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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

[x]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
     1934

                  For the fiscal year ended December 31, 2003

                                       OR

[ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
     OF 1934

     For the transition period from _______________________ to _____________


                        Commission file number 333-86873


                               HOME DIRECTOR, INC.
                 (Name of small business issuer in its charter)

                   Delaware                                 52-2143430
        (State or other jurisdiction of                 (I.R.S. Employer
        incorporation or organization)                 Identification No.)

2525 Collier Canyon Road, Livermore, California                94551
   (Address of principal executive offices)                 (Zip Code)

                    Issuer's telephone number: (925) 373-0438

       Securities registered under Section 12(b) of the Exchange Act: None

         Securities registered under Section 12(g) of the Exchange Act:
                    Common Stock, par value $0.01 per share


Check whether the issuer (1) 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 (2) has been
subject to such filing requirements for the past 90 days. [x] Yes [ ] No

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

State issuer's revenues for its most recent fiscal year. $ 9,251,252

State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.) $7,849,250*


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*As of March 29, 2003. Solely for purposes of this calculation, all directors
and executive officers of the registrant and all stockholders beneficially
owning more than 5% of the registrant's common stock are considered to be
affiliates.

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. 7,222,146 as of March 29, 2004


Transitional Small Business Disclosure Format (Check one): Yes ____; No __x___


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive proxy statement, which will be filed in
accordance with Rule 14a-101 of the Exchange Act, are hereby incorporated by
reference into Item 5 of Part II and Items 9, 10, 11, 12 and 14 of Part III of
this Form 10-KSB.




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                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                                                                             PAGE
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<S>                                                                                                                          <C>
PART I
Item 1. Description of Business.............................................................................................    4
Item 2. Description of Property.............................................................................................   10
Item 3. Legal Proceedings...................................................................................................   10
Item 4. Submission of Matters to a Vote of Security Holders.................................................................   10

PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................................   11
Item 6. Management's Discussion and Analysis or Plan of Operation...........................................................   12
Item 7. Financial Statements................................................................................................   22
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................   23
Item 8A.Controls and Procedures.............................................................................................   23

PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.....   24
Item 10. Executive Compensation.............................................................................................   24
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.....................   24
Item 12. Certain Relationships and Related Transactions.....................................................................   24
Item 13. Exhibits and Reports on Form 8-K...................................................................................   24
Item 14. Principal Accountant Fees and Services ............................................................................   29
Signatures .................................................................................................................   30
Consolidated Financial Statements ..........................................................................................  F-1
</TABLE>


CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

     This document contains "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. These statements are
subject to risks and uncertainties and are based on the beliefs and assumptions
of management of Home Director, based on information currently available to
management. The use of words such as "believes," "expects," "anticipates,"
"intends," "plans," "estimates," "should," "likely" or similar expressions,
indicates a forward-looking statement.

     Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Future results may differ materially from
those expressed in the forward-looking statements. Many of the factors that will
determine these results are beyond the ability of Home Director to control or
predict. Stockholders are cautioned not to put undue reliance on any
forward-looking statements. For those statements, Home Director claims the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.

     For a discussion of some of the factors that may cause actual results to
differ materially from those suggested by the forward-looking statements, please
read carefully the information under "Cautionary Statements" beginning on page
16.

     The identification in this document of factors that may affect future
performance and the accuracy of forward-looking statements is meant to be
illustrative and by no means exhaustive. All forward-looking statements should
be evaluated with the understanding of their inherent uncertainty.



                                       3
<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

RECENT DEVELOPMENTS

     Until December 19, 2002, we were known as Netword, Inc. On that date, we
acquired all of the stock of Home Director Technologies, Inc. (formerly Home
Director, Inc. and referred to in this report as "HDT") in a merger of Netword's
special purpose subsidiary into HDT. Immediately before the merger, we completed
a one-for-40 reverse split of our outstanding Common Stock.

     As a result of the merger, HDT became our wholly-owned subsidiary, we
changed our name from Netword, Inc. to Home Director, Inc., and the business of
HDT became our only business. When we refer to "Netword" in this report, we are
referring to the Company as it existed before the merger, and when we refer to
"the merger," we are referring to the merger in which we acquired HDT.

     In December 2003 and January 2004 we raised gross proceeds of $3,226,315 in
a private sale of units consisting of 3,470,679 shares of Common Stock and
warrants to purchase 3,470,679 shares of Common Stock. In addition, we issued
warrants to purchase 1,388,272 shares of Common Stock to the placement agent in
this transaction. Net proceeds were approximately $2,600,000. All of the shares
of Common Stock included in the units sold in this transaction (including the
shares underlying the warrants) were registered for resale under our
registration statement on Form SB-2, which was declared effective by the
Securities and Exchange Commission on March 19, 2004.

     Effective as of March 23, 2004, we entered into a Factoring Agreement with
Pacific Business Funding, a division of Greater Bay Bank, N.A. (the "Bank"). The
Factoring Agreement provides for the Bank's purchase of our eligible accounts
receivable, with recourse, for a purchase price of 65% of such accounts (each,
an "advance"), subject to maximum advances of $750,000, and is secured by
substantially all of our assets. The amounts advanced by the Bank are subject to
a finance fee equal to the Bank's prime rate plus 6% per annum (10% as of April
1, 2004). Any advances under the Factoring Agreement are within the complete
discretion of the Bank. In addition, the Factoring Agreement requires that we
raise proceeds of at least $2.0 million in an equity financing before May 1,
2004 and if we do not raise such proceeds by such date, the finance fee under
the Factoring Agreement will be increased by 5% per annum. The term of the
Factoring Agreement expires on May 5, 2005, but it is terminable at will by the
Bank or us at any time.

     On April 1, 2004, we were advanced $450,000 under the Factoring Agreement,
and approximately $300,000 of this advance was used to repay the amount
outstanding under our line of credit with Venture Banking Group, thereby
terminating the agreement governing such line of credit. However, there can be
no assurance that additional funds will be advanced under the Factoring
Agreement in the future, and even if such funds are advanced, we will still
require additional financing to satisfy our working capital requirements and we
expect to seek such financing through additional sales of equity securities. Our
operations may suffer and may ultimately have to be discontinued if we are
unable to obtain necessary financing on a timely basis. See "Liquidity and
Capital Resources."

HISTORY

     Netword was formed on February 18, 1999 as a Delaware corporation.
Thereafter, Netword acquired and developed the Netword System, a patented
Internet utility that used "Networds" as Internet Keywords. Netword later
commenced development of a custom online digital media player directed at the
entertainment and media industries, and formed Rabbit Media, Inc. as a wholly
owned subsidiary to complete this development. Netword's operations never
generated material revenues and it ceased all marketing activity in February
2002. Prior to the merger, Netword had sought unsuccessfully to find a buyer for
its intellectual property.

RECENT OPERATING HISTORY AND MANAGEMENT CHANGES

     Our operating results for 2003 were disappointing and led to significant
management changes at the end of 2003 and early in 2004. At the end of December
2003, our Chairman and Chief Executive Officer resigned and was replaced by
Michael Liddle. Early in March 2004, our President and Chief Operating Officer
resigned in a negotiated arrangement approved by our Board of Directors. His
responsibilities have been assumed by other senior level managers pending
designation of a full time replacement. Mr. Liddle has begun to implement a new
strategic vision for the Company, based on improved and expanded hardware and
software product offerings. Among recent management actions taken was the
retention of Jerry Steckling in the new positions of Vice President, Advanced
Technology and Chief Technology Officer. Mr. Steckling's background in
engineering and high end audio technology are expected to provide leadership and
depth to our research and development activities.

                                       4

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     In January 2003, we transferred all of Netword's intellectual property to
Rabbit Media, Inc., and subsequently sold all of the stock of Rabbit Media, Inc.
to Michael Wise, a director and the former President of Netword. As
consideration for the sale, Mr. Wise agreed to (a) indemnify us for future
claims related to the Netword intellectual property in the event that such
claims are not discharged by Rabbit Media, Inc. and (b) pay us 10% of any
consideration that he receives from any sale of the Rabbit Media stock within
two years after the date of the agreement.

     HDT was incorporated in Delaware on October 13, 1999 under the name Home
Director, Inc. It commenced operations on December 8, 1999, subsequent to
acquiring the assets of and assuming certain liabilities of IBM Corporation's
Home Director business unit.

     HDT acquired Digital Interiors, Inc. ("DI"), an installer of home
networking products, on January 25, 2001 and acquired certain assets from Los
Gatos Home Theatre, also an installer of home networking products, on May 14,
2001.

     Our executive offices are located at 2525 Collier Canyon Road, Livermore,
California 94551. Our telephone number is (925) 373-0438 and our web site
address is www.homedirector.com.

BUSINESS

     We design, manufacture, sell and install home networking solutions that can
interconnect security systems, audio systems, video services, televisions,
utilities, personal computers and the Internet. Our products are marketed
primarily for installation in new homes. Customers for our home networking
systems include some of the largest home builders in the United States,
including KB Homes, Richmond America, DR Horton, Lennar and Arvida. Through our
relationships and marketing arrangements with these and other home builders, we
have direct access to home buyers that we use to facilitate additional sales of
our products while the buyers are in the process of selecting options for their
new homes. Our products have been sold to over 60,000 home owners in the United
States and Canada.

     Our home networking solutions are intended to function as the electronic
foundation for linked access to third-party services and technologies, including
those that are currently available and those that may be offered in the
future. Within a "connected" or "networked" home, our proprietary Network
Connection Center can be used to interconnect a number of devices, appliances or
gateways so they can be centrally controlled. With a properly featured Home
Director system, a home owner can listen to music from speakers throughout the
home, play different music in different areas of the home, view and manage
digital photographs on television, network a number of computers within the
home, remotely view other areas of the home, change or reconfigure
telecommunications options within the home, and perform a variety of other
automated functions.

     We believe that as information and telecommunications technology continue
to develop and electronic access to entertainment and other content becomes
increasingly a staple of contemporary culture, a home networking infrastructure
that offers central and distributed access to information sources located
throughout the home will become a virtually standard new-home feature. Based on
this expectation, we have targeted the new home construction market and
positioned our business to provide a cost-effective and flexible infrastructure
option for the average new home buyer.

     Our business is channeled through several marketing programs.

     Since January 2001, we have generated sales of our networking systems and
related products and services through direct involvement as integrators and
installers of our systems, acting primarily as subcontractors for builders in
their new home developments. In the local areas where we perform these services,
we act as a single source supplier, participating directly in sales to consumers
and offering assistance ranging from pre-sale design to post-installation
support and including pre-packaged and custom options. We currently carry on
these systems installation activities in California, Florida, Colorado and
Texas.



                                       5

<PAGE>

     Through a strategic relationship with Sears, Roebuck & Co., we are now
actively engaged with Sears in an important marketing initiative called the
Sears Connected Home program. This marketing initiative began as a pilot program
in Florida in 2002, and, under an agreement with Sears entered into in April
2003, we are now supporting Sears in the implementation of the Connected Home
program on a national basis. The Sears Connected Home program is intended to
capitalize on Sears' established reputation and contacts in the home building
industry by offering builders a reputable single source for technology-based
lifestyles options in their new home projects. Through the program, Sears offers
builders a variety of home networking options, arranges for installation of
selected network solutions through pre-certified local and regional integrators
and provides quality assurances that differentiate its program from the limited
local service typically available to developers. Home Director is the preferred
product supplier for the Sears program and acts as an integrator for the
program, primarily in areas where Sears has not yet certified other local
service providers.

     Under the Sears program, Sears contracts with a builder for installation of
home networking systems in the builder's new houses, typically in a multi-home
development. Simultaneously, Sears contracts with one of its authorized
integrators in the area (which may be Home Director or its Digital Interiors
subsidiary in the regions where we operate) to fulfill the Sears contract with
the builder. Under our agreement with Sears (which expires in April 2005), we
are the preferred supplier of hardware products used in the home networking
systems installed by Sears authorized integrators. Home Director products are
supplied to these integrators (other than Home Director or its subsidiary)
through an authorized Home Director distributor.

     Important aspects of the Sears Connected Home program include:

     o    Sears' objective is to have the largest nationwide network of
          certified installers providing home networking solutions to the
          homebuilding industry. To this end, it has showcased the Connected
          Home program at major builders' expos and tradeshows.

     o    Sears is already a leading supplier of appliances and other products
          for new homes and has an established reputation in the home-builder
          community and existing relationships with many home builders.

     o    Sears certifies local integrators for the program based on a thorough
          approval process which requires both technical and financial
          qualification. Sears has received numerous applications for
          certification by integrators seeking to participate in the program and
          has granted a limited number of certifications.

     o    The network of certified integrators offers home builders easy access
          to reliable and technically qualified installers who may otherwise be
          difficult to identify in a business that is characterized by the
          presence of numerous small independent concerns.

     o    Home Director is the preferred supplier of home networking hardware
          products for the program. We expect that this status will facilitate
          increased sales of our products over the next several years as more
          certified integrators and builders join the program.

     The term of our agreement with Sears expires on April 17, 2005, subject to
each party's right to terminate the agreement at any time, with or without cause
and without penalty or liability, upon 120 days' notice. During the term of the
agreement, we are prohibited from entering into similar agreements with other
parties (except under certain specified circumstances).

     While we have high expectations for the Sears Connected Home program, we
can provide no assurance that our strategic relationship with Sears will
continue or that it will result in any increase in our revenue.

     We also continue to sell our hardware and software networking products
throughout the United States and Canada to distributors primarily for resale to
regional integrators and installers who carry out their own installation
activities, frequently with our technical and training assistance.

INDUSTRY OVERVIEW AND MARKET OPPORTUNITY

     Target Market

     The new home construction industry offers the principal market for Home
Director's products and services. An average of more than 1.5 million new homes
(including residential apartment units) have been built in the United States
during each of the past 10 years, and 1.6 million new homes were built in 2002.
(Source: United States Bureau of the Census.) Based on our own experience, we
believe that only a relatively small number of these new homes were built with
electronic networking capabilities but that the percentage of new homes
incorporating these capabilities has been increasing.



                                       6

<PAGE>

     Industry Evolution

     The market for solutions that will facilitate the distribution and control
of data within the home is relatively new and we believe is still in an early
stage of evolution. This market appears to be driven by a number of recent
trends, including the following:

     o    a demand for video, audio and voice capabilities throughout the home
          rather than in a single location;

     o    the growing number of households with multiple personal computers and
          Internet capabilities;

     o    the rise in the number of people who work from home;

     o    the increase in the availability of "last mile" high speed bandwidth,
          via cable modem, DSL and satellite;

     o    the proliferation of new technology and digital applications;

     o    the expectation that devices and technology will perform multiple
          functions; and

     o    the decreasing cost of relatively sophisticated home networking
          solutions.

OUR SOLUTION

     In our effort to exploit this evolving market, and by contrast to the many
small-scale local businesses that offer limited low-tech network functions, we
offer scaleable and upgradeable technology, established distribution channels,
and, in sections of California, Florida, Colorado and Texas, and in other areas
served by certified integrators of the Sears Connected Home program, a
single-source for products and professional sales and service. We believe we
address prospective obsolescence by providing a structured wiring infrastructure
that handles multiple mediums, is scaleable and can be functionally upgraded by
means of hardware and software. Our home networking solutions can be controlled
from inside the home or remotely from web-access devices. We offer a full range
of support from pre-sale design and installation to post-installation service,
at prices we believe to be competitive. To meet a broad range of demand from
entry level to custom homes, we employ standardized base
packages or modules with a menu of functional add-ons or upgrades to provide a
range of performance capabilities responsive to the individual consumer's budget
and needs.

     Our home networking solutions enable shared high-speed Internet access,
linked computer peripherals, centrally controlled home security systems,
distributed entertainment content and other services and capabilities. These
solutions allow home owners to access information and entertainment in any room
in the home and centrally control their security, energy and lighting. We couple
our networking hardware with scaleable and upgradeable proprietary software that
delivers functionality and an intuitive "plug and play" user interface. Devices
connected into our system can be controlled through television sets in the home
or remotely by both wired and wireless web-access devices.

