**UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

**FORM 10-Q**

(Mark One)
[x] 
Quarterly report pursuant to Section 13 or 15(d) of theSecurities and Exchange Act of 1934 for the
 
quarterly period ended June 30, 2006
  
Or
  [  ] 
Transition report pursuant to Section 13 or 15(d) of theSecurities and Exchange Act of 1934 for the
 
transition period from ________ to ________

CommissionFile Number: 001-31711

**HOMESOLUTIONS OF AMERICA, INC.**(Exact name of registrant asspecified in its charter)

**Delaware****(Stateof incorporation)99-0273889(I.R.S.Employer Identification No.)**

**1500Dragon Street, Suite B Dallas, TX 75207(Addressof principal executive offices)(214)623-8446****(Registrant'stelephone number, including area code)**

Indicate by checkmark whether the registrant (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.  Yes   X  No        

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  See definition of "accelerated filer and largeaccelerated filer" in Rule 12b-2 of the Exchange Act.  Large accelerated filer         Accelerated filer         Non-acceleratedfiler   X    

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes        No   X   

The number ofshares outstanding of the registrant's common stock, $.001 par value per share,as of August 14, 2006 was 44,569,160.

Transitional SmallBusiness Disclosure Format:  Yes        No  X    
 
 

**PARTI - FINANCIAL INFORMATION**

**Item 1.  FinancialStatements**

**Home Solutions ofAmerica, Inc.Consolidated Balance Sheets**(Dollars in thousands, except per share data)

**June 30,**

December 31,

**2006**

2005

**Assets**

**(unaudited)**

(audited)

Current assets:

** **

     Cash

** $**

**13,831 **

 $

8,225 

     Accounts receivable,  net

**21,962 **

20,585 

     Current portion of  notes receivable

**938 **

361 

     Inventories

**3,564 **

1,026 

     Current assets of  discontinued operations held for sale

**- **

767 

     Prepaid expenses and  other current assets

**2,070 **

1,041 
     Deferred tax asset
**9,171 **

- 
     Assets held for sale

**840 **

840 

Total  current assets

**52,376 **

32,845 

** **

Property and equipment, net

**2,636 **

2,466 

Intangibles, net

**9,094 **

9,501 

Goodwill

**42,802 **

41,882 

Notes receivable, net of  current portion 

**1,628 **

525 

Non-current assets of  discontinued operations held for sale

**- **

391 
Deferred tax asset
**-**** **

793 

Other assets

**329 **

264 

** $**

**108,865 **

 $

88,667 

**Liabilities and  Stockholders' Equity**

** **

Current liabilities:

** **

     Accounts payable and  accrued expenses

** $**

**4,750 **

 $

6,267 

     Current portion of  debt

**1,196 **

3,382 

     Current portion of  capital lease obligations

**64 **

76 

     Current liabilities of  discontinued operations held for sale

**- **

1,216 

Total  current liabilities

**6,010 **

10,941 

Long-term Liabilities:

** **

     Debt, net of current  portion

**334 **

1,363 

     Non-current  liabilities of discontinued operations held for sale

**- **

158 

     Minority interest

**366 **

483 

     Capital lease  obligations, net of current portion

**120 **

117 

Total  liabilities

**6,830 **

13,062 

Commitments and  Contingencies

** **

Stockholders' Equity:

** **

     Common stock, $.001  par value, 100,000 shares authorized; 40,446  and 

** **

          35,510 shares  issued and outstanding, respectively

**40 **

36 

     Additional paid-in  capital

**108,957 **

90,122 

     Accumulated deficit

**(6,962)**

(14,553)

Total  stockholders' equity

**102,035 **

75,605 

** $**

**108,865 **

 $

88,667 

*See Notes to ConsolidatedFinancial Statements.*

** **

** **

1

**Home Solutions ofAmerica, Inc.ConsolidatedStatements of Income**(Dollars in thousands, except share and per share data)(unaudited)

** **

*For the Three Months Ended*

** **

*For the Six Months Ended*

** **

*June 30,*

** **

*June 30,*

** **

**2006**

** **

2005

** **

**2006**

** **

2005

Net sales

** $**

**24,154 **

 $

12,732 

** $**

**43,433 **

 $

22,047 

Costs and expenses

** **

** **

     Cost of sales

**12,781 **

7,164 

**22,112 **

12,013 

     Selling, general and  administrative expenses

**5,471 **

3,690 

**11,420 **

6,529 

**18,252 **

10,854 

**33,532 **

18,542 

** **

** **

Operating income

**5,902 **

1,878 

**9,901 **

3,505 

Other income (expense):

** **

** **

     Gain on sale of assets

**- **

**- **

**22 **

1 

     Interest income

**74 **

15 

**124 **

32 

     Interest expense

**(58)**

(433)

**(118)**

(780)

     Other income

**29 **

29 

**55 **

47 

          Total other  income (expense)

**45 **

(389)

**83 **

(700)

** **

** **

Income from continuing  operations before income taxes and minority interest

**5,947 **

1,489 

**9,984 **

2,805 

** **

** **

Income taxes

**(2,246)**

(116)

**(3,668)**

(218)

Minority interest

**(208)**

(287)

**(466)**

(480)

** **

** **

Income before discontinued  operations

**3,493 **

1,086 

**5,850 **

2,107 

** **

** **

Gain (loss) from  discontinued operations, net of taxes 

**975 **

(21)

**1,741 **

(21)

** **

** **

Net income

** $**

**4,468 **

 $

1,065 

** $**

**7,591 **

 $

2,086 

** **

** **

Net income available to  common shareholders per share:

** **

** **

** **

** **

     Basic earnings per  share:

** **

** **

     Income from continuing  operations

** $**

**0.09 **

 $

0.04 

** $**

**0.16 **

 $

0.09 

     Gain from discontinued  operations, net of tax

**0.03 **

- 

**0.04 **

- 

     

** $**

**0.12 **

 $

0.04 

** $**

**0.20 **

 $

0.09 

** **

** **

     Diluted earnings per  share:

** **

** **

     Income from continuing  operations

** $**

**0.09 **

 $

0.04 

** $**

**0.15 **

 $

0.08 

     Gain from discontinued  operations, net of tax

**0.02 **

- 

**0.04 **

- 

** $**

**0.11 **

 $

0.04 

** $**

**0.19 **

 $

0.08 

** **

** **

Weighted average number of  common shares outstanding:

** **

** **

     Basic

**38,295 **

20,929 

**37,103 **

18,959 

     Diluted

**40,594 **

22,464 

**39,642 **

20,622 

** **

** **

*See Notes to ConsolidatedFinancial Statements.*

2

**Home Solutions ofAmerica, Inc.ConsolidatedStatements of Cash Flows**(Dollars in thousands)(unaudited)

** **

*For the Six Months Ended June 30,*

** **

**2006**

** **

2005

**Cash Flows from  Operating Activities**

** **

** **

** **

     Net income

**$**

**7,591 **

** **

 $

2,086 

     Adjustments-

** **

** **

Depreciation  and amortization

**818 **

** **

818 

Minority  interest in income of consolidated subsidiary

**466 **

** **

480 

Provision  for doubtful accounts

**1,224 **

** **

163 

Gain  on sale of assets

**(22)**

** **

- 

Stock-based  compensation

**298 **

** **

- 

Estimated  fair value of common stock issued for services

**171 **

** **

- 

Gain  on sale of discontinued operations

**(3,177)**

** **

- 

     Changes in assets and  liabilities, net of acquisitions and divestitures:

** **

** **

Accounts  receivable

**(2,481)**

** **

(2,721)

Prepaid  expenses and other current assets

**(571)**

** **

205 

Inventories

**(859)**

** **

(773)

Other  assets

**714 **

** **

(354)

Deferred  tax asset

**(9,171)**

** **

- 
Costs  in excess of billings

**- **

** **

(505)

Accounts  payable and accrued expenses

**(3,065)**

** **

1,245 

**                 **

** **

                

     Net cash provided by  (used in) operating activities

**(8,064)**

** **

644 

** **

** **

**Cash Flows from  Investing Activities**

** **

** **

     

** **

** **

     Cash advanced under note  receivable

**(375)**

** **

- 

     Payments received on  notes receivable

**650 **

** **

337 

     Cash acquired in  acquisitions, net of cash paid

**87 **

** **

- 

     Acquisition costs of  Cornerstone Granite & Marble, Inc.

**- **

** **

(2,122)

     Purchases of property  and equipment

**(223)**

** **

(115)

     Net cash provided by  (used in) investing activities

**139 **

** **

(1,900)

** **

** **

**Cash Flows from  Financing Activities**

**    **

** **

     Proceeds from note  payable, net of cash issuance costs

**- **

** **

5,955 

     Principal payments on  debt and capital leases

**(3,182)**

** **

(3,558)

     Excess tax benefit  from options exercises

**9,171 **

** **

- 

     Proceeds from exercise  of warrants and options

**7,880 **

** **

23 

     Distributions to  minority stockholder

**(583)**

** **

(391)

     Proceeds received from  disgorgement of profits

**245 **

** **

- 

     Net cash provided by  financing activities

**13,531 **

** **

2,029 

** **

** **

Net Increase in cash

**5,606 **

** **

773 

** **

** **

Cash at beginning of period

**8,225 **

** **

1,128 

** **

** **

Cash at end of period

**$ **

**13,831 **
** **

 $

1,901 

** **

** **

** **

*See Notes to ConsolidatedFinancial Statements.*

3

**Home Solutions ofAmerica, Inc.ConsolidatedStatements of Cash Flows**(Dollars in thousands)(unaudited)

*For the Six Months Ended June 30,*

**2006**

2005

Cash paid for:

     Interest

 $

102 

 $

515 

     Income taxes

 $

3,276 

 $

108 
     
Supplemental schedule of  non-cash investing and financing activities:

     Issuance of stock for  conversion of debt and accrued interest

 $

902 

 $

135 

     Fixed assets acquired  through debt and capital lease obligations

 $

128 

 $

205 

     Issuance of stock for  payment of interest

 $

- 

 $

14 

     Preferred dividend  accrual

 $

- 

 $

107 

     Fair value of warrants  issued for debt private placement

 $

- 

 $

1,295 

     Issue of stock for  acquisition

 $

- 

 $

3,808 

     Issuance of notes  payable for acquisition

 $

745 

 $

1,600 

     Issuance of stock for  supply agreement

 $

- 

 $

1,350 

     Debt assumed in  acquisition

 $

- 

 $

1,897 

     Amortization of  preferred stock issuance costs and beneficial

conversion  as preferred stock dividends

 $

- 

 $

253 

     Shares issued for  prepaid consulting

 $

- 

 $

68 

     Inventory received for  reduction of note receivable from 

Cornerstone  

 $

1,559 

 $

- 

     Issuance of common  stock for preferred dividends

 $

- 

 $

109 

     

*         See Notes toConsolidated Financial Statements.*

4

**HomeSolutions of America, Inc.Notesto Consolidated Financial StatementsJune30, 2006**** **(Unless otherwise indicated, dollars and shares inthousands, except per share data)(unaudited)

**NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

**Interim Unaudited Condensed Consolidated FinancialStatements**

The accompanying condensed consolidated financialstatements have been prepared in accordance with the regulations for interimfinancial information of the Securities and Exchange Commission (the "SEC").Accordingly, they do not include all of the disclosures required by accountingprinciples generally accepted in the United States of America for completefinancial statements. In the opinion of management, all adjustments (whichconsist only of normal and recurring adjustments) considered necessary for afair presentation have been included. The results of operations for the sixmonth period ended June 30, 2006 are not necessarily indicative of the resultsthat may be expected for the entire fiscal year.

**Company Description and Nature of Operations**

Home Solutions of America,Inc. ("the Company")a Delawarecorporation, is a provider ofrecovery, restoration and rebuilding/remodeling services to commercial andresidential areas that are (i) prone to flooding, hurricanes, tornados, firesor other naturally occurring and repetitive weather related emergencies; and/or(ii) experiencing robust housing development. With operations in the South,Gulf Coast regions and California, we believe that the Company is wellpositioned to capitalize on the growing demand for our suite of Recovery,Restoration and Rebuilding/Remodeling services. We seek to expand our coreservice offerings through the future acquisition of strategic, specialized,profitable and well-managed companies operating in our target markets andbusiness segments with a proven history of internal growth.

Our business consists of threeintegrated service offerings:  (i) Recovery, (ii) Restoration and (iii) Rebuilding/Remodeling. 

*Recovery. *TheCompany's Recovery services include catastrophic storm response, clean up andremoval of debris, initial set up services in an impacted area (includingpower, lodging, sustenance and training), water mitigation, drying, dehumidificationand preparing affected areas for the next stage of restoration and rebuilding. We have trained employees who provide onsite first response to respond to fire,water and weather-related emergencies in our target markets to both commercial andresidential clients.  These services are currently provided through ourwholly-owned subsidiaries, Fireline Restoration, Inc. ("Fireline"), which weacquired effective July 1, 2006 pursuant to an acquisition closed on July 31, 2006, and Home Solutions Restoration of Louisiana, Inc.("HSR of Louisiana"), which commenced operations in September 2005 inconnection with the acquisition of substantially all the assets of FloridaEnvironmental Remediation Services, Inc., ("FERS"), a Florida corporation engaged inrecovery services.  Our Recovery services are currently provided in thedisaster impacted areas of Florida, Louisiana, Mississippi and Texas.  See Note10 - Subsequent Events for additional information regarding the Firelineacquisition.

*Restoration.* Our Restoration segment focuses on the next stage of services after the initialclean up and catastrophic storm response.  Services presently included in ourRestoration business segment involve water, fire and wind restoration, moldremediation, contents restoration, air decontamination, asbestos and lead paintremoval, cleaning, drying and deodorization of carpet and furniture and movingand storage services.  We are also involved in the initial stages ofreconstruction of commercial and residential properties.  Fireline, whichspecializes in disaster recovery services, insurance estimates and repairs forcommercial, industrial and residential properties, is certified in multipleaspects of the restoration industry, including smoke, fire, water and mold. Fireline is licensed as a general contractor in Florida and offers fullinterior and exterior restoration and reconstruction services in that state. Restoration business segment services are also provided through PW Stephens,Inc. ("PWS") and FiberSeal Systems, L.P., a wholly-owned subsidiary ("FSS").  PWS provides water and fire restoration services, air decontamination, andremoval of mold asbestos and lead paint in California and to a lesser extent inFlorida.  FSS provides cleaning, drying, and deodorization of carpet andfurniture as well as moving and storage services in 23 states and the Districtof Columbia.

