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

UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

|        |                                                                                      |
|--------|--------------------------------------------------------------------------------------|
|   | **Quarterly report underSection 13 or 15(d) of the Securities Exchange Act of 1934** |

For the quarterly period ended March 31, 2004

|        |                                                                                                  |
|--------|--------------------------------------------------------------------------------------------------|
|   | **Transition report underSection 13 or 15(d) of the Exchange Act For the transition periodfrom** |

______________________   to   ______________________

Commission file number 333-86873

HOME DIRECTOR, INC.

(Exact Name of Small Business Issuerin Its Charter)

|                                                             |  |                                     |  |  |  |  |
|-------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Delaware                                                    |  | 52-2143430                          |
| (Stateor other jurisdiction ofincorporation ororganization) |  | (I.R.S. Employer IdentificationNo.) |
| 2525Collier Canyon Road, Livermore, California              |  | 94551                               |
| (Address of Principal Executive Offices)                    |  | (ZipCode)                           |
|                                                             |

Issuer's telephonenumber: **(925) 373-0438**

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.    Yes ; No 

APPLICABLE ONLY TOCORPORATE ISSUERS

State the number of sharesoutstanding of each of the issuer's classes of common equity, asof the latest practicable date. 7,222,146 as of May 20, 2004

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

    

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

----

TABLEOF CONTENTS

|                              |  |                                                                               |        |        |        |        |  |  |  |  |
|------------------------------|--|-------------------------------------------------------------------------------|--------|--------|--------|--------|--|--|--|--|
|                         |  |                                                                          |        | Page   |
| PARTI                        |  |                                                                          |        |   |   |   |
| Item1.                       |  | FinancialStatements                                                           |        |   | 1      |   |
| Item2.                       |  | Management's Discussion and Analysis or Plan ofOperation                      |        |   | 13     |   |
| Item 3.                      |  | Controlsand Procedures                                                        |        |   | 17     |   |
| PARTII                       |  |                                                                          |        |   |   |   |
| Item 1.                      |  | LegalProceedings                                                              |        |   | 19     |   |
| Item2.                       |  | Changes in Securities and Small Business Issuer Purchases ofEquity Securities |        |   | 19     |   |
| Item3.                       |  | Defaults in SeniorSecurities                                                  |        |   | 19     |   |
| Item4.                       |  | Submission of Matters to a Vote of SecurityHolders                            |        |   | 19     |   |
| Item 5.                      |  | OtherInformation                                                              |        |   | 19     |   |
| Item6.                       |  | Exhibits and Reports on Form8-K                                               |        |   | 19     |   |
|    Signatures |  |                                                                          | 21     |   |
|    Exhibits   |  |                                                                          |   |   |
|                              |

Cautionary Note ConcerningForward-Looking Statements

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

----

PART I

ITEM 1.    FINANCIAL STATEMENTS

HOME DIRECTOR, INC.Consolidated Balance Sheets March 31, 2004 and December 31,2003

|                                                                                                                |  |                |             |             |  |        |             |         |  |  |
|----------------------------------------------------------------------------------------------------------------|--|----------------|-------------|-------------|--|--------|-------------|---------|--|--|
|                                                                                                           |  | March 31, 2004 |             | Dec 31,2003 |
|                                                                                                           |  | (Unaudited)    |             |        |
| **ASSETS**                                                                                                     |  |
| Currentassets:                                                                                                 |  |           |        |        |  |   |        |    |
| Cash and cashequivalents                                                                                       |  | $              | —     |        |  | $      | 65,733      |    |
| Accounts receivable,net ofallowances                                                                           |  |           | 1,675,939   |        |  |   | 1,452,934   |    |
| Inventories,net ofallowances                                                                                   |  |           | 700,406     |        |  |   | 818,421     |    |
| Othercurrentassets                                                                                             |  |           | 208,089     |        |  |   | 195,128     |    |
| Totalcurrentassets                                                                                             |  |           | 2,584,434   |        |  |   | 2,532,216   |    |
| Propertyand equipment,net                                                                                      |  |           | 287,101     |        |  |   | 280,463     |    |
| Customer lists,net of accumulatedamortization                                                                  |  |           | 81,633      |        |  |   | 87,075      |    |
| Goodwill,net of accumulatedamortization                                                                        |  |           | 5,825,652   |        |  |   | 5,825,652   |    |
|                                                                                                           |  | $              | 8,778,820   |        |  | $      | 8,725,406   |    |
| **LIABILITIESAND SHAREHOLDERS'EQUITY**                                                                         |  |           |        |        |  |   |        |    |
| Currentliabilities:                                                                                            |  |           |        |        |  |   |        |    |
| Accountspayable and accruedexpenses                                                                            |  | $              | 2,216,843   |        |  | $      | 1,770,922   |    |
| Payablesto relatedparties                                                                                      |  |           | 46,000      |        |  |   | —     |    |
| Bankborrowings                                                                                                 |  |           | 300,000     |        |  |   | 300,000     |    |
| Notespayable                                                                                                   |  |           | 125,000     |        |  |   | 125,000     |    |
| Currentportion of capital leaseobligations                                                                     |  |           | 85,550      |        |  |   | 116,313     |    |
| Totalcurrentliabilities                                                                                        |  |           | 2,773,393   |        |  |   | 2,312,235   |    |
| Capitallease obligations, less currentportion                                                                  |  |           | 4,831       |        |  |   | 10,077      |    |
| Other Long TermLiabilities                                                                                     |  |           | 360,514     |        |  |   | 393,975     |    |
| Commitmentsand contingencies (Note6)                                                                           |  |           |        |        |  |   |        |    |
| Shareholders'equity:                                                                                           |  |           |        |        |  |   |        |    |
| Preferredstock, $0.01 par value                                                                                |  |
| Authorized –2,000,000shares                                                                              |  |           | —     |        |  |   | —     |    |
| Noshares issued oroutstanding                                                                                  |  |           |        |        |  |   |        |    |
| Commonstock, $0.01 par valueAuthorized — 40,000,000shares                                                |  |           |        |        |  |   |        |    |
| Issued andoutstanding – 7,222,146 and 6,163,071 shares as of March 31, 2004and Dec 31, 2003,respectively |  |           | 72,221      |        |  |   | 61,631      |    |
| Additionalpaid-incapital                                                                                       |  |           | 78,437,326  |        |  |   | 77,582,890  |    |
| Accumulateddeficit                                                                                             |  |           | (72,869,465 | )      |  |   | (71,635,402 | )  |
| Totalshareholders'equity                                                                                       |  |           | 5,640,082   |        |  |   | 6,009,119   |    |
|                                                                                                           |  | $              | 8,778,820   |        |  | $      | 8,725,406   |    |
|                                                                                                                |

Seeaccompanying notes to these financial statements.

