|  |
|--|
|  |
|  |
|  |
|  |

UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM10-QSB

 Quarterly report under Section 13 or15(d) of the Securities Exchange Act of 1934

For thequarterly period ended June 30, 2004

Transition report under Section 13 or 15(d) of the Exchange Act Forthe transition period from________________   to   ________________

Commission file number 333-86873

HOME DIRECTOR, INC.

(ExactName of Small Business Issuer in Its Charter)

|                                                              |  |                                      |  |  |  |  |
|--------------------------------------------------------------|--|--------------------------------------|--|--|--|--|
| Delaware                                                     |  | 52-2143430                           |
| (Stateor other jurisdiction ofincorporation or organization) |  | (I.R.S. Employer Identification No.) |
|                                                         |  |                                 |
| 2525Collier Canyon Road, Livermore, California               |  | 94551                                |
| (Address of Principal Executive Offices)                     |  | (ZipCode)                            |
|                                                              |

Issuer's telephonenumber:     (925) 373-0438

Check whether theissuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90days. Yes  ; No 

APPLICABLE ONLY TOCORPORATE ISSUERS

State the number of shares outstandingof each of the issuer's classes of common equity, as of thelatest practicable date. 16,035,715 as of August 13, 2004

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

    

|  |
|--|
|  |
|  |
|  |
|  |

----

TABLE OFCONTENTS

|            |  |                                                                               |  |        |        |        |  |  |  |  |
|------------|--|-------------------------------------------------------------------------------|--|--------|--------|--------|--|--|--|--|
|       |  |                                                                          |  | Page   |
| PART I     |  |                                                                          |  |
| Item 1.    |  | FinancialStatements                                                           |  |   | 3      |   |
| Item 2.    |  | Management's Discussion and Analysis or Plan ofOperation                      |  |   | 15     |   |
| Item 3.    |  | Controls andProcedures                                                        |  |   | 20     |   |
|       |  |
| PARTII     |  |
| Item 1.    |  | Legal Proceedings                                                             |  |   | 22     |   |
| Item 2.    |  | Changes in Securities andSmall Business Issuer Purchases of Equity Securities |  |   | 22     |   |
| Item 3.    |  | Defaults Upon SeniorSecurities                                                |  |   | 23     |   |
| Item 4.    |  | Submissionof Matters to a Vote of Security Holders                            |  |   | 23     |   |
| Item 5.    |  | Other Information                                                             |  |   | 24     |   |
| Item 6.    |  | Exhibits and Reports on Form 8-K                                              |  |   | 24     |   |
|       |  |
| Signatures |  |                                                                          |  |   | 25     |   |
| Exhibits   |  |                                                                          |  |   |   |   |
|            |

CautionaryNote Concerning Forward-Looking Statements

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

Forward-looking statements are not guarantees of performance. Theyinvolve risks, uncertainties and assumptions. Future results may differmaterially from those expressed in the forward-looking statements. Manyof the factors that will determine these results are beyond the abilityof Home Director to control or predict. Stockholders are cautioned notto put undue reliance on any forward-looking statements. For thosestatements, Home Director claims the protection of the safe harbor forforward-looking statements contained in the Private SecuritiesLitigation Reform Act of 1995.

The identification in thisdocument of factors that may affect future performance and the accuracyof forward-looking statements is meant to be illustrative and by nomeans exhaustive. All forward-looking statements should be evaluatedwith the understanding of their inherentuncertainty.

2

----

PART I

ITEM 1. FINANCIAL STATEMENTS

HOME DIRECTOR, INC.Consolidated Balance Sheets June 30, 2004 and December 31,2003(Unaudited)

|                                                                                                                                                                          |  |               |             |             |  |        |             |         |  |  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|---------------|-------------|-------------|--|--------|-------------|---------|--|--|
| ASSETS                                                                                                                                                                   |  |
|                                                                                                                                                                     |  | June 30, 2004 |             | Dec 31,2003 |
| Currentassets:                                                                                                                                                           |  |          |        |        |  |   |        |    |
| Cash and cashequivalents                                                                                                                                                 |  | $             | 430,900     |        |  | $      | 65,733      |    |
| Accounts receivable, net ofallowances                                                                                                                                    |  |          | 2,920,161   |        |  |   | 1,452,934   |    |
| Inventories, net ofallowances                                                                                                                                            |  |          | 501,341     |        |  |   | 818,421     |    |
| Othercurrentassets                                                                                                                                                       |  |          | 301,299     |        |  |   | 195,128     |    |
| Total currentassets                                                                                                                                                      |  |          | 4,153,701   |        |  |   | 2,532,216   |    |
| Propertyand equipment, net                                                                                                                                               |  |          | 411,815     |        |  |   | 280,463     |    |
| Customer lists, net of accumulatedamortization                                                                                                                           |  |          | 74,700      |        |  |   | 87,075      |    |
| Goodwill, net of accumulatedamortization                                                                                                                                 |  |          | 5,825,652   |        |  |   | 5,825,652   |    |
|                                                                                                                                                                     |  | $             | 10,465,868  |        |  | $      | 8,725,406   |    |
| **LIABILITIES ANDSHAREHOLDERS'EQUITY**                                                                                                                                   |  |          |        |        |  |   |        |    |
| Currentliabilities:                                                                                                                                                      |  |          |        |        |  |   |        |    |
| Accountspayable and accruedexpenses                                                                                                                                      |  | $             | 3,165,393   |        |  | $      | 1,770,922   |    |
| Payablesto relatedparties                                                                                                                                                |  |          | 48,250      |        |  |   | —     |    |
| Bankborrowings                                                                                                                                                           |  |          | 702,140     |        |  |   | 300,000     |    |
| Notespayable                                                                                                                                                             |  |          | 125,000     |        |  |   | 125,000     |    |
| Current portion of capital leaseobligations                                                                                                                              |  |          | 69,172      |        |  |   | 116,313     |    |
| Total currentliabilities                                                                                                                                                 |  |          | 4,109,955   |        |  |   | 2,312,235   |    |
| Capital lease obligations, less currentportion                                                                                                                           |  |          | 37,728      |        |  |   | 10,077      |    |
| Other LongTerm Liabilities                                                                                                                                               |  |          | 326,380     |        |  |   | 393,975     |    |
| Commitments and contingencies (Note6)                                                                                                                                    |  |          |        |        |  |   |        |    |
| Shareholders'equity:                                                                                                                                                     |  |
| Preferred stock, $0.01 parvalueAuthorized – 2,000,000 shares No shares issued oroutstanding                                                                        |  |          | —     |        |  |   | —     |    |
| Commonstock, $0.01 par valueAuthorized - 40,000,000 sharesIssuedand outstanding – 11,024,184 and 6,163,071 shares as of June 30,2004 and Dec 31, 2003,respectively |  |          | 110,242     |        |  |   | 61,631      |    |
| Additionalpaid-in capital                                                                                                                                                |  |          | 80,293,219  |        |  |   | 77,582,890  |    |
| Accumulated deficit                                                                                                                                                      |  |          | (74,411,656 | )      |  |   | (71,635,402 | )  |
| Total shareholders' equity                                                                                                                                               |  |          | 5,991,805   |        |  |   | 6,009,119   |    |
|                                                                                                                                                                     |  | $             | 10,465,868  |        |  | $      | 8,725,406   |    |
|                                                                                                                                                                          |

See accompanyingnotes to these financial statements.

3

----

HOME DIRECTOR, INC.ConsolidatedStatements of Operations For the Three & Six Month PeriodsEnded June 30, 2004 and 2003 (Unaudited)

|                                                                    |  |                           |            |                         |  |                    |            |                    |  |        |            |         |  |        |            |         |  |  |
|--------------------------------------------------------------------|--|---------------------------|------------|-------------------------|--|--------------------|------------|--------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                               |  | Forthe three months ended |            | For the six monthsended |
|                                                               |  | June 30,2004              |            | June 30, 2003           |  | June 30, 2004      |            | June 30,2003       |
| Revenue                                                            |  | $                         | 2,444,128  |                    |  | $                  | 2,496,909  |               |  | $      | 4,492,245  |    |  | $      | 4,960,985  |    |
| Costs andexpenses:                                                 |  |
| Cost of revenue                                                    |  |                      | 1,796,290  |                    |  |               | 1,407,865  |               |  |   | 3,528,244  |    |  |   | 2,854,497  |    |
| General and administrative                                         |  |                      | 1,027,090  |                    |  |               | 718,247    |               |  |   | 1,779,307  |    |  |   | 1,362,565  |    |
| Sales and marketing                                                |  |                      | 819,610    |                    |  |               | 662,194    |               |  |   | 1,413,759  |    |  |   | 1,303,439  |    |
| Research and development                                           |  |                      | 165,640    |                    |  |               | 55,524     |               |  |   | 292,851    |    |  |   | 154,702    |    |
| Depreciation and amortization                                      |  |                      | 69,889     |                    |  |               | 100,218    |               |  |   | 123,957    |    |  |   | 194,889    |    |
| Provision for abandonment of facility                              |  |                      | —    |                    |  |               | 590,000    |               |  |   | —    |    |  |   | 590,000    |    |
| Total costs andexpenses                                            |  |                      | 3,878,519  |                    |  | $                  | 3,534,048  |               |  |   | 7,138,118  |    |  | $      | 6,460,092  |    |
| Income (Loss) from operations                                      |  | $                         | (1,434,391 | )                  |  | $                  | (1,037,139 | )             |  | $      | (2,645,873 | )  |  | $      | (1,499,107 | )  |
| Other expense,net                                                  |  |                      | (107,800   | )                  |  |               | (15,730    | )             |  |   | (130,381   | )  |  |   | (13,197    | )  |
| Net income(loss)                                                   |  | $                         | (1,542,191 | )                  |  | $                  | (1,052,869 | )             |  | $      | (2,776,254 | )  |  | $      | (1,512,304 | )  |
| Comprehensive income(loss)                                         |  | $                         | (1,542,191 | )                  |  | $                  | (1,052,869 | )             |  | $      | (2,776,254 | )  |  | $      | (1,512,304 | )  |
| Net income (loss) percommon share — basic anddiluted:        |  |
| Shares used in computing basic netincome (loss) per common share   |  |                      | 7,637,776  |                    |  |               | 3,751,467  |               |  |   | 7,301,941  |    |  |   | 3,751,467  |    |
| Shares used in computingdiluted net income (loss) per common share |  |                      | 7,637,776  |                    |  |               | 3,751,467  |               |  |   | 7,301,941  |    |  |   | 3,751,467  |    |
| Net income (loss) pershare                                         |  |
| Basic:                                                             |  | $(.20)          |            | $(.28)        |  | $(.38)   |            | $(.40)   |
| Diluted:                                                           |  | $(.20)          |            | $(.28)        |  | $(.38)   |            | $(.40)   |
|                                                                    |

