UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

for the fiscal year ended December 31, 2006

for the transition period from                      to                     

1500 Dragon Street, Suite B Dallas, TX 75207
(Address of principal executive offices)

(214) 623-8446
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No þ

          Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such 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 þ No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

          State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter. $41,262,108

          The number of shares outstanding of the registrant’s common stock, $.001 par value per share, as of March 16, 2007 was 47,322,683

Proxy statement for the 2007 Annual Meeting of Stockholders, which will be filed pursuant to Regulation 14A, is incorporated by reference in Part III to the extent described therein.

 

December 31, 2006

TABLE OF CONTENTS

ITEM 1. BUSINESS

Overview

Home Solutions of America, Inc. (referred to herein as “we,” “us,” “our,” “Home Solutions,” or the “Company”), a Delaware corporation, is a provider of restoration, construction and interior services to commercial and residential areas that are (i) prone to flooding, hurricanes, tornados, fires or other naturally occurring and repetitive weather related emergencies, and/or (ii) experiencing robust commercial or residential development. With operations in the South, Gulf Coast regions and California, we believe that the Company is well positioned to capitalize on the growing demand for our suite of restoration, construction and interior services. We seek to expand our core service offerings through the future acquisition of strategic, specialized, profitable and well-managed companies operating in our target markets and business segments with a proven history of internal growth.

The Company was incorporated in Delaware on January 8, 1998, for the purpose of serving as the successor corporation of EIF Holdings, Inc., a Hawaii corporation, pursuant to a reincorporation merger that was completed in June 1998. During 1999 and most of 2000, the Company, then named U.S. Industrial Services, Inc., operated through its wholly-owned subsidiaries as a multi-state service company specializing in industrial cleaning services, including soil and groundwater remediation, and hazardous material management and clean up.

From February 2002 until November 2002, the Company, then named Nextgen Communications, had no significant operations.

In September 2002, we adopted a new corporate strategy of acquiring or generating projects that focus on providing specialty residential services to homeowners. In November 2002, the Company closed its first acquisition as part of this strategy, acquiring PW Stephens, Inc. (“PWS”), a provider of indoor air contaminates removal services for homeowners in California. PWS has a twenty-year operating history of providing indoor air contaminate removal services for residential and light commercial clients.

In December 2002, in connection with the implementation of our residential services strategy, our stockholders approved a change of our corporate name to Home Solutions of America, Inc.

In July 2003, Home Solutions closed the acquisition of Fiber Seal Systems, L.P. (“FSS”), a provider of cleaning and fabric protection services based in Dallas, Texas. FSS provides cleaning and fabric protection services through both company-owned and over 40 licensed locations across the United States.

In December 2003, Home Solutions closed the acquisition of Southern Exposure Unlimited of Florida, Inc. (“Southern Exposure”) and related companies, a provider of cabinet and countertop installation services to homebuilders and homeowners throughout southwestern Florida.

On March 31, 2005, Home Solutions acquired Cornerstone Building and Remodeling, Inc. (“Cornerstone”). Cornerstone, which has headquarters in Fort Myers, Florida, near the headquarters of the Company’s Southern Exposure subsidiaries, is engaged in the business of installing custom marble and granite countertops.

On September 27, 2005, our wholly owned subsidiary, Home Solutions Restoration of Louisiana, Inc. (“HSR of Louisiana”) acquired substantially all of the assets of Florida Environmental Remediation Services, Inc., (“FERS”), a restoration company operating in Florida, Louisiana and Mississippi. This acquisition represented the Company’s entrance into the commercial restoration services market.

On July 31, 2006, the Company consummated the acquisition of Fireline Restoration, Inc. (“Fireline”), a privately held provider of recovery and restoration services throughout Florida, Louisiana and Mississippi, pursuant to a purchase agreement entered into among Fireline, the owner of Fireline and the Company, which was effective July 1, 2006. On October 26, 2006, HSR of Louisiana acquired Associated Contractors LLC (“Associated”), a general contractor operating in Louisiana and Mississippi engaged in providing construction and rebuilding services for commercial and residential properties.

Home Solutions’ business plan is to contribute to its growth strategy with additional acquisitions in the future.

Our business consists of two integrated business segments: (i) restoration and construction services and (ii) interior services. For financial information relating to our business segments, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.”

Home Solutions is an emerging restoration and construction services company, offering diversified general contracting, restoration, construction management and design-build services to private clients and public agencies throughout the southern United States and California. We have established a strong reputation within our markets by executing significant projects on time and within budget while adhering to strict quality control measures. We offer general contracting, preconstruction planning and comprehensive project management services, including planning, scheduling and providing the manpower, equipment, materials and subcontractors required for a project. A portion of our work requires surety bonding and the Company has surety bonding agreements with various institutions to meet its bonding needs. We also serve as the subcontractor on several projects in the same markets.

The Company’s restoration services include catastrophic storm response, clean up and removal of debris, initial set up services in an impacted area (including power, lodging, sustenance and training), water mitigation, drying, dehumidification and 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 and residential clients. These services are primarily provided through our wholly-owned subsidiaries, Fireline, which we acquired effective July 1, 2006 pursuant to an acquisition closed on July 31, 2006, and HSR of Louisiana, which commenced operations in September 2005 in connection with the acquisition of substantially all the assets of FERS. HSR of Louisiana purchased Associated in October 2006 to expand its business development and general contracting capabilities. Our restoration services are currently provided in the areas of Florida, Louisiana, Mississippi, Alabama, Georgia, South Carolina, Texas and California.

Our restoration services include servicing the next stage of the project after the initial clean up and catastrophic storm response. Restoration services presently include water, fire and wind restoration, mold remediation, contents restoration, air decontamination, asbestos and lead paint removal, cleaning, drying, and deodorization of carpet and furniture and moving and storage services. Fireline, which specializes in disaster recovery services and insurance estimates and repairs for commercial, industrial and residential properties, is certified in multiple aspects of the restoration industry, including smoke, fire, water and mold. Fireline is licensed as a general contractor in Florida and offers full interior and exterior restoration and reconstruction services. Restoration business segment services are also provided through PWS and FSS, two of our wholly-owned subsidiaries. PWS provides water and fire restoration services, air decontamination and removal of mold, asbestos and lead paint in California and, to a lesser extent, in Florida, and FSS provides cleaning, drying and deodorization of carpet and furniture as well as moving and storage services in 24 states and the District of Columbia.

