UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

    Quarterly report under Section 13 or 15(d) ofthe Securities Exchange Act of 1934

For thequarterly period ended September 30, 2004

    Transition report under Section 13 or 15(d) ofthe Exchange Act

|  | For the transition periodfrom                                    to                                      |
|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

Commission file number 333-86873

HOME DIRECTOR, INC.

(Exact Name of Small Business Issuer in ItsCharter)

|                                                             |  |                                     |  |  |  |  |
|-------------------------------------------------------------|--|-------------------------------------|--|--|--|--|
| Delaware                                                    |  | 52-2143430                          |
| (Stateor other jurisdiction ofincorporation ororganization) |  | (I.R.S. Employer IdentificationNo.) |
| 2525Collier Canyon Road, Livermore,California               |  | 94551                               |
| (Address of PrincipalExecutive 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) of theExchange Act during the past 12 months (or for such shorter period thatthe registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes    No 

APPLICABLE ONLY TO CORPORATEISSUERS

State the number of shares outstanding of eachof the issuer's classes of common equity, as of the latestpracticable date. 16,035,715 as of November 19, 2004.

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

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TABLE OFCONTENTS

|            |  |                                                           |  |        |        |        |  |  |  |  |
|------------|--|-----------------------------------------------------------|--|--------|--------|--------|--|--|--|--|
|       |  |                                                      |  | Page   |
| PARTI      |  |                                                      |  |   |   |   |
| Item1.     |  | FinancialStatements                                       |  |   | 1      |   |
| Item2.     |  | Management's Discussion and Analysis or Plan ofOperation  |  |   | 15     |   |
| Item 3.    |  | Controls andProcedures                                    |  |   | 20     |   |
| PARTII     |  |                                                      |  |   |   |   |
| Item 1.    |  | LegalProceedings                                          |  |   | 22     |   |
| Item 2.    |  | UnregisteredSales of Equity Securities and Use ofProceeds |  |   | 22     |   |
| Item 3.    |  | Defaults UponSenior Securities                            |  |   | 22     |   |
| Item4.     |  | Submission of Matters to a Vote of SecurityHolders        |  |   | 22     |   |
| Item 5.    |  | OtherInformation                                          |  |   | 22     |   |
| Item6.     |  | Exhibits                                                  |  |   | 23     |   |
| Signatures |  |                                                      |  |   | 24     |   |
|            |

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.

ii

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PART I

ITEM 1.FINANCIAL STATEMENTS

HOME DIRECTOR, INC.ConsolidatedBalance SheetsSeptember 30, 2004 and December 31,2003(Unaudited)

|                                                                                                                                                                                  |  |              |             |               |  |        |             |         |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|-------------|---------------|--|--------|-------------|---------|--|--|
| ASSETS                                                                                                                                                                           |  |
|                                                                                                                                                                             |  | Sep.30, 2004 |             | Dec. 31, 2003 |
| Currentassets:                                                                                                                                                                   |  |
| Cash and cashequivalents                                                                                                                                                         |  | $            | 45,338      |          |  | $      | 65,733      |    |
| Accountsreceivable, net ofallowances                                                                                                                                             |  |         | 2,902,958   |          |  |   | 1,452,934   |    |
| Inventories,net ofallowances                                                                                                                                                     |  |         | 952,234     |          |  |   | 818,421     |    |
| Othercurrentassets                                                                                                                                                               |  |         | 372,917     |          |  |   | 195,128     |    |
| Totalcurrentassets                                                                                                                                                               |  |         | 4,273,447   |          |  |   | 2,532,216   |    |
| Propertyand equipment,net                                                                                                                                                        |  |         | 468,572     |          |  |   | 280,463     |    |
| Customer lists,net of accumulatedamortization                                                                                                                                    |  |         | 69,258      |          |  |   | 87,075      |    |
| Goodwill,net of accumulatedamortization                                                                                                                                          |  |         | 5,825,652   |          |  |   | 5,825,652   |    |
|                                                                                                                                                                             |  | $            | 10,636,929  |          |  | $      | 8,725,406   |    |
| **LIABILITIESAND SHAREHOLDERS' EQUITY**                                                                                                                                          |  |
| Currentliabilities:                                                                                                                                                              |  |
| Accounts payable and accruedexpenses                                                                                                                                             |  | $            | 3,043,744   |          |  | $      | 1,770,922   |    |
| Bankborrowings                                                                                                                                                                   |  |         | 677,011     |          |  |   | 300,000     |    |
| Notespayable                                                                                                                                                                     |  |         | 125,000     |          |  |   | 125,000     |    |
| Currentportion of capital leaseobligations                                                                                                                                       |  |         | 32,591      |          |  |   | 116,313     |    |
| Totalcurrentliabilities                                                                                                                                                          |  |         | 3,878,346   |          |  |   | 2,312,235   |    |
| Capitallease obligations, less currentportion                                                                                                                                    |  |         | 36,861      |          |  |   | 10,077      |    |
| Other LongTermLiabilities                                                                                                                                                        |  |         | 291,558     |          |  |   | 393,975     |    |
| Commitmentsand contingencies (Note 6)                                                                                                                                            |  |
| Shareholders'equity:                                                                                                                                                             |  |
| Preferred stock, $0.01 par valueAuthorized – 2,000,000 shares No shares issued oroutstanding                                                                               |  |         | —     |          |  |   | —     |    |
| Commonstock, $0.01 par value Authorized – 40,000,000 sharesIssuedand outstanding – 16,035,715 and 6,163,071 shares as of Sep.30, 2004 and Dec. 31, 2003,respectively |  |         | 160,357     |          |  |   | 61,631      |    |
| Additionalpaid-incapital                                                                                                                                                         |  |         | 82,983,955  |          |  |   | 77,582,890  |    |
| Accumulateddeficit                                                                                                                                                               |  |         | (76,714,148 | )        |  |   | (71,635,402 | )  |
| Totalshareholders'equity                                                                                                                                                         |  |         | 6,430,164   |          |  |   | 6,009,119   |    |
|                                                                                                                                                                             |  | $            | 10,636,929  |          |  | $      | 8,725,406   |    |
|                                                                                                                                                                                  |

Seeaccompanying notes to these financial statements.