1

----

HOME DIRECTOR, INC.ConsolidatedStatements of OperationsFor the Three Month Periods Ended March31, 2004 and 2003(Unaudited)

|                                                          |  |                          |            |             |  |        |           |         |  |  |
|----------------------------------------------------------|--|--------------------------|------------|-------------|--|--------|-----------|---------|--|--|
|                                                     |  | Forthe three monthsended |
|                                                     |  | Mar 31,2004              |            | Mar 31,2003 |
| Revenue                                                  |  | $                        | 2,048,117  |        |  | $      | 2,464,076 |    |
| Costsand expenses:                                       |  |                     |       |        |  |   |      |    |
| Cost ofrevenue                                           |  |                     | 1,731,954  |        |  |   | 1,446,632 |    |
| Generalandadministrative                                 |  |                     | 752,217    |        |  |   | 644,318   |    |
| Salesandmarketing                                        |  |                     | 594,149    |        |  |   | 641,245   |    |
| Researchanddevelopment                                   |  |                     | 127,211    |        |  |   | 99,178    |    |
| Depreciationandamortization                              |  |                     | 54,068     |        |  |   | 94,671    |    |
| Totalcosts andexpenses                                   |  | $                        | 3,259,599  |        |  | $      | 2,926,044 |    |
| Lossfromoperations                                       |  | $                        | (1,211,482 | )      |  | $      | (461,968  | )  |
| Otherincome (expense),net                                |  |                     | (22,581    | )      |  |   | 2,533     |    |
| Netloss                                                  |  | $                        | (1,234,063 | )      |  | $      | (459,435  | )  |
| Comprehensiveloss                                        |  | $                        | (1,234,063 | )      |  | $      | (459,435  | )  |
| Netloss per common share — basic anddiluted:       |  |                     |       |        |  |   |      |    |
| Shares used incomputing basic net loss per commonshare   |  |                     | 6,966,106  |        |  |   | 3,751,467 |    |
| Sharesused in computing diluted net loss per commonshare |  |                     | 6,966,106  |        |  |   | 3,751,467 |    |
| Netloss pershare                                         |  |                     |       |        |  |   |      |    |
| Basic:                                                   |  | $                        | (.18       | )      |  | $      | (0.12     | )  |
| Diluted:                                                 |  | $                        | (.18       | )      |  | $      | (0.12     | )  |
|                                                          |

Seeaccompanying notes to these financial statements.

2

----

HOME DIRECTOR, INC.ConsolidatedStatements of Cash FlowsFor the Three Months Ended Mar 31, 2004and 2003(Unaudited)

|                                                                                    |  |        |            |         |  |        |            |         |  |  |
|------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                               |  | 2004   |            | 2003    |
| Cashflows from operatingactivities:                                                |  |   |       |    |  |   |       |    |
| Netloss                                                                            |  | $      | (1,234,063 | )  |  | $      | (459,435   | )  |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities:          |  |   |       |    |  |   |       |    |
| Depreciationandamortization                                                        |  |   | 54,068     |    |  |   | 94,671     |    |
| Deferredrent                                                                       |  |   | (2,377     | )  |  |   | (9,942     | )  |
| Issuanceof common stock warrants tobank                                            |  |   | 6,977      |    |  |   | —    |    |
| Changesin operating assets and liabilities, net of assets and liabilitiesacquired: |  |   |       |    |  |   |       |    |
| Accountsreceivable                                                                 |  |   | (223,006   | )  |  |   | (368,113   | )  |
| Inventories                                                                        |  |   | 118,015    |    |  |   | 163,878    |    |
| Othercurrentassets                                                                 |  |   | (12,960    | )  |  |   | (754       | )  |
| Accountspayable and accruedexpenses                                                |  |   | 414,838    |    |  |   | (449,649   | )  |
| Netcash used in operatingactivities                                                |  |   | (878,508   | )  |  |   | (1,029,344 | )  |
| Cashflows from investingactivities:                                                |  |   |       |    |  |   |       |    |
| Purchases ofproperty andequipment                                                  |  |   | (55,264    | )  |  |   | (40,788    | )  |
| Netcash used in investingactivities                                                |  |   | (55,264    | )  |  |   | (40,788    | )  |
| Cashflows from financingactivities:                                                |  |   |       |    |  |   |       |    |
| Net receipts(payments) to relatedparties                                           |  |   | 46,000     |    |  |   | (289,103   | )  |
| Repaymentof capital lease obligations,net                                          |  |   | (36,009    | )  |  |   | (38,720    | )  |
| Proceedsfrom issuance of common stock,net                                          |  |   | 858,048    |    |  |   | —    |    |
| Netcash provided by (used in)financingactivities                                   |  |   | 868,039    |    |  |   | (327,823   | )  |
| Netincrease (decrease) in cash and cashequivalents                                 |  |   | (65,733    | )  |  |   | (1,397,955 | )  |
| Cashand cash equivalents at beginning ofperiod                                     |  |   | 65,733     |    |  |   | 2,557,214  |    |
| Cashand cash equivalents at end of period                                          |  | $      | —    |    |  | $      | 1,159,259  |    |
| SupplementalDisclosure of Cash FlowInformation                                     |
|                                                                               |  | 2004   |            | 2003    |
| Cashpaid during the period forinterest                                             |  | $      | 15,605     |    |  | $      | 3,485      |    |
|                                                                                    |

Seeaccompanying notes to these financialstatements.

3

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements (Unaudited)

Note 1 -Basis of Presentation and Description of Business

Home DirectorTechnologies Inc. (formerly Home Director, Inc."HDT") was incorporated on October 13, 1999under the laws of the State of Delaware. On December 19, 2002, HDT wasacquired by Netword, Inc. (now Home Director, Inc.) in a merger ofNetword'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 Companyoperates in a single industry, the provision of infrastructure andcomponents for home networking, and is engaged in the design, sale andinstallation of home networking products and services for the new homeconstruction market.