*Rebuilding/Remodeling.*  Our Rebuilding/Remodeling segment includes theproduction and installation of custom kitchen cabinets and countertops and theinstallation of custom marble and granite countertops provided through ourwholly-owned subsidiary, Southern Exposure Unlimited of Florida, Inc. and its50% owned subsidiary, SouthernStone Cabinets, Inc. (collectively, "Southern Exposure") and theinstallation of custom marble and granite countertops through our wholly-ownedsubsidiary, Cornerstone Marble & Granite, Inc. formerly known asCornerstone Building and Remodeling, Inc. ("Cornerstone").

5

**Principles of Consolidation**

The accompanying consolidatedfinancial statements include the accounts of Home Solutions and its wholly and 50% owned subsidiaries. All significant intercompany transactions and balanceshave been eliminated in consolidation.   The minority owner's interest in asubsidiary has been reflected as minority interest in the accompanyingconsolidated balance sheets.

**Use of Estimates**

The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofthe contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reporting period.Significant estimates made by management include, among others, therealizability of accounts and notes receivable, inventories, recoverability ofproperty and equipment, intangibles and goodwill and valuation of stock-basedcompensation and deferred tax assets.  Actual results could differ from theseestimates. 

**Long-Lived Assets**

The Company's managementassesses the recoverability of its long-lived assets upon the occurrence of atriggering event by determining whether the depreciation and amortization oflong-lived assets over their remaining lives can be recovered through projectedundiscounted future cash flows.  The amount of long-lived asset impairment, ifany, is measured based on fair value and is charged to operations in the periodin which long-lived asset impairment is determined by management.  At June 30,2006, the Company's management believes there is no impairment of itslong-lived assets.  There can be no assurance, however, that market conditionswill not change or demand for the Company's products and services willcontinue, which could result in impairment of long-lived assets in the future.

**Intangibles**

Identifiableintangibles acquired in connection with business acquisitions accounted forunder the purchase method are recorded at their respective fair values. TheCompany is amortizing the identifiable intangibles over their estimated usefullives, ranging from 6 to 20 years.  Intangibles consist of the following at June 30, 2006:

** **

**Estimated Useful**

**Balance**

**Life (Years)**

Trade name

 $

4,540 

15      

Customer list

4,100 

15      

Supply agreement	

1,350 

20      

Non -compete

441 

6      

10,431 

Accumulated amortization

(1,337)

 $

9,094 

Amortization expense totaled$407 and $202 for the six months ended June 30, 2006 and 2005, respectively.The estimated amortization for the next five years is as follows.

2007

$    725

2008

725

2009

725

2010

725

2011

725

**Goodwill**

Goodwill represents the excess of acquisition costover the net assets acquired in a business combination and is not amortized inaccordance with Statement of Financial Accounting Standards ("SFAS") No. 142, "*Goodwilland Other Intangible Assets."* The provisions of SFAS No. 142 require thatthe Company allocate its goodwill to its various reporting units, determine thecarrying value of those businesses, and estimate the fair value of thereporting units so that a two-step goodwill impairment test can be performed. In the first step of the goodwill impairment test, the fair value of eachreporting unit is compared to its carrying value.  Management reviews, on anannual basis, the carrying value of goodwill in order to determine whetherimpairment has occurred.  Impairment is based on several factors including theCompany's projection of future discounted operating cash flows. If animpairment of the carrying value were to be indicated by this review, theCompany would perform the second step of the goodwill impairment test in orderto determine the amount of goodwill impairment, if any.

6

 

Thechanges in the carrying amount of goodwill for the six months ended June 30,2006 are as follows:  (see Note 3 - Acquisitions and Disposals): 

Balance  as of December 31, 2005

 $

41,882 

Goodwill  acquired during the six months ended June 30, 2006

920 

Balance  as of June 30, 2006

 $

42,802 

**Revenue Recognition**

The Company recognizes revenue in accordance withStaff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in FinancialStatements", as revised by SAB No. 104. As such, the Company recognizes revenuewhen persuasive evidence of an arrangement exists, title transfer has occurred,the price is fixed or readily determinable and collectibility is probable.Sales are recorded net of sales discounts.

PWS, FSS, and HSR of Louisiana recognize revenue at the time the contract andrelated services are performed.

Southern Exposure andCornerstone recognize revenue for product sales at the time the related productsare shipped to the customer. These subsidiaries recognize revenue forinstallation jobs upon complete installation of the cabinets or countertops andinspection by the customer. Deferred revenue represents amounts billed tocustomers and collected prior to completion of the installation of the cabinetsor countertops and inspection by the customer.

**Stock-Based Compensation**

At June 30, 2006, theCompany had two stock-based compensation plans. Prior to January 1, 2006, theCompany accounted for these plans under the recognition and measurementprovisions of Accounting Principles Board ("APB") Opinion No. 25, *Accountingfor Stock Issued to Employees*, and related interpretations, as permitted bySFAS No. 123, *Accounting for Stock Based Compensation*. No stock-basedemployee compensation cost was recognized in the statements of operations forthe three and six months ended June 30, 2005, as all options granted underthese plans had an exercise price equal to or greater than the market value ofthe underlying common stock on the date of grant.

Effective January 1, 2006, on the first day of theCompany's fiscal year 2006, the Company adopted the fair value recognitionprovisions of SFAS No. 123(R), *Share Based Payment*, using themodified-prospective transition method. Under this transition method,compensation cost recognized in the six months ended June 30, 2006 includes:(a) compensation cost for all share-based payments granted and not yet vestedprior to January 1, 2006, based on the grant date fair value estimated inaccordance with the original provisions of SFAS No. 123, and (b) compensationcost for all share-based payments granted subsequent to December 31, 2005 basedon the grant-date fair value estimated in accordance with the provisions ofSFAS No. 123(R). Results for prior periods have not been restated. Sincestock-based compensation expense recognized in the statements of operations forthe three and six months ended June 30, 2006 is based on awards ultimatelyexpected to vest, the compensation expense has been reduced for estimatedforfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. We estimated forfeitures to be 2% of the optionsissued.

7

The Company calculates stock-based compensation byestimating the fair value of each option using the Black-Scholes option pricingmodel. The Company's determination of fair value of share-based payment awardsare made as of their respective dates of grant using that option pricing modeland is affected by the Company's stock price as well as assumptions regarding anumber of subjective assumptions. These variables include, but are not limitedto, the Company's expected stock price volatility over the term of the awardsand actual and projected employee stock option exercise behavior.  The expectedterm of options granted is derived from historical data on employee exercisesand post-vesting employment termination behavior. The risk-free rate selectedto value any particular grant is based on the U.S. Treasury rate thatcorresponds to the pricing term of the grant effective as of the date of thegrant.  The expected volatility is based on the historical volatility of theCompany's stock price.  These factors could change in the future, affecting thedetermination of stock-based compensation expense in future periods. TheBlack-Scholes option pricing model was developed for use in estimating thevalue of traded options that have no vesting or hedging restrictions and arefully transferable. Because the Company's employee stock options have certaincharacteristics that are significantly different from traded options, theexisting valuation models may not provide an accurate measure of the fair valueof the Company's employee stock options. Although the fair value of employeestock options is determined in accordance with SFAS No. 123(R) using anoption-pricing model, that value may not be indicative of the fair valueobserved in a willing buyer/willing seller market transaction. The calculated compensationcost is recognized on a straight-line basis over the vesting period of theoption.

The Company has issued stock options to employees anddirectors whose only condition for vesting are continued employment or serviceduring the related vesting period. Typically, the vesting period is three yearsfor employee awards, although awards are sometimes granted with immediatevesting. 

Priorto the adoption of Statement 123(R), the Company presented all tax benefits ofdeductions resulting from the exercise of stock options as operating cash flowsin the statement of cash flows.  Statement 123(R) requires the cash flowsresulting from the tax benefits resulting from tax deductions in excess of thecompensation cost recognized for those options (excess tax benefit) to beclassified as financing cash flows.  The $9,171 excess tax benefit classifiedas a financing cash inflow during the six month period ended June 30, 2006,would have been classified as an operating cash inflow if the Company  hadcontinued to account for its share-based payments under APB No. 25

Forthe six months ended June 30, 2006, the Company recognized compensation cost of$298, which is included in selling, general and administrative expenses in theaccompanying statement of operations, as a result of the adoption of SFAS 123R.The effect of the change in applying the original provisions of SFAS 123resulted in lowering income from continuing operations, income before taxes,net income and basic and diluted earnings per share are as follows:

*For the Three Months Ended*

* *

*For the Six Months Ended*

*June 30, 2006*

*June 30, 2006*

**SFAS 123R**

**APB 25**

**SFAS 123 R**

**APB 25**

Income from continuing  operations before income

     taxes and minority  interest

 $

5,947 

 $

6,245 

 $

9,984 

 $

10,282 

Net income

 $

4,468 

 $

4,766 

 $

7,591 

 $

7,889 

Basic income per share

 $

0.12 

 $

0.12 

 $

0.20 

 $

0.21 

Diluted income per share

 $

0.11 

 $

0.12 

 $

0.20 

 $

0.20 

The following table illustrates the effect on netincome and net income per share for the three and six months ended June 30,2005 as if the Company had applied the fair value recognition provisions ofSFAS 123 to options granted under the Company's stock option plans. Forpurposes of this pro forma disclosure, the fair value of the options isestimated using the Black Scholes option-pricing model and amortized on astraight-line basis to expense over the options' vesting period:

 

 

 

8

*For the Three*

* *

*For the Six*

*Months Ended*

* *

*Months Ended*

*June 30, 2005*

* *

*June 30, 2005*

Net income, as reported

 $

1,065 

 $

2,086 

Add: Share-based employee compensation expense  included

     in net income, net of related tax effects, as  reported

- 

- 

Deduct: Share-based employee compensation expense

     determined under the fair value method, net of  related tax

     tax effects - pro forma

(200)

(576)

Net income - pro forma

 $

865 

 $

1,510 
   
Net income per common share, as reported

Basic

 $

0.04 

 $

0.09 

Diluted

 $

0.04 
 $

0.08    
Net income per common share, proforma

Basic

 $

0.03 

 $

0.06 

Diluted

 $

0.03 
 $ 

0.06 
*Stock Plans*

The Company hastwo stock-based plans.  They are the 1998 Stock option Plan (the "1998Plan") and the 2001 Stock Plan (the "2001 Plan" and collectively, the "StockPlans").  Under the Stock Plans non-qualified and incentive stock optionshave been granted to employees, non-employees and board members. Under the 2001Plan stock purchase rights have been granted to directors. The Board ofDirectors determines eligibility, vesting schedules and exercise prices forawards granted under the Stock Plans. The Companyissues new shares to satisfy stock option exercises and stock purchases underour Stock Plans. An income tax benefit of $9,171 was realized from activity inour Stock Plans during the six months ended June 30, 2006 and there was no suchbenefit in 2005.  

A summary of the shares reserved for grant and awardsavailable for grant under each Stock Plan is as follows:

June 30, 2006

Shares Reserved

Awards Available

for Grant

for Grant
   
1998 Stock Plan

3,500

1,039

2001 Stock Plan

  6,500

 3,173
   
10,000

4,212

Option awards are generally granted with an exerciseprice equal to the market price of the Company's stock at the date of grant.Option awards generally have a vesting schedule of three years and areexercisable over a 5 to 10 year service period.  

The fair value of each stock-based award is estimatedon the grant date using the Black Scholes option-pricing model. Expectedvolatilities are based on the historical volatility of the Company's stockprice. The expected term of options granted subsequent to the adoption of SFAS123R is derived using the simplified method as defined in the SEC's StaffAccounting Bulletin 107*, Implementation of FASB 123R*. The risk-free ratefor periods within the contractual life of the option is based on the U.S.Treasury interest rates in effect at the time of grant. The fair value ofoptions granted was estimated using the following weighted-average assumptions:

9

*For the Six Months Ended June 30,*

**2006**

2005

Expected term (in years)

                    10    

                      5   

Expected volatility

                    80%

                    65%

Risk-free interest rate

                    4.5%

                   3.5%

Dividend yield

                       -   

                      -   

A summary of option activity under the Stock Plans andchanges during the six months ended June 30, 2006 is presented below, excluding95 shares of common stock issued under the 2001 Plan.  See Note 6 - Equity foradditional information.  (In thousands, except per share data):

**June 30, 2006**

Weighted-Average

Remaining

Aggregate

Exercise

Contractual

Intrinsic

Shares

Price

Term (Years)

Value

Outstanding, at December 31, 2005

4,731 

 $

0.86 

Granted

250 

5.15 

Cancelled/forfeited

(75) 	

1.25 

Exercised

(3,514)

1.67 

 $

33,962 
   
Outstanding at June 30, 2006

1,392 

 $

3.10 

5.8 

 $

5,881 
   
Options exercisable at end of period

1,128 

 $

3.14 

5.0 

 $

5,124 

A summary of the activity of the Company's nonvestedoptions is presented below (in thousands, except share and per share data):

**June 30, 2006**

Weighted-Average

Remaining

Remaining

Unrecognized

Grant-Date

Years

Compensation

Shares

Fair Value

To Vest

Cost
   
Nonvested  outstanding at December 31, 2005

490 

 $

0.88 

Granted

250 

4.31 

Vested

(476)

1.13 

Forfeited

- 

- 

Nonvested  outstanding at June 30, 2006

264 

 $

3.47 

2.3 

 $

915 

**Issuanceof stock for Non Cash Consideration**

All issuances of the Company's stock for non-cashconsideration have been assigned a dollar amount equaling either the marketvalue of the shares issued or the value of consideration received whichever ismore readily determinable. The majority of the non-cash consideration receivedpertains to services rendered by consultants and others and have been valued atthe market value of the shares issued. In certain issuances, the Company maydiscount the value assigned to the issued for illiquidity and restriction onresale. 

