**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**


**(Mark
      one)**




x
            ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the fiscal year ended December 31, 2007ORo
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934


For
      the
      transition period from ____________ to _______________





Commission
      File No. **814-00631**





**Homeland
      Security Capital Corporation**


(Exact
      Name of Registrant as Specified in Charter)





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




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




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




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





Securities
      Registered Under Section 12(g) of the Exchange Act: None





Indicate
      by check mark if the issuer is not required to file reports pursuant to section
      13 or 15(d) of the Exchange Act. o No x





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act, as amended (the “Exchange Act”) during the
      past 12 months (or for such shorter period that the registrant was required
      to
      file such reports), and (2) has been subject to such filing requirements for
      the
      past 90 days. Yes x No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





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





State
      registrant’s revenues for the fiscal year ended December 31, 2007 :
      $12,628,183.




The
      aggregate market value of common stock held by non-affiliates of the registrant
      as of March 28, 2008, was approximately $2,350,130 based on the closing price
      on
      the Over-The-Counter Electronic Bulletin Board. For purposes of this
      computation, shares held by certain stockholders and by directors and executive
      officers of the registrant have been excluded. Such exclusion of shares held
      by
      such persons is not intended, nor shall it be deemed, to be an admission that
      such persons are affiliates of the Registrant. There were 49,246,244 shares
      of
      the Registrant’s common stock, par value $0.001 per share (the “Common Stock”)
      outstanding at March 28, 2008.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




[Not
      applicable]









**TABLE
      OF CONTENTS**


**Page**FORWARD-LOOKING
                    STATEMENTS AND ASSOCIATED RISKS
                1PART
                    I
                2Item
                    1. Business
                2Item
                    2. Properties
                21Item
                    3. Legal Proceedings
                21Item
                    4. Submission Of Matters To A Vote Of Security Holders
                21PART
                    II
                22Item
                    5. Market For Common Equity, Related Stock Holder Matters And
                    Issuer
                    Purchases Of Equity Securities
                22Item
                    6. Management’s Discussion And Analysis Of Financial Condition And Results
                    Of Operations
                24Item
                    7. Financial Statements
                31Item
                    8. Changes In And Disagreements With Accountants On Accounting
                    And
                    Financial Disclosure
                31Item
                    8A(T). Controls And Procedures
                31Item
                    8B. Other Information
                32PART
                    III
                33Item
                    9. Directors And Executive Officers
                33Item
                    10. Executive Compensation
                36Item
                    11. Security Ownership Of Certain Beneficial Owners And Management
                    And
                    Related Stockholder
                39Item
                    12. Certain Relationships And Related Transactions
                41Item
                    13. Exhibits
                43Item
                    14. Principal Accountant Fees And Services
                46SIGNATURES
                48EXHIBIT
                    31.1EXHIBIT
                    31.2EXHIBIT
                    32.1EXHIBIT
                    32.2




This
      Annual Report on Form 10-KSB contains forward-looking statements that involve
      certain risks and uncertainties. Homeland Security Capital Corporation’s actual
      results could differ materially from the results discussed in the
      forward-looking statements. See “Description of Business”, “Risk Factors” and
“Forward-Looking Statements and Associated Risks.”




i




**FORWARD-LOOKING
      STATEMENTS AND ASSOCIATED RISKS**




Information
      included or incorporated by reference in this filing may contain forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933,
      as
      amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of
      1934, as amended (the “Exchange Act”). This information may involve known and
      unknown risks, uncertainties and other factors which may cause our actual
      results, performance or achievements to be materially different from the future
      results, performance or achievements expressed or implied by any forward-looking
      statements. Forward-looking statements, which involve assumptions and describe
      our future plans, strategies and expectations, are generally identifiable by
      use
      of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other
      variations on these words or comparable terminology.




This
      filing contains forward-looking statements, including statements regarding,
      among other things, our (a) projected revenues and profitability, (b) growth
      strategies, (c) future financing plans and (d) anticipated needs for working
      capital. These statements may be found under “Management’s Discussion and
      Analysis of Financial Condition and Results of Operations” and “Business,” as
      well as in this prospectus generally. Actual events or results may differ
      materially from those discussed in forward-looking statements as a result of
      various factors, including, without limitation, the risks outlined under “Risk
      Factors” beginning on page 13 and matters described in this filing generally. In
      light of these risks and uncertainties, there can be no assurance that the
      forward-looking statements contained in this filing will in fact
      occur.




1




**PART
      I**




**Item
      1. Business**




**History**




Homeland
      Security Capital Corporation (together with any subsidiaries shall be referred
      to as the “Company,” “we,” “us” and “our”) is a consolidator in the fragmented
      homeland security industry. The Company is focused on creating long-term value
      by taking controlling interest and developing its subsidiary companies through
      superior operations and management. We intend to operate businesses that provide
      homeland security products and services solutions, growing organically and
      by
      acquisitions. The Company is targeting growth companies that are generating
      revenues but face challenges in scaling their businesses to capitalize on
      homeland security opportunities. The Company will enhance the operations of
      these companies by helping them generate new business, grow revenues and improve
      cash flows.




The
      Company was incorporated in Delaware in August 1997 under the name “Celerity
      Systems, Inc.” The Company’s original business was to develop and manufacture
      digital set top boxes and digital video servers for interactive television
      and
      high speed internet networks ("interactive video"). The Company also designed, developed, installed, and
      supported CD-ROM software products for business applications. In February 2001,
      the Company completed the sale of its CD-ROM segment. The sales of interactive
      video products were made direct to its customers, except for the education
      market which was conducted through a network of distributors.





On
      June
      3, 2003, the Company elected to become a business development company (“BDC”),
      to be regulated pursuant to Section 54 of the Investment Company Act of 1940,
      as
      amended (the “Investment Company Act”). A business development company is an
      investment company designed to assist eligible portfolio companies with capital
      formation and management advice. Accordingly, the Company changed its business
      plan to primarily seek investments in developing companies.




As
      a BDC,
      the Company had three investments. First, the Company entered into a business
      development agreement with Sagamore Holdings,
      Inc. ("Sagamore")  and
      received 7,500,000 shares of Sagamore common stock as consideration for its
      agreement to provide future services regarding capital formation and management
      advice. These shares have no value. Second, the Company had direct investments
      in two companies, the first being in a wholly-owned subsidiary named Celerity Systems,
      Inc., a Nevada corporation ("Celerity-Nevada"), and the other a minority
      interest in Yorkville Advisors Management, LLC ("Yorkville"). In the
      fourth quarter of 2004, Celerity-Nevada was closed with the business and the
      related assets sold. Yorkville returned the Company’s investment in Yorkville to
      the Company as a liquidating distribution.





On
      December 30, 2005, at a special stockholders meeting, the stockholders of the
      Company voted to amend the Certificate of Incorporation of the Company to change
      the name to “Homeland Security Capital Corporation” and voted to withdraw the
      Company’s election as a BDC. Accordingly, the Company changed its business plan
      to primarily seek acquisition of, and joint ventures with, companies that
      provide homeland security products and services.




