EXHIBIT 10.3
 
SECURITY AGREEMENT
 
THIS SECURITY AGREEMENT (the “Agreement”), is entered into and made effective as
of June 1, 2007, by and between HOMELAND SECURITY CAPITAL CORPORATION, a
Delaware corporation with its principal place of business located at 4100 North
Fairfax Drive, Suite 1150, Arlington, Virginia 22203 (the “Company”), in favor
of the BUYER(S) (the “Secured Party”) listed on Schedule I attached to the
Securities Purchase Agreement (the “Securities Purchase Agreement”) dated the
date hereof between the Company and the Secured Party.
 
WHEREAS, the Company shall issue and sell to the Secured Party, as provided in
the Securities Purchase Agreement, and the Secured Party shall purchase, up to
Two Million Seven Hundred Fifty Thousand Dollars ($2,750,000) of secured
convertible debentures (the “Convertible Debentures”), which shall be
convertible into shares of the Company’s common stock, par value $0.001, in the
respective amounts set forth opposite each Buyer(s) name on Schedule I attached
to the Securities Purchase Agreement;
 
WHEREAS, to induce the Secured Party to enter into the transaction contemplated
by the Securities Purchase Agreement, the Convertible Debentures, the Investor
Registration Rights Agreement of even date herewith between the Company and the
Secured Party (the “Investor Registration Rights Agreement”), and the
Irrevocable Transfer Agent Instructions among the Company, the Secured Party,
the Company’s transfer agent, and David Gonzalez, Esq. (the “Transfer Agent
Instructions”) (collectively referred to as the “Transaction Documents”), the
Company hereby grants to the Secured Party a security interest in and to the
pledged property of the Company identified on Exhibit A hereto (collectively
referred to as the “Pledged Property”) to secure all of the Obligations (as
defined below).
 
NOW, THEREFORE, in consideration of the promises and the mutual covenants herein
contained, and for other good and valuable consideration, the adequacy and
receipt of which are hereby acknowledged, the parties hereto hereby agree as
follows:
 
ARTICLE 1.
 
DEFINITIONS AND INTERPRETATIONS
 
Section 1.1. Recitals. The above recitals are true and correct and are
incorporated herein, in their entirety, by this reference.
 
Section 1.2. Interpretations. Nothing herein expressed or implied is intended or
shall be construed to confer upon any person other than the Secured Party any
right, remedy or claim under or by reason hereof.
 
Section 1.3. Obligations Secured. The security interest created hereby in the
Pledged Property constitutes continuing collateral security for all of the
obligations of the Company now existing or hereinafter incurred to the Buyers,
whether oral or written and whether arising before, on or after the date hereof
including, without limitation following obligations (collectively, the
“Obligations”):
 

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(a) for so long as the Convertible Debentures are outstanding, the payment by
the Company, as and when due and payable (by scheduled maturity, acceleration,
demand or otherwise), of all amounts from time to time owing by it in respect of
the Securities Purchase Agreement, the Convertible Debentures and the other
Transaction Documents; and
 
(b) for so long as the Convertible Debentures are outstanding, the due
performance and observance by the Company of all of its other obligations from
time to time existing in respect of any of the Transaction Documents, including
without limitation, the Company’s obligations with respect to any conversion or
redemption rights of the Secured Party under the Convertible Debentures.
 
ARTICLE 2.
 
PLEDGED PROPERTY; EVENT OF DEFAULT
 
Section 2.1. Pledged Property.
 
(a) As collateral security for all of the Obligations, the Company hereby
pledges to the Secured Party, and creates in the Secured Party for its benefit,
a continuing security interest in and to all of the Pledged Property whether now
owned or hereafter acquired.
 
(b) Simultaneously with the execution and delivery of this Agreement, the
Company shall make, execute, acknowledge, file, record and deliver to the
Secured Party any documents reasonably requested by the Secured Party to perfect
its security interest in the Pledged Property. Simultaneously with the execution
and delivery of this Agreement, the Company shall make, execute, acknowledge and
deliver to the Secured Party such documents and instruments, including, without
limitation, financing statements, certificates, affidavits and forms as may, in
the Secured Party’s reasonable judgment, be necessary to effectuate, complete or
perfect, or to continue and preserve, the security interest of the Secured Party
in the Pledged Property, and the Secured Party shall hold such documents and
instruments as secured party, subject to the terms and conditions contained
herein.
 