**Per Share Data**

Basic earnings per share ("BEPS") are computed by dividingincome available to common stockholders by the weighted average number ofoutstanding common shares during the period of computation. Diluted earningsper share ("DEPS") give effect to all potential dilutive common sharesoutstanding during the period of computation. The computation of DEPS does notassume conversion, exercise or contingent exercise of securities that wouldhave an anti-dilutive effect on earnings.

10

Thefollowing is a table reconciling BEPS and DEPS and the related weighted averagenumber of shares outstanding for the three months ended June 30, 2006:

***For the Three Months Ended June 30, 2006***

**Numerator**

** **

**Denominator**

** **

**Per Share**

**(Income)**

** **

**(Shares)**

** **

**Amount**

** **

** **

** **

** **

** **

Basic  EPS:

** **

** **

** **

** **

** **

Net  income

** $**

**4,468 **

** **

** **

** **

** **

Income  available to common stockholders

**4,468 **

** **

**38,295 **

** **

** $**

**0.12 **

** **

** **

** **

** **

** **

Effect  of dilutive securities:

** **

** **

** **

** **

** **

Options  and warrants

**- **

** **

**2,299 **

** **

** **

** **

** **

** **

** **

** **

Diluted  EPS:

** **

** **

** **

** **

** **

Income  available to common stockholders

** $**

**4,468 **

** **

**40,594 **

** **

** $**

**0.11 **

The following is a table reconciling BEPS and DEPS andthe related weighted average number of outstanding shares for the three monthsended June 30, 2005:

*For the Three Months Ended June 30, 2005*

Numerator

Denominator

Per Share

(Income)

(Shares)

Amount

Basic  EPS:

Net  income

 $

1,065 

Less:  convertible preferred stock dividends

(55)

Less:  amortization of convertible preferred stock

      issuance costs and beneficial conversion feature

(127)

Income  available to common stockholders

883 

20,929 

 $

0.04 

Effect  of dilutive securities:

Options  and warrants

- 

1,535 

Diluted  EPS:

Income available to common  stockholders 

 $

883 

22,464 

 $

0.04 

The following is a table reconciling BEPS and DEPS andthe related weighted average number of shares outstanding for the six monthsended June 30, 2006:

***For the Six Months Ended June 30, 2006***

**Numerator**

** **

**Denominator**

** **

**Per Share**

**(Income)**

** **

**(Shares)**

** **

**Amount**

** **

** **

** **

** **

** **

Basic  EPS:

** **

** **

** **

** **

** **

Net  income

** $**

**7,591 **

** **

** **

** **

** **

Income  available to common stockholders

**7,591 **

** **

**37,103 **

** **

** $**

**0.20 **

** **

** **

** **

** **

** **

Effect  of dilutive securities:

** **

** **

** **

** **

** **

Options  and warrants

**- **

** **

**2,539 **

** **

** **

** **

** **

** **

** **

** **

Diluted  EPS:

** **

** **

** **

** **

** **

Income  available to common stockholders

** $**

**7,591 **

** **

**39,642 **

** **

** $**

**0.19 **

 

11

The following is a table reconciling BEPS and DEPS andthe related weighted average number of outstanding shares for the six monthsended June 30, 2005:

*For the Six Months Ended June 30, 2005*

Numerator

Denominator

Per Share

(Income)

(Shares)

Amount

Basic  EPS:

Net  income

 $

2,086 

Less:  convertible preferred stock dividends

(107)

Less:  amortization of convertible preferred stock

      issuance costs and beneficial conversion feature

(253)

Income  available to common stockholders

1,726 

18,959 

 $

0.09 

Effect  of dilutive securities:

Options  and warrants

- 

1,663 

Diluted  EPS:

Income available to common  stockholders 

 $

1,726 

20,622 

 $

0.08 

**RecentAccounting Pronouncements**

Recent accounting pronouncements issued by the FinancialAccounting Standards Board ("FASB") (including its Emerging Issues Task Force),the American Institute of Certified Public Accountants, and the Securities andExchange Commission did not or are not believed by management to have amaterial impact on the Company's present or future consolidated financialstatements. 

**NOTE 2 - SEGMENT INFORMATION**

The Company operates in two segments: Recovery/Restoration andRebuilding/Remodeling.  The Company's Recovery/Restoration segment includescatastrophic storm response services, water, fire and wind restoration, moldremediation and air decontamination provided to commercial, residential andindustrial properties, as well as carpet cleaning, air duct cleaning and fabricprotection services provided primarily to residential properties.  The Rebuilding/Remodeling segmentincludes interior and exterior restoration and reconstruction services providedto commercial, residential and industrial properties and cabinet production, aswell as cabinet and countertop installation services provided primarily toresidential properties. See Note 8 - Segment Reporting for additionalinformation. 

**NOTE3 - ACQUISITIONS AND DISPOSALS**

During the first quarter of 2006, the Companyconsummated two separate acquisitions. The acquisitions were accounted for as purchases. The combined purchase price was $765, payable in promissory notes of$745 and cash of $20. The excess of the purchase price over the tangiblenet assets acquired of $920 was assigned to goodwill at March 31, 2006 in theaccompanying consolidated balance sheet.  

Proforma disclosure information is not presentedbecause the operations acquired are not considered significant to the Company.  Noacquisitions were consummated in the second quarter of 2006.

**Cornerstone Building and Remodeling Division**

During thefourth quarter of 2005, the Company's management committed to a plan to disposeof certain assets and liabilities of its building and remodeling division, whichwas acquired in April 2005.  

On March 24, 2006, the Company entered into an assetpurchase agreement to sell certain assets and liabilities used in connectionwith the operation of the building and remodeling division of Cornerstone, theCompany's wholly-owned subsidiary. The sales price was $500 cash at closing and$3,000 as a note receivable.  See Note 4 - Notes Receivable for additionalinformation. The Company does not consider the disposition to be significant tothe Company's operations, and does not consider the agreements entered into inconnection with the disposition to be material to the Company.

In accordancewith SFAS No. 144, *"Accounting for the Impairment or Disposal of Long LivedAssets,"*the assets and liabilities related to this transaction have beensegregated from continuing operations and are reported as assets and liabilitiesof discontinued operations held for sale in the accompanying balance sheets, allof which were liquidated as of June 30, 2006.  In addition, operationsassociated with these assets and liabilities and the gain on the sale have beenclassified as gain (loss) from discontinued operations in the accompanyingstatements of income.

12

Discontinuedoperations' results were as follows: 

*For the Three Months Ended*

*For the Six Months Ended*

*June 30,*

*June 30,*

**2006**

2005

**2006**

2005

Results  of discontinued operations:

      Net sales

 $

- 

 $

3,323 

 $

514 

 $

3,323 

      Loss before income taxes

 $

- 

 $

(21)

 $

(478)

 $

(21)

Gain  on sale of discontinued operations:

     Sales price

- 

- 

3,500 

- 

      Net assets sold

- 

- 

(323)

- 
     Deferred gain recognized   
1,433 
- 
- 
- 
      Gain on sale

1,433 

- 

3,177 

- 

        	

     	

Gain  (loss) from discontinued operations 

   	

      before income taxes

1,433 

(21)

2,699 

(21)

Income  taxes

(458)

- 

(958)

- 

Gain  (loss) from discontinued operations

 $

975 

 $

(21)

 $

1,741 

 $

(21)

**NOTE4 - NOTES RECEIVABLE**

As of June 30, 2006, the Company has a note receivablewith a balance of $750. The note receivable, as amended, required payments tothe Company of $150 paid in March 2006, to be followed by semi-annual paymentsof $188 commencing on June 30, 2006 and with a final payment on December 31,2007.  The note receivable is personally guaranteed by a third party.****TheCompany recorded this note receivable with an implicit rate of 4.55%. 

On March 24, 2006, the Company entered into an assetpurchase agreement to sell certain assets and liabilities used in connectionwith the operation of the building and remodeling division of Cornerstone, theCompany's wholly-owned subsidiary.  See Note 3 - Acquisitions and Disposals foradditional information regarding this transaction. The sales price was $500cash at closing and $3,000 in a note receivable. The note receivable principaland accrued interest is payable quarterly, beginning June 30, 2006 and maturingMarch 31, 2009. The note bears interest at the lesser of (a) on a per annumbasis, the "prime rate" as published in the Wall Street Journal and, (b) themaximum rate per annum permitted by applicable law. The note is secured by theassets of the purchaser and a guarantee by the parent company of the purchaser.At June 30, 2006 the note receivable balance was $1,441.  During the three monthsended June 30, 2006, the note receivable balance was paid down by the receiptof inventory totaling $1,559.  The note receivable balance was paid off in thethird quarter of 2006.

OnMay 24, 2006, the Company entered into an exclusive agreement with a modularhousing sales agent stating it will provide installation servicesfor modular housing in New Orleans and surrounding areas.  In connection withthe agreement, the Company agreed to loan a third party up to $800 in a notereceivable.  The note requires one balloon installment of all accrued butunpaid interest and all outstanding principal on August 17, 2006.  The notebears interest at the lesser of (a) 7% on a per annum basis, (b) the maximumrate per annum permitted by applicable law. At June 30, 2006 the notereceivable balance was $375. 

**NOTE5 - DEBT**

InMarch 2006, the Company obtained a $10,000 revolving line of credit ("Line ofCredit") from a financial institution. The annual interest rate is at thefinancial institution's prime rate of interest less one quarter of one percent(0.25%), totaling 8% at June 30, 2006. Interest payments on the outstandingprincipal balance of the Line of Credit are due monthly beginning on April 1,2006. The Line of Credit expires, and all outstanding principal must be repaidto the financial institution, on September 1, 2007. The borrowings from theLine of Credit will be used for working capital purposes. 

13

Subjectto the provisions of the Line of Credit, the Company can borrow, repay andreborrow principal under the Line of Credit from time to time during its term.The principal amount outstanding under the Line of Credit may not exceed thelesser of (a) $10,000 or (b) an amount equal to two times the Company's freecash flow for the immediately preceding two calendar quarters ("the CreditLimit"). For purposes of the Line of Credit, the Company's free cash flow isdefined for each period of determination as (a) net income plus the sum ofinterest, depreciation and amortization, less (b) distributions or dividends,less (c) accounts receivable of the Company and its subsidiaries unpaid 180days or more after invoice date, plus (d) reserves specifically establishedagainst the receivables described in (c) to the extent such reserves arededucted in determining net income for the period in question. In connectionwith the Line of Credit, the Company paid the financial institution acommitment fee in the amount of $100. The Company is also obligated to pay anunused facility fee on the daily average unused amount of the Line of Creditless taxes paidequal to one-half of one percent (0.5%) per annum, calculated and payablequarterly in arrears. 

TheLine of Credit is secured by substantially all of the assets of the Company andits subsidiaries, excluding Fireline, and the capital stock of suchsubsidiaries, excluding Fireline, pursuant to a Pledge and Security Agreement.The Line of Credit is guaranteed by the subsidiaries of the Company, excludingFireline, pursuant to a Guaranty Agreement. 

Underthe Line of Credit, the financial institution has agreed to issue letters ofcredit meeting the requirements of the financial institution set forth in theLine of Credit for the benefit of the Company in an amount not to exceed $2,000in the aggregate, and subject to the amount of cash advanced under the Line ofCredit plus amounts outstanding under the letters of credit not being in excessof the Credit Limit. Pursuant to the terms of the Line of Credit, for eachletter of credit issued by the financial institution, the Company agrees topay a letter of credit fee equal to one and one-half percent (1.5%) of the faceamount of the letter of credit, but not less than $5, plus other fees chargedunder the financial institution's then-current policies. 

TheLine of Credit contains covenants, including financial covenants, with whichthe Company must comply. The financial covenants include current assets tocurrent liabilities ratio and a debt service coverage ratio. With certainexceptions, the Company is prohibited under the Line of Credit from incurringany debt or permitting any liens to be placed on its assets or the assets ofits subsidiaries. Under the terms of the Line of Credit, the Company has agreednot to take certain actions, prior to the financial institution's approval,including becoming a party to a merger or consolidation, acquiring assets, andsubject to certain exceptions, issuing securities.  At June 30, 2006, theCompany is in compliance with such covenants.

In July 2006, the Company borrowed $7,000 on the Lineof Credit.  A portion of the cash was used to fund the purchase price ofFireline.  In connection with obtaining the financial institution's approvalfor the acquisition of Fireline, the Company agreed to pay the financialinstitution a $15 fee and agreed to cause the former owner of Fireline toexecute a subordination agreement by October 15, 2006.  See Note 10 -Subsequent Events for additional information regarding the acquisition. 

Debtconsists of the following at June 30, 2006:   

Note payable to Southern Exposure seller, interest  at 2% in excess of one-month LIBOR rate (adjusted on the first day of each  calendar quarter totaling 6.83% at June 30, 2006), principal and interest  payments due quarterly. The payments are equal to the greater of (i) the  amount of principal and interest that would be payable under a 10-year  amortization or (ii) 60% of free cash flow (as defined) of the calendar  quarter that precedes the payment date by two calendar quarters. The note is  secured by a security interest in all the assets and stock of Southern  Exposure Unlimited of Florida, Inc. and SE Tops of Florida, Inc. and a first  lien on 50% of the stock of SouthernStone Cabinets, Inc.  The note was paid  in July 2006.
   
 $

1,074 

Note payable, non-interest bearing, payable in $5  monthly installments until paid in full to the seller of Fiber Seal Systems  of Los Angeles (FSSLA).

195 

Notes and leases payable to various financial  institutions, collateralized by various equipment and automobiles, bearing  interest at various annual interest rates ranging from prime plus 0.75% to  13.21% principal and interest payable in monthly installments ranging from  $0.4 to $1 through March 2011.
   
261 

Total

1,530 

Less  current portion

(1,196)

Non-current  portion

 $

334 

 

14

**NOTE6 - EQUITY**

**Common Stock**

During the six months ended June 30, 2006, the Companyissued 3,501 shares of common stock for $6,017 in connection with the exerciseof stock options.