**Business
        Overview**
  We
        are
        seeking to build consolidated enterprises through the acquisition and
        integration of multiple businesses in the homeland security industry. We
        are
        seeking to create long-term stockholder value by taking controlling interests
        in
        companies that provide homeland security products and services and helping
        them
        develop through superior operations, management and acquisitions. Our value
        creation strategy is designed to foster significant growth at our platform
        companies by providing leadership and counsel, capital support and financial
        expertise, strategic guidance and operating discipline, access to best practices
        and industry knowledge. We are targeting emerging and established companies
        in
        fragmented sectors of the homeland security industry. These target companies
        are
        generating revenues from promising technologies and security products and
        services but face challenges in scaling their businesses to capitalize on
        opportunities in the homeland security industry.
  Our
        goal
        is to become a leading consolidator of product and service companies in the
        fragmented homeland security industry. We believe that our strong
        intergovernmental relationships, the operating and acquisition expertise
        of our
        management team, and our ability to address the needs of our subsidiary
        management teams will allow us to achieve our goal of being the “consolidator of
        choice” of acquisition candidates in the homeland security
        industry.
  2
  In
        order
        to achieve our goal, we will focus on:
  ·
              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 earnouts 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
  ·
              acquiring
                  follow-on companies that provide complementary products or services
                  to our
                  platform companies.
  We
        offer
        a range of operational and management services to each of our subsidiaries
        through a team of dedicated professionals. Our subsidiaries will compensate
        our
        holding company for such services. We engage in an ongoing planning and
        assessment process through our involvement and engagement in the development
        of
        our platform companies, and our executives provide mentoring, advice and
        guidance to develop the management of these companies.
  In
        general, we expect to hold our ownership interest in our platform companies
        as
        long as we believe that such company meets our strategic criteria and that
        we
        can leverage our resources to assist them in achieving superior financial
        performance and value growth. When a platform company or other subsidiary
        no
        longer meets our strategic criteria, we will consider divesting the company
        and
        redeploying the capital realized in other acquisition and development
        opportunities. We may achieve liquidity events through a number of means,
        including sales of an entire company or sales of our interest in a company,
        which may include, in the case of public companies owned by us, sales in
        the
        open market or in privately negotiated sales and public offerings of the
        company’s securities. We may, in certain cases, take our platform companies
        public through a registered spinoff or stock dividend distribution by
        distributing our subsidiary’s stock held by us to our public stockholders and
        subsequently registering such shares with the United States Securities and
        Exchange Commission (the “SEC”). Alternatively, we may utilize a rights offering
        with respect to particular platform company. A rights offering is an initial
        public offering of a company directed to our stockholders. It involves the
        grant
        by a company to our stockholders of transferable rights to buy shares of
        the
        company’s stock at a price established by the company, us, and the underwriter,
        and supported by two independent valuations. Our stockholders are able to
        exercise the rights, thereby participating in the initial public
        offering.
  **The
        Industry**
  We
        believe the homeland security industry is among the fastest growing industries
        in the United States. We believe that the billions of dollars of governmental
        and private sector expenditures for homeland security should result in increased
        demand for homeland security products and services. We also believe that
        this
        anticipated growth should create attractive acquisition opportunities with
        significant potential for capital appreciation.
  The
        homeland security industry is not an easily defined market. In July 2002,
        the
        Department of Homeland Security published the National Strategy for the Homeland
        Security, which defines homeland security as “a concerted national effort to
        prevent terrorist attacks within the United States, reduce America’s
        vulnerability to terrorism, and minimize the damage and recover from attacks
        that do occur.” It identifies six mission areas:
  ·
              Intelligence
                  and Warning
  ·
              Border
                  and Transportation Security
  ·
              Domestic
                  Counterterrorism
  ·
              Protection
                  of Critical Infrastructure and Key
                  Assets
  ·
              Defense
                  Against Catastrophic Threats
  3
  ·
              Emergency
                  Preparedness and Response
  According
        to Homeland Security Research Corporation, a market research firm, assuming
        no
        new major terrorist attack, the worldwide homeland security market, including
        private sector expenditures, is forecasted to grow by nearly 100% from $231
        billion in 2006 to $518 billion in 2015. According to USBX Advisory Services,
        an
        investment bank serving the security industry, the overall security industry
        is
        highly fragmented with over 130 large, public players and thousands of emerging
        private companies in the industry. Another significant trend impacting the
        homeland security industry is the growing decentralized procurement for homeland
        security products and services between federal, state and local levels. We
        believe that the highly fragmented nature of the homeland security industry,
        and
        of its procurement, is driving growth and consolidation of the
        industry.
  **Our
        Solution**
  We
        offer
        the financial, managerial and operational resources to address the challenges
        facing our companies. We believe that our experience in developing and operating
        companies enables us to identify and attract companies with the greatest
        potential for success and to create value for our stockholders.
  **Management
        and Operational Support**
  We
        offer
        management and operational support to our platform companies. We believe
        these
        services provide our companies with significant competitive advantages in
        their
        individual markets. The resources that we can provide our companies in order
        to
        accelerate their development include the following:
  ·
              ***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.
  We
        engage
        in an ongoing planning and assessment process through our involvement and
        engagement in the development of our companies. Our executives provide
        mentoring, advice and guidance to develop the management of our companies.
        Our
        executives will generally serve on the boards of directors of our companies
        and
        work with them to develop and implement strategic and operating plans.
        Achievement of these plans is measured and monitored through reporting of
        performance measurements and financial results.
  We
        believe our business model provides us with competitive advantages. Our
        decentralized management approach allows managers of our acquired companies
        to
        benefit from the economies of a larger organization while simultaneously
        retaining local operational control, enabling them to provide flexible and
        responsive service to customers. Such an approach could, however, limit possible
        consolidation efficiencies and integration efforts. In addition, although
        our
        management team has experience in acquiring and consolidating businesses,
        we are
        unlikely to have experience in the specific sectors of the homeland security
        industry that we select for consolidation. We, therefore, expect to rely
        in part
        upon management of acquired companies or other individuals who are experienced
        in the sectors which we pursue for consolidation.
  4
  **Operating
        Strategy**
  ***Capitalize
        on Cross-Selling Opportunities.*** We
        leverage our current client relationships by cross-selling the range of products
        and services offered by our various platform companies. For example, we believe
        cross-selling opportunities will increase as we acquire businesses in other
        sectors of the homeland security industry.
  ***Achieve
        Operating Efficiencies.*** We
        intend to achieve operating efficiencies within our various platform companies.
        For example, as new businesses are acquired, we believe our existing technology
        infrastructure can support additional customers. At the corporate level,
        we will
        also seek to combine certain administrative functions, such as
        Sarbanes -Oxley
        compliance, financial reporting, insurance, employee benefits and legal support
        and to realize volume purchasing advantages with respect to travel and other
        purchases across the Company.
  ***Leverage
        Platform Company Autonomy.*** We
        conduct our operations on a decentralized basis whereby management of each
        platform company will be responsible for its day-to-day operations, sales
        and
        service relationships and the identification of additional acquisition
        candidates in their respective sectors. Our senior management will provide
        the
        platform companies with strategic oversight and guidance with respect to
        acquisitions, financing, marketing, operations and cross selling opportunities.
        We believe that a decentralized management approach will result in better
        customer service by allowing management of each platform company the flexibility
        to implement policies and make decisions based on the needs of customers.
        This
        management approach is in contrast to the traditional consolidation approach
        used by other consolidators in which the owners/operators and their employees
        are often relieved of management responsibility as a result of complete
        centralization of management in the consolidated enterprises.
  ***Implement
        Technology.*** We
        utilize technology to enhance our efficiency and ability to monitor our various
        companies. We believe we will be able to increase the operating margin of
        combined acquired companies by using operating and technology systems to
        improve
        and enhance the operations of the combined acquired companies. We believe
        that
        many of our acquired companies have not made material investments in such
        operating and technology systems because, as independent entities, they lack
        the
        necessary scale to justify the investment. We believe the implantation of
        such
        systems may significantly increase the efficiency of our acquired
        companies.
  **Acquisition
        Strategy**
  ***Identify
        and Pursue Strategic Consolidation Opportunities.*** We seek
        to capitalize upon consolidation opportunities in the homeland security industry
        by acquiring companies in growing sectors that will benefit from economies
        of
        scale having some or all of the following characteristics:
  ·
              generating
                  revenues and preferably profits, with established
                  customers;
  ·
              long-term
                  growth prospects for 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.
  We
        believe that the homeland security sectors in which we will pursue consolidation
        opportunities are fragmented and often headed by owners/operators who desire
        liquidity and may be unable to gain the scale necessary to access the capital
        markets effectively. These owner/operators also may not have access to the
        government markets that are characterized by complex and bureaucratic processes,
        protracted sales cycles, and diffused procurement between federal, state
        and
        local levels.
  ***Acquire
        Complementary Businesses.*** We
        intend to acquire businesses that offer additional expertise and cross-selling
        opportunities for our platform companies’ operations. We also believe that
        adding complementary businesses may offer geographic breadth and expand our
        target markets. Increasing our presence within geographic regions will allow
        us
        to service our clients more efficiently and cost effectively. As our customers’
industries continue to consolidate, we believe that national coverage and
        technology capabilities will become increasingly important.
  5
  ***Acquire
        Strategic New Businesses.*** We
        believe that there are numerous attractive fragmented sectors within the
        homeland security industry, such as products and services for the intelligence
        industry, medical, public health and environmental disaster management,
        surveillance and monitoring or remote sensing. By entering any one or more
        of
        these sectors, we may realize additional operating and revenue synergies
        across
        our platform companies, and may leverage existing relationships to create
        cross-selling opportunities.
  **Our
        Platform Companies**
  We
        currently conduct our ongoing operations through two majority-owned
        subsidiaries. The following chart provides certain information about those
        subsidiaries at December 31, 2007:
  **Name,
                  Address AndHeadquarters**
              