Seeaccompanying notes to these financial statements.

4

----

HOME DIRECTOR, INC.ConsolidatedStatements of Cash FlowsFor the Six Months Ended June 30, 2004 and2003(Unaudited)

|                                                                                    |  |        |            |         |  |        |            |         |  |  |
|------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                               |  | 2004   |            | 2003    |
| Cash flows from operatingactivities:                                               |  |
| Net loss                                                                           |  | $      | (2,776,254 | )  |  | $      | (1,512,304 | )  |
| Adjustments toreconcile net loss to net cash used in operatingactivities:          |  |
| Depreciation and amortization                                                      |  |   | 123,957    |    |  |   | 194,890    |    |
| Provisionfor abandonment of facility                                               |  |   | —    |    |  |   | 590,000    |    |
| Changes in operating assetsand liabilities, net of assets and liabilitiesacquired: |  |
| Accounts receivable                                                                |  |   | (1,467,227 | )  |  |   | (724,407   | )  |
| Inventories                                                                        |  |   | 317,080    |    |  |   | (44,123    | )  |
| Other currentassets                                                                |  |   | (106,171   | )  |  |   | (20,838    | )  |
| Accountspayable and accrued expenses                                               |  |   | 1,471,337  |    |  |   | (397,689   | )  |
| Other long-term liabilities                                                        |  |   | (67,595    | )  |  |   | —    |    |
| Net cash used in operatingactivities                                               |  |   | (2,504,873 | )  |  |   | (1,914,471 | )  |
| Cashflows from investing activities:                                               |  |
| Purchases ofproperty and equipment                                                 |  |   | (167,477   | )  |  |   | (81,862    | )  |
| Net cash used in investingactivities                                               |  |   | (167,477   | )  |  |   | (81,862    | )  |
| Cash flows from financingactivities:                                               |  |
| Net proceeds from bank borrowings                                                  |  |   | 402,140    |    |  |   | —    |    |
| Netreceipts (payments) of payables to related parties                              |  |   | 48,250     |    |  |   | (291,793   | )  |
| Repayment of capital leaseobligations, net                                         |  |   | (94,947    | )  |  |   | (53,209    | )  |
| Proceeds from convertible notesand issuance of common stock, net of issuancecosts  |  |   | 2,682,074  |    |  |   | —    |    |
| Net cash provided by (usedin)financing activities                                  |  |   | 3,037,517  |    |  |   | (345,002   | )  |
| Net increase (decrease) in cash andcash equivalents                                |  |   | 365,167    |    |  |   | (2,341,335 | )  |
| Cash and cash equivalents atbeginning of period                                    |  |   | 65,733     |    |  |   | 2,557,214  |    |
| Cash and cash equivalents at end ofperiod                                          |  | $      | 430,900    |    |  | $      | 215,879    |    |
| Supplemental Disclosureof Cash FlowInformation                                     |  |
|                                                                               |  | 2004   |            | 2003    |
| Cash paid during theperiod                                                         |  |
| Interest                                                                           |  | $      | 31,084     |    |  | $      | 17,316     |    |
| Non-cash investing and financingactivities:                                        |  |
| Conversion of convertible notesto common stock                                     |  | $      | 784,402    |    |  | $      | —    |    |
| Capital lease obligationsincurred                                                  |  | $      | 75,457     |    |  | $      | —    |    |
|                                                                                    |

Seeaccompanying notes to these financial statements.

5

----

HomeDirector, Inc.

Condensed Notes to ConsolidatedFinancial Statements(Unaudited)

Note 1 — Basis of Presentation and Description ofBusiness

Home Director Technologies Inc. (formerly HomeDirector, Inc. "HDT") was incorporated onOctober 13, 1999 under the laws of the State of Delaware. On December19, 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'sstockholders received shares of Netword common stock in accordance withthe exchange ratio described in the merger agreement. Upon completionof the Merger, HDT's stockholders owned approximately 86%of the outstanding Netword common stock. The Merger was treated as areverse merger, with HDT being the acquirer for accounting purposes.The pre-acquisition financial statements of HDT became the historicalfinancial statements of the combined companies. The transaction wasaccounted for as the issuance of common stock by HDT for the netmonetary assets of Netword, accompanied by a recapitalization toreflect the legally issued and outstanding shares of the mergedcompanies. Pre-acquisition stockholders' equity of HDT wasretroactively restated for the equivalent number of shares of Networdreceived by HDT in the Merger, with differences between the par valueof Netword's and HDT's stock recorded as paid-in capital.Transaction costs related to the Merger were also charged directly toequity. The transaction did not result in any additional goodwill orother intangible assets. All common share and per share amounts for allperiods presented in the accompanying consolidated financial statementshave 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 combinedcompanies after the Merger.

The Company, which is headquarteredin Livermore, California, commenced operations on December 8, 1999,subsequent to acquiring the assets of and assuming certain liabilitiesof IBM Corporation's Home Director business unit. The Companyprovides infrastructure components for home networking and is engagedin the design, sale and installation of home networking products andservices for the new home construction market.

Summary ofSignificant Accounting Policies

Principles ofConsolidation

The accompanying consolidated financialstatements include the accounts of Home Director, Inc. (formerlyNetword, Inc.) and its wholly-owned subsidiaries, HDT and DigitalInteriors, Inc. All significant intercompany accounts and transactionshave been eliminated in consolidation.

Unaudited InterimFinancial Statements

The accompanying unaudited interimfinancial statements have been prepared in accordance with generallyaccepted accounting principles in the United States of America andapplicable Securities and Exchange Commission (SEC) regulations forinterim financial information. These financial statements are unauditedand, in the opinion of management, include all adjustments necessary topresent fairly the balance sheets, statements of operations andstatements of cash flows for the periods presented in accordance withaccounting principles generally accepted in the United States. Certaininformation and footnote disclosures normally included in financialstatements prepared in accordance with generally accepted accountingprinciples in the United States of America have been condensed oromitted pursuant to SEC rules and regulations. Operating results forthe six months ended June 30, 2004 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2004.These financial statements and notes should be read in conjunction withthe financial statements and notes thereto for the year ended December31, 2003 included in the Company's annual report on Form 10-KSBfiled with the SEC on April 2, 2004. The balance sheet at December 31,2003 has been derived from the audited consolidated financialstatements of the Company.

6

----

HomeDirector, Inc.

Condensed Notes to ConsolidatedFinancial Statements**—(continued)**(Unaudited)

Use of Estimates

The preparationof financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires managementto make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period.Significant estimates include the allowance for doubtful accounts andthe allowance for obsolete and slow-moving inventory. Actual resultscan differ from those estimates.

Cash and Cash Equivalents

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

Inventories

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

Fair Value of Financial Instruments

Carryingamounts of certain of the Company's financial instruments,including cash and cash equivalents, accounts receivable, accruedliabilities, note payable and bank borrowings approximate fair valuebecause of their short maturities.

Credit Risk, SignificantCustomers and Concentrations

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

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 insuranceprovided. Generally, these deposits may be redeemed upon demand andtherefore bear minimal risk.

As of June 30, 2004, one customeraccounted for 14% of the accounts receivable balance and onecustomer accounted for 22% of the revenue for the six monthsended June 30, 2004. As of December 31, 2003, three customers accountedfor 38% and one customer accounted for 36% of theaccounts receivable balance and annual revenue, respectively.

The Company is not currently dependent upon any single manufacturerand it believes that alternative manufacturing sources would be readilyavailable without material delay in the event of the interruption ofsupplies from any of its current sources.

Income (Loss) PerShare

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

The effect of options to purchase 2,215,960 and 643,306 shares ofthe Company's common stock outstanding during the three and sixmonth periods ended June 30, 2004 and 2003, respectively, were notincluded in the computation of diluted net loss per share because theireffect would be anti-dilutive (i.e. increases the number of shares inthe earnings per share calculations).

7

----

HomeDirector, Inc.

