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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2005

OR

For the transition period from                      to                     

Commission file number 000-18291

U.S. HOME SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (214) 488-6300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 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  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

As of May 7, 2005, there were 7,928,245 shares of the registrant’s common stock, $0.001 par value, outstanding.

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INDEX

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PART I. FINANCIAL INFORMATION

U.S. Home Systems, Inc.

Consolidated Balance Sheets

See accompanying notes.

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U.S. Home Systems, Inc.

Consolidated Statements of Operations

See accompanying notes.

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U.S. Home Systems, Inc.

Consolidated Statements of Cash Flows

See accompanying notes.

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

(unaudited)

March 31, 2005

U.S. Home Systems, Inc. (the “Company” or “U.S. Home”) is engaged in the manufacture, design, sale and installation of custom quality specialty home improvement products, and providing consumer financing services to the home improvement and remodeling industry.

The accompanying interim consolidated financial statements of the Company and its subsidiaries as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 are unaudited; however, in the opinion of management, these interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows. These financial statements should be read in conjunction with the consolidated annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

The Company’s accounting policies require it to apply methodologies, estimates and judgments that have significant impact on the results reported in the Company’s financial statements. The Company’s Annual Report on Form 10-K includes a discussion of those policies that management believes is critical and requires the use of complex judgment in their application. Since the date of that Form 10-K, there have been no material changes to the Company’s critical accounting policies or the methodologies or assumptions applied under them.

Stock Compensation

In December 2004, the Financial Accounting Standards Board issued a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123R”). SFAS No. 123R supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees” and requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the related service period. SFAS No. 123R is effective for fiscal years beginning after June 15, 2005 and the Company will begin recognizing option expense January 1, 2006.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months ended March 31, 2005 and 2004, as well as the expected effect of adopting SFAS No. 123R.

Reclassifications

Certain reclassifications have been made to conform to the prior period amounts to the current period presentation.

The Company has revised its quarterly financial data for the three months ended March 31, 2004 from that previously reported in its unaudited report on Form 10-Q to reflect the operating results, net of tax, of its RbA operations, as a discontinued operation.

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

Recent Accounting Pronouncements

In addition to SFAS No. 123R more fully discussed above, the FASB issued SFAS No. 151, “Inventory Costs,” which amends ARB 43, Chapter 4, “Inventory Pricing”, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and spoilage should be recognized as current period expenses. Also, the Statement requires fixed overhead costs to be allocated to inventory based on normal production capacity. SFAS No. 151 is effective for inventory costs incurred in fiscal years beginning after June 15, 2005. The Company does not expect a material effect from adoption of this pronouncement.

The Company has three operating segments and is engaged in two lines of business, the specialty product home improvement business and the consumer financing business. The Company’s operating segments have been aggregated and reported based on the nature of products or services offered to consumers. The Company’s home improvement operations consists of two reporting segments; the interior products segment (consisting principally of kitchen and bath products) and the exterior products segment (consisting of wood decks and related accessories). The Company’s consumer finance business consists of one reporting segment.

The Company’s home improvement operations are engaged, through direct consumer marketing, in the design, manufacturing, sales, and installation of custom quality specialty home improvement products. The Company’s primary product lines include replacement kitchen cabinetry, kitchen cabinet refacing and countertop products utilized in kitchen remodeling, bathroom refacing and related products utilized in bathroom remodeling, and wood decks and related accessories. The Company manufactures certain of its own cabinet refacing, custom countertops, bathroom cabinetry and wood deck products.

The Company’s home improvement products are marketed directly to consumers through a variety of media sources under nationally recognized brands, “The Home Depot Kitchen and Bathroom Refacing,” “The Home Depot Installed Decks,” “Century 21 Home Improvements,” “Century 21 Cabinet Refacing,” as well as the Company’s own “Facelifters” brand.

The Company has a license agreement with TM Acquisition Corp. (“TM”) and HFS Licensing Inc. (“HFS”) pursuant to a master license agreement between Century 21 Real Estate Corporation and each of TM and HFS (collectively, the “Licensor”). The license agreement provides for the Company to market, sell and install kitchen and bathroom remodeling products, replacement windows and patio doors in specific geographic territories using the service marks and trademarks “CENTURY 21 Cabinet Refacing” and “CENTURY 21 Home Improvements”.

