twenty-one consecutive trading days.
The shares of common stock underlying 350,000 warrants were
registered for resale on August 3, 2000, under the Securities Act of
1933. 100,000 incentive warrants will be made available and will
vest at the end of October 2000 if the first objective of $4.00 is
achieved before the end of October. As of May 31, 2002, 250,000 of
the underlying shares of common stock have not yet been registered
for resale under the Securities Act of 1933.

50,000 stock purchase warrants issued to Weed and Co. L.P. expiring
December 10, 2002.

18

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

The warrants are to purchase fully paid and non-assessable shares
of the common stock, par value $.001 per share at a purchase price
of $1.55 per share. The shares of common stock underlying the
warrants were registered for resale on August 3, 2000, under the
Securities Act of 1933. As of May 31, 2002, 25,000 warrants have
been exercised resulting in cash proceeds of $38,750.

20,000 stock purchase warrants issued to Kason, Inc., expiring
October 7, 2002. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $1.75 per share. The shares of common stock
underlying these warrants were registered for resale on November 30,
2000, under the Securities Act of 1933. May 31, 2002, 6,234 warrants
have been exercised resulting in cash proceeds of $10,910.

25,000 stock purchase warrants issued to Synchton, Inc., expiring
January 1, 2004. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $2.00 per share. The shares of common stock
underlying these have not been registered, under the Securities Act
of 1933. As of May 31, 2002, none of these warrants have been
exercised.

41,667 stock purchase warrants issued to Peter Miles expiring July
20, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.00 per share. The shares of common stock underlying
these have not been registered, under the Securities Act of 1933. As
of May 31, 2002, none of these warrants have been exercised.

41,667 stock purchase warrants issued to Peter Miles expiring July
20, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $2.25 per share. The shares of common stock underlying
these warrants have not been registered or issued, under the
Securities Act of 1933. As of May 31, 2002, none of these warrants
have been exercised.

58,333 stock purchase warrants issued to Peter Miles expiring July
20, 2004. The warrants are to purchase fully paid and non-assessable
shares of the common stock, par value $.001 per share at a purchase
price of $3.00 per share. The shares of common stock underlying
these warrants have not been registered or issued, under the
Securities Act of 1933. As of May 31, 2002, none of these warrants
have been exercised.

50,000 stock purchase warrants issued to Weed and Co. L.P. expiring
June 10, 2002. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.00 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of May 31, 2002, none of
these warrants have been exercised.

40,000 stock purchase warrants issued to Rachel McClere 1998 Trust
expiring April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of May 31, 2002, none of these
warrants have been registered, issued or exercised.

160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of May 31, 2002, none of these
warrants have been registered, issued or exercised.

232,000 stock purchase warrants issued to Shannon D. McLeroy
expiring April 24, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.75 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of May 31, 2002, none of these
warrants have been registered, issued or exercised.

176,000 stock purchase warrants issued to Tech Technologies
Services, LLC expiring April 24, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common

19

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

stock, par value $.001 per share at a purchase price of $3.75 per
share. The shares of common stock underlying these warrants have
not been registered or issued, under the Securities Act of 1933.
As of May 31, 2002, none of these warrants have been registered,
issued or exercised.

328,000 stock purchase warrants issued to Candlelight Investors,
LLC. Expiration of warrants is as follows: 104,000 on December 31,
2002, 112,000 on February 15, 2003 and the remaining 112,000 on
April 19, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $3.95 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of May 31, 2002, none of these
warrants have been registered, issued or exercised.

25,000 stock purchase warrants issued to Synchton, Inc., expiring
October 1, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $4.50 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of May 31, 2002, none of
these warrants have been exercised.

100,000 stock purchase warrants issued to National Financial
Communications Corp. expiring June 2003. The warrants are to
purchase fully paid and non-assessable shares of the common stock,
par value $.001 per share at a purchase price of $7.00 per share. As
of May 31, 2002, the underlying shares of common stock have not yet
been registered for resale under the Securities Act of 1933.

250,000 stock purchase warrants issued to Sands Brothers and Co.,
LTD. expiring July 13, 2003. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $7.49 per share. As of May 31, 2002,
the underlying shares of common stock have not yet been registered
for resale under the Securities Act of 1933.

25,000 stock purchase warrants issued to Synchton, Inc., expiring
July 1, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of May 31, 2002, none of
these warrants have been exercised.

192,000 stock purchase warrants issued to Tech Technologies
Services, LLC. expiring April 24, 2008. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $7.50 per share. The shares
of common stock underlying these warrants have not been registered
or issued, under the Securities Act of 1933. As of May 31, 2002,
none of these warrants have been registered, issued or exercised.

240,000 stock purchase warrants issued to Shannon D. McLeroy
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of May 31, 2002, none of these
warrants have been registered, issued or exercised.

168,000 stock purchase warrants issued to Michael T. McClere
expiring April, 24, 2008. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $7.50 per share. The shares of common
stock underlying these warrants have not been registered or issued,
under the Securities Act of 1933. As of May 31, 2002, none of these
warrants have been registered, issued or exercised.

