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U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 (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, 2010
 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
  1005 North Glebe Road, Suite 550Delaware
    
    52-2050585
    
    Arlington, Virginia 22201(State or other jurisdiction
    
    (IRS Employer
    
    (Address of principal executive offices)of incorporation)
    
    Identification No.)
    
    (Zip Code)
 (703) 528-7073
 Common Stock, par value $.001 per share
   Yes o No þ
 Yes o No þ
 þ o
 Yes
o No o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF CONTENTS
 PageFORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
    
    
    3PART I
    
    
    4Item 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    19Item 1B. Unresolved Staff Comments
    
    
    36Item 2. Properties
    
    
    36Item 3. Legal Proceedings
    
    
    37Item 4. Reserved
    
    
    37PART II
    
    
    38Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
    
    
    38Item 6. Selected Financial Data
    
    
    39Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    39Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    44Item 8. Financial Statements and Supplementary Data
    
    
    44Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    44Item 9A. Controls and Procedures
    
    
    44Item 9B. Other Information
    
    
    45PART III
    
    
    46Item 10. Directors, Executive Officers and Corporate Governance
    
    
    46Item 11. Executive Compensation
    
    
    52Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
    
    
    56Item 13. Certain Relationships and Related Transactions, Director Independence
    
    
    58Item 14. Principal Accountant Fees and Services
    
    
    58PART IV
    
    
    60Item 15. Exhibits and Financial Statement Schedules
    
    
    60SIGNATURES
    
    
    65Appendix  Consolidated Financial Statements and Related NotesExhibit 21Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
    3




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PART I
 
 ITEM 1. BUSINESS
 The Company
 th
  Our History
      4




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Business Overview
    
    
    identifying acquisition candidates which meet our consolidation
criteria, including the presence of a strong management team as a
platform company;
 
    
    attracting and acquiring companies through implantation of our
decentralized management approach coupled with strong performance
incentives including the use of financially attractive earn-out
arrangements and contingent purchase payments for selling
managers;
 
    
    achieving operating efficiencies and synergies by combining
non-customer related administrative functions, implementing system
and technology improvements and purchasing products and services
in large volumes; and
 
    
    achieving organic growth in our platform companies through
cross-selling, targeted marketing and streamlined management and
acquiring follow-on companies that provide complementary products
or services to our platform companies.
  5




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Our Industry
    Our Strategy
   6




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Management and Operational Strategy
  
    
    Marketing. The identification of the companys market position and
the development and implementation of effective market
penetration, branding and marketing strategies.
 
    
    Business Development. Providing access to the initial reference
customers and external marketing channels that generate growth
opportunities through strategic partnerships, joint ventures or
acquisitions.
 
    
    Technology. The strategic assessment of technology, market
opportunities and trends; the design, development and
commercialization of proprietary technology solutions; and access
to complementary technologies and strategic partnerships.
 
    
    Operations. Significant management interaction to optimize a
companys business, ranging from the establishment of facilities
and administrative processes to the operations and financial
infrastructure a growing enterprise requires.
 
    
    Legal and Financial. The development of appropriate corporate,
legal and financial structures and the expertise to execute a wide
variety of corporate and financial transactions.
   Operating Strategy
 Capitalize on Cross-Selling Opportunities.
 Achieve Operating Efficiencies.
 Leverage Platform Company Autonomy.
  7




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Implement Technology.
 Management Execution Teams.
 Acquisition Strategy
 Identify and Pursue Strategic Consolidation Opportunities.
 
    
    generating revenues and preferably profits, with established customers;
 
    
    long-term growth prospects for technology-based products and services offered;
 
    
    experienced management team willing to continue managing the enterprise;
 
    
    significant acquisition consideration that is performance-based; and
 
    
    a highly fragmented sector of the homeland security industry characterized by
significant potential smaller acquisition targets with few market leaders in
the sector.
  Acquire Complementary Businesses.
  8




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Our Platform Companies
  Name, Address And
    
    Place Of
    
    OwnershipHeadquarters
    
    Formation
    
    Percentage
    
    BusinessSafety & Ecology
Holdings Corporation
2800 Solway Road
Knoxville, TN 37931www.sec-tn.com
    
    Nevada, USA
    
    100%
    
    
    Safety & Ecology
Holdings
Corporation is an
international
provider of
environmental,
nuclear and
radiological
infrastructure
remediation,
disaster relief
solutions and
advanced
construction
services.Nexus Technologies
Group, Inc.
7 West Cross Street
Hawthorne, NY 10532
www.nexusna.com
    
    Delaware, USA
    
    93%
(remaining 7% owned
by former Nexus
management and
directors)
    
    Nexus Technologies
Group, Inc.
designs, develops
and installs
integrated security
systems for
government and
commercial clients.Polimatrix, Inc.
1005 North Glebe Road
Suite 550
Arlington, VA 22201
www.polimatrix.com
    
    Virginia, USA
    
    51%
(remaining 49%
owned by Polimaster
Inc.)
    
    Polimatrix, Inc.
markets, sells and
distributes
proprietary
radiological
detection
equipment.
  Company Businesses, Products and Services
   9




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SAFETY & ECOLOGY HOLDINGS CORPORATION
  
    
    Decommissioning and Remediation. Safety offers a full range of services that include:
characterization, decontamination, decommissioning of facilities, soil and groundwater
remediation, infrastructure reduction and demolition, site preparation, excavation, and
remedial system construction; underground and overhead utility installation; electrical and
mechanical installation; security fencing and device installation and upgrades; building
renovation; piping; roadways, parking lots, and drainage system construction/repair; and
landfill remediation and capping. Safety also engages in facility deactivation, demolition
and closure solutions, including: project investigation; radiological pre-engineering;
demolition planning; removing above ground structures and structural components; storing,
testing, certifying, processing and shipping nuclear waste; and abatement of hazardous
materials. Safety has established the ability to implement project management processes to
estimate, execute and complete projects on-time and within budget. The elements of a
successful project execution program are risk management, mitigation, project management
systems and controls, experienced leadership, quality control programs, safety processes
and the ability to develop complex proposals including estimating and innovative solutions.
 
    
    Environmental and Consultancy Services. Safety provides environmental consulting and
staff services that are distinguished and unique among its world-wide competitors. Safety
focuses its service offering on the application and integration of health physics,
industrial hygiene, hazardous material consultancy and safety and health. In addition,
Safety couples its technology with its instrumentation offering, on-site radiological
laboratory capabilities, mobile radiological materials license, and a team of over 250
certified health physicists (CHP), certified industrial hygienists (CIH), engineers
and radiological technicians to provide complete radiological services and consultation.
 
    
    Nuclear Energy Design, Build, Refurbishment and Operations Support Services. Safety
provides comprehensive integrated services to the nuclear energy industry. Safety has a
wide spectrum of technical and engineering expertise and employs professions who bring
innovation and build on practical experience to meet the significant challenges faced by
the nuclear industry. Safety provides specialized services to a wide customer base,
including government agencies, commercial customers and major engineering and construction
companies around the world that are focused in the nuclear new plant deployment
initiative, facility operation, decommissioning and refurbishment.
 
    
    Instrumentation and Measurement Technologies. Safety has developed proven processes and
methodologies to deliver comprehensive project execution services to a wide diversity of
clients. Within Safetys core competencies is a portfolio of technologies offered to
clients as a direct service, a sub-element of project services or as a component of a
technical solution. The primary elements of Safetys technology offering are
instrumentation services and instrumentation technology, both of which are targeted to
field investigations, characterizations of contaminants and clean-up and material
management and disposal solutions.
   10




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th Engineering News-Records
   Locations
  NEXUS TECHNOLOGIES GROUP, INC.
    11




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
    
    Financial Institutionsincluding banks, brokerage facilities,
trading facilities and foreign currency exchange centers;
 
    
    Infrastructure Securityincluding nuclear power generating
facilities, water processing facilities, electricity generating
facilities, power transfer stations and transportation centers
which include highway, bridge, tunnel, airport, rail and port
security;
  12




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
    
    Government Facilitiesincluding federal, state and local
government buildings and offices, domestic and foreign embassies,
military installations and police and fire department operations
centers;
 
    
    Education Facilitiesincluding grammar, high school and college
buildings, dorms and campuses, satellite learning centers and
daycare centers; and
 
    
    Corporate Marketsincluding office buildings and grounds, parking
lots, garages, retail locations, warehouses and apartment and
condominium complexes.
   POLIMATRIX, INC.
      13




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Investments
     14




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Significant Customers
   Significant Suppliers
   Research and Development
  Patents and Proprietary Rights
  Competition
   15




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Safety.
    Nexus
  16




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PMX
 Manufacturing and Supply
   Government Regulation
  Radiological Detection.
  17




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Environmental Remediation.
  Product Liability and Insurance
  Employees
   Available Information
   18




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ITEM 1A. RISK FACTORS
 In analyzing our Company, you should consider carefully the following risk factors, together
with all of the other information included in this annual report on Form 10-K . Factors that could
cause or contribute to differences in our actual results include those discussed in the following
subsection, as well as those discussed in Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere throughout this annual report on Form 10-K . Each
of the following risk factors, either alone or taken together, could adversely affect our business,
operating results and financial condition, as well as adversely affect the value of an investment
in our Company.
 General Risks
 We have a limited operating history, which makes it difficult to evaluate our current business and
future prospects and may cause our revenues to decline.
  We are dependent upon key personnel who would be difficult to replace and whose loss could impede
our development.
  Appropriate acquisitions may not be available, which may adversely affect our growth.
   19




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If our consolidation strategy is not successful, our operations and financial condition will be
adversely affected.
  Competition and industry consolidation may limit our ability to implement our business strategies.
  Failure to qualify for investment company act exemptions could adversely affect our growth and
financial condition.
   20




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Potential tax consequences of our acquisitions may adversely affect our financial conditions.
  Our financial condition could be harmed if businesses we acquire failed to comply with applicable
laws or have other undisclosed liabilities.
  We may need to raise additional capital on terms unfavorable to our stockholders.
   21




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Business Risks
 As a government contractor, we are subject to extensive government regulation, and our failure to
comply with applicable regulations could subject us to penalties that may restrict our ability to
conduct our business.
   Economic downturns, reductions or diversions in government funding could have a negative impact on
our businesses.
  We and our customers operate in regulated industries that require us and them to obtain, and to
comply with, national, state and local government licenses, permits and approvals.
  
    
    failure to provide adequate financial assurance for decommissioning or closure;
 
    
    failure to comply with environmental and safety laws and regulations or permit conditions;
  22




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
    
    local community, political or other opposition;
 
    
    executive action; and
 
    
    legislative action.
  We and our customers operate in a politically sensitive environment, and the public perception of
radioactive materials can affect our customers and us.
  The elimination or any modification of the Price-Anderson Acts indemnification authority could
have adverse consequents for our business.
  We are subject to liability under environmental laws and regulation.
   23




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Construction sites and maintenance sites are inherently dangerous workplaces. If we fail to
maintain safe work sites, we can be exposed to significant financial losses as well as civil and
criminal proceedings.
  Our business has inherent operational risks that cannot be adequately covered by insurance or
indemnity, and our products and technologies may not qualify for protection under the SAFETY Act.
   Our failure to maintain our safety record could have an adverse effect on our business.
   24