1

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HOME DIRECTOR, INC.ConsolidatedStatements of OperationsFor the Three & Nine Month PeriodsEnded September 30, 2004 and 2003(Unaudited)

|                                                                   |  |                           |            |                          |  |               |           |              |  |        |            |         |  |        |            |         |  |  |
|-------------------------------------------------------------------|--|---------------------------|------------|--------------------------|--|---------------|-----------|--------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                              |  | Forthe three months ended |            | For the nine monthsended |
|                                                              |  | Sep. 30,2004              |            | Sep. 30, 2003            |  | Sep. 30, 2004 |           | Sep. 30,2003 |
| Revenue                                                           |  | $                         | 3,007,212  |                     |  | $             | 2,348,034 |         |  | $      | 7,499,457  |    |  | $      | 7,309,019  |    |
| Costsand expenses:                                                |  |
| Cost ofrevenue                                                    |  |                      | 2,385,785  |                     |  |          | 1,614,178 |         |  |   | 5,914,029  |    |  |   | 4,468,674  |    |
| Generalandadministrative                                          |  |                      | 1,372,895  |                     |  |          | 454,201   |         |  |   | 3,152,201  |    |  |   | 1,816,766  |    |
| Salesandmarketing                                                 |  |                      | 1,324,225  |                     |  |          | 518,951   |         |  |   | 2,737,984  |    |  |   | 1,822,389  |    |
| Researchanddevelopment                                            |  |                      | 126,004    |                     |  |          | 54,307    |         |  |   | 418,855    |    |  |   | 209,009    |    |
| Depreciationandamortization                                       |  |                      | 79,441     |                     |  |          | 101,053   |         |  |   | 203,398    |    |  |   | 295,943    |    |
| Provisionfor abandonment offacility                               |  |                      | —    |                     |  |          | —   |         |  |   | —    |    |  |   | 590,000    |    |
| Totalcosts andexpenses                                            |  |                      | 5,288,350  |                     |  | $             | 2,742,690 |         |  |   | 12,426,467 |    |  | $      | 9,202,781  |    |
| Income(Loss) fromoperations                                       |  | $                         | (2,281,138 | )                   |  | $             | (394,656  | )       |  | $      | (4,927,010 | )  |  | $      | (1,893,762 | )  |
| Otherexpense,net                                                  |  |                      | (21,355    | )                   |  |          | (43,606   | )       |  |   | (151,736   | )  |  |   | (56,804    | )  |
| Netincome(loss)                                                   |  | $                         | (2,302,493 | )                   |  | $             | (438,262  | )       |  | $      | (5,078,746 | )  |  | $      | (1,950,566 | )  |
| Comprehensiveincome(loss)                                         |  | $                         | (2,302,493 | )                   |  | $             | (438,262  | )       |  | $      | (5,078,746 | )  |  | $      | (1,950,566 | )  |
| Netincome (loss) per common share — basic anddiluted:       |  |
| Shares used in computing basic netincome (loss) per commonshare   |  |                      | 14,608,375 |                     |  |          | 3,751,467 |         |  |   | 9,737,419  |    |  |   | 3,751,467  |    |
| Sharesused in computing diluted net income (loss) per commonshare |  |                      | 14,608,375 |                     |  |          | 3,751,467 |         |  |   | 9,737,419  |    |  |   | 3,751,467  |    |
| Netincome (loss) pershare                                         |  |
| Basic:                                                            |  | $                         | (.16       | )                   |  | $             | (.12      | )       |  | $      | (.52       | )  |  | $      | (.52       | )  |
| Diluted:                                                          |  | $                         | (.16       | )                   |  | $             | (.12      | )       |  | $      | (.52       | )  |  | $      | (.52       | )  |
|                                                                   |

Seeaccompanying notes to these financial statements.

2

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HOME DIRECTOR, INC.ConsolidatedStatements of Cash FlowsFor the Nine Months Ended September 30,2004 and 2003(Unaudited)

|                                                                                                |  |        |            |         |  |        |            |         |  |  |
|------------------------------------------------------------------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                           |  | 2004   |            | 2003    |
| Cashflows from operating activities:                                                           |  |
| Netloss                                                                                        |  | $      | (5,078,746 | )  |  | $      | (1,950,566 | )  |
| Adjustmentsto reconcile net loss to net cash used in operatingactivities:                      |  |
| Depreciation andamortization                                                                   |  |   | 203,398    |    |  |   | 295,943    |    |
| Provisionfor abandonment offacility                                                            |  |   | —    |    |  |   | 590,000    |    |
| Noncash expense from warrant issuance                                                          |  |   | 309,823    |    |  |   | 31,412     |    |
| Changes inoperating assets and liabilities, net of assets and liabilitiesacquired:             |  |
| Accountsreceivable                                                                             |  |   | (1,450,024 | )  |  |   | (722,973   | )  |
| Inventories                                                                                    |  |   | (133,813   | )  |  |   | (244,317   | )  |
| Other currentassets                                                                            |  |   | (177,789   | )  |  |   | (54,084    | )  |
| Accounts payable and accruedexpenses                                                           |  |   | 1,272,822  |    |  |   | (119,733   | )  |
| Other long-termliabilities                                                                     |  |   | (102,417   | )  |  |   | —    |    |
| Net cash used in operatingactivities                                                           |  |   | (5,156,746 | )  |  |   | (2,174,317 | )  |
| Cash flows from investingactivities:                                                           |  |
| Purchases of property andequipment                                                             |  |   | (298,231   | )  |  |   | (91,075    | )  |
| Net cash used in investingactivities                                                           |  |   | (298,231   | )  |  |   | (91,075    | )  |
| Cash flows from financingactivities:                                                           |  |
| Net proceeds from bankborrowings                                                               |  |   | 377,011    |    |  |   | 400,000    |    |
| Netreceipts (payments) of payables to relatedparties                                           |  |   | —    |    |  |   | (291,793   | )  |
| Repayment of capital lease obligations,net                                                     |  |   | (132,395   | )  |  |   | (90,448    | )  |
| Proceeds from (payment of) convertible notes andissuance of common stock, net of issuancecosts |  |   | 5,189,966  |    |  |   | (3,319     | )  |
| Netcash provided by (used in) financingactivities                                              |  |   | 5,434,582  |    |  |   | 14,440     |    |
| Net increase (decrease) in cash and cashequivalents                                            |  |   | (20,395    | )  |  |   | (2,250,952 | )  |
| Cash and cash equivalents at beginning ofperiod                                                |  |   | 65,733     |    |  |   | 2,557,214  |    |
| Cashand cash equivalents at end ofperiod                                                       |  | $      | 45,338     |    |  | $      | 306,262    |    |
| SupplementalDisclosure of Cash FlowInformation                                                 |  |
|                                                                                           |  | 2004   |            | 2003    |
| Cashpaid during theperiod                                                                      |  |
| Interest                                                                                       |  | $      | 36,077     |    |  | $      | 18,519     |    |
| Non-cashinvesting and financing activities:                                                    |  |
| Conversionof convertible notes to commonstock                                                  |  | $      | 784,402    |    |  | $      | —    |    |
| Capitallease obligationsincurred                                                               |  | $      | 75,457     |    |  | $      | —    |    |
|                                                                                                |

Seeaccompanying notes to these financialstatements.

3

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HomeDirector, Inc. Condensed Notes to Consolidated FinancialStatements(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 nine months ended September 30, 2004 are not necessarily indicativeof the results that may be expected for the year ending December 31,2004. These financial statements and notes should be read inconjunction with the financial statements and notes thereto for theyear ended December 31, 2003 included in the Company's annualreport on Form 10-KSB filed with the SEC on April 2, 2004. The balancesheet at December 31, 2003 has been derived from the auditedconsolidated financial statements of the Company.

4

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HomeDirector, Inc. Condensed Notes to Consolidated FinancialStatements —(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 September 30, 2004, twocustomers accounted for 30% of the accounts receivable balanceand three customers accounted for 48% of the revenue for thenine months ended September 30, 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 2,242,047and 613,371 shares of the Company's common stock outstandingduring the three and nine month periods ended September 30, 2004 and2003, respectively, were not included in the computation of diluted netloss per share because their effect would be anti-dilutive (i.e. wouldincrease the number of shares in the loss per sharecalculations).