40,000 stock purchase warrants issued to Rachel McClere 1998 Trust
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $7.50 per share. The shares of common stock
underlying these warrants have not been registered or issued, under
the Securities Act of 1933. As of May 31, 2002, none of these
warrants have been registered, issued or exercised.

160,000 stock purchase warrants issued to McClere Family Trust
expiring April 24, 2008. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par

20

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

value $.001 per share at a purchase price of $7.50 per share. The
shares of common stock underlying these warrants have not been
registered or issued, under the Securities Act of 1933. As May 31,
2002, none of these warrants have been registered, issued or
exercised.

50,000 stock purchase warrants issued to Weed and Co. L.P. expiring
June 10, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $9.68 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of May 31, 2002, none of
these warrants have been exercised.

25,000 stock purchase warrants issued to Synchton, Inc., expiring
April 1, 2003. The warrants are to purchase fully paid and
non-assessable shares of the common stock, par value $.001 per share
at a purchase price of $10.00 per share. The shares of common stock
underlying these warrants were registered for resale on August 3,
2000, under the Securities Act of 1933. As of May 31, 2002, none of
these warrants have been exercised.

250,000 stock purchase warrants issued to Sands Brothers and Co.,
LTD. expiring July 13, 2003. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $10.00 per share. These warrants,
however are not exercisable until and unless the closing price of
Common Stock at any time during the exercise period reaches $10.00
per share. As of May 31, 2002, the underlying shares of common stock
have not yet been registered for resale under the Securities Act of
1933.

250,000 stock purchase warrants issued to Hampton-Porter Investment
Bankers LLC expiring June 27, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $12.00 per share. The shares
of common stock underlying these warrants were registered for resale
on August 3, 2000, under the Securities Act of 1933. As of May 31,
2002, none of these warrants have been exercised.

350,000 stock purchase warrants issued to Sands Brothers and Co.,
LTD. expiring July 13, 2003. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $14.00 per share. These warrants,
however, are not exercisable until and unless the closing price of
the Common Stock at any time during the exercise period reaches
$14.00 per share. As of May 31, 2002, the underlying shares of
common stock have not yet been registered for resale under the
Securities Act of 1933.

250,000 stock purchase warrants issued to Hampton-Porter Investment
Bankers LLC expiring June 27, 2003. The warrants are to purchase
fully paid and non-assessable shares of the common stock, par value
$.001 per share at a purchase price of $18.00 per share. The shares
of common stock underlying these warrants were registered for resale
on August 3, 2000, under the Securities Act of 1933. As of May 31,
2002, none of these warrants have been exercised.

150,000 stock purchase warrants issued to Sands Brothers and Co.,
LTD. expiring July 13, 2003. The warrants are to purchase fully paid
and non-assessable shares of the common stock, par value $.001 per
share at a purchase price of $25.00 per share. These warrants,
however, are not exercisable until and unless the closing price of
the Common Stock at any time during the exercise period reaches
$25.00 per share. As of May 31, 2002, the underlying shares of
common stock have not yet been registered for resale under the
Securities Act of 1933.

The warrants outstanding are segregated into four categories (exercisable,
non-exercisable, non-registered, and expired).

21

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

AN ASTERISK (*) DENOTES WARRANTS WHICH WOULD HAVE AN ANTI-DILUTIVE EFFECT
IF CURRENTLY USED TO CALCULATE EARNINGS PER SHARE FOR THE MONTHS ENDED
MAY 31, 2002 AND 2001, RESPECTIVELY.

NOTE 13 - CAPITALIZATION ACTIVITIES:

On July 10, 2000, AtlanticPacific Communications, Inc., (a wholly owned
subsidiary) initiated a stock offering in accordance with Regulation D
promulgated under the Securities Act of 1933. AtlanticPacific
Communications, Inc. is offering units at $25,000 per unit. Each unit
consists of 10,000 shares of common stock and 10,000 Class A warrants to
purchase AtlanticPacific Communications, Inc. common stock at a price of
$6.00 per share with one warrant being issued as a unit with each common
share sold. AtlanticPacific Communications, Inc. will sell up to 4,000,000
shares of common stock and up to 4,000,000 Class A warrants (400 units).
As of May 31, 2002, 1,325 units have been sold totaling 132,500 shares and
resulting in proceeds of $331,250.

NOTE 14 - RISK FACTORS:

For the nine months ended May 31, 2002 and 2001, substantially all of the
Company's business activities have remained within the United States and
have been extended to the wireless infrastructure, fiber, and cabling and
broadband industry. Approximately, seventy-six percent of the Company's
revenues and receivables have been created solely in the state of Texas,
one percent have been created in the international market, and the
approximate twenty-three percent remainder have been created relatively
evenly over the rest of the nation during the nine months ended May 31,
2002. Whereas approximately eighty-six percent of the Company's revenues
and receivables have been created solely in the state of Texas, two
percent have been created in the international market, and the approximate
twelve percent remainder has been created relatively evenly over the rest
of the nation for the nine months ended May 31, 2001. Through the normal
course of business, the Company generally does not require its customers
to post any collateral.

22

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

Although the Company had previously concentrated its efforts in the
wireless infrastructure industry and has since expanded into the fiber,
cable and broadband markets for the nine months ended May 31, 2002 and
2001, it is management's belief that the Company's diversification into
other products and services reduces its credit and economic risk exposures
in the technology and manufacturing sectors.