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We are engaged in highly competitive businesses and typically must bid against other competitors to
obtain major contracts.
  Our ability to compete depends on our ability to innovate successfully and quickly.
  Our products compete in markets that are subject to rapid technological change, and one or more of
the technologies underlying our products could be made obsolete by new technology.
  Our CBRNE detection products are subject to a number of risks, including lengthy product
development and contract negotiation periods and certain risks inherent in long-term government
contracts.
   25




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Our business qualifies as a small business for significant opportunities which would be negatively
impacted if our small business status were to change to other than small.
  If our teaming members or partners fail to perform their contractual obligations on a project or if
we fail to coordinate effectively with our partners or subcontractors, we could be exposed to legal
liability, loss of reputation and reduced profit on the project.
  Our operating results are difficult to predict and may fluctuate significantly in the future.
  
    
    the seasonality of the spending cycle of our government customers and the
spending patterns of our commercial customers;
 
    
    the number and significance of projects commenced and completed during a quarter;
 
    
    unanticipated changes in contract performance, particularly with contracts that
have funding limits;
 
    
    the timing of resolutions of change orders, requests for equitable adjustments
and other contract adjustments;
 
    
    decisions by customers to terminate our contracts;
 
    
    seasonal variations in shipments of radioactive materials;
  26




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
    
    weather conditions that delay work at project sites;
 
    
    staff levels and utilization rates;
 
    
    changes in the prices of services offered by our competitors; and
 
    
    general economic or political conditions.
  Our business depends on the development of markets for detection and surveillance products and
solutions.
   The contracts in our backlog may be adjusted, cancelled or suspended by our clients. Additionally,
even if fully performed, our backlog may not be a good indicator of our future gross margins.
    27




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The loss of one or a few customers could have an adverse effect on us.
  We bear the risk of cost overruns in fixed-price contracts. We may experience reduced profits or,
in some cases, losses under these contracts if costs increase above our estimates.
  Our use of level of effort or percent complete performance accounting could result in reduction or
elimination of previously reported profits.
  The outcome of pending and future claims and litigation could have a material adverse effect on our
business.
   28




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Adequate bonding is necessary for us to win certain types of new work.
  We have substantial financial assurance and insurance requirements, and increases in the costs of
obtaining adequate financial assurance, or the inadequacy of our insurance coverage, could
negatively impact our liquidity and increase our liabilities.
  Unforeseen circumstances could result in a need for additional capital.
   29




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Armed hostilities could constrain our ability to conduct business internationally and could also
disrupt our U.S. operations.
  A substantial portion of our revenues depends on sales to the U.S. government and could be affected
by changes in federal funding levels.
   We may not realize anticipated benefits from stimulus packages.
   30




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Our operating results may be adversely impacted by worldwide political and economic uncertainties
and specific conditions in the markets we address.
  We derive a majority of our revenue from government agencies, and any disruption in government
funding or in our relationship with those agencies could adversely affect our business.
   
    
    Changes in and delays or cancellations of government programs, requirements or
appropriations;
 
    
    Budget constraints or policy changes resulting in delay or curtailment of
expenditures related to the services we provide;
 
    
    Re-competes of government contracts;
 
    
    The timing and amount of tax revenue received by federal, state and local
governments, and the overall level of government expenditures;
 
    
    Curtailment of the use of government contracting firms;
 
    
    Delays associated with a lack of a sufficient number of government staff to
oversee contracts;
 
    
    The increasing preference by government agencies for contracting with small and
disadvantaged businesses;
 
    
    Competing political priorities and changes in the political climate with regard
to the funding or operation of the services we provide;
 
    
    The adoption of new laws or regulations affecting our contracting relationships
with the federal, state or local governments;
 
    
    Unsatisfactory performance on government contracts by us or one of our
subcontractors, negative government audits, or other events that may impair our
relationship with the federal, state or local governments;
 
    
    A dispute with or improper activity by any of our subcontractors; and
 
    
    General economic or political conditions.
  31




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A delay in the completion of the budget process of the U.S. government could delay procurement of
our services and have an adverse effect on our future revenues.
  Our failure to win new contracts and renew existing contracts with private and public sector
clients could adversely affect our profitability.
  Restrictive covenants in our credit agreement may restrict our ability to pursue certain business
strategies.
  
    
    Incur additional indebtedness;
 
    
    Create liens securing debt or other encumbrances on our assets;
 
    
    Make loans or advances;
 
    
    Pay dividends or make distributions to our stockholders;
 
    
    Purchase or redeem our stock;
 
    
    Repay indebtedness that is junior to indebtedness under our credit agreement;
 
    
    Acquire the assets of, or merge or consolidate with, other companies; and
 
    
    Sell, lease or otherwise dispose of assets.
   32




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Because our operating results may fluctuate significantly and may be below the expectations of
analysts and investors, the market price for our stock may be volatile.
  
    
    expenses incurred in pursuing and closing acquisitions and in follow-up
integration efforts;
 
    
    changes in customers budgets and procurement policies and priorities, and
funding delays, particularly with respect to government contracts;
 
    
    new competitors and the introduction of enhanced products from new or
existing competitors;
 
    
    unforeseen legal expenses, including litigation and bid protest costs;
 
    
    unanticipated delays or problems in releasing new products and services; and
 
    
    the amount and timing of our investments in research and development
activities and manufacturing improvements.
  Our common stock is deemed to be penny stock, which may make it more difficult for investors to
sell their shares due to suitability requirements.
  
    
    with a price of less than $5.00 per share;
 
    
    that are not traded on a recognized national exchange;
 
    
    whose price is not quoted on the NASDAQ automated quotation system
(NASDAQ-listed stock must still have a price of not less than
$5.00 per share); or
 
    
    stock in issuers with net tangible assets less than $2,000,000 (if
the issuer has been in continuous operation for at least three
years) or $5,000,000 (if in continuous operation for less than
three years), or with average revenues of less than $6,000,000 for
the last three years.
   33




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We do not expect to pay dividends with respect to our common stock which may hinder our ability to
attract additional capital.
  We have historically had severe working capital shortages, even following significant financing
transactions.
  We have raised capital and issued securities during the years ended June 30, 2008 and December 31,
2007 and 2006, which has resulted (and will in the future when warrant exercises or conversions
occur) result in dilution to our existing stockholders; this was accomplished to provide necessary
working capital or obtain assets and services. We will likely issue more securities to raise
additional capital or to obtain other services or assets, any of which may result in substantial
additional dilution.
   34




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If demand for any of our products grows suddenly, we may lack the resources to meet demand or we
may be required to increase our capital spending significantly.
  Our common stock is vulnerable to pricing and purchasing actions that are beyond our control and,
therefore, persons acquiring or holding our shares may be unable to resell their shares at a profit
as a result of this volatility.
  The conversion ratio of our Series H Stock is subject to adjustment based on the performance of our
Safety subsidiary in 2008 and 2009.
  Outstanding Preferred Stock, options and warrants may make it difficult for us to obtain additional
capital on reasonable terms.
   35




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If we fail to effect and maintain registration of the common stock issued or issuable pursuant to
conversion of our Preferred Stock, the Additional Shares or certain of our outstanding common stock
warrants, we may be obligated to pay the investors of those securities liquidated damages.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
     36




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Expiration of
    
    Square
    
    
    Annual RentLocation
    
    Lease
    
    Footage
    
    
    CostKnoxville, TN (HQ)
    
    May 31, 2018
    
    
    20,850
    
    
    $
    344,028Knoxville, TN (Tech Bldg.)
    
    September 20, 2011
    
    
    11,000
    
    
    $
    79,094Blaydon On Tyne, England
(Safety Ltd. HQ)
    
    Monthly
    
    
    1,000
    
    
    $
    10,848
    (1)Sandusky, OH
    
    January 31, 2011
    
    
    1,100
    
    
    $
    9,300Oakridge, TN
    
    February 28, 2011
    
    
    6,338
    
    
    $
    62,885Albany, NY
    
    March 31, 2011
    
    
    1,000
    
    
    $
    11,720Richland, WA
    
    Monthly
    
    
    1,970
    
    
    $
    10,836Pittsburgh, PA
    
    Monthly
    
    
    640
    
    
    $
    10,500
 (1)
    
    Based on a conversion ratio of pounds to dollars of £0.664 as of June 30, 2010.  
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. RESERVED
  37




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PART II
 
 ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
 Market Information
  Fiscal Year 2010
    
    High
    
    
    Low4th
Quarter (April  June 2010)
    
    $
    0.065
    
    
    $
    0.0353rd
Quarter (January  March 2010)
    
    $
    0.090
    
    
    $
    0.0592nd Quarter (October  December 2009)
    
    $
    0.190
    
    
    $
    0.1411st Quarter (July  September 2009)
    
    $
    0.240
    
    
    $
    0.115
 Fiscal Year 2009
    
    High
    
    
    Low4th Quarter (April  June 2009)
    
    $
    0.125
    
    
    $
    0.0703rd Quarter (January  March 2009)
    
    $
    0.115
    
    
    $
    0.0702nd Quarter (October  December 2008)
    
    $
    0.105
    
    
    $
    0.0751st Quarter (July  September 2008)
    
    $
    0.080
    
    
    $
    0.030
 Dividends
  Recent Sales of Unregistered Securities
  Securities Authorized for Issuance Under Equity Compensation Plans
  Number ofsecuritiesNumber of
    
    
    
    
    
    remainingsecurities to
    
    
    Weighted
    
    
    available forbe issued
    
    
    average
    
    
    futureupon exercise
    
    
    exercise price
    
    
    issuance underof
    
    
    of
    
    
    equity compensationoutstanding
    
    
    outstanding
    
    
    plans (excludingoptions, warrants and
    
    
    options, warrants and
    
    
    securities reflectedPlan category
    
    rights
    
    
    rights
    
    
    in column (a))Equity compensation plans approved by security holders
    
    
    6,800,000
    
    
    $
    0.088
    
    
    
    400,000
    (1)Equity compensation plans not approved by security
holders (2)(3)
    
    
    76,510,000
    
    
    $
    0.054
    
    
    
    1,216,640
    (1)Total
    
    
    83,310,000
    
    
    $
    0.057
    
    
    
    1,616,640
 (1)
    
    400,000 options available for future issuance pursuant to the Companys 2005 Stock Option Plan (the
2005 Plan) and 1,216,640 options available for future issuance pursuant to the Companys 2008 Stock
Option Plan (the 2008 Plan).(2)
    
    Includes 73,750,000 non-qualified options to purchase common stock pursuant to the Companys 2008 Plan.(3)
    
    Includes 2,760,000 non-qualified options to purchase common stock issued to each of our non-employee
directors and one consultant.  38




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Purchases of Equity Securities by the Registrant and Affiliated Purchasers
  Holders of our Common Stock
  
 ITEM 6. SELECTED FINANCIAL DATA
  
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following information should be read in conjunction with the consolidated financial
statements of the Company and the notes thereto appearing elsewhere in this filing. Statements in
this Managements Discussion and Analysis and Results of Operation and elsewhere in this annual
report that are not statements of historical or current fact constitute forward-looking
statements.
 Overview
      39




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Results of Operations
   Year Ended June 30, 2010 as Compared to the Year Ended June 30, 2009
 Contract revenue
  Year Ended June 30,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    Safety
    
    
    85,723,970
    
    
    
    72,106,878
    
    
    
    13,617,092
    
    
    
    18.9
    %Nexus
    
    
    10,207,192
    
    
    
    6,462,511
    
    
    