5

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

The effect of warrants to purchase22,331,475 and 773,592 shares of the Company's common stockoutstanding during the three and nine month periods ended September 30,2004 and 2003, respectively, were not included in the computation ofdiluted net loss per share because their effect would be anti-dilutive(i.e. would increase the number of shares in the loss 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 certain installation projects using thepercentage of completion method, based primarily on revenue milestones.On certain other installation projects, the Company recognizes revenueusing the percentage of completion method, based upon actual costsincurred compared to total estimated contract costs. Changes to totalestimated contract costs or losses, if any, are recognized in theperiod in which they are determined. For these other installationprojects, which represent less than 5% of revenues, revenuerecognized in excess of amounts billed of $77,541 and $203,808 atSeptember 30, 2004 and December 31, 2003, respectively, is classifiedas current assets under "AccountsReceivable." Amounts billed in excess of revenuerecognized to date of $14,002 and $17,675 at September 30, 2004 andDecember 31, 2003, respectively, are classified as current liabilitiesunder "Accounts Payable and AccruedExpenses."

Property and Equipment

Propertyand equipment is recorded at cost and depreciated using thestraight-line method over estimated useful lives which generally rangefrom 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," whichwas required to be applied for fiscal years beginning after December15, 2001. The Company adopted SFAS 142 as of January 1, 2002. SFAS 142eliminated the amortization of goodwill and certain other intangibleassets. It also required 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. As of September 30, 2004, the Company does notbelieve there have been any events that have occurred that would causeit to assess impairment of goodwill. During 2004, the Company hascontinued to experience operating and cash flow losses but successfullycompleted a private placement raising $5.2 million of gross proceeds(See Note 7 - Liquidity). As required by SFAS 142, the Company willperform its next annual impairment test as of December 31, 2004 andadjustments to the recorded goodwill may be required at that time.

Research and Development Costs

Research and developmentcosts are charged to operations as incurred.

AdvertisingCosts

The Company expenses advertising costs as incurred. Theamount of advertising expensed during the nine months ended September30, 2004 and 2003, was $136,640 and $22,326, respectively.

6

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HomeDirector, Inc. Condensed Notes to Consolidated FinancialStatements —(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 September 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 principles 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.

|                                                                                                                                         |  |                           |            |                          |  |                |          |               |  |        |            |         |  |        |            |         |  |  |
|-----------------------------------------------------------------------------------------------------------------------------------------|--|---------------------------|------------|--------------------------|--|----------------|----------|---------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                                                                                    |  | Forthe Three Months Ended |            | For the Nine MonthsEnded |
|                                                                                                                                    |  | Sept. 30,2004             |            | Sept. 30, 2003           |  | Sept. 30, 2004 |          | Sept. 30,2003 |
| Net Loss, asreported                                                                                                                    |  |                      | (2,302,493 | )                   |  |           | (438,262 | )        |  |   | (5,078,746 | )  |  |   | (1,950,566 | )  |
| Deduct:Total stock-based employee compensation expense determined under fairvalue based method for all awards, net of income taxeffects |  |                      | (146,419   | )                   |  |           | (124,273 | )        |  |   | (447,329   | )  |  |   | (260,129   | )  |
| Pro-formanetloss                                                                                                                        |  |                      | (2,448,912 | )                   |  |           | (562,535 | )        |  |   | (5,526,075 | )  |  |   | (2,210,695 | )  |
| Netloss per share:                                                                                                                      |  |
| Basic — asreported                                                                                                                |  |                      | (0.16      | )                   |  |           | (0.12    | )        |  |   | (0.52      | )  |  |   | (0.52      | )  |
| Diluted— asreported                                                                                                               |  |                      | (0.16      | )                   |  |           | (0.12    | )        |  |   | (0.52      | )  |  |   | (0.52      | )  |
| Basic— proforma                                                                                                                   |  |                      | (0.17      | )                   |  |           | (0.15    | )        |  |   | (0.57      | )  |  |   | (0.59      | )  |
| Diluted— proforma                                                                                                                 |  |                      | (0.17      | )                   |  |           | (0.15    | )        |  |   | (0.57      | )  |  |   | (0.59      | )  |
|                                                                                                                                         |

7

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

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 asfollows:

|                                     |  |        |      |         |  |        |      |         |  |  |
|-------------------------------------|--|--------|------|---------|--|--------|------|---------|--|--|
|                                |  | 2004   |      | 2003    |
| Expecteddividend yield              |  |   | 0.00 | %  |  |   | 0.00 | %  |
| Risk-free interest rate             |  |   | 4.4  | %  |  |   | 4.4  | %  |
| Expected life (inyears)             |  |   | 10.0 |    |  |   | 10.0 |    |
| Volatility                          |  |   | 70   | %  |  |   | 70   | %  |
| Weighted-averagefair value pershare |  | $      | 1.02 |    |  | $      | 3.57 |    |
|                                     |

As of September30, 2004, the Company had reserved a total of 2,488,620 shares ofcommon stock for issuance under the Plan. The Plan permits the grantingof incentive stock options and non-qualified stock options. The termsof stock option grants are determined by the Compensation Committee ofthe Board 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 246,573 at September 30, 2004.

The following summarizesthe stock option activity as of September 30, 2004:

|                                     |  |                    |           |                              |  |        |         |         |  |  |
|-------------------------------------|--|--------------------|-----------|------------------------------|--|--------|---------|---------|--|--|
|                                |  | OptionsOutstanding |           | WeightedAverageExercisePrice |
| Balanceat December 31,2002          |  |               | 101,206   |                         |  | $      | 64.84   |    |
| Grant (exerciseprice = fairvalue)   |  |               | 542,100   |                         |  |   | 3.72    |    |
| Exercised                           |  |               | —   |                         |  |   | — |    |
| Cancelled                           |  |               | (166,178  | )                       |  |   | (9.08   | )  |
| Balance at December 31,2003         |  |               | 477,128   |                         |  | $      | 14.82   |    |
| Granted(exercise price = fairvalue) |  |               | 1,980,467 |                         |  |   | 0.99    |    |
| Exercised                           |  |               | —   |                         |  |   | — |    |
| Cancelled                           |  |               | (215,548  | )                       |  |   | (21.50  | )  |
| Balance at September 30,2004        |  |               | 2,242,047 |                         |  | $      | 1.96    |    |
|                                     |