Condensed Notes to ConsolidatedFinancial Statements**—(continued)**(Unaudited)

The effect of warrants to purchase14,814,960 and 584,439 shares of the Company's common stockoutstanding during the three and six month periods ended June 30, 2004and 2003, respectively, were not included in the computation of dilutednet loss per share because their effect would be anti-dilutive (i.e.increases the number of shares in the earnings per sharecalculations).

Revenue Recognition

The Company'srevenues consist primarily of sales of home networking products andservices. The Company generally recognizes product revenue whenpersuasive evidence of an arrangement exists, delivery has occurred,the fee is fixed or determinable, and collectibility is reasonablyassured. The Company accrues for sales returns, rebate programs andwarranty costs based on historical information.

The Companyrecognizes revenue on installation projects using the percentage ofcompletion method, based primarily on revenue milestones. On certainother installation projects, the Company recognizes revenue using thepercentage of completion method, based upon actual costs incurredcompared to total estimated contract costs under the project. Changesto total estimated contract costs or losses, if any, are recognized inthe period in which they are determined. For these other installationprojects, revenue recognized in excess of amounts billed of $111,737and $203,808 at June 30, 2004 and December 31, 2003, respectively, isclassified as current assets under "AccountsReceivable." Amounts billed in excess of revenuerecognized to date of $14,002 and $17,675 at June 30, 2004 and December31, 2003, respectively, are classified as current liabilities under"Accounts Payable and Accrued Expenses."

Property and Equipment

Property and equipment is recordedat cost and depreciated using the straight-line method over theirestimated 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 theestimated useful life of the equipment.

Intangible Assets

In June 2001, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards("SFAS") No. 142, "Goodwill andOther Intangible Assets," which was required to be appliedfor fiscal years beginning after December 15, 2001. The Company adoptedSFAS 142 as of January 1, 2002. SFAS 142 eliminated the amortization ofgoodwill and certain other intangible assets. It also required theCompany to complete a test for impairment of these assets annually, aswell as a transitional goodwill impairment test within six months fromthe date of adoption. The results of these tests did not indicateadditional impairment of the Company's recorded goodwill. TheCompany does not believe there have been any events that have occurredthat would cause it to assess impairment of goodwill. For example, theCompany has successfully completed a bridge financing and privateplacement raising $5.2 million of gross proceeds (See Note 7 -Liquidity). The Company will perform its next annual impairment test asof December 31, 2004.

Research and Development Costs

Research and development costs are charged to operations asincurred.

Advertising Costs

The Company expensesadvertising costs as incurred. The amount of advertising expensedduring the six months ended June 30, 2004 and 2003 was $47,933 and$43,618, respectively.

8

----

HomeDirector, Inc.

Condensed Notes to ConsolidatedFinancial Statements**—(continued)**(Unaudited)

Income Taxes

The Company accountsfor income taxes using the liability method which requires therecognition of deferred tax assets or liabilities for the temporarydifferences between the financial reporting and tax bases of theCompany's assets and liabilities and for tax carryforwards atenacted statutory rates in effect for the years in which thedifferences are expected to reverse. The effect on deferred taxes of achange in tax rates is recognized in income in the period that includesthe enactment date. In addition, valuation allowances are establishedwhen necessary to reduce deferred tax assets to the amounts expected tobe realized. The Company has not recorded any income tax expense orbenefit as a result of its available net operating loss carryforwards,which are fully reserved by a valuation allowance.

Accountingfor Stock-Based Compensation

As permitted by Statement ofFinancial Accounting Standards No. 123, "Accounting forStock-Based Compensation" ("SFAS123"), the Company has elected to account for itsstock-based compensation to employees and outside directors, whereappropriate, under the provisions of Accounting Principles BoardOpinion No. 25, "Accounting for Stock Issued toEmployees" ("APB 25") andrelated interpretations and amendments. Under APB 25, because theexercise price of the Company's employee stock options equals themarket price of the underlying stock on the date of grant, nocompensation expense is recognized.

At June 30, 2004, theCompany has a stock-based compensation plan (the"Plan"), more fully described in theCompany's proxy statement for its 2004 annual meeting ofstockholders. The Company accounts for the Plan under the recognitionand measurement principals of APB Opinion No. 25, Accounting for StockIssued to Employees, and related interpretations. No stock-basedemployee compensation is reflected in net income, as all optionsgranted under the Plan had an exercise price equal to the market valueof the underlying common stock on the date of grant.

Thefollowing table illustrates the effect on net income and earnings pershare if the Company had applied the fair value recognition provisionsof SFAS 123 to stock-based employee compensation.

**(Inthousands, except per share amounts)**

|                                                                                                                                         |  |              |            |             |  |        |            |         |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------|--|--------------|------------|-------------|--|--------|------------|---------|--|--|
|                                                                                                                                    |  | June 30,2004 |            | June30,2003 |
| Net loss, as reported                                                                                                                   |  | $            | (2,776,254 | )      |  | $      | (1,512,304 | )  |
| Deduct: Totalstock-based employee compensation expense determined under fair valuebased method for all awards, net of income taxeffects |  |         | (133,552   | )      |  |   | (124,273   | )  |
| Pro forma net loss                                                                                                                      |  | $            | (2,909,806 | )      |  | $      | (1,636,577 | )  |
| Netloss per share:                                                                                                                      |  |
| Basic — asreported                                                                                                                |  | $            | (0.38      | )      |  | $      | (0.40      | )  |
| Diluted — as reported                                                                                                             |  | $            | (0.38      | )      |  | $      | (0.40      | )  |
| Basic — proforma                                                                                                                  |  | $            | (0.40      | )      |  | $      | (0.44      | )  |
| Diluted — proforma                                                                                                                |  | $            | (0.40      | )      |  | $      | (0.44      | )  |
|                                                                                                                                         |

Pro forma information regarding net loss isalso required by SFAS 123 and has been determined as if the Company hadaccounted for all of its employee stock options under the fair valuemethod of that statement. The Company computes fair value for thispurpose using the minimum value option-pricing model. Theweighted-average assumptions used in this model to estimate fair valueand the resulting values are as follows:

9

----

HomeDirector, Inc.

Condensed Notes to ConsolidatedFinancial Statements**—(continued)**(Unaudited)

|                                      |  |        |      |         |  |        |      |         |  |  |
|--------------------------------------|--|--------|------|---------|--|--------|------|---------|--|--|
|                                 |  | 2004   |      | 2003    |
| Expected dividendyield               |  |   | 0.0  | %  |  |   | 0.0  | %  |
| Risk-free interestrate               |  |   | 4.4  | %  |  |   | 4.4  | %  |
| Expected life (in years)             |  |   | 10.0 |    |  |   | 10.0 |    |
| Weighted-average fair value pershare |  | $      | 2.58 |    |  | $      | 3.57 |    |
|                                      |

As of June 30,2004, the Company had reserved a total of 2,488,620 shares of commonstock for issuance under the Plan. The Plan permits the granting ofincentive stock options and non-qualified stock options. The terms ofstock option grants are determined by the Compensation Committee of theBoard of Directors. Options granted to employees under the Plangenerally vest over three years and generally expire ten years afterthe grant date. Shares available for future issuance under the Plantotal 272,660 at June 30, 2004.

The following summarizes thestock option activity as of June 30, 2004:

|                                      |  |                    |           |                              |  |        |         |         |  |  |
|--------------------------------------|--|--------------------|-----------|------------------------------|--|--------|---------|---------|--|--|
|                                 |  | OptionsOutstanding |           | WeightedAverageExercisePrice |
| Balance at December 31, 2002         |  |               | 101,206   |                         |  | $      | 64.84   |    |
| Grant (exercise price = fair value)  |  |               | 542,100   |                         |  |   | 3.72    |    |
| Exercised                            |  |               | —   |                         |  |   | — |    |
| Cancelled                            |  |               | (166,178  | )                       |  |   | (9.08   | )  |
| Balance at December 31, 2003         |  |               | 477,128   |                         |  | $      | 14.82   |    |
| Granted (exerciseprice = fair value) |  |               | 1,935,467 |                         |  |   | 0.99    |    |
| Exercised                            |  |               | —   |                         |  |   | — |    |
| Cancelled                            |  |               | (196,635  | )                       |  |   | (26.72  | )  |
| Balance at June 30, 2004             |  |               | 2,215,960 |                         |  | $      | 1.69    |    |
|                                      |

Selected information regarding stock optionsas of June 30, 2004 follows:

|        |  |                                                         |        |                            |  |                                     |           |                              |  |        |        |        |  |        |         |        |  |  |
|--------|--|---------------------------------------------------------|--------|----------------------------|--|-------------------------------------|-----------|------------------------------|--|--------|--------|--------|--|--------|---------|--------|--|--|
|   |  | Range ofExercise PricesAndWeightedAverageExercisePrices |        | NumberofOptionsOutstanding |  | WeightedAverageRemainingLifeinYears |           | Number of OptionsExercisable |
|   |  | $                                                       | 0.74   |                       |  |                                | 1,059,500 |                         |  |   | 9.92   |   |  |   | 190,000 |   |
|   |  |                                                    | 1.30   |                       |  |                                | 875,967   |                         |  |   | 9.54   |   |  |   | 70,077  |   |
|   |  |                                                    | 2.50   |                       |  |                                | 12,500    |                         |  |   | 8.79   |   |  |   | 12,500  |   |
|   |  |                                                    | 3.63   |                       |  |                                | 11,024    |                         |  |   | 7.83   |   |  |   | 9,876   |   |
|   |  |                                                    | 3.75   |                       |  |                                | 244,600   |                         |  |   | 8.54   |   |  |   | 193,792 |   |
|   |  |                                                    | 7.26   |                       |  |                                | 23        |                         |  |   | 5.50   |   |  |   | 23      |   |
|   |  |                                                    | 60.00  |                       |  |                                | 1,875     |                         |  |   | 0.14   |   |  |   | 1,875   |   |
|   |  |                                                    | 79.83  |                       |  |                                | 197       |                         |  |   | 7.22   |   |  |   | 197     |   |
|   |  |                                                    | 80.00  |                       |  |                                | 7,875     |                         |  |   | 0.69   |   |  |   | 7,875   |   |
|   |  |                                                    | 163.28 |                       |  |                                | 96        |                         |  |   | 6.33   |   |  |   | 96      |   |
|   |  |                                                    | 362.84 |                       |  |                                | 2,303     |                         |  |   | 6.56   |   |  |   | 2,303   |   |
|   |  | $                                                       | 1.69   |                       |  |                                | 2,215,960 |                         |  |   |   |   |  |   | 488,614 |   |
|        |

Note2 — Capital Stock

On April 1, 2002, the Company'sBoard of Directors approved a one-for-ten reverse common stock splitwhich was subsequently approved by the Company's stockholders asof May 2, 2002. An 

10

----

HomeDirector, Inc.