    3,744,681
    
    
    
    57.9
    %PMX
    
    
    1,968,706
    
    
    
    2,269,958
    
    
    
    (301,252
    )
    
    
    -13.3
    %$
    97,899,868
    
    
    $
    80,839,847
    
    
    $
    17,060,521
    
    
    
    21.1
    %
   40




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##### Table of Contents



Contract cost
  Year Ended June 30,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    
    
    
    $
    
    
    
    $
    Safety
    
    
    68,698,494
    
    
    
    62,175,026
    
    
    
    6,523,468
    
    
    
    10.5
    %Nexus
    
    
    7,218,629
    
    
    
    4,803,989
    
    
    
    2,414,640
    
    
    
    50.3
    %PMX
    
    
    1,890,051
    
    
    
    2,177,481
    
    
    
    (287,430
    )
    
    
    -13.2
    %$
    77,807,174
    
    
    $
    69,156,496
    
    
    $
    8,650,678
    
    
    
    12.5
    %
  Operating expenses
  Year Ended June 30,2010
    
    
    2009
    
    
    Increase (Decrease)Holding Company
    
    $
    2,480,103
    
    
    $
    4,099,586
    
    
    $
    (1,619,483
    )
    
    
    -39.5
    %Safety
    
    
    10,743,617
    
    
    
    9,479,019
    
    
    
    1,264,598
    
    
    
    13.3
    %Nexus
    
    
    1,045,631
    
    
    
    1,154,272
    
    
    
    (108,641
    )
    
    
    -9.4
    %PMX
    
    
    29,887
    
    
    
    284,626
    
    
    
    (254,739
    )
    
    
    -89.5
    %$
    14,299,238
    
    
    $
    15,017,503
    
    
    $
    (718,265
    )
    
    
    -4.8
    %
  Other income and expense
  Year Ended June 30,2010
    
    
    2009
    
    
    (Increase) DecreaseHolding Company
    
    $
    (1,882,547
    )
    
    $
    (5,428,250
    )
    
    $
    3,545,703
    
    
    
    -65.3
    %Safety
    
    
    (754,365
    )
    
    
    (749,965
    )
    
    
    (4,400
    )
    
    
    0.6
    %Nexus
    
    
    (385,577
    )
    
    
    (17,780
    )
    
    
    (367,797
    )
    
    
    2068.6
    %PMX
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %$
    (3,022,489
    )
    
    $
    (6,195,995
    )
    
    $
    3,173,506
    
    
    
    -51.2
    %
  41




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##### Table of Contents



Year Ended June 30,2010
    
    
    2009
    
    
    (Increase) DecreaseInterest expense
    
    $
    (2,093,910
    )
    
    $
    (2,011,991
    )
    
    $
    (81,919
    )
    
    
    4.1
    %Amortization of debt
offering costs
    
    
    (378,210
    )
    
    
    (504,869
    )
    
    
    126,659
    
    
    
    -25.1
    %Amortization of debt
discount
    
    
    (34,053
    )
    
    
    (48,074
    )
    
    
    14,021
    
    
    
    -29.2
    %Currency loss
    
    
    (59,085
    )
    
    
    (405,821
    )
    
    
    346,736
    
    
    
    -85.4
    %Impairment losses
    
    
    (530,264
    )
    
    
    (3,317,837
    )
    
    
    2,787,573
    
    
    
    -84.0
    %Interest and other
income
    
    
    73,033
    
    
    
    92,597
    
    
    
    (19,564
    )
    
    
    -21.1
    %$
    (3,022,489
    )
    
    $
    (6,195,995
    )
    
    $
    3,173,506
    
    
    
    -51.2
    %
  Net income (loss)
  Liquidity and Capital Resources
   Cash Flows From Operating Activities
  Cash Flows From Investing Activities
   42




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##### Table of Contents



Cash Flows From Financing Activities
   Off-Balance Sheet Arrangements
  Critical Accounting Policies And Estimates
 Revenue Recognition 
   Foreign Operations 
 Use of Estimates 
 Fair Value of Financial Instruments 
 Recognition of Losses on Receivables 
  43




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##### Table of Contents



Investments in Assets Held for Sale 
 Investment Valuation 
  Valuation of Stock Options and Warrants 
 Goodwill
 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   44




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##### Table of Contents



Managements Annual Report on Internal Control Over Financial Reporting
        Changes in Internal Control over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION
   45




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##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
  Name
    
    Age
    
    Position
    
    Period ServedC. Thomas McMillen
    
    
    58
    
    
    Chief Executive Officer and Chairman of the Board
    
    August 30, 2005 to PresentChristopher P. Leichtweis
    
    
    51
    
    
    President and Director
    
    March 19, 2008 to PresentMichael T. Brigante
    
    
    56
    
    
    Vice President of Finance and Chief Financial Officer
    
    July 14, 2006 to PresentZev E. Kaplan
    
    
    58
    
    
    Director, Compensation Committee Chairman
    
    December 30, 2005 to PresentPhilip A. McNeill
    
    
    51
    
    
    Director, Audit Committee Chairman
    
    December 30, 2005 to PresentBrian C. Griffin
    
    
    57
    
    
    Director
    
    May 16, 2007 to Present
 C. Thomas McMillen, Chief Executive Officer and Chairman of the Board
   46




---



##### Table of Contents



Christopher P. Leichtweis, President and Director
   Michael T. Brigante, Vice President of Finance and Chief Financial Officer
  Zev. E. Kaplan, Director
   47




---



##### Table of Contents



Philip A. McNeill, Director
   Brian C. Griffin, Director
    48




---



##### Table of Contents



Term of Office
  Family Relationships
  Involvement in Certain Legal Proceedings
  Committees of the Board of Directors and Meetings
 Audit Committee.
 www.hscapcorp.com
 AUDIT COMMITTEE REPORT
      49




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##### Table of Contents



Compensation Committee. www.hscapcorp.com
 Meeting Attendance .
  Board Leadership Structure
    50




---



##### Table of Contents



Role in Risk Oversight
    Compensation Committee Interlocks and Insider Participation
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics
 www.hscapcorp.com
 Stockholder Communications to the Board of Directors
 MBrigante@hsccap.com
 Where You Can Find More Information
  www.sec.gov
  51




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##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION
 Summary Compensation Table
  Non-
    
    
    Non-Equity
    
    
    qualifiedIncentive
    
    
    DeferredPlan
    
    
    Compen-Stock
    
    
    Options
    
    
    Compen-
    
    
    sation
    
    
    All OtherName and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus
    
    
    Awards
    
    
    Awards(1)
    
    
    sation(2)
    
    
    Earnings
    
    
    Compensation(3)
    
    
    TotalC. Thomas McMillen,
    
    
    2010
    
    
    $
    300,000
    
    
    
    
    
    
    
    
    
    
    $
    678,356
    
    
    
    
    
    
    
    
    
    
    $
    8,122
    
    
    $
    987,478Chairman of the Board and Chief Executive Officer
    
    
    2009
    
    
    $
    300,000
    
    
    $
    75,000
    
    
    
    
    
    
    $
    1,808,950
    
    
    
    
    
    
    
    
    
    
    $
    7,648
    
    
    $
    2,191,598Michael T. Brigante
    
    
    2010
    
    
    $
    222,500
    
    
    
    
    
    
    
    
    
    
    $
    118,712
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    341,212Vice President of Finance and Chief Financial Officer
    
    
    2009
    
    
    $
    217,500
    
    
    $
    25,000
    
    
    
    
    
    
    $
    316,600
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    599,100Christopher P. Leichtweis
    
    
    2010
    
    
    $
    312,000
    
    
    $
    100,000
    
    
    
    
    
    
    $
    
    
    
    $
    6,111
    
    
    
    
    
    
    $
    17,354
    
    
    $
    435,465President and Chief Executive Officer of Safety & Ecology
    
    
    2009
    
    
    $
    311,308
    
    
    $
    50,000
    
    
    
    
    
    
    $
    
    
    
    $
    5,200
    
    
    
    
    
    
    $
    21,699
    
    
    $
    388,207
 1.
    
    These amounts represent the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FAS Rule 123R. A discussion of the
assumptions used in determining grant date fair value may be found in Note 11 to our consolidated financial statements included elsewhere in this annual report.2.
    
    Reflects Company contributions to a 401(k) plan.3.
    
    Reflects Company-paid health, life and disability insurance. Narrative Disclosure to Summary Compensation Table
   C. Thomas McMillen Employment Agreement.
  52




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##### Table of Contents



Michael T. Brigante Employment Agreement.
    Christopher Leichtweis Employment Agreement.
 Equity Compensation Plan Information
 The 2005 Stock Option Plan.
  53




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##### Table of Contents



The 2008 Stock Option Plan.
  OptionsOptions Vesting
    
    
    Expected to
    
    
    OptionsTotal
    
    
    Options
    
    
    Options
    
    
    Options
    
    
    Options
    
    
    Quarterly  Next
    
    
    be
    
    
    AvailableOption
    
    Options in
    
    
    Vested at
    
    
    Forfeited
    
    
    Exercised
    
    
    Outstanding
    
    
    4 Quarters
    
    
    outstanding
    
    
    for GrantPlan
    
    the Plan
    
    
    6/30/10
    
    
    at 6/30/10
    
    
    at 6/30/10
    
    
    at 6/30/10
    
    
    Through 6/30/11
    
    
    at 6/30/11
    
    
    at 6/30/102005 Plan
    
    
    7,200,000
    
    
    
    6,800,000
    
    
    
    
    
    
    
    
    
    
    
    6,800,000
    
    
    
    
    
    
    
    6,800,000
    
    
    
    400,0002008 Plan
    
    
    75,000,000
    
    
    
    73,850,000
    
    
    
    (67,640
    )
    
    
    (33,360
    )
    
    
    73,750,000
    
    
    
    
    
    
    
    73,750,000
    
    
    
    1,216,640
  Outstanding Equity Awards at Fiscal Year-End
  Option AwardsNumber of
    
    
    Number ofSecurities
    
    
    Securities
    
    
    Equity Incentive Plan
    
    
    OptionUnderlying
    
    
    Underlying
    
    
    Awards: Number of
    
    
    ExerciseUnexercised
    
    
    Unexercised
    
    
    Securities Underlying
    
    
    Price ($
    
    
    OptionOptions - #
    
    
    Options - #
    
    
    Unexercised or Unearned
    
    
    per
    
    
    ExpirationName
    
    Exercisable
    
    
    Unexercisable
    
    
    Options - Number
    
    
    share)
    
    
    DateC. Thomas Mcmillen
    
    
    5,800,000
    (1)
    
    
    
    
    
    
    
    
    
    $
    0.08
    
    
    
    8/29/2015Chief Executive Officer
    
    
    50,000,000
    (2)
    
    
    
    
    
    
    
    
    
    $
    0.05
    
    
    
    7/30/2018Michael T. Brigante
    
    
    230,790
    (3)
    
    
    
    
    
    
    
    
    
    $
    0.17
    
    
    
    7/10/2016Vice President and
    
    
    519,210
    (4)
    
    
    
    
    
    
    
    
    
    $
    0.12
    
    
    
    5/10/2017Chief Financial Officer
    
    
    8,750,000
    (5)
    
    
    
    
    
    
    
    
    
    $
    0.05
    
    
    
    7/30/2018Christopher P.
Leichtweis 
President
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 (1)
    