              **Place
                  Of Formation**
              
              **Ownership
                  Percentage**
              
              **Business**Nexus
                  Technologies Group, Inc.
                7
                  West Cross Street
                Hawthorne,
                  NY 10532
                www.nexusna.com
              
              Delaware,
                  USA
              
              93%
                (remaining
                  7% owned by Nexus management and directors)
              
              Nexus
                  Technologies Group, Inc. (“Nexus”) was formed in February 2006 and
                  designs, develops and installs integrated security systems in the
                  mid-Atlantic region.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. (“PMX”) was formed in September 2006 and designs and manufactures
                  proprietary network capable radiological detection and isotope
                  identification devices and distributes other radiological detection
                  equipment.
  As
        a
        result of our ownership percentage and control of the boards of directors
        of the
        above subsidiaries, we consolidate the results of operations, excluding the
        minority interests.
  The
        Company discontinued its RFID, access control and security software businesses
        upon the closing of the sale of its majority owned subsidiary , Security
        Holding Corp (“SHC”) , on
        August 29, 2007 (see Note 7 to the Consolidated Financial
        Statements).
  **Platform
        Company Businesses and Products**
  During
        2007, our revenues were generated from continuing operations sales of: (1)
        $12,378,450 consisting of engineering, design and installation of security
        systems and related services (Nexus), and (2) $249,733
        consisting of  radiological
        detection products, training and services (PMX). We
        believe that sales from these products and services will continue to increase
        during 2008, due mainly to the (i) the introduction of the new radiological
        detection devices and services sold by PMX; and (ii) the growth in our backlog
        of services provided by Nexus. Additionally, in 2008 each of these platform
        companies will have been in operation as a subsidiary of the Company on a
        continuous basis, which we believe will enable them to better estimate staffing
        needs, inventory levels and products and services offered.
  **Nexus
        Technologies Group, Inc.**
  In
        February 2006, we organized Nexus as a new subsidiary and purchased $3,400,000
        of Nexus’ convertible preferred stock. Simultaneously with its formation, Nexus
        acquired 100% of the outstanding common stock of Corporate Security Solutions,
        Inc. (“CSS”), a Pennsylvania corporation doing business as Nexus Technologies
        Group. Nexus, through CSS, provides integrated security systems for the
        corporate and governmental security markets. CSS, organized in 2004, provides
        its own brand of security integration, taking advantage of the rapidly growing
        field of electronic security. CSS currently has a strong presence in the
        Mid-Atlantic region ** with
        a
        focus on the New York City market.
  6
 The
        market for integrated security applications is one that is rapidly growing
        as
        the business and public sectors continue to recognize the importance and
        benefits of protecting their personnel, facilities and assets. Nexus is
        positioned to capitalize on this trend and lead the industry in system design
        and innovation. By leveraging a unique combination of the latest technology
        and its
        management’s 50 years
        of aggregate industry experience, Nexus
        provides innovative, engineered and scaleable solutions to effectively protect
        people, property and assets for regional, national and international
        organizations. Based on a solid reputation for excellence, Nexus is typically
        contracted for the more technically challenging security integration projects.
 
