U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 2 to

FORM 10-K/A

(Mark one)

þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2009

OR

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-23279

Homeland Security Capital Corporation

(Exact Name of Registrant as Specified in Charter)

				1005 North Glebe Road, Suite 550
Delaware		52-2050585		Arlington, Virginia 22201
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)		(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (703) 528-7073

Common Stock, par value $.001 per share
(Title of Class)

Securities Registered under Section 12(b) of the Exchange Act: Common Stock, $0.001 par value, OTCBB

Securities Registered under Section 12(g) of the Exchange 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 issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No þ

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 (the “Exchange Act”) during the past 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o
Non-accelerated filer o		Smaller reporting company þ
(Do not check if a smaller reporting company)

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on June 30, 2009 (the last business day of the registrant’s most recently completed fiscal year), was $2,505,383 based on the closing price of the registrant’s common stock on Over-the-Counter Electronic Bulletin Board of $0.125 per share.

There were 49,699,595 shares of common stock outstanding as of September 25, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

EXPLANATORY NOTE

This Amendment No. 2 on Form 10-K/A (this “Amendment”) to the Annual Report on Form 10-K of Homeland Security Capital Corporation (“we, “us,” “our” or the “Company”) for the fiscal year ended June 30, 2009, originally filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2009, and as amended on March 31, 2011 by Amendment No. 1 to the Annual Report on Form 10-K/A (as amended, the “Original Filing”) is being filed for the purpose of responding to certain comments made by the SEC by letter dated March 17, 2011 (the “Comment Letter”).

In response to the Comment Letter, the Company is refiling all of its financial statements and notes thereto that are required by Item 8 (“Financial Statements and Supplementary Data”) in addition to the amended Report of Independent Registered Public Accounting Firm that the SEC had requested the Company to file by way of its first letter to the Company dated February 15, 2011. No changes have been made to the financial statements or the amended Report of Independent Registered Public Accounting Firm. Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, the Company is also including with this Amendment certain certifications dated as of the date hereof.

Except as described above, the Original Filing has not been amended, updated or otherwise modified. The Original Filing, as amended by this Amendment, continues to speak as of the date of the Original Filing and does not reflect events occurring after the filing of the Original Filing or update or otherwise modify any related or other disclosures, including forward-looking statements. Accordingly, this Amendment should be read in conjunction with our other filings made with the SEC subsequent to the filing of the Original Filing.

Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

		Page
Report of Coulter & Justus, P.C.			F-2
Report of HJ & Associates, LLC			F-3
Consolidated Balance Sheets as of June 30, 2009 and 2008 and December 31, 2007			F-4
Consolidated Statements of Operations for the year ended June 30, 2009, six months ended June 30, 2008, six months ended June 30, 2007 (unaudited) and the year ended December 31, 2007			F-5
Consolidated Statements of Cash Flows for the year ended June 30, 2009, six months ended June 30, 2008, six months ended June 30, 2007 (unaudited) and the year ended December 31, 2007			F-6
Consolidated Statements of Stockholders’ Equity for the years ended June 30, 2009 and 2008 and December 31, 2007			F-7
Notes to Consolidated Financial Statements			F-8

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Homeland Security Capital Corporation

We have audited the accompanying consolidated balance sheets of Homeland Security Capital Corporation and Subsidiaries as of June 30, 2009 and 2008, and the related consolidated statement of operations, stockholders’ (deficit) equity and cash flows for the year ended June 30, 2009 and the six months ended June 30, 2008. Homeland Security Capital Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Homeland Security Capital Corporation as of June 30, 2009 and 2008 and the results of its operations and its cash flows for the year ended June 30, 2009 and the six months ended June 30, 2008, in conformity with accounting principles generally accepted in the United States of America.

Knoxville, Tennessee
September 25, 2009

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Homeland Security Capital Corporation and Subsidiaries
Arlington, Virginia

We have audited the accompanying consolidated balance sheet of Homeland Security Capital Corporation and Subsidiaries as of December 31, 2007 and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for the year ended December 31, 2007. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Homeland Security Capital Corporation and Subsidiaries as of December 31, 2007 and the results of their operations and their cash flows for the year ended December 31, 2007 in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assertion about the effectiveness of Homeland Security Capital Corporation and Subsidiaries’ internal control over financial reporting as of December 31, 2007 and, accordingly, we do not express an opinion thereon.

/s/ HJ & Associates, LLC
HJ & Associates, LLC
Salt Lake City, Utah
March 26, 2008

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets

		June 30,				June 30,				December 31,
Assets		2009				2008				2007
Cash		$	2,356,534			$	3,182,357			$	57,521
Accounts receivable — net			13,425,804				11,977,737				3,993,723
Cost in excess of billings on uncompleted contracts			3,937,086				5,659,217				538,540
Other current assets			613,348				258,958				101,611
Total current assets			20,332,772				21,078,269				4,691,395
Fixed assets — net			4,398,833				5,493,396				269,255
Deferred financing costs — net			386,210				841,079				733,626
Notes receivable — related party			412,127				393,360				414,099
Notes payable — other			—				90,400				90,400
Securities available for sale			193,945				2,057,197				3,248,571
Other non-current assets			319,516				178,670				150,000
Intangible assets — net			391,372				497,622				—
Goodwill			6,403,982				4,266,702				—
Total assets		$	32,838,757			$	34,896,695			$	9,597,346
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities
Accounts payable		$	10,003,336			$	6,202,137			$	2,639,721
Derivative liability			—				—				7,263,204
Current portion of related party debt			—				—				6,252,887
Current portion of long term debt			1,247,016				647,576				72,319
Notes payable — related party			50,110				1,526,137				—
Accrued interest and other liabilities			3,257,903				3,201,607				656,837
Billings in excess of costs on uncompleted contracts			1,022,125				824,402				144,885
Deferred revenue			59,636				43,164				—
Total current liabilities			15,640,126				12,445,023				17,029,853
Senior notes payable — related party			13,904,870				13,856,796				—
Interest payable — related party			2,210,131				493,060				—
Secured notes payable — related party			250,000				—				—
Long term debt, less current maturities			1,421,272				4,463,844				134,688
Dividends payable			1,869,107				400,833				—
Total liabilities			35,295,506				31,659,556				17,164,541
Warrants Payable — Series H			169,768				169,768				—
Stockholders’ (Deficit) Equity
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 1,918,080, 1,918,080 and 1,358,080 shares issued and outstanding, respectively			14,261,207				12,346,481				135,808
Common stock, $0.001 par value, 2,000,000,000 shares authorized, 53,270,160, 48,846,244 and 48,764,677 shares issued and 49,699,729, 48,846,244 and 48,764,677 shares outstanding, respectively			53,270				48,846				48,765
Additional paid-in capital			54,131,548				51,385,199				47,799,790
Additional paid-in capital — warrants			272,529				148,652				—
Treasury stock - 3,570,431 shares at cost			(250,000	)			—				—
Accumulated deficit			(70,953,480	)			(59,339,836	)			(55,219,082	)
Accumulated comprehensive loss			(141,591	)			(1,521,971	)			(332,476	)
Total stockholders’ (deficit) equity			(2,626,517	)			3,067,371				(7,567,195	)
Total liabilities and stockholders’ (deficit) equity		$	32,838,757			$	34,896,695			$	9,597,346

The accompanying notes are an integral part of these consolidated financial statements.