Condensed Notes to ConsolidatedFinancial Statements**—(continued)**(Unaudited)

amendment to the Company's Certificateof Incorporation effecting the stock split was filed with the State ofDelaware on May 2, 2002. All common share and per common share amountsfor all periods presented in the accompanying consolidated financialstatements have been restated to reflect the effect of this commonstock split.

As of June 30, 2004, the Company had authorized40,000,000 shares of common stock with a par value of $0.01. TheCompany also had authorized 2,000,000 shares of preferred stock, whichare undesignated, with a par value of$0.01.

11

----

HomeDirector, Inc. Condensed Notes to Consolidated FinancialStatements(Unaudited)

Note3 - Common Stock Reserved for Future Issuance

At June 30, 2004,the Company had reserved a total of 17,343,580 of its authorized40,000,000 shares of common stock for future issuance as follows:

|                                                  |  |        |            |        |  |  |
|--------------------------------------------------|--|--------|------------|--------|--|--|
| Outstandingcommon stock warrants                 |  |   | 14,814,960 |   |
| Possiblefuture issuance of common stock warrants |  |   | 40,000     |   |
| Outstanding stock options                        |  |   | 2,215,960  |   |
| Possible future issuance under stock optionplan  |  |   | 272,660    |   |
|                                             |  |   | 17,343,580 |   |
|                                                  |

Note 4 - RelatedParty Transactions

Related Party Payables

DuringFebruary and March 2004, one of the Company's executive officersmade a series of loans to the Company in the aggregate principal amountof $46,000. Commencing in July 2004, the Company began repaying theloans on a bi-weekly basis. As of August  16, 2004, theoutstanding balance is $11,000. These loans are payable on demand andhave an interest rate of 10% per annum.

Placement andOther Fees

In connection with the private placement ofcommon stock and warrants in June 2004, the Company incurred placementfees of approximately $271,000, paid to Spencer Trask Ventures, Inc.The placement fees were recorded as a reduction to amounts raised. Inaddition, Spencer Trask also received warrants to purchase 1,520,816shares of the Company's common stock at a price of $0.74 pershare as part of the placement fee arrangement.

In connectionwith the private placement of common stock and warrants in December2003 and January 2004, the Company incurred placement fees ofapproximately $420,000, paid to Spencer Trask Ventures, Inc. Theplacement fees were recorded as a reduction to amounts raised. Inaddition, Spencer Trask also received warrants to purchase 657,846shares of the Company's common stock at a price of $1.068 pershare, warrants to purchase 306,795 shares of the Company'scommon stock at a price of $1.178 per share and warrants to purchase423,630 shares of the Company's common stock at a price of $1.298per share as part of the placement fee arrangement.

On March 28,2003, the Company entered into a Consulting Agreement under which itretained Spencer Trask as its non-exclusive financial advisor andinvestment banker. Under this agreement, the Company agreed that untilMarch 28, 2004, it would compensate Spencer Trask, in cash and/orwarrants to purchase Common Stock, for advisory services in connectionwith acquisitions, mergers, combinations, private and public equityofferings, debt financing and other similar business transactions. Nocompensation was paid under this agreement.

BridgeFinancing

In May 2004, certain officers, directors andaffiliates of the Company (including a family member of a director andcertain affiliates of Spencer Trask Ventures, Inc.) purchased $565,000aggregate principal amount of the Company's convertible notes andwarrants to purchase an aggregate of 565,000 shares of theCompany's common stock as part of a bridge financing totaling$1,015,000. In June 2004, the entire $565,000 principal amount of thenotes purchased by these officers, directors and affiliates wasautomatically converted into units in the Company's privateplacement at a conversion price of $0.59 per unit. See Note 7,Liquidity.

Note 5- Provision for Abandonment of Facility

In June 2003, the Company exited its Durham, North Carolinawarehouse facility and relocated the operations to its Livermore,California facility. The Company agreed to a settlement of $657,891 tobe 

12

----

HomeDirector, Inc. Condensed Notes to Consolidated FinancialStatements(Unaudited)

repaid over four years. As a result, theCompany recorded a discounted provision of $590,000 related to theremaining lease commitment associated with the Durham facility. InDecember 2003, the Company determined that certain fixed assets locatedin North Carolina would not be used and wrote off $93,966. There wereno severance costs associated with this abandonment.

|                     |  |                    |         |           |  |          |         |                  |  |   |         |         |  |   |         |        |  |  |
|---------------------|--|--------------------|---------|-----------|--|----------|---------|------------------|--|---|---------|---------|--|---|---------|--------|--|--|
|                |  | Balanceat 12/31/03 |         | Provision |  | Payments |         | Balanceat6/30/04 |
| FacilityAbandonment |  | $                  | 521,343 |      |  |     | — |             |  | $ | (62,415 | )  |  | $ | 458,928 |   |
|                     |

AtJune 30, 2004 $132,548 of the balance is recorded as part of accountspayable and accrued expenses and $326,380 is recorded as otherlong-term liabilities.

Note 6 – Commitments andContingencies

The Company is subject to various legalproceedings and claims, which have arisen in the ordinary course of itsbusiness and have not been fully adjudicated. It is impossible at thistime for the Company to predict with any certainty the outcome of suchlitigation. However, management is of the opinion, based uponinformation presently available, that it is unlikely that any suchliability, to the extent not provided for through insurance orotherwise, would be material in relation to the Company'sconsolidated financial position or results of operations.

On June 18, 2001, Point West Ventures, LP("Point West") filed a complaint against HDTand Spencer Trask Ventures, Inc., the placement agent for HDT'sSeries B convertible preferred stock financing in 2000, in New YorkState Supreme Court. Point West, one of the investors in thatfinancing, alleged misrepresentation in connection with that financingand sought rescission of its $500,000 investment. Subsequent to thefiling of the complaint Point West was placed in receivership and theaction against the Company and Spencer Trask was stayed and remainsinactive. The receiver may determine to pursue the action at somefuture date.

In June 2003, the Company has receivedwritten notice from a third party alleging breach of contract andviolation of trademark law in connection with the use of the"Home Director" trademark. The Company hastaken what it believes is appropriate remedial action and does notbelieve that there is any remaining basis for a claim by the thirdparty, nor has the third party taken further action to pursue itsclaim. Nevertheless, it is possible that the third party will initiatelegal action seeking damages and/or injunctive relief against theCompany. If any such litigation should be resolved adversely, theCompany could be compelled to pay damages and/or royalties to the thirdparty for its use of the Home Director name and/or limit or discontinueits use as a trademark.

On March 3, 2004, Robert N.Wise resigned as the President, Chief Operating Officer and a directorof the Company and entered into a Separation and Release Agreement withthe Company. Under the terms of this agreement, the Company retainedMr. Wise as an independent consultant for a transition period of 30days and the Company's obligation to employ Mr. Wise as itsPresident and Chief Operating Officer under his Employment Agreementwas terminated. The Company agreed to pay Mr. Wise (i) $10,000 duringthe transition period, (ii) $50,000 upon his resignation, (iii)2% of the Company's first year revenues derived fromcertain contracts and projects, and (iv) 1% of theCompany's second year revenues derived from such contracts andprojects. In addition, the Company agreed to continue to provide Mr.Wise with benefits under the Company's employee benefit plansuntil December 31, 2004 and to pay the remaining installments due underan automobile lease and the balance of the purchase price of the leasedautomobile upon expiration of the lease. The Company and Mr. Wiseexchanged releases. Pursuant to his employment agreement, Mr. Wiseremains subject to certain restrictions on his post-employmentactivities for up to 12 months after his resignation. All options topurchase shares of Common Stock granted to Mr. Wise before the mergerexpired upon his resignation. On January 16, 2003, the Company grantedMr. Wise options to purchase 180,000 shares of Common Stock at anexercise price of $3.75 per share. Upon Mr. Wise's resignation,60,000 of such options expired unexercised, and under the terms of theSeparation and Release Agreement, 120,000 of such options areexercisable through March 3, 2005. In the first quarter of 2004, theCompany recorded a charge of approximately $130,000 related to thissettlement.