 Nexus
        has
        developed a strong niche in the electronic security market through its ability
        to engineer an open ended system which combines previously separated systems
        into one. This enables clients to utilize open ended technology between existing
        security technology and newly developed technology in the security
        sector.
  As
        a
        systems integrator, Nexus primarily designs, customizes, installs, connects
        and
        maintains closed circuit television and access control systems for customers
        in
        the private and public sectors. Either together or on a stand-alone basis,
        these
        systems detect and/or reduce crime, prevent unauthorized entry and record
        evidence of infractions or accidents. These systems have proven to be an
        effective tool in improving building and facility security
        management.
  Nexus
        has
        also utilized its security engineering capabilities to expand regionally
        in the
        multi-billion dollar electronic security market by contracting for more
        technically challenging projects initiated by medium- to larger-sized clients.
        Recently, Nexus has undertaken projects in a variety of markets, including:
        financial services, corporate and commercial, healthcare, government, utility
        services, public transportation, airports, industrial complexes, museums,
        prisons, higher education and data centers, as well as a national accounts
        program, geared for Fortune 500 companies.
  Nexus
        builds partnerships with customers by working closely with them to completely
        understand their specific needs. Security system solutions are a business
        process that impacts all departments in the complex organizations we serve.
        Nexus understands that to achieve the proper system, an in-depth understanding
        of the client’s business and their management information systems is vital. By
        taking the time to achieve a clear understanding of the client’s objectives,
        Nexus is able to maximize return on investment, system performance and customer
        satisfaction. Key tenets of the Nexus delivery program include:
  ·
              Providing
                  excellent care and superior service to our
                  customers;
  ·
              Delivering
                  consistency and uniformity for each
                  project;
  ·
              Offering
                  fully engineered solutions;
  ·
              Engineering
                  technology-driven and scalable
                  solutions;
  ·
              Possessing
                  in-house technical knowledge of all the technologies utilized;
                  and
  ·
              Providing
                  professional project management for all projects.
  The
        objective of Nexus is to become a leading systems integrator in security
        that
        extends its customer base across the United States. The key elements of Nexus’ strategy
        involve:
  ·
              Continued
                  application of new proven technological solutions for customer
                  security
                  needs;
  ·
              Aggressive
                  marketing to larger customers and projects regionally and
                  nationally;
  ·
              Growth
                  by acquisitions of, and joint ventures with, selected systems integrators
                  in complimentary geographic areas of the
                  country;
  7
  ·
              Expansion
                  of our work force in technical, marketing and managerial fields
                  as well as
                  our dealer network to capitalize on emerging business opportunities;
                  and
  ·
              Establishment
                  of additional offices in strategic business
                  locations.
  To
        maintain Nexus’ competitive edge, it is our policy to consistently seek and
        utilize nationally recognized third parties’ advanced technologies applicable to
        our customers’ and the marketplace’s evolving needs.
  Nexus
        is
        a non-proprietary provider of integrated security solutions including access
        control, alarm/intrusion, CCTV, communication, perimeter protection and bomb
        and
        metal detection security systems. Nexus is aligned with most of the major
        industry Original Equipment Manufacturers (OEMs), which provides our clients
        with flexibility and cost efficiency. This is a key aspect of the Nexus business
        model. While the technology that Nexus incorporates into its integrated
        electronic security systems is highly sophisticated and proprietary, Nexus
        has
        followed a policy of using commercial off-the-shelf technology (COTS) for
        the
        individual components that make up a system. This minimizes development costs
        on
        the front-end and provides the system with scalability and lower maintenance
        costs on the back-end.
  The
        systems developed by Nexus pull together all core facility security systems
        and
        seamlessly integrate information from these different enterprise subsystems.
        Ultimately, its engineered solutions enable its customers to have information
        they need to make critical decisions quickly and correctly.
  Information
        technology and networking are always critically important to corporate security
        infrastructure. Nexus products and services are grounded in IT standards.
        By
        utilizing the latest software industry practices and standards in the selection
        of its strategic partners, Nexus’ efforts bring the power of leading-edge
        technology and flexibility of open systems architecture to a previously
        proprietary security market.
  Nexus
        maintains the highest standards by continually reviewing and improving all
        of
        our work processes, procedures and policies to ensure our internal and external
        customer requirements are completely satisfied. The success of Nexus is measured
        by the satisfaction of its customers and subsequently, by the growth of its
        customer base.
  **Security
        Holding Corp.**
  In
        August
        2006, we acquired a majority interest in SHC,
        through the purchase of $3,000,000 of SHC’s convertible preferred stock.
        Simultaneous with our acquisition of SHC, SHC acquired 100% of the outstanding
        stock of Security Holdings Enterprises, Inc. (“SHEI”), a Wisconsin corporation,
        through a merger with SHC. SHEI owned 100% of the outstanding equity of each
        of
        Auto Access Identification, Inc. (“AAID”), SecurityInc, LLC (“SI”) and Cyberlynk
        (“CL”). Upon the consummation of the acquisition, SHEI ceased operations,
        leaving its aforementioned subsidiaries wholly owned by SHC. Also, in August
        2006, SHC acquired substantially all of the assets of Compass Technologies
        Inc.
        (“CTI”), a Delaware company, for $500,000 in cash.
  On
        August
        29, 2007, the Company discontinued the operations of its majority owned SHC
        subsidiary. The Company sold its ownership to Vuance Ltd. (“Vuance”) in exchange for 692,660 common
        shares of Vuance, valued at $3,581,052 on the date of the sale (see Note
        7 to
        the Consolidated Financial Statements). The Company continues to hold all
        of
        these Vuance shares.
  **Polimatrix,
        Inc.**
  In
        September 2006, we formed Polimatrix, Inc., a U.S. -based
        joint venture with Polimaster, Inc. (“Polimaster”), a company involved in the
        field of radiological detection and isotope identification. Polimaster has
        been
        in the radiological detection business for fifteen (15) years with its
        technology widely in use in the U.S. Department of State, U.S. Secret
        Service, Coast Guard and the New York Police Department.
  Studies
        have shown that a major threat to security on a national level is the potential
        introduction of nuclear and radiological contamination by terrorists through
        the
        use of a nuclear device or a “dirty bomb,” a radiological dispersion device
        (“RDD”) that is not a nuclear bomb and does not result in a nuclear explosion.
        Rather, an RDD is a device that contains radioactive materials and some method
        by which those materials can be spread over a wide area. Either of these
        devices
        can be built in a variety of sizes, and the radiation released can cause
        physical and environmental contamination, economic damage, and physical harm.
        According to a study by the Center for Technology and National Security Policy
        at the National Defense University, “The threat of a radiological attack on the
        United States is real, and terrorists have a broad palette of radiological
        isotopes to choose from. It could cause tens to hundreds of fatalities under
        the
        right circumstances, and is essentially certain to cause great panic and
        enormous economic losses.” According to the International Atomic Energy Agency
        (“IAEA”) there were 103 confirmed incidents of illicit trafficking and other
        unauthorized activities involving nuclear and radioactive materials in 2005,
        the
        latest year for which statistics are available.
  8
  The
        current deployment of nuclear and radiological detection devices around the
        world has been compared to a “Maginot Line of defense.” Most of the current
        detection devices are fixed as to location and are deployed at perimeter
        borders
        and ports. The current non-perimeter devices are located at obvious, easily
        avoided, areas such as New York’s Times Square, bridges and tunnels. The vast
        majorities of these devices are “dumb” devices and not networked and many of
        them are without isotope identification capability. Many of these devices
        are
        easily defeated if the nuclear or radiological materials are lightly
        shielded.
  PMX,
        through an exclusive agreement, purchases from Polimaster and resells portable
        handheld devices for networked radiological detection and isotope
        identification. This line of devices, named RadFlash, has been tested by
        several
        commercial customers and government agencies at both the federal and state
        levels. Additionally, the products have been rigorously field-tested by
        nationally recognized laboratories. These tests have shown the products to
        be
        superior to competitors products and in part led to the November 7, 2007
        award
        by the Illinois Law Enforcement Alarm System (ILEAS), of up
        to  20,000
        portable detectors. This award, which remains subject to final contract
        negotiations, is believed to be the largest such award in the United States.
        RadFlash is an exclusive line of devices which are highly cost effective,
        networkable and capable of rapid isotope identification, while eliminating
        many
        of the false positives inherent in most of our competition’s products. The
        unique advantages allow rapid low cost deployment of a distributed detection
        network that is randomized and layered. A major deployment of the RadFlash
        system will cost less than the competitors’ systems; systems that only have a
        fraction of the capabilities of the RadFlash system. The RadFlash network
        also
        provides real-time situational awareness and empowers command, control and
        communications.
  Accordingly,
        the PMX strategy includes:
  ·
              Widespread
                    deployment of a small, intelligent, networked isotope identification
                    device that is comparably
                    inexpensive;
  ·
              Deploying
                  devices with governmental and non-governmental individuals where
                  interactions with terrorists are most likely to occur (postal workers,
                  rental car agencies, toll booths and law enforcement
                  agencies);
  ·
              Saturate
                  cities with networked devices, effectively creating a randomized,
                  layered
                  and distributed network putting terrorists constantly at risk,
                  degrading