Summary of Significant AccountingPolicies

Principles of Consolidation

The accompanyingconsolidated financial statements include the accounts of HomeDirector, Inc. (formerly Netword, Inc.) and its wholly-ownedsubsidiaries, HDT and Digital Interiors, Inc. All significantintercompany accounts and transactions have been eliminated inconsolidation.

Unaudited Interim Financial Statements

The accompanying unaudited interim financial statements have beenprepared in accordance with generally accepted accounting principlesand applicable 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 have been condensed or omitted pursuant to SEC rules andregulations. Operating results for the three months ended March 31,2004 are not necessarily indicative of the results that may be expectedfor the year ending December 31, 2004. These financial statements andnotes should be read in conjunction with the financial statements andnotes thereto for the year ended December 31, 2003 included in theCompany's annual report on Form 10-KSB filed with the SEC onApril 2, 2004. The balance sheet at December 31, 2003 has been derivedfrom the audited consolidated financial statements of the Company.

Use of Estimates

The preparation of financial statements inconformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions

4

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenueand expenses during the reporting period. Significant estimates includethe allowance for doubtful accounts and the allowance for obsolete andslow-moving inventory. Actual results can differ from thoseestimates.

Cash and Cash Equivalents

The Companyconsiders all highly liquid investments purchased with an original orremaining maturity of less than three months at the date of purchase tobe cash equivalents.

Inventories

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

Fair Valueof Financial Instruments

Carrying amounts of certain of theCompany's financial instruments, including cash and cashequivalents, accounts receivable, accrued liabilities, note payable andbank borrowings approximate fair value because of their shortmaturities.

Credit Risk, Significant Customers andConcentrations

Financial instruments that potentially subjectthe Company to credit risk consist principally of accounts receivableand cash investments. Receivables are unsecured. The Company providesan allowance for doubtful accounts equal to the estimated lossesexpected to be incurred in the collection of accounts receivable.

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

As of March 31, 2004, one customer accounted forapproximately 19% of the accounts receivable balance and twocustomers accounted for approximately 34% of the revenue for thethree months ended March 31, 2004. As of December 31, 2003, threecustomers accounted for 38% and one customer accounted for36% of the accounts receivable balance and annual revenue,respectively.

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

Income (Loss) Per Share

In accordance with SFAS 128, basicand diluted net income (loss) per common share has been computed usingthe weighted-average number of shares of common stock outstandingduring the period.

The effect of options to purchase 700,957 and585,806 shares of the Company's common stock outstanding duringthe three month periods ended March 31, 2004 and 2003, respectively,were not included in the computation of diluted net loss per sharebecause their effect would be anti-dilutive.

The effect ofwarrants to purchase 7,187,372 and 584,439 shares of theCompany's common stock outstanding during the three month periodsended March 31, 2004 and 2003, respectively, were not included in thecomputation of diluted net loss per share because their effect would beanti-dilutive.

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 

5

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

exists, delivery has occurred, the fee isfixed or determinable, and collectibility is reasonably assured. TheCompany accrues for sales returns, rebate programs and warranty costsbased on its experience.

The Company recognizes revenue oninstallation projects using the percentage of completion method, basedprimarily on revenue milestones. On certain other installationprojects, the Company recognizes revenue using the percentage ofcompletion method, based upon actual costs incurred compared to totalestimated contract costs under the project. Changes to total estimatedcontract costs or losses, if any, are recognized in the period in whichthey are determined. For these other installation projects, revenuerecognized in excess of amounts billed of $146,917 and $203,808 atMarch 31, 2004 and December 31, 2003, respectively, is classified ascurrent assets under "Accounts Receivable."Amounts billed in excess of revenue recognized to date of $14,002 and$17,675 at March 31, 2004 and December 31, 2003, respectively, areclassified as current liabilities under "Accounts Payableand Accrued Expenses."

Property and Equipment

Property and equipment is recorded at cost and depreciated using thestraight-line method over their estimated useful lives which generallyrange from two to five years. Property and equipment includes certainequipment under capital leases. These items are depreciated over theshorter of the lease period or the estimated useful life of theequipment.

Intangible Assets

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

Research and DevelopmentCosts

Research and development costs are charged to operationsas incurred.

Advertising Costs

The Company expensesadvertising costs as incurred. The amount of advertising expensedduring the quarters ended March 31, 2004 and 2003 was $34,283 and$17,292, respectively.

Income Taxes

The Companyaccounts for 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 

6

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

compensation to employees and outsidedirectors, where appropriate, under the provisions of AccountingPrinciples Board Opinion No. 25, "Accounting for StockIssued to Employees" ("APB 25")and related 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 March 31, 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 shareamounts)                                                                                                  |  |         |            |          |
|                                                                                                                                    |  | Mar.31, 2004 |            | Mar. 31, 2003 |
| Net loss,asreported                                                                                                                     |  | $            | (1,234,063 | )        |  | $      | (459,435 | )  |
| Deduct:Total stock-based employee compensation expense determined under fairvalue based method for all awards, net of income taxeffects |  |         | (167,358   | )        |  |   | (11,583  | )  |
| Proforma netloss                                                                                                                        |  | $            | (1,401,421 | )        |  | $      | (471,018 | )  |
| Netloss pershare:                                                                                                                       |  |         |       |          |  |   |     |    |
| Basic— asreported                                                                                                                 |  | $            | (0.18      | )        |  | $      | (0.12    | )  |
| Diluted— asreported                                                                                                               |  | $            | (0.18      | )        |  | $      | (0.12    | )  |
| Basic—proforma                                                                                                                    |  | $            | (0.20      | )        |  | $      | (0.13    | )  |
| Diluted—proforma                                                                                                                  |  | $            | (0.20      | )        |  | $      | (0.13    | )  |
|                                                                                                                                         |

Proforma information regarding net loss is also required by SFAS 123 andhas been determined as if the Company had accounted for all of itsemployee stock options under the fair value method of that statement.The Company computes fair value for this purpose using the minimumvalue option-pricing model. The weighted-average assumptions used inthis model to estimate fair value and the resulting values are asfollows:

|                                     |  |        |      |         |  |        |      |         |  |  |
|-------------------------------------|--|--------|------|---------|--|--------|------|---------|--|--|
|                                |  | 2004   |      | 2003    |
| Expecteddividendyield               |  |   | 0.0  | %  |  |   | 0.0  | %  |
| Risk-freeinterestrate               |  |   | 4.4  | %  |  |   | 4.4  | %  |
| Expectedlife (inyears)              |  |   | 10.0 |    |  |   | 10.0 |    |
| Weighted-averagefair value pershare |  | $      | 2.58 |    |  | $      | 3.57 |    |
|                                     |

As of March 31,2004, the Company had reserved a total of 750,000 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. Separate from the Plan, the Company has granted stockoptions and warrants to consultants as compensation for theirconsulting services. Shares available for future issuance under thePlan total 37,663 at March 31, 2004.