OUR PRODUCTS AND SERVICES

     Our home networking solution consists of structured wiring and proprietary
hardware and software. This solution is based on our proprietary communications
device, called the Network Connection Center, which has received awards from the
National Association of Home Builders, Popular Science Magazine and the Home
Automation and Networking Association. The Network Connection Center is a
hardware installation offered in several configurations which houses structured
wiring terminals and, in conjunction with applications software, connects and
coordinates that includes all of the networked applications and devices within
the home. The structured wiring infrastructure can be scaled to high or low
capacity levels in accordance with specific builder or consumer requirements.
The Network Connection Center can support a variety of hardware and software
products to allow for the integration of "best of breed" technologies. With the
Network Connection Center, we offer a menu of hardware and software add-ons and
upgrades which determine the scope and capacity of each individual system. For
example, our AudioZone is a home audio product that allows homeowners to
distribute music over network wiring, and our WebPoint is a suite of wired and
wireless computer networking and broadband Internet sharing products. The cost
of a system varies depending on the size of the home and the number of selected
features. Typically, the price to consumers of a complete, installed home
networking solution ranges from $1,500 to $4,000, plus the cost of any audio,
video, security and other peripheral components and systems, including speakers,
which may be linked to the network and included in the installed package.



                                       7

<PAGE>

     Packages

     Our installed systems are currently offered to home builders in four
distinct "packages". In planning a new-home development, a participating builder
selects and purchases the package that affords the performance capabilities it
believes will best suit the kind and style of homes it plans to build. Every
package incorporates our proprietary Network Connection Center. All packages
include high performance cables which replace traditional telephone and
television wiring. Outlets are installed throughout the home in appropriate
configurations to accommodate specific technologies and services to be connected
and integrated. The four packages now offered are as follows:

     o    Starter Package - appropriate for smaller homes and multi-dwelling
          units.

     o    Basic Package - includes video amplification capabilities.

     o    Personal Package - features additional locations to accommodate
          automation and security accessories and has premium video
          amplification and distribution capabilities.

     o    Signature Package - features additional locations for routers, cable
          modems, DSL modems, security circuit boards and other accessories.

SALES AND MARKETING STRATEGY

     We currently target our products and services primarily to the new home
market. Our systems involve in-wall construction activities and are therefore
inherently more expensive and inconvenient to install in existing residences
than in new homes under construction. To reach the new-home market, we
concentrate our marketing efforts on creating and enhancing relationships with
home builders and developers who have direct access to purchasers of new homes
at the very time when they are making decisions regarding the design, function
and financing of their new homes.

     We recognize an additional potentially huge market for network retro
fitting of existing homes and businesses. We believe that custom retrofitting of
existing homes currently represents a relatively insignificant segment of the
overall market for home networking systems. We believe, however, that the
development of this segment of the market must await the further development and
improvement of existing wireless technologies which will make retro fitting
economically feasible on a broader scale.

     Home Builders

     Our "Intelligent Home Marketing Program" is intended to standardize and
streamline a home builder's sales, design, installation and customer support for
our networking solutions. Using each participating builder's blueprints for a
home development project, we recommend the most appropriate standard packages
and application modules for potential buyers and identify standard locations for
voice, video, data, security and home management features within the framework
of the overall designs contemplated by the blueprints. We display our products
and systems in the builder's showroom or model, where a sales representative is
available to consult with each home buyer at the same time the buyer is
selecting other home options, such as cabinets, carpeting and tile.

         We currently have joint marketing relationships with home builders in
parts of California, Florida, Colorado and Texas. Subject to demand, the
availability of capital and the requirements of the Sears Connected Home
Program, we may establish similar relationships with builders in other
geographic areas. In our existing relationships, we try to obtain the builder's
commitment to purchase and include a home networking package in all of the
housing units within a new-home development. With this commitment, we receive
revenue from each home built in the development, based on the package selected
by the builder, and further revenue from sales of add-ons, upgrades and
application modules selected by individual home buyers.



                                       8

<PAGE>

     We believe our home networking solutions are flexible enough to accommodate
builders' requirements for virtually all levels of housing units, including
production, semi-custom and custom homes. Builders of production and semi-custom
homes provide high-volume deployment of our networking infrastructure and
products and services. Builders of custom homes provide early deployment of new
technology in high-end home solutions and tend to yield useful feedback for
future product and service offerings.

     Builders generally are interested in including home networking packages in
their new home developments for a variety of reasons which may include any of
the following:

          o    The home networking package is marked up and included in the
               gross sales price of each home and therefore represents an
               incremental item of net revenue to the builder.

          o    The package represents a relatively inexpensive value enhancement
               to prospective home buyers, particularly younger buyers who have
               grown up with newer communications technologies, and increases
               the marketability of a new home.

          o    Inclusion of a network package facilitates sales of video,
               security, telecommunications and other applications which
               represent further potential net revenue to the builder.

          o    Consumer demand and competition from other builders make it
               essential.

     Distributors

     We also sell our products to distributors in the U.S. and Canada who stock
our line of home network hardware products and related software and sell them
primarily to regional installers and integrators or home builders. To support
this business, we offer technical assistance and training to our distributors
and their customers.

MANUFACTURING

     Our employees design the hardware and software components that are offered
as options within our Network Connection Centers. Hardware components are
manufactured to our specifications by several third party suppliers in the
United States and abroad. We are not currently dependent upon any single
supplier, and we believe that alternative manufacturing sources would be readily
available without material delay in the event of the interruption of supplies
from any of our current sources.

INTELLECTUAL PROPERTY

     We own or have rights to use proprietary technology that we believe afford
us a current competitive advantage. We have filed and intend to continue to file
patent applications on various technologies in the United States and have
obtained two patents. We have also licensed intellectual property from several
companies, including major computer and communications manufacturers. We also
rely on a combination of trade secret, copyright and trademark law,
nondisclosure agreements and technical measures to protect our proprietary
technology. We have four trademarks registered and seven trademarks pending in
the United States, as well as trademarks registered in other countries.

     We have received written notice from a third party alleging breach of
contract and violation of trademark law in connection with our use of the "Home
Director" trademark. We have taken what we believe is appropriate remedial
action and do not believe that there is any remaining basis for a claim by the
third party, nor has the third party taken further action to pursue its claim.
Nevertheless, it is possible that the third party will initiate legal action
seeking damages and/or injunctive relief against us. If any such litigation
should be resolved adversely, we could be compelled to pay damages and/or
royalties to the third party for our use of the Home Director name and/or to
limit or discontinue its use as a trademark. Any significant limitations on our
use of the Home Director name could adversely impact our marketing program and
our efforts to establish brand recognition.



                                       9

<PAGE>

COMPETITION

     Our competitors are rapidly changing. They currently include domestic and
foreign manufacturers of competitive products and local and regional systems
integrators who piece together and install products and services from disparate
hardware, software and residential gateway providers. Other competitors are
businesses that offer various aspects of home networking using a home's existing
electrical wiring or wireless home networking for data connectivity.

     In the production and marketing of hardware for networking installations,
our principal competitors include OnQ Technologies, Inc., Leviton, USTec, and
LifeStyle Innovations, Inc.

RESEARCH AND DEVELOPMENT

     Our expenses related to research and development activities were
approximately $6,087,067 in 2001, $714,804 in 2002, and $277,631 in 2003. We
expect our expenses for research and development to increase in 2004 and
subsequent years as we seek to develop new and improved products to enhance our
competitive position and the adaptability of our networks to more complex
applications.

EMPLOYEES

     As of March 4, 2004, we had approximately 90 full-time employees, 60 of
whom are located in California, 14 in Colorado, 10 in Florida and three in each
of North Carolina and Texas. Of our total workforce, 28 are engaged in business
development, product research and development, finance and administration, and
the balance in operations. None of our employees is covered by a collective
bargaining agreement, nor have we experienced any work stoppages. We believe
that our relations with our employees are good.


ITEM 2.  DESCRIPTION OF PROPERTY

     Our corporate headquarters are located in Livermore, California. The
Livermore facility has 11,470 square feet and is also used as our northern
California service center and for general warehouse storage. Our sublease for
the Livermore facility expires in 2008 and requires average monthly lease
payments of $14,390. We expect that we will need to seek additional corporate
office space in or around Livermore during 2004. Based on the current market for
office space in the area, we do not anticipate any difficulties in identifying
and leasing sufficient space for our needs on appropriate terms in the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

     On June 18, 2001, Point West Ventures, LP filed a complaint against HDT and
Spencer Trask Ventures, Inc., the placement agent for HDT's convertible
preferred stock financing, in New York Supreme Court. Point West, one of the
investors in that financing, alleged misrepresentation in connection with that
financing and sought recission of its $500,000 investment. Subsequent to the
filing of the complaint, Point West was placed in receivership and the action
was stayed and remains inactive. The receiver may determine to pursue the action
at some future date.

     We are occasionally subject to legal proceedings and claims that arise in
the ordinary course of our business. It is impossible for us to predict with any
certainty the outcome of pending disputes, and we cannot predict whether any
liability arising from pending claims and litigation will be material in
relation to our consolidated financial position or results of operations.

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

         None.



                                       10
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                                     PART II

ITEM 5:  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
         MATTERS

MARKET INFORMATION

         Our Common Stock is quoted on the OTC Bulletin Board under the symbol
"HMDR". Prior to the merger, Netword's Common Stock was quoted on the OTC
Bulletin Board under the symbol "NTWD".

         The following approximate high and low bid information for the Common
Stock is as reported by the OTC Bulletin Board. The prices stated represent
inter-dealer quotations, which do not include retail mark-ups, mark-downs or
commissions. Such prices do not necessarily represent actual transactions. The
high price during the fourth quarter of 2002 (and all periods thereafter)
reflects a one-for-40 reverse split of our Common Stock on December 19, 2002.

         As of March 29, 2004, there were approximately 825 holders of record of
our Common Stock.

                                                                    PRICE
                                                                    -----
                                                                HIGH     LOW
                                                                ----     ---

         2002
               First quarter................................   $0.14   $0.07
               Second quarter...............................    0.12    0.06
               Third quarter................................    0.09    0.04
               Fourth quarter...............................    8.00    0.04

         2003
               First quarter................................    8.00    2.85
               Second quarter...............................    3.00    1.50
               Third quarter................................    2.10    0.75
               Fourth quarter  .............................    1.50    0.85


DIVIDENDS

     We have not paid any cash dividends on our Common Stock and do not
anticipate declaring or paying any cash dividends in the foreseeable future.
The holders of our Common Stock are entitled to dividends when and if declared
by our board of directors from legally available funds.

EQUITY COMPENSATION PLANS

         The information required under this item related to equity compensation
plans is incorporated herein by reference to the proxy statement for our 2004
annual meeting of stockholders.

UNREGISTERED SALES OF SECURITIES

         In December 2003 and January 2004, we sold units consisting of
3,470,679 shares of Common Stock and warrants to purchase 3,470,679 shares of
Common Stock, for aggregate consideration of $3,226,315. The units were sold to
persons we reasonably believed were accredited investors, without public
solicitation or advertising, the certificates issued therefor were endorsed with
an appropriate restrictive legend, and the transaction was therefore exempt from
registration pursuant to Rule 506 under the Securities Act. We paid Spencer
Trask, our placement agent, cash compensation of $370,000, including
reimbursement for its non-accountable expenses. In addition, we issued Spencer
Trask warrants to purchase 1,388,270 shares of Common Stock at exercise prices
ranging from $1.068 to $1.298 per share.



                                       11
<PAGE>

         On December 9, 2003, in separate transactions, we engaged Brockington
Securities, Inc. and SLD Capital Corp. to provide certain services to us and
issued to each of them a warrant to purchase 100,000 shares of Common Stock at
$1.15 per share. The warrants were issued in negotiated transactions without
solicitation, the recipients of the warrants represented to us that they were
accredited investors, the certificates for the warrants were endorsed with an
appropriate restrictive legend, and the transactions were therefore exempt from
registration pursuant to Rule 506 under the Securities Act.

         On July 24, 2003, in connection with an extension of credit to us, we
issued a warrant to purchase 23,684 shares of Common Stock at $1.90 per share to
Greater Bay Bancorp. The warrant was issued to a single purchaser in a
negotiated transaction, the purchaser was an accredited investor, the
certificate for the warrant was endorsed with an appropriate restrictive legend,
and the transaction was therefore exempt from registration pursuant to Rule 506
under the Securities Act.

         During the past three years, we have issued options to purchase shares
of our Common Stock from time to time under our Amended and Restated Stock
Option Plan. The exercise prices of such options are equal to the fair market
value of our Common Stock on the respective grant dates. The stock option grants
were exempt from registration pursuant to Section 4(2) of the Securities Act,
since they were made to a small number of informed persons who were provided
with all information relevant to their investment decisions. In addition,
pursuant to the merger, we assumed all outstanding options under HDT's Stock
Incentive Plan (subject to necessary adjustments to reflect the exchange ratio
under the merger agreement), which were granted by HDT without registration
pursuant to the exemption from registration available under Rule 701 under the
Securities Act. We plan to register under the Securities Act the offering of
Common Stock pursuant to all options granted or which may be granted under our
Amended and Restated Stock Option Plan (including the HDT options assumed in the
merger).


ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

         As a result of the merger, on December 19, 2002, HDT became our
wholly-owned subsidiary, we changed our name from Netword, Inc. to Home
Director, Inc., and the business of HDT became our only business. Since the
former stockholders of HDT acquired a majority of our voting interests in the
merger, the transaction was treated as a reverse acquisition, with HDT treated
as the acquirer for accounting purposes. Accordingly, the pre-merger financial
statements of HDT are our historical financial statements. At the time of the
merger, Netword had no continuing operations and its historical results would
not be meaningful if combined with the historical results of HDT.

         Our revenues consist primarily of revenues from the sale of home
networking products and services. Home networking hardware is sold primarily to
distributors for use by integrators who install the hardware in homes throughout
the United States and Canada. The Company also provides installation services,
primarily to the new home construction market, in California, Florida, Colorado
and, since early 2004, Texas.

         Research and development expenses consist primarily of salaries and
related personnel expenses, subcontracted research expenses, and technology
license expenses. As of December 31, 2003, all research and development costs
had been expensed as incurred. We believe that continued investment in research
and development is critical to attaining our strategic objectives, and we expect
such expenses to increase during 2004.

         General and administrative expenses consist primarily of expenses for
executive, finance and administrative personnel, professional fees, and other
general corporate expenses. As we add personnel and incur additional costs
related to the growth of our business, general and administrative expenses will
also increase.



                                       12
<PAGE>

RECENT DEVELOPMENTS

     In December 2003 and January 2004, we raised gross proceeds of
$3,226,315 in a private sale of units consisting of 3,470,679 shares of Common
Stock and warrants to purchase 3,470,679 shares of Common Stock. In addition, we
issued warrants to purchase 1,388,270 shares of Common Stock to the placement
agent in this transaction. Net proceeds of the sale were approximately
$2,600,000. All of the shares of Common Stock included in the units sold in this
transaction (including the shares underlying the warrants) were registered for
resale under out registration statement on Form SB-2, which was declared
effective by the Securities and Exchange Commission on March 19, 2004.

         Effective as of March 23, 2004, we entered into a Factoring Agreement
with Pacific Business Funding, a division of Greater Bay Bank, N.A. (the
"Bank"). The Factoring Agreement provides for the Bank's purchase of our
eligible accounts receivable, with recourse, for a purchase price of 65% of such
accounts (each, an "advance"), subject to maximum advances of $750,000, and is
secured by substantially all of our assets. The amounts advanced by the bank are
subject to a finance fee equal to the Bank's prime rate plus 6% per annum (10%
as of April 1, 2004). Any advances under the Factoring Agreement are within the
complete discretion of the Bank. In addition, the Factoring Agreement requires
that we raise proceeds of at least $2.0 million in an equity financing before
May 1, 2004 and if we do not raise such proceeds by such date, the finance fee
under the Factoring Agreement will be increased by 5% per annum. The term of the
Factoring Agreement expires on May 5, 2005, but it is terminable at will by the
Bank or us at any time.

         On April 17, 2003, we entered into an agreement with Sears, Roebuck &
Co., pursuant to which we are currently expanding a strategic marketing
relationship with Sears called the Sears Connected Home program. This program
began as a pilot program in Florida in 2002 and, under the terms of the
agreement with Sears, is being implemented by Sears, with our support, on a
national basis. For a description of the agreement with Sears and the Sears
Connected Home program, see "Business."