    These options were granted to Mr. McMillen under the 2005 Plan in connection with his
employment by the Company and appointment to the Board on August 29, 2005. These options vest
as follows: (i) options to acquire 1,160,000 shares of common stock vested on August 29, 2005,
and (ii) options to acquire 1,160,000 shares of common stock vested at the end of each of the
first, second, third and fourth calendar quarters following the initial vesting date. At June
30, 2010, these options were fully vested. These options expire on August 29, 2015.(2)
    
    These options were granted to Mr. McMillen in connection with the successful completion of
the Safety acquisition under the 2008 Plan. These options vested as follows: (i) options to
acquire 12,500,000 shares of common stock vested on July 30, 2008, and (ii) options to acquire
4,687,500 additional shares of common stock vest at the end of each of the following eight
calendar quarters after the initial vesting date. At June 30, 2010, all of these options were
fully vested. These options expire on July 30, 2018.(3)
    
    These options were granted to Mr. Brigante in connection with his consulting agreement with
the Company. On July 5, 2006, Mr. Brigante was granted options to purchase 750,000 shares of
common stock under the 2005 Plan. These options vested as follows: (i) options to acquire
57,720 shares of common stock vested on July 10, 006, and (ii) options to acquire 57,690
additional shares of common stock vested at the end of each of the following twelve calendar
quarters following the initial vesting date. At June 30, 2010, these options were fully
vested. These options expire on July 10, 2016.(4)
    
    These options were granted to Mr. Brigante in connection to his appointment as Chief
Financial Officer of the Company. On May 15, 2007, Mr. Brigante was granted options to
purchase 519,210 shares of common stock under the 2005 Plan, and the Company cancelled 519,210
unvested options from his July 5, 2006 grant. These options vested as follows (i) options to
57,690 additional shares of common stock vested on June 30, 2007, and (ii) options to acquire
57,690 additional shares of common stock vested at the end of each of the following eight
calendar quarters following the initial vesting date. At June 30, 2010, these options were
fully vested. These options expire on May 10, 2017.(5)
    
    These options were granted to Mr. Brigante in connection with the successful completion of
the Safety acquisition under the 2008 Plan. These options vested as follows: (i) options to
acquire 2,187,500 shares of common stock vested on July 30, 2008, and (ii) options to acquire
820,313 additional shares of common stock vest at the end of each of the following eight
calendar quarters after the initial vesting date. At June 30, 2010, all of these options were
fully vested. These options expire on July 30, 2018.  54




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##### Table of Contents



Potential Payments Upon Termination or Change-in-Control
  Director Compensation
  Fees
    
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    
    NonqualifiedEarned or
    
    
    
    
    
    
    
    
    
    
    Incentive
    
    
    DeferredPaid in
    
    
    Stock
    
    
    Option
    
    
    Plan
    
    
    Compensation
    
    
    All OtherName
    
    Cash
    
    
    Awards
    
    
    Awards(1)
    
    
    Compensation
    
    
    Earnings
    
    
    Compensation
    
    
    TotalPhilip A. McNeill
    
    $
    29,000
    
    
    $
    
    
    
    $
    67,836
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    96,836Zev E. Kaplan
    
    $
    28,000
    
    
    $
    
    
    
    $
    67,836
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    95,836Brian C. Griffin
    
    $
    27,000
    
    
    $
    
    
    
    $
    67,836
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    94,836
 (1)
    
    These amounts represent the dollar amount recognized for financial statement reporting
purposes with respect to the fiscal year in accordance with FAS 123R. A discussion of the
assumptions used in determining grant date fair value may be found in Note 11 to our
consolidated financial statements included elsewhere in this annual report.  Fees Received Per QuarterDirector
    
    2010
    
    
    2009Philip McNeill
    
    $
    7,250
    
    
    $
    7,250Zev Kaplan
    
    $
    7,000
    
    
    $
    7,000Brian C. Griffin
    
    $
    6,750
    
    
    $
    6,750
  55




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##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
 Principal Stockholders
  SharesBeneficially
    
    
    PercentName and Address
    
    Title of Class
    
    
    Owned
    
    
    of Class(1)YA Global Investments, L.P. 
101 Hudson St
Jersey City, 
NJ 07302
    
    common stock
    
    
    5,414,007
    (2)
    
    
    9.99
    %Titan Global Holdings, Inc. 
1700 Jay Ell Drive, Suite 200
Richardson, TX 75081
    
    common stock
    
    
    3,000,303
    
    
    
    5.54
    %
 (1)
    
    Applicable percentage of ownership is based on 54,194,268 shares of common stock outstanding as of September 24, 2010 together with securities
convertible or exercisable into shares of common stock within 60 days for the stockholder, taking into consideration the 9.99% blocker in YAs
Series H Preferred Stock (see footnote 2 below). Beneficial ownership is determined in accordance with the rules of the Commission and
generally includes voting or investment power with respect to securities. Shares of common stock subject to securities that are currently
exercisable or exercisable within 60 days of September 24, 2010, are deemed to be beneficially owned by the person holding such securities for
the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.(2)
    
    YA Global Investments, L.P. (YA) does not directly own any shares of common stock as of September 24, 2010. Yorkville Bhn S.p.A., a
subsidiary of YA, directly owns 1,200,000 shares of common stock and a senior officer of Yorkville Advisors, LLC, which is the portfolio
manager to YA, directly owns 6,250 shares of common stock.YA also holds warrants to purchase 81,166,666, 1,000,000 and 800,000 shares of
our common stock at a price of $0.03, $1.00 and $0.15 per share, respectively.
In addition, YA holds 1,000,000 shares of our Series F Preferred Stock
convertible into approximately 10,000,000 shares of our common stock at $0.10
per share and 9,660 shares of our Series H Stock convertible into a minimum of
319,139,716 (maximum approximately 549,139,716) shares of our common stock. YA
cannot convert either our warrants or preferred stock into shares of common
stock that would cause YA to own more than 9.99% of the issued and outstanding
common stock. The Series H Stock vote on an as-converted basis but YAs voting
power may not exceed 9.99% with respect it its Series H Stock. The Series F
Stock has no voting rights. The remaining shares of common stock beneficially
owned by YA were acquired from us through various private placement
transactions. Management
  SharesBeneficiallyName and Address
    
    Owned
    
    
    Percent of ClassC. Thomas McMillen
    
    
    81,300,000
    (1)
    
    
    60.00
    %Christopher P. Leichtweis
    
    
    121,313,523
    (2)
    
    
    69.12
    %Michael T. Brigante
    
    
    9,500,000
    (3)
    
    
    14.92
    %Zev E. Kaplan
    
    
    5,720,000
    (4)
    
    
    9.55
    %Philip A. McNeill
    
    
    5,720,000
    (5)
    
    
    9.55
    %Brian C. Griffin
    
    
    5,720,000
    (6)
    
    
    9.55
    %All Officers and Directors as Group (6)
    
    
    229,273,523
    
    
    
    80.88
    %
  56




---



##### Table of Contents



(1)
    
    Mr. McMillen owns 12,500,000 shares of common stock and 325 shares of
Series H Stock which are convertible into 10,833,333 shares of common
stock. On August 30, 2005, McMillen was granted option to purchase
5,800,000 shares of common stock pursuant to the McMillen Employment
Agreement, all of which were exercisable on September 24, 2010, and
these options have an exercise price of $0.08. Mr. McMillen also owns
warrants to purchase 2,166,667 shares of common stock at $0.03 per
share. On July 30, 2008, Mr. McMillen was granted options to purchase
50,000,000 shares of common stock, all of which were exercisable on
September 24, 2010 and these options have an exercise price of $0.05.(2)
    
    Mr. Leichtweis owns 505,473 shares of Series I
Convertible Preferred Stock convertible into
101,094,600 shares of common stock. Mr. Leichtweis
also owns warrants to purchase 20,218,923 shares of
common stock at $0.03 per share. Mr. Leichtweis
ownership in Series I Preferred Stock and the warrants
is a result of the sale of his ownership Safety to the
Company in March 2008.(3)
    
    Mr. Brigante was granted options, on July 10, 2006, to
purchase 750,000 shares of common stock, of which
519,210 were cancelled on May 10, 2007 and 230,790
were exercisable on September 17, 2010. On May 10,
2007, Mr. Brigante was separately granted options to
purchase 519,210 shares of common stock, all of which
were exercisable on September 24, 2010. On July 30,
2008, Mr. Brigante was granted options to purchase
8,750,000 shares of common stock, all of which were
exercisable on September 24, 2010.(4)
    
    Mr. Kaplan was granted options to purchase 720,000
shares of common stock in December 2005. All of these
options were exercisable on September 24, 2010. On
July 30, 2008, Mr. Kaplan was granted options to
purchase 5,000,000 shares of common stock, all of
which were exercisable on September 24, 2010.(5)
    
    Mr. McNeill was granted options to purchase 720,000
shares of common stock in December 2005. All of these
options were exercisable at September 24, 2010. On
July 30, 2008, Mr. McNeill was granted options to
purchase 5,000,000 shares of common stock, all of
which were exercisable on September 24, 2010.(6)
    
    Mr. Griffin was granted options to purchase 720,000
shares of common stock in May 2007, all of which were
exercisable on September 24, 2010. On July 30, 2008,
Mr. Griffin was granted options to purchase 5,000,000
shares of common stock, all of which were exercisable
on September 24, 2010.  57




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Audit Fees.
 
    
    Audit of our annual financial statements included in our Annual
Report on Form 10-K for the year ended June 30, 2009.
 
    
    Review of our financial statements included in our Quarterly
Report on Form 10-Q for the year ended June 30, 2010.
  
    
    Audit of our annual financial statements included in our Annual
Report on Form 10-K for the six month transition ended June 30,
2008.
 