7

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

The following summarizes the stock optionactivity as of March 31,2004:

|                                     |  |                    |          |                                |  |        |         |         |  |  |
|-------------------------------------|--|--------------------|----------|--------------------------------|--|--------|---------|---------|--|--|
|                                |  | OptionsOutstanding |          | Weighted Average ExercisePrice |
| Balance at December 31,2002         |  |               | 101,206  |                           |  | $      | 64.84   |    |
| Granted(exercise price = fairvalue) |  |               | 542,100  |                           |  |   | 3.72    |    |
| Exercised                           |  |               | —  |                           |  |   | — |    |
| Cancelled                           |  |               | (166,178 | )                         |  |   | (9.08   | )  |
| Balanceat December 31,2003          |  |               | 477,128  |                           |  | $      | 14.82   |    |
| Granted(exercise price =fairvalue)  |  |               | 420,464  |                           |  |   | 1.30    |    |
| Exercised                           |  |               | —  |                           |  |   | — |    |
| Cancelled                           |  |               | (196,635 | )                         |  |   | (22.75  | )  |
| Balanceat March 31,2004             |  |               | 700,957  |                           |  |   | 4.49    |    |
|                                     |

Selectedinformation regarding stock options as of March 31, 2004 follows:

|                 |  |                              |         |                                         |  |                              |        |        |  |        |
|-----------------|--|------------------------------|---------|-----------------------------------------|--|------------------------------|--------|--------|--|--------|
| Exercise Prices |  | Numberof Options Outstanding |         | Weighted AverageRemaining Life in Years |  | Number of OptionsExercisable |
| $1.30           |  |                         | 420,464 |                                    |  |                         | 9.75   |   |  |   | 35,039 |   |
| 2.50            |  |                         | 12,500  |                                    |  |                         | 9.04   |   |  |   | 6,250 |   |
| 3.63            |  |                         | 11,024  |                                    |  |                         | 8.08   |   |  |   | 9,302 |   |
| 3.75            |  |                         | 244,600 |                                    |  |                         | 8.96   |   |  |   | 186,533 |   |
| 7.26            |  |                         | 23      |                                    |  |                         | 6.74   |   |  |   | 23 |   |
| 60.00           |  |                         | 1,875   |                                    |  |                         | 0.39   |   |  |   | 1,875 |   |
| 79.83           |  |                         | 197     |                                    |  |                         | 7.47   |   |  |   | 197 |   |
| 80.00           |  |                         | 7,875   |                                    |  |                         | 0.94   |   |  |   | 7,875 |   |
| 163.28          |  |                         | 96      |                                    |  |                         | 6.58   |   |  |   | 96 |   |
| 362.84          |  |                         | 2,303   |                                    |  |                         | 6.81   |   |  |   | 2,303 |   |
|            |  |                         | 700,957 |                                    |  |                         |   |   |  |   | 249,493 |   |
|                 |

Note2 - Capital Stock

On April 1, 2002, the Company's Boardof Directors approved a one-for-ten reverse common stock split whichwas subsequently approved by the Company's stockholders as of May2, 2002. An amendment to the Company's Certificate ofIncorporation 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 March 31, 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.

8

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

Note 3 - Common Stock Reserved for FutureIssuance

At March 31, 2004, the Company had reserved a total of7,965,992 of its authorized 40,000,000 shares of common stock forfuture issuance as follows:

|                                                 |  |        |           |        |  |  |
|-------------------------------------------------|--|--------|-----------|--------|--|--|
| Outstandingcommon stock warrants                |  |   | 7,187,372 |   |
| Possiblefuture issuance of common stockwarrants |  |   | 40,000    |   |
| Outstanding stockoptions                        |  |   | 700,957   |   |
| Possible future issuanceunder stock optionplan  |  |   | 37,663    |   |
|                                            |  |   | 7,965,992 |   |
|                                                 |

Note4 - Related Party Transactions

Related Party Payables

During February and March 2004, one of the Company's executiveofficers made a series of loans to the Company in the aggregateprincipal amount of $46,000. These loans are payable on demand and havean interest rate of 10% per annum.

Placement and OtherFees

In connection with the private placement of common stockand warrants in December 2003 and January 2004, the Company incurredplacement fees of approximately $420,000, paid to Spencer TraskVentures, Inc. The placement fees were recorded as a reduction toamounts raised. In addition, Spencer Trask also received warrants topurchase 657,846 shares of the Company's common stock at a priceof $1.068 per share, warrants to purchase 306,795 shares of theCompany's common stock at a price of $1.178 per share andwarrants to purchase 423,630 shares of the Company's common stockat a price of $1.298 per share as part of the placement agencyagreement.

On March 28, 2003, the Company entered into aConsulting Agreement under which it retained Spencer Trask as itsnon-exclusive financial advisor and investment banker. Under thisagreement, the Company agreed that until March 28, 2004, we wouldcompensate Spencer Trask, in cash and/or warrants to purchase CommonStock, for advisory services in connection with acquisitions, mergers,combinations, private and public equity offerings, debt financing andother similar business transactions. No compensation has been paidunder this agreement.

