##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
   Form 10-Q
   (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended
    June 30, 2007o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission File Number:
    001-31711
   HOME SOLUTIONS OF AMERICA,
    INC.
 (Exact name of registrant as
    specified in its charter)
   Delaware(State of
    incorporation)

99-0273889(I.R.S. Employer
    Identification No.)   1500 Dragon Street, Suite B Dallas, TX 75207
 (Address of principal executive
    offices)
  (214) 623-8446
 (Registrants telephone
    number, including area code)
   þ o
  Rule 12b-2
  o þ o
  Rule 12b-2 o þ




---



##### 



Home
    Solutions of America, Inc.
  INDEX TO
    FORM 10-Q
  
  ItemNumber



PagePART I.
    FINANCIAL INFORMATION1


Financial
    Statements (Unaudited):


1Condensed
    Consolidated Balance Sheets as of June 30, 2007 and
    December 31, 2006


1Condensed
    Consolidated Statements of Income for the Three and Six Months
    Ended June 30, 2007 and 2006


2Condensed
    Consolidated Statements of Cash Flows for the Six Months Ended
    June 30, 2007 and 2006


3Notes to Condensed
    Consolidated Financial Statements


52


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


213


Quantitative and
    Qualitative Disclosure about Market Risk


294


Controls and
    Procedures


30PART II. OTHER
    INFORMATION1


Legal
    Proceedings


351A


Risk
    Factors


352


Unregistered Sales
    of Equity Securities and Use of Proceeds


363


Defaults Upon
    Senior Securities


364


Submission of
    Matters to a Vote of Security Holders


365


Other
    Information


376


Exhibits


37Signatures


38Satisfaction of Note and Amendment to Stock Purchase AgreementRestricted Stock Purchase Agreement - Frank J. FradellaRestricted Stock Purchase Agreement - Jeffrey M. MattichBoard Compensation PlanRule 13a-14(a) Certification by our Principal Executive OfficerRule 13a-14(a) Certification by our Principal Financial OfficerSection 1350 Certification by our Principal Executive OfficerSection 1350 Certification by our Principal Financial Officer




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##### Table of Contents



PART I 
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements Home
    Solutions of America, Inc.
    Condensed Consolidated Balance Sheets June 30,


December 31,2007


2006(Unaudited)


(Audited)(Dollars and shares in thousands)ASSETSCurrent assets:Cash

$
4,646


$
8,713Accounts receivable, net


82,304



58,106Current portion of notes receivable


1,857



703Inventories


3,511



4,000Prepaid expenses and other current
    assets


5,908



4,654Costs in excess of billings


3,717



6,292Deferred tax asset


1,269



1,337Total current assets


103,212



83,805Property and equipment, net


6,451



6,129Intangibles, net


15,630



8,732Goodwill


106,723



122,500Notes receivable, net of current
    portion






750Other assets


905



809Total assets

$
232,921


$
222,725LIABILITIES AND
    STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued
    expenses

$
31,177


$
15,608Billings in excess of costs


383



688Current portion of debt


5,166



26,816Current portion of capital lease
    obligations


512



254Total current liabilities


37,238



43,366Long-term liabilities:Debt, net of current portion


7,906



10,448Line of credit


27,111



13,111Amounts due to seller






9,855Deferred tax liabilities


890



890Capital lease obligations, net of
    current portion


958



929Total liabilities


74,103



78,599Minority interest


207



237Commitments and contingenciesStockholders equity:Common stock, $0.001 par
    value, 100,000 shares authorized; 47,423 and
    47,297 shares issued and outstanding, respectively


47



47Additional paid-in capital


142,139



140,497Retained earnings


16,425



3,345Total stockholders equity


158,611



143,889Total liabilities and
    stockholders equity

$
232,921


$
222,725    1




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##### Table of Contents



Home
    Solutions of America, Inc.
  Condensed Consolidated Statements of Income
  Three Months Ended June 30,


Six Months Ended June 30,2007


2006


2007


2006(Unaudited)(Dollars and shares in thousands,except per share data)Net sales

$
50,960


$
24,154


$
90,045


$
43,433Costs and expenses:Cost of sales


27,213



12,781



46,573



22,112Selling, general and
    administrative expenses


10,482



5,471



19,712



11,42037,695



18,252



66,285



33,532Operating income


13,265



5,902



23,760



9,901Other income (expense), net:Gain (loss) on sale of assets


2







(5
)


22Interest income


56



74



119



124Interest expense


(1,209
)


(58
)


(2,273
)


(118
)Other income, net


24



29



52



55Total other (expense) income, net


(1,127
)


45



(2,107
)


83Income from continuing operations
    before income taxes and minority interest


12,138



5,947



21,653



9,984Income taxes


(4,602
)


(2,246
)


(8,254
)


(3,668
)Minority interest


(164
)


(208
)


(319
)


(466
)Income before discontinued
    operations


7,372



3,493



13,080



5,850Gain on disposal, net of loss from
    discontinued operations, net of tax of $0, $527, $0 and $971,
    respectively