NOTE 15 - FOREIGN OPERATIONS:

Although the Company is based in the United States, its product is sold on
the international market. Presently, international sales total
approximately 1% and 2% at May 31, 2002 and 2001, respectively.

NOTE 16 - COMMITMENTS AND CONTINGENT LIABILITIES:

LEASES

The Company leases its primary office space in League City, Texas, for
$36,352 per month with ANREM Corporation. This non-cancelable lease
commenced on June 1, 2001, and expires on May 31, 2004. For the three
months ended May 31, 2002 and 2001, rental expenses of approximately
$109,055 and $59,581 respectively, were incurred.

The Company also leases office space in Oxnard, California with Tiger
Ventura County, L.P. This three-year non-cancelable lease commenced August
1, 2000 and expires July 31, 2003. Under the terms of the lease, monthly
payments will be $2,130 for the first twelve months whereat the monthly
payments will increase by 3.5% at the beginning of both the second and
third years. For the periods ended May 31, 2002 and 2001, rental expense
of $6,612 and $6,390, respectively were incurred.

The Company's wholly owned subsidiary, AtlanticPacific Communications,
Inc., leases office space in Houston, Texas, with Houston Industrial
Partners, Ltd. This non-cancelable lease expires October 2002. The monthly
payments are $2,160. For the periods ended May 31, 2002 and 2001, rental
expense of $6,480 and $4,494, respectively were incurred.

AtlanticPacific Communications, Inc. also leases office space in Chicago,
Illinois with Prime Group Realty Services. This twenty-nine month lease
commenced on October 1, 2000, and expires February 28, 2003. Under the
terms of the lease, monthly payments will be $4,187 for the first twelve
months whereat they will increase by 3.2% at the thirteenth and
twenty-fifth months. For the periods ended May 31, 2002 and 2001, rental
expense of $11,023 and $6,660, respectively were incurred.

AtlanticPacific Communications, Inc. also leases office space in Houston,
Texas, with WL and Deborah Miller in the amount of $6,500 per month. This
non-cancelable lease expiring September 2002 maintains a five-year renewal
option. Rental expense for the period ended May 31, 2002 and 2001, of
$19,500 and $13,500 were incurred.

The Company's subsidiary, ClearWorks Home Systems, Inc., leases office
space in Houston, Texas, with Transwestern Commercial Services. This
non-cancelable lease expires on April 30, 2003. The monthly payments are
$12,667. For the period ended May 31, 2002 and 2001, rental expense of
$46,074 and $0 were incurred.

Also, ClearWorks Home Systems, Inc., leases office space in Phoenix,
Arizona, with Airpark Holdings. This non-cancelable lease expires on July
31, 2003. The monthly payments are variable. For the period ended May 31,
2002 and 2001, rental expense of $27,397 and $14,118 were incurred.

Also, ClearWorks Home Systems, Inc., leases office space in San Antonio,
Texas, with Glenn Gaiser. This is a month-to-month lease. The monthly
payments are $3,300. For the period ended May 31, 2002 and 2001, rental
expense of $9,900 and $6,000 was incurred.

The Company's subsidiary, ClearWorks Home Systems, Inc., leases office
space in Austin, Texas, with Ditto Communications Technologies, Inc. This
non-cancelable lease commenced on August 1, 2001, and expires August 30,
2002. The monthly payments are $5,876. For the period ended May 31, 2002
and 2001, rental expense of $17,629 and $0 was incurred.

The Company's subsidiary, United Computing Group, Inc., leases office
space in Dallas, Texas, with AMB Property II, LP. This non-cancelable
lease commenced on June 19, 2000 and expires June 30, 2002. The monthly
payments are $3,164. For the period ended May 31, 2002 and 2001, rental
expense of $10,007 and $6,537 was incurred.

23

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

The Company's wholly-owned subsidiary, Contact Wireless, Inc., leases
office space in San Antonio, Texas, with Cotter and Sons, Inc. This
non-cancelable lease commenced on August 1, 1998, and expires on July 31,
2002. The monthly payments are $2,490. For the periods ended May 31, 2002
and 2001, rental expense of $7,470 and $0, respectively were incurred.

Future obligations under the non-cancelable lease terms are:

LEGAL PROCEEDINGS

CLEARWORKS.NET, INC.
ClearWorks.Net, Inc., is subject to legal proceedings and claims that
arise in the ordinary course of business. Management does not expect that
the results in any of these legal proceedings will have a material adverse
effect on the Company's financial condition or results of operations.
Coinciding with the reverse merger with Southeast, the former management
of Southeast established a trust to provide for the orderly liquidation of
any alleged claims existing as of the date of acquisition. Certain
stockholders of Southeast have contributed 86,000 shares of the
ClearWorks.Net, Inc. common stock to the trust to satisfy approximately
$150,000 of alleged claims. Due to the resignation of the trustee, the
trust shares have been deposited in the registry of the Harris County
Texas District Court, and the Company has been named a nominal defendant
in an Interpleader action. ClearWorks.Net, Inc. intends to vigorously
defend its position by requesting the court release the stock for payment
of all alleged claims as was originally intended. Management does not
expect that the results of this legal proceeding to have a material
adverse effect on the ClearWorks.Net, Inc. financial condition or results
of operations.