The following details the types of restoration and construction services we provide:

Through our wholly-owned subsidiaries, Southern Exposure and Cornerstone, we offer cabinet and countertop installation services. 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 the acquisition of Cornerstone, which installs custom marble and granite countertops for residential customers. Currently, we manufacture cabinets and install cabinets and kitchen countertops for Centex Corporation (“Centex”), one of the largest homebuilders in the nation, in its southwest Florida market. We also install granite countertops for Home Depot, Inc. (“Home Depot”) in Florida, Georgia, Alabama and South Carolina. 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 these contracts. We have no contract with Centex, and Centex is not obligated to buy our products or use our services. We also have granite fabrication and installation operations in Southern California which services the residential and multi-family markets.

We include restoration and construction projects in our backlog at such time as a contract is awarded or a firm letter of commitment is obtained and funding is in place. As a result, the backlog figures are firm, subject only to the cancellation provisions contained in the various contracts. As of December 31, 2006, construction backlog was approximately $40,000, as compared to $0 as of December 31, 2005.

The restoration and construction industry and the interior services industry are highly competitive and the markets in which we compete have numerous and often larger companies that provide similar services. In certain end markets there are competitors with significantly greater capabilities and resources. In our restoration and construction segment, we compete with a variety of national and regional contractors. We believe price, experience, reputation, responsiveness, customer relationships, project completion track record and quality of work are key factors in customers awarding contracts across our end markets.

Our growth strategy is to target markets that are (i) prone to flooding, hurricanes, tornados, fires or other naturally occurring and repetitive weather emergencies, and/or (ii) experiencing robust housing development, and penetrate these markets through internal growth of our existing operating subsidiaries and a well-executed acquisition program to expand the Company’s service offerings. During 2005 we implemented our initiative to expand into the hardest hit areas of the 2005 hurricane season by forming HSR of Louisiana and acquiring substantially all of the assets of FERS in September of 2005. Initially, the services provided by these operations will involve the drying, dehumidifying, clean up and removal of debris at many of the disaster-affected locations prior to commencing Restoration and Construction services. We expect the Restoration, Construction and rebuilding effort associated with the 2005 hurricanes to happen in stages and last between two and five years. The Company plans to take advantage of the opportunity to service these areas through each stage with each of its restoration, construction and interior services offerings.

We also see the opportunity to further capitalize on the robust growth in housing in our target markets through the Company’s relationship with Centex as well as with the expansion of our relationships with retailers including Home Depot.

Portions of our operations, particularly our restoration and construction business segment, are highly regulated and subject to a variety of federal and state laws, including environmental laws, which require that we obtain various licenses, permits and approvals. We must obtain and maintain various federal, state and local governmental licenses, permits and approvals in order to provide our services. We believe we are in material compliance with all applicable licensing and similar regulatory requirements. However, there is no assurance that we can maintain our licenses or registrations in the states in which we currently do business, or that we can obtain licenses or registrations required by any states in which we may desire to expand our business.

As of December 31, 2006, we had an aggregate of 458 employees, including leased employees. The Company utilizes an employee leasing company to provide services such as screening, U.S. citizenship verification, workers compensation and payroll administration. None of these employees are represented by collective bargaining agreements.

Home Solutions of America, Inc. is a Delaware corporation with principal executive offices located at 1500 Dragon Street, Suite B, Dallas, Texas 75207. Our website address is www.hsoacorp.com. We make available on our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to such reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission (“SEC”).

We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether or to what extent any of such risks may be realized, nor are there any assurances that the Company has identified all possible risks that might arise. Our revenues are derived from specialty restoration, construction and interior services products and services. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. Some of these risks are set forth below.

Unless otherwise indicated, all numbers (except per share amounts) presented under this Item 1A are stated in thousands.

Our limited operating history makes it difficult for us to evaluate our future business prospects and make decisions based on those estimates of our future performance.

We did not begin operations of our current business concept until November 2002. We have a limited operating history in our current combined form, which makes it difficult to evaluate our business on the basis of historical operations. The revenues from two of our operating subsidiaries, Fireline and HSR of Louisiana, which account for a significant portion of our revenue for fiscal year 2006, were the result of acquisitions that we closed in October 2006, July 2006 and September 2005. As a consequence, it is difficult, if not impossible, to forecast our future results based upon our historical data. Reliance on the historical results of our acquisition targets may not be representative of the results we will achieve, particularly in our combined form. Because of the uncertainties related to our lack of historical operations, we may be hindered in our ability to anticipate and timely adapt to increases or decreases in sales, revenues or expenses. If we make poor budgetary decisions as a result of unreliable historical data, we could be less profitable or incur losses, which may result in a decline in our stock price.

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

We incurred a consolidated net 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, a net profit of $7,185 for the year ended December 31, 2005 and a net profit of $17,898 for the year ended December 31, 2006. Our management believes that our current business plan will be successful and that we will continue to maintain and grow profitability; however, our business plan is speculative and unproven. Although our revenues grew substantially due to our growth strategy and we achieved a profit in fiscal years 2004, 2005 and 2006, there is no assurance that we will be successful in executing our business plan or, even if we successfully implement our business plan, that we will sustain profitability now or in the future. If we incur significant operating losses, our stock price may decline, perhaps significantly.

Our business depends on the demand for restoration, construction and interior services, and if the demand for those services decreases, our revenues could decline.

Our business depends upon the demand for the services that we provide, which include restoration, construction and interior services that we provide to residential home owners and commercial properties. Because of our significant emphasis on the construction and reconstruction of residential and commercial properties, we would be adversely affected by any slowdown in the growth of, or reduction in demand for, these services. Demand for our restoration services is event-based and depends upon the frequency and intensity of natural disasters and the type and scope of damage to properties. Additionally, demand for our services depends on numerous other factors, including: the amount and growth of household income; the financial condition of the end user of our services, and whether an insurance policy or reimbursement from the federal or state government is available to pay the cost of our services; changes in mortgage rates and decreases in housing growth in markets where the Company operates; and general economic conditions.