975







1,741Net income

$
7,372


$
4,468


$
13,080


$
7,591Earnings per common
    share  basic:Income from continuing operations

$
0.16


$
0.09


$
0.28


$
0.16Discontinued operations






0.03







0.04Net earnings per share available
    to common stockholders

$
0.16


$
0.12


$
0.28


$
0.20Earnings per common
    share  diluted:Income from continuing operations

$
0.15


$
0.09


$
0.27


$
0.15Gain from discontinued operations,
    net of taxes






0.02







0.04Net earnings per share available
    to common stockholders

$
0.15


$
0.11


$
0.27


$
0.19Weighted average number of common
    shares outstanding:Basic


47,361



38,295



47,337



37,103Diluted


48,129



40,594



48,102



39,642    2




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##### Table of Contents



Home
    Solutions of America, Inc.
  Condensed Consolidated Statements of Cash Flows
  For the Six Months EndedJune 30,2007


2006(Unaudited)(Dollars in thousands)Cash Flows from Operating
    ActivitiesNet income

$
13,080


$
7,591Adjustments-Depreciation and amortization


1,564



818Minority interest in income of
    consolidated subsidiary


319



466Provision for doubtful accounts


515



1,224Loss (gain) on sale of assets


5



(22
)Stock-based compensation


1,251



298Estimated fair value of common
    stock issued for services






171Gain on sale of discontinued
    operations






(3,177
)Changes in assets and liabilities,
    net of acquisitions and divestitures:Accounts receivable


(46,261
)


(2,481
)Prepaid expenses and other current
    assets


(1,426
)


(571
)Costs in excess of billings, net


2,270



Inventories


489



(859
)Other assets


(919
)


714Deferred tax asset


68



(9,171
)Accounts payable and accrued
    expenses


15,569



(3,065
)Net cash used in operating
    activities


(13,476
)


(8,064
)Cash Flows from Investing
    ActivitiesCash advanced under note receivable


(764
)


(375
)Cash received under note receivable


360



650Cash acquired in acquisition, net
    of cash paid






87Purchases of property and equipment


(454
)


(223
)Net cash (used in) provided by
    investing activities


(858
)


139Cash Flows from Financing
    ActivitiesPrincipal payments on debt and
    capital leases


(2,828
)


(3,182
)Proceeds on line of credit, net of
    repayments


14,000



Payments on amounts due to seller


(1,119
)


Excess tax benefit from options
    exercises






9,171Proceeds from exercise of warrants
    and options


563



7,880Proceeds received from
    disgorgement of profits






245Distributions to minority
    stockholder


(349
)


(583
)Net cash provided by financing
    activities


10,267



13,531Net change in cash


(4,067
)


5,606Cash at beginning of period


8,713



8,225Cash at end of period

$
4,646


$
13,831    3




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##### Table of Contents



Home
    Solutions of America, Inc.
  Condensed
    Consolidated Statements of Cash Flows
  For the Six Months EndedJune 30,2007


2006(Unaudited)(Dollars in thousands)Cash paid for:Interest

$
1,322


$
102Income taxes

$
846


$
3,276Supplemental schedule of non-cash
    investing and financing activities:Satisfaction of seller note
    against accounts receivable

$
21,548


$
Offset of amounts due to seller
    against goodwill

$
8,736


$
Issuance of stock for conversion
    of debt and accrued interest

$



$
902Fixed assets acquired through debt
    and capital lease obligations

$
471


$
128Inventory received for reduction
    of note receivable from Cornerstone

$



$
1,559Issuance of notes payable for
    acquisition

$



$
745Reclassification of goodwill to
    intangibles

$
7,748


$
    4




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##### Table of Contents



Home
    Solutions of America, Inc.Notes to Condensed Consolidated Financial StatementsJune 30, 2007
    (Unless otherwise indicated, dollars and shares in thousands,
    except per share data)
    (unaudited)
  1.
    Basis of
    Presentation  Interim
    Unaudited Condensed Consolidated Financial
    Statements
    Form 10-K.
  Company
    Description and Nature of Operations
      Restoration
    and Construction Services
     5




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
          
    Recovery:  The Companys recovery services
    include providing initial set up services in an impacted area
    (including power, lodging, and training) and then providing the
    drying, dehumidification, cleanup and removal of debris from
    commercial and residential areas to prepare the areas for the
    next stage of restoration. The Company provides these services
    on an hourly rate to our commercial and residential clients,
    both as a contractor and as a subcontractor to customers
    providing additional services in these markets.
    Fire and Water Damage Restoration:  The Company
    provides trained employees to respond to fire, water and
    weather-related emergencies, to inspect structural members and
    contents damaged by water, to determine the likelihood or extent
    of mold growth and to provide immediate cleaning, drying,
    moving, storage and deodorization, among other services.
    Construction:  The Companys construction
    services include general contracting work and subcontracting
    work. The Companys services are provided to a number of
    high growth$ companies and specialized building markets,
    including hospitality and gaming, insurance, education and
    healthcare markets, as well as to state and local government
    agencies and districts.
    Indoor Air Contamination:  Through PWS, the
    Company provides indoor air contamination services, including
    contamination from mold, asbestos and lead paint. With increased
    media attention regarding the health threat of mold, fewer
    insurance options and property transfers at risk, current market
    conditions have created significant demand for mold inspections,
    certifications and remediation services. These services consist
    of property and system inspections, surface and air testing,
    project design, microbial removal, light interior demolition,
    repair and specialized cleaning work. Customer opportunities are
    developed through a regional sales force as well as through
    referrals by real estate firms, insurance adjusters, mortgage
    companies, attorneys and nationally-branded retailers.
    Cleaning and Fabric Protection:  Through FSS,
    the Company  provides fabric protection services to protect
    furniture, carpet and draperies from stains and daily wear
    through both Company-owned locations and over forty licensed
    locations. This niche market is primarily targeted at
    above-average income homeowners. We also provide air duct
    cleaning services to remove particulate (organic and inorganic)
    material, which can cause 6