13

----

HomeDirector, Inc. Condensed Notes to Consolidated FinancialStatements(Unaudited)

Note 7 – Liquidity

Historically the Company's operations have never beenself-sustaining, and it has financed its continuing operations througha series of private offerings of debt and equity and by asset-basedborrowings from commercial lenders. The Company cannot predict when, ifever, its business will produce sufficient cash to reduce or eliminateits dependence on external financing as its primary source of workingcapital.

As a result of the Company's financing efforts inMay, June and July 2004 involving the successful completion of thebridge financing and the private placement referred to below, itsworking capital position improved considerably. The Company believesits working capital resources (including sums available under presentand potential secured credit facilities) are adequate to meet itsworking capital needs at least through June 30, 2005. Nevertheless, ifthe Company were to continue to incur losses at the rate accrued duringthe first two quarters of 2004, it would be required to seek additionalfinancing which would be difficult if not impossible to obtain.

Line of Credit

As of March 31, 2004, the Company owed$300,000 under a line of credit with Venture Banking Group, and, as aresult of the Company's failure to comply with certain financialcovenants applicable to such line of credit, an event of defaultexisted. On April 1, 2004, the Company obtained advances of $450,000under the Factoring Agreement (described below) and appliedapproximately $300,000 of the advances to repay the line of credit,which was then terminated.

Factoring Agreement

Asof June 30, 2004, the Company owed approximately $702,000 under aFactoring Agreement with Pacific Business Funding, a division ofGreater Bay Bank, N.A. ("Pacific"). TheFactoring Agreement provides for borrowings on the Company'seligible accounts receivable, with recourse to the Company, in theamount of 65% of the amounts owing on such accounts (each, an"advance"), subject to maximum advances of$750,000, and is secured by substantially all of the Company'sassets. The making of advances under the Factoring Agreement is withinthe complete discretion of Pacific. Amounts advanced and uncollectedare subject to a finance fee equal to Pacific's prime rate plus6% per annum, which is subject to increase by an additional5% per annum in the event of a default. In connection with theFactoring Agreement, the Company issued to Pacific's parentwarrants to purchase 8,333 shares of the Company's common stockand recorded a $6,977 charge to interest expense in the first quarterof 2004.

We have notified Pacific of a default under theFactoring Agreement attributable to our failure to pay Federalwithholding taxes for certain periods. Although we are seeking tosettle these withholding tax liabilities and Pacific has continued tomake advances to us under the Factoring Agreement, we can provide noassurance that Pacific will not exercise its default remedies, whichinclude termination of further advances and acceleration of repaymentof all outstanding advances. If Pacific exercises its default remedies,we would need to seek alternative financing which might not beavailable on terms satisfactory to us or at all.

ForbearanceAgreement

Under the Factoring Agreement, the Company agreedto raise at least $2 million in an equity financing before May 1, 2004.On May 6, 2004 the Company and Pacific entered into a ForbearanceAgreement under which the Company acknowledged that its failure toraise the required amount constituted an event of default and Pacificagreed to refrain from exercising its remedies with respect to theevent of default until July 1, 2004 and to waive the event of defaultif the Company raised the required amount in an equity financing bythat date. The Company satisfied this condition as a result of theBridge Financing and Private Placement (described below.)

14

----

HomeDirector, Inc. Condensed Notes to Consolidated FinancialStatements(Unaudited)

May 2004 Bridge Financing and June andJuly 2004 Private Placement

In May 2004, the Companyprivately sold $1,015,000 face amount of its 8% convertiblenotes and warrants to purchase shares of its Common Stock to accreditedinvestors, including certain of its directors and officers andaffiliates, for gross proceeds of $1,015,000. The notes matured on June16, 2004, upon automatic conversion into investment units of the kindsold in the first equity financing of the Company. Purchasers of thenotes received three-year warrants to purchase an aggregate of1,015,000 shares of Common Stock at an exercise price of $1.00 pershare. The Company recorded non-cash interest expense of approximately$77,000 associated with the warrants issued with the convertible notessold during the second quarter of 2004.

In June and July 2004the Company raised gross proceeds of $5.2 million ($2.2 million as ofJune 30, 2004) through the private placement of equity units at a priceof $0.59 per unit, including proceeds from the conversion of $1,015,000principal of notes issued in the Bridge Financing. Net proceeds of $1.8million were received during the second quarter and are reflected inthe balance sheet as of June 30, 2004 and net proceeds of approximately$2.6 million were received in July 2004. The units comprise a total of8,813,569 shares of common stock and warrants to purchase an additional8,813,569 shares at $0.74 per share. Spencer Trask Ventures Inc. wasthe placement agent for the transaction and received cash compensationof $657,000, including reimbursement for its non-accountable expenses,and warrants to purchase 3,525,427 shares of common stock at $0.74 pershare.

December 2003 and January 2004 PrivatePlacement

In December 2003 and January 2004, the Companyraised gross proceeds of $3,226,315 in a private sale of equity unitsconsisting of 3,470,679 shares of Common Stock and three-year warrantsto purchase 3,470,679 shares of Common Stock at exercise prices rangingfrom $1.068 to $1.298 per share. Net proceeds of $1,740,000 werereceived in 2003 and are reflected in the balance sheet as of December31, 2003, and the remaining proceeds of $860,000 were received in 2004.Spencer Trask was the placement agent for the transaction and received$369,421 as cash compensation and reimbursement of non-accountableexpenses and five-year warrants to purchase 1,388,272 shares of CommonStock at exercise prices ranging from $1.068 to $1.298 per share. Allof the shares of Common Stock included in the units sold in thistransaction (including the shares underlying the warrants) wereregistered for resale under our registration statement on Form SB-2,which was declared effective by the Securities and Exchange Commissionon March 19, 2004.

ITEM 2. MANAGEMENT'S DISCUSSION ANDANALYSIS OR PLAN OF OPERATION

The following discussion ofour financial condition and results of operations should be readtogether with the financial statements and related notes includedelsewhere in this report. Some of the statements in this section thatare not historical facts are forward-looking statements. You arecautioned that the forward-looking statements contained in this sectionare estimates and predictions, and that our actual results could differmaterially from those anticipated in the forward-looking statements dueto risks, uncertainties or actual events differing from the assumptionsunderlying these statements. The risks, uncertainties, and assumptionsinclude, but are not limited to, those disclosed in our annual reporton Form 10-KSB for our fiscal year ended December 31, 2003.

Overview

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

15

----

Our revenues consist primarily of revenues from the sale of homenetworking products and services. Home networking hardware is soldprimarily to distributors for use by integrators who install thehardware in homes throughout the United States and Canada. We alsoprovide installation services, primarily to the new home constructionmarket, in California, Florida, Colorado and Texas.

As ofJanuary 1, 2004, Donald Witmer resigned as our Chairman and ChiefExecutive Officer and was succeeded as Chief Executive Officer byMichael Liddle. In Feburary 2004, following the resignation of RobertN. Wise as President and Chief Operating Officer, Mr. Liddle assumedthe additional title of President and was appointed a director. OnJanuary 7, 2004, Jerry Steckling was appointed Vice President, AdvancedTechnology and Chief Technology Officer and in March 2004, we hiredScott Garrison as Vice President, Sales and Tom Wilky as VicePresident, Marketing.

Operations in Colorado andTexas

During the fourth quarter of 2003, we opened an officein Colorado Springs, Colorado, and during the first quarter of 2004, weopened an office in Houston, Texas. The primary function of these newoffices is to provide quality network installation services to homebuilders in the adjacent areas.

Sears Agreement

OnApril 17, 2003, we entered into an agreement with Sears, Roebuck &Co., pursuant to which we are currently expanding a strategic marketingrelationship with Sears called the Sears Connected Home program. Thisprogram began as a pilot program in Florida in 2002 and is beingimplemented by Sears, with our support, on a national basis. While weexpect this program to have a longer term positive impact on our salesof hardware, the lead time for new sales is significant and the impacton our revenues thus far has not been material.

Research anddevelopment expenses consist primarily of salaries and relatedpersonnel expenses, subcontracted research expenses, and technologylicense expenses. As of June 30, 2004, all research and developmentcosts had been expensed as incurred. We believe that continuedinvestment in research and development is critical to attaining ourstrategic objectives, and we expect such expenses to increase duringthe remainder of 2004.

General and administrative expensesconsist primarily of expenses for executive, finance and administrativepersonnel, professional fees, and other general corporate expenses. Aswe add personnel and incur additional costs related to the growth ofour business, general and administrative expenses will alsoincrease.

Critical Accounting Policies

The preparationof financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results coulddiffer from those estimates. We believe the following criticalaccounting policies, which have been discussed by senior management andour audit committee, have significant effect in the preparation of ourconsolidated financial statements.

Revenue Recognition.We generally recognize product revenue when persuasive evidence of anarrangement exists, delivery has occurred, the fee is fixed ordeterminable and collectibility is reasonably assured. The Companyaccrues for sales returns, rebate programs and warranty costs based onits experience. We also recognize revenue using the percentage ofcompletion method on installation projects, primarily by comparingcontractual billing milestones with total contract value. Accountingfor revenue from services, payment of upfront fees, and achievement ofcontract-specific milestones involves management making assessments ofbusiness conditions and estimates regarding timing and cost of workassociated with the revenue. Over time, these estimates may be adjustedbased on then-current circumstances, such as changes in contractamounts, resulting in adjustment to revenues. Changes to totalestimated contract costs or losses, if any, are recognized in theperiod in which they are identified.