Section 2.2. Event of Default. An “Event of Default” shall be deemed to have
occurred under this Agreement upon an Event of Default under and as defined in
the Convertible Debentures.
 
Section 2.3. Release of Pledged Property. The Secured Party agrees that, upon
effectiveness of a registration statement with the Securities and Exchange
Commission registering for distribution in a spin off transaction (a “Spin Off”)
of the common stock underlying any of the securities listed on Exhibit B hereto
(the “Spin Off Shares”), it will deliver the Spin Off Shares to the Company and
will terminate any security interest the Secured Party may have in such Spin Off
Shares pursuant to this Agreement or any other agreement between the parties;
provided, however, that the Company must receive the prior written consent of
the Secured Party to declare any dividend with respect to (and distribute out)
any Spin Off Shares that would be in excess of twenty-five percent (25%) of the
aggregate number of shares of common stock the Company owns of any such entity
being spun off.
 
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ARTICLE 3.
 
ATTORNEY-IN-FACT; PERFORMANCE
 
Section 3.1. Secured Party Appointed Attorney-In-Fact. Upon the occurrence and
during the continuance of an Event of Default: (a) the Company hereby appoints
the Secured Party as its attorney-in-fact, with full authority in the place and
stead of the Company and in the name of the Company or otherwise, from time to
time in the Secured Party’s discretion to take any action and to execute any
instrument which the Secured Party may reasonably deem necessary to accomplish
the purposes of this Agreement, including, without limitation, to receive and
collect all instruments made payable to the Company representing any payments in
respect of the Pledged Property or any part thereof and to give full discharge
for the same; (b) the Secured Party may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Pledged Property as
and when the Secured Party may determine, and (c) to facilitate collection, the
Secured Party may notify account debtors and obligors on any Pledged Property to
make payments directly to the Secured Party.
 
Section 3.2. Secured Party May Perform. If the Company fails to perform any
agreement contained herein, the Secured Party, at its option, may itself
perform, or cause performance of, such agreement, and the expenses of the
Secured Party incurred in connection therewith shall be included in the
Obligations secured hereby and payable by the Company under Section 8.3.
 
ARTICLE 4.
 
REPRESENTATIONS AND WARRANTIES
 
Section 4.1. Authorization; Enforceability. Each of the parties hereto
represents and warrants that it has taken all action necessary to authorize the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby; and upon execution and delivery, this Agreement shall
constitute a valid and binding obligation of the respective party, subject to
applicable bankruptcy, insolvency, reorganization, moratorium and similar laws
affecting creditors’ rights or by the principles governing the availability of
equitable remedies.
 
Section 4.2. Ownership of Pledged Property. The Company represents and warrants
that it is the legal and beneficial owner of the Pledged Property free and clear
of any lien, security interest, option or other charge or encumbrance (each, a
“Lien”) except for the security interest created by this Agreement and other
Permitted Liens. For purposes of this Agreement, “Permitted Liens” means: (1)
the security interest created by this Agreement, (2) existing Liens disclosed by
the Company to the Secured Party; (3) inchoate Liens for taxes, assessments or
governmental charges or levies not yet due, as to which the grace period, if
any, related thereto has not yet expired, or being contested in good faith and
by appropriate proceedings for which adequate reserves have been established in
accordance with GAAP; (4) Liens of carriers, materialmen, warehousemen,
mechanics and landlords and other similar Liens which secure amounts which are
not yet overdue by more than 60 days or which are being contested in good faith
by appropriate proceedings; (5) licenses, sublicenses, leases or subleases
granted to other Persons not materially interfering with the conduct of the
business of the Company; (6) Liens securing capitalized lease obligations and
purchase money indebtedness incurred solely for the purpose of financing an
acquisition or lease; (7) easements, rights-of-way, restrictions, encroachments,
municipal zoning ordinances and other similar charges or encumbrances, and minor
title deficiencies, in each case not securing debt and not materially
interfering with the conduct of the business of the Company and not materially
detracting from the value of the property subject thereto; (8) Liens arising out
of the existence of judgments or awards which judgments or awards do not
constitute an Event of Default; (9) Liens incurred in the ordinary course of
business in connection with workers compensation claims, unemployment insurance,
pension liabilities and social security benefits and Liens securing the
performance of bids, tenders, leases and contracts in the ordinary course of
business, statutory obligations, surety bonds, performance bonds and other
obligations of a like nature (other than appeal bonds) incurred in the ordinary
course of business (exclusive of obligations in respect of the payment for
borrowed money); (10) Liens in favor of a banking institution arising by
operation of law encumbering deposits (including the right of set-off) and
contractual set-off rights held by such banking institution and which are within
the general parameters customary in the banking industry and only burdening
deposit accounts or other funds maintained with a creditor depository
institution; (11) usual and customary set-off rights in leases and other
contracts; and (12) escrows in connection with acquisitions and dispositions.
 