ClearWorks.Net, Inc. is currently a defendant in Robert Horn vs.
ClearWorks Technologies, Inc. The suit was filed March 25, 1999, alleging
causes of action based on breach of contract in the amount of
approximately $250,000; 100,000 shares of ClearWorks' common stock;
alleged lost commissions and attorney fees. ClearWorks.Net, Inc. filed an
answer on April 16, 1999, denying the claim and asserting its affirmative
defenses. During March 2002, a jury found in favor of Horn in the amount
of 225,000 plus pre- and post-judgment interest. Post discovery has been
served on ClearWorks.Net, Inc.

ClearWorks.Net, Inc. is a defendant in Valley First Community Bank vs.
ClearWorks.Net, Inc., and ClearWorks Home Systems, Inc. On August 16,
2000, Valley First Community Bank (Valley) filed suit alleging a breach of
contract, breach of implied duty of good faith and fair dealing,
conversion, intentional interference with contract, and promissory
estoppel/detrimental reliance. This suit arose when ClearWorks Home
Systems, Inc., (CHS) executed a binding letter of intent to purchase from
Valley certain assets, which Valley represented to CHS that it held first
lien for a purchase price of $150,000. Subsequently, CHS learned Valley
did not in fact hold a first lien on such assets, rather such assets were
sold in a landlord's auction. As a result, CHS did not remit $150,000 to
Valley for payment (see Note 2). This suit was settled.

ClearWorks.Net, Inc. is a defendant in STATE OF FLORIDA DEPARTMENT OF
ENVIRONMENTAL PROTECTION VS. RECO TRICOTE, INC., AND SOUTHEAST TIRE
RECYCLING, INC., A/K/A CLEARWORK.NET, INC.; IN THE CIRCUIT COURT OF THE
TENTH JUDICIAL CIRCUIT IN AND FOR POLK COUNTY, FLORIDA. On December 13,
2000, Florida EPA sued the Company presenting claims for recovery costs
and penalties for a waste tire processing facility. The suit seeks
recovery of costs and penalties in a sum in excess of $1,000,000,
attorneys' fees and cost of court. The Company immediately filed a
Motion to Strike Portions of the Complaint/or for a More Definite
Statement and a Motion to Dismiss. The Florida EPA is amending the
petition. ClearWorks.Net, Inc. denies the claims and intends to
vigorously contest all claims in this case and to enforce its
indemnification rights against the principals of Southeast Tire
Recycling. No discovery has been conducted in this lawsuit.

ClearWorks.Net, Inc. is a defendant in Candlelight Investors LLC v.
ClearWorks.Net, Inc., et al which is pending in the Supreme Court of the
State of New York, County of New York, ("New York lawsuit"). Plaintiff
seeks a judgment against ClearWorks.Net, Inc. arising out of the alleged
failure of ClearWorks.Net, Inc., to convert certain debentures of the
Company into common stock of ClearWorks.Net, Inc., to register stock to
permit such conversion, and for other alleged breaches relating to
agreements between plaintiff and ClearWorks.Net, Inc. Plaintiff seeks
compensatory damages exceeding $2,763,998, injunctive relief, specific
performance, punitive

24

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

damages and other relief. The Plaintiff has obtained a judgement in the
amount of $3,200,000, against ClearWorks.Net, Inc. Plaintiffs will be
conducting jurisdictional discovery on Eagle Broadband, Inc. and Dr. H.
Dean Cubley. The defendants deny the allegations of the complaint.

Candlelight Investors LLC is also suing Eagle Broadband, Inc. and
ClearWorks.Net, Inc. in Texas for issues that arise in connection with
the New York lawsuit ("Texas Lawsuit"). The lawsuit is currently in the
discovery phase. Plaintiff has filed a motion for summary judgment and
has set same for hearing before the judge in August 2002.

ClearWorks.Net, Inc. is a defendant in Kaufman Bros., LLP v.
Clearworks.Net, Inc., et al, (Index No. 600939/01), which is pending in
the Supreme Court of the State of New York, County of New York. In this
action, plaintiff alleges that defendants have breached an agreement
with ClearWorks.Net, Inc. to pay plaintiff a fee for financial advice
and services allegedly rendered by plaintiff. The complaint seeks
compensatory damages of $4,000,000, plus attorneys' fees and costs. This
suit is currently in the discovery phase. The defendants deny the
allegations of the complaint.

On October 2, 2001, Metro Networks sued ClearWorks.Net, Inc. The suit
presents claims for breach of contract to provide ClearWorks.Net, Inc.
radio advertisement. The suit seeks recovery of damages in the sum of
$146,750 plus interest, attorney's fees and court costs. ClearWorks.Net,
Inc. denies the claims and will file an answer. This suit is currently
in the discovery phase. ClearWorks.Net, Inc. intends to vigorously
contest all claims in this case.