The Company is a provider of kitchen and bathroom refacing solutions and wood decks to The Home Depot in selected markets. The Company currently offers its kitchen and bath refacing products in 370 The Home Depot stores primarily in the Western and Midwestern United States. In April 2005, the Company expanded its kitchen and bathroom servicing agreements with The Home Depot to add seven markets in Texas, Michigan, Utah and Nevada (which comprise approximately 140 The Home Depot stores). The Company provides wood deck products in over 240 The Home Depot stores in the Mid-Atlantic and Northeastern United States. In October 2004, the Company amended its wood deck servicing agreement with The Home Depot and added ten additional markets primarily in the Midwest (which comprise approximately 245 The Home Depot stores). Also in October 2004, the Company entered into an agreement with Universal Forest Products, Inc. (“Universal”) whereby the Company granted a limited license to Universal to manufacture pre-engineered deck component parts for the Company.

The Company’s consumer finance business, First Consumer Credit, Inc. (“FCC”), purchases Retail Installment Obligations (“RIOs”) from remodeling contractors, including RIOs originated by the Company’s home improvement operations. During the three months ended March 31, 2005 and 2004, FCC originated approximately $1,266,000 and $2,135,000 of RIOs in the Company’s home improvement operations, respectively.

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

The Company maintains discrete financial information of each segment. Corporate expenses, primarily consisting of certain corporate executive officers’ salaries, bonuses and benefits, and general corporate expenses, including legal, audit and tax preparation fees, director and officer liability insurance, information systems support, general insurance, and investor relations expenses, are allocated to each reporting segment based on management’s estimate of the costs attributable, or time spent, on each of its segments. Corporate expenses allocated to reporting segments for the three months ended March 31, 2005 and 2004 are as follows (in thousands):

The following presents certain financial information of the Company’s segments for the three months ended March 31, 2005 and 2004, respectively (in thousands):

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

Revenues attributable to each of the Company’s product lines in the home improvement operations are as follows (in thousands):

The percentage of home improvement revenues attributable to each of the Company’s major brands is as follows:

Revenues in the Company’s consumer finance segment were comprised of the following (in thousands):

Inventories consisted of the following:

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

Finance receivables held for investment consisted of the following:

Changes in the allowance for loan losses were as follows:

At March 31, 2005 and December 31, 2004, scheduled principal maturities of finance receivables held for investment are as follows:

The Company utilizes a $5.0 million revolving line of credit and a $75 million Credit Facility to purchase and fund RIO’s (see Note 6). At March 31, 2005 and December 31, 2004, the Company had approximately $36,694,000 and $38,056,000 outstanding under these lines of credit, respectively. During the three months ended March 31, 2005, the weighted average interest rate paid under these lines was 5.1%, and the weighted average interest rate earned on the portfolio was 14.1%. At March 31, 2005, interest rates on finance receivables held for investment ranged from 6.0% to 16.5% with a weighted average interest rate of 14.1%.

In connection with RIOs originated by the Company, the Company incurs direct administrative costs and expenses. These costs are capitalized. The Company amortizes these costs to reduce interest income over the term of the respective RIO using the effective interest method. Unamortized deferred origination costs were $41,383 and $42,618 at March 31, 2005 and December 31, 2004, respectively.

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

Debt under the Company’s credit facilities consisted of the following:

On February 11, 2003, FCC entered into a $75 million credit facility agreement (the “Credit Facility”) with Autobahn Funding Company LLC (“Autobahn”) as the lender, and DZ Bank AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main (“DZ Bank” or the “Agent”). FCC Acceptance Corporation (“FCCA”), a wholly-owned subsidiary of FCC, is the borrower under the Credit Facility. FCC is the servicer under the Credit Facility. The Credit Facility is a five-year program funded out of DZ Banks’ conduit, Autobahn, pursuant to which Autobahn funds loans made to FCCA through the issuance of commercial paper. DZ Bank provides a standby liquidity facility necessary for Autobahn to issue the commercial paper. The Credit Facility is restricted to the purchase and financing of RIOs, and is secured by the RIOs under the Credit Facility. Transaction costs were approximately $800,000 and are being amortized to interest expense over the term of the agreement. Amortization of Credit Facility origination costs was approximately $40,000 for the three months ended March 31, 2005 and 2004. At March 31, 2005 and December 31, 2004, the Company had outstanding borrowings of $36,093,000 and $36,072,000 under the Credit Facility, respectively.