8

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

Selected information regarding stockoptions as of September 30, 2004follows:

|        |  |                                                          |        |                            |  |                                     |           |                            |  |        |        |        |  |        |         |        |  |  |
|--------|--|----------------------------------------------------------|--------|----------------------------|--|-------------------------------------|-----------|----------------------------|--|--------|--------|--------|--|--------|---------|--------|--|--|
|   |  | Range ofExercisePricesAnd WeightedAverage ExercisePrices |        | NumberofOptionsOutstanding |  | WeightedAverageRemainingLifeinYears |           | NumberofOptionsExercisable |
|   |  | $                                                        | 0.74   |                       |  |                                | 1,097,500 |                       |  |   | 9.67   |   |  |   | 275,583 |   |
|   |  |                                                     | 1.30   |                       |  |                                | 875,967   |                       |  |   | 9.29   |   |  |   | 105,116 |   |
|   |  |                                                     | 2.50   |                       |  |                                | 12,500    |                       |  |   | 8.54   |   |  |   | 12,500  |   |
|   |  |                                                     | 3.63   |                       |  |                                | 11,024    |                       |  |   | 7.58   |   |  |   | 10,220  |   |
|   |  |                                                     | 3.75   |                       |  |                                | 234,600   |                       |  |   | 8.29   |   |  |   | 195,883 |   |
|   |  |                                                     | 79.83  |                       |  |                                | 196       |                       |  |   | 7.22   |   |  |   | 196     |   |
|   |  |                                                     | 80.00  |                       |  |                                | 7,875     |                       |  |   | 0.69   |   |  |   | 7,875   |   |
|   |  |                                                     | 163.28 |                       |  |                                | 96        |                       |  |   | 6.33   |   |  |   | 96      |   |
|   |  |                                                     | 362.84 |                       |  |                                | 2,289     |                       |  |   | 6.56   |   |  |   | 2,289   |   |
|   |  | $                                                        | 1.96   |                       |  |                                | 2,242,047 |                       |  |   |   |   |  |   | 609,758 |   |
|        |

Note2 — Capital Stock

On April 1, 2002, the Company'sBoard of Directors approved a one-for-ten reverse common stock splitwhich was approved by the Company's stockholders as of May 2,2002. An amendment to the Company's Certificate of Incorporationeffecting the stock split was filed with the State of Delaware on May2, 2002. All common share and per common share amounts for all periodspresented in the accompanying consolidated financial statements havebeen restated to reflect the effect of this common stock split.

As of September 30, 2004, the Company had authorized 40,000,000shares of common stock with a par value of $0.01. The Company also hadauthorized 2,000,000 shares of preferred stock, which are undesignated,with a par value of $0.01.

Note 3 - Common Stock Reserved forFuture Issuance

At September 30, 2004, the Company had reserveda total of 24,860,095 of its authorized 40,000,000 shares of commonstock for future issuance as follows:

|                                                 |  |        |            |        |  |  |  |  |  |  |
|-------------------------------------------------|--|--------|------------|--------|--|--|--|--|--|--|
| Outstandingcommon stock warrants                |  |   | 22,331,475 |   |  |
| Possiblefuture issuance of common stockwarrants |  |   | 40,000     |   |  |
| Outstanding stockoptions                        |  |   | 2,242,047  |   |  |
| Possible future issuanceunder stock optionplan  |  |   | 246,573    |   |  |
|                                            |  |   | 24,860,095 |   |  |
|                                                 |

Asof November 15, 2004, only 23,964,285 of the authorized shares wereissuable. Effective July 1, 2004, the Company entered into an agreementwith certain of its directors and officers under which such directorsand officers agreed not to exercise options and warrants to purchase anaggregate of 1,599,394 shares of common stock until such time, if ever,as the Company amends its certificate of incorporation to increase itsauthorized shares of common stock to a number that is sufficient topermit exercise of all of its outstanding options, warrants and otherrights to acquire shares of its common stock. In exchange, the Companyagreed to use its best efforts to seek stockholder approval of such anamendment at its 2005 annual stockholdersmeeting.

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

Note 4 — Related Party Transactions

Related PartyPayables

During February and March 2004, one of theCompany's executive officers made a series of loans to theCompany in the aggregate principal amount of $46,000. Commencing inJuly 2004, the Company began repaying the loans. As of September 30,2004, these loans have been paid in full. These loans were payable ondemand and had an interest rate of 10% per annum.

Placement and Other Fees

In connection with theprivate placement of common stock and warrants completed in July 2004,the Company incurred placement fees of approximately $657,000, paid toSpencer Trask Ventures, Inc. These placement fees were recorded as areduction of amounts raised. In addition, Spencer Trask was grantedwarrants to purchase 3,525,429 shares of the Company's commonstock at a price of $0.74 per share.

In connection with theprivate placement of common stock and warrants in December 2003 andJanuary 2004, the Company incurred placement fees of approximately$420,000, paid to Spencer Trask Ventures, Inc. The placement fees wererecorded as a reduction of amounts raised. In addition, Spencer Traskalso received warrants to purchase 657,846 shares of theCompany's common stock at a price of $1.068 per share, warrantsto purchase 306,795 shares of the Company's common stock at aprice of $1.178 per share and warrants to purchase 423,630 shares ofthe Company's common stock at a price of $1.298 per share. As aresult of anti-dilution adjustments triggered by the private placementcompleted in July 2004, these warrants now represent the right topurchase 1,791,917 shares of common stock at exercise prices rangingfrom $0.86 to $0.96 per share.

On March 28, 2003, the Companyentered into a Consulting Agreement under which it retained SpencerTrask as its non-exclusive financial advisor and investment banker.Under this agreement, the Company agreed that until March 28, 2004, itwould compensate Spencer Trask, in cash and/or warrants to purchaseCommon Stock, for advisory services in connection with acquisitions,mergers, combinations, private and public equity offerings, debtfinancing and other similar business transactions. No compensation waspaid under this agreement.

Bridge Financing

InMay 2004, certain officers, directors and affiliates of the Company(including a family member of a director and certain affiliates ofSpencer Trask Ventures, Inc.) purchased $565,000 aggregate principalamount of the Company's convertible notes and warrants topurchase an aggregate of 565,000 shares of the Company's commonstock as part of a bridge financing totaling $1,015,000. In June 2004,the entire $565,000 principal amount of the notes purchased by theseofficers, directors and affiliates was automatically converted intounits in the Company's private placement at a conversion price of$0.59 per unit. See Note 7, Liquidity.

Note 5 — Provisionfor Abandonment of Facility

In June 2003, the Company exitedits Durham, North Carolina warehouse facility and relocated theoperations to its Livermore, California facility. The Company agreed toa settlement of its remaining lease obligations for $657,891, to bepaid over four years. As a result, the Company recorded a discountedprovision of $590,000 related to the remaining lease commitment. 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.

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

|                     |  |                   |         |           |  |          |         |                  |  |   |         |         |  |   |         |        |  |  |
|---------------------|--|-------------------|---------|-----------|--|----------|---------|------------------|--|---|---------|---------|--|---|---------|--------|--|--|
|                |  | Balanceat12/31/03 |         | Provision |  | Payments |         | Balanceat9/30/04 |
| FacilityAbandonment |  | $                 | 521,343 |      |  |     | — |             |  | $ | (94,568 | )  |  | $ | 426,775 |   |
|                     |

AtSeptember 30, 2004 $135,217 of the balance is recorded as part ofaccounts payable and accrued expenses and $291,558 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.

OnJune 18, 2001, Point West Ventures, LP ("PointWest") filed a complaint in New York State Supreme Courtagainst HDT and Spencer Trask Ventures, Inc., the placement agent forHDT's Series B convertible preferred stock financing in 2000.Point West 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. SpencerTrask and the receiver are currently negotiating a proposed settlementunder which the Company would agree to repurchase the securitiesacquired by Point West for $44,000. There is no assurance that thematter will be settled on the proposed terms or at all.