If demand for the services that we provide decreases, then we may experience a decline in sales resulting in decreased profits. If demand for our services decreases and our management fails to implement appropriate adjustments, then our profitability could suffer and the price of our common stock could decline.

A significant portion of our interior services business segment is dependent upon relationships with two customers.

Our interior services business segment currently consists of the manufacture and installation of custom kitchen cabinets and the installation of kitchen countertops. These products and services are offered to residential customers primarily through a furnish and installation contract with Home Depot, and through a relationship with Centex. The Home Depot contract may be terminated by Home Depot at any time upon notice to us. Furthermore, Home Depot is not obligated to use our services under this contract. We have no contract with Centex, and Centex is not obligated to buy our products or use our services. If Home Depot terminates its contract with us, or if Home Depot or Centex choose not to buy our products or use our services, we would experience an immediate detrimental impact on our interior services business segment, resulting in a material adverse effect on our results of operations.

We intend to engage in acquisitions as part of our growth strategy, which will consume resources and may be unsuccessful or unprofitable.

We have pursued, and we intend to continue to pursue, a strategy of acquiring businesses that fit within our business model. However, acquisitions are not always successful or profitable. Any future acquisitions could expose us to risks, including risks associated with assimilating new operations and personnel; diversion of resources from our existing businesses; inability to generate revenues sufficient to offset associated acquisition costs; the maintenance of uniform standards, controls, procedures and policies. Acquisitions may also result in additional expenses from amortizing acquired intangible assets. If we attempt an acquisition and are unsuccessful in its completion, we will likely incur significant expenses without any benefit to our Company. If we are successful in completing an acquisition, the risks and other problems we face may ultimately make the acquisition unprofitable. Failed acquisition transactions and underperforming completed acquisitions would burden us with significant costs without any corresponding benefits to us, which could cause our stock price to decrease, perhaps significantly.

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

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

We must effectively manage the growth of our operations, or our results of operations will suffer.

Our ability to successfully implement our business plan requires an effective planning and management process. If funding is available, we intend to increase the scope of our operations and acquire complementary businesses. Implementing our business plan will require significant additional funding and resources. If we are successful in growing our operations, we will need to hire additional employees and make significant capital investments. As we continue to grow our operations, it may place a significant strain on our management and our resources. As a result of our recent growth and any continued growth, we will need to improve our financial and managerial controls and reporting systems and procedures, and we will need to expand, train and manage our workforce. Any failure to manage any of the foregoing areas efficiently and effectively could cause our results of operations to suffer.

We face competition from numerous sources and competition may increase, leading to a decline in revenues.

We compete primarily with well-established companies, many of which we believe have greater resources than Home Solutions. We believe that barriers to entry in our restoration and construction services and interior services business segments are not significant and start-up costs are relatively low, so our competition may increase in the future. New competitors may be able to launch new businesses similar to ours, and current competitors may replicate our business model, at a relatively low cost. If competitors with significantly greater resources than ours decide to replicate our business model, they may be able to quickly gain recognition and acceptance of their business methods and products through marketing and promotion. We may not have the resources to compete effectively with current or future competitors. If we are unable to effectively compete, we will lose sales to our competitors and our revenues will decline.

Our failure to comply with federal and state environmental laws and regulations could result in fines or injunctions, which could materially impair the operation of our business.

Portions of our business are heavily regulated by federal, state and local environmental laws and regulations, including those promulgated under the Environmental Protection Agency. These federal, state and local environmental laws and regulations govern the discharge of hazardous materials into the air and water, as well as the handling, storage, and disposal of hazardous materials and

the remediation of contaminated sites. Our businesses involve working around and with volatile, toxic and hazardous substances 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 become subject 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 an injunction which would impede or even prevent us from operating that portion of our business. Any significant environmental claim or injunction could have a material adverse impact on our financial condition. Additionally, environmental regulations and laws are constantly changing, and changes in those laws and regulations could significantly increase our compliance costs and divert our human and other resources from revenue-generating activities.

The failure to obtain and maintain required governmental licenses, permits and approvals could have a substantial adverse effect on our operations.

Portions of our operations, particularly our restoration and construction services business segment, are highly regulated and subject to a variety of federal and state laws, including environmental laws which require that we obtain various licenses, permits and approvals. We must obtain and maintain various federal, state and local governmental licenses, permits and approvals in order to provide our services. We may not be successful in obtaining or maintaining any necessary license, permit or approval. Further, as we seek to expand our operations into new markets, regulatory and licensing requirements may delay our entry into new markets, or make entry into new markets cost-prohibitive. We cannot assure you that we will be able to obtain or, once obtained, maintain our licenses or registrations in any states where we are required to be licensed or registered to operate our business. Our activities in states where necessary licenses or registrations are not available could be curtailed pending processing of an application, and we may be required to cease operating in states where we do not have valid licenses or registrations. We could also become subject to civil or criminal penalties for operating without required licenses or registrations. These costs may be substantial and may materially impair our prospects, business, financial condition and results of operations.

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

We carry standard general liability insurance in amounts determined to be reasonable by our management. We are also covered through standard worker’s compensation insurance against claims by our employees for injuries and other conditions contacted while on the job. Although we believe we are adequately insured, if we fail to adequately assess our insurance needs or if a significant amount of claims are made by workers or others, there can be no assurance that the amount of such claims will not exceed our available insurance, resulting in a material negative impact on our financial results. This could have an adverse impact on the price of our common stock.

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

If we lose members of our senior management, we may not be able to find appropriate replacements on a timely basis, and our business could be adversely affected. Our existing operations and continued future development depend to a significant extent upon the performance and active participation of certain key individuals, including our Chief Executive Officer and Chief Financial Officer. We cannot guarantee that we will be successful in retaining the services of these or other key personnel. If we were to lose any of these individuals, we may not be able to find appropriate replacements on a timely basis and our financial condition and results of operations could be materially adversely affected.

Our inability to hire, train and retain qualified employees could cause our financial condition to suffer.