16

----

Allowance for Doubtful Accounts.Accounts receivable are unsecured and we maintain allowances fordoubtful accounts for estimated losses from customers' inabilityto make payments. We assess each account that is more than 90 daysdelinquent or others when information known to us indicates amounts maybe uncollectible; in order to estimate the appropriate level of theallowance, we consider such factors as historical bad debts, currentcustomer credit worthiness, changes in customer payment patterns andany correspondence with the customer. In 2003, we experienced losses,or recorded provisions for potential losses, totaling $373,000, or4% of revenues. If the financial condition of our customers wereto deteriorate and impair their ability to make payments, additionalallowances might be required in future periods. No material chargesassociated with doubtful accounts were incurred by the Company in thefirst half of 2004

Inventory. We present inventory valueat the lower of cost or market and net of valuation allowances forexcess and obsolete units. Establishing this reserve requires estimatesof sales volumes and pricing. In 2003, we recorded expenses fordisposal of or provision for obsolete inventory, totaling $956,000, or10% of revenues. The obsolete inventory was acquired primarilyin 2000 and 2001, and we anticipate that the level of these expensesand write-downs will be lower in future periods. To the extent that weare not able to correctly anticipate these trends, additional reservesmay be required in future periods. No material charges associated withinventory were incurred by the Company in the first half of 2004.

Intangible Assets - Goodwill. Intangible assets include costsin excess of net assets acquired ("goodwill")and other purchased intangibles. The carrying amount of goodwill isreviewed annually. If this review indicates that goodwill will not berecoverable, the carrying amount of the goodwill will be reduced to itsestimated fair value. This requires us to estimate such factors asfuture sales volumes and costs of business produced by theseintangibles. To the extent that we are not able to correctly anticipatethese trends, additional adjustments to estimated fair value may berequired in future periods.

Valuation of Warrants and OtherEquity Instruments. We have entered, and may continue to enter,into transactions whereby we grant warrants to purchase stock tonon-employees. These transactions sometimes require us to determine thefair value of non-exchange traded instruments. The development of thesefair values requires significant judgment and estimates by management.We disclose the principal assumptions used in determining these fairvalues in our financial statements and we believe these assumptions arereasonable. However, the use of different valuation models, orassumptions differing from ours, could cause materially differentvalues to be assigned these instruments and could have a significantimpact, positive or negative, on our reported results of operations.During 2003, we issued warrants in connection with our bank line ofcredit and certain agreements to provide investor relation services.Expenses relating to the value of those warrants totaled $144,000. Inthe first quarter of 2004, we issued warrants to purchase shares of ourcommon stock in connection with our Factoring Agreement. Expensesrelating to the value of these warrants totaled $7,000. In the secondquarter of 2004, we issued warrants to purchase shares of our commonstock in connection with our Bridge Financing. Expenses relating to thevalue of these warrants totaled $77,000 and are recorded as interestexpense in the second quarter of 2004.

Results ofOperations

Three and Six Month Periods Ended June 30, 2004and 2003. Revenues were $2,444,000 in the second quarter of 2004,compared to $2,497,000 in the second quarter of 2003, a decrease of2%. Revenues were $4,492,000 in the first half of 2004, comparedto $4,961,000 in the first half of 2003, a decrease of 9%. Thereductions were primarily attributable to reduced hardware sales in2004 (from $1,360,000 during the first half of 2003 to $749,000 duringthe first half of 2004, or a reduction of 45%), partially offsetby increased services revenues (from $3,601,000 during the first halfof 2003 to $3,743,000 during the first half of 2004, or an increase of4%.) Hardware sales accounted for 21% of revenues in thesecond quarter of 2004, as compared to 22% in the second quarterof 2003 and accounted for 17% of revenues in the first half of2004, as compared to 27% in the first half of 2003. The declinein hardware sales reflects several factors, including our strategicdecisions to concentrate on cost reduction measures in the second halfof 2003 and the sale of hardware primarily through the still-developingSears Connected Home program, as well as intense price competition.Hardware sales 

17

----

grew from $238,000 in the first quarter of2004 to $511,000 in the second quarter of 2004 and we believe thatsales for our hardware products will continue to grow in the secondhalf of 2004.

On the services side, revenues increased by4% in the first half of 2004 as compared to the first half of2003. During 2004, we have signed a number of new contracts to providenetworking solutions to home builders and, during the fourth quarter of2003 and the first quarter of 2004, we opened offices in ColoradoSprings and Houston to provide networking solutions in those areas. Inthe first seven months of 2004, sales orders for home installationservices increased by 38% as compared to the same period in2003. We believe that our total revenues in the second half of 2004will compare favorably with our total revenues from the second half of2003.

Total costs and expenses were $3,879,000 in the secondquarter of 2004, compared to $3,534,000 in the second quarter of 2003.The increase in 2004 was primarily attributable to increased cost ofrevenues of $388,000, general and administrative expenses of $309,000,sales and marketing expenses of $158,000 and research and developmentexpenses of $110,000, offset in part by the provision for abandonmentof facility of $590,000 which was recorded in 2003. Cost of revenueswas $1,796,000, or 73% of revenues, in the second quarter of2004 as compared to $1,408,000, or 56% of revenues, in 2003.Cost of revenues in 2004 was adversely affected by decreased averagehardware selling prices and a change in the mix of the Company'srevenues. Total costs and expenses were $7,138,000 in the first half of2004, compared to $6,460,000 in the first half of 2003. The increase in2004 was primarily attributable to increased cost of revenues of$674,000, general and administrative expenses of $416,000, research anddevelopment expenses of $138,000 and sales and marketing expenses of$111,000, offset in part by the provision for abandonment of facilityof $590,000 which was recorded in 2003. Cost of revenues was$3,528,000, or 79% of revenues, in the first half of 2004 ascompared to $2,854,000, or 58% of revenues, in 2003. Cost ofrevenues in 2004 was adversely affected by decreased average hardwareselling prices and a change in the mix of the Company'srevenues.

We expect our research and development expenses tocontinue to increase, due primarily to our hiring of additionalengineering personnel and increased licensing costs as we undertake toimprove and broaden our product offerings. From time to time, we mayincur additional professional fees and other costs in connection withfuture attempts to expand our product offerings. We also expect oursales and marketing expenses to continue to increase, due primarily toour hiring of additional sales and marketing personnel, expandedmarketing efforts undertaken to increase brand recognition and demandfor our products and increased commission expenses caused by expectedincreases in revenues.

Net interest expense increased in 2004($108,000 in the second quarter and $130,000 for the first half of theyear) compared to 2003 ($3,000 of net interest income in the secondquarter and $13,000 of net interest expense for the first half of theyear) primarily due to warrants we issued the second quarter of 2004 topurchase shares of our common stock in connection with our BridgeFinancing. Expenses relating to the value of these warrants totaled$77,000 and are recorded as interest expense in the second quarter of2004.

Our net loss in the second quarter of 2004 wasapproximately $1,542,000, as compared to a net loss of approximately$1,035,000 in 2003. Our net loss for the six months ended June 30, 2004was approximately $2,776,000, as compared to net loss of approximately$1,512,000 in the same period in 2003. The increase in the net loss forthe second quarter in 2004 and the six months ended June  30,2004 is primarily due to the decline in gross margin and the increasesin general and administrative expenses as discussed above.

Liquidity and Capital Resources

Historically our operationshave never been self-sustaining, and we have financed our continuingoperations through a series of private offerings of debt and equity andby asset-based borrowings from commercial lenders. We cannot predictwhen, if ever, our business will produce sufficient cash to reduce oreliminate our dependence on external financing as our primary source ofworking capital.

As a result of our financing efforts in May,June and July 2004 involving the successful completion of the bridgefinancing and the private placement referred to below, our workingcapital position 

18

----

improved considerably. We believe our workingcapital resources (including sums available under present and potentialsecured credit facilities) are adequate to meet our working capitalneeds at least through June 30, 2005. Nevertheless, if we continue toincur losses at the rate accrued during the first two quarters of 2004,we would be required to seek additional financing which would bedifficult if not impossible to obtain.

Line of Credit

As of March 31, 2004, we owed $300,000 under a line of credit withVenture Banking Group, and, as a result of our failure to comply withcertain financial covenants applicable to such line of credit, an eventof default existed. On April 1, 2004, we obtained advances of $450,000under the Factoring Agreement (described below) and appliedapproximately $300,000 of the advances to repay the line of credit,which was then terminated.

Factoring Agreement

Asof June 30, 2004, we owed approximately $702,000 under a FactoringAgreement with Pacific Business Funding, a division of Greater BayBank, N.A. ("Pacific"). The FactoringAgreement provides for borrowings on the Company's eligibleaccounts receivable, with recourse to the Company, in the amount of65% of the amounts owing on such accounts (each, an"advance"), subject to maximum advances of$750,000, and is secured by substantially all of the Company'sassets. The making of advances under the Factoring Agreement is withinthe complete discretion of Pacific. Amounts advanced and uncollectedare subject to a finance fee equal to Pacific's prime rate plus6% per annum, which is subject to increase by an additional5% per annum in the event of a default. In connection with theFactoring Agreement, we issued to Pacific's parent warrants topurchase 8,333 shares of our common stock and recorded a $6,977 chargeto interest expense in the first quarter of 2004. We are currently indiscussions with other commercial institutions to obtain a newborrowing facility, to be used for working capital purposes. There canbe no assurances, however, that we will be successful in obtaining anew borrowing facility at terms acceptable to us or at all.