Subject to the $75 million credit limit, the maximum advance under the Credit Facility is 90% of the amount of eligible RIOs. At March 31, 2005, the maximum advance under the Credit Facility was approximately $35,457,000 based on eligible RIO’s of $39,397,000. The $636,000 difference between the facility balance and the maximum advance amount represents available cash on deposit in the collection account that had not been applied as payment against the Credit Facility. In the event that a RIO ceases to be an eligible RIO, FCCA is required to pay down the line of credit in an amount by which the outstanding borrowings do not exceed the maximum advance rate applied to the outstanding balance of the eligible RIOs. A RIO becomes ineligible upon the occurrence of specified events identified in the Credit Facility that involve either delinquency, collectibility, certain over-concentrations or disputes between the borrower and the contractor. Among other provisions, the Credit Facility provides that (i) each advance under the facility will be an amount not less than $250,000 and will be funded by the issuance of commercial paper at various terms with interest payable at the rate of the Agent’s then current commercial paper rate plus 2.5% (5.2% at March 31, 2005), and (ii) if the excess spread is less than 5%, FCCA is required to deposit funds into a sinking fund account, or purchase specified rate caps or other interest rate hedging instruments, to hedge to the extent possible the interest rate exposure of the lender. The excess spread represents the difference between the weighted average interest rate of all eligible RIOs charged by the Company and (a) certain fees associated with the program and (b) the interest rate charged to the Company under the facility. At March 31, 2005 the excess spread was 7.2%. The Company has not been required to make a sinking fund deposit or purchase any interest rate hedge instrument at March 31, 2005. The Credit Facility contains various representations, warranties and covenants as is customary in a commercial transaction of this nature which among other matters (1) limit the ability to merge, consolidate or sell substantially all of the assets of the FCC subsidiary, (2) require the maintenance of a certain tangible net worth, and (3) restrict the purchase of RIOs unless certain underwriting criteria are met. The Company has guaranteed to FCCA, the lender and Agent, the performance by FCC of its obligations and duties under the Credit Facility in the event of fraud, intentional misrepresentation or intentional failure to act by FCC.

On May 30, 2003, the Company entered into a loan agreement (the “Loan Agreement”) with Frost National Bank (“Frost Bank”). The Loan Agreement, as amended, includes a $5 million revolving line of credit (the “Revolving Line”), a $3 million line of credit (the “Borrowing Base Line”), and a term loan in the amount of $775,000 (the “Term Loan”). Concurrent with the execution of the Loan Agreement, the Company terminated and retired all prior credit agreements between the parties and all outstanding balances from the prior agreements were refinanced under the Loan Agreement.

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

The Revolving Line allows borrowings up to $5 million for the purchase of RIOs. Subject to the $5 million credit limit, the maximum advance under the Revolving Line is 90% of the outstanding principal balance of eligible RIOs. FCC holds RIOs until the first payment is made by the customer, typically within 30 days, and then sells the RIOs to its subsidiary, FCCA, utilizing the Credit Facility to refinance and pay down the Revolving Line. FCC is required to pay down the line of credit upon the sale of RIOs, or if the borrowing base is less than the outstanding principal balance under the line. Interest on the Revolving Line is payable monthly at LIBOR plus 2.6% (5.7% at March 31, 2005). The Revolving Line, as amended, matures May 30, 2006 at which time any outstanding principal and accrued interest is due and payable. The Revolving Line is secured by substantially all of the assets of the Company and its subsidiaries, and the Company and its subsidiaries are guarantors. At March 31, 2005 and December 31, 2004, the Company had outstanding borrowings of $600,565 and $1,984,135 under the Revolving Line, respectively.

The Borrowing Base Line allows borrowings up to $3 million for working capital. Borrowings and required payments under the Borrowing Base Line are based upon an asset formula involving accounts receivable and inventory. At March 31, 2005 and December 31, 2004 the Company had outstanding borrowings of $1,310,339 under the Borrowing Base Line. At March 31, 2005, the Company had an additional borrowing capacity of approximately $1,690,000 under the line. The Borrowing Base Line matures May 30, 2006. Interest on the Borrowing Base Line is payable monthly at LIBOR plus 2.6% (5.7% at March 31, 2005). The Borrowing Base Line is secured by substantially all of the assets of the Company and its subsidiaries, and the Company and its subsidiaries are guarantors.

The Term Loan is payable in 48 monthly principal payments of $16,146 plus accrued interest through May 30, 2007. Interest is computed on the unpaid principal balance at LIBOR plus 2.6% (5.7% at March 31, 2005). The Term Loan is secured by substantially all of the assets of the Company and its subsidiaries, and the Company and its subsidiaries are guarantors. At March 31, 2005 and December 31, 2004, the outstanding balance of the Term Loan was $419,792 and $468,229, respectively.