                  their ability to act, move, operate and attack (taxi cabs, subways,
                  courier services and police and fire departments);
                  and
  ·
              Keeping
                  devices small, scaleable, simple to use and cost effective, and
                  understanding and enabling real time networked communications for
                  command
                  and control tracking.
  **Investments**
  On
        August
        29, 2007, the Company completed the sale of its majority interest in SHC
        to
        Vuance. As consideration for its interest in SHC, the Company received 692,660
        restricted common shares in Vuance (NASDAQ: VUNC) valued at $5.17 per share
        or a
        total sales price of $3,581,052 (see Note 7 to the Consolidated Financials
        Statements).
  The
        Company classifies these Vuance shares as “available-for-sale” for financial
        reporting purposes and accordingly adjusts the carrying value of the shares
        at
        the closing market price on the valuation date by recording an increase or
        decrease in the value of this investment and a corresponding increase or
        decrease in shareholders’ equity. At December 31, 2007, the carrying value of
        this investment was $3,248,571 or $4.69 per share.
  On
        June
        1, 2007, the Company loaned $500,000 to Secure America Acquisition Holdings,
        LLC
        (“SAAH”), a company controlled by C. Thomas McMillen, our CEO. The loan was for
        working capital purposes and is evidenced by a note bearing five percent
        (5%)
        interest per annum and is due on or before May 31, 2011, with no prepayment
        penalties. The loan is guaranteed in its entirety by Mr. McMillen. SAAH is
        the
        initial principal stockholder in Secure America Acquisition Corporation
        (“SAAC”), a blank check company, whose primary purpose is to seek an acquisition
        or business combination in the homeland security industry, excluding companies
        whose primary focus is secure data facilities or whose enterprise value is
        less
        than $60,000,000. As an inducement for granting the loan, the Company received
        a
        membership interest in SAAH, which entitles it to receive 250,000 shares
        of
        common stock in SAAC, if and when SAAC completes an acquisition or business
        combination, which it has 24 months to consummate.
  9
  On
        October 22, 2007, the Company purchased seventy five thousand (75,000)
        membership interests in SAAH by making an investment in SAAH in the amount
        of
        one hundred fifty thousand dollars ($150,000). The membership interests entitle
        the Company to receive seventy five thousand (75,000) shares of common stock
        in
        SAAC, if and when SAAC completes an acquisition or business combination,
        which
        it has 24 months to consummate.
  SAAC
        (AMEX: HLD) completed an Initial Public Offering (“IPO”) on October 29, 2007.
        Notwithstanding the completion of the SAAC IPO, the Company does not value,
        at
        market prices, the shares of common stock of SAAC it is entitled to receive
        as a
        result of its membership interests in SAAH. Management believes that some
        uncertainty to the successful completion of an acquisition or business
        combination exists and therefore chooses to carry its loan to SAAH at the
        principal amount plus accrued interest less repayments and its investment
        in
        SAAH at the original investment amount. At December 31, 2007, these amounts
        were
        $414,099 and $150,000, respectively.
  Between
        November 19, 2007 and December 21, 2007, the Company loaned $90,400 to Green
        Energy Acquisition Holdings LLC (“GEAH”). The loans are for working capital
        purposes and are evidenced by a note that does not bear interest and is due
        the
        earlier of June 30, 2008 or the successful completion of an Initial Public
        Offering by Green Energy Acquisition Corporation (“GEAC”), in which GEAH is the
        initial principal shareholder. The notes are guaranteed in their entirety
        by C.
        Thomas McMillen, our CEO. At December 31, 2007, the amount outstanding on
        the
        note was $90,400.
  The
        Company measures impairment of its investments and notes on a monthly basis
        and
        adjusts the carrying amounts accordingly.
  **Significant
        Customers**
  As
        of
        December 31, 2007, Greystone Psychiatric Hospital was the only customer that
        accounted for greater than 10% of our consolidated revenues or consolidated
        net
        accounts receivable.
  **Significant
        Suppliers**
  As
        of
        December 31, 2007, our PMX
        subsidiary purchased all of its products from Polimaster, our joint venture
        partner in PMX. If our relationship with Polimaster were to terminate or
        if PMX
        were unable to purchase radiation detection products from them, for any reason,
        our business could be materially adversely affected.
  **Research
        and Development**
  Consistent
        with our product development strategy, we are seeking to identify and evaluate
        new products and services in all our subsidiaries. During 2006
        and
        2007, we did
        not have any
        research and development expenditures .
        During
        2008, we expect to focus our research and development efforts on existing
        and
        new products for homeland security applications, specifically in our PMX
        subsidiary. Although we identified several new additions to the PMX family
        of
        products we did not bring any products beyond the conceptual stage as of
        December 31, 2007. While we continue to move forward with our research and
        development programs and to pursue the establishment of proprietary patented,
        copyrighted or trademarked products, we do not expect to receive significant
        revenues in 2008 from these products.
  **Patents
        and Proprietary Rights**
  As
        of
        December 31, 2007, we do not have any patents. We rely primarily on a
        combination of trade secrets, confidentiality procedures and contractual
        provisions to protect our technology, intellectual property and proprietary
        rights. Despite our efforts to protect our rights, unauthorized parties may
        attempt to copy aspects of our products or to obtain and use information
        that we
        regard as proprietary. Policing unauthorized use of our technology and products
        is difficult. In addition, the laws of many countries do not protect our
        rights
        in information, materials and intellectual property that we regard as
        proprietary to as great an extent as do the laws of the United States. There
        can
        be no assurance that our means of protecting our rights in proprietary
        information, processes and technology will be adequate or that our competitors
        will not independently develop similar information, technology or intellectual
        property. See “Risk Factors” beginning on page 13.
  10
  In
        September 2006, we entered into an exclusive licensing agreement with Polimaster
        that entitles us to the exclusive intellectual property rights of the RadFlash
        product (other than in Japan, Egypt and the countries that comprised the
        former
        Soviet Union). The licensing agreement has a term that expires on December
        31,
        2007 but automatically renews for 10 one-year periods. The licensing agreement
        may be terminated by Polimaster if certain contractual milestones are not
        achieved by the end of the 2008 and 2009 calendar years. Polimaster is entitled
        to receive a 5% royalty fee based on gross revenues for the sale of the product.
        Polimaster has filed a patent application on the RadFlash product. We can
        offer
        no assurances that any patents will be awarded related to this product.
  **Competition**
  Many
        of
        our potential competitors are larger and have significantly greater financial,
        technical, marketing and other resources than we. Some of our competitors
        may
        form partnerships or alliances with other large homeland security companies,
        with the resulting entity possessing greater market strength than we have.
        Many
        of the areas in which we either compete or intend to compete are rapidly
        evolving. Competition may develop a patentable product or process that may
        prevent us from competing in our intended markets. While we expect to compete
        primarily on the basis of product performance, proprietary position and price
        and performance, in many cases the first company to introduce a product to
        the
        market will obtain at least a temporary competitive advantage over subsequent
        market entrants. We face competition in both of our subsidiaries as described
        below.
  ***Nexus.*** A
        large
        number of companies are involved in the security integration industry, an
        industry that received a significant impetus from the events of September
        11,
        2001. Many of these companies (such as Henry Brothers Electronics, Inc. and
        Diebold, Inc.) are significantly larger than Nexus and generally have greater
        financial resources at their disposal. We believe that our unique approach
        to
        business in this sector of the industry coupled with our highly engineered
        security system design and installation and our management teams many years
        of
        experience will be attractive to the marketplace. Given the size and importance
        of the homeland security market, we anticipate that even greater competition
        will emerge. Additionally, within the services segment of homeland security,
        there will continue to be significant additions to security services required.
        There will be continued pressure within this business segment by larger service
        providers such as Henry Brothers Electronics, Inc. However, niche segments
        exist
        that provide us significant opportunities that otherwise could be
        underrepresented.
  ***Polimatrix.*** The
        market for nuclear, radiological and isotope detection devices as applied
        to
        homeland security is new but rapidly  growing.
        Many large domestic and international companies (such as Thermo Scientific
        and
        Canberra) have  recently
        added a nuclear and radiological detection product line, either through
        acquisition or development. These companies are significantly larger than
        Polimatrix and have greater financial resources than Polimatrix. Our recent
        entry into this industry segment is through a joint venture with a long
        established well respected company. We believe that through our partners’ past
        success in this industry and our financial resources and management expertise,
        we will be able to gain a significant foothold in this emerging industry.
        Also,
        our development efforts have been concentrated primarily in handheld networked
        nuclear and radiological detection equipment. This niche segment of the market
        has less competitors and has no clear leader.
  **Manufacturing
        and Supply**
  Other
        than with Polimaster, our joint venture partner in PMX, we do not have any
        written agreements with our suppliers. Although we attempt to reduce our
        dependence on our suppliers, disruption or termination of any of the sources
        could occur, and such disruptions or terminations could have at least a
        temporary, materially adverse effect on our business, financial condition,
        and
        results of operations. Moreover, a prolonged inability to obtain alternative
        sources of supply could have a materially adverse effect on our relations
        with
        our customers.
  Generally,
        we find the products necessary for our operations to be readily available,
        either from the general marketplace for raw materials that are commonly
        available, or through our suppliers.
  **Government
        Regulation**
  Regulation
        by government authorities or international agencies in the United States
        and