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations

										Six Months
						Six Months				Ended
		Year Ended				Ended				June 30,				Year Ended
		June 30,				June 30,				2007				December 31,
		2009				2008				(Unaudited)				2007
Net contract revenue		$	79,489,509			$	23,154,250			$	6,285,087			$	12,628,183
Contract costs			67,806,658				19,166,303				4,856,212				9,592,926
Gross profit on contract revenue			11,682,851				3,987,947				1,428,875				3,035,257
Operating expenses
Marketing			308,499				89,274				16,648				28,499
Personnel			8,881,940				3,219,413				1,430,164				3,037,205
Insurance and facility costs			1,027,224				448,604				215,099				352,796
Travel and transportation			502,888				285,110				136,574				352,994
Other operating costs			939,776				145,824				70,040				114,160
Depreciation and amortization			1,285,756				192,068				36,699				71,480
Amortization of intangible assets			106,250				45,866				—				—
Professional services			711,776				234,820				419,788				698,616
Administrative costs			1,253,394				825,659				45,835				263,403
Total operating expenses			15,017,503				5,486,638				2,370,847				4,919,153
Operating loss			(3,334,652	)			(1,498,691	)			(941,972	)			(1,883,896	)
Other (expense) income
Interest expense			(2,011,991	)			(882,358	)			(323,611	)			(954,846	)
Amortization of debt discounts and offering costs			(552,943	)			(805,214	)			(1,192,766	)			(2,799,123	)
Currency loss			(405,821	)			—				—				—
Adjustment of fair value of derivative liability			—				(513,516	)			(155,710	)			1,000,193
Impairment loss on securities available for sale			(3,317,837	)			—				—				—
Gain on extinguishment of debt			—				3,377,997				—				—
Other income			92,597				62,408				58,668				51,673
Total other (expense) income			(6,195,995	)			1,239,317				(1,613,419	)			(2,702,103	)
Loss from continuing operations			(9,530,647	)			(259,374	)			(2,555,391	)			(4,585,999	)
(Loss) income from discontinued operations
Loss from discontinued operations			—				—				(1,959,218	)			(2,023,197	)
Gain from sale of operating segment			—				—				—				3,657,930
(Loss) gain from discontinued operations			—				—				(1,959,218	)			1,634,733
Net loss			(9,530,647	)			(259,374	)			(4,514,609	)			(2,951,266	)
Less preferred dividends and other beneficial conversion features associated with preferred stock issuance			(2,082,998	)			(3,934,993	)			—				—
Net loss attributable to common stockholders		$	(11,613,645	)		$	(4,194,367	)		$	(4,514,609	)		$	(2,951,266	)
(Loss) income per common share — basic and diluted
Loss from continuing operations		$	(0.24	)		$	(0.09	)		$	(0.06	)		$	(0.11	)
Loss from discontinued operations			—				—				(0.05	)			0.04
Basic and diluted EPS		$	(0.24	)		$	(0.09	)		$	(0.11	)		$	(0.07	)
Weighted average shares outstanding —
Basic and diluted			47,664,614				48,819,354				41,755,250				43,043,114

The accompanying notes are an integral part of these consolidated financial statements.

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows

										Six Months
						Six Months				Ended
		Year Ended				Ended				June 30,				Year Ended
		June 30,				June 30,				2007				December 31,
		2009				2008				(Unaudited)				2007
Cash flows from operating activities:
Net loss		$	(9,530,647	)		$	(259,374	)		$	(4,514,609	)		$	(2,951,266	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain on sale of operating segment			—				—				—				(3,657,930	)
Gain on extinguishment of debt			—				(3,377,997	)			—				—
Settlement of debt			—				—				(51,261	)			(6,024	)
Share-based compensation expense			2,150,773				121,764				181,151				352,056
Depreciation			1,842,723				620,279				36,699				71,480
Amortization of intangibles			106,250				45,866				—				—
Disposal of fixed assets			5,843				—				—				—
Change in allowance for bad debts			—				215,998				—				(57,407	)
Impairment loss of securities available for sale			3,317,837				—				—				—
Write off of note receivable — related party			90,400				—				—				—
Equity valuation in subsidiaries			—				—				582,470				582,470
Amortization of debt discount			48,074				570,021				1,003,277				2,382,601
Amortization of debt offering costs			504,869				235,191				97,004				416,522
Valuation losses for changes in derivative liability			—				513,516				155,710				(1,000,193	)
Changes in operating assets and liabilities:
Accounts receivable			(1,448,066	)			3,631,614				(1,379,273	)			(120,888	)
Net assets of discontinued operations			—				—				745,271				476,741
Costs in excess of billings on uncompleted contracts			1,722,131				(743,841	)			(87,241	)			(272,568	)
Other assets			(514,004	)			97,924				(12,885	)			(137,430	)
Accounts payable			3,801,201				136,758				589,244				352,269
Billings in excess of costs on uncompleted contracts			197,723				(696,874	)			(94,525	)			(356,196	)
Accrued interest and other liabilities			1,855,587				798,624				98,284				638,893
Deferred revenue			16,472				43,164				—				—
Net cash provided by (used in) operating activities			4,167,166				1,952,633				(2,650,684	)			(3,286,870	)
Cash flows from investing activities:
Purchase of fixed assets			(799,144	)			(571,340	)			(82,574	)			(97,163	)
Proceeds from sale of assets			45,141				—				—				—
Issuance of notes receivable from related parties			—				—				(500,000	)			(504,499	)
Collection of notes receivable from related parties			—				808,820				—				—
Investment in equity of subsidiaries			(113,403	)			(9,539,773	)			—				—
Investment activity from discontinued operations			—				—				55,434				743,142
Net cash (used in) provided by investing activities			(867,406	)			(9,302,293	)			(527,140	)			141,480
Cash flows from financing activities:
Proceeds from convertible debentures — related party			—				—				2,750,000				2,750,000
Costs of convertible debentures — related party			—				—				(190,000	)			(190,000	)
Proceeds from preferred stock — related party			—				6,190,000				—				—
Proceeds from senior notes — related party			—				6,310,000				—				—
Debt offering costs			(50,000	)			(982,773	)			—				—
Proceeds from notes payable			58,136				2,771,622				480,128				514,277
Net (payments) borrowings on line of credit			(1,853,935	)			2,365,935				—				—
Repayments of term debt			(647,333	)			(6,182,166	)			—				(474,402	)
Proceeds from notes payable — related parties			50,000				—				—				—
Repayments of notes payable to related parties			(1,608,247	)			—				—				—
Financing activity from discontinued operations			—				—				62,974				(611,147	)
Net cash (used in) provided by financing activities			(4,051,379	)			10,472,618				3,103,102				1,988,728
Effect of exchange rate changes on cash and cash equivalents			(74,204	)			1,878				—				—
Net (decrease) increase in cash			(825,823	)			3,124,836				(74,722	)			(1,156,662	)
Cash, beginning of period			3,182,357				57,521				776,139				1,214,183
Cash, end of period		$	2,356,534			$	3,182,357			$	701,417			$	57,521

The accompanying notes are an integral part of these consolidated financial statements.