         During 2003, we signed new contracts to provide networking solutions
and services to Shea Homes, Bright Development, SummerHill Homes, Richmond
American Homes-Los Angeles Division, Greystone Homes, Cobblestone Homes,
Jonathan Homes and Beazer Homes. During the fourth quarter of 2003, we opened an
office in Colorado Springs, Colorado, where our first customer was Classic
Homes.

         While we expect revenues to stem from these new agreements and the
commencement of operations in Colorado, we can provide no assurance that any of
the relationships contemplated by these agreements or the new office will
continue or will result in any increase in our revenue.

CRITICAL ACCOUNTING POLICIES

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
We believe the following critical accounting policies, which have been discussed
by senior management and our audit committee, have significant effect in the
preparation of our consolidated financial statements.

         Revenue Recognition. We generally recognize product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is reasonably assured. The Company
accrues for sales returns, rebate programs and warranty costs based on its
experience. We also recognize revenue using the percentage of completion method
on installation projects, primarily by comparing contractual billing milestones
with total contract value. Accounting for revenue from services, payment of
upfront fees, and achievement of contract-specific milestones involves
management making assessments of business conditions and estimates regarding
timing and cost of work associated with the revenue. Over time, these estimates
may be adjusted based on then-current circumstances, such as changes in contract
amounts, resulting in adjustment to revenues. Changes to total estimated
contract costs or losses, if any, are recognized in the period in which they are
identified.

         Allowance for Doubtful Accounts. Accounts receivable are unsecured and
we maintain allowances for doubtful accounts for estimated losses from
customers' inability to make payments. We assess each account that is more than
90 days delinquent or others when information known to us indicates amounts may
be uncollectable; in order to estimate the appropriate level of the allowance,
we consider such factors as historical bad debts, current customer credit
worthiness, changes in customer payment patterns and any correspondence with the
customer. In 2003, we experienced losses, or recorded provisions for potential
losses, totaling $373,000, or 4% of revenues. If the financial condition of our
customers were to deteriorate and impair their ability to make payments,
additional allowances might be required in future periods.



                                       13
<PAGE>

         Inventory. We present inventory value at the lower of cost or market
and net of valuation allowances for excess and obsolete units. Establishing this
reserve requires estimates of sales volumes and pricing. In 2003, we recorded
expenses for disposal of or provision for obsolete inventory, totaling $956,000,
or 10% of revenues. The obsolete inventory was acquired primarily in 2000 and
2001, and we anticipate that the level of these expenses and write-downs will be
lower in future periods. To the extent that we are not able to correctly
anticipate these trends, additional reserves may be required in future periods.

         Intangible Assets - Goodwill. Intangible assets include costs in excess
of net assets acquired ("goodwill") and other purchased intangibles. The
carrying amount of goodwill is reviewed annually. If this review indicates that
goodwill will not be recoverable, the carrying amount of the goodwill will be
reduced to its estimated fair value. This requires us to estimate such factors
as future sales volumes and costs of business produced by these intangibles. To
the extent that we are not able to correctly anticipate these trends, additional
adjustments to estimated fair value may be required in future periods.

         Valuation of Warrants and Other Equity Instruments. We have entered,
and may continue to enter, into transactions whereby we grant warrants to
purchase stock to non-employees. These transactions sometimes require us to
determine the fair value of non-exchange traded instruments. The development of
these fair values requires significant judgment and estimates by management. We
disclose the principal assumptions used in determining these fair values in our
financial statements and we believe these assumptions are reasonable. However,
the use of different valuation models, or assumptions differing from ours, could
cause materially different values to be assigned these instruments and could
have a significant impact, positive or negative, on our reported results of
operations. During 2003, we issued warrants in connection with our bank line of
credit and certain agreements to provide investor relation services. Expenses
relating to the value of those warrants totaled $144,000.

RESULTS OF OPERATIONS

         Years Ended December 31, 2003 and 2002

         Our revenues are derived from the sale of home networking products and
services. Revenues were $9,251,000 in 2003, compared to $10,447,000 in 2002, a
decrease of 11%. The reduction was primarily attributable to reduced hardware
sales in 2003 (from $4.3 million in 2002 to $2.5 million in 2003, or a reduction
of 42%), partially offset by increased services revenues. During 2003, unit
sales of hardware decreased by 20% (from 13.7 million units to 10.9 million
units) and average hardware selling prices decreased by 27% (from $317 to $230).
In addition, during the first two months of 2004, orders for hardware products
decreased 57% as compared to the same period during 2003. Hardware sales
accounted for 27% of revenues in 2003, as compared to 42% in 2002. The decline
in hardware sales reflects several factors, including our strategic decisions to
concentrate on cost reduction measures and the sale of hardware primarily
through the still-developing Sears Connected Home program as well as price
competition. Based upon increased price competition during 2003, we reduced our
average hardware selling prices by 20% in the fourth quarter of 2003 as compared
to the third quarter of 2003. Although we have limited ability to project future
revenues from hardware sales since shipments are generally made in the same
month orders are received, we expect pricing pressure to abate during 2004 as
pricing stabilizes.

         On the services side, revenues increased by 11% in 2003 as compared to
2002. During 2003, we signed several new contracts to provide networking
solutions to numerous home builders and, during the fourth quarter of 2003, we
opened an office in Colorado Springs to provide networking solutions, with
Classic Homes as our first customer. In the first two months of 2004, sales
orders for home installation services increased by 37% as compared to the same
period in 2003.



                                       14

<PAGE>

         Total costs and expenses were $14,170,000 in 2003, compared to
$9,210,000 in 2002. The increase in 2003 was primarily attributable to the
non-recurring nature of the gain of $4,516,000 from the extinguishment of
certain liabilities in 2002 and the provision for abandonment of facility of
$684,000, offset in part by reduced research and development expenses of
$437,000, during 2003. Cost of revenues were $7,251,000, or 78% of revenues, in
2003 as compared to $7,021,000, or 67% of revenues, in 2002. Cost of revenues in
2003 were adversely affected by decreased average hardware selling prices and
charges related to inventory. During the fourth quarter of 2003, we recorded
expenses for disposal of or provisions for obsolete inventory of approximately
$956,000. Factors leading to the charges in the fourth quarter included a
decline in hardware sales which we believe was related principally to the
technological obsolescence of certain inventory and our inability to compete
with products of a more recent design. We believe that we may have increased
future research and development expenses, resulting primarily from hiring
additional engineering personnel and increased licensing costs as we plan to
improve and broaden our product offerings. From time-to-time, we may incur
additional professional fees and other costs in connection with possible future
attempts to expand our product offerings.

         Our net loss in 2003 was approximately $4,986,000, as compared to a net
loss of approximately $2,009,000 in 2002. The increase was primarily
attributable to:

          o    the fact that we had no extinguishment of liabilities in 2003
               while we had a gain of $4.5 million from the extinguishment of
               certain liabilities in 2002;

          o    other expenses (net) of $3,258,491 associated with HDT's
               convertible notes that were retired on conversion in December
               2002 (described below);

          o    a provision of approximately $684,000 for abandonment of facility
               recorded in 2003; and

          o    the inventory charge of $956,000 recorded in 2003.

Years Ended December 31, 2002 and 2001

          Total revenues consisted of revenues from the sale of home networking
products and services. Revenues were $10.4 million in 2002, compared to $13.2
million in 2001, a decrease of 21%. This decrease was due primarily to inventory
shortages stemming from cash constraints that affected our relations with
certain key vendors during the first half of 2002 and our inability to recapture
or replace new home building projects and hardware business in the second half
of that year.

            Total expenses in all categories decreased substantially in 2002
compared to 2001. For 2002 compared to 2001, cost of revenues decreased by
approximately $1.8 million (or 20%) which was primarily attributable to
decreased revenues. For 2002, general and administrative expenses decreased by
approximately $2.2 million (or 41%), sales and marketing expenses decreased by
approximately $3.5 million (or 60%) and research and development expenses
decreased by approximately $5.4 million (or 88%). Cost reduction measures which
contributed to these decreases included a reduction in headcount, a reduction in
spending on new product development, a reduction in marketing and promotional
expenses and a change in sales strategy for our products.

         Interest expense for 2002 was adversely affected by certain expenses
related to HDT's sale of convertible notes. The charges included interest
accrued on HDT's convertible notes, which were paid to investors by the issuance
of shares of HDT's common stock immediately prior to the merger, and
amortization of costs of the offering of the notes, which raised essential
capital. All of the convertible notes were automatically converted into HDT
common stock immediately prior to the merger. Although management views the
underlying economic basis of issuance of convertible debt as a sale of HDT
common stock, generally accepted accounting principles require the third-party
costs associated with the convertible notes to be treated as fees paid for
obtaining debt financing which are then amortized over the expected term of the
financing, which was from the date of the issuance of the convertible notes
through the date of the merger.

            We recognized a $4.5 million gain from the extinguishment of certain
liabilities in 2002 as a result of a debt restructuring by HDT.

            Our net loss in 2002 was approximately $2.0 million, as compared to
a net loss of approximately $30.4 million in 2001. The substantial improvement
was primarily attributable to the items discussed above, the elimination of
goodwill amortization as a result of a required change in accounting principle
and the non-recurrence of various restructuring charges incurred in 2001.



                                       15
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         As a result of our continuing losses, particularly during the fourth
quarter of 2003, we face an acute shortage of working capital.

         Effective as of March 23, 2004, we entered into a Factoring Agreement
with Pacific Business Funding (described below), which provides for advances
equal to 65% of our eligible accounts receivable (as determined by Pacific
Business Funding), with recourse, subject to maximum total advances of $750,000.
On April 1, 2004, we were advanced $450,000 under the Factoring Agreement and
approximately $300,000 of this advance was used to repay the amount outstanding
under our line of credit with Venture Banking Group, thereby terminating the
agreement governing such line of credit.

         Pacific Business Funding has complete discretion to determine which, if
any, of our accounts receivable qualify as eligible accounts receivable and
there can be no assurance that they will advance any additional funds to us
under the Factoring Agreement. Even if additional funds are advanced under the
Factoring Agreement, we will still require additional financing to satisfy our
working capital requirements and we expect to seek such financing through
additional sales of equity securities. However, we currently have no commitments
with respect to any equity financing. Our operations may suffer and may
ultimately have to be discontinued if we are unable to obtain necessary
financing on a timely basis.

         Historically, our operations have never been self-sustaining, and we
have financed our continuing operations through a series of private offerings of
debt and equity and by obtaining advances under the bank line of credit. We
cannot predict when, if ever, our business will produce sufficient cash to
reduce or eliminate our dependence on external financing as our primary source
of working capital.

Private Placement

         In December 2003 and January 2004, we raised gross proceeds of
$3,226,315 in a private placement of equity units consisting of 3,470,679 shares
of Common Stock and three-year warrants to purchase 3,470,679 shares of Common
Stock at exercise prices ranging from $1.068 to $1.298 per share. Net proceeds
of $1,740,000 was received in 2003 and is reflected in the balance sheet as of
December 31, 2003, and the remaining net proceeds of $860,000 was received in
January 2004. We paid the placement agent cash compensation of $370,000, which
includes reimbursement for non-accountable expenses, and issued the placement
agent five-year warrants to purchase 1,388,270 shares of Common Stock at
exercise prices ranging from $1.068 to $1.298 per share.

Factoring Agreement

         Effective as of March 23, 2004, we entered into a Factoring Agreement
with Pacific Business Funding, a division of Greater Bay Bank, N.A. (the
"Bank"). The Factoring Agreement provides for the Bank's purchase of our
eligible accounts receivable, with recourse, for a purchase price of 65% of such
accounts (each, an "advance"), subject to maximum advances of $750,000, and is
secured by substantially all of our assets. The amounts advanced by the Bank are
subject to a finance fee equal to the Bank's prime rate plus 6% per annum (10%
as of April 1, 2004).

         Any advances under the Factoring Agreement are within the complete
discretion of the Bank. In addition, the Factoring Agreement requires that we
raise proceeds of at least $2.0 million in an equity financing before May 1,
2004 and if we do not raise such proceeds by such date, the finance fee will be
increased by 5% per annum. The term of the Factoring Agreement expires on May 5,
2005, but is terminable at will by the Bank or us at any time. We currently have
no commitments with respect to any equity financing and there can be no
assurance that we will be able to raise any equity financing by May 1, 2004 or
thereafter.

         On April 1, 2004 we were advanced $450,000 under the Factoring
Agreement and approximately $300,000 of this advance was used to repay the
amount outstanding under our line of credit with Venture Banking Group, thereby
terminating the agreement governing such line of credit.



                                       16
<PAGE>

Cash
         As of December 31, 2003, we had cash, cash equivalents, investments and
interest receivable totaling approximately $66,000.

         Cash used in 2003 totaled $2.5 million. Of that amount approximately
$730,000 was used for payments of fees for legal, accounting and financial
advisory services in connection with the merger. The balance was primarily used
to fund the cash operating loss ($3,752,000), a decrease in accounts payable and
accrued expenses ($651,000) and an increase in accounts receivable ($226,000),
offset in part by net proceeds from the issuance of Common Stock and warrants
($1,740,000) and net borrowings under the bank line of credit ($300,000).

         Net cash used in operating activities was $4.0 million for 2003 and
$5.1 million for 2002. Net cash used for both periods in operating activities
was primarily for increases in accounts receivable, funding of operating losses
and payments to reduce accounts payable. Payments to reduce accounts payable in
2003 were primarily for legal and accounting fees of $480,000 related to the
merger.

         Net cash used in investing activities was $98,000 for 2003. $873,000 of
net cash was provided by investing activities for 2002. Cash was used in
investing activities during 2003 primarily to purchase property and equipment.
Cash was provided by investing activities during 2002 primarily from cash
acquired in the merger.

         Net cash provided by financing activities was $1.6 million for 2003 and
6.2 million for 2002. Net cash provided by financing activities during 2003
resulted primarily from the proceeds received from the sale of Common Stock and
warrants and borrowings under the bank line of credit, offset in part by the
payment of a $250,000 fee to the Company's financial adviser in connection with
the merger. The net cash provided by financing activities during 2002 was
primarily proceeds from the issuance of HDT's convertible notes, which were
converted into shares of common stock in connection with the merger, offset in
part by merger costs and payments to a related party.

Going Concern Considerations

         As a result of our losses from operations, the event of default that
existed under the line of credit before its payoff (See Note 14 to our
Financial Statements), and dependence upon financing operations through a series
of private offerings of debt and equity, and our uncertainty about the adequacy
of funding during 2004, our independent auditors have included an explanatory
paragraph in their report on the accompanying financial statements indicating
there is substantial doubt about our ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

OFF BALANCE SHEET ARRANGEMENTS

We have no off balance sheet arrangements.


                                       17
<PAGE>

                              CAUTIONARY STATEMENTS

AN INVESTMENT IN OUR COMMON STOCK IS RISKY. PROSPECTIVE PURCHASERS
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS, AS WELL AS THE OTHER INFORMATION
CONTAINED IN THIS REPORT. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT
WOULD HARM OUR BUSINESS. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK
COULD DECLINE. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES
FACING US. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT
WE CURRENTLY SEE AS IMMATERIAL, MAY ALSO HARM OUR BUSINESS.

THE REPORT OF OUR INDEPENDENT AUDITORS ON OUR FINANCIAL STATEMENTS CONTAINS AN
EXPLANATORY PARAGRAPH ON OUR ABILITY TO CONTINUE AS A GOING CONCERN.

         The report of our independent auditors contains an explanatory
paragraph raising substantial doubt about our ability to continue as a going
concern because of our operating losses, an event of default that existed under
our line of credit before it was paid off and terminated (See Note 14 to our
Financial Statements) and our dependence upon financing our operations through a
series of private offerings of debt and equity securities. Our financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER BE PROFITABLE.