During the six months ended June 30, 2006, the Companyissued 9 shares of common stock in connection with the cashless exercise ofstock options.

During the six months ended June 30, 2006, the Companyissued 58 shares of common stock in connection with the cashless exercise ofwarrants.

During the six months ended June 30, 2006, the Companyissued 480 shares of common stock in connection with the conversion of $902 ofconvertible debt and accrued interest payable.

During the six months ended June 30, 2006, the Companyissued 793 shares of common stock for $1,863 in connection with the exercise ofwarrants.

During the six months ended June 30, 2006, the Companyissued 95 shares of common stock to the Company's board of directors under itsStock Plans, in consideration of services provided from January 1, 2005 to April30, 2006.  During the six months ended June 30, 2006, the Company expensedapproximately $86 in the accompanying statement of operations.

During the Annual Meeting, the stockholders approvedan amendment of the Company's Restated Certificate of Incorporation to increasethe number of authorized shares of Common Stock from 50,000 to 100,000 shares.

In July 2006the Company's Compensation Committee approved two separate stock grants of 20(an aggregate of 240 shares) each of the Company's common stockfor the Company board members' services during the period from June 1, 2006 toMay 31, 2008.  During the six months ended June 30, 2006 the Company expensedapproximately $85 in the accompanying statement of operations.

In May and June 2006, our President andCEO engaged in separate transactions resulting in disgorgement of profits tothe Company within the meaning of the provisions of Section 16(a) of theSecurities Exchange Act of 1934. Under that provision, profits made byofficers, directors and certain shareholders on transactions within a six monthperiod of a matching transaction inure to the benefit of and may be recoveredby the Company. Our President and CEO each informed the Company of his intentto engage in a matchable transaction in advance, and the profits relating tosuch sales were paid to the Company concurrently with such transactions. Theseofficers paid, and we accepted, an aggregate of approximately $245 asdisgorgement of profits on the transactions.The profitdisgorgement has been recorded as an increase to stockholders' equity in thesecond quarter of 2006. 

**NOTE7 - COMMITMENTS AND CONTINGENCIES**

**Litigation**

The nature and scope of theCompany's business operations bring it into regular contact with the generalpublic, a variety of businesses and government agencies. These activitiesinherently subject the Company to potential litigation, which are defended inthe normal course of business.  

On June 20, 2006, a class action lawsuit was filed inthe United States District Court of the Northern District of Texas.  HomeSolutions and the Chief Executive Officer, President and Chief FinancialOfficer of Home Solutions are named as defendants in that action.  Thecomplaint alleges claims against Home Solutions and such officers for violationsof the Securities Act of 1934.  The complaint alleges that the defendantsdisseminated false and misleading information to the public and misrepresentedthe accuracy of the Company's financial condition and future revenueprospects.  The complaint further alleges that the effect of the purportedfraud was to manipulate Home Solution's stock price so that the defendantscould profit from the manipulation.  The action seeks damages in an unspecifiedamount.  The Company intends tovigorously defend the action.

On June 27, 2006 and on July 6, 2006, two additionalclass action lawsuits were filed in the United States District Court for theNorthern District of Texas.  Home Solutions and its directors are named asdefendants in those actions.  The allegations in these two additional classaction lawsuits are substantially similar to those in the first lawsuit.  Theactions seek damages in an unspecified amount.  The Company intends to vigorously defend the actions.

15

The Company is occasionally involved in otherlitigation matters relating to claims arising in the ordinary course ofbusiness.  Other than the class action lawsuits described above, the Company'smanagement believes that there are no claims or actions pending or threatenedagainst the Company, the ultimate disposition of which would have a materialadverse effect on our business, results of operations and financial condition. However, if a court or jury rules against us and the ruling is ultimatelysustained on appeal and damages are awarded against us, such ruling could havea material and adverse effect on our business, results of operations andfinancial condition.

**Indemnities and Guarantees**

The Company has made certainindemnities and guarantees, under which it may be required to make payments toa guaranteed or indemnified party, in relation to certain transactions.  TheCompany indemnifies its directors, officers, employees and agents to themaximum extent permitted under the laws of the State of Delaware.  Inconnection with its facility leases, the Company has indemnified its lessors forcertain claims arising from the use of the facilities.  In connection withcertain of its debt, stock purchase and other agreements, the Company hasindemnified lenders, sellers, and various other parties for certain claimsarising from the Company's breach of representations, warranties and otherprovisions contained in the agreements.  Historically,the Company has not been obligated to make any payments for these obligationsand no liabilities have been recorded for these indemnities and guarantees inthe accompanying consolidated balance sheets.

Pursuant to a merger agreement, on March 31,2005, the Company acquired 100% of thecapital stock of Cornerstone.  For each of threeconsecutive calendar years commencing with 2005, in the event that Cornerstoneproduces earnings before interest, taxes, depreciation and amortization("EBITDA") in such calendar year in excess of $2,400, the Company agreed to issue to the seller additional shares of the Company's common stockrepresenting 30% of the EBITDA amount in excess of $2,400 (50% under certaincircumstances) and as specified in the merger agreement.  In lieu of issuingshares of common stock, the Company has the option of making a cash payment tothe seller equal to 30% of the excess EBITDA amount.  To date, there have beenno amounts earned under this earnout provision.  Subsequent to the end ofthe second quarter, the Company entered into an agreement pursuant to which theCompany was released from its obligations under the merger agreement.

OnSeptember 27, 2005, HSR of Louisiana closed the purchase of substantially allof the assets of FERS, which was engaged in recovery services.  The acquisitionwas effective on September 1, 2005.  FERS is entitled to receive an amount (incash or restricted common stock, at the Company's option) equal to ten percent(10%) of the excess of the HSR of Louisiana's earnings before interest, taxes,depreciation and amortization with respect to the acquired assets related tothe business, if any, that exceeds $15,000 in each of fiscal years 2006 and2007, subject to the terms and provisions of the purchase agreement.  To date, there have been no amounts earned under thisprovision.

**NOTE8 - SEGMENT REPORTING**

The Company reports its business segments based on industry classification, which are as follows:

 *For the Three Months Ended*
 *For the Six Months Ended*
 *June 30,*
 *June 30,*
 **2006**2005
 **2006**2005
Net sales:
 
 
 
 
 
Recovery/Restoration services
$
14,996 
 $
4,874 
 
$
23,616 
 $
10,011 
Rebuilding/Remodeling
9,158 
7,858 
 
19,817 
12,036 
Total segment net sales
$ 
24,154 
 $ 
12,732 
 
$ 
43,433 
 $ 
22,047 
 
 
 
 
 
 
Operating Income:
 
 
 
 
 
Recovery/Restoration services
$
6,418 
 $ 
762 
 
$ 
8,987 
 $ 
1,828 
Rebuilding/Remodeling
1,080 
1,673 
 
3,509 
2,762 
Corporate
(1,596)
(557)
 
(2,595)
(1,085)
Total segment operating income
$ 
5,902 
 $
1,878 
 
$ 
9,901 
 $ 
3,505 
 
 
 
 
 
 
Depreciation and amortization included in operating income:
 
 
 
 
 
Recovery/Restoration services
$
155 
$ 
131 
 
$ 
355 
$
261 
Rebuilding/Remodeling
168 
172 
 
358 
180 
Corporate
64 
46 
 
105 
88 
Total segment depreciation and amortization
$ 
387 
$ 
349 
 
$
818 
$
529 
 
 
 
 
 
 
Identifiable assets:
 
 
 
 
 
Recovery/Restoration services
 
 
 
$ 
49,537 
$ 
19,007 
Rebuilding/Remodeling
 
 
 
38,090 
31,494 
Corporate
 
 
 
21,238 
2,226 
Total segment identifiable assets
 
 
 
 $
108,865 
 $
52,727 
 

16

There were no intersegment sales.  Operating income isdefined as third party sales less operating expenses.  All of the Company'sbusiness activities are conducted within the United States geographicboundaries.

**NOTE 9 - RELATED PARTY TRANSACTIONS**

For the period ended June30, 2006, the Company leased a warehouse facility from a related party under anon-cancelable lease.  The lease term is one year through July 2007 for $15monthly.  The Company also leases warehouse andadministrative spaces from a related party under cancellable leases.  The Companycan vacate the spaces with 60 days notice to the related party.  

For the periodended June 30, 2006, officers and directorsexercised 3,126 stock options of the Company's common stock for $5,319 atexercise prices ranges from $1.25 to $2.53 per share.

**NOTE 10 - SUBSEQUENT EVENTS**

In July 2006, the Company issued120 shares of common stock to the members of the Company's board of directors valued at$508 in connection with the issuance of stock purchase rights under its StockPlans, in consideration of services to be provided for the period from June 1,2006 to May 31, 2007.  See Note 6 - Equity, for additional information.

In July 2006, the Company issued3 shares of common stock for $17 in connection with the exercise of warrants.

On July 31, 2006, the Company consummated theacquisition of Fireline, a privately held provider of recovery and restorationservices throughout Florida, Louisiana and Mississippi, pursuant to a purchaseagreement entered into among Fireline, the owner of Fireline and the Company.  The acquisition is effective as of July 1, 2006. Under the agreement, the Company paid the owner of Fireline $11,500 in cash,issued an unsecured promissory note in the principal amount of $21,650 andissued the owner 4,000 shares of the Company's common stock.  The Company borrowed $7,000 on the Line of Credit.  Aportion of the cash was used to fund the Fireline acquisition.  See Note 5 -Debt for additional information regarding the Line of Credit.  

**RISKSASSOCIATED WITH FORWARD-LOOKING STATEMENT INCLUDED IN THIS FORM 10-Q**

This Form 10-Q contains certain forward-looking statements within the meaningof Section 27A of the Securities Act of 1933, as amended, and Section 21E ofthe Securities Exchange Act of 1934, as amended, which are intended to becovered by the safe harbors created thereby.  These statements include theplans and objectives of management for future operations, including plans andobjectives relating to the Company's acquisition strategies and availability ofcapital to fund such strategies.  The forward-looking statements includedherein are based on current expectations that involve numerous risks anduncertainties.  Assumptions relating to the foregoing involve judgments with respectto, among other things, future economic, competitive and market conditions,regulatory framework, and future business decisions, all of which are difficultor impossible to predict accurately and many of which are beyond the control ofthe Company.  We refer you to the section entitled "Trends, Risks andUncertainties" in Item 6 of Part II of our annual report on Form 10-KSB for theyear ended December 31, 2005, for a list of specific factors that could causeactual results to differ materially from those indicated by our forward-lookingstatements made herein and presented elsewhere by management.  Although theCompany believes that the assumptions underlying the forward-looking statementsare reasonable, any of the assumptions could be inaccurate and, therefore,there can be no assurance that the forward-looking statements included in thisForm 10-Q will prove to be accurate.  In light of the significant uncertaintiesinherent in the forward-looking statements included herein, the inclusion ofsuch information should not be regarded as a representation by the Company orany other person that the objectives and plans of the Company will beachieved.  Furthermore, we do not undertake any obligation to updateforward-looking statements made herein.

**Item 2. Management'sDiscussion and Analysis of Financial Condition and Results of Operations orPlan of Operation (Dollars and shares in thousandsexcept per share data).**

**Overview  **

Home Solutions is a provider of recovery, restoration andrebuilding/remodeling services to commercial and residential areas that are (i)prone to flooding, hurricanes, tornados, fires or other naturally occurring andrepetitive weather-related emergencies; and/or (ii) experiencing robust housingdevelopment.  With operations in the South, Gulf Coast regions and California,we believe that the Company is well positioned to capitalize on the growingdemand for our suite of Recovery, Restoration and Rebuilding/Remodelingservices.  Home Solutions is a Delaware corporationwith principal executive offices located at 1500 Dragon Street, Suite B,Dallas, Texas 75207.  Our website is located at www.HOMcorp.com.  Our Chairmanof the Board and Chief Executive Officer is Frank Fradella.  Our ChiefOperating Officer and President is Rick O'Brien, and our Senior Vice Presidentand Chief Financial Officer is Jeff Mattich.

17

**GrowthStrategy**

Ourgrowth strategy is to expand our core service offerings through the futureacquisition of strategic, specialized, profitable and well-managed companies operatingin our target markets and business segments with a proven history of internalgrowth.  Including the Fireline acquisition, which was closed on July 31, 2006,and effective as of July 1, 2006,we have closed six acquisitions since November of 2002.  

Ourrecent acquisitions have focused on the Recovery segment of our business.  Wesignificantly expanded our Recovery services and our capability to respond tomajor catastrophes through the July 31, 2006 acquisition of Fireline, aFlorida-based company specializing in disaster recovery services, which iseffective as of July 1, 2006.  We enteredthe Recovery market last year by expanding into the hardest hit areas of the2005 hurricane season through the formation of HSR of Louisiana, a wholly-ownedsubsidiary.  HSR of Louisiana acquired substantially all of the assets of FERS, a company engaged in recoveryservices, in September of 2005.  Initially, the services provided by ourRecovery operations involve the drying, dehumidifying, clean up and removal ofdebris at many of the hurricane-affected locations prior to commencingrestoration services.  We are also now involved in the initial stages ofreconstruction of commercial and residential properties.  We expect therecovery, restoration and rebuilding efforts associated with the 2005hurricanes to occur in stages and to extend for two to five years.  The Companyplans to take advantage of the opportunity to service these areas through eachstage with its Recovery, Restoration and Rebuilding/Remodeling serviceofferings.

We also see the opportunity to further capitalize on therobust growth in housing in our target markets through the Company'srelationship with Centex Corp. ("Centex"), a leading public homebuilder, as well as with theexpansion of our relationships with retailers including Home Depot, Inc. ("Home Depot").  

**Service Offerings**

Our businessconsists of three integrated service offerings:  (i) Recovery; (ii)Restoration; and (iii) Rebuilding/Remodeling.  We believe that the naturalprogression of our business offerings in markets affected by weather-related emergencies,from Recovery, to Restoration, to Rebuilding/Remodeling, increases ouropportunities across all three service offerings.  