In June2003, the Company 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. The third party has not 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 commenced and resolvedadversely, the Company could be compelled to pay damages and/orroyalties to the third party for its use of the Home Director nameand/or limit or discontinue its use as a trademark.

On March 3,2004, Robert N. Wise resigned as President, Chief Operating Officer anda director of the Company and entered into a Separation and ReleaseAgreement with the Company. Under the terms of this agreement, theCompany retained Mr. Wise as an independent consultant for a transitionperiod of 30 days and the Company's obligation to employ Mr. Wiseas its President and Chief Operating Officer under his EmploymentAgreement was terminated. The Company agreed to pay Mr. Wise (i)$10,000 during the transition period, (ii) $50,000 upon hisresignation, (iii) 2% of the Company's first year revenuesderived from certain 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.

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HomeDirector, Inc.Condensed Notes to Consolidated FinancialStatements   — (continued)(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.

The net proceeds (approximately $4.4 million) from theCompany's private sale of equity units completed in July 2004temporarily met the Company's cash needs for working capitalpurposes. Since that time, although the Company's revenues andsales increased during the third quarter of 2004, the Company haslargely exhausted its cash reserves, and it has an immediate need foradditional cash to sustain and grow its operations. The depletion ofthe Company's cash during the third quarter was the direct resultof the unanticipated magnitude of the loss for the quarter (generatedin part by initial costs of its expanded product development programand a higher level of marketing and sales activities) and an excessiveinventory build-up (which the Company believes will be largely workedoff during the fourth quarter of 2004 and the first few months of2005). Although the Company anticipates continued sales growth andremains optimistic about its longer-term prospects, the Company expectsthat some of the factors, including operating losses, which havedepleted its cash will continue to severely stress its cash resourcesfor at least the next six months.

The Company's potentialsources of additional cash are limited. In light of the poor marketperformance of the Company's shares, its history of losses andthe current lack of authorized common stock available for issuance, theCompany's capacity to raise capital through the sale ofadditional equity securities is uncertain, at best. The Company'sentitlement to cash advances under its existing Factoring Agreement islimited to a percentage of "eligible"accounts receivable that satisfy certain criteria and is currentlycapped at $750,000 (of which approximately $677,000 was outstanding asof September 30, 2004).

The Company is actively considering anumber of immediate measures to relieve the stress on its cashresources. These measures include, but are not limited to, (1)privately selling relatively small amounts of highly-dilutiveconvertible debt or preferred stock, subject to subsequent increase inthe Company's authorized common stock, (2) increasing theCompany's borrowing capacity by a modest amount through expansionor replacement of its single existing credit facility, (3) sharplyreducing the Company's staff and/or marketing, productdevelopment and other expenses, (4) reducing inventories, and (5)selling assets or one or more business segments. Significant reductionsin the Company's staff or other expenses would likely have amaterial adverse impact on its longer term potential for growth.

There is no assurance that the Company will be able to successfullyimplement any of the remedial measures it is considering or any otherremedial measures. If the Company successfully implements any remedialmeasures, there is no assurance that the measures taken will besufficient to satisfy its near-term cash requirements or will have alonger-term beneficial effect on its operations. If the Company isunable either to raise sufficient additional cash in the near future orpromptly and substantially reduce expenses, it will be forced tocurtail or cease its operations.

Line of Credit

As of March 31, 2004, as a result of the Company's failure tocomply with certain financial covenants, the Company was in defaultunder a $300,000 outstanding line of credit from Venture Banking Group.On April 1, 2004, the Company obtained advances of $450,000 under a newFactoring Agreement (described below) and applied approximately$300,000 of the advances to repay the line of credit, which was thenterminated.

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

Factoring Agreement

As ofSeptember 30, 2004, the Company owed approximately $677,000 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. Borrowings are secured by substantially all of theCompany's assets. The making of advances under the FactoringAgreement is within the complete discretion of Pacific. Amountsadvanced and uncollected bear a finance fee equal to Pacific'sprime rate plus 6% per annum, which is subject to increase by anadditional 5% per annum in the event of a default. In connectionwith the Factoring Agreement, the Company issued to Pacific'sparent warrants to purchase 8,333 shares of the Company's commonstock and recorded a $6,977 charge to interest expense in the firstquarter of 2004.

The Company has notified Pacific of a defaultunder the Factoring Agreement attributable to the Company'sfailure to pay Federal and state withholding taxes for certain periods.Although the Company is seeking to settle these withholding taxliabilities and Pacific has continued to make advances under theFactoring Agreement, the Company can provide no assurance that Pacificwill not exercise its default remedies, which include termination offurther advances and acceleration of repayment of all outstandingadvances. If Pacific exercises its default remedies, the Company wouldneed to seek other financing which might not be available on termssatisfactory to it or at all. At September 30, 2004, the Companymaintained a liability for these witholding taxes of approximately$863,000, and adjustments may be required upon final resolution withthe respective tax authorities.

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.)

May2004 Bridge Financing and June and July 2004 Private Placement

In May 2004, the Company privately sold $1,015,000 face amount ofits 8% convertible notes and warrants to purchase shares of itsCommon Stock to accredited investors, including certain of itsdirectors and officers and affiliates, for gross proceeds of$1,015,000. The notes matured on June 16, 2004, upon automaticconversion into investment units of the kind sold in theCompany's first equity financing. Purchasers of the notesreceived three-year warrants to purchase an aggregate of 1,015,000shares of Common Stock at an exercise price of $1.00 per share. TheCompany recorded non-cash interest expense of approximately $77,000associated with the issuance of the warrants, during the second quarterof 2004.

In June and July 2004 the Company raised gross proceedsof $5.2 million ($2.2 million in June and $3 million in July, 2004)through the private placement of equity units at a price of $0.59 perunit, including proceeds from the conversion of $1,015,000 principalamount of notes issued in the Bridge Financing. Net proceeds of $1.8million were received during the second quarter and net proceeds ofapproximately $2.6 million were received in July 2004, all of which arereflected in the balance sheet as of September 30, 2004. The unitscomprise a total of 8,813,569 shares of common stock and warrants topurchase an additional 8,813,569 shares at $0.74 per share. SpencerTrask Ventures Inc. was the placement agent for the transaction andreceived cash compensation of $657,000, including reimbursement for itsnon-accountable expenses, and warrants to purchase 3,525,429 shares ofcommon stock at $0.74 per share.

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

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(adjusted to 1,791,917 shares of Common Stock at $0.86 to $0.96 pershare as a result of anti-dilution provisions triggered by theCompany's private placement completed in July 2004).

All ofthe shares of Common Stock included in the units sold in the equityfinancing transactions described above (including the shares underlyingthe warrants) were registered for resale under the Company'sregistration statement on Form SB-2, which was declared effective bythe Securities and Exchange Commission on September 24,2004.

14

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ITEM2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION

The following discussion of our financialcondition and results of operations should be read together with thefinancial statements and related notes included elsewhere in thisreport. Some of the statements in this section that are not historicalfacts are forward-looking statements. You are cautioned that theforward-looking statements contained in this section are estimates andpredictions, and that our actual results could differ materially fromthose anticipated in the forward-looking statements due to 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

Our revenues consistprimarily of revenues from the sale of home networking products andservices. Our home networking products are sold primarily todistributors for use by integrators who install the products in homesthroughout the United States and Canada. The Company providesinstallation services, primarily to the new home construction market,in California, Florida, Colorado and Texas.