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Section 4.3. Name Change. The Company and each Subsidiary have only effectuated
changes their respective corporate names as designated in Schedule 4.3 herein.
 
ARTICLE 5.
 
DEFAULT; REMEDIES; SUBSTITUTE COLLATERAL
 
Section 5.1 Method of Realizing Upon the Pledged Property: Other Remedies. If
any Event of Default shall have occurred and be continuing:
 
(a) The Secured Party may exercise in respect of the Pledged Property, in
addition to any other rights and remedies provided for herein or otherwise
available to it, all of the rights and remedies of a secured party upon default
under the Uniform Commercial Code (whether or not the Uniform Commercial Code
applies to the affected Pledged Property), and also may (i) take absolute
control of the Pledged Property, including, without limitation, transfer into
the Secured Party's name or into the name of its nominee or nominees (to the
extent the Secured Party has not theretofore done so) and thereafter receive,
for the benefit of the Secured Party, all payments made thereon, give all
consents, waivers and ratifications in respect thereof and otherwise act with
respect thereto as though it were the outright owner thereof, (ii) require the
Company to assemble all or part of the Pledged Property as directed by the
Secured Party and make it available to the Secured Party at a place or places to
be designated by the Secured Party that is reasonably convenient to both
parties, and the Secured Party may enter into and occupy any premises owned or
leased by the Company where the Pledged Property or any part thereof is located
or assembled for a reasonable period in order to effectuate the Secured Party's
rights and remedies hereunder or under law, without obligation to the Company in
respect of such occupation, and (iii) without notice except as specified below
and without any obligation to prepare or process the Pledged Property for sale,
(A) sell the Pledged Property or any part thereof in one or more parcels at
public or private sale, at any of the Secured Party's offices or elsewhere, for
cash, on credit or for future delivery, and at such price or prices and upon
such other terms as the Secured Party may deem commercially reasonable and/or
(B) lease, license or dispose of the Pledged Property or any part thereof upon
such terms as the Secured Party may deem commercially reasonable. The Company
agrees that, to the extent notice of sale or any other disposition of the
Pledged Property shall be required by law, at least ten (10) days' notice to the
Company of the time and place of any public sale or the time after which any
private sale or other disposition of the Pledged Property is to be made shall
constitute reasonable notification. The Secured Party shall not be obligated to
make any sale or other disposition of any Pledged Property regardless of notice
of sale having been given. The Secured Party may adjourn any public or private
sale from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to which it
was so adjourned. The Company hereby waives any claims against the Secured Party
arising by reason of the fact that the price at which the Pledged Property may
have been sold at a private sale was less than the price which might have been
obtained at a public sale or was less than the aggregate amount of the
Obligations, even if the Secured Party accepts the first offer received and does
not offer such Pledged Property to more than one offeree, and waives all rights
that the Company may have to require that all or any part of such Pledged
Property be marshaled upon any sale (public or private) thereof. The Company
hereby acknowledges that (i) any such sale of the Pledged Property by the
Secured Party may be made without warranty, (ii) the Secured Party may
specifically disclaim any warranties of title, possession, quiet enjoyment or
the like, and (iii) such actions set forth in clauses (i) and (ii) above shall
not adversely affect the commercial reasonableness of any such sale of Pledged
Property.
 
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(b) Any cash held by the Secured Party as Pledged Property and all cash proceeds
received by the Secured Party in respect of any sale of or collection from, or
other realization upon, all or any part of the Pledged Property shall be applied
(after payment of any amounts payable to the Secured Party pursuant to Section
8.3 hereof) by the Secured Party against, all or any part of the Obligations in
such order as the Secured Party shall elect, consistent with the provisions of
the Securities Purchase Agreement. Any surplus of such cash or cash proceeds
held by the Secured Party and remaining after the indefeasible payment in full
in cash of all of the Obligations shall be paid over to whomsoever shall be
lawfully entitled to receive the same or as a court of competent jurisdiction
shall direct.
 