Note 5 - Provision for Abandonment ofFacility

In June 2003, the Company exited its Durham, NorthCarolina warehouse facility and relocated the operations to itsLivermore, California facility. The Company agreed to a settlement of$657,891 to be repaid over four years. As a result, the Companyrecorded a discounted provision of $590,000 related to the remaininglease commitment associated with the Durham facility. In December 2003,the Company determined that certain fixed assets located in NorthCarolina would not be used and wrote off $93,966. There were noseverance costs associated with thisabandonment.

|                     |  |                    |         |           |  |          |         |                   |  |   |         |         |  |   |         |        |  |  |
|---------------------|--|--------------------|---------|-----------|--|----------|---------|-------------------|--|---|---------|---------|--|---|---------|--------|--|--|
|                |  | Balanceat 12/31/03 |         | Provision |  | Payments |         | Balanceat 3/31/04 |
| FacilityAbandonment |  | $                  | 521,343 |      |  |     | — |              |  | $ | (30,896 | )  |  | $ | 490,447 |   |
|                     |

Approximately$129,933 of the balance at March 31, 2004 is recorded as part ofaccounts payable and accrued expenses and $360,514 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 

9

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

Company to predict with any certainty theoutcome of such litigation. However, management is of the opinion,based upon information presently available, that it is unlikely thatany such liability, to the extent not provided for through insurance orotherwise, would be material in relation to the Company'sconsolidated 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 againstthe Company and Spencer Trask was stayed and remains inactive. Thereceiver may determine to pursue the action at some future date.

The Company has received written notice from a third party allegingbreach of contract and violation of trademark law in connection withthe use of the "Home Director" trademark. TheCompany has taken what it believes is appropriate remedial action anddoes not believe that there is any remaining basis for a claim by thethird party, 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. Wiseresigned as the President, Chief Operating Officer and a director ofthe 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. On January 16,2003, the Company granted Mr. Wise options to purchase 180,000 sharesof Common Stock at an exercise price of $3.75 per share. Upon Mr.Wise's resignation, 60,000 of such expired unexercised, and underthe terms of the Separation and Release Agreement, 120,000 of suchoptions are exercisable through March 3, 2005. In the first quarter of2004, the Company recorded a charge of approximately $130,000 relatedto this settlement.

Note 7 - Liquidity

Historically theCompany's operations have never been self-sustaining, and it hasfinanced its continuing operations through a series of privateofferings of debt and equity and by asset-based borrowings fromcommercial lenders. The Company cannot predict when, if ever, itsbusiness will produce sufficient cash to reduce or eliminate itsdependence on external financing as its primary source of workingcapital.

As a result of the Company's continuing losses,particularly during the fourth quarter of 2003 and the first quarter of2004, it faces an acute shortage of working capital. The Companyexpects to satisfy its working capital requirements through additionalsales of equity securities and advances under the Factoring Agreementdescribed below. However, the Company can provide no assurance that itwill 

10

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

be able to satisfy its working capitalrequirements on terms acceptable to it or at all. If the Company isunable to satisfy its immediate need for working capital, it may becompelled to limit or cease its operations.

Line of Credit

As of March 31, 2004, the Company owed $300,000 under a line ofcredit with Venture Banking Group, and, as a result of theCompany's failure to comply with certain financial covenantsapplicable to such line of credit, an event of default existed. OnApril 1, 2004, the Company obtained advances of $450,000 under theFactoring Agreement (described below) and applied approximately$300,000 of the advances to repay the line of credit, which was thenterminated.

Factoring Agreement

As of March 23, 2004,the Company entered into a Factoring Agreement with Pacific BusinessFunding, a division of Greater Bay Bank, N.A.("Pacific"). The Factoring Agreement providesfor borrowings on the Company's eligible accounts receivable,with recourse to the Company, in the amount of 65% of theamounts 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.

Forbearance Agreement

Under the FactoringAgreement, the Company agreed to raise at least $2 million in an equityfinancing before May 1, 2004. On May 6, 2004 the Company and Pacificentered into a Forbearance Agreement under which the Companyacknowledged that its 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 the Company raises at least $2 millioninclusive of the funds raised in the bridge financing (described below)in an equity financing by that date. See "Liquidity andCapital Resources"

Bridge Financing

As ofMay 20, 2004, the Company privately sold $755,000 face amount of its8% convertible notes and warrants to purchase shares of itsCommon Stock to accredited investors, including certain of itsdirectors and officers, for gross proceeds of $755,000. The notesmature on September 14, 2004, subject to automatic conversion intoinvestment units of the kind sold in the first equity financing of theCompany prior to that time. Purchasers of the notes received three-yearwarrants to purchase an aggregate of 755,000 shares of Common Stock atan exercise price of $1.00 per share. The Company's board ofdirectors has authorized the sale of up to $345,000 of additionalconvertible notes and warrants on identical terms as the convertiblenotes and warrants sold as of May 20, 2004. The Company expects torecord interest expense for the convertible notes during the secondquarter of 2004.

Private Placement

In December 2003 andJanuary 2004, the Company raised gross proceeds of $3,226,315 in aprivate sale of equity units consisting of 3,470,679 shares of CommonStock and three-year warrants to 

11

----

HOMEDIRECTOR, INC. Condensed Notes to Consolidated FinancialStatements**—(continued)** (Unaudited)

purchase 3,470,679 shares of Common Stock atexercise prices ranging from $1.068 to $1.298 per share. Net proceedsof $1,740,000 were received in 2003 and are reflected in the balancesheet as of December 31, 2003, and the remaining proceeds of $860,000were received in 2004. The Company paid its placement agentapproximately $420,000 as cash compensation and reimbursement ofnon-accountable expenses and issued the placement agent five-yearwarrants to purchase 1,388,272 shares of Common Stock at exerciseprices ranging from $1.068 to $1.298 pershare.

12

----

ITEM2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION

The following discussion of our financial conditionand results of operations should be read together with the financialstatements and related notes included elsewhere in this report. Some ofthe statements in this section that are not historical facts areforward-looking statements. You are cautioned that the forward-lookingstatements contained in this section are estimates and predictions, andthat our actual results could differ materially from those anticipatedin the forward-looking statements due to risks, uncertainties or actualevents differing from the assumptions underlying these statements. Therisks, uncertainties, and assumptions include, but are not limited to,those disclosed in our annual report on Form 10-KSB for our fiscal yearended December 31, 2003.

Overview

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

Our revenues consist primarily ofrevenues from the sale of home networking products and services. Homenetworking hardware is sold primarily to distributors for use byintegrators who install the hardware in homes throughout the UnitedStates and Canada. We also provide installation services, primarily tothe new home construction market, in California, Florida, Colorado andTexas. As of January 1, 2004, Donald Witmer resigned as our Chairmanand Chief Executive Officer and was succeeded as Chief ExecutiveOfficer by Michael Liddle. In Feburary 2004, following the resignationof Robert N. Wise as President and Chief Operating Officer, Mr. Liddleassumed the additional title of President and was appointed a director.On January 7, 2004, Jerry Steckling was appointed Vice President,Advanced Technology and Chief Technology Officer.