    
    Review of our financial statements included in our Quarterly
Reports on Form 10-Q for the year ended June 30, 2009.
 Audit-Related Fees.
 Tax Fees.
  58




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##### Table of Contents



All Other Fees.
   Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors
  
    
    approved by our audit committee; or
 
    
    entered into pursuant to pre-approval policies and procedures
established by the audit committee, provided the policies and
procedures are detailed as to the particular service, the audit
committee is informed of each service, and such policies and
procedures do not include delegation of the audit committees
responsibilities to management.
    59




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a) Documents filed as part of this report:
  (b) Exhibits:
 EXHIBITNUMBER
    
    DESCRIPTION2.1
    
    
    Agreement and Plan Of Merger and Stock Purchase
Agreement dated March 13, 2008, among Homeland Security
Capital Corp., HSCC Acquisition Corp., Safety & Ecology
Holdings Corp., and certain individuals named therein
(previously filed as Exhibit 2.1 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on March 19, 2008 and incorporated
herein by reference).2.2
    
    
    First Amendment to the Agreement and Plan of Merger and
Stock Purchase Agreement, dated March 13, 2008, among
Homeland Security Capital Corp., Safety & Ecology
Holdings Corp., and Christopher Leichtweis and John H.
Macrae (previously filed as Exhibit 2.2 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on May 7, 2008 and
incorporated herein by reference).3.1
    
    
    Bylaws of Celerity Systems, Inc. (previously filed as
Exhibit 3.2 to the Registrants Registration Statement
on Form SB-2, originally filed with the SEC on August
13, 1997, and incorporated herein by reference).3.2
    
    
    Certificate of Designation of Series C Preferred Stock
(incorporated by reference to the Registrants
Registration Statement on Form SB-2, originally filed
with the SEC on October 18, 2001).3.3
    
    
    Certificate of Designation of Series D Preferred Stock
(previously filed as Exhibit 3.4 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on March 27, 2002, and incorporated herein by
reference).3.4
    
    
    Certificate of Designation of Series E Preferred Stock
(previously filed as Exhibit 3.4 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on April 15, 2005, and incorporated herein by
reference).3.5
    
    
    Certificate of Amendment to Certificate of Incorporation
of Celerity Systems, Inc., dated April 17, 2002
(previously filed as Exhibit 3.7 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on April 15, 2005, and incorporated herein by
reference).3.6
    
    
    Certificate of Amendment to Certificate of Incorporation
of Celerity Systems, Inc., dated August 23, 2002
(previously filed as Exhibit 3.6 to the Registrants
Annual Report on Form 10-K, originally filed with the
SEC on April 15, 2005, and incorporated herein by
reference).3.7
    
    
    Certificate of Designation of Series F Preferred Stock
(previously filed as Exhibit 99.2 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on October 7, 2005, and incorporated
herein by reference).3.8
    
    
    Certificate of Amendment to Certificate of Incorporation
of Celerity Systems, Inc. (previously filed as Exhibit
3.1 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on February 6,
2006, and incorporated herein by reference).3.9
    
    
    Certificate of Designation, Series G Convertible
Preferred Stock (previously filed as Exhibit 3.1 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on February 14, 2006, and
incorporated herein by reference).
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EXHIBITNUMBER
    
    DESCRIPTION3.10
    
    
    Certificate of Designation of Relative Rights and
Preferences, Series I Convertible Preferred Stock of
Homeland Security Capital Corp. (previously filed as
Exhibit 3.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
March 19, 2008 and incorporated herein by reference).3.11
    
    
    Certificate of Designation of Relative Rights and
Preferences, Series H Convertible Preferred Stock Of
Homeland Security Capital Corp. (previously filed as
Exhibit 3.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
March 19, 2008 and incorporated herein by reference).3.12
    
    
    Certificate of Amendment to Certificate of Incorporation
(previously filed Exhibit A to Scheduled 14C, originally
filed with the SEC on June 23, 2008 and incorporated
herein by reference).4.1
    
    
    Secured Convertible Debenture (previously filed as
Exhibit 4.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
February 14, 2006, and incorporated herein by
reference).4.2
    
    
    Form of Warrant to purchase shares of Homeland Security
Capital Corp. Common Stock (previously filed as Exhibit
4.1 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on March 19,
2008 and incorporated herein by reference).4.3
    
    
    Warrant to purchase shares of Homeland Security Capital
Corp. Common Stock held by YA Global Investments, L.P.,
dated March 14, 2008 (previously filed as Exhibit 4.2 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference).10.1
    
    
    Indemnification Agreement by and between C. Thomas
McMillen and Celerity Systems, Inc. (previously filed as
Exhibit 99.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
October 7, 2005 and incorporated herein by reference).10.2
    
    
    Escrow Agreement, dated as of October 6, 2005, by and
between Celerity Systems, Inc. and Cornell Capital
Partners, L.P. (previously filed as Exhibit 99.3 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on October 7, 2005 and
incorporated herein by reference).10.3
    
    
    Securities Purchase Agreement dated as of October 6,
2005, by and between the Celerity Systems, Inc. and
Cornell Capital Partners, LP (previously filed as
Exhibit 99.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
October 7, 2005 and incorporated herein by reference).10.4
    
    
    Securities Purchase Agreement, dated February 6, 2006,
by and among Homeland Security Capital Corp., and
Cornell Capital Partners, L.P. (previously filed as
Exhibit 10.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
February 14, 2006, and incorporated herein by
reference).10.5
    
    
    Registration Rights Agreement, dated February 6, 2006,
by and among Homeland Security Capital Corp., and
Cornell Capital Partners, L.P. (previously filed as
Exhibit 10.2 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
February 14, 2006, and incorporated herein by
reference).10.6
    
    
    Investment Agreement, dated February 6, 2006, by and
between Cornell Capital Partners, L.P., and Homeland
Security Capital Corp. (previously filed as Exhibit 10.3
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on February 14, 2006,
and incorporated herein by reference).10.7
    
    
    Security Agreement, dated February 6, 2006, by and
between Homeland Security Capital Corp. and Cornell
Capital Partners, (previously filed as Exhibit 10.4 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on February 14, 2006,
and incorporated herein by reference).10.8
    
    
    Agreement And Plan Of Merger, dated February 8, 2006, by
and among Nexus Technologies Group, Inc., CSS
Acquisition, Inc., and shareholders of Corporate
Security Solutions, Inc. (previously filed as Exhibit
10.1 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on February 14,
2006, and incorporated herein by reference).
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EXHIBITNUMBER
    
    DESCRIPTION10.9
    
    
    Series A Convertible Preferred Stock Purchase Agreement,
dated February 8, 2006 by and among Nexus Technologies
Group, Inc. and Homeland Security Capital Corp.
(previously filed as Exhibit 10.2 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on February 14, 2006, and
incorporated herein by reference).10.10
    
    
    Celerity Systems, Inc. 2005 Stock Option Plan
(previously filed as Exhibit 10.8 to the Registrants
Optional Form for Quarterly and Transition Reports of
Small Business Issuers on Form 10QSB,originally filed
with the SEC on May 22, 2006, and incorporated herein by
reference).10.11
    
    
    Securities Purchase Agreement, dated August 21, 2006, by
and among Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.1
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference).10.12
    
    
    Registration Rights Agreement, dated August 21, 2006, by
and among Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.2
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference).10.13
    
    
    Pledge And Security Agreement, dated August 21, 2006, by
and between Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.3
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference).10.14
    
    
    Secured Convertible Debenture issued by Homeland
Security Capital Corp. to Cornell Capital Partners, L.P.
on August 21, 2006 (previously filed as Exhibit 10.4 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on August 24, 2006,
and incorporated herein by reference).10.15
    
    
    Warrant to purchase shares of Homeland Security Capital
Corp. Common Stock, dated August 21, 2006, held by
Cornell Capital Partners, L.P., (previously filed as
Exhibit 10.5 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
August 24, 2006, and incorporated herein by reference).10.16
    
    
    Agreement And Plan Of Merger, dated August 21, 2006, by
and among Security Holding Corp., and Security Holding
Enterprises, Inc. and its stockholders (previously filed
as Exhibit 10.1 to the Registrants Registration Current
Report on Form 8-K, originally filed with the SEC on
August 29, 2006, and incorporated herein by reference).10.17
    
    
    Series A Convertible Preferred Stock Purchase Agreement
dated August 21, 2006 by and among Security Holding
Corp. and Homeland Security Capital Corp. (previously
filed as Exhibit 10.2 to the Registrants Registration
Current Report on Form 8-K, originally filed with the
SEC on August 29, 2006, and incorporated herein by
reference).10.18
    
    
    Employment Agreement, dated May 15, 2007, by and between
Homeland Security Capital Corp., and Michael T. Brigante
(previously filed as Exhibit 10.1 to the Registrants
Optional Form For Quarterly and Transition Reports of
Small Business Issuers on Form 10QSB, originally filed
with the SEC on May 15, 2007, and incorporated herein by
reference).10.19
    
    
    Securities Purchase Agreement,dated June 1, 2007, by
and among Homeland Security Capital Corp. And Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.1
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on June 6, 2007, and
incorporated herein by reference).10.20
    
    
    Registration Rights Agreement, dated June 1, 2007, by
and among Homeland Security Capital Corp. and Cornell
Capital Partners, L.P. (previously filed as Exhibit 10.2
to the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on June 6, 2007, and
incorporated herein by reference).10.21
    
    
    Security Agreement dated June 1, 2007, by and among
Homeland Security Capital Corp. and Cornell Capital
Partners, L.P. (previously filed as Exhibit 10.3 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on June 6, 2007, and
incorporated herein by reference).
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EXHIBITNUMBER
    
    DESCRIPTION10.22
    
    
    Pledge And Escrow Agreement, dated June 1, 2007 by and
among Homeland Security Capital Corp., Cornell Capital
Partners, L.P., and David Gonzalez, Esq., as escrow
agent (previously filed as Exhibit 10.4 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on June 6, 2007, and
incorporated herein by reference).10.23
    
    
    Secured Convertible Debenture issued by Homeland
Security Capital Corp. to Cornell Capital Partners, L.P,
dated June 1, 2007 (previously filed as Exhibit 10.5 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on June 6, 2007, and
incorporated herein by reference).10.24
    
    
    Warrant to purchase shares of Homeland Security Capital
Corp. Common Stock held by Cornell Capital Partners,
L.P., dated June 1, 2007 (previously filed as Exhibit
10.6 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on June 6, 2007,
and incorporated herein by reference).10.25
    
    
    Letter Agreement, dated June 1, 2007, in connection with
the Purchase Agreement dated February 6, 2006 between
Homeland Security Capital Corp. and Cornell Capital
Partners (previously filed as Exhibit 10.7 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on June 6, 2007, and
incorporated herein by reference).10.26
    
    
    Purchase Agreement, dated July 3, 2007 by and between
Supercom Inc. and the Shareholders of Security Holding
Corp. (previously filed as Exhibit 10.1 to the
Registrants Registration Current Report on Form 8-K,
originally filed with the SEC on July 10, 2007, and
incorporated herein by reference).10.27
    
    
    Securities Purchase Agreement, dated March 13, 2008, by
and among Homeland Security Capital Corp.,and YA Global
Investments, L.P. (previously filed as Exhibit 10.1 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference).10.28
    
    
    Registration Rights Agreement, dated March 14, 2008, by
and among Homeland Security Capital Corp., and YA Global
Investments, L.P. (previously filed as Exhibit 10.2 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference).10.29
    
    
    Security Agreement, dated March 14, 2008, by and among
Homeland Security Capital Corp.,and YA Global
Investments, L.P. (previously filed as Exhibit 10.3 to
the Registrants Registration Current Report on Form
8-K, originally filed with the SEC on March 19, 2008 and
incorporated herein by reference).10.30
    
    
    Form of Senior Secured Note between Homeland Security
Capital Corp. and YA Global Investments, L.P.
(previously filed as Exhibit 10.4 to the Registrants
Registration Current Report on Form 8-K, originally
filed with the SEC on March 19, 2008 and incorporated
herein by reference).10.31
    
    
    Guaranty Agreement, dated March 14, 2008, in favor of YA
Global Investments, L.P. (previously filed as Exhibit
10.6 to the Registrants Registration Current Report on
Form 8-K, originally filed with the SEC on March 19,
2008 and incorporated herein by reference).10.32
    
    
    Executive Employment Agreement, dated September 1, 2007,
by and between Homeland Security Capital Corp. and C.
Thomas McMillen (previously filed as Exhibit 10.3 to the
Registrants Optional Form for Annual and Transition
Reports of Small Business Issuers on Form 10KSB,
originally filed with the SEC on March 31, 2008 and
incorporated herein by reference).10.33
    
    
    Homeland Security Capital Corp. 2008 Stock Incentive
Plan(previously filed as Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q, originally
filed with the SEC on February 17, 2009 and incorporated
herein by reference).10.34
    
    
    Common Stock Purchase Agreement, dated November 26,
2008, by and between YA Global Investments, L.P. and
Homeland Security Capital Corp. (previously filed as
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q, originally filed with the SEC on February 17,
2009 and incorporated herein by reference).10.35
    
    
    Common Stock Purchase Agreement, dated November 28,
2008, by and between YA Global Investments, L.P. and
Homeland Security Capital Corp. (previously filed as
Exhibit 10.3 to the Registrants Quarterly Report on
Form 10-Q, originally filed with the SEC on February 17,
2009 and incorporated herein by reference).
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EXHIBITNUMBER
    
    DESCRIPTION21
    *
    
    Subsidiaries of Homeland Security Capital Corp.31.1
    *
    
    Certificate of C. Thomas McMillen, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.31.2
    *
    
    Certification of Michael T. Brigante, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    *
    
    Certification of C. Thomas McMillen, pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002 (Subsections (a) and (b) of Section 1350, Chapter
63 of Title 18, United States Code).32.2
    *
    
    Certification of Michael T. Brigante, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code).
 