(c) In the event that the proceeds of any such sale, collection or realization
are insufficient to pay all amounts to which the Secured Party is legally
entitled, the Company shall be liable for the deficiency, together with interest
thereon at the rate specified in the Convertible Debentures for interest on
overdue principal thereof or such other rate as shall be fixed by applicable
law, together with the costs of collection and the reasonable fees, costs,
expenses and other client charges of any attorneys employed by the Secured Party
to collect such deficiency.
 
(d) The Company hereby acknowledges that if the Secured Party complies with any
applicable state, provincial or federal law requirements in connection with a
disposition of the Pledged Property, such compliance will not adversely affect
the commercial reasonableness of any sale or other disposition of the Pledged
Property.
 
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(f) The Secured Party shall not be required to marshal any present or future
collateral security (including, but not limited to, this Agreement and the
Pledged Property) for, or other assurances of payment of, the Obligations or any
of them or to resort to such collateral security or other assurances of payment
in any particular order, and all of the Secured Party's rights hereunder and in
respect of such collateral security and other assurances of payment shall be
cumulative and in addition to all other rights, however existing or arising. To
the extent that the Company lawfully may, the Company hereby agrees that it will
not invoke any law relating to the marshaling of collateral which might cause
delay in or impede the enforcement of the Secured Party's rights under this
Agreement or under any other instrument creating or evidencing any of the
Obligations or under which any of the Obligations is outstanding or by which any
of the Obligations is secured or payment thereof is otherwise assured, and, to
the extent that it lawfully may, the Company hereby irrevocably waives the
benefits of all such laws.
 
Section 5.2 Duties Regarding Pledged Property. The Secured Party shall have no
duty as to the collection or protection of the Pledged Property or any income
thereon or as to the preservation of any rights pertaining thereto, beyond the
safe custody and reasonable care of any of the Pledged Property actually in the
Secured Party’s possession.
 
ARTICLE 6.
 
AFFIRMATIVE COVENANTS
 
The Company covenants and agrees that, from the date hereof and until the
Obligations have been fully paid and satisfied or the Convertible Debentures
have been fully converted, unless the Secured Party shall consent otherwise in
writing (as provided in Section 8.4 hereof):
 
Section 6.1. Existence, Properties, Etc.
 
(a) The Company shall do, or cause to be done, all things, or proceed with due
diligence with any actions or courses of action, that may be reasonably
necessary (i) to maintain Company’s due organization, valid existence and good
standing under the laws of its state of incorporation, and (ii) to preserve and
keep in full force and effect all qualifications, licenses and registrations in
those jurisdictions in which the failure to do so could have a Material Adverse
Effect (as defined below); and (b) the Company shall not do, or cause to be
done, any act impairing the Company’s corporate power or authority (i) to carry
on the Company’s business as now conducted, and (ii) to execute or deliver this
Agreement or any other document delivered in connection herewith, including,
without limitation, any UCC-1 Financing Statements required by the Secured
Party (which other loan instruments collectively shall be referred to as the
“Loan Instruments”) to which it is or will be a party, or perform any of its
obligations hereunder or thereunder. For purpose of this Agreement, the term
“Material Adverse Effect” shall mean any material and adverse affect as
determined by Secured Party in its reasonable discretion, whether individually
or in the aggregate, upon (a) the Company’s assets, business, operations,
properties or condition, financial or otherwise; (b) the Company’s ability to
make payment as and when due of all or any part of the Obligations; or (c) the
Pledged Property.
 
Section 6.2. Financial Statements and Reports. The Company shall furnish to the
Secured Party within a reasonable time such financial data as the Secured Party
may reasonably request.
 
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Section 6.3. Accounts and Reports. The Company shall maintain a standard system
of accounting in accordance with generally accepted accounting principles
consistently applied (“GAAP”) and provide, at its sole expense, to the Secured
Party the following:
 
(a) as soon as available, a copy of any notice or other communication alleging
any nonpayment or other material breach or default, or any foreclosure or other
action respecting any material portion of its assets and properties, received
respecting any of the indebtedness of the Company in excess of $500,000 (other
than the Obligations), or any demand or other request for payment under any
guaranty, assumption, purchase agreement or similar agreement or arrangement
respecting the indebtedness or obligations of others in excess of $500,000; and
 
(b) within fifteen (15) days after the making of each submission or filing, a
copy of any report, financial statement, notice or other document, whether
periodic or otherwise, submitted to the shareholders of the Company, or
submitted to or filed by the Company with any governmental authority involving
or affecting (i) the Company that would reasonably be expected to have a
Material Adverse Effect; (ii) the Obligations; (iii) any part of the Pledged
Property; or (iv) any of the transactions contemplated in this Agreement or the
Loan Instruments (except, in each case, to the extent any such submission,
filing, report, financial statement, notice or other document is posted on EDGAR
Online).
 