Research anddevelopment expenses consist primarily of salaries and relatedpersonnel expenses, subcontracted research expenses, and technologylicense expenses. As of September 30, 2004, all research anddevelopment costs had been expensed as incurred. We believe thatcontinued investment in research and development is critical toattaining our strategic objectives, and we expect such expenses toincrease for the remainder of 2004, subject to liquidity constraintsdescribed below.

General and administrative expenses consistprimarily of expenses for executive, finance and administrativepersonnel, professional fees, and other general corporate expenses. Aswe add personnel and incur additional costs related to the anticipatedgrowth of our business, general and administrative expenses will alsoincrease, subject to the liquidity constraints.

RecentDevelopments

During the first quarter of 2004, HDT started anew division called "JSX Audio." Thisdivision focuses on developing and marketing high-end audio equipmentfor the professional and luxury home markets. JSX Audio is based inPetaluma, California where HDT has subleased office space through March31, 2005.

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.

RevenueRecognition.    We generally recognize 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 its experience. We also recognize revenue usingthe percentage of completion method on installation projects, primarilyby comparing contractual billing milestones with total contract value.Accounting for revenue from services, payment of upfront fees, andachievement of contract-specific milestones involves management makingassessments of business conditions and estimates regarding timing andcost of work associated with the revenue. Over time, these estimatesmay be adjusted based on then-current circumstances, such as changes incontract amounts, resulting in adjustment to revenues. Changes to totalestimated contract costs or losses, if any, are recognized in theperiod in which they are identified.

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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 three quarters 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.The obsolete inventory was acquired primarily in 2000 and 2001, and weanticipate that the level of these expenses and write-downs will belower in future periods. To the extent that we are not able tocorrectly anticipate these trends, additional reserves may be requiredin future periods. No material charges associated with inventory wereincurred by the Company in the first three quarters of 2004.

Intangible Assets — Goodwill.    Intangible assetsinclude costs in excess of net assets acquired("goodwill") and other purchased intangibles.The carrying amount of goodwill is reviewed annually. If this reviewindicates that goodwill will not be recoverable, the carrying amount ofthe goodwill will be reduced to its estimated fair value. This requiresus to estimate such factors as future sales volumes and costs ofbusiness produced by these intangibles. To the extent that we are notable to correctly anticipate these trends, additional adjustments toestimated fair value may be required in future periods.

Valuation of Warrants and Other Equity Instruments.    Wehave entered, and may continue to enter, into transactions whereby wegrant warrants to purchase stock to non-employees. These transactionssometimes require us to determine the fair value of non-exchange tradedinstruments. The development of these fair values requires significantjudgment and estimates by management. We disclose the principalassumptions used in determining these fair values in our financialstatements and we believe these assumptions are reasonable. However,the use of different valuation models, or assumptions differing fromours, could cause materially different values to be assigned theseinstruments and could have a significant impact, positive or negative,on our reported results of operations. During 2003, we issued warrantsin connection with our bank line of credit and certain agreements toprovide investor relation services. Expenses relating to the value ofthose warrants totaled $144,000. In the first quarter of 2004, weissued warrants to purchase shares of our common stock in connectionwith our Factoring Agreement. Expenses relating to the value of thesewarrants totaled $7,000. In the second quarter of 2004, we issuedwarrants to purchase shares of our common stock in connection with ourBridge Financing. Expenses relating to the value of these warrantstotaled $77,000 and are recorded as interest expense in the secondquarter of 2004. In the third quarter of 2004, we issued warrants topurchase shares of our common stock in connection with certainagreements to provide investor relation services. Expenses relating tothe value of those warrants totaled $226,000 and are recorded asgeneral and administrative expenses in the third quarter of 2004.

Results of Operations

Three and nine Month Periods EndedSeptember 30, 2004 and 2003.    Revenues were $3,007,000 in thethird quarter of 2004, compared to $2,348,000 in the third quarter of2003, an increase of 28%, and the Company's highestquarterly revenue since the Merger in December 2002. Revenues were$7,499,000 during the first nine months of 2004, compared to $7,309,000during the first nine months of 2003, an increase of 3%. Theincreases were primarily attributable to increased services revenues(from $5,324,000 during the first nine months of 2003 to $5,895,000during the first nine months of 

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2004, or an increase of 11%) partiallyoffset by decreased product sales in 2004 (from $1,985,000 during thefirst nine months of 2003 to $1,605,000 during the first nine months of2004, or a decrease of 19%.)

Product sales accounted for28% of revenues in the third quarter of 2004, as compared to27% in the third quarter of 2003 and accounted for 21% ofrevenues during the first nine months of 2004, as compared to27% during the first nine months of 2003. The decline in productsales for the nine months ended September 30, 2004 reflects severalfactors, including our strategic decisions to concentrate on costreduction measures in the second half of 2003 and the sale of productprimarily through the still-developing Sears Connected Home program, aswell as intense price competition. These factors had a decliningimpact, as product sales grew from $238,000 in the first quarter of2004 to $511,000 in the second quarter of 2004 and $856,000 during thethird quarter of 2004.

On the services side, revenues increasedby 11% during the first nine months of 2004 as compared to thefirst nine months of 2003. During 2004, we signed a number of newcontracts to provide networking solutions to home builders and, duringthe fourth quarter of 2003 and the first quarter of 2004, we openedoffices in Colorado Springs and Houston to provide networking solutionsin those areas. In the first nine months of 2004, sales orders for homeinstallation services increased by 18% as compared to the sameperiod in 2003.

Total costs and expenses were $5,288,000 in thethird quarter of 2004, compared to $2,743,000 in the third quarter of2003. The increase in 2004 was primarily attributable to an increase ingeneral and administrative expenses of $918,000, an increase in salesand marketing expenses of $805,000, an increase in cost of revenues of$772,000, and an increase in research and development expenses of$72,000. Cost of revenues was $2,386,000, or 79% of revenues, inthe third quarter of 2004 as compared to $1,614,000, or 69% ofrevenues, in 2003. Cost of revenues in 2004 was adversely affected bydecreased average product selling prices and a change in the mix of theCompany's revenues. Total costs and expenses were $12,426,000during the first nine months of 2004, compared to $9,203,000 during thefirst nine months of 2003. The increase in 2004 was primarilyattributable to an increase in cost of revenues of $1,445,000, anincrease in general and administrative expenses of $1,335,000, anincrease in sales and marketing expenses of $916,000, an increase inresearch and development expenses of $210,000, offset in part by theprovision for abandonment of facility of $590,000 which was recorded in2003. Cost of revenues was $5,914,000, or 79% of revenues,during the first nine months of 2004 as compared to $4,469,000, or61% of revenues, in 2003. Cost of revenues in 2004 was adverselyaffected by decreased average hardware selling prices and a change inthe mix of the Company's revenues.