    
    Indicates management compensatory plan, contract or arrangement.*
    
    Filed herewith.  64




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SIGNATURES
  HOMELAND SECURITY CAPITAL
CORPORATION
 /s/ C. Thomas McMillen

C. Thomas McMillen, Chief Executive Officer
    
    
    
    September 28, 2010/s/ Michael T. BriganteMichael T. Brigante, Vice President and Chief Financial Officer
    
    September 28, 2010
  Signature
    
    Title
    
    Date/s/ C. Thomas McMillen

C. Thomas McMillen
    
    Chief
Executive Officer
and 
Chairman of the Board
(Principal Executive Officer)
    
    September 28, 2010/s/ Michael T. Brigante

Michael T. Brigante
    
    Vice
President and Chief
Financial Officer
(Principal Accounting Officer)
    
    September 28, 2010/s/ Christopher P. Leichtweis

Christopher P. Leichtweis
    
    President
and Director
    
    September 28, 2010/s/ Brian C. Griffin

Brian C. Griffin
    
    Director
    
    September 28, 2010/s/ Zev E. Kaplan

Zev E. Kaplan
    
    Director
    
    September 28, 2010/s/ Philip A. McNeill

Philip A. McNeill
    
    Director
    
    September 28, 2010
  65




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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
 PageIndex to Financial Statements and Financial Statement Schedule
    
    
    F-1Report of Coulter & Justus, P.C.
    
    
    F-2Consolidated Balance Sheets as of June 30, 2010 and 2009
    
    
    F-3Consolidated Statements of Operations for the years ended June 30, 2010 and 2009
    
    
    F-4Consolidated Statements of Cash Flows for the years ended June 30, 2010 and 2009
    
    
    F-5Consolidated Statements of Stockholders Deficit and Comprehensive Loss for the
years ended June 30, 2010 and 2009
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7
  F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    /s/ Coulter & Justus, P.C.
 
  F-2




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##### Table of Contents



BALANCE SHEETS
 
 June 302010
    
    
    2009Assets:Cash
    
    $
    1,829,429
    
    
    $
    2,356,534Marketable fixed income securities
    
    
    872,427
    
    
    
    Accounts receivable  net
    
    
    16,764,897
    
    
    
    13,425,804Cost in excess of billings on uncompleted contracts
    
    
    7,333,931
    
    
    
    3,937,086Other current assets
    
    
    447,925
    
    
    
    613,348Total current assets
    
    
    27,248,609
    
    
    
    20,332,772Fixed assets  net
    
    
    1,129,885
    
    
    
    4,398,833Equipment held for sale
    
    
    1,455,142
    
    
    
    Deferred financing costs  net
    
    
    8,000
    
    
    
    386,210Notes receivable  related party
    
    
    430,627
    
    
    
    412,127Securities available for sale
    
    
    110,826
    
    
    
    193,945Other non-current assets
    
    
    336,499
    
    
    
    319,516Intangible assets  net
    
    
    346,814
    
    
    
    391,372Goodwill
    
    
    6,403,982
    
    
    
    6,403,982Total assets
    
    $
    37,470,384
    
    
    $
    32,838,757Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable
    
    $
    8,457,186
    
    
    $
    10,003,336Line of credit
    
    
    
    
    
    
    512,000Current portion of long term debt
    
    
    536,025
    
    
    
    735,016Current portion of long term debt  related party
    
    
    500,000
    
    
    
    Notes payable  related party
    
    
    
    
    
    
    50,110Accrued compensation
    
    
    2,568,857
    
    
    
    2,664,662Accrued other liabilities
    
    
    436,906
    
    
    
    593,241Billings in excess of costs on uncompleted contracts
    
    
    1,027,500
    
    
    
    1,022,125Income taxes payable
    
    
    551,941
    
    
    
    Current portion of deferred revenue
    
    
    85,327
    
    
    
    59,636Total current liabilities
    
    
    14,163,742
    
    
    
    15,640,126Line of credit
    
    
    2,162,000
    
    
    
    Long term debt  related party, less current maturities
    
    
    17,755,890
    
    
    
    16,365,001Long term debt, less current maturities
    
    
    688,593
    
    
    
    1,421,272Long term deferred revenue, less current portion
    
    
    124,667
    
    
    
    Dividends payable
    
    
    3,464,934
    
    
    
    1,869,107Total liabilities
    
    
    38,359,826
    
    
    
    35,295,506Warrants Payable  Series H Preferred Stock
    
    
    169,768
    
    
    
    169,768Stockholders DeficitHomeland Security Capital Corporation stockholders deficit:Preferred stock, $0.01 par value, 10,000,000 shares authorized,
1,559,985 and 1,918,080 shares issued and outstanding, respectively
    
    
    14,225,110
    
    
    
    14,261,207Common stock, $0.001 par value, 2,000,000,000 shares authorized,
51,624,725 and 53,270,160 shares issued and
48,054,294 and 49,699,729 shares outstanding, respectively
    
    
    51,625
    
    
    
    53,270Additional paid-in capital
    
    
    55,297,972
    
    
    
    54,131,548Additional paid-in capital  warrants
    
    
    272,529
    
    
    
    272,529Treasury stock  3,570,431 shares at cost
    
    
    (250,000
    )
    
    
    (250,000
    )Accumulated deficit
    
    
    (70,509,228
    )
    
    
    (70,817,549
    )Accumulated comprehensive loss
    
    
    (301,153
    )
    
    
    (141,591
    )Total Homeland Security Capital Corporation stockholders deficit
    
    
    (1,213,145
    )
    
    
    (2,490,586
    )Noncontrolling interest
    
    
    153,935
    
    
    
    (135,931
    )Total stockholders deficit
    
    
    (1,059,210
    )
    
    
    (2,626,517
    )Total liabilities and stockholders deficit
    
    $
    37,470,384
    
    
    $
    32,838,757
   F-3




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##### Table of Contents



STATEMENTS OF OPERATIONS
 
 Years Ended June 30,2010
    
    
    2009Net contract revenue
    
    $
    97,899,868
    
    
    $
    80,839,347Contract costs
    
    
    77,807,174
    
    
    
    69,156,496Gross profit on contracts
    
    
    20,092,694
    
    
    
    11,682,851Operating expenses:Marketing
    
    
    278,298
    
    
    
    308,499Personnel
    
    
    7,976,068
    
    
    
    8,881,940Insurance and facility costs
    
    
    718,484
    
    
    
    683,224Rent expense to related party
    
    
    344,000
    
    
    
    344,000Travel and transportation
    
    
    436,749
    
    
    
    502,888Other operating costs
    
    
    609,533
    
    
    
    939,776Depreciation and amortization
    
    
    1,374,456
    
    
    
    1,285,756Amortization of intangible assets
    
    
    44,558
    
    
    
    106,250Professional services
    
    
    1,120,406
    
    
    
    711,776Administrative costs
    
    
    1,396,686
    
    
    
    1,253,394Total operating expenses
    
    
    14,299,238
    
    
    
    15,017,503Operating income (loss)
    
    
    5,793,456
    
    
    
    (3,334,652
    )Other (expense) income:Interest expense
    
    
    (235,160
    )
    
    
    (294,810
    )Interest expense to related party
    
    
    (1,858,750
    )
    
    
    (1,717,181
    )Amortization of debt discounts and offering costs
    
    
    (412,263
    )
    
    
    (552,943
    )Currency loss
    
    
    (59,085
    )
    
    
    (405,821
    )Impairment losses
    
    
    (530,264
    )
    
    
    (3,317,837
    )Other income
    
    
    73,033
    
    
    
    92,597Total other expense
    
    
    (3,022,489
    )
    
    
    (6,195,995
    )Income (loss) before income taxes
    
    
    2,770,967
    
    
    
    (9,530,647
    )Income tax expense
    
    
    (590,230
    )
    
    
    Net income (loss)
    
    
    2,180,737
    
    
    
    (9,530,647
    )Less: Net (income) loss attributable to
noncontrolling interests
    
    
    (261,864
    )
    
    
    74,180Net income (loss) attributable to Homeland
Security Capital Corporation stockholders
    
    
    1,918,873
    
    
    
    (9,456,467
    )Less preferred dividends and other beneficial conversion
features associated with preferred stock issuance
    
    
    (1,610,551
    )
    
    
    (2,082,998
    )Net income (loss) attributable to common stockholders
of Homeland Security Capital Corporation
    
    $
    308,322
    
    
    $
    (11,539,465
    )Income (loss) per common share attributable to Homeland
Security Capital Corporation stockholders 
basic and dilutedBasic
    
    $
    0.01
    
    
    $
    (0.24
    )Diluted
    
    $
    0.00
    
    
    $
    (0.24
    )Weighted average shares outstanding Basic
    
    
    51,291,270
    
    
    
    47,664,614Diluted
    
    
    699,666,666
    
    
    
    47,664,614
   F-4




---



##### Table of Contents



STATEMENTS OF CASH FLOWS
 
 Years Ended June 30,2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    2,180,737
    
    
    $
    (9,530,647
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Share-based compensation expense
    
    
    1,075,625
    
    
    
    2,150,773Stock issued for services
    
    
    38,333
    
    
    
    Depreciation
    
    
    1,863,333
    
    
    
    1,842,723Amortization of intangibles
    
    
    44,558
    
    
    
    106,250Loss on disposal of assets
    
    
    9,630
    
    
    
    5,843Impairment losses on securities available for sale
    
    
    104,997
    
    
    
    3,317,837Impairment loss on equipment held for sale
    
    
    425,267
    
    
    
    Write off of note receivable  related party
    
    
    
    
    
    
    90,400Amortization of debt offering costs and discounts
    
    
    412,263
    
    
    
    552,943Accrued interest on notes receivable  related parties
    
    
    (18,500
    )
    
    
    Accrued interest due to related parties
    
    
    1,856,836
    
    
    
    1,799,291Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,339,093
    )
    
    
    (1,448,066
    )Costs in excess of billings on uncompleted contracts
    
    
    (3,396,845
    )
    
    
    1,722,131Other assets
    
    
    43,443
    
    
    
    (514,004
    )Accounts payable
    
    
    (1,546,149
    )
    
    
    3,801,201Billings in excess of costs on uncompleted contracts
    
    
    5,375
    
    
    
    197,723Accrued compensation
    
    
    (95,805
    )
    
    
    295,263Accrued other liabilities
    
    
    (156,335
    )
    
    
    (238,967
    )Income taxes payable
    
    
    551,941
    
    
    