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ (Deficit) Equity

																		Additional																Total
														Additional				Paid-In												Accumulated				Stockholders'
		Preferred				Common Stock								Paid-In				Capital -				Treasury				Accumulated				Comprehensive				(Deficit)
		Stock				Shares Issued				Amount				Capital				Warrants				Stock				Deficit				Loss				Equity
Balance, January 1, 2007		$	200,000				41,755,250			$	41,755			$	46,854,476			$	—			$	—			$	(52,267,816	)		$	—			$	(5,171,585	)
Conversion of debentures to common stock			—				4,120,787				4,121				531,955				—				—				—				—				536,076
Conversion of preferred stock - Series G			(64,192	)			2,888,640				2,889				61,303				—				—				—				—				—
Value of vested stock options			—				—				—				352,056				—				—				—				—				352,056
Reduction in value of securities available for sale			—				—				—				—				—				—				—				(332,476	)			(332,476	)
Net loss			—				—				—				—				—				—				(2,951,266	)			—				(2,951,266	)
Balance, December 31, 2007			135,808				48,764,677				48,765				47,799,790				—				—				(55,219,082	)			(332,476	)			(7,567,195	)
Conversion of debentures to common stock			—				81,567				81				3,105				—				—				—				—				3,186
Issuance of preferred stock
Series H			9,930,674				—				—				2,740,540				—				—				(2,740,540	)			—				9,930,674
Series I			2,280,000				—				—				720,000				—				—				(720,000	)			—				2,280,000
Series I warrants			—				—				—				—				148,652				—				—				—				148,652
Reduction in value of securities available for sale			—				—				—				—				—				—				—				(1,191,374	)			(1,191,374	)
Currency translation			—				—				—				—				—				—				—				1,879				1,879
Dividends on Series H			—				—				—				—				—				—				(400,840	)			—				(400,840	)
Value of vested stock options			—				—				—				121,764				—				—				—				—				121,764
Net loss			—				—				—				—				—				—				(259,374	)			—				(259,374	)
Balance, June 30, 2008			12,346,482				48,846,244				48,846				51,385,199				148,652				—				(59,339,836	)			(1,521,971	)			3,067,372
Amortization of Series H warrants			14,725																								(14,725	)			—				—
Purchase of treasury stock			—				—				—				—				—				(250,000	)			—				—				(250,000	)
Dividends on Series H and Series I			—				—				—				—				—				—				(1,468,272	)			—				(1,468,272	)
Value of vested stock options			—				—				—				1,929,577				—				—				—				—				1,929,577
Stock options exercised			—				4,423,916				4,424				216,772				—				—				—				—				221,196
Reduction in value of securities available for sale			—				—				—				—				—				—				—				(1,863,253	)			(1,863,253	)
Realization of impairment in value of assets held for sale			—				—				—				—				—				—				—				3,317,837				3,317,837
Value or Series I shares released from escrow			1,900,000				—				—				600,000				123,877				—				(600,000	)			—				2,023,877
Currency translation			—				—				—				—				—				—				—				(74,204	)			(74,204	)
Net loss			—				—				—				—				—				—				(9,530,647	)			—				(9,530,647	)
Balance, June 30, 2009		$	14,261,207				53,270,160			$	53,270			$	54,131,548			$	272,529			$	(250,000	)		$	(70,953,480	)		$	(141,591	)		$	(2,626,517	)

The accompanying notes are an integral part of these consolidated financial statements.

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements

1. Organization and Nature of Business

Homeland Security Capital Corporation (together with any subsidiaries shall be referred to as the “Company,” “we,” “us” and “our”) is a consolidator of companies providing specialized technology-based radiological, nuclear, environmental disaster relief and technology driven electronic security solutions to government and commercial customers within the fragmented homeland security industry. We are focused on creating long-term value by taking a controlling interest in and developing our subsidiary companies through superior operations and management. We intend to operate businesses that provide homeland security products and services solutions, growing organically and by acquisitions. The Company is targeting emerging companies that are generating revenues but face challenges in scaling their businesses to capitalize on homeland security opportunities.

The Company was incorporated in Delaware in August 1997 under the name “Celerity Systems, Inc.” In December 2005, the Company amended its Certificate of Incorporation to change its name to “Homeland Security Capital Corporation.”

The Company owns 93% of Nexus Technologies Group, Inc. (“Nexus”) and its wholly owned subsidiary Corporate Security Solutions, Inc. (“CSS”). Nexus provides integrated electronic security systems for the commercial and government security markets, through engineering, design and installation of open-ended technologically advanced applications.

The Company has a US-based joint venture with Polimaster, Inc., an Arlington, Virginia company involved in the field of nuclear and radiological detection and isotope identification. The joint venture operates as Polimatrix, Inc. (“PMX”) and is owned 51% by the Company. PMX uses technology licensed from Polimaster, Inc. in the development and sale of hand-held, networked detection devices intended to be sold to government and commercial customers.

As further described in Note 8, on March 13, 2008, in conjunction with its primary business plan, the Company, entered into an Agreement and Plan of Merger and Stock Purchase Agreement (the “Merger Agreement”) with Safety & Ecology Holdings Corporation (“Safety” or “SEC”) and certain persons named therein whereby the Company effectively acquired 100% of Safety, subject to future management equity incentive programs, and at June 30, 2009 owned 100% of the outstanding capital stock of Safety. Previously, Safety and the company agreed for the purpose of the transaction to transfer effective control of Safety to the Company as of March 1, 2008. From the period of March 1, 2008 until the purchase consideration was exchanged, the Company recorded $59,736 for interest imputed for the period. The accompanying financial statements include the results of Safety from March 1, 2008, the effective date of the acquisition, through June 30, 2009.

Safety, through its subsidiaries, is a provider of global environmental, hazardous and radiological infrastructure remediation and advanced construction services in the Untied States and the United Kingdom. Safety’s main core business areas and service offerings include: (1) remediation, decommissioning and demolition (D&D), environmental/remedial construction and construction project management, (2) environmental services, (3) environmental technologies; and (4) CBRNE incident response and prevention and consequence management as well as catastrophic natural disasters response.

The Company owns a majority of the outstanding capital stock of its subsidiaries, controls each of the subsidiary boards of directors and provides extensive management and advisory services to the subsidiaries. Accordingly, the Company believes it exercises sufficient control over the operations and financial results of each company and consolidates the results of operations, eliminating minority interests when such minority interests have a basis in the consolidated entity.

2. Summary of Significant Accounting Policies

Principles of Consolidation — The consolidated financial statements include the accounts of Homeland Security Capital Corporation and its controlled subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation. Minority interest of the outside equity holdings of the subsidiaries is recognized using the parent company theory.

Foreign Operations — SECL, a United Kingdom corporation, which is wholly owned by Safety had total assets of $622,804 and $4,304,287, total liabilities of $741,246 and $3,560,687 and a net loss of $708,744 and $247,637 as of and for the periods ending June 30, 2009 and 2008, respectively, which are included in the Company’s consolidated financial statements for those periods. The financial statements of SECL are translated using exchange rates in effect at year-end for assets and liabilities and average exchange rates during the year for results of operations. The related translation adjustments are reported as a separate component of shareholders’ equity.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments — The carrying amount of items included in working capital approximate fair value because of the short maturity of those instruments. The carrying value of the Company’s debt approximates fair value because it bears interest at rates that are similar to current borrowing rates for loans of comparable terms, maturity and credit risk that are available to the Company.

Revenue Recognition — Revenues are derived primarily from services performed under time and materials and fixed fee contracts and products sold. Revenues and costs derived from fixed price contracts are recognized using the percentage of completion (efforts expended) method. Revenue and costs derived from time and material contracts are recognized when revenue is earned and costs are incurred. Revenue and costs based on sale of products are derived when title to the products is transferred.