**Recovery**

With its recent expansion ofRecovery services through the July 31, 2006 acquisition of Fireline, which iseffective as of July 1, 2006, as well asour expansion into the Louisiana area in September 2005 in connection with the FERS acquisition, the Company is a first responder to clean up activities afterweather-related emergencies.  We have significant operations throughoutdisaster impacted areas in Florida, Louisiana, Mississippi and Texas.  Firelineand FERS also provided recovery services in Florida during the 2004 hurricaneseason, which we believe will position the Company to generate revenue in ourRestoration and Rebuilding/Remodeling segments in the Florida markets.  TheCompany's Recovery services include catastrophic storm response, clean up andremoval of debris, initial set up services in an impacted area (includingpower, lodging, sustenance and training), water mitigation, drying, dehumidificationand preparing affected areas for the next stage of restoration and rebuilding. We have trained employees who provide onsite first response to respond to fire,water and weather-related emergencies in our target markets to both commercialand residential clients.  We believe the Recovery segment of our business tonot only be of high growth and profitability, but we also seek to capitalize onsynergistic opportunities by continuing to provide these services in areas thatneed the full spectrum of restoration, rebuilding and remodeling services thatthe Company can provide.  Currently we provide these services on an hourly rateto our commercial and residential clients, principally as a subcontractor tocustomers providing additional services in these markets.  We pursue bids onrecovery services contracts that are reimbursable to our clients through theirinsurance agencies, as well as government branches and agencies.  

**Restoration**

Our Restoration segment focuses on the next stage ofservices after the initial clean up and catastrophic storm response.  Servicespresently included in our Restoration business segment involve water, fire andwind restoration, mold remediation, contents restoration, air decontamination,asbestos and lead paint removal, cleaning, drying and deodorization of carpetand furniture and moving and storage services.** **Thefollowing details the types of restoration services we provide:

*Fire and Water DamageRestoration*: We provide trainedemployees to respond to fire, water and weather-related emergencies, to inspectstructural members and contents damaged by water, to determine the likelihoodor extent of mold growth, and to provide immediate cleaning, drying, moving,storage, and deodorization, among other services.  Fireline, which specializesin disaster recovery services, insurance estimates and repairs for commercial,industrial and residential properties, is certified in multiple aspects of therestoration industry, including smoke, fire, water and mold.  Fireline is licensedas a general contractor in Florida and offers full interior and exteriorrestoration and reconstruction services in that state.  As most cases of moldare associated with excess moisture, we believe that our Recovery services'response to event-related damage will provide significant additional revenueopportunities for our Restoration segment.  The cost and time requirements ofrestoration projects can vary dramatically from case-to-case. 

18

*Indoor Air Contamination*: Through PWS,we provide indoor air contamination services, including contamination frommold, asbestos and lead paint to homeowners in California and to a lesserextent in Florida.  With increased media attention regarding the health threatof mold, fewer insurance options, and property transfers at risk, currentmarket conditions have created significant demand for mold inspections,certifications and remediation services.  These services consist of propertyand system inspections, surface and air testing, project design, microbialremoval, light interior demolition, repair and specialized cleaning work.  Homeinspections and testing can range from $0.2 to $0.8.  For the typicalmold-contaminated house, a remediation project can last approximately one weekand cost $10 or more.  Customer opportunities are developed through a regionalsales force as well as through referrals by real estate firms, insuranceadjusters, mortgage companies, attorneys and nationally branded retailers.  TheCompany believes it can use its industry experience to give efficacy to itsprocesses and provide homeowners with quality assurance.

*Cleaning and Fabric Protection*: Through FSS, we provide fabric protection servicesto protect furniture, carpet and draperies from stains and daily wear throughboth Company-owned locations as well as over forty licensed locations in 23states and the District of Columbia.  This niche market is primarily targetedat above-average income homeowners with an average ticket of approximately$0.400.  We also provide air duct cleaning services to remove particulate(organic and inorganic) material, which can cause allergic reactions and isoften the breeding ground for many types of mold, from heating and airconditioning systems. 

**Rebuilding/Remodeling**

Through Southern Exposure and Cornerstone, we offercustom cabinet production and cabinet and countertop installation services. Our wholly-owned subsidiary, Southern Exposure,manufactures and installs a high-end product line of cabinets and countertops. Our position in this market was strengthened in March 2005 through theacquisition of Cornerstone, which installs custom marbleand granite countertops for residential customers.  Currently, we manufactureand install cabinets and kitchen countertops for Centex, a leading publichomebuilder, in its southwest Florida market.  We also install granitecountertops for Home Depot in Florida, Georgia, Alabama and South Carolina.  Itis expected that a portion of our cabinet and countertop installation serviceswill generate additional opportunities across our other business segments.

*Use of Estimates and Critical Accounting Policies*

In preparing our consolidated financial statements, wemake estimates, assumptions and judgments that can have a significant effect onour revenues, income (loss) from operations, and net income (loss), as well ason the value of certain assets on our balance sheet.  We believe that there areseveral accounting policies that are critical to an understanding of ourhistorical and future performance as these policies affect the reported amountsof revenues, expenses, and significant estimates and judgments applied bymanagement.  While there are a number of accounting policies, methods andestimates affecting our financial statements, areas that are particularly significantinclude accounts receivable allowance, revenue recognition, stock-basedcompensation, and goodwill.  In addition, please refer to Note 1 to theaccompanying financial statements for further discussion of our accountingpolicies.

*Revenue Recognition*

Revenue is primarily recognized at the time thecontract and related services are performed. Onoccasion the Company reports revenue fromfixed price contracts using the percentage of completion method for financialreporting purposes. Under the percentage of completion method, revenues withrespect to individual contracts are recognized in the proportion that costsincurred to date bear to total estimated costs. Revenue and costs estimates aresubject to revision during the terms of the contracts and any requiredadjustment are made in the periods in which the revisions become known. Generaland administrative costs are not allocated to contract costs and are charged toexpense as incurred.

*Accounting for Stock-Based IncentivePrograms*

On January 1,2006, we adopted Statement of Financial Accounting Standards No. 123 (revised2004), "*Share-Based Payment*," ("SFAS 123(R)") which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to our employees and directors based on estimated fair values. Weadopted SFAS 123(R) using the modified prospective transaction method, whichrequires the application of the accounting standard as of January 1, 2006, thefirst day of our fiscal year 2006. Our financial statements as of and for thethree and six months ended June 30, 2006 reflect the impact of SFAS 123(R). Inaccordance with the modified prospective transition method, our financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS 123(R). The value of the portion of the award thatis ultimately expected to vest is recognized as an expense over the requisiteservice periods in our statement of operations. Prior to the adoption of SFAS123(R), we accounted for stock-based awards to employees and directors using theintrinsic value method in accordance with APB 25 as allowed under Statement ofFinancial Accounting Standards No. 123, *Accounting for Stock-BasedCompensation* (SFAS 123). As stock-based compensation expense recognized inthe statement of operations for the first quarter of fiscal 2006 is based onawards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS 123(R) requires forfeitures to be estimated at the time ofgrant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimated. We estimated forfeitures to be 2%.

Stock-basedcompensation expense recognized as operating expense under SFAS 123(R) for thesix months ended June 30, 2006 was $298, determined by the Black-Scholesvaluation model, and consisting of stock-based compensation expense related toemployee stock options. See Note 1 - Basis of Presentation and Summary ofSignificant Accounting Policies to the unaudited consolidated financialstatements for additional information.

Inaccordance with Statement of Financial AccountingStandards ("SFAS") No. 123R, "*Share Based Payment* ("SFAS 123R"), inour first quarter of fiscal year 2006 we started to recognize compensationexpense related to stock options and restricted stock purchase rights, whichare equivalent to options granted to employees based on: (a) compensation costfor all share-based payments granted prior to, but not yet vested as ofDecember 31, 2005, based on the grant date fair value estimated in accordancewith SFAS No 123, "*Accounting**for Stock-Based Compensation*,"("SFAS 123"), adjusted for an estimated future forfeiture rate, and (b)compensation cost for all share-based payments granted subsequent to December31, 2005, based on the grant date fair value estimated in accordance with theprovisions of SFAS 123R.  

19

Ourassessment of the estimated fair value of the stock options granted is affectedby our stock price as well as assumptions regarding a number of complex andsubjective variables and the related tax impact.  We utilize the Black-Scholesmodel to estimate the fair value of stock options granted.  Generally, ourcalculation of the fair value for options granted under SFAS 123R is similar tothe calculation of fair value under SFAS 123 with the with the exception of thetreatment of forfeitures.  The fair value of restricted stock units granted isbased on the grant date price of our common stock.  

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. This model also requires the input of highly subjectiveassumptions including: 
(a)
The expected volatility of ourcommon stock price, which we determine based on historical volatility of ourcommon stock over the prior eighteen month period;
(b)
Expected dividends, which are nil,as we do not anticipate issuing dividends;
(c)
Expected life of the stock option,which is estimated based on the historical stock option exercise behavior ofour employees; and 
(d)
Expected forfeitures of stockoptions, which is estimated based on the historical turnover of our employeesand expected turnover in the future.  Prior to adoption of SFAS 123R, werecognized forfeitures under SFAS 123 as they occurred.

 

In the future, we may elect to usedifferent assumptions under the Black Scholes valuation model or a differentvaluation model, which could result in a significantly different impact on ournet income or loss.

*Goodwill*

Goodwill represents the excess of acquisition costover the net assets acquired in a business combination. Management reviews, onan annual basis, the carrying value of goodwill in order to determine whetherimpairment has occurred. Impairment is based on several factors including theCompany's projection of future undiscounted operating cash flows. If animpairment of the carrying value were to be indicated by this review, theCompany would adjust the carrying value of goodwill to its estimated fair value.

**Resultsof Operations (Dollars and Shares in Thousands)**       

**Comparisonof three months ended June 30, 2006 to three months ended June 30, 2005**

*Net Sales*

**Recovery/Restoration Services**

Sales for the three months ended June 30, 2006 was$14,996, compared to $4,874 for the three months ended June 30, 2005. The sales increase from the same period in 2005 is due toHSR of Louisiana's acquisition, completed September 2005, of substantially allthe assets of FERS and additional revenue generated from operations. 

**Rebuilding/Remodeling**

The revenue for the three months ended June 30, 2006was $9,158 from continuing operations, compared to $7,858 for the three monthsended June 30, 2005. The increase from the same period in 2005 is due primarilyto an increase in Southern Exposure's sales.

*Costs of Sales*

**Recovery/Restoration Services**   

Costs of sales for the three months ended June 30,2006 were $6,562, compared to $2,512 for the three months ended June 30, 2005.The increase in the total costs of sales from the same period in 2005 is due tosales from HSR of Louisiana operations. Costs of sales as a percentage of salesfor the three months ended June 30, 2006 and 2005 were 43.8% and 51.5%,respectively.   

**Rebuilding/Remodeling**

Costs of sales for the three months ended June 30, 2006were $6,219 from continuing operations, compared to $4,652 for the three monthsended June 30, 2005. The increase in total costs of sales from the prior periodin 2005 is due to the increase in Southern Exposure's sales.  Segment costs of sales as a percentage of sales forthe three months ended June 30, 2006 and 2005 was 67.9% and 59.2%,respectively.

20

*Selling,General and Administrative Expenses*

**Recovery/Restoration Services**

Selling, general and administrative ("SG&A")expenses were $2,016 for the three months ended June 30, 2006, compared to$1,600 for the three months ended June 30, 2005.  This represents an increaseof $416 from the same period in 2005, primarily due to HSR of Louisiana operations. SG&A expenses as apercentage of sales for the three months ended June 30, 2006 and 2005 were13.4% and 32.8%, respectively. 

**Rebuilding/Remodeling**   

SG&A expenses were $1,859 from continuingoperations for the three months ended June 30, 2006, compared to $1,533 for thethree months ended June 30, 2005.  This represents anincrease of $326 from the same period in 2005, primarily due to the expansionof operational support and sales growth and the expansion of Cornerstone's HomeDepot markets.  Segment SG&A as a percentage of segment sales for thethree months ended June 30, 2006 and 2005 were 20.3% and 19.5%, respectively.

**Corporate**

Corporate SG&A expenses were $1,596 for the threemonths ended June 30, 2006, compared to $557 for the three months ended June30, 2005. The increase from the same period in 2005 is due primarily to stockoption expense of $144, increased legal and professional fees and consultingfees of $239, board of director compensation of $136 and increased salariesexpense of $623. Corporate SG&A expenses for the three months ended June30, 2006 and 2005 as a percentage of total sales were 6.6% and 3.5%,respectively.  

*Other Income (Expense)*

Interest expense was $58 for the three months endedJune 30, 2006, compared to $433 for the three months ended June 30, 2005. Thedecrease in interest expense is related to the decrease in total debt to $1,714at June 30, 2006 from $14,115 at June 30, 2005.

*IncomeTaxes*

Incometax expense was $2,246 for the three months ended June 30, 2006 compared to $116for the three months ended June 30, 2005. In 2005, the Company utilized its netoperating loss tax carry forward provision to offset 2005 federal taxableincome.  

*DiscontinuedOperations*

Duringthe year ended December 31, 2005, the Company's management committed to a planto dispose of certain assets and liabilities of the building and remodelingdivision of Cornerstone. The disposal allowed the Company to focus onsupporting higher net profit margin opportunities.

InMarch of 2006 the Company completed the sale of certain assets and liabilitiesused in connection with the operations of the building and remodeling divisionof Cornerstone.  As a result of the sale, its operations and the gain on thesale have been reclassified to discontinued operations. The Company recognizeda gain on discontinued operations during this period of $975 for the recognitionof the deferred gain on the sale of the division, and a loss of $21during the three months ended June 30, 2005, net of tax.  

**Comparisonof six months ended June 30, 2006 to six months ended June 30, 2005**

*NetSales*

**Recovery/RestorationServices**

Salesfor the six months ended June 30, 2006 was $23,616, compared to $10,011 for thesix months ended June 30, 2005. The sales increase from the same period in 2005is due to HSR of Louisiana's acquisition, completed September 2005, ofsubstantially all the assets of FERS and additional revenue generated fromoperations. The Company also generated revenues from one of its majorrestoration customers for services, including standby and mobilization of itslabor force, to be used on specific projects as specified in its masterservices agreement with the customer. The agreements allow for billings up to$40,000 for specified services, which are estimated to be complete during 2006.