    Deferred revenue
    
    
    150,358
    
    
    
    16,472Net cash provided by operating activities
    
    
    209,969
    
    
    
    4,167,166Cash flows from investing activities:Purchase of fixed assets
    
    
    (383,206
    )
    
    
    (741,008
    )Proceeds from sale of assets
    
    
    29,481
    
    
    
    45,141Purchase of marketable fixed income securities
    
    
    (1,656,471
    )
    
    
    Sales of marketable fixed income securities
    
    
    784,044
    
    
    
    Investment in equity of subsidiaries
    
    
    
    
    
    
    (113,403
    )Investment received for noncontrolling interest of subsidiary
    
    
    28,000
    
    
    
    Net cash used in investing activities
    
    
    (1,198,152
    )
    
    
    (809,270
    )Cash flows from financing activities:Net borrowings (payments) on line of credit
    
    
    1,650,000
    
    
    
    (1,853,935
    )Debt offering costs
    
    
    
    
    
    
    (50,000
    )Repayments of debt
    
    
    (1,062,369
    )
    
    
    (647,333
    )Proceeds from notes payable  related parties
    
    
    
    
    
    
    50,000Repayment of notes payable  related parties
    
    
    (50,110
    )
    
    
    (1,608,247
    )Net cash provided by (used in) financing activities
    
    
    537,521
    
    
    
    (4,109,515
    )Effect of exchange rate changes on cash
    
    
    (76,443
    )
    
    
    (74,204
    )Net decrease in cash
    
    
    (527,105
    )
    
    
    (825,823
    )Cash, beginning of year
    
    
    2,356,534
    
    
    
    3,182,357Cash, end of year
    
    $
    1,829,429
    
    
    $
    2,356,534
   F-5




---



##### Table of Contents



STATEMENTS OF STOCKHOLDERS EQUITY
 
 Homeland Security Capital Corporation ShareholdersAdditionalAdditional
    
    
    Paid-In
    
    
    
    
    
    
    
    
    
    
    Accumulated
    
    
    
    
    
    
    TotalPreferred
    
    
    Common Stock
    
    
    Paid-In
    
    
    Capital 
    
    
    Treasury
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Noncontrolling
    
    
    StockholdersStock
    
    
    Shares Issued
    
    
    Amount
    
    
    Capital
    
    
    Warrants
    
    
    Stock
    
    
    Deficit
    
    
    Loss
    
    
    Interest
    
    
    (Deficit)Balance, July 1, 2008As previously reported
    
    $
    12,346,482
    
    
    
    48,846,244
    
    
    $
    48,846
    
    
    $
    51,385,199
    
    
    $
    148,652
    
    
    $
    
    
    
    $
    (59,339,836
    )
    
    $
    (1,521,971
    )
    
    $
    
    
    
    $
    3,067,372Adjustment for adoption of
FASB ASC 810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,750
    
    
    
    
    
    
    
    (61,750
    )
    
    
    Balance, July 1, 2008 as restated
    
    
    12,346,482
    
    
    
    48,846,244
    
    
    
    48,846
    
    
    
    51,385,199
    
    
    
    148,652
    
    
    
    
    
    
    
    (59,278,086
    )
    
    
    (1,521,971
    )
    
    
    (61,750
    )
    
    
    3,067,372Amortization 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,929,577Stock options exercised
    
    
    
    
    
    
    4,423,916
    
    
    
    4,424
    
    
    
    216,772
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    221,196Reduction in value of securities
available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,863,253
    )
    
    
    
    
    
    
    (1,863,253
    )Realization of impairment in value
of securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,317,837
    
    
    
    
    
    
    
    3,317,837Value of Series I shares released
from escrow
    
    
    1,900,000
    
    
    
    
    
    
    
    
    
    
    
    600,000
    
    
    
    123,877
    
    
    
    
    
    
    
    (600,000
    )
    
    
    
    
    
    
    
    
    
    
    2,023,877Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (74,204
    )
    
    
    
    
    
    
    (74,204
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,456,467
    )
    
    
    
    
    
    
    (74,180
    )
    
    
    (9,530,647
    )Balance, June 30, 2009
    
    
    14,261,207
    
    
    
    53,270,160
    
    
    
    53,270
    
    
    
    54,131,548
    
    
    
    272,529
    
    
    
    (250,000
    )
    
    
    (70,817,550
    )
    
    
    (141,591
    )
    
    
    (135,930
    )
    
    
    (2,626,517
    )Dividends on Series H and Series I
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,595,826
    )
    
    
    
    
    
    
    
    
    
    
    (1,595,826
    )Amortization of Series H warrants
    
    
    14,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,724
    )
    
    
    
    
    
    
    
    
    
    
    Conversion of Series G to common
    
    
    (35,808
    )
    
    
    1,611,360
    
    
    
    1,612
    
    
    
    34,196
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Conversion of Series H to common
    
    
    (15,013
    )
    
    
    500,010
    
    
    
    500
    
    
    
    14,513
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Value of vested stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,075,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,075,625Rescission of option exercise
    
    
    
    
    
    
    (4,405,720
    )
    
    
    (4,406
    )
    
    
    4,406
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Issuance of stock for services
    
    
    
    
    
    
    648,915
    
    
    
    649
    
    
    
    37,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,333Noncontrolling interests
investment in subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000
    
    
    
    28,000Decrease in value of securities available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (83,119
    )
    
    
    
    
    
    
    (83,119
    )Currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,443
    )
    
    
    
    
    
    
    (76,443
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,918,873
    
    
    
    
    
    
    
    261,864
    
    
    
    2,180,737Balance, June 30, 2010
    
    $
    14,225,110
    
    
    
    51,624,725
    
    
    $
    51,625
    
    
    $
    55,297,972
    
    
    $
    272,529
    
    
    $
    (250,000
    )
    
    $
    (70,509,227
    )
    
    $
    (301,153
    )
    
    $
    153,934
    
    
    $
    (1,059,210
    )
   F-6




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##### Table of Contents



HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 1. Organization and Nature of Business
       2. Summary of Significant Accounting Policies
   F-7




---



##### Table of Contents



F-8




---



##### Table of Contents



-
  -
     Gross Unrealized
    
    
    Recognized
    
    
    EstimatedCost
    
    
    Loss
    
    
    Impairment Loss
    
    
    Fair ValueJune 30, 2010
    
    $
    3,581,047
    
    
    $
    152,384
    
    
    $
    3,317,837
    
    
    $
    110,826June 30, 2009
    
    $
    3,581,047
    
    
    $
    69,265
    
    
    $
    3,317,837
    
    
    $
    193,945
   F-9




---



##### Table of Contents



-
    F-10




---



##### Table of Contents



Recent Accounting Pronouncements
  Improving Disclosures about Fair Value Measurements.
      F-11




---



##### Table of Contents



3. Fixed Assets, net
  June 30,2010
    
    
    2009Office equipment
    
    $
    398,599
    
    
    $
    382,293Operating equipment
    
    
    1,026,496
    
    
    
    3,622,584Computer equipment
    
    
    2,166,648
    
    
    
    1,951,472Vehicles
    
    
    930,706
    
    
    
    908,124Total cost
    
    
    4,522,449
    
    
    
    6,864,473Less accumulated depreciation
    
    
    (3,392,564
    )
    
    
    (2,465,640
    )Fixed assets, net
    
    $
    1,129,885
    
    
    $
    4,398,833
   4. Intangible Assets, net
  June 30,2010
    
    
    2009Depreciable intangibles:Non-compete agreements
    
    $
    92,665
    
    
    $
    92,665Contracts
    
    
    445,823
    
    
    
    445,823538,488
    
    
    
    538,488Less accumulated amortization
    
    
    (196,674
    )
    
    
    (152,116
    )341,814
    
    
    
    386,372Non-depreciable intangiblesTrademarks
    
    
    5,000
    
    
    
    5,000Total intangible assets, net of amortization
    
    $
    346,814
    
    
    $
    391,372
  F-12




---



##### Table of Contents



5. Goodwill
  6. Minority Interest in Ultimate Escapes, Inc.
    7. Income Taxes
     F-13




---



##### Table of Contents



June 30,2010
    
    
    2009Deferred tax assets:Net operating loss, capital loss and
research credit carryforwards
    
    $
    14,002,792
    
    
    $
    16,332,874Related party accruals
    
    
    1,557,242
    
    
    
    846,259Allowance for doubtful accounts
    
    
    87,526
    
    
    
    89,915Vacation and workers compensation
    
    
    231,528
    
    
    
    109,850Impairment loss on assets held for sale
    
    
    1,310,603
    
    
    
    1,270,400Other temporary differences
    
    
    7,620
    
    
    
    21,388Valuation allowance
    
    
    (16,574,871
    )
    
    
    (17,714,926
    )Total deferred tax assets
    
    
    622,440
    
    
    
    (955,760
    )Deferred tax liabilities:Depreciation and amortization expenses
    
    
    (440,298
    )
    
    
    (745,236
    )Amortization of intangible assets
    
    
    (130,874
    )
    
    
    (147,945
    )Other temporary differences
    
    
    (51,268
    )
    
    
    (62,579
    )Total deferred tax liabilities
    
    
    (622,440
    )
    
    
    955,760Net deferred tax assets
    
    $
    
    
    
    $
    
   F-14




---



##### Table of Contents



June 30,2010
    
    
    2009Federal income taxes at 34%
    
    $
    942,129
    
    
    $
    (3,335,726
    )Effect of permanent differences
    
    
    506,500
    
    
    
    376,289Other
    
    
    (107,896
    )
    
    
    State income tax
    
    
    389,552
    
    
    
    (47,016
    )Change in valuation allowance  current year
    
    
    (1,140,055
    )
    
    
    3,006,453Net income tax expense (benefit)
    
    $
    590,230
    
    
    $
    
  Year of
    
    Capital Loss
    
    
    NOL
    
    
    TotalExpiration
    
    Carryover
    
    
    Carryover
    
    
    Carryover2014
    
    $
    90,400
    
    
    $
    
    
    
    $
    90,4002017
    
    
    
    
    
    
    3,171,774
    
    
    
    3,171,7742018
    
    
    
    
    
    
    7,017,587
    
    
    
    7,017,5872019
    
    
    
    
    
    
    5,878,720
    
    
    
    5,878,7202020
    
    
    
    
    
    
    4,942,777
    
    
    
    4,942,7772021
    
    
    
    
    
    
    4,434,157
    
    
    
    4,434,1572022
    
    
    
    
    
    
    3,438,195
    
    
    
    3,438,1952023
    
    
    
    
    
    
    14,695
    
    
    
    14,6952024
    
    
    
    
    
    
    4,031,488
    
    
    
    4,031,4882025
    
    
    
    
    
    
    1,055,115
    
    
    
    1,055,1152026
    
    
    
    
    
    
    3,066,650
    
    
    
    3,066,6502027
    
    
    
    
    
    
    2,415,265
    
    
    
    2,415,2652028
    
    
    
    
    
    
    1,627,859
    
    
    
    1,627,859$
    90,400
    
    
    $
    41,094,282
    
    
    $
    41,184,682
  F-15




---



##### Table of Contents



8. Long-Term Debt
  June 30,2010
    
    
    2009Safety Promissory Note payable due in monthly
installments of $38,296 including interest at 5.22%
until March 20102 when the unpaid balance is due,
collateralized by equipment with an original cost of
$1,993,212. Repaid in its entirety subsequent to
June 30, 2010. (See Note 3).
    