Contract costs include all direct labor, materials, and other non-labor costs and those indirect costs related to contract support, such as depreciation, fringe benefits, overhead labor, supplies, tools, repairs and equipment rental. General and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Because of inherent uncertainties in estimating costs, it is at least reasonably possible the estimates used will change within the near term.

The asset, “costs in excess of billings on uncompleted contracts” represents revenues recognized in excess of billed amounts and also includes approximately $1,300,000 and $1,200,000 at June 30, 2009 and 2008, respectively, in unbilled claims for costs incurred in excess of contracted amounts for which the Company believes they have a legal right to recover, however the ultimate realization is subject to change in the near term. The liability, “billings in excess of costs on uncompleted contracts”, represents billings in excess of revenues recognized.

Cash and Cash Equivalents - The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. Cash consists of cash on hand and deposits in banks. At June 30, 2009, the Company has approximately $100,000 at risk for funds held in non-collateralized accounts subject to the Federal Deposit Insurance Corporation (FDIC) Guarantee.

Recognition of Losses on Receivables - The Company generally does not require collateral from customers. Management periodically reviews accounts for collectability, including accounts determined to be delinquent based on contractual terms. An allowance for doubtful accounts is maintained at the level management deems necessary to reflect anticipated credit losses. When accounts are determined to be uncollectible, they are charged off against the allowance for bad debts. At June 30, 2009 and 2008 and at December 31, 2007 the Company had a consolidated bad debt allowance of $234,826, $345,998 and $130,000, respectively. Trade accounts receivable include approximately $2,400,000 and $2,800,000 of retainage receivables as of June 30, 2009 and 2008, respectively.

Property and Equipment — Fixed assets are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the underlying assets, generally five years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the improvements or the term of the lease. Routine repair and maintenance costs are expensed as incurred. Costs of major additions, replacements and improvements are capitalized. Gains and losses from disposals of assets are included in income. The Company periodically evaluates the carrying value by considering the future cash flows generated by the assets. Management believes that the carrying value reflected in the consolidated financial statements is fairly stated based on these criteria.

Debt Offering Costs — Debt offering costs are related to private placements and are being amortized on a straight line basis over the term of the related debt, most of which is in the form of senior secured notes. Should there be an early extinguishment of the debt prior to the stated maturity date, the remaining unamortized cost is expensed. Amortization expense amounted to $504,869, $235,191 and $416,522 for the year ended June 30, 2009, the six months ended June 30, 2008, and the year ending December 31, 2007, respectively. Amortization expense for the six months ended June 30, 2007 was $97,004 (unaudited).

The table below reflects the components of unamortized debt offering costs for the periods ended June 30, 2009, June 30, 2008 and December 31, 2007:

		2009				2008				2007
Beginning of period		$	841,079			$	733,626			$	867,662
New debt offering costs			50,000				982,773				282,486
Amortized with converted debt			—				(434	)			(24,286	)
Amortized with debt extinguishment			—				(640,129	)			—
Amortization expense			(504,869	)			(234,757	)			(392,236	)
Debt financing cost, net		$	386,210			$	841,079			$	733,626

Investments in Securities Available for Sale — The Company accounts for investments in marketable securities and other investments in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 addresses the accounting and reporting for investment in equity securities with readily determinable fair values and for all investments in debt securities. As of June 30, 2009 and 2008 and December 31, 2007, all marketable securities were classified as securities available for sale. Under this classification, securities are carried at fair value (period end market closing prices) with unrealized gains and losses excluded from earnings and reported in a separate component of shareholder’s equity until the gains or losses are realized or a provision for impairment is recognized.

The table below reflects the value of our securities available for sale as of June 30, 2009 and 2008 and December 31, 2007:

						Gross				Recognized
						Unrealized				Impairment				Estimated
		Cost				Loss				Loss				Fair Value
June 30, 2009		$	3,581,047			$	69,265			$	3,317,837			$	193,945
June 30, 2008		$	3,581,047			$	1,523,850				—			$	2,057,197
December 31, 2007		$	3,581,047			$	332,476				—			$	3,248,571

Investment Valuation — Investments in equity securities are recorded at fair value represented by closing prices as quoted in active markets. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, investments are valued using quoted prices for similar equity securities in active markets. If similar equity securities do not represent our equity investments, our Board of Directors has approved a multi-step valuation process which includes (i) investments are reviewed by our Board of Directors with involvement of an independent valuation firm, if necessary, engaged by our Board of Directors; (ii) the independent valuation firm conducts independent appraisals and makes their own independent assessment; (iii) the audit committee of our Board of Directors reviews and discusses the preliminary valuation from an independent appraisal; and (iv) the Board of Directors discusses the valuations and determines the fair value of each investment, in good faith, based on the input of our Directors, the independent valuation firm and the audit committee. Because of the inherent uncertainty of appraisals, valuation estimates determined by our Board of Directors may differ significantly the values that would have been used had a active market with quoted prices existed.

Income Taxes — Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates as of the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.

Stock Based Compensation — The Company accounts for stock based compensation under SFAS No. 123R “Shared Based Payment”. Share based payment awards that result in a cost will be measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and will be reflected as compensation cost in the historical financial statements.

Valuation of Options and Warrants — The valuation of options and warrants granted to unrelated parties for services are measured as of the earlier of: (1) the date at which a commitment for performance by the counterparty to earn the equity instrument is reached, or (2) the date the counterparty’s performance is complete. Pursuant to the requirements of EITF 96-18, the options and warrants will continue to be revalued in situations where they are granted prior to the completion of the performance.

Employee Benefit Plans - Safety has a 401(k) profit sharing plan covering substantially all its employees. Employees are allowed to make before-tax contributions to the plan, through salary reductions, up to the legal limits as described under the Internal Revenue Code. Any company match is discretionary. Safety contributed $516,078 and $108,093 to its plan during the year ended June 30, 2009 and the six month transitional period ended June 30, 2008, respectively.

SECL, a wholly owned subsidiary of Safety, has a group stakeholder pension scheme for the benefit of its employees. The plan covers substantially all SECL employees and provides for SECL to contribute at least three percent of the eligible employee’s compensation to the plan. SECL contributed $4,549 and $2,052 to their plan during the year ended June 30, 2009 and the six month transitional period June 30, 2008, respectively.

The holding company and Nexus both have salary deferred plans which allow each company to make a discretionary match to their plan. Neither the holding company nor Nexus made contributions to their plans for the year ending June 30, 2009 or the six month period ended June 30, 2008.

Financial Presentation — Consolidated Statements of Operations and Cash Flows for the six months ended June 30, 2007 are unaudited and have been included for comparative purposes only.

Recent Accounting Pronouncements

In April 2008, the FASB issued Staff Position No. FAS 142-3 which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under Statement 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), “Business Combinations” and other U.S. generally accepted accounting principles (GAAP). The Company believes that the amended factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FAS 142-3 will not have a significant effect on our consolidated results of operations, financial position or cash flows.

On May 9, 2008, the FASB issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. generally accepted accounting principles (“GAAP”) for nongovernmental entities. In June 2009, the FASB issued FASB Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” a replacement of FASB Statement No. 162. FASB Statement No. 168 will become the source of authoritative U.S. generally accepted accounting principles. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not believe the adoption of FASB Statement No. 168 will have a material impact on its consolidated financial statements.

In May 2009, the FASB issued FASB Statement No. 165, ‘Subsequent Events". The objective of FASB Statement No. 165 is to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available for issue. In accordance with this statement, an entity should apply the requirement to interim or annual financial periods ending after June 15, 2009. The Company has adopted this pronouncement effective with this Annual Report on Form 10K and its adoption has not had a material impact on these consolidated financial statements.