In connection with the acquisition of Deck America, or DAI, in November 2002, the Company’s subsidiary USA Deck, Inc. purchased DAI’s warehousing, manufacturing and office facilities. USA Deck obtained a mortgage in the amount of $2,125,000 from GE Capital Business Asset Funding. The mortgage is secured by the property. Among other provisions, (i) interest on the mortgage is 7.25%, (ii) the mortgage is subject to a prepayment premium, and (iii) the mortgage is guaranteed by the Company.

The Company has other term loans in which the proceeds were utilized principally to purchase machinery and equipment. These loans are payable in monthly payments of principal and interest ranging from $367 to $2,619 through February 2009. At March 31, 2005 and December 31, 2004, the aggregate amount outstanding was $231,825 and $256,120, respectively.

The Company’s credit facilities contain covenants, which among other matters, (i) limit the Company’s ability to incur indebtedness, merge, consolidate and sell assets; (ii) require the Company to satisfy certain ratios related to tangible net worth, debt to cash flows and interest coverage; and (iii) limit the Company from making any acquisition which requires in any fiscal year $1.0 million cash or $2.0 million of cash and non-cash consideration.

D.S. Berenson, a Director of the Company, is a partner in a law firm which the Company has retained to provide legal services in a variety of areas, including consumer financing. The Company made payments to the law firm during the three months ended March 31, 2005 and 2004, of approximately $37,000 and $41,000, respectively.

The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the consolidated financial position or results of operations of the Company.

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

The Company conducts a portion of its home improvement business-direct consumer marketing under the trademarks and service marks “Century 21^™ Cabinet Refacing” and “Century 21^™ Home Improvements” under license agreements with TM Acquisition Corp. (“TM”) and HFS Licensing Inc. (“HFS”) pursuant to a master license agreement between Century 21 Real Estate Corporation and each of TM and HFS (collectively, Licensor). License fees were approximately $135,000 and $191,000 for the three months ended March 31, 2005 and 2004, respectively, and are included in “Sales, marketing and license fees” on the accompanying consolidated statements of operations.

In September 2001, the Company entered into a Retailer Agreement with Renewal by Andersen (“RbA”) to be the exclusive retailer of RbA brand window and patio door products in the Los Angeles market under the trade name “Renewal by Andersen of Southern California.” In November 2004, the Company and RbA agreed to terminate the Retailer Agreement effective December 31, 2004. At March 31, 2005, the Company had substantially completed the installation of pending orders. Additionally, for a period of two years from the completion date of an RbA product installation for a customer, the Company will perform (or have others perform) any service necessary to fulfill its installation warranty for its customers.

On May 24, 2004, the Board of Directors approved and adopted the 2004 Restricted Stock Plan. Pursuant to the Restricted Stock Plan, our employees and directors may be granted restricted stock awards under such terms as determined by our Compensation Committee. Our Compensation Committee is authorized to determine the vesting schedule, rights of repurchase, and other terms, conditions and restrictions on the common stock awarded under the Restricted Stock Plan. Such terms may include acceleration of vesting or termination of rights to repurchase shares upon events such as death or disability of a participant or termination of a participant’s employment or term of board service. A participant to whom an award is made will generally have all the rights of a stockholder with respect to such shares, including the right to vote and to receive dividends, except as set forth in the applicable award agreement. The Compensation Committee is authorized to grant awards up to a maximum of 500,000 shares of common stock. At March 31, 2005, 456,877 shares were available for issuance.

Non-employee directors are required to receive at least $5,000 of their annual retainer in the form of shares of our common stock under the Restricted Stock Plan. During the three months ended March 31, 2005, the Company issued 5,623 shares to non-employee directors as compensation and recorded approximately $35,000 of expense related to these shares. The shares were issued without restriction and were fully vested upon issuance. In addition, on March 28, 2005, 37,500 shares of restricted stock were issued to certain management and employees. These awards vest based upon the passage of time, generally over 3-4 years. The associated expense is being recognized over the vesting period.

The following table sets forth the computation of earnings per share:

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U.S. Home Systems, Inc.

Notes to Consolidated Financial Statements

Outstanding stock options to purchase 737,519 and 764,659 shares of the Company’s common stock for the three months ended March 31, 2005 and 2004, respectively, were not included in the calculations of earnings per share because their inclusion would have been anti-dilutive.