    $
    1,058,860
    
    
    $
    1,452,342Safety Promissory Note payable due in monthly
installments of $20,870 including interest at 5.85%
until May 2011, when the unpaid balance is due,
collateralized by equipment with an original cost of
$648,000. Repaid in 2010.
    
    
    
    
    
    
    576,693Safety Revolving Line of Credit
    
    
    2,162,000
    
    
    
    512,000Nexus vehicle purchase obligations, due in
aggregate monthly installments of approximately
$7,700 including interest at rates averaging approximately
6% until August 2014, collateralized by
vehicles with an original cost of approximately $284,000
    
    
    165,758
    
    
    
    106,545Other notes payable, repaid in 2010
    
    
    
    
    
    
    20,708Total notes payable
    
    
    3,386,618
    
    
    
    2,668,288Less revolving line of credit
    
    
    (2,162,000
    )
    
    
    (512,000
    )Less current portion of term debt
    
    
    (536,025
    )
    
    
    (735,016
    )Long term portion
    
    $
    688,593
    
    
    $
    1,421,272
        2011
    
    $
    536,0252012
    
    
    662,3222013
    
    
    24,6552014
    
    
    1,616Total
    
    $
    1,224,618
  F-16




---



##### Table of Contents



9. Related Party Senior Notes Payable
   June 30,2010
    
    
    2009Senior Secured Notes Payable (the New Notes)
    
    $
    6,310,000
    
    
    $
    6,310,000Senior Secured Notes Payable (the Exchange
Notes)
    
    
    6,750,000
    
    
    
    6,750,000Less debt discount
    
    
    
    
    
    
    (34,053
    )Debenture interest conversion note
    
    
    878,923
    
    
    
    878,923Treasury stock purchase note
    
    
    250,000
    
    
    
    250,000Accrued interest on above notes
    
    
    4,066,967
    
    
    
    2,210,131Total notes payable
    
    
    18,255,890
    
    
    
    16,365,001Less current portion of term debt
    
    
    (500,000
    )
    
    
    Long term portion
    
    $
    17,755,890
    
    
    $
    16,365,001
 10. Convertible Preferred Stock
  Series F
  Series G
  Series H
   F-17




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##### Table of Contents



Series I
   June 30, 2010
    
    
    June 30, 2009Potential
    
    
    Accrued
    
    
    Potential
    
    
    AccruedPreferred Stock
    
    Common Shares
    
    
    Dividends
    
    
    Common Shares
    
    
    DividendsSeries F
    
    
    10,000,000
    
    
    
    
    
    
    
    10,000,000
    
    
    
    Series G
    
    
    
    
    
    
    
    
    
    
    1,611,360
    
    
    
    Series H
    
    
    562,833,323
    
    
    $
    2,745,033
    
    
    
    333,333,333
    
    
    $
    1,545,206Series I
    
    
    110,000,000
    
    
    $
    719,901
    
    
    
    110,000,000
    
    
    $
    323,901Total
    
    
    682,833,323
    
    
    $
    3,464,934
    
    
    
    454,944,693
    
    
    $
    1,869,107
  F-18




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##### Table of Contents



11. Stock Options
 Stock Options Awarded Under the 2005 Plan
  Stock Options Awarded Under the 2008 Plan
  Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan
    June 30, 2010
    
    
    June 30, 2009Weighted Average
    
    
    
    
    
    
    Weighted AverageExercise
    
    
    Grant Date
    
    
    
    
    
    
    Exercise
    
    
    Grant DateOptions
    
    
    Price
    
    
    Fair Value
    
    
    Options
    
    
    Price
    
    
    Fair ValueOutstanding at
beginning of period
    
    
    75,669,374
    
    
    $
    0.057
    
    
    $
    0.049
    
    
    
    9,560,000
    
    
    $
    0.103
    
    
    $
    0.107Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,850,000
    
    
    
    0.050
    
    
    
    0.036Rescinded
(Exercised)
    
    
    7,640,626
    
    
    
    0.050
    
    
    
    0.036
    
    
    
    (7,673,986
    )
    
    
    0.050
    
    
    
    0.036Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (66,640
    )
    
    
    0.050
    
    
    
    0.036Outstanding at
end of period
    
    
    83,310,000
    
    
    $
    0.056
    
    
    $
    0.044
    
    
    
    75,669,374
    
    
    $
    0.057
    
    
    $
    0.049Options exercisable
at end of period
    
    
    83,310,000
    
    
    $
    0.056
    
    
    $
    0.044
    
    
    
    47,992,293
    
    
    $
    0.060
    
    
    $
    0.050
  F-19




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##### Table of Contents



12. Common Stock Warrants
     13. Fair Value Measurements
 Fair Value Measurements and Disclosures Fair Value Measurements,
   F-20




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##### Table of Contents



14. Business Segments
   For the Year Ended June 30, 2010Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    85,723,970
    
    
    $
    10,207,192
    
    
    $
    1,968,706
    
    
    $
    97,899,868Gross margin
    
    
    
    
    
    
    17,025,476
    
    
    
    2,988,563
    
    
    
    78,655
    
    
    
    20,092,694Operating expenses
    
    
    2,480,103
    
    
    
    10,743,617
    
    
    
    1,045,631
    
    
    
    29,887
    
    
    
    14,299,238Other expense  net
    
    
    (1,882,547
    )
    
    
    (754,365
    )
    
    
    (385,577
    )
    
    
    
    
    
    
    (3,022,489
    )Income tax (benefit) expense
    
    
    (1,696,641
    )
    
    
    2,184,100
    
    
    
    102,771
    
    
    
    
    
    
    
    590,230Net income (loss)
    
    
    (2,666,009
    )
    
    
    3,343,394
    
    
    
    1,454,584
    
    
    
    48,768
    
    
    
    2,180,737Current assets
    
    
    243,276
    
    
    
    22,730,459
    
    
    
    4,162,952
    
    
    
    111,922
    
    
    
    27,248,609Total assets
    
    
    829,732
    
    
    
    32,087,825
    
    
    
    4,440,905
    
    
    
    111,922
    
    
    
    37,470,384Interest expense
    
    
    1,858,747
    
    
    
    227,486
    
    
    
    7,677
    
    
    
    
    
    
    
    2,093,910Depreciation expense
    
    
    
    
    
    
    1,793,143
    
    
    
    70,190
    
    
    
    
    
    
    
    1,863,333Capital expenditures
    
    
    
    
    
    
    350,949
    
    
    
    162,956
    
    
    
    
    
    
    
    513,905
  F-21




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##### Table of Contents



For the Year Ended June 30, 2009Homeland Security
    
    Holding
    
    
    Services
    
    
    Services
    
    
    ProductsCapital Corporation -
    
    Company
    
    
    Company
    
    
    Company
    
    
    CompanyConsolidated
    
    (HSCC)
    
    
    (Safety)
    
    
    (Nexus)
    
    
    (PMX)
    
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    72,106,878
    
    
    $
    6,462,511
    
    
    $
    2,269,958
    
    
    $
    80,839,347Gross margin
    
    
    
    
    
    
    9,931,852
    
    
    
    1,658,522
    
    
    
    92,477
    
    
    
    11,682,851Operating expenses
    
    
    4,099,586
    
    
    
    9,763,645
    
    
    
    1,154,272
    
    
    
    
    
    
    
    15,017,503Other expense  net
    
    
    (5,396,764
    )
    
    
    (795,173
    )
    
    
    (4,058
    )
    
    
    
    
    
    
    (6,195,995
    )Income tax (benefit) expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net (loss) income
    
    
    (9,496,350
    )
    
    
    (342,340
    )
    
    
    500,192
    
    
    
    (192,149
    )
    
    
    (9,530,647
    )Current assets
    
    
    413,578
    
    
    
    16,890,714
    
    
    
    2,279,900
    
    
    
    748,580
    
    
    
    20,332,772Total assets
    
    
    631,412
    
    
    
    28,954,567
    
    
    
    2,504,198
    
    
    
    748,580
    
    
    
    32,838,757Interest expense
    
    
    1,717,435
    
    
    
    276,776
    
    
    
    17,780
    
    
    
    
    
    
    
    2,011,991Depreciation expense
    
    
    7,593
    
    
    
    1,792,014
    
    
    
    43,116
    
    
    
    
    
    
    
    1,842,723Capital expenditures
    
    
    
    
    
    
    737,979
    
    
    
    61,165
    
    
    
    
    
    
    
    799,144
 15. Earnings (Loss) Per Share
    Year Ended June 30,2010
    
    
    2009Basic and Diluted Earnings (Loss) Per Share:Income (Loss) (Numerator)
    
    $
    1,918,873
    
    
    $
    (9,456,467
    )Less: Series H Preferred Stock beneficial
conversion feature
    
    
    (14,724
    )
    
    
    (14,724
    )Less: Preferred stock dividends
    
    
    (1,595,827
    )
    
    
    (1,468,274
    )Less: Series I Preferred Stock beneficial
conversion feature
    
    
    
    
    
    
    (600,000
    )Income (Loss) attributable to common
stockholders
    
    $
    308,322
    
    
    $
    (11,539,465
    )Shares (Denominator)Weighted-average number of common
shares:Basic
    
    
    51,291,270
    
    
    
    47,664,614Diluted
    
    
    699,666,666
    
    
    
    47,664,614Earnings Per Common ShareBasic income (loss) per share
    
    $
    0.01
    
    
    $
    (0.24
    )Diluted income (loss) per share
    
    $
    0.00
    
    
    $
    (0.24
    )
  F-22




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##### Table of Contents



16. Cash Flows
  Year Ended June 30,2010
    
    
    2009Cash paid during the period for:Interest
    
    $
    227,486
    
    
    $
    294,556Taxes
    
    
    7,677
    
    
    
    Supplemental disclosure for noncash investing
and financing activity:Preferred stock released from escrow
    
    $
    
    
    
    $
    2,023,877Temporary impairment of value of securities
available for sale
    
    
    83,119
    
    
    
    1,863,253Dividends accrued on Preferred Stock
    
    
    1,595,827
    
    
    
    1,468,274Dividends paid with Preferred Stock
    
    
    14,724
    
    
    
    14,724Reverse cashless exercise of stock option
    
    
    (4,406
    )
    
    
    Conversion of Series G Preferred Stock
    
    
    35,808
    
    
    
    Conversion of Series H Preferred Stock
    
    
    15,013
    
    
    
    Purchase of treasury stock for notes
    
    
    
    
    
    
    250,000Equipment purchased under capital leases
    
    
    130,699
    
    
    
    58,136
  F-23




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##### Table of Contents



17. Commitments and Contingencies
 Leases
  Year Ended June 30,2011
    
    $
    548,0922012
    
    
    391,7032013
    
    
    344,0282014
    
    
    344,0282015
    
    
    344,028Thereafter
    
    
    1,003,775$
    2,975,654
  Commitments
  Claims
  18. Related Party Transactions
   19. Concentration of Customers and Suppliers
 Significant Customers
   F-24




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##### Table of Contents



Significant Suppliers
  20. Changes in Estimates
  21. Continuing Operations
   22. Contingencies
  23. Subsequent Events
 Conversion of Series H Convertible Preferred Shares
   F-25




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##### Table of Contents



Ultimate Escapes, Inc. Bankruptcy Filing
    F-26