The success of our business is highly dependent upon our ability to hire, train and retain qualified employees. We face competition from other employers for laborers, and the availability of labor is limited, particularly in areas serviced by our Restoration and Construction Services segment. We must offer a competitive employment package in order to hire and retain employees, and any increase in competition for labor may require us to increase wages or benefits in order to maintain a sufficient work force, resulting in higher operation costs. Additionally, we must successfully train our employees in order to provide high-quality services. In the event of high turnover or a labor shortage, we may experience difficulty in providing consistent high-quality services, which could adversely affect our results of operations.

We have identified 18 material weaknesses in our internal control over financial reporting and cannot assure you that additional material weaknesses will not be identified in the future. If our internal control over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements that could require a restatement or our filings may not be timely and investors may lose confidence in our reported financial information, which could lead to a decline in our stock price.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our internal control over financial reporting as of the end of each year, and to include a management report assessing the effectiveness of our internal control over financial reporting in each Annual Report on Form 10-K. Section 404 also requires our independent registered public accounting firm to attest to, and report on, management’s assessment of our internal control over financial reporting.

     We have identified several material weaknesses in our internal control over financial reporting as discussed in Item 9A.

     Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

     As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.

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

Historically we have incurred debt in order to pursue our acquisition strategy, and we will likely incur additional debt in the future as we continue to implement our business plan, which involves engaging in strategic acquisitions. There is no guarantee that revenues from operations will be sufficient to pay our debts as they become due. We may need to attract new investors or lenders in order to refinance existing 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 obtain additional financing, we could still suffer financial hardships if unexpected expenses arise or if revenues fail to meet our expectations. If we fail to obtain financing or attract other investors, our results of operations may suffer, which could result in a decline in the price of our common stock.

Our subsidiaries Fireline and HSR of Louisiana are involved in providing restoration and construction services to disaster-ravaged areas and the southern United States. Our management has identified certain risks which it believes relate specifically to our restoration and construction services segment, which are set forth below.

The need for restoration services is unpredictable and depends upon the nature and extent of weather-related emergencies.

Our restoration services are significantly impacted by the frequency and intensity of weather-related emergencies, which causes the results of this segment of our business to fluctuate. Historically, the nature and frequency of weather-related emergencies has fluctuated between periods of relative calm, as compared to periods with weather-related events of greater frequency or intensity. In a period with few weather-related emergencies or in which weather-related emergencies cause comparatively less damage, we expect our revenues from this business segment to decline. Although emergencies and disasters will always occur, we cannot predict the frequency of occurrence, where they will occur and the extent of damage that will result. All of these factors impact the need for restoration and construction services. If the need for restoration services decline, our results of operations could suffer.

If we fail to win contracts that are ultimately reimbursable by insurers and federal, state and local governments, it may impede our ability to grow our restoration services segment.

The end users of our restoration services currently consist primarily of large commercial businesses and homeowners that have the funds and resources to begin recovery of their properties that have been damaged in natural disasters. We believe that individuals and smaller commercial businesses who have experienced damage or destruction to their homes and properties, but do not have the resources to respond immediately, will rely upon insurance companies and federal, state and local governments to assist them in repairing their properties. We pursue bids on recovery services contracts, the costs of which are likely to be reimbursed by insurance agencies and government branches and agencies. Some of our competitors may have better resources than we do or may have long standing relationships that will place us at a competitive disadvantage in winning contracts that are ultimately reimbursable by insurance or government funds. If we are unsuccessful in obtaining contracts that are reimbursable by insurance and government funds, it may impede the ability of our restoration and construction services segment to continue to grow, which could result in a reduction in revenues and a decline in the price of our common stock.

If insurance proceeds and federal funds are not available to our customers, then our revenues may decline, and the demand for our restoration and construction services may decline.

There is no assurance that any particular contract for our restoration and construction services segment will ultimately be paid by insurance or reimbursed by government funds. If insurance proceeds or federal funds are not available to reimburse customers for our restoration and construction services, then our current customers may delay or forego payment on current projects, and potential new customers may delay projects until funds are available, or decide not to rebuild. If a lack of insurance proceeds or federal funds causes a delay in payment or a failure to pay one or more individual material contracts, or a significant aggregate amount of smaller contracts, then our revenues could decline, perhaps significantly. Furthermore, overall demand for recovery services could decrease, resulting in decreased demand for our services and a decrease in our revenues.

Our common stock could be delisted from the NASDAQ if we do not comply with the NASDAQ continued listing standards.

We have only been listed on NASDAQ since July 2006, and prior to that, we were on the American Stock Exchange from June 2003 through July 2006. To maintain our listing, we must meet NASDAQ’s continued listing standards. If our common stock was delisted from the NASDAQ for any reason, it would reduce our liquidity and could seriously reduce the value of our common stock, reduce our ability to raise additional financing, limit our use of equity instruments to satisfy outstanding obligations, and limit our ability to attract qualified employees. Any or all of these factors could result in stockholders losing a portion or all of their investment in the Company.

Because of our low stock price, we may become subject to “penny stock” regulations, which place restrictions on the trading of our common stock.

The SEC has adopted regulations that generally define a penny stock to be any equity security that has 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 fiscal years 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 traded generally at prices above $5 per share in fiscal 2006. Regardless of our current trading price, we are currently exempt from complying with the SEC’s penny stock regulations because our common stock is listed for trading on NASDAQ. However, we could become subject to 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 an exemption. The penny stock regulations provide that unless an exemption is available, a penny stock transaction must be preceded by the delivery of a disclosure schedule explaining the penny stock market and its risks. In addition, under these regulations broker/dealers who recommend penny stocks to persons other than established customers and certain accredited investors must make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to the proposed transaction prior to the sale. If we become subject to penny stock regulations, it would be more difficult for investors to purchase or sell our common stock due to the additional restrictions imposed by those regulations, which could reduce our stock price.

Effects of anti-takeover provisions could inhibit potential investors or delay or prevent a change of control that may favor stockholders.

Some of the provisions of our certificate of incorporation, our bylaws and Delaware law could, together or separately:

In particular, our board of directors is authorized to issue preferred stock and debt instruments with rights and privileges that might be senior to our common stock, without the consent of the holders of the common stock. The issuance of preferred stock and debt instruments could cause the price of our common stock to decline, even if our business is doing well.