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  allergic reactions and is often the breeding ground for many
    types of mold, from heating and air conditioning systems.  Interior
    Services
    Principles
    of Consolidation
    2.
    Summary
    of Significant Accounting Policies  Fair
    Value of Financial Instruments
    Use of
    Estimates
    Concentration
    of Credit Risk
     7




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
        Costs
    in Excess of Billings
    Costs incurred on uncompleted
    contracts

$
38,174Estimated earnings


19,27857,452Billings to date


(54,118
)$
3,334Costs in excess of billings

$
3,717Billings in excess of costs


(383
)$
3,334   Comprehensive
    Income
    Recent
    Accounting Pronouncements
  The Fair Value Option for
    Financial Assets and Financial Liabilities  Including
    an Amendment of FASB Statement No. 115
 8




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
    Fair Value Measurements
  Accounting for Uncertainty in Income Taxe
  3.
    Computation
    of Earnings Per Share  Net income
    Per Share.
  9




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  Three Months Ended


Six Months EndedJune 30,


June 30,2007


2006


2007


2006Basic and diluted:Income from continuing operations

$
7,372


$
3,493


$
13,080


$
5,850Discontinued operations






975







1,741Net income

$
7,372


$
4,468


$
13,080


$
7,591Weighted average common shares
    outstanding  Basic


47,361



38,295



47,337



37,103Incremental shares from
    outstanding stock options


469



2,061



497



2,301Incremental shares from
    outstanding warrants


238



238



238



238Incremental shares from
    outstanding restricted stock


61







30



Weighted average common shares and
    common share equivalents  Diluted


48,129



40,594



48,102



39,642Basic earnings per common share:Income from continuing operations

$
0.16


$
0.09


$
0.28


$
0.16Discontinued operations






0.03







0.04Basic earnings per common share

$
0.16


$
0.12


$
0.28


$
0.20Diluted earnings per common share:Income from continuing operations

$
0.15


$
0.09


$
0.27


$
0.15Discontinued operations






0.02







0.04Diluted earnings per common share

$
0.15


$
0.11


$
0.27


$
0.19   4.
    Notes
    Receivable       10




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  5.
    Intangible
    Assets and Goodwill  Intangible
    Assets
    As ofAs of June 30,


December 31,


Estimated Useful2007


2006


Life (Years)Trade name

$
6,540


$
4,540



15Customer list


8,850



4,100



15Supply agreement


1,350



1,350



20Non  compete


1,439



441



618,179



10,431Accumulated amortization


(2,549
)


(1,699
)$
15,630


$
8,732     Goodwill
  Goodwill and Other
    Intangible Assets.
    Balance as of December 31,
    2006

$
122,500Goodwill related to purchase price
    adjustments


707Goodwill reversed against amounts
    due to seller


(8,736
)Estimate of identifiable
    intangibles related to the Fireline and Associated acquisitions


(7,748
)Balance as of June 30, 2007

$
106,723  11




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  6.
    Debt  As of


As ofJune 30,


December 31,2007


2006Line of CreditRevolving credit note payable to
    bank, interest of prime less 0.25% The note matures in November
    2009. At June 30, 2007 the interest rate was 8.00%.

$
27,111


$
13,111Notes PayableNote payable to bank, interest of
    prime less 0.25%. Interest and principal payable quarterly
    beginning January 1, 2007. The note matures in November
    2009. At June 30, 2007 the interest rate was 8.00%.

$
12,500


$
15,000Note payable, non-interest
    bearing, payable in $5 monthly installments until paid in
    full to the seller of FSS Systems of Los Angeles
    (FSSLA).


130



160Note payable to Brian Marshall,
    the Fireline seller, due June 30, 2007. Accrued interest on
    the outstanding principal balance was due monthly. The seller
    agreed to pay interest to the Company at 8% on certain accounts
    receivable beginning January 31, 2007. The note was
    subordinated to the Companys credit facility. As of
    June 30, 2007 the note payable was satisfied by assignment
    to the Fireline seller of the right to receive a portion of the
    proceeds from certain accounts receivable.






21,650Notes 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% with
    principal and interest payable in monthly installments ranging
    from $0.4 to $1 through March 2011.