We expect our researchand development 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. We also expect our sales and marketing expenses to continueto increase, due primarily to our hiring of additional sales andmarketing personnel, expanded marketing efforts undertaken to increasebrand recognition and demand for our products and increased commissionexpenses caused by expected increases in revenues.

Net interestexpense increased in 2004 ($21,000 in the third quarter and $152,000for the first nine months of the year) compared to 2003 ($12,000 of netinterest expense in the third quarter and $25,000 of net interestexpense for the first nine months of the year) primarily due towarrants we issued the second quarter of 2004 to purchase shares of ourcommon stock in connection with our Bridge Financing. Expenses relatingto the value of these warrants totaled $77,000 and are recorded asinterest expense in the second quarter of 2004.

Our net loss inthe third quarter of 2004 was approximately $2,302,000, as compared toa net loss of approximately $438,000 in 2003. Our net loss for the ninemonths ended September 30, 2004 was approximately $5,079,000, ascompared to net loss of approximately $1,951,000 in the same period in2003. The increase in the net loss for the third quarter in 2004 andthe nine months ended September 

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30, 2004 is primarily due to the decline ingross margin and the increases in general and administrative, sales andmarketing, and research and development expenses as discussedabove.

Liquidity and Capital Resources

Historically ouroperations have never been self-sustaining, and we have financed ourcontinuing operations through a series of private offerings of debt andequity and by asset-based borrowings from commercial lenders. We cannotpredict when, if ever, our business will produce sufficient cash toreduce or eliminate our dependence on external financing as our primarysource of working capital.

The net proceeds (approximately $4.4million) from the private sale of equity units completed in July 2004temporarily met our cash needs for working capital purposes. Since thattime, although our revenues and sales increased during the thirdquarter of 2004, we have largely exhausted our cash reserves, and wehave an immediate need for additional cash to sustain and grow ouroperations. The depletion of cash during the third quarter was thedirect result of the unanticipated magnitude of the loss for thequarter (generated in part by initial costs of our expanded productdevelopment program and a higher level of marketing and salesactivities) and an excessive inventory build-up (which we believe willbe largely worked off during the fourth quarter of 2004 and the firstfew months of 2005). Although we anticipate continued sales growth andremain optimistic about our longer-term prospects, we expect that someof the factors, including operating losses, which have depleted ourcash will continue to severely stress our cash resources for at leastthe next six months.

Our potential sources of additional cashare limited. In light of the poor market performance of our shares, ourhistory of losses and the current lack of authorized Common Stockavailable for issuance, our capacity to raise capital through the saleof additional equity securities is uncertain, at best. Our entitlementto cash advances under our existing Factoring Agreement is limited to apercentage of "eligible" accounts receivablethat satisfy certain criteria and is currently capped at $750,000 (ofwhich approximately $677,000 was outstanding as of September 30, 2004).Certain provisions of our contracts with builders limit opportunitiesto expand the scale of our accounts receivable financing. Ourreceivables arise principally from completion of installation work onindividual homes under contracts with builders that cover multiple homeinstallations in one or more large developments. In conformity withindustry practice and our builder contracts, a portion of thesereceivables is subject to the potential risk of set-off by the builderfor defaults or defects in remaining work to be performed on otherhomes in the same development. While such setoffs rarely occur, therisk itself weakens the value of the receivables as collateral forfinancing purposes.

We are actively considering a number ofimmediate measures to relieve the stress on our cash resources. Thesemeasures include, but are not limited to, (1) privately sellingrelatively small amounts of highly-dilutive convertible debt orpreferred stock, subject to subsequent increase in our authorizedCommon Stock, (2) increasing our borrowing capacity by a modest amountthrough expansion or replacement of our single existing creditfacility, (3) sharply reducing our staff and/or marketing, productdevelopment and other expenses, (4) reducing inventories, and (5)selling assets or one or more business segments. Significant reductionsin staff or other expenses would likely have a material adverse impacton our longer term potential for growth. Disposing of assets or abusiness segment could have an immediate adverse impact on revenues butcould raise significant cash and might improve short term cash flow andoperating margins and have longer term beneficial effects on ouroperations.

There is no assurance that we will be able tosuccessfully implement any of the remedial measures we are consideringor any other remedial measures. If we successfully implement anyremedial measures, there is no assurance that the measures taken willbe sufficient to satisfy our near-term cash requirements or will have alonger-term beneficial effect on our operations. If we are unableeither to raise sufficient additional cash in the near future orpromptly and substantially reduce expenses, we will be forced tocurtail or cease our operations.

Line of Credit

As of March 31, 2004, as a result of our failure to comply withcertain financial covenants, we were in default under a $300,000outstanding line of credit from Venture Banking Group. On April 1,

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2004, we obtained advances of $450,000 undera new Factoring Agreement (described below) and applied approximately$300,000 of the advances to repay the line of credit, which was thenterminated.

Factoring Agreement

As of September30, 2004, we owed approximately $677,000 under a Factoring Agreementwith Pacific Business Funding, 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. Borrowings are secured by substantially all of theCompany's assets. The making of advances under the FactoringAgreement is within the complete discretion of Pacific. Amountsadvanced and uncollected bear a finance fee equal to Pacific'sprime rate plus 6% per annum, which is subject to increase by anadditional 5% per annum in the event of a default. In connectionwith the Factoring Agreement, we issued to Pacific's parentwarrants to purchase 8,333 shares of our common stock and recorded a$6,977 charge to interest expense in the first quarter of 2004. We arecurrently in discussions with other commercial institutions to obtain anew borrowing facility, to be used for working capital purposes. Therecan be no assurances, however, that we will be successful in obtaininga new 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 seek otherfinancing which might not be available on terms satisfactory to us orat all. At September 30, 2004, the Company maintained a liability forthese withholding taxes of approximately $863,000, and adjustments maybe required upon final resolution with the respective taxauthorities.

Forbearance Agreement

Under theFactoring Agreement, we agreed to raise at least $2 million in anequity financing before May 1, 2004. On May 6, 2004 we entered into aForbearance Agreement with Pacific under which we acknowledged that ourfailure to raise the required amount constituted an event of defaultand Pacific agreed to refrain from exercising its remedies with respectto the event of default until July 1, 2004 and to waive the event ofdefault if we raised the required amount in an equity financing by thatdate. We satisfied this condition as a result of the bridge financingand private placement (described below.)

Related PartyPayables

During February and March 2004, one of ourexecutive officers made a series of loans to us in the aggregateprincipal amount of $46,000. Commencing in July 2004, we began repayingthe loans. As of September 30, 2004 these loans have been paid infull.

May 2004 Bridge Financing and June and July 2004Private Placement

In May 2004, we privately sold $1,015,000face amount of our 8% convertible notes and warrants to purchaseshares of our Common Stock to accredited investors, including certainof our directors and officers and affiliates, for gross proceeds of$1,015,000. The notes matured on June 18, 2004, upon automaticconversion into investment units in the first closing of our privateplacement. Purchasers of the notes received three-year warrants topurchase an aggregate of 1,015,000 shares of Common Stock at anexercise price of $1.00 per share. The Company recorded non-cashinterest expense of approximately $77,000 associated with the issuanceof the warrants, during the second quarter of 2004.