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

We have not paid or declared cash dividends to the holders of our common stock, and do not intend to do so in the foreseeable future. We intend to use any excess funds from our operations to operate and grow our Company. We cannot assure you that we will ever pay dividends to the holders of our common stock.

None.

In October 2002, the Company purchased an office building at 11850 Jones Road, Houston, Texas, that served as its corporate offices, consisting of approximately 8,000 square feet of office space. In May 2004, the Company moved its corporate headquarters to Dallas, Texas and currently leases an office building co-located with FSS consisting of approximately 6,000 square feet. The lease agreement for this property expires in 2011. The Company currently has the Houston, Texas building and land listed for sale and is actively marketing the property.

PWS leases an office building used as its headquarters in Huntington Beach, California and has additional offices in Fremont, El Cajon, and Corona California. These lease agreements for these properties expire in 2007 to 2008.

Southern Exposure leases an office building used as its headquarters in Fort Myers, Florida. The lease agreement for this property expires in 2007.

Cornerstone leases an office building used as its headquarters in Fort Myers, Florida on a month-to-month basis with a 60-day notice provision. Cornerstone leases an additional office in Tampa, Florida. The Tampa lease expires in 2009.

HSR of Louisiana leases an office building used as its headquarters in Mandeville, Louisiana and leases a Florida office in Fort Lauderdale. The lease agreements for these properties expire in 2008 and 2009.

Fireline leases an office building used as its headquarters in Tampa, Florida. Fireline also leases office in St. Rose, Louisiana and Vero Beach, Florida. The lease agreements for these properties expire in 2007 to 2008.

The nature and scope of the Company’s business operations bring it into regular contact with the general public, a variety of businesses and government agencies. These activities inherently subject the Company to potential litigation, which are defended in the normal course of business.

On June 20, 2006, a class action lawsuit was filed in the United States District Court for the Northern District of Texas. Home Solutions and the Chief Executive Officer, President and Chief Financial Officer of Home Solutions are named as defendants in that action. The complaint alleges claims against Home Solutions and such officers for violations of the Securities Act of 1934. The complaint alleges that the defendants disseminated false and misleading information to the public which misrepresented the accuracy of the Company’s financial condition and future revenue prospects. The complaint further alleges that the effect of the purported fraud was to manipulate Home Solution’s stock price so that the defendants could profit from the manipulation. The action seeks damages in an unspecified amount. The Company intends to vigorously defend the action.

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

Home Solutions is occasionally involved in other litigation matters relating to claims arising out of the ordinary course of business. Other than the class action lawsuits described above, the Company’s management believes that there are no claims or actions pending or threatened against the Company, the ultimate disposition of which would have a material adverse effect on our business, results of operations and financial condition. However, if a court or jury rules against us and the ruling is ultimately sustained on appeal and damages are awarded against us, such ruling could have a material and adverse effect on our business, results of operations and financial condition.

None.

Market Prices

The common stock of the Company is traded on the NASDAQ Global Market and listed under the symbol “HSOA.” The following table sets forth, for the fiscal quarters indicated, the range of the high and low sales prices for the Company’s common stock as reported by the NASDAQ Global Market. These quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

As of March 15, 2007, the Company had approximately 133 record holders of its common stock, as reflected on the books of the Company’s transfer agent. A significant number of shares were held in street name and, as such, the Company believes that the actual number of beneficial owners is significantly higher.

The Company has not established a policy to pay dividends, nor has it paid any dividends on its common stock to date. We plan to reinvest all profits in our business, and we do not anticipate that we will adopt any policy to pay dividends in the foreseeable future. Furthermore, the Company’s ability to pay dividends to holders of its common stock is restricted by the terms of certain financing arrangements. Any payment of dividends in the future will be determined by the Board of Directors in light of conditions then existing, including restrictions imposed by the Company’s preferred stock then outstanding, the Company’s earnings, financial condition, capital requirements and debt covenants, and the tax treatment consequences of paying dividends.

The Company’s common stock is subject to provisions of Section 15(g) and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), commonly referred to as the “penny stock rule.” Section 15(g) sets for the certain requirements for transactions in penny stock, and Rule 15g-9(d) incorporates the definition of “penny stock” that is found in Rule 3a51-1 of the Exchange Act. The SEC generally defines a penny stock to be any equity security that has a market price less than $5 per share, subject to certain exceptions. Regardless of our current trading price, we are currently exempt from complying with the SEC’s penny stock regulations because our Common Stock is listed for trading on NASDAQ. However, we could become subject to 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 an exemption.

If the Company’s common stock is deemed to be penny stock, trading in the shares will be subject to additional sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. “Accredited investors” are persons with assets in excess of $1,000 or annual income exceeding $200 or $300 together with their spouse. For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of such security and must have the purchaser’s written consent to the transaction prior to the purchase. Additionally, for any transaction involving a penny stock, unless exempt the rules require the delivery, prior to the first transaction of a risk disclosure document, prepared by the SEC, relating to the penny stock market. A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information for the penny stocks held in an account and information to the limited market in penny stocks. Consequently, these rules may restrict the ability of broker-dealer to trade and/or maintain a market in the Company’s Common Stock and may affect the ability of the Company’s stockholders to sell their shares.

On July 31, 2006, the Company issued 4,000 shares of common stock valued at $22,148 to Brian Marshall, the former owner of Fireline, in partial consideration for the acquisition of Fireline.

On October 26, 2006, the Company issued 1,500 shares of common stock valued at $8,144 to the former owners of Associated, in partial consideration for the acquisition of Associated. Also on October 26, 2006, the Company issued to the former owners of Associated, warrants exercisable for up to 2,000 shares of common stock at an exercise price of $.01 per share that vest and become exercisable in increments of 100 shares for every $2,500 in earnings before interest, taxes, depreciation and amortization (“EBITDA”) in excess of $9,000 in EBITDA earned by the Associated division in the two-year period following the closing of the Associated acquisition.

On December 12, 2006 the Company issued 25 shares of common stock valued at $108 to a consultant in exchange for services rendered to the Company.

The securities were issued to accredited investors without public solicitation in accordance with the exemption from registration available under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and thus, were exempt from the registration requirements of the Securities Act.