        other countries is a significant consideration in the research, development,
        production, distribution and marketing of our radiological detection products.
        In order to test, manufacture, distribute, market and sell products, we must
        follow safety and other standards established by applicable regulatory
        authorities. We may be subject to various laws, regulations and requirements
        relating to such matters as the import and export of our products, ensuring
        safe
        working conditions and manufacturing practices, and the use, storage and
        disposal of hazardous or potentially hazardous substances used in connection
        with our research, development and manufacturing activities. The regulations
        potentially material to our business are summarized below.
  11
  **Radiological
        Detection.** The
        federal government does not specifically regulate performance of our
        radiological detection devices. However, in developing and testing our devices
        we use a number of radiological isotopes and materials to verify product
        effectiveness. Many of these isotopes are regulated by the International
        Atomic
        Energy Agency (IAEA) and require the users to obtain and maintain a current
        license to possess these materials. Also the IAEA regulates the purchase,
        shipment and storage of such materials, and we are subject to random inspection
        to assure compliance with specific regulations. If we fail to comply with
        the
        appropriate regulations or are not granted a renewal of our license, for
        any
        reason, the development of our products could be adversely affected.
        Additionally, our devices must meet the standards set forth by the American
        Standards Institute (“ANSI”) in order to be eligible for federal grant funds.
        PMX devices have been tested by Department of Homeland Security and other
        third-party validators and have been shown to meet these standards. As a
        result,
        our devices are listed on the Responder Knowledge Base list of available
        products and can be procured with such grant funds. Similar standards exist
        through the IAEA, and our devices also comport with these international
        standards. Beyond these general standards, individual procurements typically
        include qualifications that devices must meet to be procured. These procurement
        standards by necessity must be evaluated on a case by case basis.
  **Product
        Liability and Insurance**
  Our
        business exposes us to substantial product, occupational and other liability
        risks. These risks are inherent in product research and development,
        manufacturing, installation, marketing, distribution, and in the use of our
        products and operations. We have at our Nexus subsidiary, and will attempt
        to
        renew, product liability insurance in order to protect ourselves from such
        potential exposures; however there can be no guarantee that upon expiration
        of
        our current coverage, adequate insurance coverage will be available, or,
        if
        available, that the cost will be acceptable. Furthermore, a product liability
        or
        other claims could materially and adversely affect our business or financial
        condition. The terms of our customer agreements provide that liability is
        limited to our standard warranty to replace non-conforming product, and
        liability for consequential damages caused by the improper use of our products
        is limited by contractual terms. Nevertheless, one or more third parties
        could
        file suit against us based on product liability, breach of warranty or other
        claims. The foregoing contract clauses might effectively limit our liability
        in
        any such actions. Additionally, we intend to apply for “Homeland Security
        product coverage” under the United States Safety Act, specifically in reference
        to our PMX products. If this application is accepted, we, our manufacturers
        and
        our clients would be covered for liability of that product in the event the
        specified product was in place during an occurrence defined as a terrorism
        attack.
  **Employees**
  As
        of
        December 31, 2007, we had 27  full-time employees. We have 23
        employees employed by our Nexus subsidiary; 1
        employee employed by our PMX subsidiary; and 3
        employees employed by our corporate offices.
  We
        consider our relations with our employees to be good. None of our employees
        are
        covered by a collective bargaining agreement. We also employ a number of
        contractors, consultants and part time employees on a regular
        basis.
  The
        address of our principal executive offices, and our telephone and facsimile
        numbers at that address, and our website address are:
  Homeland
                  Security Capital Corporation
                1005
                  North Glebe Road, Suite 550
                Arlington,
                  VA 22201
                Telephone
                  No.: (703) 528-7073
                Facsimile
                  No.: (703) 528-0956
                www.hscapcorp.com
  12
  **RISK
        FACTORS**
  **WE
        ARE SUBJECT TO VARIOUS RISKS, WHICH MAY MATERIALLY HARM OUR BUSINESS, FINANCIAL
        CONDITION AND RESULTS OF OPERATIONS. YOU SHOULD CAREFULLY CONSIDER THE RISKS
        AND
        UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING BEFORE
        DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR UNCERTAINTIES
        ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD
        BE
        MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD
        DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.**
  ***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***
  The
        Company consolidates companies in the homeland security industry. Until its
        acquisitions of Nexus and Security Holding Corp. in 2006 and its joint venture
        with Polimaster in 2006, the Company had not generated any revenues other
        than
        interest income on its cash since 2002. The Company’s ability to generate
        revenues and earnings (if any) will be directly dependent upon the operating
        results of such acquired business and any additional acquisitions, and the
        successful integration and consolidation of those businesses. No assurances
        can
        be given that we will be successful in generating revenues and earnings based
        on
        our business model.
  ***We
        Are Dependent Upon Key Personnel Who Would Be Difficult To Replace And Whose
        Loss Could Impede Our Development***
  The
        Company believes that its success depends principally upon the experience
        of C.
        Thomas McMillen, its Chairman and Chief Executive Officer , and
        Michael T. Brigante, its Chief Financial Officer. Although Messrs . McMillen
        and Brigante have substantial experience in acquiring and consolidating
        businesses, our acquired companies personnel do not have significant experience
        in managing companies formed for the specific purpose of consolidating one
        or
        more companies. Additionally, Messrs. McMillen
        and Brigante did not have
        experience in managing companies in the various sectors of the homeland security industry
        (other than McMillen’s experience in managing Fortress America Acquisition
        Corporation (“FAAC”)). As a result, the Company likely will rely significantly
        on the senior management of the businesses it acquires .
        Such
        acquired senior management may not be suitable to the Company’s business model
        or combined operations.
  If
        the
        Company loses the services of one or more of its current executives, the
        Company’s business could be adversely affected. The Company may not successfully
        recruit additional personnel and any additional personnel that are recruited
        may
        not have the requisite skills, knowledge or experience necessary or desirable
        to
        enhance the incumbent management. The Company does maintain key man life
        insurance with respect to Mr. McMillen in amount of $5 million. (See
“Management.”) There can be no assurance that the Company will be able to obtain
        this insurance at an acceptable cost, or at all, in the future.
  ***Appropriate
        Acquisitions May Not Be Available Which May Adversely Affect Our
        Growth***
  The
        results of the Company’s planned operations are dependent upon the Company’s
        ability to identify, attract and acquire additional desirable acquisition
        candidates, which may take considerable time. The Company may not be successful
        in identifying, attracting or acquiring additional acquisition candidates,
        in
        integrating such candidates into the Company or in realizing profits from
        any
        acquisition candidates, if acquired. The failure to complete additional
        acquisitions or to operate the acquired companies profitably would have a
        material adverse effect on the Company’s business, financial condition and/or
        results of operations.
  ***If
        Our Consolidation Strategy Is Not Successful, Our Operations And Financial
        Condition Will Be Adversely Affected***
  One
        of
        the Company’s strategies is to increase its revenues, the range of products and
        services that it offers and the markets that it serves through the acquisition
        of additional homeland security businesses. To date, the Company has completed
        three acquisitions and has signed a nonbinding letter of intent with one
        other
        company. Investors have no basis on which to evaluate the possible merits
        or
        risks of any future acquisition candidates’ operations and prospects. Although
        management of the Company will endeavor to evaluate the risks inherent in
        any
        particular acquisition candidate, the Company may not properly ascertain
        all of
        such risks.
  13
  Management
        of the Company has significant flexibility in identifying and selecting
        prospective acquisition candidates. Management may not succeed in selecting
        acquisition candidates that will be profitable or that can be integrated
        successfully. Although the Company intends to scrutinize closely the management
        of a prospective acquisition candidate in connection with evaluating the
        desirability of effecting a business combination, the Company’s assessment of
        management may not prove to be correct. The Company may enlist the assistance
        of
        other persons to assess the management of acquisition candidates.
  One
        of
        the key elements of the Company’s internal growth strategy is to improve the
        profitability and increase the revenues of acquired businesses. The Company
        will
        seek to improve the profitability and increase the revenues of acquired
        businesses by various means, including combining administrative functions,
        eliminating redundant facilities, implementing system and technology
        improvements, purchasing products and services in large quantities and
        cross-selling products and services. The Company’s ability to increase revenues
        will be affected by various factors, including the Company’s ability to expand
        the products and services offered to the customers of acquired companies,
        develop national accounts and attract and retain a sufficient number of
        employees to perform the Company’s services. There can be no assurance that the
        Company’s internal growth strategies will be successful.
  ***Obligations
        Of Our Chief Executive Officer May Create A Conflict Of Interest That Could
        Adversely Affect The Company’s Operations***
  Our
        Chairman and Chief Executive Officer, C. Thomas McMillen (“McMillen”) is
        required to devote at least 25 hours per week to the Company pursuant to
        an
        employment agreement, dated as of September 1, 2007, with the Company (the
        “McMillen Employment Agreement”). Mr. McMillen also serves as Chairman and
        Co-Chief Executive Officer of Secure America Acquisition Corporation (SAAC),
        a
        homeland security special purpose acquisition corporation (SPAC) that completed