         We experienced a net loss of approximately $30.4 million for 2001, a
loss of approximately $6.5 million (before a gain of approximately $4.5 million
as a result of the extinguishment of certain liabilities) for 2002, and a
net loss of approximately $5 million for 2003. We have incurred significant
quarterly and annual operating losses in every fiscal period since our
inception, and we may continue to incur quarterly and annual operating losses in
the future. There is no assurance that we will ever be profitable. Our ability
to achieve profitability will depend upon a number of factors, including, but
not limited to, whether we:

          o    have financing available for working capital, product development
               and sales and marketing efforts;

          o    develop new products for existing and new markets;

          o    maintain sales prices, achieve higher sales volume and achieve
               contract manufacturing efficiencies in order to maintain or
               improve our gross margins;

          o    control our operating expenses;

          o    expand the distribution network for our products; and

          o    withstand competition in our marketplace.


OUR ACTIVITIES REQUIRE ADDITIONAL FINANCING, WHICH MAY NOT BE OBTAINABLE.

         As of December 31, 2003 we had a cash and cash equivalents balance of
approximately $66,000 and working capital of approximately $220,000. We have
historically needed to raise capital to fund our operating losses, and, although
we raised approximately $2,600,000 in net proceeds through a private sale of
Common Stock and warrants in December 2003 and January 2004, our continuing
losses require us to obtain additional working capital which we are seeking
through the Factoring Agreement (see below) and possible additional equity
offerings. We may also need to raise additional capital to fund expansion of our
business by way of one or more strategic acquisitions. There can be no assurance
that we will be able to obtain any such capital on acceptable terms, if at all.
If we are unable to obtain necessary working capital, we may be compelled to
cease operations.

ALTHOUGH WE HAVE ENTERED INTO A FACTORING AGREEMENT, ADVANCES UNDER THE
AGREEMENT ARE WITHIN THE COMPLETE DISCRETION OF THE BANK AND THE AGREEMENT MAY
BE TERMINATED BY THE BANK OR US AT ANY TIME.

         Effective as of March 23, 2004, we entered into a Factoring Agreement
that provides for the bank's purchase of our eligible accounts receivable, with
recourse, for a purchase price of 65% of such accounts, subject to maximum
purchases of $750,000. Any purchases under the agreement are within the complete
discretion of the bank and the agreement is terminable at will by the bank or us
at any time. On April 1, 2004, we were advanced $450,000 under the Factoring
Agreement and approximately $300,000 of this advance was used to pay off our
line of credit with Venture Banking Croup. We can provide no assurance that we
will obtain advances under the Factoring Agreement in the future.

                                       18
<PAGE>

THE PUBLIC OFFERING BY SELLING STOCKHOLDERS OF A LARGE QUANTITY OF OUR SHARES AS
A RESULT OR OUR RECENT REGISTRATION OF SHARES FOR RESALE MAY ADVERSELY AFFECT
THE TRADING PRICE OF OUR COMMON STOCK AND OUR ABILITY TO RAISE CAPITAL IN NEW
STOCK OFFERINGS.

         On March 19, 2004, our registration statement on Form SB-2 registering
for resale 3,488,354 shares of Common Stock and up to 7,100,279 shares of Common
Stock upon exercise of warrants was declared effective by the Securities and
Exchange Commission. Efforts by the Selling Stockholders to sell all or a
significant portion of these shares during a limited period pursuant to the
registration statement could have a depressing effect on the market price of our
Common Stock and could make it more difficult for us to raise capital through
sales of our equity securities.

LIQUIDITY ON THE OTC BULLETIN BOARD IS LIMITED, AND WE MAY BE UNABLE TO OBTAIN
LISTING OF OUR COMMON STOCK ON A MORE LIQUID MARKET.

         Our Common Stock is quoted on the OTC Bulletin Board, which provides
significantly less liquidity than a securities exchange (such as the American or
New York Stock Exchange) or an automated quotation system (such as the Nasdaq
National or SmallCap Market). There is uncertainty that we will ever be accepted
for a listing on an automated quotation system or securities exchange.

OUR COMMON STOCK HAS BEEN THINLY TRADED, AND THE PUBLIC MARKET MAY PROVIDE
LITTLE OR NO LIQUIDITY FOR HOLDERS OF OUR COMMON STOCK.

         Purchasers of shares of our Common Stock may find it difficult to
resell their shares at prices quoted in the market or at all. There is currently
a limited volume of trading in our Common Stock, and on many days there has been
no trading activity at all. Due to the historically low trading price of our
Common Stock, many brokerage firms may be unwilling to effect transactions in
our Common Stock, particularly because low-priced securities are subject to an
SEC rule that imposes additional sales practice requirements on broker-dealers
who sell low-priced securities (generally those below $5.00 per share). We
cannot predict when or whether investor interest in our Common Stock might lead
to an increase in its market price or the development of a more active trading
market or how liquid that market might become.

OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL
LOSSES FOR PURCHASERS OF OUR COMMON STOCK.

         The relative illiquidity of trading in our Common Stock makes it
particularly susceptible to price volatility which could cause purchasers of our
Common Stock to incur substantial losses. Among factors that could cause
significant fluctuation in the market price of our Common Stock are the
following:

          o    an increase in the volume of public resales of our Common Stock
               pursuant to the above referenced registration statement;

          o    changes in market valuations of similar companies;

          o    announcements by us or our competitors of new or enhanced
               products, technologies or services or significant contracts,
               acquisitions, strategic relationships, joint ventures or capital
               commitments;

          o    regulatory developments;

          o    additions or departures of key personnel; and

          o    deviations in our results of operations from the estimates of
               securities analysts.

WE DEPEND HEAVILY ON OUR SENIOR MANAGEMENT WHO MAY BE DIFFICULT TO REPLACE.

         We believe that our future success depends to a significant degree on
the skills, experience and efforts of Michael Liddle, our Chief Executive
Officer, who joined us on January 1, 2004, and Jerry Steckling, our Vice
President, Advanced Technology and Chief Technology Officer, who joined us on
January 7, 2004. While they have incentives to remain with the Company, there is
no assurance that they will do so.

IMPROVEMENT IN OUR BUSINESS DEPENDS ON OUR ABILITY TO INCREASE CONSUMER DEMAND
FOR OUR PRODUCTS AND SERVICES AND HOME BUILDER PARTICIPATION IN OUR MARKETING
PROGRAMS.

         Unless and until otherwise motivated by consumer demand, additional
home builders may be unwilling to introduce or bear the costs of offering our
systems to new home purchasers. Adverse events or economic or other conditions
affecting markets for new homes, potential delays in product development,
product and service flaws, changes in technology and the availability of
competitive products are among a number of factors that could limit home builder
and consumer demand for our products and services.



                                       19
<PAGE>

IF OUR NAME DOES NOT ACHIEVE AND MAINTAIN BROAD MARKET RECOGNITION, WE MAY FAIL
TO MAINTAIN OR INCREASE OUR MARKET SHARE.

         We believe that brand recognition is important to our marketing efforts
and we have spent substantial amounts to promote our name. These efforts and
expenditures may not have achieved their objective or, even if our brand becomes
more generally known, may not result in a recovery of advertising and
promotional expenses or in any significant market penetration or increase in
revenues.

A THIRD PARTY HAS ASSERTED THAT OUR USE OF THE HOME DIRECTOR NAME IN CONNECTION
WITH THE MARKETING OF CERTAIN OF OUR PRODUCTS VIOLATES CERTAIN TRADEMARK AND
CONTRACTUAL RESTRICTIONS. IF THIS CLAIM WERE TO BE RESOLVED ADVERSELY, WE COULD
BE COMPELLED TO PAY ROYALTIES OR DAMAGES AND/OR LIMIT OR DISCONTINUE USE OF THE
NAME AS A TRADEMARK.

         In June 2003, we received written notice from a third party alleging
that we had breached the terms of an agreement by using the "Home Director" mark
without displaying a distinctive corporate identifier in connection with some of
our products. We have taken what we believe is appropriate remedial action and
do not believe that there is any remaining basis for a claim by the third party,
nor has the third party taken further action to pursue its claim. Nevertheless,
it is possible that the third party will initiate legal action seeking damages
and/or injunctive relief against us. If any such litigation should be resolved
adversely, we could be compelled to pay damages and/or royalties to the third
party for our use of the Home Director name and/or to limit or discontinue its
use as a trademark. Any significant limitations on our use of the Home Director
name could adversely impact our marketing program and our efforts to establish
brand recognition.

WE ARE DEPENDENT ON OUR RELATIONSHIPS WITH A LIMITED NUMBER OF HOME BUILDERS IN
LIMITED GEOGRAPHICAL AREAS FOR A MATERIAL PORTION OF OUR REVENUES.

         Our home networking systems installation business accounted for
approximately 73% of our total revenues in 2003, and one home builder accounted
for approximately 49% of this revenue. Our penetration of the new home market
represents a small percentage of all new homes constructed by the home builders
that we have relationships with. Loss or reduction of demand or increased
pricing pressure from any of these builders could adversely affect our revenues
and our ability to achieve profitability.

THE SEARS CONNECTED HOME PROGRAM, WHICH IS AN IMPORTANT ELEMENT OF OUR BUSINESS
PLAN, COULD BE DISCONTINUED BY SEARS AT ANY TIME.

         A significant portion of our current marketing and sales efforts and
expectations is focused on the relatively new Sears Connected Home program. The
program is directly tied to our relationship with Sears, which is promoting the
program through its extensive marketing and distribution facilities and
resources. Failure or discontinuance of the program would have an adverse impact
on our marketing and sales activities and could compel us to seek other
financial and distribution resources to support these activities. There is no
assurance that we could obtain any such alternative resources.

OUR BUSINESS IS TIED TO THE NEW HOUSING MARKET, WHICH IS INHERENTLY CYCLICAL,
SEASONAL AND SUBJECT TO CONTINUING UNCERTAINTIES.

         Our business is directly related to the level of housing starts,
especially in those areas where we operate our systems installation business.
The housing industry is cyclical, and our revenues from new residential
installations will be affected by factors that affect the housing industry, both
generally and in the limited areas where we operate. The home building market is
also seasonal in many areas of the United States. As a result of all or any of
these factors, our revenues and operating results may fluctuate from period to
period.



                                       20

<PAGE>

REGULATORY CONSTRAINTS ON THE HOME CONSTRUCTION INDUSTRY MAY NEGATIVELY AFFECT
OUR BUSINESS.

         The home construction industry is subject to various local, state and
federal laws and regulations. Sales of our products may be adversely affected by
periodic delays in homebuilding projects for a variety of regulatory reasons,
including factors relating to local and regional environmental and
infrastructure conditions and tax and assessment issues which may delay or halt
construction or increase the costs of home development and decrease potential
sales of our products.

THE MARKET IN WHICH WE OPERATE IS HIGHLY COMPETITIVE AND SUBJECT TO RAPID
TECHNOLOGICAL AND OTHER CHANGES.

         The market for home technology products is highly competitive and
subject to rapid technological and other changes. Price competition has
adversely affected our revenues and margins in the recent past. We expect
competition to increase and to continue to exert downward pressure on our
margins. Many of our current and potential competitors have significantly
greater financial, technical, marketing and other resources and significantly
greater name and brand recognition than we have. Many of them also have
well-established relationships with current and potential distributors of our
products. All or any of these factors may limit or prevent any further
development of our business and our ability to achieve profitability. We believe
that in order to remain competitive, we will need to respond to frequent and
rapid changes in technology and industry standards affecting the market for our
products. For a variety of reasons, including lack of financial, technological
and proprietary resources, we may fail to recognize or be unable to respond to
these changes in a timely or cost-effective manner. We may also encounter
capabilities or technologies developed by others that render our products
obsolete or not competitive.

OUR NETWORKING HARDWARE AND SOFTWARE PRODUCTS MAY, FROM TIME TO TIME, SUFFER
FROM DESIGN OR MANUFACTURING DEFECTS WHICH COULD ADVERSELY AFFECT OUR REPUTATION
AND BUSINESS.

         Our networking software products are complex. Errors by us or our
suppliers could result in software, design or manufacturing defects that could
be difficult to detect and correct. Any such defects could adversely impact
market interest in or demand for our products and our reputation, credibility
and relationships with home builders, current and prospective distributors and
consumers. Despite our efforts and testing, our products (including new products
and enhancements) may be susceptible to flaws or performance degradation, which
could result in:

     o    loss of or delay in revenue;

     o    loss of market share;

     o    failure to achieve market acceptance;

     o    adverse publicity;

     o    diversion of development resources;

     o    claims against us by customers; or

     o    injury to our reputation.

WE MAY BE EXPOSED TO SIGNIFICANT COSTS OF DEFENSE AND DAMAGES IN LITIGATION
STEMMING FROM PRODUCT LIABILITY AND RELATED CLAIMS.

         In spite of our best efforts, we may become subject to claims that give
rise to litigation resulting from the installation of our products and those of
other manufacturers in a consumer's premises. While we carry insurance that we
believe is adequate to cover our potential exposure in these matters, the
possibility exists that we may become subject to claims in amounts or for
reasons that are outside the scope of our insurance coverage. Litigation
involving personal injury or loss of life could lead to awards of enormous sums,
which could exceed our insurance coverage and force us to liquidate or seek
bankruptcy protection.

OUR TECHNOLOGY, WHETHER OR NOT PATENTED, MAY BE VULNERABLE TO MISAPPROPRIATION
BY OUR COMPETITORS AND THE EFFECTS OF COMPETITIVE, NON-INFRINGING TECHNOLOGY.

         We own or have rights to use proprietary technology that we believe
affords us a current competitive advantage. This technology is not, however,
fully protected from infringement by competitors or from their introduction of
non-infringing technologies. Our patent rights and the additional steps we have
taken to protect our intellectual property may not be adequate to deter
misappropriation, and our proprietary position remains subject to the risk that
our competitors will independently develop non-infringing technologies that are
substantially equivalent or superior to our technologies.



                                       21
<PAGE>

WE MAY BE SUBJECT TO THE COSTS AND RISKS OF CLAIMS FOR PATENT AND/OR TRADEMARK
INFRINGEMENT ASSERTED AGAINST US BY OTHERS.

         We remain subject to the risk that third parties will assert
infringement claims against us that will result in costly litigation, require us
to redesign infringing products or obtain a license to use the intellectual
property of third parties. Such licenses may not be available on reasonable
terms or at all. Any intellectual property claims resolved against us (including
the trademark-related claim against us for use of the Home Director name) could
adversely affect our ability to continue in business.

OUR ABILITY TO OPERATE AND COMPETE EFFECTIVELY REQUIRES THAT WE HIRE AND RETAIN
SKILLED TECHNICAL PERSONNEL, WHO, FROM TIME TO TIME, HAVE BEEN IN SHORT SUPPLY
AND MAY BE UNAVAILABLE TO US WHEN WE NEED THEM.

         Our business requires us to be able to continuously attract, train,
motivate and retain highly skilled employees, particularly engineers and other
senior technical personnel. Our failure to attract and retain the highly trained
technical personnel who are integral to our sales, development and service teams
may limit the rate at which we can generate sales and develop new products or
product enhancements. Our inability to attract and retain the individuals we
need could adversely impact our business and our ability to achieve
profitability.

OUR INSTALLATION BUSINESS REQUIRES US TO HIRE, TRAIN AND RETAIN INCREASING
NUMBERS OF SKILLED TRADESMAN, BUT WE MAY PERIODICALLY BE UNABLE TO DO SO IN THE
LABOR MARKETS IN WHICH WE OPERATE.

         We must continue to attract, train, motivate and retain highly skilled
tradesmen at competitive wage rates, to install and service our systems.
Qualified skilled tradesmen are scarce and in great demand throughout the
construction industry and particularly in the geographic areas where our systems
installation activities are currently conducted. Our inability to attract and
retain necessary skilled personnel, when we need them and at rates we can
afford, could adversely impact our business and our ability to achieve
profitability.

WE HAVE PREVIOUSLY ISSUED A SUBSTANTIAL NUMBER OF OPTIONS AND WARRANTS WHICH
REMAIN OUTSTANDING. THE EXISTENCE OF SUCH OPTIONS AND WARRANTS MAY HAVE A
DEPRESSING EFFECT ON THE MARKET PRICE OF OUR COMMON STOCK AND IMPAIR OUR ABILITY
TO RAISE ADDITIONAL CAPITAL, WHILE ANY EXERCISE OF SUCH OPTIONS AND WARRANTS
WILL DILUTE THE INTERESTS OF THE HOLDERS OF OUTSTANDING COMMON STOCK.