** **

21

**Rebuilding/Remodeling**

Therevenue for the six months ended June 30, 2006 was $19,817 from continuingoperations, compared to $12,036 for the six months ended June 30, 2005. Theincrease from the same period in 2005 is due to an increase in SouthernExposure sales and the Cornerstone acquisition effective March 31, 2005.  TheSouthern Exposure sales increase resulted from increased demand from itsprimary customer to complete certain projects during the first quarter of 2006.

*Costsof Sales*

**Recovery/RestorationServices**  

Costsof sales for the six months ended June 30, 2006 were $9,446, compared to $4,885for the six months ended June 30, 2005. The increase in the total costs ofsales from the same period in 2005 is due to sales from HSR of Louisianaoperations. Costs of sales as a percentage of sales for the six months endedJune 30, 2006 and 2005 were 40.0% and 48.8%, respectively. HSR of Louisianagenerated higher margin fees associated with contracts to commit a portion ofits labor force with its major recovery/restoration customer.  

**Rebuilding/Remodeling**

Costsof sales for the six months ended June 30, 2006 were $12,666 from continuingoperations, compared to $7,128 for the six months ended June 30, 2005. Theincrease in total costs of sales from the same period in 2005 is due to anincrease in Southern Exposure sales. Segment costs of sales as a percentage ofsales for the six months ended June 30, 2006 and 2005 was 63.9% and 59.2%,respectively.

*Selling,General and Administrative Expenses*

**Recovery/RestorationServices**

Selling,general and administrative ("SG&A") expenses were $5,183 for the six monthsended June 30, 2006, compared to $3,298 for the six months ended June 30,2005.  This represents an increase of $1,885 from the same period in 2005,primarily due to increased activity in the HSR of Louisiana operations.SG&A expenses as a percentage of sales for the six months ended June 30,2006 and 2005 were 21.9% and 32.9%, respectively. The Company also increasedits reserve and allowances associated with its accounts receivable. 

**Rebuilding/Remodeling**               

SG&Aexpenses were $3,642 from continuing operations for the six months ended June30, 2006 compared to $2,146 for the six months ended June 30, 2005.  SegmentSG&A expenses increased from the same period in 2005, primarily due to theexpansion of its operational support and sales growth and the expansion of itsHome Depot markets. Segment SG&A as a percentage of segment sales for thesix months ended June 30, 2006 and 2005 were 18.4% and 17.8%, respectively.

**Corporate**

CorporateSG&A were $2,595 for the six months ended June 30, 2006, compared to $1,085for the six months ended June 30, 2005. The increase from the same period in2005 is due primarily to stock option expense of $298, increased legal andprofessional fees and consulting fees of $423, board of director compensationof $224 and salary expense of $665. Corporate SG&A for the six months endedJune 30, 2006 and 2005 as a percentage of total sales were 6.0% and 4.3%,respectively.  

*OtherIncome (Expense)*

Interestexpense was $118 for the six months ended June 30, 2006, compared to $780 forthe six months ended June 30, 2005.  The decrease in interest expense isrelated to the decrease in total debt to $1,714 at June 30, 2006 from $14,115at June 30, 2005.

*IncomeTaxes*

Incometax expense was $3,668 for the six months ended June 30, 2006 compared to $218for the six months ended June 30, 2005. In 2005, the Company utilized its netoperating loss tax carry forward provision to offset 2005 federal taxableincome.  

* *

22

*DiscontinuedOperations*

Duringthe year ended December 31, 2005, the Company's management committed to a planto dispose of certain assets and liabilities of the building and remodelingdivision of Cornerstone. The disposal allowed the Company to focus onsupporting higher net profit margin opportunities.  

InMarch of 2006 the Company sold the building and remodeling division ofCornerstone, which was acquired in the Cornerstone acquisition.  As a result ofthe sale, its operations have been reclassified to discontinued operations. The Company recognized a gain on discontinued operations during this period of$1,741, net of tax, including a pre-tax gain of $3,177.  

Netsales from discontinued operations for the six months ended June 30, 2006 were$514, as compared to $3,323 for the six months ended June 30, 2005.  For thesix months ended June 30, 2006 and 2005 cost of sales were $676 and $2,326,respectively, and selling, general and administrative expenses were $317 and$1,015, respectively. 

**Liquidityand Capital Resources**

The Company's existing capital resources as of June 30,2006, consist of cash andaccounts receivable totaling $35,793, compared to cash and accounts receivableof $28,810 as of December 31, 2005. The Company believes that the current financingarrangements and those that the Company currently has planned are sufficient tofinance its working capital needs for the next twelve months. Implementation of the Company's strategic plan ofacquiring niche residential services companies will require additional capital,however.

InMarch 2006, the Company obtained a $10,000 revolving line of credit ("Line ofCredit") from a financial institution. The annual interest rate is at thefinancial institution's prime rate of interest less one quarter of one percent(0.25%), totaling 8% at June 30, 2006. Interest payments on the outstandingprincipal balance of the Line of Credit are due monthly beginning on April 1,2006. The Line of Credit expires, and all outstanding principal must be repaidto the financial institution, on September 1, 2007. The borrowings from theLine of Credit will be used for working capital purposes. 

Subjectto the provisions of the Line of Credit, the Company can borrow, repay andreborrow principal under the Line of Credit from time to time during its term.The principal amount outstanding under the Line of Credit may not exceed thelesser of (a) $10,000 or (b) an amount equal to two times the Company's freecash flow for the immediately preceding two calendar quarters ("the CreditLimit"). For purposes of the Line of Credit, the Company's free cash flow isdefined for each period of determination as (a) net income plus the sum ofinterest, depreciation and amortization, less (b) distributions or dividends,less (c) accounts receivable of the Company and its subsidiaries unpaid 180days or more after invoice date, plus (d) reserves specifically establishedagainst the receivables described in (c) to the extent such reserves arededucted in determining net income for the period in question. In connectionwith the Line of Credit, the Company paid the financial institution acommitment fee in the amount of $100. The Company is also obligated to pay anunused facility fee on the daily average unused amount of the Line of Creditless taxes paidequal to one-half of one percent (0.5%) per annum, calculated and payablequarterly in arrears. 

TheLine of Credit is secured by substantially all of the assets of the Company andits subsidiaries and the capital stock of such subsidiaries, excludingFireline, pursuant to a Pledge and Security Agreement. The Line of Credit isguaranteed by the subsidiaries of the Company pursuant to a Guaranty Agreement.

Underthe Line of Credit, the financial institution has agreed to issue letters ofcredit meeting the requirements of the financial institution set forth in theLine of Credit for the benefit of the Company in an amount not to exceed $2,000in the aggregate, and subject to the amount of cash advanced under the Line ofCredit plus amounts outstanding under the letters of credit not being in excessof the Credit Limit. Pursuant to the terms of the Line of Credit, for eachletter of credit issued by the financial institution, Home Solutions agrees topay a letter of credit fee equal to one and one-half percent (1.5%) of the faceamount of the letter of credit, but not less than $5, plus other fees chargedunder the financial institution's then-current policies. 

TheLine of Credit contains covenants, including financial covenants, with whichthe Company must comply. The financial covenants include current assets tocurrent liabilities ratio and a debt service coverage ratio. With certainexceptions, the Company is prohibited under the Line of Credit from incurringany debt or permitting any liens to be placed on its assets or the assets ofits subsidiaries. Under the terms of the Line of Credit, the Company has agreednot to take certain actions, prior to the financial institution's approval,including becoming a party to a merger or consolidation, acquiring assets, andsubject to certain exceptions, issuing securities.  At June 30, 2006, theCompany is in compliance with such covenants.

Inconnection with obtaining the financial institution's approval for theacquisition of Fireline, Home Solutions borrowed $7,000 on the line of creditand agreed to pay the financial institution a $15 fee and agreed to cause theformer owner of Fireline to execute a subordination agreement by October 15,2006.

23

Inconnection with entering into an agreement to provide services to an agent fora provider of modular homes in New Orleans area on an exclusive basis, on May24, 2006, the Company agreed to loan the third party up to $800 in a notereceivable.  The note requires on balloon installment of all accrued but unpaidinterest and all outstanding principal on August 17, 2006.  The note bearsinterest at the lesser of (a) 7% on a per annum basis, (b) the maximum rate perannum permitted by applicable law.  At June 30, 2006, the note receivablebalance was $375.

During the six months ended June 30, 2006, the Companyused net cash from operating activities of $8,064, including net income of $7,591. 

The Company's investing activities provided net cashof $139 primarily due to repayments of notesreceivable, net of issuances and cash acquired in acquisitions, net of cashpaid.

The Company's net cash from financing activities of $13,531was primarily due to proceeds from the exercises of warrants and options andexcess tax benefits from option exercises. Cash flow outlays were for principalpayments on long-term debt and capital leases and distributions to a minoritystockholder.  

**CONTRACTUALOBLIGATIONS**

Duringthe first quarter 2006, the Company entered into a Master Services Agreementwith a recovery/restoration contractor to provide stand-by and mobilizationservices beginning January 2006. Contracted work is inclusive of emergencyresponse remediation abatement and construction of both residential andcommercial projects. The Company will perform all work in accordance with theplans and specifications identified by the contractor and furnish labor,materials, equipment and supplies in such quantities and schedule such hours aswill be necessary to accomplish the work. If the contractor elects to cease orpostpone its projects, the contractor may terminate the contract by written notice.

On May 24, 2006, the Companyentered into an exclusive agreement with a modular housing sales agent statingit will provide installation servicesfor modular housing in New Orleans and surrounding areas.

Thefollowing table represents our contractual obligations as of June 30, 2006.

**Payments Due by Period**

** **

** **

**Less than**

** **

**1 - 3**

** **

**4 - 5**

** **

**More than**

**Contractual Obligations**

**Total**

** **

**1 Year**

** **

**Years**

** **

**Years**

** **

**5 Years**

Capital lease obligations

 $

184 

 $

64 

 $

119 

 $

1 

 $

- 

Notes payable

1,530 

1,196 

294 

40 

- 

Operating leases

1,673 

553 

931 

170 

19 

Total

 $

3,387 

 $

1,813 

 $

1,344 

 $

211 

 $

19 

Webelieve that, for the period presented, inflation has not had a material effecton our operations.

**Item 3. Quantitative and QualitativeDisclosures About Market Risk**

Pursuantto the instructions to Item 305(c) of Regulations S-K, quantitative andqualitative disclosures about material risk is not required until after thefirst fiscal year end in which Item 305 is applicable, and thus, suchinformation is not included. 

**Item 4. Controls andProcedures** 

(a) Evaluation ofDisclosure Controls and Procedures. The Company carried out an evaluation underthe supervision and with the participation of the Company's management,including the Company's Chief Executive Officer ("CEO") and Chief FinancialOfficer ("CFO"), of the effectiveness of the Company's disclosure controls andprocedures. Based upon that evaluation, the CEO and CFO concluded that as of June30, 2006 our disclosure controls and procedures were effective in timelyalerting them to the material information relating to the Company (or theCompany's consolidated subsidiaries) required to be included in the Company'speriodic filings with the Securities and Exchange Commission ("the SEC"), such that the information relating to the Company,required to be disclosed in SEC reports (i) is recorded, processed, summarizedand reported within the time periods specified in SEC rules and forms, and (ii)is accumulated and communicated to the Company's management, including our CEOand CFO, as appropriate to allow timely decisions regarding requireddisclosure.

 

24

 (b) Changes ininternal control over financial reporting. There has been no change in theCompany's internal control over financial reporting that occurred during thesix months ended June 30, 2006 that has materially affected, or is reasonablylikely to materially affect, the Company's internal control over financialreporting.

The Company'smanagement, including the CEO and CFO, does not expect that our disclosurecontrols and procedures or our internal control over financial reporting willnecessarily prevent all fraud and material error. An internal control system,no matter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met. Further,the design of the control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the Company have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple error ormistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management override ofthe internal control. The design of any system of controls also is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions.

**PARTII****OTHER INFORMATION**(Dollars and shares in thousands, except for per sharedata)

**Item 1. Legal Proceedings.**

Thenature and scope of the Company's business operations bring it into regularcontact with the general public, a variety of businesses and governmentagencies.  These activities inherently subject the Company to potentiallitigation, which are defended in the normal course of business. 

On June 20, 2006, a class actionlawsuit was filed in the United States District Court for the Northern Districtof Texas.  Home Solutions and the Chief Executive Officer, President andChief Financial Officer of Home Solutions are named as defendants in thataction.  The complaint alleges claims against Home Solutions and suchofficers for violations of the Securities Act of 1934.  The complaintalleges that the defendants disseminated false and misleading information to thepublic which misrepresented the accuracy of the Company's financial conditionand future revenue prospects.  The complaint further alleges that theeffect of the purported fraud was to manipulate Home Solution's stock price sothat the defendants could profit from the manipulation.  The action seeksdamages in an unspecified amount.  The Companyintends to vigorously defend the action.

On June 27, 2006 and on July 6, 2006, two additionalclass action lawsuits were filed in the United States District Court for theNorthern District of Texas.  Home Solutions and its directors are named asdefendants in those actions.  The allegations in these two additional classaction lawsuits are substantially similar to those in the first lawsuit.  Theactions seek damages in an unspecified amount. The Company intends to vigorously defend the actions.

Home Solutions is occasionally involvedin other litigation matters relating to claims arising out of the ordinarycourse of business.  Other than the class action lawsuits described above, theCompany's management believes that there are no claims or actions pending orthreatened against the Company, the ultimate disposition of which would have amaterial adverse effect on our business, results of operations and financialcondition.  However, if a court or jury rules against us and the ruling isultimately sustained on appeal and damages are awarded against us, such rulingcould have a material and adverse effect on our business, results of operationsand financial condition.