On December 17, 2001, certain former employees of ClearWorks.Net, Inc.
sued Eagle and ClearWorks.Net, Inc. for breach of contract and other
related matters. The suit seeks recovery of damages in excess of
$10,000,000 plus attorney's fees and court costs. The court granted
ClearWorks.Net, Inc. a temporary restraining order, wherein the Court
enforced a covenant against competition provision found in the
individual's employment contracts with the Company. Such order restrains
these individuals from competing against ClearWorks.Net, Inc. for a period
of six months. This lawsuit is currently in the discovery phase. The
defendants deny the allegations of the complaint.

On December 31, 2001, Optibase, Inc., sued ClearWorks Communications,
Inc. The suit presents claims based on a sworn account and breach of
contract to provide ClearWorks Communications, Inc. equipment. The suit
seeks recovery of damages in the sum of $353,000 plus interest,
attorney's fees, and court costs. No discovery has been conducted in
this case. ClearWorks Communications, Inc. intends to vigorously
contest all claims in this case.

OTHER COMMITMENTS

On July 13, 2000, the Company entered into a non-exclusive agreement with
Sands Brothers and Co., LTD. (Sands) whereby Sands will perform financial
advisory services and assist the Company with mergers and acquisitions,
corporate finances and other related matters for a period of two years. As
compensation for these services, the Company will immediately pay Sands
$50,000 and issue them 10,000 shares of the Company's common stock. As an
additional inducement, the Company has issued Sands 1,000,000 stock
purchase warrants to be exercisable for a three-year period expiring July
13, 2003. These warrants shall vest and be exercisable as follows: 25% of
such warrants shall vest upon execution of this agreement and shall have
an exercise price per share of $7.49; an additional 25% shall vest when
and if the closing price of the common stock at any time during the
exercise period reaches $10.00 per share and shall be exercisable at
$10.00 per share; an additional 35% shall vest when and if the closing
price of the common stock at any time during the exercise period reaches
$14.00 per share and shall be exercisable at $14.00 per share; an
additional 15% shall vest at any time during the exercise period when the
closing price of the common stock at any time reaches $25.00 per share and
shall be exercisable at $25.00 per share. Additionally, Sands shall
receive further compensation for other activities such as fund raising
based upon a percent of all monies raised.

On April 1, 2000, the Company entered into a one-year agreement with
Synchton, Inc., whereby Synchton, Inc., will provide professional business
services. As compensation for these services, the Company will pay $10,000
per month as well as issue 100,000 stock purchase warrants. These warrants
shall be issued in 25,000 increments on the first day of each quarter of
the agreement with an exercise price equal to the closing price of the
Company's common stock of the prior day to issuance. Additionally, these
warrants are not exercisable until six months after issuance and expire
three years after said issuance. Although this agreement shall
automatically renew on an annual basis, it is terminable by the Company
prior to the annual renewal by providing Synchton, Inc., with ninety days
advance written notice.

On September 1, 1999, the Company entered into an agreement with Paladin
Associates (Paladin) whereby Paladin will assist the Company with general
financial related services. These services shall include, but not be
limited to, assistance in writing news releases, stockholder
communications, communications with retail brokers and brokerage firms,
consulting to large shareholders and general image and public relations
issues. As compensation

25

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

for the services to be rendered under this twelve-month contract, the
Company will pay $3,500 and issue 2,000 free trading shares of the
Company's common stock per month. This agreement also contains incentive
based bonuses tied to the consecutive twenty-one day average closing bid
price of the Company's common stock. This incentive will consist of
500,000 two-year options for the purchase of the Company's common stock
at $1.50. These options will be vested in three equal portions based
upon the Company's performance in the stock market. One-third will vest
when the closing bid price reaches $4.00 and remains above this level
for a minimum of twenty-one consecutive trading days. The second
one-third will vest when the closing bid price reaches $6.00 and remains
above this level for a minimum of twenty-one consecutive trading days.
The remaining one-third shall vest when the closing bid price reaches
$8.00 and remains above this level for a minimum of twenty-one
consecutive trading days. This agreement is cancelable by either party
without cause given ten days written notice.

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 nine months ended May 31, 2002 and 2001, anti-dilutive securities
existed (see Note 12).

NOTE 18 - EMPLOYEE STOCK OPTION PLAN:

In July 1996, the Board of Directors and majority stockholders adopted a
stock option plan under which 400,000 shares of the Company's common stock
have been reserved for issuance. Since that time, the Board of Directors
have amended the July 1996, employee stock option plan under which
1,000,000 shares of Common Stock have been reserved for issuance. Under
this plan, as of May 31, 2002 and 2001, 416,474 and 404,974 warrants have
been issued to various employees. Of these outstanding warrants, 0 and 0
were exercised for the months ended May 31, 2002, and 2001, respectively.
Additionally, 10,350 warrants have expired as of May 31, 2002.

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.

26

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

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 granted during 2000
is estimated as $0.58 on the date of grant. A meaningful weighted average
fair value of the individual options granted during 2000 using the method
prescribed by SFAS 123 could not be determined due to the volatility of
the share price during the measurement period. Management estimates the
average fair value for options granted during 2001 to be comparable to
those granted in 2000. The impact on net income 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:

NOTE 19 - RETIREMENT PLANS:

During October 1997, the Company initiated a 401(k) plan for its
employees, which is funded through the contributions of its participants.
This plan maintains that the Company will match up to 50% of each
participants' contribution up to a total of 6% of their salary (i.e. up to
3% of their salary.) For the nine months ended May 31, 2002 and 2001,
employee contributions were approximately $174,578 and $109,905,
respectively. The Company matched approximately $65,115 and $36,914,
respectively for those same periods.