         There are outstanding options and warrants (including those held by the
selling stockholders) to purchase approximately 7,965,096 shares of Common Stock
at exercise prices ranging from $0.36 to $453.56 per share, as compared to a
total of only 7,222,146 shares of Common Stock currently outstanding. Such
options and warrants will likely be exercised, if at all, only at times when the
exercise or strike price thereunder is lower than the market price of our Common
Stock. While some of these options and warrants are largely valueless and
unlikely to be exercised prior to their expiration, there remains a significant
overhang of options and warrants exercisable at more modest prices
(approximately 7,215,992 shares of Common Stock at exercise prices ranging from
$0.36 to $10.89 per share). The existence of these options and warrants may have
a depressing effect on the market price of our Common Stock and may impair our
ability to raise additional capital through sales of our Common Stock or
adversely affect the terms of any such sales. The exercise of such options and
warrants (including by cashless exercise, where permitted) may result in
dilution of the relative interests of holders of our Common Stock in our
stockholders equity and earnings, if any.

ITEM 7. FINANCIAL STATEMENTS

         Our consolidated financial statements, the notes thereto and the report
of the independent public accountants thereon are included in this report
commencing at page F-1 and are incorporated herein by reference.



                                       22
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         We have not changed or had any material disagreements with our
independent accountants within the last two fiscal years. However, since the
merger was a reverse acquisition and HDT was the acquirer for accounting
purposes, the pre-acquisition financial statements of HDT are now our historical
financial statements, and those financial statements were audited by Ernst &
Young LLP.

ITEM 8A. CONTROLS AND PROCEDURES.

         CEO and CFO Certifications. Attached as exhibits to this annual report
are the certifications of the CEO and the CFO required by Rules 13a-15 and
15d-15 the Securities Exchange Act of 1934 (the "Certifications"). This section
of the annual report contains the information concerning the evaluation of
Disclosure controls and changes to Internal Controls over Financial Reporting
referred to in the Certifications and this information should be read in
conjunction with the Certifications for a more complete understanding of the
topics presented.

         Disclosure Controls. Disclosure Controls are procedures that are
designed for the purpose of ensuring that information required to be disclosed
in our reports filed under the Securities Exchange Act of 1934 (such as this
annual report), is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.

         Internal Controls over Financial Reporting. Internal Controls over
Financial Reporting means a process designed by, or under the supervision of,
our principal executive and principal financial officers, or persons performing
similar functions, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States of America ("GAAP"), and includes those policies and procedures
that:

         -- pertain to the maintenance of records that in reasonable detail
            accurately and fairly reflect the transactions and dispositions of
            our assets;

         -- provide reasonable assurance our transactions are recorded as
            necessary to permit preparation of financial statements in
            accordance with GAAP, and that our receipts and expenditures are
            being made only in accordance with authorizations of our management
            and directors; and

         -- provide reasonable assurance regarding prevention or timely
            detection of unauthorized acquisition, use or disposition of our
            assets that could have a material effect on our consolidated
            financial statements.

         Limitations on the Effectiveness of Controls. Our management, including
the CEO and CFO, do not expect that our Disclosure Controls or Internal Controls
over Financial Reporting will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the limitations in all control systems, no evaluation of our controls
can provide absolute assurance that all control issues and instances of fraud,
if any, have been detected. Further, the design of any control system is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Because of these inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.

         Changes to Internal Controls over Financial Reporting. In accordance
with the SEC's requirements, the CEO and CFO note that, during the fiscal year
ended December 31, 2003, there have been no significant changes in Internal
Controls over Financial Reporting or in other factors that have affected or are
reasonably likely to materially affect Internal Controls over Financial
Reporting, including any corrective actions with regard to significant
deficiencies and material weaknesses.

         Conclusions regarding Disclosure Controls.  Based upon the required
evaluation of Disclosure Controls, the CEO and CFO have concluded, as of
December 31, 2003, that, subject to the limitations noted above, the Company's
Disclosure Controls are effective to provide reasonable assurance that material
information relating to Home Director and its consolidated subsidiaries is made
known to management, including the CEO and CFO.



                                       23
<PAGE>


                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT

         The information with respect to directors, executive officers,
promoters and control persons; compliance with Section 16(a) of the Exchange Act
and the other information under this item is incorporated herein by reference to
the proxy statement for our 2004 annual meeting of stockholders.

ITEM 10. EXECUTIVE COMPENSATION

          Information with respect to executive compensation is incorporated
herein by reference to the proxy statement for our 2004 annual meeting of
stockholders.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

         The information with respect to security ownership of certain
beneficial owners and management and related stockholder matters is incorporated
herein by reference to the proxy statement for our 2004 annual meeting of
stockholders.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information with respect to certain relationships and related
transactions is incorporated by reference to the proxy statement for our 2004
annual meeting of stockholders.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K

(a)      The following documents are filed as part of this report:

          1.   Financial Statements--see the consolidated financial statements
               commencing at page F-1 of this report.

          2.   Financial Statement Schedules. None.

          3.   The following exhibits are filed with this document:

<TABLE>

<S>            <C>
     2.1       Asset Purchase Agreement by and among Home Director, Inc., Spencer Trask Intellectual Capital
               Company LLC and International Business Machines Corporation, dated as of December 7, 1999.****

     2.2       Agreement and Plan of Merger and Reorganization among Home Director, Inc., DI Acquisition, Inc.,
               Digital Interiors, Inc. and Donald B. Witmer as Stockholders' Agent, dated as of October 24,
               2000.****

     2.3       Asset Purchase Agreement, dated May 14, 2001, by and among Digital Interiors, Inc., Los Gatos Home
               Theater, Inc. and Joseph J. Paris.****

     2.4       Agreement and Plan of Merger, dated as of April 9, 2002, by and among Netword, Inc., Webspeak
               Acquisition Corp. and Home Director, Inc.*

     2.5       Amendment No. 1 to Agreement and Plan of Merger, dated as of July 31, 2002, by and among Netword,
               Inc., Webspeak Acquisition Corp. and Home Director, Inc.*

     2.6       Amendment No. 2 to Agreement and Plan of Merger, dated as of October 25, 2002, by and among
               Netword, Inc., Webspeak Acquisition Corp. and Home Director, Inc.**



                                       24

<PAGE>

     2.7       Stock Purchase Agreement, dated as of January 22, 2003, between Home Director, Inc. and Michael L.
               Wise.****

     3.1       Certificate of Incorporation of Netword, Inc. ++

     3.2       First Certificate of Amendment to the Certificate of Incorporation of Netword, Inc.***

     3.3       Restated Certificate of Incorporation of Home Director, Inc.***

     3.4       Bylaws of Home Director, Inc., as amended and restated on March 3, 2004. +++++

     3.5       Certificate of Merger merging Webspeak Acquisition Corp. with and into Home Director, Inc.***

     4.1       Form of Warrant to purchase shares of Common Stock of Netword, Inc. issued to members of
               Netword, LLC in connection with the merger of Netword, LLC and Netword, Inc. ++

     4.2       Warrant to purchase shares of Common Stock of Netword, Inc., dated May 1, 1999, issued to Pryor,
               Cashman, Sherman & Flynn LLP. ++

     4.3       Form of Subscription Agreement to purchase shares of Common Stock of Netword, Inc. executed in
               connection with the Rule 506 sale of 782,000 units consummated on July 28, 1999 and August 5,
               1999. ++

     4.4       Form of Warrant to purchase shares of Common Stock of Netword, Inc. issued to purchasers in the
               Rule 506 offering to David Segal and to NorthStar Capital Partners LLC.++

     4.5       Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated March 3,
               2000, issued to the McKenna Group. ****

     4.6       Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated May 4,
               2001, issued to the McKenna Group.****

     4.7       Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated October 5,
               2000, issued to Motorola, Inc.****

     4.8       Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated October 11,
               2000, issued to Spencer Trask Ventures, Inc.****

     4.9       Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated October 11,
               2001, issued to Mary Walker.****

     4.10      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated January 25,
               2001, issued to Spencer Trask Ventures, Inc.****

     4.11      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated May 14,
               2001, issued to Joseph J. Paris.****

     4.12      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated October 11,
               2001, issued to The Conrado Company, Inc.****



                                       25

<PAGE>

     4.13      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated December 3,
               2001, issued to Peter Blaettler.****

     4.14      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated February 6,
               2002, issued to Spencer Trask Investment Partners, LLC.****

     4.15      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated February 6,
               2002, issued to Donald B. Witmer.****

     4.16      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated February 6,
               2002, issued to Robert N. Wise.****

     4.17      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated May 1,
               2002, issued to Southport Park Limited Partnership.****

     4.18      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated May 8,
               2002, issued to the Dioguardi Family Trust.****

     4.19      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated May 8,
               2002, issued to Donald B. Witmer.****

     4.20      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated May 8,
               2002, issued to Spencer Trask Ventures, Inc.****

     4.21      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated May 14,
               2002, issued to Spencer Trask Ventures, Inc.****

     4.22      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated June 26,
               2002, issued to Spencer Trask Ventures, Inc.****

     4.23      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated July 8,
               2002, issued to Spencer Trask Ventures, Inc.****

     4.24      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated July 26,
               2002, issued to Spencer Trask Ventures, Inc.****

     4.25      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated September
               30, 2002, issued to Spencer Trask Ventures, Inc.****

     4.26      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated October 7,
               2002, issued to Spencer Trask Ventures, Inc.****

     4.27      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated September



                                       26

<PAGE>

               30, 2002, issued to Kirlin Securities, Inc.****

     4.28      Warrant to purchase shares of Common Stock of Home Director, Inc. (subsequently adjusted in
               accordance with the terms of the Agreement and Plan of Merger (see Exhibit 2.4)), dated October 7,
               2002, issued to Kirlin Securities, Inc.****

     4.29      Warrant to purchase shares of Series B Convertible Preferred Stock of Home Director, Inc.
               (subsequently adjusted in accordance with the terms of the Agreement and Plan of Merger (see
               Exhibit 2.4)), dated April 3, 2000, issued to Spencer Trask Ventures, Incorporated.****

     4.30      Warrant to purchase shares of Series C Convertible Preferred Stock of Home Director, Inc.
               (subsequently adjusted in accordance with the terms of the Agreement and Plan of Merger (see
               Exhibit 2.4)), dated July 6, 2000, issued to Spencer Trask Ventures, Incorporated.****

     4.31      Stock Option Plan of Home Director, Inc., as amended through October 1, 2002****

     4.32      Form of Award Letter for Optionees. ++

     4.33      Warrant to purchase shares of Common Stock of Home Director, Inc. issued to Greater Bay
               Bancorp on July 24, 2003.+++++

     4.34      Warrant to purchase shares of Common Stock of Home Director, Inc. issued to Brockington Securities,
               Inc. on December 9, 2003. +++++

     4.35      Warrant to purchase shares of Common Stock of Home Director, Inc. issued to SLD Capital Corp. on
               December 9, 2003.   +++++

     4.36      Form of warrant to purchase shares of Common Stock of Home Director, Inc. issued to investors in
               December 2003 and January 2004.  +++++

     4.37      Form of warrants to purchase shares of Common Stock of Home Director, Inc. issued to Spencer Trask
               Ventures, Inc. in December 2003 and January 2004. +++++

     9.1       Voting Agreement, dated as of April 30, 2002, among Netword, Inc., Spencer Trask Intellectual
               Capital Company LLC, Spencer Trask Ventures, Inc., Cisco Systems, Inc., Motorola, Inc., Donald
               Witmer, Robert Wise and Daryl Stemm.*

     9.2       Stockholders Agreement, dated as of July 16, 2002, among Home Director, Inc., Netword, Inc.,
               Spencer Trask Investment Partners, LLC, Spencer Trask Intellectual Capital Company LLC, Spencer
               Trask Ventures, Inc., Motorola, Inc., Cisco Systems, Inc., Donald Witmer, Daryl Stemm, Kent M.
               Klineman, Jordan Klineman, Justine Klineman, Michael Wise, Batya Wise, David Wise, Gidon Wise,
               Joseph S. Reiss, Gary and Lynn Gettenberg as joint tenants, The Lawrence Charitable Trust, Klondike
               Resources, Inc., the Jesurum Family Limited Partnership and Stilwell Holding LLC.*

     9.3       Letter Agreement, dated as of April 30, 2002, among Netword, Inc., Spencer Trask Investment
               Partners, LLC, Spencer Trask Intellectual Capital Company, LLC, Spencer Trask Ventures, Inc.,
               Donald B. Witmer, Robert Wise and Daryl Stemm.*



                                       27

<PAGE>

     10.3      Employment Agreement, dated as of September 24, 2001, between Home Director, Inc. and Donald B.
               Witmer.****

     10.4      Employment Agreement, dated as of September 24, 2001, between Home Director, Inc. and Robert N.
               Wise.****

     10.5      Sublease Agreement, dated July 23, 2002, among Adaptec, Inc., Home Director, Inc. and Shea Center
               Livermore, LLC.****

     10.6      Lease Agreement, dated as of April 19, 2000, by and between Southport Business Park Limited
               Partnership and Home Director, Inc., as amended.****

     10.7      Placement Agency Agreement, dated April 10, 2002, by and between Home Director, Inc. and Spencer
               Trask Ventures, Inc. ****

     10.8      Agreement, dated as of April 17, 2003, by and between Sears, Roebuck & Co. and Home Director,
               Inc.+++ Portions of this exhibit have been omitted pursuant to a request for confidential
               treatment.  The term "confidential treatment" and the mark "*" used throughout this exhibit mean
               that the material has been omitted and separately filed with the SEC.

     10.9      Loan and Security Agreement, dated as of July 24, 2003, by and between Venture Banking Group, a
               Division of Cupertino National Bank, and Home Director, Inc., Home Director Technologies, Inc. and
               Digital Interiors, Inc. ++++

     10.10     Placement Agency Agreement, dated as of November 10, 2003, by and between Spencer Trask Ventures,
               Inc. and Home Director, Inc.  +++++

     10.11     Letter Agreement, dated as of December 9, 2003, by and between Home Director, Inc. and Brockington
               Securities, Inc.   +++++

     10.12     Letter Agreement, dated as of December 9, 2003, by and between Home Director, Inc. and SLD Capital
               Corp.   +++++

     10.13     Form of Subscription Agreements to purchase shares of Common Stock and Warrants to purchase
               shares of Common Stock between Home Director, Inc. and the several purchasers of its equity
               units sold on December 9, 2003, December 19, 2003 and January 21, 2004. +++++

     10.14     Form of Registration Rights Agreement between Home Director, Inc. and the several purchasers of its
               equity units sold on December 9, 2003, December 19, 2003 and January 21, 2004.  +++++

     10.15     Employment Agreement, dated as of December 31, 2003, by and between Home Director, Inc. and Michael
               Liddle.  +++++

     10.16     Employment Agreement, dated as of January 7, 2004, by and between Home Director, Inc. and Jerry
               Steckling.  +++++

     10.17     Separation and Release Agreement by and between Robert N. Wise, Home Director, Inc., Home Director
               Technologies, Inc. and Digital Interiors, Inc., dated as of March 3, 2004. +++++

     10.18     Factoring Agreement dated March 23, 2004 by and between Home Director, Inc., Home Director
               Technologies, Inc. and Digital Interiors, Inc. and Pacific Business Funding, a division of Greater
               Bay Bank, N.A. (Filed herewith).

     21        List of subsidiaries of Home Director, Inc.****

                                       28

<PAGE>

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

     31.2      Certification of the Chief Financial Officer and Secretary pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002. (Filed herewith)

     32.1      Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)

     32.2      Certification of the Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section
               1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith)
</TABLE>


+     Exhibits that pre-date the merger on December 19, 2002 and refer to Home
      Director, Inc. are references to Home Director Technologies, Inc., now a
      wholly-owned subsidiary of the registrant (See Exhibit 21), and exhibits
      that pre-date the merger and refer to Netword, Inc. are references to Home
      Director, Inc., the registrant.

++    Incorporated by reference to the corresponding exhibit previously filed as
      an exhibit to Netword's registration statement on Form SB-1 (Reg. No.
      333-86873) filed with the Securities and Exchange Commission on September
      9, 1999.