320



307Term loans with various financial
    institutions with interest at various annual interest rates
    ranging from 7.5% to 9.25%, payable in monthly installments
    ranging from $0.5 to $2, due through September 2009, secured by
    accounts receivable and equipment


122



147Total notes payable


13,072



37,264Less current portion of notes
    payable


(5,166
)


(26,816
)Non-current portion of notes
    payable

$
7,906


$
10,448   7.
    Stockholders
    Equity  Common
    Stock
    2007-2008
 12




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  2006-2007 lock-up lock-up lock-up
  lock-up lock-up
  lock-up
  8.
    Commitments
    and Contingencies  Litigation
     13




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  Rule 10b-5
        Regulatory
    Inquiries
   14




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  Promissory
    Note
    Indemnities
    and Guarantees
          9.
    Stock-Based
    Compensation    Share Based Payment Accounting for Stock-Based
    Compensation
 15




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
      Stock
    Plans
      Shares Reserved


Awards Availablefor Grant


for Grant1998 Stock Plan


3,500



3932001 Stock Plan


6,500



2,89610,000



3,289    16




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
    , Implementation
    of FASB 123R
  For the Three Months


For the Six MonthsEnded June 30,


Ended June 30,2007


2006


2007


2006Expected term (in years)






10







10Expected volatility






80.0
%






80.0
%Risk-free interest rate






4.5
%






4.5
%Dividend yield














     Weighted-AverageWeighted-


Remaining


AggregateNumber of


Average


Contractual


IntrinsicShares


Exercise Price


Term (Years)


ValueOutstanding at December 31,
    2006


1,897


$
4.31Granted






Cancelled/forfeited


(69
)


6.96Exercised


(126
)


4.52






$
272Outstanding at June 30, 2007


1,702


$
4.18



6.5


$
3,115Options exercisable at end of
    period


1,227


$
3.51



5.1


$
3,052       Summary
    of Restricted Stock Awards
   17




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
    Weighted-AverageNumber of


Grant DateShares


Fair ValueNonvested at December 31, 2006


203


$
6.40Granted


112



5.54Vested


(89
)


6.37Forfeited






Nonvested at June 30, 2007


226


$
5.97     Issuance
    of Stock for Non-Cash Consideration
    10.
    Business
    Segments    Restoration andConstruction


InteriorThree Months Ended June 30, 2007

Services


Services


Other


ConsolidatedRevenue

$
45,328


$
5,973


$
(341
)

$
50,960Income (loss) from continuing
    operations before tax


15,961



(390
)


(3,433
)


12,138Net (loss) income


15,374



(457
)


(7,545
)


7,372Total assets


87,620



14,745



130,556



232,921Intangibles, net


10,813



4,817







15,630Goodwill


86,592



20,131







106,723Depreciation and amortization


559



193



20



772  18




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
  Restoration andConstruction


InteriorThree Months Ended June 30, 2006

Services


Services


Other


ConsolidatedRevenue

$
14,996


$
9,158


$



$
24,154Income (loss) from continuing
    operations before tax


6,421



1,101



(1,575
)


5,947Income from discontinued operations






975







975Net (loss) income


6,421



2,076



(1,575
)


4,468Total assets


49,537



38,090



21,238



108,865Intangibles, net


3,900



5,194







9,094Depreciation and amortization


155



168



64



387   Restoration andConstruction


InteriorSix Months Ended June 30, 2007

Services


Services


Other


ConsolidatedRevenue

$
76,713


$
15,234


$
(1,902
)

$
90,045Income from continuing operations
    before tax


27,415



473



(6,235
)


21,653Net (loss) income


26,356



157



(13,433
)


13,080Total assets


87,620



14,745



130,556



232,921Intangibles, net


10,813



4,817







15,630Goodwill


86,592



20,131







106,723Depreciation and amortization


1,012



396



156



1,564   Restoration andConstruction


InteriorSix Months Ended June 30, 2006

Services


Services


Other


ConsolidatedRevenue

$
23,616


$
19,817


$



$
43,433Income (loss) from continuing
    operations before tax


8,984



3,556



(2,556
)


9,984Income from discontinued operations






1,741







1,741Net (loss) income


8,984



5,297



(6,690
)


7,591Total assets


49,537



38,090



21,238



108,865Intangibles, net


3,900



5,194







9,094Depreciation and amortization


355



358



105



818     11.
    Related
    Party Transactions   19




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##### Table of Contents



Home
    Solutions of America, Inc.
    Notes to Condensed Consolidated Financial
    Statements  (Continued)
               20




---



##### Table of Contents



RISKS
    ASSOCIATED WITH FORWARD-LOOKING STATEMENT INCLUDED IN THIS
    FORM 10-Q
  Form 10-Q Form 10-K Form 10-Q
  Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations (Dollars and shares in thousands except per share
    data or where noted).  Overview
      Fiscal
    2007 Highlights:
  