NOTE 20 - MAJOR CUSTOMER:

The Company had gross revenues of $6,485,000 and $11,358,000 for the three
months ended May 31, 2002 and 2001, respectively. The following parties
individually represent a greater than ten percent of these revenues.

During the nine months ended May 31, 2002, the Company had outstanding
accounts receivable with Enron Corporation and many of its subsidiaries.
The exposure from the bankruptcy totals approximately $205,000, which has
been accounted for through allowance of doubtful accounts in these
financials.

NOTE 21 - INDUSTRY SEGMENTS:

The Company has adopted the provisions of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". At May 31, 2002, the
Company's nine business units have separate management teams and
infrastructures that offer different products and services. The business
units have been aggregated into two reportable segments (as described
below) since the long-term financial performance of these reportable
segments is affected by similar economic conditions.

Eagle Broadband, Inc., (Eagle) is a worldwide supplier of broadband and
telecommunications equipment with related software and broadband
products. (Including Eagle Wireless International, Inc.,
BroadbandMagic, Inc., and Etoolz, Inc. for this summary).

AtlanticPacific Communications, Inc., (APC) specializes 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 re-sellers.

ClearWorks Communications, Inc., (COMM) provides solutions to consumers by
implementing technology both within the residential community and home.
This is accomplished through the installation of fiber optic backbones to
deliver voice, video and data solutions directly to consumers.

27

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

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

United Computing Group, Inc., (UCG) is IT products and services company.
UCG/INT maintains a national market presence.

Link Two Communications, Inc., (Link II) is in the development and
delivery of one- and two-way messaging systems over a national high-speed
wireless broadband network. Link II continues to add to the paging
customer base.

DSS Security, Inc. is a security monitoring company.

ClearWorks.Net, Inc., (.NET) is inactive with exception of debt related
expenses.

Contact Wireless, Inc. is a paging, cellular, and mobile services provider
and reseller.

The accounting policies of the reportable segments are the same as those
described in Note 1. 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.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.

The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this
Form 10-Q. Information included herein relating to projected growth and
future results and events constitutes forward-looking statements. Actual
results in future periods may differ materially from the forward-looking
statements due to a number of risks and uncertainties, including but not
limited to fluctuations in the construction, technology, communication and
industrial sectors; the success of the Company's restructuring and cost
reduction plans; the success of the Company's competitive pricing; the
Company's relationship with its suppliers; relations with the Company's
employees; the Company's ability to manage its operating costs; the
continued availability of financing; governmental regulations; risks
associated with regional, national, and world economies; and consummation
of the merger and asset purchase transactions. Any forward-looking
statements should be considered in light of these factors.

OVERVIEW

During the quarter ended May 31, 2002, we have initiated the
implementation of cost reductions in various operating segments which
were not expected to provide significant long-term revenues and
profitability. These reductions will impact the expense categories of
salaries and benefits, rents, travel, research and development and
other support expenses. We anticipate that additional cost reduction
efforts will continue through August 31, 2002. Also, the company is
continuing the development of the "technology center" for distribution
on a nationwide basis of voice, video and data content; increased
sales efforts in the telephone, cable, internet, security services and

28

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

wireless segments; and securing of long-term relationships for content
for the bundled digital services activities; and marketing/sales
agreements with other companies for the sale of broadband products and
services. Eagle's revenues, gross profit and net loss for the quarter
totaled $6,485,000, $2,465,000 and $(2,568,000), respectively. The
revenues declined from the prior quarter; however the gross profit
improved by $150,000. The improvement in gross profit is a result of
increased sales of broadband products, wireless infrastructure equipment
and service, set-top boxes and structured wiring products. The sales of
computer products and related engineering services declined due to the
loss of a significant customer in this quarter. On a nationwide basis,
we are entering into business relationships with financial and
technology companies to provide bundle digital services (digital
content) to cities and municipalities that currently have constructed
their own fiber infrastructure to the home. We believe that our
companies have the technology, products and capabilities to provide
these fiber-ready cities with digital content set-top boxes and
structured wiring services. By the end of our fiscal year, the development
of our nationwide digital "technology center" will be complete providing
us with operational capabilities to market BDS services to these
municipalities and other fiber-ready communities by the first quarter
of fiscal year 2003. Our loss reflects a continued investment in our
24-7 customer service center, lower gross profits due to a decrease in
sales, and increased costs associated with personnel terminations and
facilities consolidation.

REVENUE RECOGNITION

The Company designs, manufactures, markets and services its products and
services under the Eagle Broadband, Inc.; Eagle Wireless International,
Inc.; BroadbandMagic, Inc.; ClearWorks Communications, Inc.; ClearWorks
Home Systems, Inc.; AtlanticPacific Communications, Inc.; Link Two
Communications, Inc.; United Computing Group, Inc.; Contact Wireless,
Inc.; and DSS Security, Inc., names.