In June 2009, the FASB issued FASB Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”. FASB Statement No. 167 is intended to improve financial reporting by enterprises involved in variable interest entities. As a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, “Accounting for Transfers of Financial Assets” and concerns about the application of certain key provisions of Interpretation 46(R) not always providing timely and useful information about an enterprises involvement in a variable interest entity. This statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009. The Company is currently evaluating the impact of applying the various provisions of FASB Statement No. 167.

Impairment of Long-Lived Assets — The Company accounts for impairment of long-lived assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, which requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. At June 30, 2009, June 30, 2008 and December 31, 2007, the Company believes that there has been no impairment of its long-lived assets.

Advertising — The Company follows the policy of charging the costs of advertising to expense as incurred. Expenses incurred were $443,402, $89,274 and $28,499 for the year ended June 30, 2009, the six months ended June 30, 2008 and the year ended December 31, 2007, respectively. Expense incurred for the six months ended June 30, 2007 was $16,648 (unaudited).

Net Earnings (Loss) Per Share — The Company computes basic earnings (loss) per share by dividing net income (loss) attributable to common stockholders, by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income attributable to common stockholders, by diluted weighted average shares outstanding. Potentially dilutive shares include the assumed exercise of stock options and warrants, the assumed conversion of preferred stock and the assumed vesting of stock option grants (using the treasury stock method), if dilutive.

Reclassifications — Certain prior year’s balances have been reclassified to conform with the current year presentation.

3. Fixed Assets, net

Cost and related accumulated depreciation of the fixed assets at June 30, 2009, June 30, 2008 and December 31, 2007 are as follows:

		2009				2008				2007
Office equipment		$	382,293			$	367,942			$	42,347
Operating equipment			3,622,584				3,139,423				—
Computer equipment			1,951,472				1,781,828				30,731
Vehicles			908,124				886,360				338,470
Accumulative depreciation			(2,465,640	)			(682,157	)			(142,293	)
Total fixed assets, net		$	4,398,833			$	5,493,396			$	269,255

Depreciation expense was $1,842,726 (including $556,970 recorded in cost of contracts), $620,279 (including $428,211 recorded in cost of contracts), and $71,480 for the year ended June 30, 2009, the six months ended June 30, 2008 and the year ended December 31, 2007, respectively. Depreciation expense for the six months ended June 30, 2007 was $32,099 (unaudited).

4. Intangible Assets, net

The components of intangible assets derived from the acquisition of Safety consist of the following at June 30:

		2009				2008
Depreciable intangibles:
Non-compete agreements		$	92,665			$	92,665
Contracts			445,823				445,823
			538,488				538,488
Less accumulated amortization			(152,116	)			(45,866	)
			386,372				492,622
Non-depreciable intangibles:
Trademarks			5,000				5,000
Total intangible assets, net of amortization at June 30,		$	391,372			$	497,622

Amortization expense for intangibles was $106,250 and $45,866 for the year ended June 30, 2009 and the six months ended June 30, 2008, respectively. Amortization expense for intangibles for the next five years is expected to be approximately $45,000 for each year ending from June 30, 2010 through June 30, 2014.

5. Goodwill

Goodwill is calculated as the difference between the cost of acquisition and the fair value of the net assets acquired of any business that is acquired. The Company performs impairment tests of the intangible assets at least annually and impairment losses are recognized if the carrying value of the intangible asset exceeds its fair value. For the year ended June 30, 2009 and for the six months ended June 30, 2008, the Company did not incur any charges for impairment. For the year ended December 31, 2007,the Company recorded $483,942 as an impairment charge to goodwill.

6. Discontinued operations

On July 3, 2007, the Company entered into an agreement to sell the SHC business to Vuance Ltd. (“Vuance”). Pursuant to the terms of the agreement, dated July 3, 2007, by and among the Company, as majority shareholder of SHC, the other shareholders of SHC and SuperCom, Inc., a Delaware corporation and wholly owned subsidiary of Vuance (“SuperCom”), SuperCom agreed to acquire all of the issued and outstanding capital stock of SHC for a purchase price of $5.1 million, payable in Vuance ordinary (common) shares. All required conditions were met and the sale was closed on August 29, 2007.

On August 29, 2007, 692,660 ordinary (common) shares of Vuance were issued to the Company at a price of $5.17 per share. Vuance also repaid all obligations of SHC to the Company under a certain note in the amount of approximately $400,000. The Company agreed to certain lock-up periods during which it will not sell or otherwise dispose of the Vuance ordinary (common) shares.

Management has recognized the SHC activity as discontinued operations for the year ended December 31, 2007. The following table reflects selected elements of SHC’s results for the six months ended June 30, 2007 and the year ended December 31, 2007:

		June 30,
		2007				December 31,
		(unaudited)				2007
Revenue		$	2,163,570			$	3,029,306
Gross Margin			874,119				1,279,261
Operating expenses (includes $483,942 of goodwill impairment write-down for the year ended December 31, 2007)			2,840,340				3,300,480
Other Expense			7,003				(1,978	)
(Loss) gain from Discontinued Operations			(1,959,218	)			(2,023,197	)
Gain on Sale of Operating Segment			—				3,657,930
Income from Discontinued Operations			(1,959,218	)			1,634,733
Total Assets			1,613,408				1,861,572
Total Liabilities			1,596,312				1,938,456

7. Minority Interest in Secure America Acquisition Corporation

The Company has indirectly acquired a minority equity interest in Secure America Acquisition Corporation (“SAAC”). SAAC is a blank check company formed for the purpose of acquiring one or more operating businesses in the homeland security industry. On June 1, 2007, the Company loaned $500,000 to Secure America Acquisition Holdings, LLC (“SAAH”), the principal initial stockholder of SAAC, pursuant to a promissory note (the “SAAH Note”). The SAAH Note has a maturity date of May 31, 2011 and bears interest at a rate of 5% per annum. All principal and accrued interest on the SAAH Note is due upon maturity. The obligations of SAAH under the SAAH Note have been guaranteed by our Chief Executive Officer and Chairman. As consideration for the issuance of the SAAH Note, the Company received 250,000 membership interests in SAAH. On October 22, 2007, the Company purchased 75,000 Class C membership interests in SAAH, through an investment in SAAH in the amount of $150,000. Through its membership interests in SAAH, the Company is deemed to beneficially own 2.6% of the outstanding capital stock of SAAC at June 30, 2009 and is entitled to receive 325,000 shares of common stock in SAAC if and when SAAC completes an acquisition or business combination which it has 24 months to consummate. At June 30, 2009 the balance of the promissory note due to the Company was $412,127, including accrued interest of $42,127.

In addition to the Company’s ownership in SAAH, our Chief Executive Officer and Chairman beneficially owns 1,178,733 membership interests in SAAH or approximately 56.8%, our Chief Financial Officer owns 82,500 membership interests in SAAH or approximately 4.0%, and two of our Directors, own 100,000 membership interests in SAAH or approximately 4.8% and 25,000 membership interests in SAAH or approximately 1.2%, respectively.

On June 25, 2007, SAAC filed a registration statement with the Securities Exchange Commission relating to an initial public offering (“IPO”) of 10,000,000 units, each unit comprised of one common share and one warrant to purchase a common share priced at $8.00/unit.