Section 6.4. Maintenance of Books and Records; Inspection. The Company shall
maintain its books, accounts and records in accordance with GAAP, and permit the
Secured Party, its officers and employees and any professionals designated by
the Secured Party in writing, at any time during normal business hours and upon
reasonable notice to visit and inspect any of its properties (including but not
limited to the collateral security described in the Transaction Documents and/or
the Loan Instruments), corporate books and financial records, and to discuss its
accounts, affairs and finances with any employee, officer or director thereof
(it being agreed that, unless an Event of Default shall have occurred and be
continuing, there shall be no more than two (2) such visits and inspections in
any Fiscal Year).
 
Section 6.5. Maintenance and Insurance.
 
(a) The Company shall maintain or cause to be maintained, at its own expense,
all of its material assets and properties in good working order and condition,
ordinary wear and tear excepted, making all necessary repairs thereto and
renewals and replacements thereof.
 
(b) The Company shall maintain or cause to be maintained, at its own expense,
insurance in form, substance and amounts (including deductibles), which the
Company deems reasonably necessary to the Company’s business, (i) adequate to
insure all assets and properties of the Company of a character usually insured
by persons engaged in the same or similar business against loss or damage
resulting from fire or other risks included in an extended coverage policy;
(ii) against public liability and other tort claims that may be incurred by the
Company; (iii) as may be required by the Transaction Documents and/or applicable
law and (iv) as may be reasonably requested by Secured Party, all with
financially sound and reputable insurers.
 
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Section 6.6. Contracts and Other CollateralThe Company shall perform all of its
obligations under or with respect to each instrument, receivable, contract and
other intangible included in the Pledged Property to which the Company is now or
hereafter will be party on a timely basis and in the manner therein required,
including, without limitation, this Agreement, except to the extent the failure
to so perform such obligations would not reasonably be expected to have a
Material Adverse Effect.
 
Section 6.7. Defense of Collateral, Etc. The Company shall defend and enforce
its right, title and interest in and to any part of: (a) the Pledged Property;
and (b) if not included within the Pledged Property, those assets and properties
whose loss would reasonably be expected to have a Material Adverse Effect, each
against all manner of claims and demands on a timely basis to the full extent
permitted by applicable law (other than any such claims and demands by holders
of Permitted Liens).
 
Section 6.8. Taxes and Assessments. The Company shall (a) file all material tax
returns and appropriate schedules thereto that are required to be filed under
applicable law, prior to the date of delinquency (taking into account any
extensions of the original due date), (b) pay and discharge all material taxes,
assessments and governmental charges or levies imposed upon the Company, upon
its income and profits or upon any properties belonging to it, prior to the date
on which penalties attach thereto, and (c) pay all material taxes, assessments
and governmental charges or levies that, if unpaid, might become a lien or
charge upon any of its properties; provided, however, that the Company in good
faith may contest any such tax, assessment, governmental charge or levy
described in the foregoing clauses (b) and (c) so long as appropriate reserves
are maintained with respect thereto if and to the extent required by GAAP.
 
Section 6.9. Compliance with Law and Other Agreements. The Company shall
maintain its business operations and property owned or used in connection
therewith in compliance with (a) all applicable federal, state and local laws,
regulations and ordinances governing such business operations and the use and
ownership of such property, and (b) all agreements, licenses, franchises,
indentures and mortgages to which the Company is a party or by which the Company
or any of its properties is bound, except where the failure to so comply would
not reasonably be expected to have a Material Adverse Effect.
 
Section 6.10. Notice of Default. The Company shall give written notice to the
Secured Party of the occurrence of any Event of Default.
 