Wehave notified Pacific of a default under the Factoring Agreementattributable to our failure to pay federal withholding taxes forcertain periods. Although we are seeking to settle these withholdingtax liabilities and Pacific has continued to make advances to us underthe Factoring Agreement, we can provide no assurance that Pacific willnot exercise its default remedies, which include termination of furtheradvances and acceleration of repayment of all outstanding advances. IfPacific exercises its default remedies, we would need to seekalternative financing which might not be available on termssatisfactory to us or at all.

Forbearance Agreement

Under the Factoring Agreement, we agreed to raise at least $2million in an equity financing before May 1, 2004. On May 6, 2004 weentered into a Forbearance Agreement with Pacific under which weacknowledged that our failure to raise the required amount constitutedan event of default and Pacific agreed to refrain from exercising itsremedies with respect to the event of default until July 1, 2004 and towaive the event of default if we raised the required amount in anequity financing by that date. We satisfied this condition as a resultof the bridge financing and private placement (describedbelow.)

Related Party Payables

During February andMarch 2004, one of our executive officers made a series of loans to usin the aggregate principal amount of $46,000. Commencing in July 2004,we began repairing the loans on a bi-weekly basis. As of August16, 2004, the outstanding balance is $11,000.

May 2004 BridgeFinancing and June and July 2004 Private Placement

In May2004, we privately sold $1,015,000 face amount of our 8%convertible notes and warrants to purchase shares of our Common Stockto accredited investors, including certain of our directors andofficers and affiliates, for gross proceeds of $1,015,000. The notesmatured on June 18, 2004, upon automatic conversion into investmentunits in the first closing of our private placement. Purchasers of thenotes received three-year warrants to purchase an aggregate of1,015,000 shares of Common Stock 

19

----

at an exercise price of $1.00 per share. TheCompany recorded non-cash interest expense of approximately $77,000associated with the warrants issued with the convertible notes soldduring the second quarter of 2004.

In June and July 2004 weraised gross proceeds of $5.2 million ($2.2 million as of June 30,2004) through the private placement of equity units at a price of $0.59per unit, including proceeds from the conversion of $1,015,000principal of notes issued in the Bridge Financing. Net proceeds of $1.8million were received during the second quarter and are reflected inthe balance sheet as of June 30, 2004 and net proceeds of approximately$2.6 million were received in July 2004. The units comprise a total of8,813,569 shares of common stock and warrants to purchase an additional8,813,569 shares at $0.74 per share. Spencer Trask Ventures Inc. wasthe placement agent for the transaction and received cash compensationof $657,000, including reimbursement for its non-accountable expenses,and warrants to purchase 3,525,427 shares of common stock at $0.74 pershare.

December 2003 and January 2004 PrivatePlacement

In December 2003 and January 2004, we raised grossproceeds of $3,226,315 in a private sale of equity units consisting of3,470,679 shares of Common Stock and three-year warrants to purchase3,470,679 shares of Common Stock at exercise prices ranging from $1.068to $1.298 per share. Net proceeds of $1,740,000 were received in 2003and are reflected in the balance sheet as of December 31, 2003, and theremaining proceeds of $860,000 were received in 2004. Spencer Trask wasthe placement agent for the transaction and received $369,421 as cashcompensation and reimbursement of non-accountable expenses andfive-year warrants to purchase 1,388,272 shares of Common Stock atexercise prices ranging from $1.068 to $1.298 per share. All of theshares of Common Stock included in the units sold in this transaction(including the shares underlying the warrants) were registered forresale under our registration statement on Form SB-2, which wasdeclared effective by the Securities and Exchange Commission on March19, 2004.

Cash

As of June 30, 2004, we hadapproximately $431,000 of cash, cash equivalents, investments orinterest receivable. Cash increased in the first half of 2004 by$365,000. Approximately $2,776,000 was used to fund our operating loss,an increase in accounts receivable ($1,467,000) and purchases ofproperty and equipment ($243,000), offset in part by net proceeds fromthe issuance of Common Stock and warrants ($2,682,000), an increase inaccounts payable and accrued expenses ($1,471,000), net bank borrowings($402,000) and a decrease in inventories ($317,000).

Net cashused in operating activities was $2,505,000 for the first half of 2004.Net cash used for the period in operating activities was primarily forincreases in accounts receivable and funding of operating losses,offset in part by increases in accounts payable and accrued expensesand a decrease in inventories.

Net cash used in investingactivities was $243,000 for the first half of 2004. Cash used for theperiod in investing activities was primarily to purchase property andequipment.

Net cash provided by financing activities was$3,113,000 for the first half of 2004. Net cash provided during theperiod by financing activities resulted primarily from the proceedsreceived from the private sale of units of Common Stock and warrants(see "Private Placements" above) and net bankborrowings.

Off Balance Sheet Arrangements

We have nooff balance sheet arrangements.

ITEM 3. CONTROLS ANDPROCEDURES

CEO and CFO Certifications. Attached asexhibits to this quarterly report are the certifications of the CEO andthe CFO required by Rules 13a-14a and 15d-14a under the SecuritiesExchange Act of 1934 (the "Certifications").This section of the quarterly report contains the informationconcerning the 

20

----

evaluation of Disclosure Controls and changesto Internal Controls over Financial Reporting referred to in theCertifications and this information should be read in conjunction withthe Certifications for a more complete understanding of the topicspresented.

Disclosure Controls. Disclosure Controls areprocedures that are designed for the purpose of ensuring thatinformation required to be disclosed in our reports filed under theSecurities Exchange Act of 1934 (such as this quarterly report), isrecorded, processed, summarized and reported within the time periodsspecified in the SEC's rules and forms.

InternalControls over Financial Reporting. Internal Controls over FinancialReporting means a process designed by, or under the supervision of, ourprincipal executive and principal financial officers, or personsperforming similar functions, and effected by our board of directors,management and other personnel, to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance withaccounting principles generally accepted in the United States ofAmerica ("GAAP"), and includes those policiesand procedures that:

|  |                                      |                                                                                                                                              |
|--|--------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|
|  | •      | pertain to the maintenanceof records that in reasonable detail accurately and fairly reflect thetransactions and dispositions of our assets; |

|  |                                      |                                                                                                                                                                                                                                                                              |
|--|--------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •      | provide reasonable assuranceour transactions are recorded as necessary to permit preparation offinancial statements in accordance with GAAP, and that our receipts andexpenditures are being made only in accordance with authorizations ofour management and directors; and |

|  |                                      |                                                                                                                                                                                                              |
|--|--------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •      | provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect onour consolidated financial statements. |

Limitations on theEffectiveness of Controls. Our management, including the CEO andCFO, do not expect that our Disclosure Controls or Internal Controlsover Financial Reporting will prevent all error and all fraud. Acontrol system, no matter how well conceived and operated, can provideonly reasonable, not absolute, assurance that the objectives of thecontrol system are met. Because of the limitations in all controlsystems, no evaluation of our controls can provide absolute assurancethat all control issues and instances of fraud, if any, have beendetected. Further, the design of any control system is based in partupon certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving itsstated goals under all potential future conditions. Because of theseinherent limitations in a cost-effective control system, misstatementsdue to error or fraud may occur and not be detected.

Changesto Internal Controls over Financial Reporting. In accordance withthe SEC's requirements, the CEO and CFO note that, during thequarter ended June 30, 2004, there have been no significant changes inInternal Controls over Financial Reporting or in other factors thathave affected or are reasonably likely to materially affect InternalControls over Financial Reporting, including any corrective actionswith regard to significant deficiencies and material weaknesses.

Conclusions regarding Disclosure Controls. Based upon therequired evaluation of Disclosure Controls, the CEO and CFO haveconcluded, as of June 30, 2004, that, subject to the limitations notedabove, the Company's Disclosure Controls are effective to providereasonable assurance that material information relating to HomeDirector and its consolidated subsidiaries is made known to management,including the CEO and CFO.

21

----

PART II

ITEM 1.    LEGAL PROCEEDINGS

Weare subject to various legal proceedings and claims, which have arisenin the ordinary course of its business and have not been fullyadjudicated. It is impossible at this time for us to predict with anycertainty the outcome of such litigation. However, management is of theopinion, based upon information presently available, that it isunlikely that any such liability, to the extent not provided forthrough insurance or otherwise, would be material in relation to ourconsolidated financial position or results of operations.

OnJune 18, 2001, Point West Ventures, LP ("PointWest") filed a complaint against HDT and Spencer TraskVentures, Inc., the placement agent for HDT's Series Bconvertible preferred stock financing in 2000, in New York StateSupreme Court. Point West, one of the investors in that financing,alleged misrepresentation in connection with that financing and soughtrescission of its $500,000 investment. Subsequent to the filing of thecomplaint Point West was placed in receivership and the action againstus and Spencer Trask was stayed and remains inactive. The receiver maydetermine to pursue the action at some future date.

In June2003, we received written notice from a third party alleging that wehad breached the terms of an agreement by using the "HomeDirector" mark without displaying a distinctive corporateidentifier in connection with some of our products. We have taken whatwe believe is appropriate remedial action and do not believe that thereis any remaining basis for a claim by the third party, nor has thethird party taken further action to pursue its claim. Nevertheless, itis possible that the third party will initiate legal action seekingdamages and/or injunctive relief against us. If any such litigationshould be resolved adversely, we could be compelled to pay damagesand/or royalties to the third party for our use of the Home Directorname and/or to limit or discontinue its use as a trademark. Anysignificant limitations on our use of the Home Director name couldadversely impact our marketing program and our efforts to establishbrand recognition.