EAGLE WIRELESS INTERNATIONAL, INC.
Eagle designs, manufactures and markets transmitters, receivers,
controllers and software, along with other equipment used in commercial
and personal communication systems, radio and telephone systems. Revenues
from these products are recognized when the product is shipped.

BROADBANDMAGIC, INC.
BroadbandMagic, Inc., designs, manufactures and markets the convergent
set-top boxes. Products are sent principally to commercial customers for a
pre-sale test period of 90-days. Upon the end of the pre-sale test period,
the customer either returns the product or accepts the product, at which
time the Company recognizes the revenue.

Eagle Wireless International, Inc. and BroadbandMagic, Inc. engage
independent agents for sales principally in foreign countries and certain
geographic regions in the United States. Under the terms of these one-year
agreements the distributor or sales agents provide the companies with
manufacturing business sales leads. The transactions from these
distributors and agents are subject to the Company's approval prior to
sale. The distributorship or sales agent 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 sales agents
and distributors are not a significant portion of total sales in any of
the periods presented.

CLEARWORKS COMMUNICATIONS, INC.
ClearWorks Communications, Inc. provides Bundle 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.

CLEARWORKS HOME SYSTEMS, INC.
ClearWorks Home Systems, Inc. provides structured wiring to homes, audio
and visual components. This subsidiary 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.

ATLANTICPACIFIC COMMUNICATIONS, INC.
AtlanticPacific Communications, 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 earned.

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

29

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

LINK TWO COMMUNICATIONS, INC.
Link Two Communications, Inc. provides customers with one- and two-way
messaging systems over a national high-speed wireless broadband network.
The revenue from these services is recognized as it is earned from the
customer and incurs expense in the current period.

UNITED COMPUTING GROUP, INC.
United Computing Group, Inc. provides business-to-business hardware and
software network solutions and a 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 as earned.

CONTACT WIRELESS, INC.
Contact Wireless, Inc., provides customers with paging and mobile
telephone products and related monthly services. Revenue from product
sales is recorded at the time of shipment. Revenue for the mobile phone
and paging service is billed monthly as the service is provided.

DSS SECURITY, INC.
DSS Security, Inc., principal business activity is the providing of
monthly security monitoring service to residential customers. The
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.

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

RECEIVABLES

For the nine months ended May 31, 2002, Eagle accounts receivables
decreased to $5,595,000 from $7,144,000 at August 31, 2001. The majority
of this decrease is due to increased receivable collection efforts and a
temporary slow down in customer purchases of IT products and structured
wiring.

MARKETABLE SECURITIES

Eagle has adopted the provisions of SFA No. 115, as amended by SFAS No.
130, which provides that all marketable equity securities be classified as
available-for-sale or trading securities and be carried on the balance
sheet at fair market value. Any unrealized holding gains or losses
affiliated to these securities are carried below net income under the
caption "Other Comprehensive Income," net of tax.

INVENTORY

Inventories are valued at the lower of cost or market. The cost is
determined by using the first-in first-out method. At May 31, 2002,
Eagle's inventory totaled $7,852,000 as compared to $10,637,000 at August
31, 2001. The decrease in inventory is primarily attributable to the
internal utilization for the development of the digital headends and
expansion of the fiber networks in the residential communities.

RESULTS OF OPERATIONS

FOR THE THREE MONTHS AND NINE MONTHS ENDED MAY 31, 2002 AND 2001

NET SALES. For the three months ended May 31, 2002, net sales decreased to
$6,485,000 from $11,358,000 during the three months ended May 31, 2001.
For the nine months ended May 31, 2002, net sales increased to $22,626,000
from $18,020,000 during the nine months ended May 31, 2001. For the
quarter ended May 2002, product and structured wiring sales have decreased
due to delays in customer contract implementation and the loss of a
significant customer which used to purchase the majority of United
Computing Group, Inc.'s products. Currently, United Computing Group, Inc.
has added new customer that are purchasing significant product and IT
services. The decrease in the sales of structured wiring products and
services is directly attributable to a deferment of purchasing by certain
major customers. During June and July 2002, these major customers have
resumed purchasing of products and services under the terms of their
contracts with AtlanticPacific Communications, Inc. For the nine months,
net sales increased $4,606,000 to $22,626,000 in 2002 as compared to
$18,020,000 results in 2001. During February 2001, Eagle merged with
ClearWorks.Net, Inc. and, accordingly, the net sales for the nine months
ended May 31, 2001 include only four months of the merged companies
revenues. The majority of this

30

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

increase is due to including a complete nine months of merged companies
consolidated revenue for 2002 as compared to the prior period which does
not include pre-merger revenues of ClearWorks.Net, Inc. These increases
were primarily attributable to added sales from Eagle Wireless
International, Inc., BroadbandMagic, Inc., Atlanticpacific
Communications, Inc., ClearWorks Home Systems, Inc., ClearWorks
Communications, Inc., and United Computing Group, Inc. AtlanticPacific
Communications, Inc. provides project planning, installation, project
management, testing, and documentation of fiber and cable to commercial
and industrial clients throughout the United States. ClearWorks Home
Systems, Inc. provides structured wiring solutions and audio/visual
equipment to single- and multi-family dwellings. ClearWorks
Communications, Inc. provides solutions to consumers by implementing
technology both within the residential community and home. This is
accomplished through the installation of fiber optic backbones to
deliver voice, video, and data solutions directly to consumers. United
Computing Group, Inc. provides business-to-business hardware and
software network solutions and network monitoring services. Eagle
Wireless International, Inc. provides wireless infrastructure and
services. Broadband Magic, Inc. provides digital set-top boxes and
broadband solutions.