        an initial public offering on October 29, 2007 and as Vice Chairman of Fortress
        International Group, Inc. (“FIGI”), a mission critical firm that is the
        successor company to Fortress America Acquisition Corporation which completed an initial public offering in July 2005. The officers and directors
        of
        SAAC and FIGI, including McMillen, have an obligation, so long as they are
        an
        officer or director, to present to SAAC and FIGI for its consideration, prior
        to
        presentation to any other entity, including the Company, any business
        opportunity which may reasonably be required to be presented to them under
        Delaware law, subject, however, to any pre-existing fiduciary or contractual
        obligations they might have. The McMillen Employment Agreement does not preclude
        McMillen from competing with the Company through his position as Chairman
        of
        SAAC or a Vice Chairman of FIGI. It is possible, however, that SAAC and FIGI
        will become a competitor of ours if the business it acquires serves markets
        or
        sectors of the homeland security industry the Company is serving.
  ***Our
        Inability To Successfully Integrate Our Acquisitions May Adversely Affect
        Our
        Operations And Financial Condition***
  The
        Company’s business model is based upon an aggressive acquisition program. No
        assurance can be given that the Company will be able to successfully integrate
        its future acquisitions without substantial costs, delays or other problems.
        The
        costs of such acquisitions and their integration could have an adverse effect
        on
        short-term operating results. Such costs could include severance payments
        to
        employees of such acquired companies, restructuring charges associated with
        the
        acquisitions and other expenses associated with a change of control, as well
        as
        non-recurring acquisition costs including accounting and legal fees, investment
        banking fees, recognition of transaction-related obligations and various
        other
        acquisition-related costs. Any failure by the Company to make acquisitions
        would
        have a material adverse effect on the Company’s business, financial condition
        and results of operations. Moreover, the Company may be unable to replicate
        the
        success in consolidating various industries that other consolidators have
        achieved.
  The
        Company may not be able to execute successfully its consolidation strategy
        or
        anticipate all of the changing demands that consolidation transactions will
        impose on its management personnel, operational and management information
        systems and financial systems. The integration of newly acquired companies
        may
        also lead to diversion of management attention from other ongoing business
        concerns. In addition, the rapid pace of acquisitions may adversely affect
        the
        Company’s efforts to integrate acquisitions and manage those acquisitions
        profitably. Moreover, it is possible that neither management of the Company
        nor
        management of any of the acquired companies will have the necessary skills
        to
        manage a company implementing an aggressive acquisition program. The Company
        may
        seek to recruit additional managers to supplement the incumbent management
        of
        the acquired companies but the Company may not have the ability to recruit
        additional managers with the skills necessary to enhance the management of
        the
        acquired companies. Any or all of these factors could have a material adverse
        effect on the Company’s business, financial condition and/or results of
        operations.
  14
  ***Competition
        And Industry Consolidation May Limit Our Ability To Implement Our Business
        Strategies***
  The
        Company expects to face significant competition to acquire homeland security
        businesses from larger companies that currently pursue, or are expected to
        pursue, acquisitions as part of their growth strategies and as the industry
        undergoes continuing consolidation. Such competition could lead to higher
        prices
        being paid for acquired companies.
  The
        Company believes that the homeland security industry will undergo considerable
        consolidation during the next several years. The Company expects that, in
        response to such consolidation and in light of the Company’s financial
        resources, it will consider from time to time additional strategies to enhance
        stockholder value. These include, among others, strategic alliances and joint
        ventures; purchase, sale and merger transactions with other large companies;
        and
        other similar transactions. In considering any of these strategies, the Company
        will evaluate the consequences of such strategies, including, among other
        things, the potential for leverage that would result from such a transaction,
        the tax effects of the transaction, and the accounting consequences of the
        transaction. In addition, such strategies could have various other significant
        consequences, including changes in management, control or operational or
        acquisition strategies of the Company. There can be no assurance that any
        one of
        these strategies will be undertaken, or that, if undertaken, any such strategy
        will be completed successfully.
  ***Failure
        To Qualify For Investment Company Act Exemptions Could Adversely Effect Our
        Growth And Financial Condition***
  The
        regulatory scope of the Investment Company Act extends generally to companies
        engaged primarily in the business of investing, reinvesting, owning, holding
        or
        trading in securities. The Investment Company Act also may apply to a company
        which does not intend to be characterized as an investment company but which,
        nevertheless, engages in activities that bring it within the Investment Company
        Act’s definition of an investment company. The Company believes that its
        principal activities, which will involve acquiring control of operating
        companies and providing managerial and consulting services, will not subject
        the
        Company to registration and regulation under the Investment Company Act.
        The
        Company intends to remain exempt from investment company regulation either
        by
        not engaging in investment company activities or by qualifying for the exemption
        from investment company regulation available to any company that has no more
        than 45% of its total assets invested in, and no more than 45% of its income
        derived from, investment securities, as defined in the Investment Company
        Act.
  There
        can
        be no assurance that the Company will be able to avoid registration and
        regulation as an investment company. In the event the Company is unable to
        avail
        itself of an exemption or safe harbor from the Investment Company Act, the
        Company may become subject to certain restrictions relating to the Company’s
        activities, as noted below, and contracts entered into by the Company at
        such
        time that it was an unregistered investment company may be unenforceable.
        The
        Investment Company Act imposes substantive requirements on registered investment
        companies including limitations on capital structure, restrictions on certain
        investments, prohibitions on transactions with affiliates and compliance
        with
        reporting, record keeping, voting, proxy disclosure and other rules and
        regulations. Registration as an investment company could have a material
        adverse
        effect on the Company.
  ***Potential
        Tax Consequences Of Our Acquisitions May Adversely Affect Our Financial
        Conditions***
  As
        a
        general rule, federal and state tax laws and regulations have a significant
        impact upon the structuring of business combinations. The Company will evaluate
        the possible tax consequences of any prospective business combination and
        will
        endeavor to structure the business combination so as to achieve the most
        favorable tax treatment to the Company, the acquisition candidate and their
        respective stockholders. Nonetheless, the Internal Revenue Service (the “IRS”)
        or appropriate state tax authorities may not ultimately agree with the Company’s
        tax treatment of a consummated business combination. To the extent that the
        IRS
        or state tax authorities ultimately prevail in recharacterizing the tax
        treatment of a business combination, there may be adverse tax consequences
        to
        the Company, the acquisition candidate and/or their respective
        stockholders.
  15
  ***We
        May Be Dependent On Government Contracts For A Substantial Portion Of Our
        Revenues, And Any Reduction In The amount Of Business We Do With Federal,
        State
        And Local Governments And Government Agencies Could Have A Material Adverse
        Effect On Our Revenues, Operating Results And Financial
        Condition***
  We
        may
        derive a substantial portion of our revenues from contracts with federal,
        state
        and local governments and government agencies, including subcontracts under
        government prime contracts, and the success and growth of our business will
        continue to depend on our potential and current successful procurement of
        government contracts either directly or through prime contractors. Many of
        our
        government customers, such as the Department of Defense, the Department of
        Homeland Security and the Department of Health and Human Services, as well
        as
        state and local critical incident response agencies, are subject to stringent
        budgetary constraints and political considerations, and our business, revenues
        and operating results may be materially adversely affected if levels of
        government expenditures and authorizations for critical incident response
        related programs decrease, remain constant or shift to programs in areas
        where
        we do not provide products and services. Traditionally, the opportunities
        to
        generate significant profit margins under government contracts are limited.
        This
        is particularly true with respect to certain government contracts and
        subcontracts we perform that are subject to cost-allowability and reasonableness
        limitations that have no counterpart in the private sector. In addition,
        our
        business under government contracts may be adversely affected if:
  ·
              our
                  reputation or relationship with government agencies is impaired
                  and
                  reflected in past-performance ratings, which increasingly have
                  become the
                  determining factor among bidders in competitive
                  procurements;
  ·
              we
                  are prevented from entering into new government contracts, including
                  subcontracts issued under prime government contracts, or extending
                  existing government contracts based on violations or suspected
                  violations
                  of procurement laws or regulations;
  ·
              we
                  are not granted security clearances or import or export licenses
                  that may
                  be required to sell our products to domestic or foreign governments
                  or
                  such security clearances or import or export licenses are
                  revoked;
  ·
              there
                  is a change in government procurement procedures;
                  or
  ·
              we
                  are suspended from contracting with a domestic or foreign government
                  or
                  any significant law enforcement
                  agency.
  These
        and
        other factors could cause governments and governmental agencies, or prime
        contractors that use us as a subcontractor, to reduce their purchases under