**Item1A.  Risk Factors**

*Wehave sought to identify what we believe to be the most significant risks to ourbusiness, but we cannot predict whether or to what extent any of such risks maybe realized, nor are there any assurances that the Company has identified allpossible risks that might arise.  Our revenues are derived from specialtyRecovery, Restoration and Rebuilding/Remodeling products and services.  Thereare numerous and varied risks, known and unknown, that may prevent us fromachieving our goals.  Some of these risks are set forth below.*

**Our limited operating history makes itdifficult for us to evaluate our future business prospects and make decisionsbased on those estimates of our future performance***.*

We did not begin operations of our currentbusiness concept until November 2002, and through July 31, 2006, we havecompleted six acquisitions.  We have a limited operating history in our currentcombined form, which makes it difficult to evaluate our business on the basisof historical operations.  Two of our operating subsidiaries, Fireline and HSRof Louisiana, which are anticipated to account for a significant portion of ourrevenue in fiscal year 2006, were the result of acquisitions that we closed inJuly 2006 and September 2005, respectively.  As a consequence, it is difficult,if not impossible, to forecast our future results based upon our historicaldata.  Reliance on the historical results of our acquisition targets may not berepresentative of the results we will achieve, particularly in our combinedform.  Because of the uncertainties related to our lack of historicaloperations, we may be hindered in our ability to anticipate and timely adapt toincreases or decreases in sales, revenues or expenses.  If we make poor budgetarydecisions as a result of unreliable historical data, we could be lessprofitable or incur losses, which may result in a decline in our stock price. 	

25

**Our results of operations have not been consistent,and we may not be able to maintain profitability.**

We incurred a consolidatednet loss of ($702) for the year ended December 31, 2003, yet we achieved a consolidated net profit of $2,563 for the year ended December 31, 2004 and a net profit of $7,185 for the year ended December 31, 2005.  Our management believes that our current business plan will be successful and that we will continueto maintain and grow profitability; however, our business plan is speculativeand unproven.  Although our revenues grew substantially due to our growthstrategy and we achieved a profit in the years ended December 31, 2004 and December 31, 2005, there is no assurance that we will be successful in executing ourbusiness plan or that even if we successfully implement our business plan, thatwe will sustain profitability now or in the future.  If we incur significantoperating losses, our stock price may decline, perhaps significantly. 

**Our business depends on the demand for recovery,restoration and rebuilding/remodeling services, and if the demand for thoseservices decreases, our revenues could decline***.*

        Our business depends upon the demand for theservices that we provide, which include Recovery, Restoration andRebuilding/Remodeling services that we provide primarily to residential homeowners, although our Recovery services are also provided to commercialproperties.  Because of our significant emphasis on the residential market, wewould be adversely affected by any slowdown in the growth of, or reduction indemand for, residential services.  Demand for our Recovery services isevent-based and depends upon the frequency and intensity of natural disastersand the type and scope of damage to properties.  Additionally, demand for ourservices depends on numerous factors, including the amount and growth ofhousehold income; the financial condition of homeowners, and whether ahomeowner's insurance policy or reimbursement from the federal or stategovernment is available to pay the cost of our services; the need for theremediation of indoor air contaminates, cleaning services, fabric protectionand fire/water damage restoration; changes in mortgage rates and decreases inhousing growth in markets where the Company operates; and general economicconditions.

                If demand for the services that weprovide decreases, then we may experience a decline in sales resulting indecreased profits.  If demand for our services decreases and our managementfails to implement appropriate adjustments, then our profitability could sufferand the price of our common stock could decline.  

**A significant portion of ourRebuilding/Remodeling business segment is dependent upon relationships with twocustomers.**

Our Rebuilding/Remodeling business segmentcurrently consists of the manufacture and installation of custom kitchencabinets and the installation of kitchen countertops.  These products andservices are offered to residential customers primarily through a furnish andinstallation contract with Home Depot, and through a relationship with Centex. The Home Depot contract may be terminated at any time upon notice to us. Furthermore, Home Depot is not obligated to use our services under thiscontract.  We have no contract with Centex, and Centex is not obligated to buyour products or use our services.  If Home Depot terminates its contract withus, or if Home Depot or Centex choose not to buy our products or use ourservices, we would experience an immediate detrimental impact on ourRebuilding/Remodeling business segment, resulting in a material detrimentaleffect on our results of operations.

**We may engage in acquisitions, whichwill consume resources and may be unsuccessful or unprofitable.   **

We have pursued,and we intend to continue to pursue, a strategy of acquiring businesses thatfit within our business model.  However, acquisitions are not always successfulor profitable.  Any future acquisitions could expose us to risks, includingrisks associated with assimilating new operations and personnel; diversion ofresources from our existing businesses; inability to generate revenuessufficient to offset associated acquisition costs; and risks associated withthe maintenance of uniform standards, controls, procedures and policies. Acquisitions may also result in additional expenses from amortizing acquiredintangible assets.  If we attempt an acquisition and are unsuccessful in itscompletion, we will likely incur significant expenses without any benefit toour Company.  If we are successful in completing an acquisition, the risks andother problems we face may ultimately make the acquisition unprofitable. Failed acquisition transactions and underperforming completed acquisitionswould burden us with significant costs without any corresponding benefits tous, which could cause our stock price to decrease, perhaps significantly.

26

**We expect that we will need to raise additional funds,and these funds may not be available when we need them***.*

We believe that we will needto raise additional monies in order to fund our growth strategy and implementour business plan.  Specifically, we expect that we will need to raiseadditional funds in order to pursue rapid expansion, develop new or enhancedservices and products, and acquire complementary businesses or assets. Additionally, we may need funds to respond to unanticipated events that requireus to make additional investments in our business.  There can be no assurancethat additional financing will be available when needed on favorable terms, orat all.  If these funds are not available when we need them, then we may needto change our business strategy and reduce our rate of growth.  ** **

**We must effectively manage the growthof our operations, or our Company will suffer***.*

Ourability to successfully implement our business plan requires an effectiveplanning and management process.  If funding is available, we intend toincrease the scope of our operations and acquire complementary businesses. Implementing our business plan will require significant additional funding andresources.  If we are successful in growing our operations, we will need tohire additional employees and make significant capital investments.  As wecontinue to grow our operations, it may place a significant strain on ourmanagement and our resources.  As a result of our recent growth and anycontinued growth, we will need to improve our financial and managerial controlsand reporting systems and procedures, and we will need to expand, train andmanage our workforce.  Any failure to manage any of the foregoing areasefficiently and effectively could cause our business to suffer.

**We face competition fromnumerous sources and competition may increase, leading to a decline inrevenues.**

We compete primarily withwell-established companies, many of which we believe have greater resourcesthan Home Solutions.  We believe that barriers to entry in the recovery,restoration and rebuilding/remodeling services sectors are not significant andstart-up costs are relatively low, so our competition may increase in thefuture.  New competitors may be able to launch new businesses similar to ours,and current competitors may replicate our business model, at a relatively lowcost.  If competitors with significantly greater resources than ours decide toreplicate our business model, they may be able to quickly gain recognition andacceptance of their business methods and products through marketing andpromotion.  We may not have the resources to compete effectively with currentor future competitors.  If we are unable to effectively compete, we will losesales to our competitors and our revenues will decline.  

**Ourfailure to comply with federal and state environmental laws and regulationscould result in fines or injunctions, which could materially impair theoperation of our business***.***

Portions of our business are heavily regulated byfederal, state and local environmental laws and regulations, including thosepromulgated under the Environmental Protection Agency.  These federal, stateand local environmental laws and regulations govern the discharge of hazardousmaterials into the air and water, as well as the handling, storage, anddisposal of hazardous materials and the remediation of contaminated sites.  Ourbusinesses involve working around and with volatile, toxic and hazardoussubstances and other regulated substances.  We may become liable under these federal,state and local laws and regulations for the improper characterization,handling or disposal of hazardous or other regulated substances.  We may becomesubject to claims for personal injury or property damage related to accidents,spills, and exposure to hazardous substances that are related to our business. It is possible that some of our operations could become subject to aninjunction which would impede or even prevent us from operating that portion ofour business.  Any significant environmental claim or injunction could have amaterial adverse impact on our financial condition.  Additionally,environmental regulations and laws are constantly changing, and changes inthose laws and regulations could significantly increase our compliance costs anddivert our human and other resources from revenue-generating activities. 

**Thefailure to obtain and maintain required governmental licenses, permits andapprovals could have a substantial adverse effect on our operations***.***

Portions of our operations, particularlyour Recovery and Remediation business segments, are highly regulated andsubject to a variety of federal and state laws, including environmental lawswhich require that we obtain various licenses, permits and approvals.  We mustobtain and maintain various federal, state and local governmental licenses,permits and approvals in order to provide our services.  We may not besuccessful in obtaining or maintaining any necessary license, permit orapproval.  Further, as we seek to expand our operations into new markets,regulatory and licensing requirements may delay our entry into new markets, ormake entry into new markets cost-prohibitive.  We cannot assure you that wewill be able to obtain or, once obtained, maintain our licenses or registrationsin any states where we are required to be licensed or registered to operate ourbusiness.  Our activities in states where necessary licenses or registrationsare not available could be curtailed pending processing of an application, andwe may be required to cease operating in states where we do not have validlicenses or registrations.  We could also become subject to civil or criminalpenalties for operating without required licenses or registrations.  Thesecosts may be substantial and may materially impair our prospects, business,financial condition and results of operation. 

27

**If the Company fails to maintain adequate insurance,our financial results could be negatively impacted.**

We carry standard general liability insurance inamounts determined to be reasonable by our management.  We are also coveredthrough standard worker's compensation insurance against claims by ouremployees for injuries and other conditions contacted while on the job. Although we believe we are adequately insured, if we fail to adequately assessour insurance needs or if a significant amount of claims are made by workers orothers, there can be no assurance that the amount of such claims will notexceed our available insurance, resulting in a material negative impact on ourfinancial results.  This could have an adverse impact on the price of ourcommon stock. 

**We are heavily dependent on our seniormanagement, and a loss of a member of our senior management team could causeour stock price to suffer***.*

If we lose members of our seniormanagement, we may not be able to find appropriate replacements on a timelybasis, and our business could be adversely affected.  Our existing operationsand continued future development depend to a significant extent upon theperformance and active participation of certain key individuals, including ourChief Executive Officer, President and our Chief Financial Officer.  We cannotguarantee that we will be successful in retaining the services of these orother key personnel.  If we were to lose any of these individuals, we may notbe able to find appropriate replacements on a timely basis and our financialcondition and results of operations could be materially adversely affected.

**Our inability to hire, train andretain qualified employees could cause our financial condition to suffer.**

The success of our business is highlydependent upon our ability to hire, train and retain qualified employees.  Weface competition from other employers for laborers, and the availability oflabor is limited, particularly in areas serviced by our Recovery services.  Wemust offer a competitive employment package in order to hire and retainemployees, and any increase in competition for labor may require us to increasewages or benefits in order to maintain a sufficient work force, resulting inhigher operation costs.  Additionally, we must successfully train our employeesin order to provide high quality services.  In the event of high turnover or alabor shortage, we may experience difficulty in providing consistent high-qualityservices.  These factors could adversely affect our results of operations.

**If we fail to comply with the new rules underSarbanes-Oxley related to accounting controls and procedures or if materialweaknesses or other deficiencies are discovered in our internal accountingprocedures, our stock price could decline significantly.**

Section 404 of the Sarbanes-Oxley Act requires annualmanagement assessments of the effectiveness of our internal controls overfinancial reporting and a report by our independent registered publicaccounting firm addressing these assessments.  We are in the process ofdocumenting and testing our internal control procedures, and we may identifymaterial weaknesses in our internal control over financial reporting and otherdeficiencies.  If material weaknesses and deficiencies are detected, it couldcause investors to lose confidence in our Company and result in a decline inour stock price.  In addition, if we fail to achieve and maintain the adequacyof our internal controls, we may not be able to ensure that we can conclude onan ongoing basis that we have effective internal controls over financialreporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenuerecognition, are necessary for us to produce reliable financial reports and areimportant to helping prevent financial fraud.  If we cannot provide reliablefinancial reports or prevent fraud, our business and operating results could beharmed, investors could lose confidence in our reported financial information,and the trading price of our stock could drop significantly.  In addition, wecannot be certain that additional material weaknesses or significantdeficiencies in our internal controls will not be discovered in the future.

**We may be unable to pay our debts when due, which could materially impact our profitability and our stock price***.*

Historically we have incurreddebt in order to pursue our acquisition strategy, and we will likely incuradditional debt in the future as we continue to implement our business plan,which involves engaging in strategic acquisitions.  There is no guarantee thatrevenues from operations will be sufficient to pay our debts as they becomedue.  We may need to attract new investors or lenders in order to refinanceexisting debt or incur new debt, and we may not be successful in doing so. Even if we are able to attract new investors or lenders or otherwise obtainadditional financing, we could still suffer financial hardships if unexpectedexpenses arise or if revenues fail to meet our expectations.  If we fail toobtain financing or attract other investors, our results of operations maysuffer, resulting in a decline in the price of our common stock.  

28

**SPECIFIC RISKS RELATED TO RECOVERY SERVICES**

Our subsidiaries Fireline and HSR of Louisiana areinvolved in providing Recovery services to disaster-ravaged areas.  Ourmanagement has identified certain risks which it believes relate specificallyto our Recovery operations, which are set forth below. 

**The need for Recovery services isunpredictable and depends upon the nature and extent of weather-relatedemergencies.**

Our Recovery services are significantlyimpacted by the frequency and intensity of weather-related emergencies, whichcauses this segment of our business to fluctuate.  Historically, the nature andfrequency of weather-related emergencies has fluctuated between periods ofrelative calm, as compared to periods with weather-related events of greaterfrequency or intensity.  In a period with few weather-related emergencies or inwhich weather-related emergencies cause comparatively less damage, we expectour revenues from this business segment to decline.  Although emergencies anddisasters will always occur, we cannot predict the frequency of occurrence,where they will occur, and the extent of damage that will result.  All of thesefactors impact the need for Recovery services.  If the need for Recoveryservices decline, our results of operations could suffer.