*     Incorporated by reference to the corresponding exhibit previously filed as
      an exhibit to Netword's Registration Statement on Form S-4 (Reg. No.
      333-86873), filed with the Securities and Exchange Commission on August 2,
      2002.

**    Incorporated by reference to the corresponding exhibit previously filed as
      an exhibit to Amendment No. 1 to Netword's Registration Statement on Form
      S-4, filed with the Securities and Exchange Commission on October 28,
      2002.

***   Incorporated by reference to the corresponding exhibit previously filed as
      an exhibit to Home Director's report on Form 8-K, filed with the
      Securities and Exchange Commission on December 20, 2002.

****  Incorporated by reference to the corresponding exhibit previously filed as
      an exhibit to Home Director's report on Form 10-KSB for the fiscal year
      ended December 31, 2002, filed with the Securities and Exchange Commission
      on March 31, 2003.

+++   Incorporated by reference to the corresponding exhibit previously filed as
      an exhibit to Home Director's report on Form 10-QSB for the fiscal quarter
      ended June 30, 2003, filed with the Securities and Exchange Commission on
      August 19, 2003.

++++  Incorporated by reference to the corresponding exhibit previously filed as
      an exhibit to Home Director's report on Form 10-QSB for the fiscal quarter
      ended September 30, 2003, filed with the Securities and Exchange
      Commission on November 17, 2003.

+++++ Incorporated by reference to the corresponding exhibit filed previously as
      an exhibit to Home Director's registration statement on Form SB-2, filed
      with the Securities and Exchange Commission on March 8, 2004.

(b)   On December 9, 2003, we filed a report on Form 8-K announcing the sale of
      our equity securities in a private placement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The information with respect to principal accountant fees and services
is incorporated by reference to the proxy statement for our 2004 annual meeting
of stockholders.



                                       29

<PAGE>


                                   SIGNATURES

     In accordance with section 13 or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.

                                    HOME DIRECTOR, INC.
                                    (Registrant)


                                    By: /s/ Michael D. Liddle
                                        --------------------------------
                                        Michael D. Liddle
                                        President, Chief Executive Officer
                                        and Director

April 1, 2004

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

<TABLE>
<CAPTION>

SIGNATURE                        TITLE                                                             DATE
---------                        -----                                                             ----
<S>                              <C>                                                              <C>
/s/ Michael D. Liddle
-------------------------        President, Chief Executive Officer and Director (Principal
Michael D. Liddle                Executive Officer)                                                April 1, 2004

/s/ Daryl Stemm
-------------------------        Chief Financial Officer and Secretary (Principal Financial
Daryl Stemm                      Officer and Principal Accounting Officer)                         April 1, 2004

/s/ Ezra P. Mager
-------------------------
Ezra P. Mager                    Chairman of the Board of Directors                                April 1, 2004

/s/ Kent M. Klineman
-------------------------
Kent M. Klineman                 Director                                                          April 1, 2004

/s/ Stephen B. Ste. Marie
-------------------------
Stephen B. Ste. Marie            Director                                                          April 1, 2004

/s/ Michael L. Wise
-------------------------
Michael L. Wise                  Director                                                          April 1, 2004

</TABLE>



                                       30

<PAGE>




                               HOME DIRECTOR, INC.

                          Index to Financial Statements
                                                                         Page
                                                                         ----

Independent Auditor's Reports                                             F-1

Consolidated Balance Sheets as of December 31, 2003
    and 2002                                                              F-2

Consolidated Statements of Operations for the Years
    Ended December 31, 2003 and 2002                                      F-3

Consolidated Statements of Changes in Shareholders'
    Equity for the Years Ended December 31, 2003
    and 2002                                                              F-4

Consolidated Statements of Cash Flows for the Years
    Ended December 31, 2003 and 2002                                      F-5

Notes to Consolidated Financial Statements                                F-7




<PAGE>



                          INDEPENDENT AUDITOR'S REPORT


The Board of Directors
Home Director, Inc.


                We have audited the accompanying consolidated balance sheets of
Home Director, Inc. as of December 31, 2003 and 2002 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

                In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial
position of Home Director, Inc. as of December 31, 2003 and 2002, and the
consolidated results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted in the United
States of America.

                The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
14 to the financial statements, the Company has suffered recurring losses from
operations, is in default of its line of credit, has been dependent upon
financing its operations through a series of private offerings of debt and
equity and the uncertainty about the adequacy of funding during 2004 raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 14. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.



                                        /s/  Mahoney Cohen & Company CPA, P.C.


New York, New York
March 8, 2004 (except for Note 16, which is April 1, 2004)





                                      F-1
<PAGE>



                               HOME DIRECTOR, INC.
                           Consolidated Balance Sheets
                           December 31, 2003 and 2002

                                     ASSETS
                                     ------

<TABLE>
<CAPTION>
                                                                                     2003                2002
                                                                                 ------------       ------------
<S>                                                                              <C>                <C>
Current assets:
    Cash and cash equivalents                                                    $     65,733       $  2,557,214
    Accounts receivable, net of allowances of $290,996
        in 2003 and $115,897 in 2002.                                               1,452,934          1,226,479
    Inventories, net of allowance of $847,363 in 2003
        and $1,087,719 in 2002                                                        818,421          1,499,014
    Other current assets                                                              195,128            140,366
                                                                                 ------------       ------------
                Total current assets                                                2,532,216          5,423,073
Property and equipment, net                                                           280,463            645,328
Customer lists, net of accumulated amortization of
    $670,321  in 2003 and $648,552 in 2002                                             87,075            108,844

Goodwill, net of accumulated amortization of $1,654,837
    in 2003 and 2002                                                                5,825,652          5,825,652
                                                                                 ------------       ------------
                                                                                 $  8,725,406       $ 12,002,897
                                                                                 ============       ============

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable and accrued expenses                                        $  1,770,922       $  2,249,712
    Payables to related parties                                                            --            291,793
    Line of credit                                                                    300,000                 --
    Notes payable                                                                     125,000            125,000
    Current portion of capital lease obligations                                      116,313            125,626
                                                                                 ------------       ------------
                Total current liabilities                                           2,312,235          2,792,131
Capital lease obligations, less current portion                                        10,077            123,781
Other long-term liabilities                                                           393,975                 --
Commitments and contingencies (Notes 9 and 12)
Shareholders' equity:
    Preferred stock, $0.01 par value as of December 31, 2003
           and 2002, respectively
        Authorized - 2,000,000 as of December 31, 2003 and 2002, respectively
        Issued and outstanding - none as of December 31, 2003
           and 2002, respectively                                                         --                 --
    Common stock, $0.01 par value as of December 31, 2003
           and 2002, respectively
        Authorized - 40,000,000 shares
           as of December 31, 2003 and 2002, respectively
        Issued and outstanding - 6,163,071 and 3,751,467
           as of December 31, 2003 and 2002, respectively                              61,631            37,515

        Additional paid-in capital                                                 77,582,890         75,699,296
Accumulated deficit                                                               (71,635,402)       (66,649,826)
                                                                                 ------------      -------------
                Total shareholders' equity                                          6,009,119          9,086,985
                                                                                 ------------       ------------
                                                                                 $  8,725,406       $ 12,002,897
                                                                                 ============       ============
</TABLE>



                             See accompanying notes.

                                      F-2


<PAGE>


                               HOME DIRECTOR, INC.
                      Consolidated Statements of Operations
                 For the Years Ended December 31, 2003 and 2002

<TABLE>
<CAPTION>

                                                                 2003              2002
                                                            ------------      ------------
<S>                                                         <C>               <C>
Revenue                                                     $  9,251,252      $ 10,446,654

Costs and expenses:
    Cost of revenue                                            7,250,744         7,021,446
    General and administrative                                 3,194,168         3,178,643
    Sales and marketing                                        2,366,904         2,279,489
    Research and development                                     277,631           714,804
    Depreciation and amortization                                396,967           531,262
    Extinguishment of certain liabilities                             --        (4,515,504)
    Provision for abandonment of facility                        683,966                --
                                                            ------------      ------------
        Total costs and expenses                              14,170,380         9,210,140
                                                            ------------      ------------

Income (loss) from operations                                 (4,919,128)        1,236,514

Other income (expense):
    Interest income                                                4,310            12,957
    Interest expense                                             (70,758)       (3,258,491)
                                                            ------------      ------------
Net other income (expense)                                       (66,448)       (3,245,534)
                                                            ------------      ------------


Net loss                                                    $ (4,985,576)     $ (2,009,020)
                                                            ============      ============


Net loss per common share - basic and diluted:
    Shares used in computing basic and diluted net loss
        per common share                                       3,875,811           742,723
                                                            ============      ============

Loss per share                                              $      (1.29)     $      (2.70)
                                                            ============      ============
</TABLE>




                             See accompanying notes.

                                      F-3

<PAGE>


                               HOME DIRECTOR, INC.
           Consolidated Statements of Changes in Shareholders' Equity
                 For the Years Ended December 31, 2003 and 2002


<TABLE>
<CAPTION>

                                                            Total
                                                        Common Stock             Additional                          Accumulated
                                               -----------------------------       Paid-In                           Shareholders'
                                                  Shares           Amount          Capital           Deficit            Equity
                                               ------------     ------------     ------------      ------------      ------------
<S>                                                 <C>         <C>              <C>               <C>               <C>
Balance at December 31, 2001                        616,843     $      6,168     $ 65,160,567      $(64,640,806)     $    525,929
Exercise of common stock options and
         warrants                                     8,902               89           33,347               -              33,436
Compensation related to consulting
   services                                             -                -            218,943               -             218,943
Issuance of common stock warrants in
   connection with bridge note financing                -                -            230,481               -             230,481
Beneficial conversion for convertible debt              -                -            230,481               -             230,481
Issuance of common stock warrants as
   consideration for services                           -                -          1,448,714               -           1,448,714
Issuance of common stock in connection
   with conversion of convertible debt            2,558,041           25,580        9,154,761               -           9,180,341
Recapitalization, net of merger costs               567,681            5,678         (777,998)              -            (772,320)
Net loss                                                -                -                -          (2,009,020)       (2,009,020)
                                               ------------     ------------     ------------      ------------      ------------
Balance at December 31, 2002                      3,751,467     $     37,515     $ 75,699,296      $(66,649,826)     $  9,086,985

Reclassification of merger costs                        -                -             39,784               -              39,784

Expenses related to convertible note                    -                -            (16,595)              -             (16,595)
Issuance of common stock warrants as
   consideration for services                           -                -            144,372               -             144,372
 Issuance of common stock in connection
   with private placement, net                    2,411,604           24,116        1,716,033               -           1,740,149
 Net loss                                               -                -                -          (4,985,576)       (4,985,576)
                                               ------------     ------------     ------------      ------------      ------------
Balance at December 31, 2003                      6,163,071     $     61,631     $ 77,582,890      $(71,635,402)     $  6,009,119
                                               ============     ============     ============      ============      ============
</TABLE>



                             See accompanying notes.


                                      F-4
<PAGE>

                               HOME DIRECTOR, INC.
                      Consolidated Statements of Cash Flows
                 For the Years Ended December 31, 2003 and 2002
<TABLE>
<CAPTION>
                                                                     2003              2002
                                                                 -----------      -----------
<S>                                                              <C>              <C>
Cash flows from operating activities:
    Net loss                                                     $(4,985,576)     $(2,009,020)
    Adjustments to reconcile net loss to net cash used in
      operating activities:
        Depreciation and amortization                                396,967          531,262
        Loss on disposal of assets                                        --           20,490
        Deferred rent                                                  9,251           71,950
        Provision for abandonment of facility                        683,996               --
        Gain from extinguishment of certain liabilities                   --       (4,515,504)
        Non-cash consulting fees                                          --          218,943
        Amortization of discount on convertible debt                      --          460,962
        Issuance of common stock warrants as consideration
           for services                                              144,372        1,448,714
        Non-cash exercise of common stock options and
           warrants                                                       --           33,436
        Changes in operating assets and liabilities, net of
           assets and liabilities acquired:
        Accounts receivable                                         (226,455)          13,679
        Inventories                                                  680,593         (264,696)
        Other current assets                                         (54,762)         131,390
        Accounts payable and accrued expenses                       (650,741)      (1,216,669)
                                                                 -----------      -----------
                Net cash used in operating activities             (4,002,355)      (5,075,063)
                                                                 -----------      -----------
Cash flows from investing activities:
    Purchases of property and equipment                              (97,870)         (58,002)
    Cash acquired in Netword acquisition                                  --          930,673
                                                                 -----------      -----------
                Net cash provided by (used in) investing
                   activities                                        (97,870)         872,671
                                                                 -----------      -----------
Cash flows from financing activities:
    Borrowing under line of credit                                   400,000               --
     (Payments) to reduce line of credit                            (100,000)              --
    Net payments of payables to related parties                     (291,793)      (1,288,399)
    Repayment of capital lease obligations                          (123,017)        (287,476)
    Merger costs                                                          --       (1,407,906)
    Proceeds from issuance of common stock                         1,740,149               --
    Proceeds from (payments of) issuance of convertible debt         (16,595)       9,180,341
                                                                 -----------      -----------
                Net cash provided by financing
                   activities                                      1,608,744        6,196,560
                                                                 -----------      -----------
Net increase (decrease) in cash (carried forward)                $(2,491,481)     $ 1,994,168
                                                                 -----------      -----------
</TABLE>


                             See accompanying notes.



                                      F-5
<PAGE>


                               HOME DIRECTOR, INC.
                      Consolidated Statements of Cash Flows
                 For the Years Ended December 31, 2003 and 2002

<TABLE>
<CAPTION>

                                                                               2003                2002
                                                                           -------------      --------------
<S>                                                                        <C>                <C>
Net increase (decrease) in cash (brought forward)                          $  (2,491,481)     $    1,994,168

Cash and cash equivalents at beginning of year                                 2,557,214             563,046
                                                                           -------------      --------------

Cash and cash equivalents at end of year                                   $      65,733      $    2,557,214
                                                                           =============      ==============


                Supplemental Disclosure of Cash Flow Information
                                                                               2003               2002
                                                                           -------------      --------------
Cash paid during the year for:
    Interest                                                               $      39,347      $    1,159,169
                                                                           =============      ==============


                        Supplemental Schedule of Non-Cash Investing and Financing Activities

Capital lease obligations incurred                                         $      32,549      $      261,428

Reclassification of merger costs                                           $      39,784      $          ---

Issuance of common stock in connection with
    conversion of convertible debt                                         $         ---      $    9,180,341
</TABLE>



                             See accompanying notes.



                                      F-6
<PAGE>


Note 1 -     Organization and Description of Business

Home Director Technologies Inc. (formerly Home Director, Inc. "HDT") was
incorporated on October 13, 1999 under the laws of the State of Delaware. On
December 19, 2002, HDT was acquired by Netword, Inc. (now Home Director, Inc.)
in a merger of Netword's special purpose subsidiary into HDT (the "Merger"). In
the Merger, HDT's stockholders received shares of Netword common stock in
accordance with the exchange ratio described in the merger agreement. Upon
completion of the Merger, HDT's stockholders owned approximately 86% of the
outstanding Netword common stock. The Merger was treated as a reverse merger,
with HDT being the acquirer for accounting purposes. The pre-acquisition
financial statements of HDT became the historical financial statements of the
combined companies. The transaction was accounted for as the issuance of common
stock by HDT for the net monetary assets of Netword, accompanied by a
recapitalization to reflect the legally issued and outstanding shares of the
merged companies. Pre-acquisition stockholders' equity of HDT was retroactively
restated for the equivalent number of shares of Netword received by HDT in the
Merger, with differences between the par value of Netword's and HDT's stock
recorded as paid-in capital. Transaction costs related to the Merger were also
charged directly to equity. The transaction did not result in any additional
goodwill or other intangible assets. All common share and per share amounts for
all periods presented in the accompanying consolidated financial statements have
been retroactively restated to reflect the effect of the Merger. References in
these notes to "the Company" are references to HDT as it existed before the
Merger and the combined companies after the Merger.

The Company, which is headquartered in Livermore, California, commenced
operations on December 8, 1999, subsequent to acquiring the assets of and
assuming certain liabilities of IBM Corporation's Home Director business unit.
The Company operates in a single industry, the provision of infrastructure
components for home networking, and is engaged in the design, sale and
installation of home networking products and services for the new home
construction market.