COST OF GOODS SOLD. For the three months ended May 31, 2002, cost of goods
sold decreased to $4,020,000 from $9,050,000 during the three months ended
May 31, 2001. For the nine months ended May 31, 2002, cost of goods sold
increased to $16,146,000 from $13,785,000 during the nine months ended May
31, 2001. This increase is primarily associated with the purchase of
cable, fiber, and hardware products for the increased sales level.
Although the cost of sales increased, the Company's gross profit
percentage for products sold increased to 38% from 20% during the three
months ended May 31, 2002 compared to the three months ended May 31, 2001.
For the nine months ended May 31, 2002, the gross profit percentage
increased to 29% from 23% compared to the nine months ended May 31, 2001.

OPERATING EXPENSES. For the three months ended May 31, 2002, operating
expenses increased to $5,082,000 from $4,468,000 during the three months
ended May 31, 2001. For the nine months ended May 31, 2002, operating
expenses increased to $15,252,000 from $8,756,000 during the nine months
ended May 31, 2001. The primary portions of the increase are discussed
below:

A $1,120,000 and $3,503,000 increase in salaries, as a result of its
acquisitions and expanded business for the three and nine months ended May
31, 2002, respectively.

A $19,000 and $1,918,000 increase in depreciation and amortization, due to
an increase in amortization of goodwill and purchase of additional assets
for the three and nine months ended May 31, 2002, respectively.

A $651,000 decrease and $1,275,000 increase in other support costs, the
nine month increases are in rents, utilities, and communication costs and
the three month decrease is principally related to a decrease in
convention, travel and related costs.

NET EARNINGS. For the three months ended May 31, 2002, Eagle's net loss
was $2,568,000, compared to a net loss of $1,715,000 during the three
months ended May 31, 2001. For the nine months ended May 31, 2002, Eagle's
net loss was $8,448,000, compared to a net loss of $2,934,000 during the
nine months ended May 31, 2001.

CHANGES IN CASH FLOW. Eagle's operating activities provided (used) net
cash of $(1,869,000) in the nine months ended May 31, 2002, compared to
$5,085,000 in the nine months ended May 31, 2001. The decrease in net cash
used by operating activities was primarily attributable to less cash
collections and reductions in accrued expenses. Eagle's investing
activities used net cash of $13,870,000 in the nine months ended May 31,
2002, compared to $13,813,000 in the nine months ended May 31, 2001. The
increase was due primarily to cash expended for equipment. Eagle's
financing activities used cash of $1,121,000, in the nine months ended May
31, 2002, compared to cash provided of $4,129,000 in the nine months ended
May 31, 2001. The decrease at May 31, 2002, is attributable to the pay off
of AtlanticPacific Communications, Inc.'s line of credit, pay down on
United Computing Group, Inc.'s line of credit, and purchase of shares in
the open market.

LIQUIDITY AND CAPITAL RESOURCES

Current assets for the nine months ended May 31, 2002, totaled $21,404,000
as compared to $42,649,000 reported for the year ended August 31, 2001. Of
this amount, $6,983,000 consisted of cash. Eagle believes that its working
capital of $4,861,000 as of May 31, 2002 should be sufficient to fund
operations through the end of the fiscal year 2002. Currently, Eagle is
raising capital through the issuance of debt and, in addition, Eagle is
negotiating other funding alternatives. Historically, Eagle has financed
its operations through the sale of debt and equity securities. As such, if
its current cash is insufficient to fund its long-term

31

EAGLE BROADBAND, INC., AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2002

capital needs, Eagle will rely on future best-efforts financings for
capital. Refer to Note 7 and Note 8 for descriptions of lines of credit
and other immediate forms of funding the Company has available.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company's line of credit bears interest, payable monthly, at a
floating rate equal to the prime rate plus 2.0%, which floating rate was
8.0% on May 31, 2002. A 1% increase in interest rates would reduce the
Company's annual earnings by $300,000 if the full balance of the line of
credit were outstanding over the entire year. As of May 31, 2002, the
outstanding balance was $1,146,000. The Company believes that it does not
have any other material market risk sensitive instruments.

PART 2. - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. The Company's management does not expect that
the results in any of these legal proceedings will have a material adverse
effect on the Company's financial condition or results of operations (Note
16).

ITEM 2 - RECENT SALES OF UNREGISTERED SECURITIES OR CHANGES IN SECURITIES AND
USE OF PROCEEDS

None

ITEM 3 - DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5 - OTHER INFORMATION

None

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibit

None

(b) Reports on Form 8-K

None

32

SIGNATURES

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

Date: July 22, 2002 By: /s/ H. Dean Cubley
Dr. H. Dean Cubley
Chief Executive Officer

/s/ Richard R. Royall
Richard R. Royall
Chief Financial Officer

33