**If we fail to win contracts that areultimately reimbursable by insurers and federal, state and local governments,it may impede our ability to grow our Recovery services.**

The end users of our Recovery servicescurrently consist primarily of large commercial businesses and homeowners whichhave the funds and resources to begin recovery of their properties which havebeen damaged in natural disasters.  We believe that individuals and smallercommercial businesses who have experienced damage or destruction to their homesand properties, but do not have the resources to respond immediately, will relyupon insurance companies and federal, state and local governments to assistthem in repairing their properties.  We pursue bids on recovery servicescontracts, the costs of which are likely to be reimbursed by insurance agenciesand government branches and agencies.  Some of our competitors may have betterresources than we do or may have long standing relationships that will place usat a competitive disadvantage in winning contracts that are ultimatelyreimbursable by insurance or government funds.  If we are unsuccessful inobtaining contracts that are reimbursable by insurance and government funds, itmay impede the ability of our Recovery services business to continue to grow,which could result in a reduction in revenues and a decline in the price of ourcommon stock.

               **If insurance proceeds and federalfunds are not available to our customers, then our revenues may decline, andthe demand for our Recovery services may decline.**

                There is no assurance that anyparticular contract for our Recovery services will ultimately be paid byinsurance or reimbursed by government funds.  If insurance proceeds or federalfunds are not available to reimburse customers for our Recovery services, thenour current customers may delay or forego payment on current projects, andpotential new customers may delay projects until funds are available, or decidenot to rebuild.  If a lack of insurance proceeds or federal funds causes adelay in payment or a failure to pay one or more individual material contracts,or a significant aggregate amount of smaller contracts, then our revenues coulddecline, perhaps significantly.  Furthermore, overall demand for recovery servicescould decrease, resulting in decreased demand for our services and a decreasein our revenues.  

**HSR****of Louisiana is dependent upon two customers forsubstantially all of its business***.*

Currently, over 90% of the revenues of HSR of Louisiana are derived from contracts with two customers, which rely upon HSR of Louisiana as a subcontractor to provide recovery services to the Louisiana areasdevastated by Hurricane Katrina.  These contracts are terminable at any time. Furthermore, there is no requirement under these contracts that these customerscontinue to use our services.  If one or both of these customers terminatetheir contracts with us or decide not to use our services, we might not be ableto replace our business quickly enough in order to retain our employees orcontinue seamless operations.  Furthermore, a termination of one or both ofthese contracts could result in significant disruptions to our business,increased expenses, and lost revenues, all of which could cause our profits todecline.  Furthermore, as time passes, businesses and workers are returning toLouisiana and our competition is anticipated to increase.  Accordingly, thereis no guaranty that we would be able to replace our current level of revenuesif either of these contracts are terminated, which may have a material adverseeffect on our financial condition.

**RISKS RELATED TO OUR COMMON STOCK**

Ourmanagement believes that measurable risks exist in connection with aninvestment in our common stock, some of which are described below.

29

**Salesof large quantities of our common stock could reduce the price of our commonstock***. *

We are registering5,054 shares of our common stock with the SEC on or after August 2006.  InJanuary 2006, we registered 4,850 shares of our common stock with the SEC.  InMarch 2004, we registered approximately 10,533 shares of our common stock withthe SEC.  As these shares are sold in the public market, it could cause themarket price of our common stock to drop by increasing the total number of sharesoffered for sale to the public.  An overabundance of available shares in themarket may limit the price growth potential of our common stock even if ourbusiness is doing well, because the available supply may exceed the demand forour shares.  This phenomenon may impair our ability to raise needed capital byreducing the price at which we could sell our common stock.  In addition, theCompany may seek future financings that involve the issuance of equitysecurities or instruments convertible into or exchangeable for equitysecurities and any such future financings may further reduce the price of ourcommon stock.

**Our common stock could be delisted from the Nasdaq ifwe do not comply with the Nasdaq continued listing standards***.*

                Ourcommon stock is listed on the Nasdaq and to maintain our listing, we must meetNasdaq's continued listing standards.  If our common stock was delisted fromthe Nasdaq for any reason, it would reduce our liquidity and could seriouslyreduce the value of our common stock, reduce our ability to raise additionalfinancing, limit our use of equity instruments to satisfy outstandingobligations, and limit our ability to attract qualified employees.  Any or allof these factors could result in a loss of your investment in the Company.

**The currentpublic market for our Common Stock is limited and highly volatile, whichgenerally affects the price of our common stock. **

We have only beenlisted on Nasdaq since July 2006, and prior to that, we were on the AmericanStock Exchange from June 2003 through July 2006.  Trading activity in ourcommon stock should be considered sporadic, illiquid and highly volatile.  Anactive trading market for our common stock may not exist in the future.  Evenif a market for our common stock continues to exist, investors may not be ableto resell their common stock at or above the purchase price for which theypurchased such shares. 

**Because of our low stockprice, we may become subject to "penny stock" regulations, which placerestrictions on the trading of our common stock.**

The SEC has adoptedregulations that generally define a penny stock to be any equity security thathas a market price of less than $5 per share, subject to certain exemptions. Our trading price has historically ranged from $1 to $3 per share in the fiscalyears ended December 31, 2003 and December 31, 2004, and from $1 to $6 in the fiscal year ended December 31, 2005, although our common stock has tradedprimarily at prices above $5 per share in fiscal 2006.  Regardless of our current trading price, we are currentlyexempt from complying with the SEC's penny stock regulations because ourcommon stock is listed for trading on Nasdaq.  However, we could become subjectto the penny stock regulations if we are delisted from Nasdaq or if the SEC expands the coverage of its penny stock regulations so that Nasdaq listing is no longer anexemption.  The penny stock regulations provide that unless an exemption isavailable, a penny stock transaction must be preceded by the delivery of adisclosure schedule explaining the penny stock market and its risks.  Inaddition, under these regulations broker/dealers who recommend penny stocks topersons other than established customers and certain accredited investors mustmake a special written suitability determination for the purchaser and receivethe purchaser's written agreement to the proposed transaction prior to thesale.  If we become subject to penny stock regulations, it would be moredifficult for investors to purchase or sell our common stock due to theadditional restrictions imposed by those regulations, which could reduce ourstock price. 

**Effects of anti-takeover provisions could inhibitpotential investors or delay or prevent a change of control that may favorstockholders.**

Some of the provisions of our certificate ofincorporation, our bylaws and Delaware law could, together or separately:
- discourage     potential acquisition proposals;
- delay     or prevent a change in control; and
- limit     the price that investors might be willing to pay in the future for shares     of our common stock.

Inparticular, our board of directors is authorized to issue up to 999 shares ofpreferred stock and debt instruments with rights and privileges that might besenior to our common stock, without the consent of the holders of the commonstock.  The issuance of preferred stock and debt instruments could cause theprice of our common stock to decline, even if our business is doing well.

30

**We have not paid dividends in the past, and do notanticipate paying dividends in the future***.*

We have not paidor declared cash dividends to the holders of our common stock, and do notintend to do so in the foreseeable future.  We intend to use any excess fundsfrom our operations to operate and grow our Company.  We cannot assure you thatwe will ever pay dividends to the holders of our common stock.

**Item 2. UnregisteredSales of Equity Securities and Use of Proceeds.**

During the threemonths ended June 30, 2006 (any issuances previously disclosed by the Companyon Form 8-K during such periods are not necessarily repeated herein), theCompany issued the following shares of its common stockand other equity securities without registration under the Securities Act of1933, as amended (the "Securities Act") (dollars and shares are reported  in thousands, except pershare data):

1.  The Company issued 58 shares of common stock inconnection with the cashless exercise of warrants at an exercise price of $5.50per share; and 

2.  The Company issued 793 shares of common stock for$1,862 in connection with the exercise of warrants at an exercise price of$5.50 and $1.75 per share.

The above issuances wereunregistered, as the Company was relying on the exemptions from registrationcontained in Section 4(2) of the Securities Act, and incertain cases, Regulation D promulgated thereunder, on the basis that suchtransactions did not involve public offerings of securities.

**Item3.  Defaults Upon Senior Securities**

None

**Item4.  Submission of Matters to a Vote of Security Holders**

The2006 Annual Meeting of Stockholders of Home Solutions of America, Inc. (the"Annual Meeting") was held on June 16, 2006.  

Atthe Annual Meeting, the following persons were elected to serve as directors,serving until the 2007 Annual Meeting, by the votes indicated:

** **

** **

**Abstain/**

** **

** **

**Broker**

**Name**

**For**

**Non-Votes**

Michael  S. Chadwick

27,216

5,152

Frank  J. Fradella

27,237

5,121

Willard  W. Kimbrell

27,378

1,980

Charles  P. McCusker

30,415

1,943

Patrick  A. McGreeney

30,418

1,940

Duringthe Annual Meeting, the stockholders also (i) approved an amendment of theCompany's 2001 Stock Plan to increase the shares of Common Stock available forgrant thereunder from 4,000 to 6,500 shares, (ii) approved an amendment of theCompany's Restated Certificate of Incorporation to increase the number ofauthorized shares of Common Stock from 50,000 to 100,000 shares, and (iii)ratified the appointment of Corbin & Company, LLP as the Company's auditorsfor 2006, by the votes indicated below:

** **

** **

**Abstain/**

** **

** **

**Broker**

**For**

**Against**

**Non-Votes**

Amend  the Company's 2001 Stock Plan

9,685

5,763

481

Amend  the Company's Restated Certificate of Incorporation

28,083

3,780

499

Appointment  of Corbin & Company

31,680

226

457

 

31

Noother matters were voted on during the meeting.  For further information withrespect to the matters presented to the stockholders for approval at the 2006Annual Meeting of Stockholders, please refer to our Definitive Proxy Statementon Schedule 14A, filed with the SEC on May 2, 2006.

**Item5.  Other information**

On July 17, 2006, the Company commenced trading of itscommon stock on The Nasdaq Global Market ("Nasdaq").  The move to Nasdaq, whichwas a voluntary decision made by the Company, is expected to benefit theCompany and its stockholders.  In connection with the listing and registrationof its common stock on Nasdaq, the Company voluntarily delisted its commonstock from the American Stock Exchange, on which the Company's common stock waslisted prior to Nasdaq.

**Item6.        Exhibits**
2.1
Stock Purchase Agreement among Fireline Restoration,Inc., Brian Marshall and Home Solutions of America, Inc. dated July 31, 2006(effective July 1, 2006; filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed onAugust 4, 2006, and incorporated herein by reference).
3.1
Certificateof Incorporation of the Company, as restated on July 31, 2001 (filed as ExhibitA to the Company's Information Statement on Schedule 14C filed on July 9, 2001,and incorporated herein by reference).
3.2
Certificateof Amendment to the Certificate of Incorporation of Nextgen CommunicationsCorporation, changing the corporation's name to "Home Solutions of America,Inc.", as filed on December 23, 2002 (filed as Exhibit A to the Company'sInformation Statement on Schedule 14C filed on December 22, 2002, and incorporatedherein by reference).
3.3
Certificateof Amendment to the Restated Certificate of Incorporation of Home Solutions ofAmerica, Inc. as filed with the Delaware Secretary of State on June 16, 2006(filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A filedon July 14, 2006, and incorporated herein by reference).
3.4
Amended and RestatedBylaws of the Company, as amended on April 4, 2006 (filed as Exhibit 3.3 to theCompany's Quarterly Report on Form 10-Q filed on May 15, 2006 and incorporatedherein by reference). 
10.1
Loan Agreement between Home Solutions of America, Inc. andTexas Capital Bank, National Association, dated March 6, 2006 (filed as Exhibit10.1 to the Company's Current Report on Form 8-K filed on March 10, 2006, andincorporated herein by reference).
10.2
RevolvingCredit Promissory Note issued by Home Solutions of America, Inc., to the orderof Texas Capital Bank, National Association in the principal amount of$10,000,000.00 dated March 6, 2006 (filed as Exhibit 10.2 to the Company'sCurrent Report on Form 8-K filed on March 10, 2006, and incorporated herein byreference).
10.3
Pledgeand Security Agreement among Cornerstone Building and Remodeling, Inc.,Fiber-Seal Systems, L.P., Home Solutions Restoration of Louisiana, Inc., P.W.Stephens, Inc., Southern Exposure Unlimited of Florida, Inc., S.E. Tops ofFlorida, Inc., Southern Exposure Holdings, Inc. and FSS Holding Corp. for thebenefit of Texas Capital Bank, National Association, dated March 6, 2006 (filedas Exhibit 10.3 to the Company's Current Report on Form 8-K filed on March 10,2006, and incorporated herein by reference). 
10.4
GuarantyAgreement among Cornerstone Building and Remodeling, Inc., Fiber-Seal Systems,L.P., Home Solutions Restoration of Louisiana, Inc., P.W. Stephens, Inc.,Southern Exposure Unlimited of Florida, Inc., S.E. Tops of Florida, Inc.,Southern Exposure Holdings, Inc. and FSS Holding Corp. for the benefit of TexasCapital Bank, National Association, dated March 6, 2006 (filed as Exhibit 10.4to the Company's Current Report on Form 8-K filed on March 10, 2006, andincorporated herein by reference).
10.5
Promissory Note issued byHome Solutions of America, Inc. to Brian Marshall in the principal amount of$21,650,000, dated as of July 1, 2006 (the effective date) (filed as Exhibit10.01 to the Company's Current Report on Form 8-K filed on August 4, 2006, andincorporated herein by reference).
10.6
Employment Agreement among Home Solutions of America, Inc., Fireline Restoration, Inc. and BrianMarshall dated as of July 1, 2006 (the effective date) (filed as Exhibit 10.02to the Company's Current Report on Form 8-K filed on August 4, 2006, andincorporated herein by reference).
31.1
Rule13a-14(a)/15d-14(a) Certifications. +

32
32.1
Section 1350Certifications. +

+ Filed herewith

 

 

 

 

 

 

 

 

 

33

**Signatures**

            Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

HOME SOLUTIONS OF  AMERICA, INC.

Registrant
   
August 14, 2006

/s/ Frank J.  Fradella

Frank J. Fradella

Chairman and Chief  Executive Officer
   
August 14, 2006

/s/ Jeffrey M.  Mattich

Jeffrey M. Mattich

Chief Financial  Officer