Section 6.11. Notice of Litigation. The Company shall give notice, in writing,
to the Secured Party of (a) any actions, suits or proceedings wherein the amount
at issue is in excess of $250,000, instituted by any persons against the
Company, or affecting any of the assets of the Company, and (b) any dispute, not
resolved within fifteen (15) days of the commencement thereof, between the
Company on the one hand and any governmental or regulatory body on the other
hand, which might reasonably be expected to have a Material Adverse Effect on
the business operations or financial condition of the Company.
 
Section 6.13. Future Subsidiaries. If the Company shall hereafter create or
acquire any subsidiary, simultaneously with the creation or acquisition of such
subsidiary, the Company shall cause such subsidiary to grant to the Secured
Party a security interest of the same tenor as created under this Agreement.
 
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ARTICLE 7.
 
NEGATIVE COVENANTS
 
The Company covenants and agrees that, from the date hereof until the
Obligations have been fully paid and satisfied, the Company shall not, unless
the Secured Party shall consent otherwise in writing:
 
Section 7.1. Liens and Encumbrances. Directly or indirectly make, create, incur,
assume or permit to exist any Lien in, to or against any part of the Pledged
Property other than Permitted Liens.
 
Section 7.2. Restriction on Redemption and Cash Dividends. Directly or
indirectly, redeem, repurchase or declare or pay any cash dividend or
distribution on its capital stock without the prior express written consent of
the Secured Party.
 
Section 7.3. Incurrence of Indebtedness. Directly or indirectly, incur or
guarantee, assume or suffer to exist any indebtedness, other than the
indebtedness evidenced by the Convertible Debentures and other Permitted
Indebtedness. “Permitted Indebtedness” means: (i) indebtedness evidenced by
Convertible Debentures; (ii) indebtedness described on the Disclosure Schedule
to the Securities Purchase Agreement; (iii) indebtedness incurred solely for the
purpose of financing the acquisition or lease of any equipment by the Company,
including capital lease obligations with no recourse other than to such
equipment; (iv) indebtedness (A) the repayment of which has been subordinated to
the payment of the Convertible Debentures on terms and conditions acceptable to
the Secured Party, including with regard to interest payments and repayment of
principal, (B) which does not mature or otherwise require or permit redemption
or repayment prior to or on the 91st day after the maturity date of any
Convertible Debentures then outstanding; and (C) which is not secured by any
assets of the Company; (v) indebtedness solely between the Company and/or one of
its domestic subsidiaries, on the one hand, and the Company and/or one of its
domestic subsidiaries, on the other which indebtedness is not secured by any
assets of the Company or any of its subsidiaries, provided that (x) in each case
a majority of the equity of any such domestic subsidiary is directly or
indirectly owned by the Company, such domestic subsidiary is controlled by the
Company and such domestic subsidiary has executed a security agreement in the
form of this Agreement and (y) any such loan shall be evidenced by an
intercompany note that is pledged by the Company or its subsidiary, as
applicable, as collateral pursuant to this Agreement; (vi) reimbursement
obligations in respect of letters of credit issued for the account of the
Company or any of its subsidiaries for the purpose of securing performance
obligations of the Company or its subsidiaries incurred in the ordinary course
of business so long as the aggregate face amount of all such letters of credit
does not exceed $500,000 at any one time; and (vii) renewals, extensions and
refinancing of any indebtedness described in clauses (i) or (iii) of this
subsection.
 
Section 7.4. Places of Business. Change the location of its chief place of
business, chief executive office or any place of business disclosed to the
Secured Party, unless such change in location is to a different location within
the United States and the Company provides notice to the Secured Party of new
location within 10 days’ of such change in location.
 
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Section 7.5. Company Name. The Company shall not change its name with out
providing the Secured Party thirty (30) calendar days prior written notice.
 
Section 7.6. Bank Accounts. The Company shall not open, create, assume,
establish or maintain any bank account without having it designated as a
“Deposit Account” and complying with the term hereunder.
 
ARTICLE 8.
 
MISCELLANEOUS
 
Section 8.1. Notices. All notices or other communications required or permitted
to be given pursuant to this Agreement shall be in writing and shall be
considered as duly given on: (a) the date of delivery, if delivered in person or
by nationally recognized overnight delivery service or (b) five (5) days after
mailing if mailed from within the continental United States by certified mail,
return receipt requested to the party entitled to receive the same:
 
If to the Secured Party:
Cornell Capital Partners, LP
 
101 Hudson Street-Suite 3700
 
Jersey City, New Jersey 07302
 
Attention: Mark Angelo
 
Portfolio Manager
 
Telephone: (201) 986-8300
 
Facsimile: (201) 985-8266
   
With a copy to:
David Gonzalez, Esq.
 