    We continued to integrate recent acquisitions which serve to
    diversify our revenue base.
    The $21,650 seller note payable to Brian Marshall, the seller of
    our Fireline subsidiary, was satisfied, paid in full and
    cancelled pursuant to an agreement providing for
    Mr. Marshall to receive certain of the proceeds from
    certain designated outstanding accounts receivable. The consent
    of the Companys lender, which has not been obtained, is
    required. See Note 11, Related Party Transactions, for
    further information.
    We announced that our Fireline subsidiary has entered into a
    joint venture with a New York-based construction management
    firm, to develop and construct three projects including 339
    residential condominiums and 160,000 square feet of mixed
    use retail space located in the boroughs of Brooklyn, Manhattan
    and Queens, New York. The aggregate revenue from the contracts
    to Fireline is expected to exceed $100 million.
    Construction under one of the three projects began during the
    second quarter of 2007, slightly ahead of schedule, and is
    expected to be completed by 2009. Construction of the other two
    projects is expected to commence in the fourth quarter of 2007
    or the first quarter of 2008. Fireline is expected to complete
    approximately $12 million in work under the first of the
    three projects currently under construction in 2007.
    We announced that our Fireline subsidiary has been awarded a
    contract valued at approximately $100 million to provide
    construction management, general contracting and development
    services for a 600,000 plus square foot retail center and
    corporate office site located in Hillsborough County, Florida.
    The project is 21




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##### Table of Contents



being developed by a Tampa Bay-based real estate development
    firm. The parent of the real estate development firm is owned
    50% by unrelated third party investors, and 50% by an entity of
    which by Brian Marshall, a director and the Executive Vice
    President of the Company, is a 50% owner.  Our management
    believes the terms of the transaction are fair and reasonable to
    the Company, and has requested our Audit Committee to conduct an
    independent investigation to analyze the fairness of  the
    transaction to the Company.  
    We continued in our efforts to implement a companywide general
    ledger program which will centralize our accounting function
    while simultaneously eliminating several of our reported
    internal control weaknesses.
    We amended our credit agreement with our lenders which included
    the following revisions: (1) The percentage of eligible
    accounts receivable (as defined in the credit agreement) used to
    calculate the borrowing base is increased from 80% to 85% from
    the period from April 1, 2007 through December 31,
    2007, and thereafter, is reduced to 80%; and (2) The
    interest rate on advances under the line of credit will remain
    at its current rate of prime less 0.25% until December 31,
    2007, and thereafter, it will be reduced to prime less 0.50%.
    Prior to the modification, the credit agreement provided for the
    reduction in the interest rate to begin on July 1, 2007.  Growth
    Strategy
  and/or
    Service
    Offerings
    Restoration
    and Construction Services
     22




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##### Table of Contents




    Recovery:  Our recovery services include
    providing initial set up services in an impacted area (including
    power, lodging, and training) and then providing the drying,
    dehumidification, cleanup and removal of debris from commercial
    and residential areas to prepare the areas for the next stage of
    restoration. We provide these services on an hourly rate to our
    commercial and residential clients, both as a contractor and as
    a subcontractor to customers providing additional services in
    these markets.
    Fire and Water Damage Restoration:  We provide
    trained employees to respond to fire, water and weather-related
    emergencies, to inspect structural members and contents damaged
    by water, to determine the likelihood or extent of mold growth
    and to provide immediate cleaning, drying, moving, storage and
    deodorization, among other services.
    Construction:  The Companys construction
    services include general contracting work and subcontracting
    work. Our services are provide to a number of high growth
    companies and specialized building markets, including
    hospitality and gaming, insurance, education and healthcare
    markets, as well as to state and local government agencies and
    districts.
    Indoor Air Contamination:  Through PWS, we
    provide indoor air contamination services, including
    contamination from mold, asbestos and lead paint. With increased
    media attention regarding the health threat of mold, fewer
    insurance options and property transfers at risk, current market
    conditions have created significant demand for mold inspections,
    certifications and remediation services. These services consist
    of property and system inspections, surface and air testing,
    project design, microbial removal, light interior demolition,
    repair and specialized cleaning work. Customer opportunities are
    developed through a regional sales force as well as through
    referrals by real estate firms, insurance adjusters, mortgage
    companies, attorneys and nationally-branded retailers.
    Cleaning and Fabric Protection:  Through FSS,
    we provide fabric protection services to protect furniture,
    carpet and draperies from stains and daily wear through both
    Company-owned locations and over forty licensed locations. This
    niche market is primarily targeted at above-average income
    homeowners. We also provide air duct cleaning services to remove
    particulate (organic and inorganic) material, which can cause
    allergic reactions and is often the breeding ground for many
    types of mold, from heating and air conditioning systems.  Interior
    Services
   23




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##### Table of Contents



Critical
    Accounting Policies
    Allowance
    for Doubtful Accounts
    Impairment
    of Long-Lived Assets
    Goodwill
  Goodwill and Other
    Intangible Assets.
 24




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Revenue
    Recognition
  Revenue Recognition in Financial
    Statements
        Stock-Based
    Compensation
    Share-Based Payment Accounting for
    Stock-Based Compensation
   25




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Deferred
    Taxes
  Accounting for Income Taxes. Accounting for
    Uncertainty in Income Taxe
  Results
    of Operations (Dollars and Shares in Thousands)
  Comparison
    of the three months ended June 30, 2007 to the three months
    ended June 30, 2006
  Restoration
    and Construction Services
  Net Sales.
  Costs of Sales.
 26