The following table summarizes as of December 31, 2006, the shares of common stock authorized for issuance under our equity compensation plans:

Summary of Selected Financial Data (Unaudited)
(Dollars in thousands, except per share data)

Use of Estimates and Critical Accounting Policies

In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant effect on our revenues, income (loss) from operations, and net income, as well as on the value of certain assets on our consolidated balance sheet. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance as these policies affect the reported amounts of revenues, expenses and significant estimates and judgments applied by management. While there are a number of accounting policies, methods and estimates affecting our financial statements, areas that are particularly significant include allowance for doubtful accounts, recoverability of long-lived assets (including goodwill), revenue recognition, stock-based compensation, and deferred taxes. In addition, please refer to Note 1 to the accompanying financial statements for further discussion of our accounting policies.

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on specific identification of customer accounts and our best estimate of the likelihood of potential loss, taking into account such factors as the financial condition and payment history of major customers. We evaluate the collectibility of our receivables at least quarterly. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The differences could be material and could significantly impact cash flows from operating activities.

The Company’s management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long-lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment is measured based on fair value and is charged to operations in the period in which long-lived asset impairment is determined by management.

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

We record a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. We have considered estimated future taxable income an ongoing tax planning strategies in assessing the amount needed for the valuation allowance.

The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as revised by SAB 104. As such, the Company recognizes revenue when 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 and related services are performed.

Southern Exposure and Cornerstone recognize revenue for product sales at the time the related products are shipped to the customer. These subsidiaries recognize revenue for installation jobs upon complete installation of the cabinets and inspection by the customer. Deferred revenue represents amounts billed to customers and collected prior to completion of the cabinets and inspection by the customer.

Cornerstone recognized revenue from its building and remodeling jobs using the percentage of completion method for financial reporting purposes. Under the percentage of completion method, revenues with respect to individual contracts are recognized in the proportion that costs incurred to date bear to total estimated costs. Revenue and costs estimates are subject to revision during the terms of the contracts and any required adjustments are made in the periods in which the revisions become known. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported contract profit, we recognize a credit, or a charge against current earnings, which could be material. General and administrative costs are not allocated to contract costs and are charged to expense as incurred.

Fireline and Associated also recognize revenue from certain jobs using the percentage-of-completion method. Under the percentage of completion method, revenues with respect to individual contracts are recognized in the proportion that costs incurred to date bear to total estimated costs and progress towards completion. These estimates are dependent upon judgments including material costs and quantities, labor productivity, subcontractor performance and other costs. In addition, disputes on our projects can and sometimes do occur with our customers, subcontractors and equipment vendors that require significant judgment as to the ultimate resolution and may take an extended period of time to resolve. As projects are executed, estimates of total revenues and total costs at completion are refined and revised. These estimates change due to factors and events affection execution and often include estimates for resolution of disputes that may be settled in negotiations or through arbitration, mediation or other legal methods. The percentage-of-completion method requires that adjustments to estimated revenues and costs, including estimated claim recoveries, be recognized on a cumulative basis, when the adjustments are identified. When these adjustments are identified near or at the end of a project, the full impact of the change in estimate would be recognized as a change in the gross profit on the contract in that period. This can result in a material impact on our results for a single reporting period. General and administrative costs are not allocated to contract costs and are charged to expense as incurred.

     The business segment that used the percentage of completion method had revenues of $88,754, and operating income of $32,282 for the year. At December 31, 2006, the costs in excess of billings (asset) were $6,292, and the billings in excess of costs (liability) were $688. Should these accounts be written off, the Company would recognize a loss of approximately $5,604.

The Company maintains two shareholder-approved stock-based incentive compensation plans that permit the issuance of equity-based compensation awards to employees, qualified consultants and directors, including stock options and stock purchase rights.

On January 1, 2006, the first day of the Company’s fiscal year 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified prospective transaction method. Under this transition method, compensation cost recognized in the year ended December 31, 2006, includes: (a) compensation cost for all share-based payments granted and not yet vested prior to January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Results for prior periods have not been restated. Since stock-based compensation expense recognized in the consolidated statements of income for the year ended December 31, 2006 is based on awards ultimately expected to vest, the compensation expense has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimated forfeitures to be 2% of the awards issued.

Prior to the adoption of SFAS No. 123(R), the Company accounted for these plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by SFAS No. 123, Accounting for Stock Based Compensation. No stock-based employee compensation cost was recognized in the consolidated statements of income for the year ended December 31, 2005, as all options granted under the Stock Plans had an exercise price equal to or greater than the market value of the underlying common stock on the date of grant.

Our assessment of the estimated fair value of the stock options granted is affected by our stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. We utilize the Black-Scholes model to estimate the fair value of stock options granted. Generally, our calculation of the fair value for options granted under SFAS No. 123(R) is similar to the calculation of fair value under SFAS No. 123 with the exception of the treatment of forfeitures. The fair value of stock purchase rights is based on the market price of our common stock on the grant date.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:

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

See Note 1 – Basis of Presentation and Summary of Significant Accounting Policies – to the consolidated financial statements contained in this report for additional information regarding our accounting policies for stock-based compensation.

Restoration and Construction Services

The revenue for the year ended December 31, 2006 was $88,754 compared to $37,142 for the year ended December 31, 2005. The increase is primarily due to an increase in construction work for HSR of Louisiana and the acquisitions of Fireline and Associated during 2006. The majority of the work related to reconstruction projects in Florida and Louisiana as a result of post hurricane buildback.

Interior Services

The revenue for the year ended December 31, 2006 was $38,466 compared to $30,993 for the year ended December 31, 2005. The increase is due primarily to an increase in sales related to Southern Exposure of $3,573 and an increase in sales related to Marble Man, a subsidiary of PWS, of $2,257.

Restoration and Construction Services

Costs of sales for the year ended December 31, 2006 were $41,569 compared to $18,642 for the year ended December 31, 2005. Restoration and construction services cost of sales increased primarily due to the increase in construction work for HSR of Louisiana and the acquisitions of Fireline and Associated during 2006. Gross margins were 53% and 50% for the years ended December 31, 2006 and 2005, respectively.