101 Hudson Street, Suite 3700
 
Jersey City, NJ 07302
 
Telephone: (201) 985-8300
 
Facsimile: (201) 985-8266

 
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And if to the Company:
Homeland Security Capital Corporation
 
4100 North Fairfax Drive, Suite 1150
 
Arlington, Virginia 22203
 
Attention: C. Thomas McMillen
 
Telephone: (703) 528-7073
 
Facsimile: (703) 528 0956
   
With a copy to:
Kirkpatrick & Lockhart Preston Gates Ellis, LLP
 
201 South Biscayne Boulevard, Suite 2000
 
Miami, Florida 33131
 
Attention: Clayton E. Parker, Esq.
 
Telephone: (305) 539-3306
 
Facsimile: (305) 358-7095

Any party may change its address by giving notice to the other party stating its
new address. Commencing on the tenth (10th) day after the giving of such notice,
such newly designated address shall be such party’s address for the purpose of
all notices or other communications required or permitted to be given pursuant
to this Agreement.
 
Section 8.2. Severability. If any provision of this Agreement shall be held
invalid or unenforceable, such invalidity or unenforceability shall attach only
to such provision and shall not in any manner affect or render invalid or
unenforceable any other severable provision of this Agreement, and this
Agreement shall be carried out as if any such invalid or unenforceable provision
were not contained herein.
 
Section 8.3. Expenses. In the event of an Event of Default, the Company will pay
to the Secured Party the amount of any and all reasonable out-of-pocket
expenses, including the reasonable fees and expenses of its counsel, which the
Secured Party may incur in connection with: (i) the custody or preservation of,
or the sale, collection from, or other realization upon, any of the Pledged
Property; (ii) the exercise or enforcement of any of the rights of the Secured
Party hereunder or (iii) the failure by the Company to perform or observe any of
the provisions hereof.
 
Section 8.4. Waivers, Amendments, Etc. The Secured Party’s delay or failure at
any time or times hereafter to require strict performance by Company of any
undertakings, agreements or covenants shall not waive, affect, or diminish any
right of the Secured Party under this Agreement to demand strict compliance and
performance herewith. Any waiver by the Secured Party of any Event of Default
shall not waive or affect any other Event of Default, whether such Event of
Default is prior or subsequent thereto and whether of the same or a different
type. None of the undertakings, agreements and covenants of the Company
contained in this Agreement, and no Event of Default, shall be deemed to have
been waived by the Secured Party, nor may this Agreement be amended, changed or
modified, unless such waiver, amendment, change or modification is evidenced by
an instrument in writing specifying such waiver, amendment, change or
modification and signed by the Secured Party in the case of any such waiver, and
signed by the Secured Party and the Company in the case of any such amendment,
change or modification.
 
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Section 8.5. Continuing Security Interest; Partial Release.
 
(a) This Agreement shall create a continuing security interest in the Pledged
Property and shall: (i) remain in full force and effect until payment or
conversion in full of the Convertible Debentures; (ii) be binding upon the
Company and its successors and assigns; and (iii) inure to the benefit of the
Secured Party and its successors and assigns. Upon the payment or satisfaction
in full or conversion in full of the Convertible Debentures, this Agreement and
the security interest created hereby shall terminate, and, in connection
therewith, the Company shall be entitled to the return, at its expense, of such
of the Pledged Property as shall not have been sold in accordance with
Section 5.2 hereof or otherwise applied pursuant to the terms hereof and the
Secured Party shall deliver to the Company such documents as the Company shall
reasonably request to evidence such termination.
 
(b) Effective upon the closing of a disposition of any Pledged Property,
provided the Secured Party consents in writing prior to such disposition or such
disposition is made in the ordinary course of business, the security interest
granted hereunder in the Pledged Property so disposed of shall terminate and the
Secured Party shall deliver such documents as the Company shall reasonably
request to evidence such termination; provided, however, the security interest
granted hereunder in all remaining Pledged Property shall remain in full force
and effect.
 
Section 8.6. Independent Representation. Each party hereto acknowledges and
agrees that it has received or has had the opportunity to receive independent
legal counsel of its own choice and that it has been sufficiently apprised of
its rights and responsibilities with regard to the substance of this Agreement.
 