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##### Table of Contents



Selling, General and Administrative
    Expenses.
  Interior
    Services
  Net Sales.
  Costs of Sales.
  Selling, General and Administrative
    Expenses.
  Corporate
  Selling, General and Administrative
    Expenses.
  Other Income (Expense).
  Income Taxes.
  Comparison
    of the six months ended June 30, 2007 to the six months
    ended June 30, 2006
  Restoration
    and Construction Services
  Net Sales.
  Costs of Sales.
 27




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##### Table of Contents



Selling, General and Administrative
    Expenses.
  Interior
    Services
  Net Sales.
  Costs of Sales.
  Selling, General and Administrative
    Expenses.
  Corporate
  Selling, General and Administrative
    Expenses.
  Other Income (Expense).
  Income Taxes.
  Liquidity
    and Capital Resources
   28




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##### Table of Contents




    the percentage of eligible accounts receivable (as defined in
    the credit agreement) used to calculate the borrowing base is
    increased from 80% to 85% from the period from April 1,
    2007 through December 31, 2007, and thereafter, was reduced
    to 80%; and
    the interest rate on advances under the line of credit will
    remain at its current rate of prime less 0.25% until
    December 31, 2007, and thereafter, it will be reduced to
    prime less 0.50%. Prior to the modification, the credit
    agreement provided for the reduction in the interest rate to
    begin on July 1, 2007.        Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk     29




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##### Table of Contents



Item 4.
    Controls
    and Procedures  Evaluation
    of disclosure controls and procedures
  Rule 13a-15(e))
      
    pertain to the maintenance of records that, in reasonable
    detail, accurately and fairly reflect the transactions and
    dispositions of the assets of the Company;
    provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with GAAP, and that receipts and expenditures of the
    Company are being made only in accordance with authorizations of
    management and directors of the Company; and
    provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use, or disposition of
    the Companys assets that could have a material effect on
    the consolidated financial statements.    Form 10-K
  
    Management did not maintain effective controls over management
    review of user accounts at any location within the Company
    because of a lack of segregation of duties within each
    application.
    The Company did not maintain effective control environment
    because it lacked (1) the appropriate communication of the
    code of conduct, employee handbook and fraud policy (2) the
    appropriate documentation related to personnel responsibilities
    and performance, (3) appropriate human resource policies
    regarding personnel matters, and (4) an internal audit
    function.
    Management did not maintain effective controls over
    stock/options. A reconciliation of the Companys
    outstanding shares against the stock transfer agents
    records historically is not performed. Also, journal entries to
    record compensation expense and option exercises were not
    reviewed and approved by the CFO. Finally, the Companys
    registered public auditing firm noted during the financial
    statement audit for the year ended December 31, 2006 that
    Board of Director compensation expense was erroneously recorded
    as prepaid expenses ($254,000) in the second quarter of 2006. 30




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
    The Company did not maintain effective internal controls over
    income taxes because documentation of the review and approval of
    the income tax returns, quarterly tax estimates, and tax journal
    entries were not present.
    The Company did not maintain effective controls over the
    accounts payable and expenditures cycle because (1) vendor
    maintenance request forms were incomplete and were completed
    after all additions had already been entered into the system,
    (2) vendor maintenance requests were not approved,
    (3) no purchases journal was maintained by the accounts
    payable clerk and not all purchase orders matched the invoices
    (and there was support for variances), (4) managers were
    not signing all invoices when the product/service is received to
    ensure that the product/service is acceptable prior to payment,
    (5) not all invoices contained documentation of the
    approval and GL coding provided by the controller,
    (6) expense reports were not reviewed and approved prior to
    payment, (7) wire transfers were not approved and one
    person has the ability to initiate and perform a wire transfer,
    (8) goods and services received but not invoiced are not
    tracked to ensure timely recording of all expenditures,
    (9) the accounts payable system did not prevent entry of
    duplicate invoices, (10) there was no indication that
    review of check registers tested had occurred, (11) for
    invoices that did not match the amount paid per the check stub,
    there was no explanation provided on the invoice explaining or
    reconciling the variance, (12) lack of segregation of
    duties, (13) check registers were not reviewed and
    approved, (14) the Companys registered public
    accounting firm noted several adjustments related to the
    accounts payable cycle and the fact that a vendor statement did
    not agree to the general ledger.
    At three locations, management did not maintain effective
    controls over accounts receivables and sales because:
    (1) masterfile changes were not approved, and the
    masterfile was not reviewed for validity, accuracy, completeness
    and timely recording of changes, (2) individual contracts
    were not approved, (3) copies of lien waivers and copies of
    invoices were not provided as support for several sales,
    (4) there was no evidence of a reviewed and approval of
    invoices, (5) cash receipts were not reviewed and approved,
    (6) posted cash receipt entries were not reviewed,
    (7) the appropriate accounts receivable and sales were not
    reviewed and approved, (8) a lack of access and segregation
    of duties was noted, (9) management noted during the
    financial statement audit that some sales were recorded twice,
    (10) the appropriate approval of contracts were not
    documented, (11) invoices to accounts receivable subledger
    reconciliation was not independently reviewed, (12) account
    receivable subledger to general ledger reconciliation was not
    independently reviewed, (13) cash receipts record (log) was
    not reviewed and no one verified that cash receipts are posted
    to the correct account.
    At one location, management did not maintain effective controls
    over the inventory function because (1) an inventory
    tracking system (subledger) was not maintained; therefore, no
    reconciliation to the general ledger could be performed,
    (2) an inventory master list was not being maintained,
    (3) matching of the receipts with the purchase order and
    bill of lading was not performed and the quality inspection is
    not performed, (4) the entries to record the receipt of
    inventory in the general ledger were not reviewed/approved,
    (5) a review of the inventory records to ensure that all
    issuances were properly approved was not performed,
    (6) lack of segregation of duties and access authorization
    was noted, (7) quarter inventory adjustments were not
    reviewed, (8) lack of appropriate documentation for the
    inventory count was noted, (9) finally, during the
    financial statement audit the auditor made an adjustment to
    inventory.
    At three locations, the Company did not maintain effective
    internal controls over Financial Closing and Reporting because
    (1) not all journal entries have adequate support, nor are
    all journal entries approved, (2) all required elements
    were not included in the controllers monthly binder(s),
    (e.g. bank reconciliations, bank statements, and the
    reconciliation for intercompany accounts), (3) no
    supporting inventory documentation was submitted as a part of
    the financial package, (4) no sales and expenses cutoff
    review were performed, (5) lack of access controls to the
    chart of accounts and the rights within the accounting software,
    (6) no approval for changes to the chart of accounts was
    noted, (7) no review and approval of the financial
    reporting packages to the supporting general ledgers was noted,
    (8) management did not use a generally accepted accounting
    principles (GAAP) disclosure checklist in preparing and
    reviewing draft financial statements to ensure accuracy,
    completeness and consistency of required disclosures, and
    (9) each financial-statement disclosure was not
    independently reviewed and validated for appropriate
    assumptions, 31