In January 2003, the Company transferred all of the intellectual property
associated with Netword to Netword's subsidiary, Rabbit Media, Inc., and
subsequently sold all of the stock of Rabbit Media, Inc. to a director and the
former President of Netword. As consideration for the sale, the buyer agreed to
indemnify the Company for future claims related to the Netword intellectual
property in the event that such claims are not discharged by Rabbit Media, Inc.
and to pay the Company 10% of any consideration that it receives from any sale
of the Rabbit Media, Inc. stock within two years after the date of the
agreement.


Note 2 - Summary of Significant Accounting Policies

         Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
of Home Director, Inc. (formerly Netword, Inc.) and its wholly-owned
subsidiaries, HDT and Digital Interiors. All significant intercompany accounts
and transactions have been eliminated in consolidation.

         Use of Estimates

         The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts

                                      F-7


<PAGE>

of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Significant estimates include the
allowance for doubtful accounts and the allowance for obsolete and slow-moving
inventory. Actual results can differ from those estimates.

         Cash and Cash Equivalents

         The Company considers all highly liquid investments purchased with an
original or remaining maturity of less than three months at the date of purchase
to be cash equivalents.

         Inventories

         Inventories consist of finished goods and are stated at the lower of
cost or market. Cost is determined by the weighted average costing method.

         Fair Value of Financial Instruments

         Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, accounts receivable and accrued liabilities
approximate fair value because of their short maturities.

         Credit Risk, Significant Customers and Concentrations

         Financial instruments that potentially subject the Company to credit
risk consist principally of accounts receivable and cash investments.
Receivables are unsecured. The Company provides an allowance for doubtful
accounts equal to the estimated losses expected to be incurred in the collection
of accounts receivable.

         Cash and cash equivalents consist of cash deposits, money market funds
and highly rated commercial paper held at banks. Deposits held at banks may at
times exceed the amount of insurance provided. Generally, these deposits may be
redeemed upon demand and therefore bear minimal risk.

         As of December 31, 2003, three customers accounted for 38% and one
customer accounted for 36% of the accounts receivable balance and annual
revenue, respectively. As of December 31, 2002, two customers accounted for 53%
and 57% of the accounts receivable balance and annual revenue, respectively.

         The Company is not currently dependent upon any single manufacturer and
it believes that alternative manufacturing sources would be readily available
without material delay in the event of the interruption of supplies from any of
its current sources.

         Loss Per Share

         In accordance with SFAS 128, basic and diluted net loss per common
share has been computed using the weighted-average number of shares of common
stock outstanding during the period.

         The effect of options to purchase 477,128 and 101,206 shares of the
Company's common stock outstanding during 2003 and 2002, respectively, was not
included in the computation of diluted net income per share because their effect
would be antidilutive.

             The effect of warrants to purchase 5,769,883 and 584,439 shares of


                                      F-8
<PAGE>

the Company's common stock outstanding during 2003 and 2002, respectively, was
not included in the computation of diluted net income per share because their
effect would be antidilutive.

         Revenue Recognition

         The Company's revenues consist primarily of sales of home networking
products and services. The Company generally recognizes product revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collectibility is reasonably assured. The Company
accrues for sales returns, rebate programs and warranty costs based on its
experience.

         The Company recognizes revenue on installation projects using the
percentage of completion method, based primarily on revenue milestones. On
certain other installation projects, the Company recognizes revenue using the
percentage of completion method, based upon actual costs incurred compared to
total estimated contract costs under the project. Changes to total estimated
contract costs or losses, if any, are recognized in the period in which they are
determined. For these other installation projects, revenue recognized in excess
of amounts billed of $203,808 and $208,648 at December 31, 2003 and 2002,
respectively, is classified as current assets under "Accounts Receivable."
Amounts billed in excess of revenue recognized to date of $17,675 and $25,106 at
December 31, 2003 and 2002, respectively, are classified as current liabilities
under "Accounts Payable and Accrued Expenses."

         Property and Equipment

         Property and equipment is recorded at cost and depreciated using the
straight-line method over their estimated useful lives which generally range
from two to five years. Property and equipment includes certain equipment under
capital leases. These items are depreciated over the shorter of the lease period
or the estimated useful life of the equipment.

         Intangible Assets

In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible
Assets," which is required to be applied for fiscal years beginning after
December 15, 2001. The Company has adopted SFAS 142 as of January 1, 2002. SFAS
142 eliminates the amortization of goodwill and certain other intangible assets.
It also requires the Company to complete a test for impairment of these assets
annually, as well as a transitional goodwill impairment test within six months
from the date of adoption. The results of these tests did not indicate
additional impairment of the Company's recorded goodwill. The Company will
perform its next impairment test as of December 31, 2004.

         The summary of estimated amortization expense for customer lists is as
follows:

              Fiscal Year
                Ending
             December 31,
             ------------

                                      F-9
<PAGE>


                  2004                                 $     21,769
                  2005                                       21,769
                  2006                                       21,769
                  2007                                       21,768
                                                       ------------
                                                       $     87,075
                                                       ============

         Research and Development Costs

         Research and development costs are charged to operations as incurred.

         Advertising Costs

         The Company expenses advertising costs as incurred. The amount of
advertising expensed during the years ended December 31, 2003 and 2002 was
$71,938 and $149,852, respectively.

         Income Taxes

         The Company accounts for income taxes using the liability method which
requires the recognition of deferred tax assets or liabilities for the temporary
differences between the financial reporting and tax bases of the Company's
assets and liabilities and for tax carryforwards at enacted statutory rates in
effect for the years in which the differences are expected to reverse. The
effect on deferred taxes of a change in tax rates is recognized in income in the
period that includes the enactment date. In addition, valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The Company has not recorded any income tax expense or benefit
as a result of its available net operating loss carryforwards, which are fully
reserved by a valuation allowance.

         Accounting for Stock-Based Compensation

         As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), the Company has elected
to account for its stock-based compensation to employees and outside directors,
where appropriate, under the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations and amendments. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.

         Recent Accounting Pronouncements

         In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44 and 65, Amendment of FASB Statement
No. 13 and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," and an amendment of that
statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements." The statement will require gains or losses from extinguishment of
debt to be classified as operating items, as opposed to extraordinary items,
unless they meet the more stringent criteria of APB No. 30. The statement
requires retroactive reclassification for comparative financial statements
issued after adoption.

         The Company began applying SFAS No. 145 in 2003 and, as a result, for
year ended December 31, 2002, has reclassified the extraordinary gain from
extinguishment of certain liabilities to operating income in its comparative


                                      F-10
<PAGE>

financial statements issued after adoption. This reclassification did not have
an impact on previously reported net loss.

         In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of FASB
Statement No. 123," ("SFAS 148"). This statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation." ("SFAS 123") to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, the statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. The amendments to SFAS 123 regarding disclosure are effective
for financial statements for fiscal years ending after December 15, 2002. The
Company will continue to make the appropriate fair value disclosures required.

         At December 31, 2003, the Company has a stock-based compensation plan
(the "Plan"), more fully described in the Company's proxy statement for its 2003
annual meeting of stockholders. The Company accounts for the Plan under the
recognition and measurement principals of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock-based employee
compensation is reflected in net income, as all options granted under the Plan
had an exercise price equal to the market value of the underlying common stock
on the date of grant.

         The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation.


<TABLE>
<CAPTION>

                                                                    Dec 31, 2003       Dec 31, 2002
                                                                 ------------------ ------------------
<S>                                                                   <C>                <C>
Net income (loss), as reported                                        $(4,985,576)       $(2,009,020)
Deduct: Total stock-based employee compensation expense
  determined under fair value based method for all awards, net           (384,400)           (46,330)
  of income tax effects
                                                                 ------------------ ------------------

Pro forma net income (loss)                                           $(5,369,976)       $(2,055,350)
                                                                 ================== ==================

Net income (loss) per share:

         Basic - as reported                                               $(1.29)            $(2.70)
                                                                 ================== ==================

         Diluted - as reported                                             $(1.29)            $(2.70)
                                                                 ================== ==================

         Basic - proforma                                                  $(1.39)            $(2.78)
                                                                 ================== ==================

         Diluted - proforma                                                $(1.39)            $(2.78)
                                                                 ================== ==================
</TABLE>


         Pro forma information regarding net loss is also required by SFAS 123
and has been determined as if the Company had accounted for all of its employee
stock options under the fair value method of that statement. The Company
computes fair value for this purpose using the minimum value option-pricing
model. The weighted-average assumptions used in this model to estimate fair
value and the resulting values are as follows:

                                                       2003            2002
                                                      ------          ------
          Expected dividend yield                        0.0%           0.0%
          Risk-free interest rate                        4.4%          3.98%
          Expected life (in years)                      10.0            3.0
          Weighted-average fair value per share       $ 3.57         $ 1.81



                                      F-11
<PAGE>


         In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
No. 133 on Derivative Instruments and Hedging Activities." This statement amends
and clarifies accounting for derivative instruments, including certain
derivative instruments imbedded in other contracts, and for hedging activities
under SFAS No. 133. This statement is effective for contracts entered into or
modified after June 30, 2003, except as for provisions that relate to SFAS No.
133 implementation issues that have been effective for fiscal quarters that
began prior to June 15, 2003, which should continue to be applied in accordance
with their respective dates. The adoption of this pronouncement did not have a
material effect on the results of operations or financial position.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." This
statement requires that certain financial instruments that, under previous
guidance, issuers could account for as equity, be classified as liabilities in
statements of financial position. Most of the guidance in SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this pronouncement did not have a
material effect on the results of operations or financial position.

Note 3 - Property and Equipment

         At December 31, property and equipment consists of:

                                                     2003             2002
                                                  ----------       ----------
         Computer equipment and software          $  592,009       $  536,781
         Furniture and fixtures                      518,586          518,585
         Office equipment                             36,092           35,453
         Vehicles                                    374,525          341,976
         Leasehold improvements                       44,784           35,331
                                                  ----------       ----------
                                                   1,565,996        1,468,126
         Less:  Accumulated depreciation

           and amortization                        1,285,533          822,798
                                                  ----------       ----------
                                                  $  280,463       $  645,328
                                                  ==========       ==========


         The cost basis of assets acquired under capital leases at December 31,
2003 and 2002 was $374,525 and $341,976, respectively.

Note 4 - Income Taxes

         The Company had no income tax expense for the years ended December 31,
2003 and 2002 due to net losses. At December 31, 2003, the Company had federal
and state net operating loss carryforwards of approximately $64,000,000. The
federal net operating loss carryforwards expire beginning in the year 2020 and
the state net operating loss carryforwards begin to expire in 2016. The deferred
tax asset of $25,643,000 and $24,171,000 relating primarily to differences
between book and tax treatment of net operating losses, was fully reserved as of
December 31, 2003 and 2002. The Company has established a valuation allowance of
$25,643,000 and $24,171,000 for the years ended December 31, 2003 and 2002 to
reduce the deferred tax assets due to the uncertainty surrounding the
realization of such assets. The Tax Reform Act of 1986 contains provisions that
limit the ability to utilize net operating loss carryforwards in the case of
certain events including significant changes in ownership interests. The Company
has not evaluated whether it has undergone an ownership change pursuant to this
act. If such ownership changes are found to exist, the net operating loss
carryforwards as reported below could be


                                      F-12
<PAGE>

significantly limited.

         Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred income taxes are as follows at December
31:

                                                     2003           2002
                                                 -----------     -----------
         Deferred tax assets:
            Net operating loss carryforwards      25,415,000      23,581,000
             Other                                   228,000         590,000
                                                 -----------     -----------
                 Deferred tax assets              25,643,000      24,171,000
         Less:   Valuation allowance              25,643,000      24,171,000
                                                 -----------     -----------
         Net deferred tax assets                 $     -         $    -
                                                 ===========     ===========

         Total tax expense for 2003 and 2002 differs from the amount computed by
applying the federal statutory rate of 34% primarily due to the valuation
allowance established against net operating loss carryforwards. The Company's
effective tax rate was 0% for 2003 and 2002.

Note 5 - Capital Stock

         On April 1, 2002, the Board of Directors approved a one-for-ten reverse
common stock split which was subsequently approved by shareholders as of May 2,
2002. An amendment to the Company's Certificate of Incorporation effecting the
stock split was filed with the State of Delaware on May 2, 2002. All common
share and per common share amounts for all periods presented in the accompanying
consolidated financial statements have been restated to reflect the effect of
this common stock split.

         As of December 31, 2003, the Company has authorized 40,000,000 shares
of common stock with a par value of $0.01. The Company also has authorized
2,000,000 shares of preferred stock, which are undesignated, with a par value of
$0.01.

Note 6 - Stock-Based Compensation

         The Company has reserved a total of 750,000 shares of common stock for
issuance under its stock option plan (the "Plan"). The Plan permits the granting
of incentive stock options and non-qualified stock options. The terms of stock
option grants are determined by the Board of Directors. The Company's stock
options generally vest over three years and have a maximum life of ten years.
Separate from the Plan, the Company has granted stock options and warrants to
consultants as compensation for their consulting services. Shares available for
future issuance under the Plan total 261,492 at December 31, 2003.

         The following summarizes the stock option activity for the years ended
December 31, 2003 and 2002:


                                      F-13
<PAGE>

                                                                  Weighted
                                                                  Average
                                                   Options        Exercise
                                                  Outstanding      Price
                                                  -----------   ------------
         Balance at December 31, 2001                38,010      $ 123.37
         Granted (exercise price = fair value)       20,119          3.63
         Assumption of Netword options               59,342         54.30
         Exercised                                   (7,524)        (8.64)
         Cancelled                                   (8,741)      (155.23)
                                                    -------      --------
         Balance at December 31, 2002               101,206         64.84
         Granted (exercise price = fair value)      542,100          3.72
         Exercised                                       --          --
         Cancelled                                 (166,178)        (9.08)
                                                    -------      --------
         Balance at December 31, 2003               477,128      $  14.82
                                                    =======      ========

         During the year ended December 31, 2003, the Company recorded non-cash
expense of $31,412 for the fair value of stock options granted as consideration
for services provided to the Company. This expense, which equates to a per share
amount of $0.01 for the year ended December 31, 2003, was computed using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used in this model: expected dividend yield of 0%, risk-free interest rate
of 4.4%, expected life of 7.0 years and stock price volatility of 70%.

         During the year ended December 31, 2003, the Company recorded non-cash
expense of $112,960 for the fair value of stock options granted as consideration
for services provided to the Company. This expense, which equates to a per share
amount of $0.03 for the year ended December 31, 2003, was computed using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used in this model: expected dividend yield of 0%, risk-free interest rate
of 4.4%, expected life of 3.0 years and stock price volatility of 70%.

         Selected information regarding stock options as of December 31, 2003
follows:

                                                 Weighted
                                                 Average
                                Number           Remaining        Number
             Exercise         of Options         Life in         of Options
             Prices           Outstanding         Years         Exercisable
             ------           -----------         -----         -----------


           $    2.50              12,500           9.29               6,250
                3.63              16,123           8.33               9,187
                3.75             377,100           9.21             114,033
                7.26                  23           6.99                  23
               50.00              49,591           0.13              49,591
               60.00               1,875           0.64               1,875
               79.83               7,087           7.72                 197
               80.00               7,875           1.19               7,875
              163.28                  96           6.83                  96
              362.84               4,858           7.06               3,129
                           -------------                        -----------
                                 477,128                            192,257
                           =============                        ===========


                                      F-14
<PAGE>

Note 7 - Common Stock Reserved for Future Issuance

         At December 31, 2003, the Company had reserved a total of 6,548,503 of
its authorized 40,000,000 shares of common stock for future issuance as follows:

          Outstanding common stock warrants                     5,769,883
          Possible future issuance of common stock warrants        40,000
          Outstanding stock options                               477,128
          Possible future issuance under stock option plans       261,492
                                                                ---------
                                                                6,548,503
                                                                =========

Note 8 - Leases

             The Company leases certain furniture and equipment under various
non-cancellable capital leases and its office space and certain equipment under
non-cancellable operating leases. Future minimum payments under the
non-cancellable capital and operating leases at December 31, 2003 are as
follows:

     Year                                                 Capital     Operating
    Ending                                                 Leases       Leases
    ------                                                --------    ----------
     2004                                                 $119,267    $  315,397
     2005                                                    9,161       257,326
     2006                                                    1,166       194,986
     2007                                                   -            200,493
     2008                                                   -             33,492
                                                          --------    ----------
    Total minimum payments                                 129,594    $1,001,695
                                                                      ==========
    Less:  Amounts representing interest                     3,204
                                                          --------
    Present value of minimum lease payments                126,390
    Less:  Current portion of capital lease obligations    116,313
                                                          --------
    Long-term portion of capital lease obligations        $ 10,077
                                                          ========

         Rent expense charged to operations during the years ended December 31,
2003 and 2002 was $283,595 and $272,319, respectively.