Section 8.7. Applicable Law: Jurisdiction. This Agreement shall be governed by
and interpreted in accordance with the laws of the State of Delaware without
regard to the principles of conflict of laws. The parties further agree that any
action between them shall be heard in Hudson County, New Jersey, and expressly
consent to the jurisdiction and venue of the Superior Court of New Jersey,
sitting in Hudson County and the United States District Court for the District
of New Jersey sitting in Newark, New Jersey for the adjudication of any civil
action asserted pursuant to this Paragraph.
 
Section 8.8. Waiver of Jury Trial. AS A FURTHER INDUCEMENT FOR THE SECURED PARTY
TO ENTER INTO THIS AGREEMENT AND TO MAKE THE FINANCIAL ACCOMMODATIONS TO THE
COMPANY, THE COMPANY HEREBY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY LEGAL
PROCEEDING RELATED IN ANY WAY TO THIS AGREEMENT AND/OR ANY AND ALL OTHER
DOCUMENTS RELATED TO THIS TRANSACTION.
 
Section 8.9. Entire Agreement. This Agreement constitutes the entire agreement
among the parties and supersedes any prior agreement or understanding among them
with respect to the subject matter hereof.

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IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as
of the date first above written.

   
COMPANY:
   
HOMELAND SECURITY CAPITAL CORPORATION
        By:
/s/ C. Thomas McMillen   
   
Name: C. Thomas McMillen
   
Title: Chief Executive Officer
     

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IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as
of the date first above written.

         
SECURED PARTY:
   
CORNELL CAPITAL PARTNERS, L.P.
         
By: Yorkville Advisors, LLC
   
Its: Investment Manager
        By:
/s/ Mark Angelo   
   
Name: Mark Angelo
   
Title: Portfolio Manager
     

 
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EXHIBIT A
 
DEFINITION OF PLEDGED PROPERTY
 
For the purpose of securing prompt and complete payment and performance by the
Company of all of the Obligations, the Company unconditionally and irrevocably
hereby grants to the Secured Party a continuing security interest in and to, and
lien upon, the following Pledged Property of the Company:
 
(a) all goods of the Company, including, without limitation, machinery,
equipment, furniture, furnishings, fixtures, signs, lights, tools, parts,
supplies and motor vehicles of every kind and description, now or hereafter
owned by the Company or in which the Company may have or may hereafter acquire
any interest, and all replacements, additions, accessions, substitutions and
proceeds thereof, arising from the sale or disposition thereof, and where
applicable, the proceeds of insurance and of any tort claims involving any of
the foregoing;
 
(b) all inventory of the Company, including, but not limited to, all goods,
wares, merchandise, parts, supplies, finished products, other tangible personal
property, including such inventory as is temporarily out of Company’s custody or
possession and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing;
 
(c) all contract rights and general intangibles of the Company, including,
without limitation, goodwill, trademarks, trade styles, trade names, leasehold
interests, partnership or joint venture interests, patents and patent
applications, copyrights, deposit accounts whether now owned or hereafter
created;
 
(d) all documents, warehouse receipts, instruments and chattel paper of the
Company whether now owned or hereafter created;
 
(e) all accounts and other receivables, instruments or other forms of
obligations and rights to payment of the Company (herein collectively referred
to as “Accounts”), together with the proceeds thereof, all goods represented by
such Accounts and all such goods that may be returned by the Company’s
customers, and all proceeds of any insurance thereon, and all guarantees,
securities and liens which the Company may hold for the payment of any such
Accounts including, without limitation, all rights of stoppage in transit,
replevin and reclamation and as an unpaid vendor and/or lienor;
 
(f) to the extent assignable, all of the Company’s rights under all present and
future authorizations, permits, licenses and franchises issued or granted in
connection with the operations of any of its facilities;
 
(g) all equity interests, securities or other instruments in other companies,
including, without limitation, any subsidiaries, investments or other entities
(whether or not controlled); whether now existing or later acquired or created
and
 
(h) all products, proceeds (including, without limitation, insurance proceeds
and proceeds received upon the sale of the capital stock of the Company’s
subsidiaries) and distributions (other than regularly scheduled dividends and
including any distributions resulting from the sale of the subsidiary’s assets)
from the above-described Pledged Property.
 

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EXHIBIT B
SPIN OFF SHARES
 

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