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##### Table of Contents



methodology, and presentation of all relevant information in
    accordance with generally accepted accounting principles.  
    At one location, management did not maintain effective controls
    over the fixed asset cycle because (1) a fixed asset policy
    existed but there was no evidence of review and approval and the
    fixed asset policy had not been distributed to the person who
    codes and records all purchases, including fixed asset purchases
    to the general ledger (accounts payable clerk), (2) capital
    expenditure forms were not completed for all fixed asset
    acquisitions. One asset was purchased using the expense
    reimbursement process and not recorded, (3) reconciliation
    of fixed assets and accumulated depreciation was not performed
    and reviewed, (4) management did not review the fixed asset
    ledger at least quarterly to ensure compliance, (5) fixed
    asset inventory review, documentation and approval are not
    performed, any required impairment adjustments are not recorded,
    (6) the monthly depreciation expense journal entry prepared
    is not reviewed as part of the monthly closing and journal entry
    review processes, (7) no documentation of the approval of
    the disposal of assets was noted, (8) management does not
    review the purchase journal and invoices to ensure that fixed
    assets are recorded in the proper period. The journal entry and
    support was not put into a monthly binder and reviewed quarterly
    by the corporate controller.
    At one location, management did not maintain effective controls
    over the payroll function because (1) no authorization for
    hiring employees was noted, (2) no review of the employee
    master file occurred, (3) no review and approval of
    timekeeping was noted, (4) no reconciliation was prepared
    and there was no documented review of the comparison of
    timesheets to paychecks, and (5) no control over the
    distribution of paychecks was noted.    Remediation
    of Material Weaknesses
            
    We are devoting more resources to developing and communicating
    an anti-fraud program, code of conduct policies and human
    resource polices to our employees and management. The program
    may include the hiring of outside or in-house counsel to be
    dedicated to the development and enforcement of compliance
    programs. Background checks are being performed on personnel
    being placed into positions of material responsibility. The
    compliance program also will include a communication project to
    set the right tone from the top. Additionally, we are expending
    significant resources to following up on addressing control
    deficiencies identified in the previous audits; 32




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##### Table of Contents




    The Company intends to develop additional policies and
    procedures to further strengthen its reporting, including the
    areas of, sales and expense cut-off and sales returns, financial
    reporting and disclosure procedures. In addition, we anticipate
    hiring additional resources to perform the internal audit
    function;
    The Company is evaluating the implementation of an ERP Suite to
    address certain of the material weaknesses listed in the
    Management Report on Internal Controls Over Financial Reporting,
    including the effective control over period-end financial close
    and reporting and the effective control over certain accounting
    functions. The ERP implementation should facilitate the
    appropriate review and approval over the recording of journal
    entries to ensure the accuracy and completeness of the journal
    entries recorded. Additionally, the Company will make changes to
    its corporate accounting staff, including the hiring or
    contracting of additional personnel;
    Additional segregation of duties and appropriate review,
    approval, and supporting documentation will be installed in 2007
    to maintain effective controls over the disbursement function.
    We are developing policies for proper documentation, review and
    approval related to subsidiary operations, compensation, expense
    reimbursements;
    Additional segregation of duties and appropriate review,
    approval, and supporting documentation will be implemented in
    2007 to maintain effective controls over the fixed asset and
    payroll functions;
    With the implementation of an ERP the financial reporting
    package, we should be able to further restrict access to the
    inventory detail schedule used to support the general ledger
    balances. With additional implementation of ERP applications, we
    plan to eventually replace the current periodic inventory
    system, relying on monthly inventory counts using physical
    inventory count sheets, with a perpetual inventory system.
    Meanwhile, more procedures will be installed for review of
    inventory count documentation;
    Additional processes will be instituted to timely resolve
    identified accounting and legal issues so that period-end
    financial statements and reporting can be timely
    completed; and
    Management intends to review our internal disclosure policies
    and procedures to ensure that they provide reasonable assurance
    that information required to be disclosed in our reports that
    are filed or submitted under the Exchange Act is accumulated and
    communicated to our management, as appropriate to allow timely
    decisions regarding required disclosure.       33