The Company has also entered into an agreement with SAAC to receive a monthly fee of up to $7,500 for providing SAAC with office space and certain office and administrative services. The agreement became effective on October 29, 2007, the effective date of the SAAC registration statement as filed with the Securities Exchange Commission. Certain employees of the Company will perform required services pursuant to the SAAC Agreement.

Notwithstanding the completion of the SAAC IPO, the Company does not value at market prices the shares of common stock in SAAC it is entitled to receive as a result of its membership interests in SAAH. Management believes some uncertainty to the successful completion of an acquisition or business combination exists and therefore values its loan to SAAH at the principal amount plus accrued interest and its investment in SAAH at the original investment amount. The Company measures impairment of these amounts on a monthly basis and adjusts the amounts accordingly. At June 30, 2009, the Company recorded its investment in SAAH membership units at $150,000, which is classified with other non-current assets on the balance sheet.

8. Investment in Safety & Ecology Holdings Corporation

On March 13, 2008, the Company entered into a merger agreement with Safety. Previously, Safety and the Company agreed, for the purposes of the transaction, to transfer effective control of SEC to the Company as of March 1, 2008. From the period of March 1, 2008 until the purchase consideration was exchanged, the Company recorded $59,736 for interest inputed during this period. The accompanying financial statements include the results of Safety from March 1, 2008, the effective date of acquisition, through June 30, 2008 and for the year ended June 30, 2009.

Pursuant to the merger agreement, the Company purchased 10,550,000 shares of Safety Series A Convertible Preferred Stock (the “Safety Preferred Shares”) and 20 shares of Safety common stock for an aggregate purchase price of $10,550,020. Each Safety Preferred Share will accrue dividends cumulatively at the rate of eight percent (8%) per annum and is convertible into one (1) share of the Safety common stock at any time by the Company, subject to adjustment for stock dividends, stock splits, and similar events. Each Safety Preferred Share will be entitled to one vote as if converted into Safety common stock. The holders of the outstanding Safety Preferred Shares vote as a class on certain matters and will have the right to designate a majority of the board of directors of Safety. Each Safety Preferred Share will have a liquidation preference of $1.00 per share plus any accrued and unpaid dividends.

In exchange for all of the issued and outstanding Safety common stock, the shareholders of Safety (the “Shareholders”) initially received: (1) an aggregate of 550,000 shares of Company’s Series I Convertible Preferred Stock (the “Series I Stock”) with an initial stated and liquidation value of $3,300,000, (2) warrants (the “Warrants”), to purchase up to 22,000,000 shares of the Company’s Common Stock, (3) unsecured promissory notes (the “Notes”) of Safety in an aggregate principal amount of $2,000,000, and (4) $3,900,000 in cash, (collectively, the “Merger Consideration”). Pursuant to the merger agreement, the Merger Consideration received by the Shareholders may be: (1) reduced based on Safety’s stockholders’ equity (as determined at closing) and (2) reduced or increased based on Safety’s working capital (as determined at closing). As of the closing of the merger there were no adjustments to the Merger Consideration received by the Shareholders. In addition, in the future, the Shareholders may receive up to an aggregate of $6,000,000 of the Company’s Common Stock if certain performance criteria are achieved by Safety in 2008 and 2009. The Series I Stock and Warrants were to be held in escrow for twelve months to offset any indemnification claims or purchase price adjustments pursuant to the merger agreement. As of June 30, 2009, all previously escrowed shares and warrants have been released to the former Shareholders of Safety.

Also pursuant to the merger agreement, (1) $6,650,000 in existing indebtedness of Safety was repaid, (2) $2,000,000 in Safety preferred stock was redeemed, and (3) approximately $2,400,000 of existing indebtedness of Safety was permitted to remain outstanding.

The Company amended its Certificate of Incorporation to designate 550,000 shares of its authorized preferred stock as Series I Convertible Preferred Stock. Each share of Series I Stock accrues a dividend of 12% per annum. The Series I Stock ranks pari passu with the Company’s Series H Convertible Preferred Stock (see Note 9 to the Consolidated Financial Statements) and is senior to all other series of the Company’s preferred stock and the Company’s Common Stock. The holder of the Series I Stock may convert the accrued dividends into Common Stock at a conversion price of $0.06 per share or receive a cash payment upon liquidation or sale of the Company. Each share of Series I Stock is convertible into 200 shares of Common Stock (effectively a conversion price of $0.038 per share at the date issued) and has a liquidation preference of $6.00 per share.

The Warrants have an exercise price equal to $0.03, which may be adjusted under the terms of the Warrants, and have a term of five years from the date of issuance of March 14, 2008. The Notes accrue interest at a rate of 6% per annum and are subordinate to the existing indebtedness of Safety. Immediately following the Merger, the Company controlled 100% of the voting power of Safety.

The following is an unaudited condensed statement of operations for the six months ended June 30, 2008 showing the combined results of operations of the Company (including all other consolidated subsidiaries) and Safety as though the Company had acquired the Safety shares on January 1, 2008:

						Safety & Ecology
		Homeland				Holdings
		Security Capital				Corporation
		Corporation				(Safety)
		(Consolidated)				January 1, 2008 -
		June 30, 2008				February 29, 2008				Pro Forma
Net contract revenue		$	23,154,250			$	9,583,863			$	32,738,113
Gross margin on contracts			3,987,947				2,140,919				6,128,866
Operating income (loss)			(1,498,691	)			534,741				(963,950	)
Net loss		$	(259,374	)		$	(123,913	)		$	(383,287	)
Loss applicable to common shareholders		$	(4,194,367	)		$	(123,913	)		$	(4,318,280	)
Basic and diluted earnings (loss) per share		$	(0.09	)		$	0.00			$	(0.09	)

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, rounded to the nearest thousand, as recorded by the Company after finalizing its valuation analysis.

		Estimated Fair
		Value
Current assets		$	18,724,000
Property, plant and equipment			5,273,000
Other assets			29,000
Goodwill and other intangible assets			6,835,000
Total assets acquired		$	30,861,000
Current liabilities		$	13,501,000
Long term debt			1,885,000
Other liabilities			1,203,000
Total liabilities assumed		$	16,589,000
Net assets acquired		$	14,272,000

At June 30, 2009 goodwill and other intangible assets includes: $93,000 was assigned to non-compete agreements (1 year useful life), $446,000 was assigned to contracts (10 year useful life), $5,000 was assigned to trademarks (indefinite life) and $6,400,000 was assigned to goodwill.

9. Securities Purchase Agreement with YA Global Investments, L.P.

The Company’s Senior Secured Notes Payable and Convertible Debentures consist of the following:

		June 30,				June 30,				December 31,
		2009				2008				2007
Senior Secured Notes Payable (the New Notes)		$	6,310,000			$	6,310,000			$	—
Senior Secured Notes Payable (the Exchange Notes)			6,750,000				6,750,000				—
Convertible Debentures (net of discounts) Extinguished in 2008			—				—				10,563,186
Debenture interest conversion note			878,923				878,923				—
Less debt discount			(34,053	)			(82,127	)			(4,310,299	)
Senior notes payable			13,904,870				13,856,796				6,252,887
Less current portion			—				—				(6,252,887	)
Long term portion		$	13,904,870			$	13,856,796			$	—

On March 14, 2008, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with YA Global Investments, L.P. (“YA”), which provided for the following transactions:

Pursuant to the Purchase Agreement, the Company has authorized the designation of its Series H Convertible Preferred Stock, par value $.01 per share (the “Series H Stock”), consisting of 10,000 shares of Series H Stock, which are convertible into shares of the Company’s Common Stock, par value $0.001 in accordance with the terms of the Certificate of Designation of the Series H Stock of the Company (the “Certificate of Designation”).