On May 10, 2005, the Company decided to cease manufacturing of wood decks at its Glen Mills, Pennsylvania, Westborough, Massachusetts and Bridgeport, Connecticut, facilities effective May 30, 2005. The Company will continue to operate deck sales and installation centers in these markets and will transition the Glen Mills and Westborough manufacturing facilities into distribution and warehouse centers. The Company will reassign some of its manufacturing personnel to manage and operate the warehouse facilities and others to supplement the installation workforce in these markets. The Company will also transfer certain personnel to its deck manufacturing facilities in Woodbridge, Virginia.

In connection with this plan, the Company expects to incur in the second quarter 2005 between $1.6 million and $1.8 million of exit costs, which include approximately $100,000 for employee severance costs, approximately $100,000 for costs as a result of the reduction of its installation vehicle fleet, an estimated $100,000 for equipment disposal expenses and between $1.3 million to $1.5 million for non-cash charges related to the impairment of certain assets utilized at the manufacturing facilities.

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The following should be read in conjunction with our unaudited financial statements for the three months ended March 31, 2005 included herein, and our audited financial statements for years ended December 31, 2004, 2003 and 2002, and the notes to these financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Except for the historical information contained herein, certain matters set forth in this report are forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and as expressed in such forward-looking statements.

Overview

We are engaged in two lines of business, the home improvement business and the consumer finance business. In our home improvement business, we manufacture or procure, design, sell and install custom quality, specialty home improvement products. These products are marketed under nationally recognized brands such as The Home Depot Kitchen and Bathroom Refacing, The Home Depot Installed Decks, Century 21 Home Improvements, Century 21 Cabinet Refacing, and under our own Facelifters brand. Our home improvement products are marketed through a variety of sources including television, direct mail, marriage mail, magazines, newspaper inserts, home shows, selected neighborhood canvassing and in-store displays. Our home improvement operations include two reporting segments, the interior products segment and the exterior products segment. In our interior products segment, our principal product lines include kitchen and bathroom cabinetry and cabinet refacing products and countertops. In our exterior products segment, our product line includes wood decks and related accessories.

We manufacture certain of our kitchen cabinet refacing products, bathroom cabinetry and custom countertops at our Charles City, Virginia facility. We operate 25 kitchen and bath sales and installation centers (three of which also provide replacement window products) in 16 states serving 20 major U.S. remodeling markets and maintain a marketing center in Boca Raton, Florida.

At March 31, 2005, we operated six wood deck sales and installation centers, four of which also serve as wood deck manufacturing centers. Effective May 30, 2005, we intend to discontinue manufacturing wood decks at our Glen Mills, Pennsylvania, Westborough, Massachusetts and Bridgeport, Connecticut facilities. We will continue to operate deck sales and installation centers in these markets and will transition the space currently dedicated to manufacturing into warehouse and distribution centers. We will continue to utilize our Woodbridge, Virginia manufacturing facility to serve our Washington, D.C., Maryland and Virginia customers. Additionally, our Woodbridge facility will manufacture decks and related accessories for our New Jersey and greater Philadelphia markets. We intend to service our deck customers in Connecticut, Massachusetts, Northern New Jersey and the greater Chicago markets by outsourcing the manufacturing of deck component parts to Universal Forest Products, Inc. and warehousing these materials in our facilities.

Our consumer finance business purchases retail installment obligations, or RIOs, from residential remodeling contractors throughout the United States, including RIOs originated by our own home improvement operations. As of March 31, 2005, we owned and serviced a RIO portfolio having a principal balance of approximately $41.2 million and our average RIO balance was approximately $6,293 with a weighted average remaining term of approximately 105 months. We do not purchase RIOs that have a principal balance of more than $50,000 or a term longer than 240 months. The availability of this financing program provides our home improvement operations with a consistent and reliable financing source and enables us to offer a broad range of credit products to our customers and other remodeling contractors.

Since October 2003, our home improvement operations have engaged in an aggressive expansion program in connection with our agreements with The Home Depot. We believe our relationship with The Home Depot is a significant factor to the achievement of our business strategy and long-term growth. Our current business strategy is to become a principal vendor of wood decks, and kitchen and bath refacing products to The Home Depot in designated markets. We intend for the remainder of 2005 to concentrate our efforts and to

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allocate our personnel and capital resources to continue the expansion of the roll out of wood decks, and kitchen and bath refacing products in designated The Home Depot stores.

Results of Operations

Results of operations for the three months ended March 31, 2005 as compared to the three months ended March 31, 2004.