In June andJuly 2004 we raised gross proceeds of $5.2 million through the privateplacement of equity units at a price of $0.59 per unit, includingproceeds from the conversion of $1,015,000 principal 

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amount of notes issued in the BridgeFinancing. Net proceeds of $1.8 million were received during the secondquarter and net proceeds of approximately $2.6 million were received inJuly 2004, all of which are reflected in the balance sheet as ofSeptember 30, 2004. The units comprise a total of 8,813,569 shares ofcommon stock and warrants to purchase an additional 8,813,569 shares at$0.74 per share. Spencer Trask Ventures Inc. was the placement agentfor the transaction and received cash compensation of $657,000,including reimbursement for its non-accountable expenses, and warrantsto purchase 3,525,429 shares of common stock at $0.74 per share.

December 2003 and January 2004 Private Placement

InDecember 2003 and January 2004, we raised gross proceeds of $3,226,315in a private sale of equity units consisting of 3,470,679 shares ofCommon Stock and three-year warrants to purchase 3,470,679 shares ofCommon Stock at exercise prices ranging from $1.068 to $1.298 pershare. Net proceeds of $1,740,000 were received in 2003 and arereflected 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 (adjusted to1,791,917 shares of Common Stock at $0.86 to $0.96 per share as aresult of anti-dilution provisions triggered by our private placementcompleted in July 2004).

All of the shares of Common Stockincluded in the units sold in the equity financing transactionsdescribed above (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 September 24, 2004.

Cash

As of September 30,2004, we had approximately $45,000 of cash and cash equivalents. Cashdecreased during the first nine months of 2004 by approximately$20,000. Approximately $5,079,000 was used to fund our operating loss,an increase in accounts receivable ($1,450,000), purchases of propertyand equipment ($298,000) and changes to inventory, other current assetsand other liabilities ($413,000), offset in part by net proceeds fromthe issuance of Common Stock and warrants ($5,190,000), an increase inaccounts payable and accrued expenses ($1,273,000), non-cash expenses($513,000) and net bank borrowings ($377,000).

Net cash used inoperating activities was $5,157,000 for the first nine months 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 accruedexpenses.

Net cash used in investing activities was $298,000 forthe first nine months of 2004. Cash used for the period in investingactivities was primarily to purchase property and equipment.

Netcash provided by financing activities was $5,435,000 for the first ninemonths 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 (described above)and net bank borrowings.

Off Balance Sheet Arrangements

We have no off balance sheet arrangements.

ITEM3.    CONTROLS AND PROCEDURES

CEO and CFOCertifications.    Attached as exhibits to this quarterly reportare the certifications of the CEO and the CFO required by Rules 13a-14aand 15d-14a under the Securities Exchange Act of 1934 (the"Certifications"). This section of thequarterly report contains the information concerning the evaluation ofDisclosure Controls and changes to Internal Controls over FinancialReporting referred to in the Certifications and this information shouldbe read in conjunction with the Certifications for a more completeunderstanding of the topics presented.

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DisclosureControls.    Disclosure Controls are procedures that are designedfor the purpose of ensuring that information required to be disclosedin our reports filed under the Securities Exchange Act of 1934 (such asthis quarterly report), is recorded, processed, summarized and reportedwithin the time periods specified in the SEC's rules andforms.

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 ourassets; |

|              |                                                                                                                                                                                                                                                                             |
|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | 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 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 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 September 30, 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 September 30, 2004,that, subject to the limitations noted above, the Company'sDisclosure Controls are effective to provide reasonable assurance thatmaterial information relating to Home Director and its consolidatedsubsidiaries is made known to management, including the CEO andCFO.

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PART II

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

We are subjectto various legal proceedings and claims, which have arisen in theordinary course of its business and have not been fully adjudicated. Itis impossible at this time for us 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 our consolidated financialposition or results of operations.

On June 18, 2001, Point WestVentures, LP ("Point West") filed a complaintagainst HDT and Spencer Trask Ventures, Inc., the placement agent forHDT's Series B convertible preferred stock financing in 2000, inNew York State 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. SpencerTrask and the receiver are currently negotiating a proposed settlementunder which the Company would agree to repurchase the securitiesacquired by Point West for $44,000. There is no assurance that thematter will be settled on the proposed terms or at all.

|              |                                                            |
|--------------|------------------------------------------------------------|
| ITEM2.  | UNREGISTERED SALES OF EQUITY SECURITIES AND USEOF PROCEEDS |

During the third quarter we issued options topurchase 45,000 shares of our common stock under our Amended andRestated Stock Option Plan. The exercise prices of such options areequal to the fair market value on the respective grant dates. Since thestock option grants were made to a small number of informed persons whowere provided with all information relevant to their investmentdecisions, we believe such grants were exempt from registrationpursuant to Section 4(2) of the Securities Act. We plan to registerunder the Securities Act the offering of common stock pursuant to alloptions granted or which may be granted under our Amended and RestatedStock Option Plan.

|               |                                |
|---------------|--------------------------------|
| ITEM 3.  | DEFAULTS UPONSENIOR SECURITIES |

We have notified Pacific of a default underthe Factoring Agreement attributable to our failure to pay federal andstate withholding 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. At September 30, 2004,the Company maintained a liability for these taxes of approximately$863,000, and adjustments may be required upon final resolution withthe respective tax authorities.

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

None.

|               |                  |
|---------------|------------------|
| ITEM 5.  | OTHERINFORMATION |

None.

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|               |          |
|---------------|----------|
| ITEM 6.  | EXHIBITS |

|        |      |          |  |                                                                                                                                     |  |  |
|--------|------|----------|--|-------------------------------------------------------------------------------------------------------------------------------------|--|--|
| (a)    |      | Exhibits |
|   | 31.1 |     |  | Certificationof Chief Executive Officer pursuant to Rule 13a-14 or Rule 15d-14(a) ofthe Securities Exchange Act of 1934, asamended. |
|   | 31.2 |     |  | Certification of ChiefFinancial Officer pursuant to Rule 13a-14 or Rule 15d-14(a) of theSecurities Exchange Act of 1934, asamended. |
|   | 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.                            |
|        |

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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.

|        |  |                                   |  |                                                    |  |  |  |  |  |  |
|--------|--|-----------------------------------|--|----------------------------------------------------|--|--|--|--|--|--|
|   |  | **HOMEDIRECTOR,INC.**(Registrant) |
|   |  | By:                               |  | /s/Michael Liddle                                  |
|   |  |                              |  | MichaelLiddlePresident and Chief Executive Officer |
|   |  | By:                               |  | /s/Daryl Stemm                                     |
|   |  |                              |  | Daryl StemmChiefFinancial Officer andSecretary     |
|        |

Date: November 19,2004

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ExhibitIndex

|            |  |                                                                                                                                     |  |  |  |  |
|------------|--|-------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description                                                                                                                         |
| 31.1       |  | Certificationof Chief Executive Officer pursuant to Rule 13a-14 or Rule 15d-14(a) ofthe Securities Exchange Act of 1934, asamended. |
| 31.2       |  | Certification of ChiefFinancial Officer pursuant to Rule 13a-14 or Rule 15d-14(a) of theSecurities Exchange Act of 1934, asamended. |
| 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.                            |
|            |

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