Interior Services

Costs of sales for the year ended December 31, 2006 were $25,154 compared to $19,730 for the year ended December 31, 2005. The increase in total costs of sales is due to the increase in Southern Exposure’s cabinet and countertop sales and Marble Man sales. Gross margins were 35% and 40% for the years ended December 31, 2006 and 2005, respectively.

Restoration and Construction Services

Selling, general and administrative expenses were $14,903 for the year ended December 31, 2006 compared to $6,642 for the year ended December 31, 2005. The increase of $8,261 from 2005 is due to the increase in construction work for HSR of Louisiana and the acquisitions of Fireline and Associated during 2006. Selling, general and administrative expenses as a percentage of revenues were 17% and 18% for the years ended December 31, 2006 and December 31, 2005, respectively.

Interior Services

Selling, general and administrative expenses were $7,720 for the year ended December 31, 2006 compared to $5,379 for the year ended December 31, 2005. This increase is due to an increase in sales for Southern Exposure and PWS. Selling, general and administrative expenses as a percentage of revenues were 20% and 17% for the year ended December 31, 2006 and December 31, 2005, respectively. The Cornerstone administrative costs are slightly higher than the Southern Exposure business because of the higher administrative cost to service residential customers and Cornerstone’s expansion to service additional Home Depot stores.

Corporate

Corporate general and administrative expenses were $7,262 for the year ended December 31, 2006 compared to $4,464 for the year ended December 31, 2005. The increase of $2,798 is due primarily to an increase in consulting, legal and professional fees of $824, salaries and bonus expenses of $496, board of directors’ compensation of $267, Sarbanes-Oxley audit-related costs of $675 and investor relations expenses of $101. Corporate expenses as a percentage of total revenues were 6% and 7% for the years ended December 31, 2006 and December 31, 2005, respectively.

Interest expense was $2,345 for the year ended December 31, 2006 compared to $3,351 for the year ended December 31, 2005. The decrease of $1,006 is primarily related to the mezzanine debt issue cost of $2,147 and the associated interest of $518 in 2005, offset by additional interest incurred during 2006 resulting from the addition of debt. Other income was $132 for the year ended December 31, 2006 compared to $97 in 2005. Interest income was $268 for the year ended

December 31, 2006 compared to $61 for the year ended December 31, 2005. The increase in interest income in 2006 is related to the interest earned on cash received from private placement proceeds in November 2005.

During the year ended December 31, 2005, the Company’s management committed to a plan to dispose of certain assets and liabilities of the building and remodeling division of Cornerstone. The disposal allowed the Company to focus on supporting higher net profit margin opportunities. In March of 2006, the Company sold the building and remodeling division of Cornerstone, which was acquired in the Cornerstone acquisition. As a result of the sale, its operations were 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 $2,698. Net sales from discontinued operations for the year ended December 31, 2006 were $514 as compared to $4,213 for the year ended December 31, 2005. For the year ended December 31, 2006 and 2005 cost of sales were $675 and $3,844, respectively, and selling, general and administrative expenses were $317 and $2,559, respectively.

Restoration and Construction Services

The revenue for the year ended December 31, 2005 was $37,142 compared to $16,566 for the year ended December 31, 2004. The increase was primarily due to the HSR of Louisiana acquisition of the FERS assets effective September 1, 2005, which increased our volume of recovery work in the Southeastern United States. Sales of PWS and FSS increased $1,656 from 2004. In 2005, PWS continued recovery/restoration work from the 2004 hurricane season.

Interior Services

The revenue for the year ended December 31, 2005 was $30,993 compared to $14,555 for the year ended December 31, 2004. The increase was due primarily to the Cornerstone acquisition effective March 31, 2005. Southern Exposure sales increased $5,004 primarily due to increased product demand from its principal customer.

Restoration and Construction Services

Costs of sales for the year ended December 31, 2005 were $18,642 compared to $7,937 for the year ended December 31, 2004. Restoration and Construction Services total cost of sales increased primarily due to the HSR of Louisiana acquisition of the FERS assets effective December 31, 2005. Restoration and Construction gross margins were 50% and 48% for the years ended December 31, 2005 and 2004, respectively. The increase in cost of sales from 2004 is due primarily to higher costs of sales experienced for the recovery/restoration work performed by HSR of Louisiana in the Southeastern United States.

Interior Services

Costs of sales for the year ended December 31, 2005 were $19,730 compared to $8,781 for the year ended December 31, 2004. The increase in total costs of sales is due to the Cornerstone acquisition effective March 31, 2005 and the increase in Southern Exposure sales. Southern Exposure gross margins were 40% for the years ended December 31, 2005 and 2004.

Restoration and Construction Services

Selling, general and administrative expenses were $6,642 for the year ended December 31, 2005 compared to $6,097 for the year ended December 31, 2004. The increase of $545 from 2004 is due primarily to the HSR of Louisiana acquisition of the FERS assets effective December 31, 2005. Selling, general and administrative expenses as a percentage of revenues were 18% and 37% for the years ended December 31, 2005 and December 31, 2004, respectively.

Interior Services

Selling, general and administrative expenses were $5,379 for the year ended December 31, 2005 compared to $2,140 for the year ended December 31, 2004. This increase is due to the Cornerstone acquisition effective March 31, 2005. Selling, general and administrative expenses as a percentage of revenues were 17% and 15% for the years ended December 31, 2005 and December 31, 2004, respectively. The Cornerstone administrative costs are slightly higher than the Southern Exposure business because of the higher administrative cost to service residential customers and Cornerstone’s expansion to additional Home Depot stores. The Company also made two small acquisitions in the first quarter of 2007.

Corporate

Corporate general and administrative expenses were $4,464 for the year ended December 31, 2005 compared to $2,119 for the year ended December 31, 2004. The increase of $2,345 is due primarily to the variable stock option expense of $952, increased salaries

and payroll taxes of $1,000 and stock compensation expense of $257. Corporate expenses as a percentage of revenues were 7% and 7% for the year ended December 31, 2005 and December 31, 2004, respectively.

Interest expense was $3,351 for the year ended December 31, 2005 compared to $930 for the year ended December 31, 2004. The increase of $2,421 is primarily related to the mezzanine debt issue cost amortization of $1,791 and the associated interest of $518. Other income was $97 in 2005 compared to $224 in 2004. The year ended December 31, 2005 included a one time gain of $129 related to the forgiveness of debt. Interest income was $61 for the year ended December 31, 2005 compared to $38 for the year ended December 31, 2004. The increase in interest income in 2005 is related to the interest earned from the private placement proceeds received in November 2005.