Operations inColorado and Texas

During the fourth quarter of 2003, we openedan office in Colorado Springs, Colorado, and during the first quarterof 2004, we opened an office in Houston, Texas. The primary function ofthese new offices is to provide quality network installation servicesto home builders in the adjacent areas. The opening of these officesdid not have a material impact on our revenues during the first quarterof 2004.

Sears Agreement

On April 17, 2003, we enteredinto an agreement with Sears, Roebuck & Co., pursuant to which weare currently expanding a strategic marketing relationship with Searscalled the Sears Connected Home program. This program began as a pilotprogram in Florida in 2002 and is being implemented by Sears, with oursupport, on a national basis.

Research and development expensesconsist primarily of salaries and related personnel expenses,subcontracted research expenses, and technology license expenses. As ofMarch 31, 2004, all research and development costs had been expensed asincurred. We believe that continued investment in research anddevelopment is critical to attaining our strategic objectives, and weexpect such expenses to increase during the remainder of 2004.

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

Critical AccountingPolicies

The preparation of financial statements in conformitywith accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the

13

----

reported amounts of assets and liabilitiesand disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from thoseestimates. We believe the following critical accounting policies, whichhave been discussed by senior management and our audit committee, havesignificant effect in the preparation of our consolidated financialstatements.

Revenue Recognition.    We generallyrecognize product revenue when persuasive evidence of an arrangementexists, delivery has occurred, the fee is fixed or determinable andcollectibility is reasonably assured. The Company accrues for salesreturns, rebate programs and warranty costs based on its experience. Wealso recognize revenue using the percentage of completion method oninstallation projects, primarily by comparing contractual billingmilestones with total contract value. Accounting for revenue fromservices, payment of upfront fees, and achievement of contract-specificmilestones involves management making assessments of businessconditions and estimates regarding timing and cost of work associatedwith the revenue. Over time, these estimates may be adjusted based onthen-current circumstances, such as changes in contract amounts,resulting in adjustment to revenues. Changes to total estimatedcontract costs or losses, if any, are recognized in the period in whichthey are identified.

Allowance for DoubtfulAccounts.    Accounts receivable are unsecured and we maintainallowances for doubtful accounts for estimated losses fromcustomers' inability to make payments. We assess each accountthat is more than 90 days delinquent or others when information knownto us indicates amounts may be uncollectible. In order to estimate theappropriate level of the allowance, we consider such factors ashistorical bad debts, current customer credit worthiness, changes incustomer payment patterns and any correspondence with the customer. In2003, we experienced losses, or recorded provisions for potentiallosses, totaling $373,000, or 4% of revenues. If the financialcondition of our customers were to deteriorate and impair their abilityto make payments, additional allowances might be required in futureperiods. No material charges associated with doubtful accounts wereincurred by the Company in the first quarter of 2004.

Inventory.    We present inventory value at the lower ofcost or market and net of valuation allowances for excess and obsoleteunits. Establishing this reserve requires estimates of sales volumesand pricing. In 2003, we recorded expenses for disposal of or provisionfor obsolete inventory, totaling $956,000, or 10% of revenues.Factors leading to the charges in the fourth quarter of 2003 included adecline of hardware sales, which we believe was related principally tothe technological obsolescence of certain inventory and our inabilityto compete with products of a more recent design. The obsoleteinventory was acquired primarily in 2000 and 2001, and we anticipatethat the level of these expenses and write-downs will be lower infuture periods. To the extent that we are not able to correctlyanticipate these trends, additional reserves may be required in futureperiods. No material charges associated with inventory were incurred bythe Company in the first quarter of 2004.

Intangible Assets -Goodwill.    Intangible assets include costs in excess of netassets acquired ("goodwill") and otherpurchased intangibles. The carrying amount of goodwill is reviewedannually. 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 toenter, 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 

14

----

agreements to provide investor relationservices. Expenses relating to the value of those warrants totaled$144,000. In the first quarter of 2004, we issued warrants to purchaseshares of our common stock in connection with our Factoring Agreement.Expenses relating to the value of these warrants totaled $7,000.

Results of Operations

Quarters Ended March 31, 2004 and2003.    Revenues were $2,048,000 in the first quarter of 2004,compared to $2,464,000 in the first quarter of 2003, a decrease of17%. The reduction was primarily attributable to reducedhardware sales in 2003 (from $818,000 during the first quarter of 2003to $238,000 during the first quarter of 2004, or a reduction of71%), partially offset by increased installation revenues.During the first quarter of 2004, unit sales of hardware decreased by29% (from 2,809 units to 2,005 units) and average hardwareselling prices decreased by 59% (from $291 to $119), as comparedto the first quarter of 2003. In addition, during the first four monthsof 2004, orders for hardware products decreased 54% as comparedto the same period during 2003. Hardware sales accounted for 12%of revenues in the first quarter of 2004, as compared to 33% inthe first quarter of 2003. The decline in hardware sales reflectsseveral factors, including our strategic decisions to concentrate oncost reduction measures and the sale of hardware primarily through thestill-developing Sears Connected Home program, as well as intense pricecompetition. We expect sequential growth of our hardware salesbeginning in the second quarter of 2004.

Installation revenuesincreased by 10% in the first quarter of 2004 as compared to thefirst quarter of 2003. During 2003, we signed a number of new contractsto provide networking solutions to home builders and, during the fourthquarter of 2003 and the first quarter of 2004, we opened offices inColorado Springs and Houston to provide networking solutions in thoseareas. In the first four months of 2004, sales orders for homeinstallation services increased by 12% as compared to the sameperiod in 2003.

Total costs and expenses were $3,260,000 in thefirst quarter of 2004, compared to $2,926,000 in the first quarter of2003. The increase in 2004 was primarily attributable to increased costof revenues of $285,000 and general and administrative expenses of$108,000. Cost of revenues was $1,732,000, or 85% of revenues,in the first quarter of 2004 as compared to $1,447,000, or 58%of revenues, in 2003. Cost of revenues in 2004 was adversely affectedby decreased average hardware selling prices and a change in the mix ofthe Company's revenues.