ITEM 2.    CHANGES IN SECURITIES AND SMALLBUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

On July 27,2004, we completed a private placement of equity units consisting of8,813,569 shares of common stock and three-year warrants to purchase8,813,569 shares of common stock at $0.74 per share, for aggregateconsideration of $5.2 million ($0.59 per unit). Spencer Trask Ventures,Inc. acted as our placement agent.

The gross proceeds of $5.2million included the automatic conversion of $1,015,000 aggregateprincipal amount of notes that we privately sold in a bridge financingcompleted in May 2004 (see below). Net cash proceeds were approximately$4.4 million, after compensation to the placement agent and other costsof the placement. We are using the proceeds primarily for workingcapital purposes, including a reduction in outstanding liabilities, andwe anticipate that our cash resources (which may include borrowingsunder currently available and anticipated credit facilities) will besufficient to meet our working capital needs at least through June 30,2005.

We paid the placement agent cash compensation of $657,310,including reimbursement for its non-accountable expenses, and issued tothe placement agent five-year warrants to purchase 3,525,427 shares ofcommon stock at $0.74 per share.

In May 2004, we privately sold$1,015,000 aggregate principal amount of convertible notes and warrantsto purchase an aggregate of 1,015,000 shares of common stock at $1.00per share for aggregate consideration of $1,015,000. On June 18, 2004,the $1,015,000 principal amount of the notes was automaticallyconverted into equity units in the above described private placement ata conversion price of $0.59 per unit.

Upon completion of theprivate placement, as of July 27, 2004, there were issued andoutstanding 16,035,715 shares of our common stock and warrants andoptions to purchase 24,895,870 additional 

22

----

shares of our common stock, exceeding thetotal of 40,000,000 shares of our authorized common stock. Certain ofour directors and officers have agreed to suspend their rights toexercise options and warrants to purchase an aggregate of 1,599,394shares of common stock until such time if ever as our certificate ofincorporation is amended to increase our authorized shares of commonstock. Any issuances of more than 667,809 shares of our common stock inaddition to those covered by other outstanding options and warrantswill require an amendment to our certificate of incorporation or thecancellation, deferral or suspension of rights to exercise additionaloptions or warrants.

The equity units and the bridge notes weresold to persons we reasonably believed were accredited investors,without public solicitation or advertising, the certificates issued forthe securities issued in the bridge financing and the private placementwere endorsed with an appropriate restrictive legend, and we believesuch transactions were therefore exempt from registration under theSecurities Act of 1933, as amended, (the "SecuritiesAct") pursuant to Rule 506 thereunder.

We haveagreed on or before September 10, 2004, to file a registrationstatement to register under the Securities Act the resale of the sharesof common stock underlying the equity units, the shares of common stockunderlying the warrants issued in the bridge financing, and thewarrants issued to the placement agent.

During the secondquarter we issued options to purchase 1,515,003 shares of our commonstock under our Amended and Restated Stock Option Plan. The exerciseprices of such options are equal to the fair market value on therespective grant dates. Since the stock option grants were made to asmall number of informed persons who were provided with all informationrelevant to their investment decisions, we believe such grants wereexempt from registration pursuant to Section 4(2) of the SecuritiesAct. We plan to register under the Securities Act the offering ofcommon stock pursuant to all options granted or which may be grantedunder our Amended and Restated Stock Option Plan.

ITEM3.    DEFAULTS UPON SENIOR SECURITIES

We have notifiedPacific of a default under the Factoring Agreement attributable to ourfailure to pay federal withholding taxes for certain periods. Althoughwe are seeking to settle these withholding tax liabilities and Pacifichas continued to make advances to us under the Factoring Agreement, wecan provide no assurance that Pacific will not exercise its defaultremedies, which include termination of further advances andacceleration of repayment of all outstanding advances. If Pacificexercises its default remedies, we would need to seek alternativefinancing which might not be available on terms satisfactory to us orat all.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

Our Annual Meeting of Stockholders was held onMay 20, 2004. Holders of an aggregate of 7,222,146 shares of our commonstock at the close of business on March 22, 2004 were entitled to voteat the meeting, of which 6,082,909 were present in person orrepresented by proxy. At such meeting, the Company's stockholdersvoted as follows:

Proposal 1.

To elect five directorsto serve until the 2005 Annual Meeting of Stockholders or until theirrespective successors shall have been duly elected and qualified.

|                       |  |                              |           |                                       |  |        |        |        |  |  |
|-----------------------|--|------------------------------|-----------|---------------------------------------|--|--------|--------|--------|--|--|
| Nameof Nominee        |  | Ttotal Votes for EachNominee |           | Total Votes Withheld from EachNominee |
| Ezra P. Mager         |  |                         | 6,064,764 |                                  |  |   | 18,145 |   |
| Michael Liddle        |  |                         | 6,034,642 |                                  |  |   | 48,267 |   |
| Kent M. Klineman      |  |                         | 6,004,917 |                                  |  |   | 77,992 |   |
| Stephen B. Ste. Marie |  |                         | 6,064,714 |                                  |  |   | 18,195 |   |
| Michael L. Wise       |  |                         | 6,035,888 |                                  |  |   | 47,021 |   |
|                       |

No otherpersons were nominated, or received votes, for election as directors ofthe Company at the 2004 Annual Meeting of Stockholders. There were noabstentions or broker non-votes with respect to this proposal.

23

----

Proposal 2.

To increase thenumber of shares of the Company's common stock available underthe Company's Stock Option Plan from 750,000 shares of commonstock to 2,500,000 shares of commonstock.

|                           |  |                               |         |                             |  |        |        |        |  |  |
|---------------------------|--|-------------------------------|---------|-----------------------------|--|--------|--------|--------|--|--|
| TotalVotes for Proposal 2 |  | Total Votes AgainstProposal 2 |         | Abstentions from Proposal 2 |
| 3,987,492                 |  |                          | 153,945 |                        |  |   | 39,412 |   |
|                           |

There were 1,902,060 broker non-voteswith respect to Proposal 2.

Proposal 3.

To ratify theappointment of Mahoney Cohen & Company CPA, PC as theCompany's independent auditors for the fiscal year endingDecember 31, 2004.

|                           |  |                                |       |                             |  |        |        |        |  |  |
|---------------------------|--|--------------------------------|-------|-----------------------------|--|--------|--------|--------|--|--|
| TotalVotes for Proposal 3 |  | Total Votes Against Proposal 3 |       | Abstentions from Proposal 3 |
| 6,015,898                 |  |                           | 6,466 |                        |  |   | 60,544 |   |
|                           |

There were no broker non-votes withrespect to Proposal 3.

ITEM 5:    OTHER INFORMATION

None.

ITEM 6:    EXHIBITS AND REPORTS ON FORM 8-K

|      |  |                                                                                                                                                                                                                                                                |  |  |  |  |
|------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| (a)  |  | Exhibits                                                                                                                                                                                                                                                       |
| 10.1 |  | Placement Agency Agreement dated May 28, 2004,between Home Director, Inc. and Spencer Trask Ventures,Inc.                                                                                                                                                      |
| 10.2 |  | Form ofRegistration Rights Agreement between Home Director, Inc. and theseveral purchasers of its equity units sold on June 18, 2004, July 30,2004, July 13, 2004 and July 27,2004.                                                                            |
| 10.3 |  | Form ofSubscription Agreement to purchase shares of common stock and warrantsto purchase shares of common stock between Home Director, Inc. and theseveral purchasers of its equity units sold on June 18, 2004, July 30,2004, July 13, 2004 and July 27,2004. |
| 10.4 |  | Form ofSecurities Purchase Agreement to purchase an 8% Convertible Noteand warrants to purchase shares of common stock between Home Director,Inc. and the several investors in its bridge financing in May2004.                                                |
| 31.1 |  | Certification of ChiefExecutive Officer pursuant to Rule 13a-14 or Rule 15d-14(a) of theSecurities Exchange Act of 1934, as amended.                                                                                                                           |
| 31.2 |  | Certification of ChiefFinancial Officer pursuant to Rule 13a-14 or Rule 15d-14(a) of theSecurities Exchange Act of 1934, as amended.                                                                                                                           |
| 32.1 |  | Certification of ChiefExecutive Officer in accordance with Section 906 of the Sarbanes-OxleyAct of 2002.                                                                                                                                                       |
| 32.2 |  | Certification of ChiefFinancial Officer in accordance with Section 906 of the Sarbanes-OxleyAct of 2002.                                                                                                                                                       |
| (b)  |  | Reports on Form8-K                                                                                                                                                                                                                                             |
|      |

We did not file any reports on Form 8-K duringthe fiscal quarter ended June 30, 2004.

24

----

SIGNATURES

In accordance withsection 13 or 15(d) of the Exchange Act, the registrant has caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

|  | **HOME DIRECTOR, INC.**(Registrant) |
|--|-------------------------------------|

|  | By: /s/ Michael LiddleMichael LiddlePresident and Chief Executive Officer |
|--|---------------------------------------------------------------------------|

|  | By: /s/ Daryl Stemm Daryl StemmChiefFinancial Officer and Secretary |
|--|---------------------------------------------------------------------|

Date: August 16,2004

25

----