Pursuant to the Purchase Agreement, the Company sold to YA (1) $6,310,000 of senior secured notes (the “New Notes”) for a purchase price of $6,310,000, (2) 6,190 Shares of Series H Stock (the “New Preferred Shares”) for a purchase price of $6,190,000, and (3) a warrant (the “YA Warrant”) to be initially exercisable to acquire 83,333,333 shares of Company’s common stock (the “Warrant Shares”).

The Company used $10,550,020 of the proceeds from the Purchase Agreement to acquire Safety. The remaining cash proceeds and other consideration were used to restructure the debentures, related discounts and derivative liabilities as follows:

(1) A Securities Purchase Agreement, dated as of February 6, 2006 (the “February 2006 Purchase Agreement”), pursuant to which, among other things, YA purchased from the Company an aggregate original principal amount of $4,000,000 of senior secured convertible debentures (the “February 2006 Debentures”), which had an outstanding principal balance at March 17, 2008 of $3,810,000, plus accrued and unpaid interest thereon.

(2) A Securities Purchase Agreement, dated as of August 21, 2006 (the “August 2006 Purchase Agreement”), pursuant to which, among other things, YA purchased from the Company an aggregate original principal amount of $4,000,000 of senior secured convertible debentures (the “August 2007 Debentures”), which had an outstanding principal balance at March 17, 2008 of $4,000,000, plus accrued and unpaid interest thereon.

(3) a Securities Purchase Agreement, dated as of June 1, 2007 (the “June 2007 Purchase Agreement”), pursuant to which, among other things, YA purchased from the Company an aggregate original principal amount of $2,750,000 of senior secured convertible debentures (the “June 2007 Debentures”), which had an outstanding principal balance at March 17, 2008 of $2,750,000, plus accrued and unpaid interest thereon.

In addition, pursuant to the Purchase Agreement, YA exchanged (1) its February 2006 Debentures (but not accrued and unpaid interest thereon) in the amount of $3,810,000 for 3,810 Shares of Series H Stock (the “Exchanged Preferred Shares” and collectively along with the New Preferred Shares, the “Preferred Shares”); and (2) its August 2006 Debentures and its June 2007 Debentures (but not accrued and unpaid interest thereon) for an aggregate original principal amount of $6,750,000 of senior secured notes (the “Exchanged Notes” and collectively along with the New Notes, the “Notes”).

Each share of Series H Stock accrues a dividend of 12% per annum. The holder of the shares of Series H Stock (a “Series H Holder”) may convert the accrued dividends into Company common stock at a conversion price of $0.06 per share or receive a cash payment on liquidation or sale of the company. The Series H Stock will rank pari passu with the Company’s Series I Stock and senior to all other series of the Company’s preferred stock and the Company’s Common Stock. Each share of Series H Stock is convertible into 33,334 shares of Common Stock (effectively a conversion price of $0.03 per share) and has a liquidation preference of $1,000 per share. Each share of Series H Stock may be voted on an as-converted basis with the Company’s Common Stock but in no instance will the voting power of a Series H Holder with respect to its Series H Stock (when aggregated with all other Common Stock beneficially owned by the Series H Holder) be permitted to exceed 9.99% of the shares permitted to vote at a meeting of the Company’s stockholders. In addition, Series H Holders are restricted from conversions of the Series H Stock that will result in it beneficially owning more than 9.99% of the Common Stock following such conversion, which is subject to waiver by the Series H Holder.

The Notes accrue interest at a rate of 13% per annum, to be increased by an additional 2% per annum if a certain contract is not awarded to Safety, and had an original maturity date of March 13, 2010. In March 2008, the Company and YA agreed to extend the maturity date of the Notes to April 1, 2011, except for $2,500,000, which remained due March 13, 2010. On September 18, 2009, the Company and YA agreed to extend the maturity date of the $2,500,000 to October 1, 2010. The obligations of the Company pursuant to the Purchase Agreement and the Notes have been guaranteed by Celerity Systems, Inc. (“Celerity”), Nexus and Homeland Security Advisory Services, Inc. (“HSAS”) pursuant to a Guaranty. The Notes are secured by the assets of the Company, Celerity and HSAS.

In connection with the Purchase Agreement, the Company issued to YA warrants to initially purchase up to 83,333,333 shares of Common Stock (the “YA Warrant”). The YA Warrant has an exercise price equal to $0.03, which may be adjusted under the terms of the YA Warrant, and has a term of five years from the date of issuance on March 17, 2008. In addition, the holder of the YA Warrant is restricted from exercises of the YA Warrant that will result in it beneficially owning more than 9.99% of the outstanding Common Stock following such exercise. If the Company fails to file a registration statement, or if filed, fails to maintain the registration statements effectiveness covering the underlying shares pursuant to the YA Warrant, the Company will be required to settle the intrinsic value of the YA Warrant in cash. As a result of this feature in the Purchase Agreement the Company has recorded the value of the YA Warrant outside of permanent equity.

In connection with EITF 98-5 and EITF 00-27, the Company reduced the carrying value of the Series H Stock for the fair value of the YA Warrant in the amount of $169,768. The Series H Stock was further reduced by $2,740,540 for the beneficial conversion feature of the security. Since the Series H Stock was convertible and the YA Warrant exercisable at the time of issuance, the Series H Stock was increased to stated value through a charge to retained earnings.

The Company also entered into a Registration Rights Agreement with YA pursuant to which the Company is obligated, upon request of YA (or its successors and assigns), to file a registration statement covering the resale of shares of Common Stock issuable upon the conversion of the Series H Stock and exercise of the YA Warrant.

In connection with the transactions pursuant to the Purchase Agreement, an affiliate of YA will receive a monitoring fee of $800,000 in the aggregate for its monitoring and managing the YA investment in the Company payable ratably on June 30, 2008 and September 30, 2008. In addition, such affiliate received $50,000 for its structuring of the transaction and its due diligence costs. As of June 30, 2009 all these amounts have been paid.

The Company amended its Certificate of Incorporation to designate 10,000 shares of its authorized preferred stock as Series H Stock.

10. Income Taxes

The Company and certain of its subsidiaries file income tax returns in the US and in various state jurisdictions. With a few exceptions, the Company is no longer subject to US federal, state and local, or non-US income tax examinations by tax authorities for years before 2003.

The Internal Revenue Service (IRS) has not notified the Company of any scheduled examination of the Company’s US income tax returns for 2004 through 2009. As of June 30, 2009, the IRS has proposed no adjustments to the Company’s tax positions.

The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of this adoption, the Company recognized no increase in the liability for unrecognized tax benefits.

There are no amounts included in the balance at June 30, 2009 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

It is the Company’s policy to recognize any interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During the year ended June 30, 2009, the six months ended June 30, 2008, the year ended December 31, 2007 the Company recognized no interest or penalties.