We expect our research anddevelopment expenses to continue to increase, due primarily to ourhiring of additional engineering personnel and increased licensingcosts as we undertake to improve and broaden our product offerings.From time to time, we may incur additional professional fees and othercosts in connection with future attempts to expand our productofferings.

Our net loss in the first quarter of 2004 wasapproximately $1,234,000, as compared to a net loss of approximately$459,000 in 2003. We attribute our continuing losses in part toincreased corporate overhead resulting from increases in management,sales and marketing and product development expenses and theformulation and implementation of new business initiatives.

Liquidity and Capital Resources

Historically, ouroperations have never been self-sustaining, and we have financed ourcontinuing operations primarily through a series of private offeringsof debt and equity and by obtaining borrowings or advances on afully-secured or factoring basis from commercial lending sources. Wecannot predict when, if ever, our business will produce sufficient cashto reduce or eliminate our dependence on external financing as ourprimary source of working capital.

As a result of our continuinglosses, especially during the fourth quarter of 2003 and the firstquarter of 2004, we face an acute shortage of working capital. Althoughwe have raised $755,000 in a bridge financing in May 2004 and we havereceived advances of approximately $690,000 outstanding under aFactoring Agreement as of May 15, 2004 (see below), these sources arenot sufficient to satisfy our immediate or longer term working capitalrequirements. We plan to meet our short and 

15

----

medium-term working capital requirementsthrough additional sales of our equity securities. There can be noassurance as to when, if ever, we will be able to obtain sufficientadditional financing to meet these requirements. If we are unable toraise sufficient working capital in the very near term, we may becompelled to limit or cease our operations.

Line of Credit

As of March 31, 2004, the Company owed $300,000 under a line ofcredit with Venture Banking Group, and, as a result of theCompany's failure to comply with certain financial covenantsapplicable to such line of credit, an event of default existed. OnApril 1, 2004, the Company obtained advances of $450,000 under theFactoring Agreement (described below) and applied approximately$300,000 of the advances to repay the line of credit, which was thenterminated.

Factoring Agreement

As of March 23, 2004,the Company entered into a Factoring Agreement with Pacific BusinessFunding, a division of Greater Bay Bank, N.A.("Pacific"). The Factoring Agreement providesfor borrowings on the Company's eligible accounts receivable,with recourse to the Company, in the amount of 65% of theamounts 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.

Forbearance Agreement

Under the FactoringAgreement, the Company agreed to raise at least $2 million in an equityfinancing before May 1, 2004. On May 6, 2004 the Company and Pacificentered into a Forbearance Agreement under which the Companyacknowledged that its 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 the Company raises gross proceeds of atleast $2 million in an equity financing before that date. If we do notraise proceeds of at least $2 million inclusive of the funds raised inthe bridge financing (described below) before July 1, 2004, Pacificcould terminate further advances under the Factoring Agreement andrequire us to immediately reimburse all outstanding advances. A copy ofthe Forbearance Agreement is included with this report as Exhibit10.4.

Demand Loans

In February and March 2004, one ofour executive officers made a series of loans to us in the aggregateprincipal amount of $46,000 to assist us in meeting our working capitalneeds. Each of these loans bears interest at 10% per annum andis payable on demand.

Bridge Financing

As of May 20,2004, we privately sold $755,000 face amount of our 8%convertible notes and warrants to purchase shares of our Common Stockto accredited investors, including certain of our directors andofficers, for gross proceeds of $755,000. The notes mature on September14, 2004, subject to automatic conversion into investment units of thekind sold in our first equity financing prior to that time. Purchasersof the notes received three-year warrants to purchase an aggregate of755,000 shares of Common Stock at an exercise price of $1.00 per share.Our board of directors has authorized the sale of up to $345,000 ofadditional convertible notes and warrants on identical terms as theconvertible notes and warrants sold as of May 20, 2004. We expect torecord interest expense for the convertible notes during the secondquarter of 2004.

16

----

Private Placement

In December2003 and January 2004, we raised gross proceeds of $3,226,315 in aprivate sale of equity units consisting of 3,470,679 shares of CommonStock and three-year warrants to purchase 3,470,679 shares of CommonStock at exercise prices ranging from $1.068 to $1.298 per share. Netproceeds of $1,740,000 were received in 2003 and are reflected in thebalance sheet as of December 31, 2003, and the remaining proceeds of$860,000 were received in 2004. We paid our placement agentapproximately $420,000 as cash compensation and reimbursement ofnon-accountable expenses and issued the placement agent five-yearwarrants to purchase 1,388,272 shares of Common Stock at exerciseprices ranging from $1.068 to $1.298 per share. All of the shares ofCommon Stock included in the units sold in this transaction (includingthe shares underlying the warrants) were registered for resale underour registration statement on Form SB-2, which was declared effectiveby the Securities and Exchange Commission on March 19, 2004.

Cash

As of March 31, 2004, we had no cash, cashequivalents, investments or interest receivable. Net cash used in thefirst quarter of 2004 totaled $66,000. Approximately $1,234,000 wasused to fund our operating loss and an increase in accounts receivable($223,000), offset in part by net proceeds from the issuance of CommonStock and warrants ($858,000), an increase in accounts payable andaccrued expenses ($415,000) and a decrease in inventories($118,000).

Net cash used in operating activities was $879,000for the first quarter of 2004. Net cash used for the period inoperating activities was primarily for increases in accounts receivableand funding of operating losses, offset in part by increases inaccounts payable and accrued expenses and a decrease ininventories.

Net cash used in investing activities was $55,000for the first quarter of 2004. Cash used for the period in investingactivities was primarily to purchase property and equipment.

Netcash provided by financing activities was $868,000 for the firstquarter of 2004. Net cash provided during the period by financingactivities resulted primarily from the proceeds received from theprivate sale of units of Common Stock and warrants (see"Private Placement" above).

GoingConcern Considerations

As a result of our losses fromoperations and dependence upon financing operations through a series ofprivate offerings of debt and equity, and our uncertainty about theadequacy of funding during 2004, our independent auditors have includedan explanatory paragraph in their audit report on our December 31, 2003financial statements indicating there is substantial doubt about ourability to continue as a going concern. The financial statements do notinclude any adjustments that might result from the outcome of thisuncertainty.