Note 9 - Related Party Transactions

         Related Party Payables

         Included in payables to related parties at December 31, 2002 is
$291,793, which consists primarily of accrued fees owed to a shareholder at
December 31, 2002.

         Placement and Other Fees

         In February 2002, Donald B. Witmer, former chairman of the Board of
Directors and chief executive officer, Robert Wise, former president, chief
operating officer and director of the Company, and Spencer Trask Venture
Partners, LLC, an affiliate of the Company's financial adviser, Spencer Trask
Ventures, Inc. ("Spencer Trask"), purchased $110,000, $55,000 and $270,000 of
the Company's exchangeable notes, respectively, which included 17,127 detachable
warrants to purchase the Company common stock at $.70 per share. The
exchangeable notes were exchangeable into convertible notes upon satisfying the
minimum sale requirements of the private placement of


                                      F-15
<PAGE>

convertible debt. These notes were exchanged for an equal principal amount of
the Company's convertible notes in May 2002. Of the $705,000 proceeds received
by the Company, $230,481 was assigned as the fair value of the detachable
warrants. The exchangeable notes contained a beneficial conversion feature
determined to be $230,481 at the date of issuance. These amounts were recorded
as an increase to interest expense during the quarter ended June 30, 2002 when
the notes were exchanged into secured convertible notes. In fiscal 2002 (prior
to the merger with Netword), the Company sold $9,200,000 principal amount of its
8% secured convertible notes which were converted into the Company common stock
at a price of $.10 per share immediately prior to the merger with Netword. Upon
the merger, all outstanding shares of the Company (including the shares that
were issued upon conversion of the Company's convertible notes) were exchanged
for shares of Netword common stock at the rate of 36.3 shares of the Company
common stock for each share of Netword common stock.

         In connection with the secured convertible note offering in 2002, the
Company incurred placement fees of approximately $1,369,000, of which a
significant portion was paid to Spencer Trask. In addition, Spencer Trask also
received warrants to purchase 407,323 shares of the Company's common stock at a
price of $3.63 per share (valued at $1,038,549 using the Black-Scholes pricing
model) as part of the placement fee arrangement. Both amounts were recorded as
an increase to interest expense during the year ended December 31, 2002.

         In connection with the private placement of common stock and warrants
in December 2003, the Company incurred placement fees of approximately $227,000,
paid to Spencer Trask. The placement fees were recorded as a reduction to
amounts raised. In addition, Spencer Trask also received warrants to purchase
657,846 shares of the Company's common stock at a price of $1.068 per share and
warrants to purchase 306,795 shares of the Company's common stock at a price of
$1.178 per share as part of the placement fee arrangement.

         On March 28, 2003, the Company entered into a Consulting Agreement
under which it retained Spencer Trask as its non-exclusive financial advisor and
investment banker. Under this agreement, the Company agreed that until March 28,
2004, we would compensate Spencer Trask, in cash and/or warrants to purchase
Common Stock, for advisory services in connection with acquisitions, mergers,
combinations, private and public equity offerings, debt financing and other
similar business transactions. No compensation has been paid under this
agreement.

Note 10 - Employee Benefit Plan

         The Company has a 401(k) plan which covers substantially all employees.
Employees may elect to contribute up to 15% of eligible compensation during any
plan year subject to IRS limits. Matching contributions to the plan are made at
the discretion of the Board of Directors. For the years ended December 31, 2003
and 2002, the Company has not made any matching contributions to the 401(k)
plan.

Note 11 - Gain from Extinguishment of Certain Liabilities

         Throughout early 2002, the Company completed a restructuring of


                                      F-16
<PAGE>

several liabilities through negotiations with vendors for settlements and/or
abatement, which resulted in the satisfaction of approximately $7,000,000 of
debt, accounts payable and other liabilities for total payments of approximately
$2,500,000. In connection with this restructuring of liabilities, the Company
recorded a gain from extinguishment of certain liabilities of approximately
$4,500,000.

Note 12 - Commitments and Contingencies

         The Company is subject to various legal proceedings and claims, which
have arisen in the ordinary course of its business and have not been fully
adjudicated. It is impossible at this time for the Company to predict with any
certainty the outcome of such litigation. However, management is of the opinion,
based upon information presently available, that it is unlikely that any such
liability, to the extent not provided for through insurance or otherwise, would
be material in relation to the Company's consolidated financial position or
results of operations.

         On June 18, 2001, Point West Ventures, LP ("Point West") filed a
complaint against HDT and Spencer Trask Ventures, Inc., the placement agent for
HDT's Series B convertible preferred stock financing in 2000, in New York State
Supreme Court. Point West, one of the investors in that financing, alleged
misrepresentation in connection with that financing and sought rescission of its
$500,000 investment. Subsequent to the filing of the complaint Point West was
placed in receivership and the action against the Company and Spencer Trask was
stayed and remains inactive. The receiver may determine to pursue the action at
some future date.

         The Company has received written notice from a third party alleging
breach of contract and violation of trademark law in connection with the use of
the "Home Director" trademark. The Company has taken what it believes is
appropriate remedial action and does not believe that there is any remaining
basis for a claim by the third party, nor has the third party taken further
action to pursue its claim. Nevertheless, it is possible that the third party
will initiate legal action seeking damages and/or injunctive relief against the
Company. If any such litigation should be resolved adversely, the Company could
be compelled to pay damages and/or royalties to the third party for its use of
the Home Director name and/or limit or discontinue its use as a trademark.

         Michael Liddle is employed by the Company as its chief executive
officer under an employment agreement dated December 31, 2003, which expires on
December 31, 2006, subject to automatic renewal for successive one-year terms
unless terminated by the Company or Mr. Liddle prior to renewal. The agreement
provides for an annual base salary of $216,000, subject to increase in the
discretion of the Board of Directors. Mr. Liddle's annual base salary will
increase to $300,000 if the Company achieves two consecutive profitable
quarters, and he may be entitled to an annual cash bonus of up to 50% of his
base salary, of which 75% is contingent upon the Company's achievement of
certain targeted financial objectives approved by the Board of Directors and 25%
is within the discretion of the Compensation Committee of the Board of
Directors.

         In connection with his employment, Mr. Liddle was granted options to
purchase purchase 420,464 shares of Common Stock at $1.30 per share (the market
price of the Common Stock as of the date of grant), vesting in 36 equal monthly
installments commencing on January 31, 2004. The number of shares of Common
Stock underlying such options represents 3% of the Company's issued and
outstanding Common Stock and shares of Common Stock underlying "in-the-money"
warrants as of January 21, 2004. In addition to this initial grant, Mr. Liddle
is entitled to receive additional stock option grants (up to a total of 1.75% of
the outstanding Common Stock and "in-the-money" warrants) at the end of 2004 and
again at the end of 2005, if the Company achieves certain targeted financial
objectives approved by the Board of Directors for each of those years.

         Under the terms of the Company's Amended and Restated Stock Option
Plan, if


                                      F-17
<PAGE>

Mr. Liddle's employment is terminated by the Company for cause, or if he
terminates his employment without the Company's consent, his unexercised options
will immediately expire.

         If Mr. Liddle's employment is terminated without cause, he will be
entitled to receive his base salary (as paid to him during the preceding 12
months or any shorter period of his employment), plus any unpaid bonus earned in
the calendar year preceding such termination. If Mr. Liddle has been employed
for at least six months during the calendar year in which his employment is
terminated without cause, he will be eligible to receive a pro-rata portion of
any bonus earned during such year, based upon the Company's achievement of
applicable performance targets and subject to the discretion of the Compensation
Committee of the Board of Directors. Also, in case of termination of Mr.
Liddle's employment by the Company without cause, (i) all of his unvested stock
options will become and remain immediately exercisable until expiration of their
respective terms and (ii) he will be entitled to receive benefits under the
Company's employee benefit plans for 12 months after the termination date or
until he obtains employee benefits in connection with new employment.

         Upon termination of his employment, Mr. Liddle will be subject to a two
year restriction on certain activities that compete with the Company.

         Donald B. Witmer was employed as our Chairman and Chief Executive
Officer under an employment agreement that expired on December 31, 2003, at
which time he resigned from these positions. All options to purchase shares of
Common Stock granted to Mr. Witmer before the merger expired on December 31,
2003. On January 16, 2003, the Company granted Mr. Witmer options to purchase
180,000 shares of Common Stock at an exercise price of $3.75 per share, of which
60,000 have vested and remain exercisable through March 31, 2004 and the other
120,000 terminated upon his resignation. Mr. Witmer resigned as a director of
the Company on February 12, 2004.

         On March 3, 2004, Robert N. Wise resigned as the President, Chief
Operating Officer and a director of the Company and entered into a Separation
and Release Agreement with the Company. Under the terms of this agreement, the
Company retained Mr. Wise as an independent consultant for a transition period
of 30 days and the Company's obligation to employ Mr. Wise as its President and
Chief Operating Officer under his Employment Agreement was terminated. The
Company agreed to pay Mr. Wise (i) $10,000 during the transition period, (ii)
$50,000 upon his resignation, (iii) 2% of the Company's first year revenues
derived from certain contracts and projects, and (iv) 1% of the Company's second
year revenues derived from such contracts and projects. In addition, the Company
agreed to continue to provide Mr. Wise with benefits under the Company's
employee benefit plans until December 31, 2004 and to pay the remaining
installments due under an automobile lease and the balance of the purchase price
of the leased automobile upon expiration of the lease. The Company and Mr. Wise
exchanged releases. Pursuant to his employment agreement, Mr. Wise remains
subject to certain restrictions on his post-employment activities for up to 12
months after his resignation.

         All options to purchase shares of Common Stock granted to Mr. Wise
before the merger expired upon his resignation. On January 16, 2003, the Company
granted Mr. Wise options to purchase 180,000 shares of Common Stock at an
exercise price of $3.75 per share. Upon Mr. Wise's resignation, 60,000 of such
expired unexercised and under the terms of the Separation and Release Agreement,
120,000 of such options are exercisable through March 3, 2005.

Note 13- Provision for Abandonment of Facility

         In June 2003, the Company exited its Durham, North Carolina warehouse
facility and relocated the operations to its Livermore, California facility. The
Company agreed to a settlement of $657,891 to be repaid over four years. As a
result, the Company recorded a discounted provision of $590,000 related to the
remaining lease commitment associated with the Durham facility. In December
2003, the Company determined that certain fixed assets located in North Carolina
would not be used and wrote off $93,966. There were no severance costs
associated with this abandonment.


                                      F-18
<PAGE>

                Balance at                                         Balance at
                 12/31/02          Provision       Payments         12/31/03
                ----------         ---------       --------        ----------
Facility
 Abandonment          ---           $590,000      $(68,657)         $521,343

         Approximately $127,369 of the balance at December 31, 2003 is recorded
as part of accounts payable and accrued expenses and $393,974 is recorded as
other long-term liabilities.

Note 14 - Liquidity

         As a result of our continuing losses, particularly during the fourth
quarter of 2003, the Company faces an acute shortage of working capital. The
Company currently owes $300,000 under a line of credit with Venture Banking
Group and, as a result of the Company's failure to comply with certain financial
covenants under the agreement governing such line of credit, an event of default
currently exists. Effective as of March 23, 2004 the Company entered into a
Factoring Agreement with Pacific Business Funding (described below), which
provides for advances equal to 65% of the Company's eligible accounts
receivable, as determined by Pacific Business Funding, subject to maximum total
advances of $750,000.

         On April 1, 2004 (see Note 16), the Company was advanced $450,000 under
the Factoring Agreement and approximately $300,000 of this advance was used to
repay the amounts outstanding under the Company's line of credit with Venture
Banking Group, thereby terminating the agreement governing such line of credit.


         Historically the Company's operations have never been self-sustaining,
and it has financed its continuing operations through a series of private
offerings of debt and equity and by obtaining advances under the Loan Agreement.
The Company cannot predict when, if ever, its business will produce sufficient
cash to reduce or eliminate its dependence on external financing as its primary
source of working capital.

Private Placement

         In December 2003 and January 2004, the Company raised gross proceeds of
$3,226,315 in a private placement of equity units consisting of 3,470,679 shares
of Common Stock and three-year warrants to purchase 3,470,679 shares of Common
Stock at exercise prices ranging from $1.068 to $1.298 per share. Net proceeds
of $1,740,000 was received in 2003 and is reflected in the balance sheet as of
December 31, 2003, and the remaining proceeds of $860,000 was received in 2004.
The Company paid the placement agent $369,421 as cash compensation and for
reimbursement of its non-accountable expenses and issued the placement agent
five-year warrants to purchase 1,388,272 shares of Common Stock at exercise
prices ranging from $1.068 to $1.298 per share.

Loan Agreement

         In July 2003, the Company entered into a Loan and Security Agreement
with Venture Banking Group, a Division of Cupertino National Bank, providing for
a revolving line of credit of up to $1,000,000 at any time outstanding. Advances
under the Loan Agreement are limited to 80% of the Company's eligible
receivables (as defined) and bear interest at the lender's prime rate plus 0.5%
(4.5% as of December 31, 2003), subject to a minimum rate of 4.75%. Amounts
owing under the Loan Agreement are secured by substantially all of the Company's
assets. As of December 31, 2003, the balance outstanding under the Loan
Agreement was $300,000.

         In October 2003 and again in February 2004, the lender notified the
Company of the occurrence of an event of default under the Loan Agreement as a
result of its failure to comply with certain financial covenants. Although the
lender has not exercised its default remedies (which include the right to demand
immediate repayment of the outstanding balance), it is not providing further
advances.


                                      F-19
<PAGE>


         As a result of the recurring losses from operations, default of the
line of credit, dependence upon financing operations through a series of
private offerings of debt and equity and the uncertainty about the adequacy of
funding during 2004, our independent auditors have included an explanatory
paragraph in their report on the accompanying financial statements indicating
there is substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

Note 15 - Notes Payable

         Notes payable consist of $125,000 remaining on a note payable to an
individual that matured on August 24, 2001 and is currently in default. The note
charged interest at 10% and accrued interest of $21,000 was recorded at December
31, 2001. No interest was accrued or paid during 2002 or 2003.


Note 16 - Subsequent Events

Factoring Agreement

         Effective as of March 23, 2004, the Company entered into a Factoring
Agreement with Pacific Business Funding, a division of Greater Bay Bank, N.A.
(the "Bank"). The Factoring Agreement provides for the Bank's purchase of our
eligible accounts receivable, with recourse, for a purchase price of 65% of such
accounts (each, an "advance"), subject to maximum advances of $750,000, and is
secured by substantially all of the Company's assets. The amounts advanced by
the Bank are subject to a finance fee equal to the Bank's prime rate plus 6% per
annum (10% as of April 1, 2004).

         Any advances under the Factoring Agreement are within the complete
discretion of the bank. In addition, the Factoring Agreement requires that the
Company raise proceeds of at least $2.0 million in an equity financing before
May 1, 2004 and if the Company does not raise such proceeds in an equity
financing by such date, the finance fee will be increased by 5% per annum. The
term of the Factoring Agreement expires on May 5, 2005, but is terminable at
will by the bank or the Company at any time. The Company currently has no
commitments with respect to any equity financing and there can be no assurance
that we will be able to raise any equity financing by May 1, 2004 or thereafter.

         On April 1, 2004 the Company was advanced $450,000 under the Factoring
Agreement and approximately $300,000 of this advance was used to repay the
amount outstanding under the line of credit with Venture Banking Group, thereby
terminating the agreement governing such line of credit.


                                      F-20