The tax effects of temporary differences giving rise to the Company’s deferred tax assets and liabilities at June 30, 2009 and 2008 and December 31, 2007 are as follows:

		June 30,				June 30,				December 31,
		2009				2008				2007
Deferred tax assets:
Net operating loss, capital loss and research credit carryforwards		$	5,603,009			$	4,382,868			$	16,493,000
Related party accruals			846,259				188,793				256,200
Allowance for doubtful accounts			89,915				132,101				50,700
Vacation and workers compensation			109,850				146,914				—
Impairment loss on securities available for sale			1,270,400				—				—
Other temporary differences			21,388				48,281				—
Valuation allowance			(6,985,061	)			(3,978,608	)			(16,799,900	)
Total deferred tax assets		$	955,760			$	920,349			$	—
Deferred tax liabilities:
Depreciation and amortization expenses		$	(745,236	)		$	(688,800	)		$	—
Amortization of intangible assets			(147,945	)			(188,670	)			—
Other temporary differences			(62,579	)			(42,879	)			—
Total deferred tax liabilities			(955,760	)			(920,349	)			—
Net deferred tax assets		$	—			$	—			$	—

As a result of significant historical pretax losses, management cannot conclude that it is more likely than not that the deferred tax asset will be not realized. Accordingly, a full valuation allowance has been established against the total net deferred tax asset. The valuation allowance was increased by $3,006,453 to $6,985,061 in 2009. During the period ended June 30, 2008, the Company decreased its valuation allowance by $12,821,292 to $3,978,608 primarily due to loss limitations from a change in control of a subsidiary.

The Company’s income tax benefit differs from that obtained by using the federal statutory rate of 35% as a result of the following:

										Six months
						Six months				Ended
		Year ended				ended				June 30				Year ended
		June 30				June 30				2007				December 31
		2009				2008				(unaudited)				2007
Computed “expected” tax benefit		$	(3,335,726	)		$	(14,482	)		$	(1,760,698	)		$	(1,015,700	)
Increase in valuation reserve			3,006,453				724,558				846,969				238,548
Compensation from options			823,530				43,354				—				137,300

										Six months
						Six months				Ended
		Year ended				ended				June 30				Year ended
		June 30				June 30				2007				December 31
		2009				2008				(unaudited)				2007
Gain on debt conversion			—				(1,293,435	)			—				—
Valuation of derivative			—				505,805				659,880				539,139
Other			40,997				34,200				65,479				57,413
Loss from foreign subsidiary			248,061				—				—				—
State income tax benefit			(47,016	)							—				(135,800	)
Other, net			(736,299	)			—				188,370				179,100
Income tax (benefit)		$	—			$	—			$	—			$	—

At June 30, 2009, the Company had an available net operating loss and capital loss carryforward of $16,466,637. These deductions create net operating loss carryforwards which in certain circumstances could become limited due to a change in control of the subsidiary. These amounts are available to reduce the Company’s future taxable income and expire in the years 2014 through 2028 as follows:

Year of		Capital Loss				NOL				Total
Expiration		Carryover				Carryover				Carryover
2014		$	90,400			$	0			$	90,400
2021							5,438				5,438
2022							3,438,195				3,438,195
2023							14,695				14,695
2024							4,031,488				4,031,488
2025							1,055,115				1,055,115
2026							3,066,650				3,066,650
2027							2,934,007				2,934,007
2028							1,830,649				1,830,649
		$	90,400			$	16,376,237			$	16,466,637

11. Debentures

On February 6, 2006, the Company entered into a Securities Purchase Agreement with Yorkville Advisors, LP (“Yorkville”), which provided for the purchase by Yorkville of a Convertible Debenture (the “2006 A Debenture”) in the amount of $4,000,000, which debenture was convertible into Common Stock. The 2006 A Debenture had an interest rate of 5% per annum.

On August 21, 2006, the Company entered into a Securities Purchase Agreement with Yorkville, which provided for the purchase by Yorkville of a secured Convertible Debenture (the “2006 B Debenture”) in the amount of $4,000,000, which debenture is convertible into Common Stock. The 2006 B Debenture had an interest at rate of 5% per annum.

In connection with the Securities Purchase Agreement, the Company issued a warrant to Yorkville for 1,000,000 of the Common Stock. The warrant has an exercise price equal to $1.00, which may be adjusted under terms of the warrant, and has a term of five years from the date of issuance on August 21, 2006.

On June 1, 2007, the Company entered into a Securities Purchase Agreement with Yorkville Capital Partners, LP (“Yorkville”), which provided for the purchase by Yorkville of a secured convertible debenture (the “2007A Debenture”) in the amount of $2,750,000. The 2007A Debenture had an interest rate of at 12% per annum.

In connection with the Securities Purchase Agreement, the Company issued a warrant to Yorkville for 800,000 shares of the Common Stock (the “Warrant”). The Warrant has an exercise price equal to $0.15, which may be adjusted under the terms of the Warrant, and has a term of five years from the date of issuance on June 1, 2007.

Each of the aforementioned Debentures were accounted for in accordance with EITF-00-19 and SFAS 150, because there was no explicit limit on the number of shares that are to be delivered upon exercise of the conversion feature and the Company was not able to assert that it would have sufficient authorized and unissued shares to settle the conversion option. As a result, the conversion feature was accounted for as a derivative liability, with the change in fair value recorded in earnings each period. Additionally, the Company was not able to assert that it would have sufficient authorized and unissued shares to exchange for the warrant, if it was exercised. As a result, the warrant was accounted for as a liability, with the change in fair value recorded in earnings each period.

As discussed in Note 9, on March 14, 2008, the Company entered into a Purchase Agreement with YA, where YA acquired from the Company all of its convertible debentures. The transaction was accounted for as an extinguishment of debt resulting in a gain on the extinguishment of $3,377,977.

The table below reflects the Company’s debentures outstanding on March 14, 2008 and the corresponding gain on the extinguishment of the debentures:

		February 2006				August 2006				June 2007
		Debenture				Debenture				Debenture				August 2006				June 2007
		2006 A				2006 B				2007 A				Warrant				Warrant				Total
Face amount		$	4,000,000			$	4,000,000			$	2,750,000											$	10,750,000
Less: Cost of issuance			(520,000	)			(569,863	)			(282,491	)											(1,372,354	)
Net proceeds		$	3,480,000			$	3,430,137			$	2,467,509											$	9,377,646
Value of derivative liability at issue date		$	3,331,544			$	2,298,787			$	2,335,962			$	154,863			$	92,486			$	8,213,642
Gain (Loss) of value of derivative liability			(585,631	)			679,818				35,441				(142,833	)			(74,646	)			(87,851	)
Converted debt			(349,071	)			—				—				—				—				(349,071	)
Gain on sale of debt			2,396,842				2,978,605				2,371,403				12,030				17,840				7,776,720
Face amount		$	4,000,000			$	4,000,000			$	2,750,000											$	10,750,000
Less debentures converted			(190,000	)			—				—												(190,000	)
			(3,810,000	)			(4,000,000	)			(2,750,000	)											(10,560,000	)
Debt discount			3,331,544				2,298,787				2,335,962												7,966,293
Less amortization of discount			(2,342,237	)			(1,183,450	)			(618,598	)											(4,144,285	)
Converted debt			(63,413	)			—				—												(63,413	)
			(925,894	)			(1,115,337	)			(1,717,364	)											(3,758,595	)
Finance costs			520,000				569,863				282,486												1,372,349
Less amortization of costs			(339,320	)			(293,375	)			(74,806	)											(707,501	)
Converted debt			(24,720	)			—				—												(24,720	)
Loss of sale of debt			(155,960	)			(276,488	)			(207,680	)			—				—				(640,128	)
Net gain on sale of debt		$	1,314,988			$	1,586,780			$	446,359			$	12,030			$	17,840			$	3,377,997