The following table presents the Company’s unaudited quarterly statements of operations for each of the eight quarters in the two-year period ended December 31, 2006. The information in the table should be read in conjunction with the Company’s audited consolidated financial statements and related notes contained elsewhere in this report. The underlying unaudited financial statements are prepared on the same basis as the audited consolidated financial statements included in this report, which include all adjustments, consisting only of normal recurring adjustments, that are considered necessary for the fair presentation of the Company’s financial position and operating results for the quarters presented. Operating results for any quarter are not necessarily indicative of results for any future periods.

Home Solutions’ business plan is to contribute to its growth strategy with acquisitions. During the period from March 31, 2005 to December 31, 2006, the Company has made several acquisitions and experienced internal growth of the existing operations. The table above includes the effective date of the each acquisition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to the consolidated financials included elsewhere in this Form 10K and in the Form 10K for 2005 for additional information on the acquisitions during the periods included in the table. Our management believes that our current business plan will be successful and that we will continue to maintain and grow profitability; however, our business plan is speculative and unproven. Although our revenues grew substantially due to our growth strategy and we achieved a profit in fiscal years 2004, 2005 and 2006, there is no assurance that we will be successful in executing our business plan or, even if we successfully implement our business plan, that we will sustain profitability now or in the future.

The Company’s existing capital resources as of December 31, 2006, consist of cash and accounts receivable totaling $66,819, compared to cash and accounts receivable of $28,810 as of December 31, 2005. The increase in the accounts receivable is due primarily to the acquisitions of Fireline and Associated, in July 2006 and October 2006, respectively, as well as increased revenues for the reconstruction of New Orleans and other hurricane-affected areas. In addition, the hurricane disaster recovery work has increased the amounts due from government agencies or entities owned by the U.S. Government, primarily FEMA and state-owned or controlled entities. While we have a history of recovering amounts related to work performed for the government, the current circumstances increase the uncertainties in estimating the amounts we will actually recover under existing contracts for work we have already performed. If our estimated amounts recoverable on these projects differ from the amounts ultimately collected, those differences will be recognized as income or loss and our earnings and cash flows could be materially impacted. The Company believes that its current financing arrangements are sufficient to finance its working capital needs for the next twelve months. However, continued implementation of the Company’s strategic plan of expanding our core service offerings through the future acquisition of strategic, specialized, profitable and well-managed companies will require additional capital.

In November 2006, the Company entered into a new $60,000 credit facility with a consortium of financial institutions experienced in providing credit to construction companies. The new facility, which replaces the Company’s previous $10,000 line of credit, was obtained to support the Company’s working capital requirements and reduce the Company’s overall borrowing costs. The Company has committed to provide Associated with a $15,000 working capital line of credit to be used for construction projects, which is included in the $60,000 credit facility. The new facility was used to finance acquisition debt and support future working capital needs of the Company.

In June 2006 Southern Family Insurance (“Southern”) was placed in liquidation. Southern was the insurance carrier on Fireline’s two significant customers. At December 31, 2006, the Company had accounts receivable and recoverable costs from these customers aggregating approximately $25,829. In order to protect its interests the Company has filed a claim with the Florida Insurance Guarantee Association (“FIGA”). Southern was an admitted insurance carrier in Florida and state statutes insures the payment of valid claims by the FIGA. FIGA has certified the Company’s claims as valid. Should the Company be unable to collect the balances due, it may have to initiate legal action. Unpaid balances related to this receivable or any other account receivable balance acquired up to a maximum of $19,400 would reduce the payment due on the note payable to the seller described in Note 3. In addition, to the right of offset against the seller note, the Company has lien rights against the property in which the work related to the FIGA claim was performed. The Company estimates that the amounts collected will be between $24,000 and $30,000 and that any amounts not collected will be applied against the amounts due on the note payable to the seller.

During the year ended December 31, 2006, the Company used net cash from operating activities of $12,509, including net income of $17,898. The Company’s investing activities used net cash of $12,553 primarily due to Fireline acquisition costs and purchases of property and equipment. Cash provided by investing activities includes repayments of notes receivable, net of issuances and acquisition costs, net of cash received.

The Company’s net cash from financing activities of $25,550 was primarily due to proceeds from the exercises of warrants and options, borrowings on the line of credit and notes payable and excess tax benefits from option exercises. Cash flow outlays were for principal payments on long-term debt and capital leases and distributions to a minority stockholder.

On May 24, 2006, the Company entered into an exclusive agreement with a modular housing sales agent to provide installation services for modular housing in New Orleans and surrounding areas. In connection with the agreement, the Company agreed to loan the sales agent up to $800 under a promissory note, which is secured by real estate and modular home units. See Note 4 – Notes Receivable – to the consolidated financial statements contained in this report for additional information regarding the transaction.

The following table presents our contractual obligations as of December 31, 2006:

We believe that, for the year ended December 31, 2006, inflation has not had a material effect on our operations.

Our primary market risk exposure relates to changes in interest rates. We are not subject to any foreign currency exchange rate risk or commodity price risk, or any other material market rate or price risks. We use short-term debt financing and working capital primarily to fund short-term uses and acquisitions and generally expect to refinance such borrowings with cash from operating activities or long-term debt.

We had $50,100 of variable rate debt outstanding at December 31, 2006. The annual interest rate on the Term Loan and the Line of Credit is equal to the higher of (a) the prime rate of interest as quoted in the Wall Street Journal, less 25 basis points (0.25%) for periods prior to June 30, 2007, and less 50 basis points (0.50%) for periods after June 30, 2007, or (b) the federal funds rate, as published by the Federal Reserve Bank of New York, plus 25 basis points (0.25%) for periods prior to June 30, 2007. The interest rate on the seller note is calculated at prime rate. If the prime rate were higher by 1%, the interest expense would have increased by $152. Conversely, if the prime rate was lower by 1%, interest expense would have decreased by $152.

See Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.

See Notes to Consolidated Financial Statements.