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##### Table of Contents



Changes
    in internal controls
  Rule 13a-15(f))
  Changes
    in internal controls over financial reporting
  Form 10-Q
  Form 10-K Form 10-Q,
  
    Hiring highly qualified accounting consultants to guide internal
    accounting personnel in the application of generally accepted
    accounting principles related to revenue recognition;
    Training internal personnel, with the assistance of the new
    external advisors, to obtain additional expertise as to the
    application of generally accepted accounting principles
    specifically related to software revenue recognition; and  
    Ensuring the review of the revenue recognition documentation by
    qualified staff.  Form 10-Q, Form 10-K
 34




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##### Table of Contents



PART II
  OTHER
    INFORMATION
 (Dollars and shares in thousands, except for per share
    data)
  Item 1.
    Legal
    Proceedings      Rule 10b-5
      Item 1A.
    Risk
    Factors  10-K
  If the downturn in the U.S. housing industry continues
    or increases, our results of operation could be materially and
    detrimentally effected.
 35




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##### Table of Contents



Form 10-K and/or 10-K
  Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds.    Item 3.
    Defaults
    Upon Senior Securities    Item 4.
    Submission
    of Matters to a Vote of Security Holders      Abstain/BrokerName

For


Non-VotesMichael S. Chadwick


37,285



1,979Frank J. Fradella


36,001



3,262Willard W. Kimbrell


37,379



1,885Brian Marshall


36,040



3,224Charles P. McCusker


36,997



2,267Patrick A. McGreeney


37,054



2,209Stephen Scott Sewell


35,685



3,579     Abstain/BrokerFor

Against

Non-VotesAppointment of KMJ
    Corbin & Company LLP


35,145



3,565



89  36




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##### Table of Contents



Item 5.
    Other
    information    Item 6.
    Exhibits    Exhibit



Method ofNumbers

Description

Filing2
.1

Satisfaction of Note and Amendment
    to Stock Purchase Agreement among Home Solutions of America,
    Inc., Fireline Restoration, Inc. and Brian marshall dated
    August 14, 2007 and effective June 30, 2007

(1)3
.1

Certificate of Incorporation of
    the Company, as restated on July 31, 2001 (filed with the
    SEC on July 9, 2001 as Exhibit A to the Companys
    Information Statement on Schedule 14C and incorporated
    herein by reference).3
.2

Certificate of Amendment to the
    Certificate of Incorporation of Nextgen Communications
    Corporation, changing the corporations name to Home
    Solutions of America, Inc., as filed with the Secretary of
    State of Delaware on December 23, 2002 (filed with the SEC
    on December 22, 2002 as Exhibit A to the
    Companys Information Statement on Schedule 14C and
    incorporated herein by reference).3
.3

Certificate of Amendment to the
    Restated Certificate of Incorporation of Home Solutions of
    America, Inc. as filed with the Delaware Secretary of State on
    June 16, 2006 (filed with the SEC on July 14, 2006 as
    Exhibit 3.3 to the Companys Registration Statement on
    Form 8-A
    and incorporated herein by reference).3
.4

Amended and Restated Bylaws of the
    Company, as amended on April 4, 2006 (filed with the SEC on
    May 15, 2006 as Exhibit 3.3 to the Companys
    Quarterly Report on
    Form 10-Q
    and incorporated herein by reference).10
.1

Restricted Stock Purchase
    Agreement between Frank J. Fradella and Home Solutions of
    America, Inc. dated May 11, 2007

(1)10
.2

Restricted Stock Purchase
    Agreement between Jeffrey M. Mattich and Home Solutions of
    America, Inc. dated May 11, 2007

(1)10
.3

Board Compensation Plan
    (2007-2008
    Board Term)

(1)31
.1

Rule 13a-14(a)
    Certification by our principal executive officer

(1)31
.2

Rule 13a-14(a)
    Certification by our principal financial officer

(1)32
.1

Section 1350 Certification by
    our principal executive officer

(1)32
.2

Section 1350 Certification by
    our principal financial officer

(1)     (1)
    
    Filed herewith. 37




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##### Table of Contents



Signatures         /s/  Frank
    J. Fradella       
      38