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-15 and 15d-15 the Securities Exchange Actof 1934 (the "Certifications"). This sectionof the quarterly report contains the information concerning theevaluation of Disclosure Controls and changes to Internal Controls overFinancial Reporting referred to in the Certifications and thisinformation should be read in conjunction with the Certifications for amore complete understanding of the topics presented.

Disclosure Controls.    Disclosure Controls are proceduresthat are designed for the purpose of ensuring that information requiredto be disclosed in our reports filed under the Securities Exchange Actof 1934 (such as this quarterly report), is recorded, processed,summarized and reported within the time periods specified in theSEC's rules and forms.

17

----

Internal Controls over FinancialReporting.    Internal Controls over Financial Reporting means aprocess designed by, or under the supervision of, our principalexecutive and principal financial officers, or persons performingsimilar functions, and effected by our board of directors, managementand other personnel, to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financialstatements for external purposes in accordance with accountingprinciples generally accepted in the United States of America("GAAP"), and includes those policies andprocedures that:

|              |                                                                                                                                              |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| •  | pertain to themaintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of our assets; |

|              |                                                                                                                                                                                                                                                                              |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | provide reasonable assurance ourtransactions 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 assurance regardingprevention or timely detection of unauthorized acquisition, use ordisposition of our assets that could have a material effect on ourconsolidated financial statements. |

Limitations on theEffectiveness of Controls.    Our management, including the CEOand CFO, do not expect that our Disclosure Controls or InternalControls over Financial Reporting will prevent all error and all fraud.A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives ofthe control 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 accordancewith the SEC's requirements, the CEO and CFO note that, duringthe quarter ended March 31, 2004, there have been no significantchanges in Internal Controls over Financial Reporting or in otherfactors that have affected or are reasonably likely to materiallyaffect Internal Controls over Financial Reporting, including anycorrective actions with regard to significant deficiencies and materialweaknesses.

Conclusions regarding DisclosureControls.    Based upon the required evaluation of DisclosureControls, the CEO and CFO have concluded, as of March 31, 2004, that,subject to the limitations noted above, the Company's DisclosureControls are effective to provide reasonable assurance that materialinformation relating to Home Director and its consolidated subsidiariesis made known to management, including the CEO andCFO.

18

----

PART II

|               |                   |
|---------------|-------------------|
| ITEM 1.  | LEGAL PROCEEDINGS |

We aresubject to various legal proceedings and claims, which have arisen inthe ordinary course of our 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 INSECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITYSECURITIES |

None.

|               |                                |
|---------------|--------------------------------|
| ITEM 3.  | DEFAULTSUPON SENIOR SECURITIES |

Under the Forbearance Agreement, weacknowledged that an event of default occurred under the FactoringAgreement as a result of our noncompliance with an equity financingcovenant. See "Liquidity and CapitalResources—Forbearance Agreement."

|              |                                                    |
|--------------|----------------------------------------------------|
| ITEM4.  | SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS |

None.

|               |                  |
|---------------|------------------|
| ITEM 5:  | OTHERINFORMATION |

Vijay Bobba resigned as a director of the Company,effective as of February 25, 2004. As previously reported, during thequarter ended March 31, 2004, Donald Witmer and Robert N. Wise alsoresigned as directors, Michael Liddle was appointed President and ChiefExecutive Officer and a director, and Ezra P. Mager was electednon-executive Chairman of the Board of Directors.

|              |                                  |
|--------------|----------------------------------|
| ITEM6:  | EXHIBITS AND REPORTS ON FORM 8-K |

(a)    Exhibits

|            |                                                                                                                                                                                                                                                                                      |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  | EmploymentAgreement dated January 7, 2004, by and between Home Director, Inc. andJerry Steckling (filed as Exhibit 10.16 to the Company'sRegistration Statement on Form SB-2 filed with the Securities andExchange Commission on March 8, 2004 and incorporated herein byreference). |

19

----

|            |                                                                                                                                                                                                                                                                                                                             |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  | Separation andRelease Agreement by and between Robert N. Wise, Home Director, Inc.and Digital Interiors, Inc. dated as of March 3, 2004 (filed as Exhibit10.17 to the Company's Registration Statement on Form SB-2 filedwith the Securities and Exchange Commission on March 8, 2004 andincorporated herein by reference). |

|            |                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3  | Factoring Agreement dated as of March 23,2004 by and between Home Director, Inc., Home Director Technologies,Inc. and Digital Interiors, Inc. and Pacific Business Funding, adivision of Greater Bay Bank, N.A. (filed as Exhibit 10.18 to theCompany's Registration Statement on Form SB-2 filed with theSecurities and Exchange Commission on March 8, 2004 and incorporatedherein by reference). |

|            |                                                                                                                         |
|------------|-------------------------------------------------------------------------------------------------------------------------|
| 10.4  | ForbearanceAgreement dated as of May 6, 2004, between Pacific Business Funding andHome Director, Inc. (filed herewith). |

|            |                                                                                                                                      |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|
| 31.1  | Certification of Chief Executive Officerpursuant to Rule 13a-15 or Rule 15d-15(a) of the Securities ExchangeAct of 1934, as amended. |

|            |                                                                                                                                      |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  | Certificationof Chief Financial Officer pursuant to Rule 13a-15 or Rule 15d-15(a) ofthe Securities Exchange Act of 1934, as amended. |

|            |                                                                                                           |
|------------|-----------------------------------------------------------------------------------------------------------|
| 32.1  | Certification of Chief Executive Officerin accordance with Section 906 of the Sarbanes-Oxley Act of 2002. |

|            |                                                                                                           |
|------------|-----------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of Chief Financial Officerin accordance with Section 906 of the Sarbanes-Oxley Act of 2002. |

(b)    Reports on Form 8-K

On January 7, 2004, we filed acurrent report on Form 8-K, reporting the appointment of Michael Liddleas our Chief Executive Officer.

20

----

SIGNATURES

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

|  | HOMEDIRECTOR, INC. (Registrant) |
|--|---------------------------------|

|  | By: /s/ MichaelLiddle   |
|--|-----------------------------------|

|  | MichaelLiddlePresident and Chief Executive Officer |
|--|----------------------------------------------------|

|  | By: /s/ DarylStemm   |
|--|--------------------------------|

|  | DarylStemmChief Financial Officer and Secretary |
|--|-------------------------------------------------|

Date:   May 24,2004

21

----