        existing contracts, to exercise their rights to terminate contracts at will
        or
        to abstain from exercising options to renew contracts, any of which could
        have a
        material adverse effect on our business, revenues and operating
        results.
  ***Our
        Strategy Of Generating Growth Through Acquisitions Has Risks And There Is
        No
        Assurance We Will Succeed, Which Could Materially Harm Our Business And
        Prospects For Growth***
  We
        have
        pursued an acquisition strategy in order to build our business of providing
        an
        integrated suite of products and services to participants in the homeland
        security industry. We have acquired two operating companies to date and have
        entered into a joint venture with respect to Polimatrix. We intend to continue
        to pursue the acquisition of companies with products and services that can
        be
        integrated with our existing offerings. Our acquisition strategy is important
        to
        the success of our business because it supports our strategy of selling a
        broad
        platform of integrated offerings for customers who we believe prefer to buy
        multiple product and service offerings from fewer vendors. However, we may
        not
        be able to identify and acquire appropriate target businesses in the future
        at
        reasonable prices or at all. Other companies also pursue acquisitions of
        companies in the critical incident response marketplace and we expect
        competition for acquisition candidates in our industry to increase, which
        may
        mean fewer suitable acquisition opportunities for us, as well as higher
        acquisition prices. In addition, even if we are successful in acquiring target
        companies, we may have difficulty integrating the acquired companies’ product
        and service offerings with our existing offerings and sales channels, which
        would reduce the benefits to us of the acquisitions and limit the effectiveness
        of our strategy. If we are unable to successfully pursue our strategy of
        acquiring complementary businesses, our business, financial condition, and
        growth prospects could be materially adversely affected.
  ***Our
        Financial Condition Could Be Harmed If Businesses We Acquire Failed To Comply
        With Applicable Laws Or Have Other Undisclosed
        Liabilities***
  Any
        business that we acquire may have been subject to many of the same laws and
        regulations to which our business is subject and possibly to others, including
        laws and regulations impacting companies that do business with federal, state
        and local governments. If any business that we acquire has not conducted
        its
        business in compliance with applicable laws and regulations, we may be held
        accountable or otherwise suffer adverse consequences, such as significant
        fines
        or unexpected termination of contracts. Businesses we acquire may have other
        undisclosed liabilities we do not discover during the acquisition process
        that
        could result in liability to us or other unanticipated problems, such as
        product
        liability claims. Unexpected liabilities such as these could materially
        adversely affect our business, financial condition and results of
        operations.
  16
  ***Costs
        Arising From Our Future Acquisitions Could Adversely Affect Our Financial
        Condition***
  Any
        acquisition that we make could result in the use of our cash, incurrence
        and
        assumption of debt, contingent liabilities, significant acquisition-related
        expenses, amortization of certain identifiable intangible assets, and research
        and development write-offs, and could require us to record goodwill and other
        intangible assets that could result in future impairments that could harm
        our
        financial results. We will likely incur significant transaction costs pursuing
        acquisitions, including acquisitions that may not be consummated. We may
        not be
        able to generate sufficient revenues from our acquisitions to offset their
        costs, which could materially adversely affect our financial
        condition.
  ***If
        We Are Unable To Effectively Manage Our Growth, Our Ability To Implement
        Our
        Business Strategy And Our Operating Results Will Likely Be Materially Adversely
        Affected***
  Our
        efforts to acquire and collaborate with complementary businesses have placed,
        and will likely continue to place, a significant strain on our management,
        administrative, operating and financial infrastructures. Our management will
        be
        required to devote considerable time to our acquisition and integration efforts,
        which will reduce the time they will have to implement our business and growth
        strategy. To manage our business and planned growth effectively, we must
        successfully develop, implement, maintain and enhance our financial and
        accounting systems and controls, integrate new personnel and businesses and
        manage expanded operations. We are still in the process of developing and
        implementing our operating and financial systems, including our internal
        systems
        and controls, which will be critical to properly managing expanded operations.
        If we are unable to make these improvements in our operating and financial
        reporting systems and to otherwise effectively manage our growth, our ability
        to
        implement our business strategy and our operating results will likely be
        materially adversely affected.
  ***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***
  Our
        operating results are difficult to predict and may fluctuate significantly
        in
        the future. As a result, our stock price may be volatile. The following factors,
        many of which are outside our control, can cause fluctuations in our operating
        results and volatility in our stock price:
  ·
              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.
  The
        deferral or loss of one or more significant contracts could materially adversely
        affect our operating results, particularly if there are significant sales
        and
        marketing expenses associated with the deferred or lost contracts. Additionally,
        we base our current and future expense levels on our internal operating plans
        and sales forecasts, and our operating costs are to a large extent fixed.
        As a
        result, we may not be able to sufficiently reduce our costs to compensate
        for an
        unexpected near-term shortfall in revenues.
  Actual
        or
        anticipated fluctuations in our operating results could cause our stock price
        to
        decline. Due to fluctuations in our operating results, a period-to-period
        comparison of our results of operations may not be a good indication of our
        future performance. In any particular quarter or quarters, our operating
        results
        could be below the expectations of securities analysts or investors and our
        stock price could decline as a result.
  17
  ***We
        Will Be Required To Evaluate Our Internal Controls Over Financial Reporting
        Under Section 404 Of The Sarbanes-Oxley Act Of 2002, Which Could Result In
        A
        Loss Of Investor Confidence In Our Financial Reports And Have An Adverse
        Effect
        On The Price Of Our Shares Of Common Stock.***
  Pursuant
        to Section 404 of the Sarbanes-Oxley Act of 2002, beginning in this annual
        report on Form 10-KSB for the year ended December 31, 2007, we will be required
        to furnish a report by management on our internal controls over financial
        reporting. Such report will contain, among other matters, an assessment of
        the
        effectiveness of our internal control over financial reporting, including
        a
        statement as to whether or not our internal control over financial reporting
        is
        effective. This assessment must include disclosure of any material weaknesses
        in
        our internal control over financial reporting identified by our management.
        Beginning with our year ending December 31, 2008, the report must also contain
        a
        statement that our auditors have issued an attestation report on our
        management’s assessment of such internal controls. Public Company Accounting
        Oversight Board Auditing Standard No. 2 provides the professional standards
        and
        related performance guidance for auditors to attest to, and report on, our
        management’s assessment of the effectiveness of internal control over financial
        reporting under Section 404.
  We
        have
        identified certain material weaknesses in our internal controls over financial
        reporting that we are in the process of addressing. We cannot be certain
        that we
        will be able to complete our evaluation of our internal controls, testing
        and
        any required remediation in a timely fashion once we become subject to the
        requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002. During
        the evaluation and testing process, if we identify one or more material
        weaknesses in our internal control over financial reporting, we will be unable
        to assert that such internal control is effective. If we are unable to assert
        that our internal control over financial reporting is effective (or if our
        auditors are unable to attest that our management’s report is fairly stated or
        they are unable to express an opinion on the effectiveness of our internal
        controls beginning with our year ending December 31, 2008), we could lose
        investor confidence in the accuracy and completeness of our financial reports,
        which may have a material adverse effect on our stock price.
  Failure
        to comply with the new rules may also make it more difficult for us to obtain
        certain types of insurance, including director and officer liability insurance,
        and we may be forced to accept reduced policy limits and coverage and/or
        incur
        substantially higher costs to obtain the same or similar coverage. The impact
        of
        these events could also make it more difficult for us to attract and retain
        qualified personnel to serve on our board of directors, on committees of
        our
        board of directors, or as executive officers.
  **General
        Risks**
  ***We
        May Need To Raise Additional Capital On Terms Unfavorable To Our
        Stockholders***
  Based
        on
        our current level of operations, we believe that our cash flow from operations,
        together with amounts we are able to borrow under our existing lines of credit,
        will be adequate to meet our anticipated operating, capital expenditure and
        debt
        service requirements for the foreseeable future. However, we do not have
        complete control over our future performance because it is subject to economic,
        political, financial, competitive, regulatory and other factors affecting
        the
        defense and security industries. Further, our acquisition strategy will likely
        require additional equity or debt financings. Such financings could also
        be
        required to support our traditional and recently required operating units.
        There
        is no assurance that we will be able to obtain such financings to fuel our
        growth strategy and support our existing businesses.
  ***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***
  Our
        Common Stock is deemed to be “penny stock” as that term is defined in Rule
        3a51-1 promulgated under the Securities Exchange Act of 1934, as amended.
        Penny
        stocks are stock:
  ·
              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
  18
  ·
              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.
  In
        addition to the “penny stock” rules promulgated by the SEC, the NASD has adopted
        rules that require that in recommending an investment to a customer, a
        broker-dealer must have reasonable grounds for believing that the investment
        is
        suitable for that customer. Prior to recommending speculative low priced
        securities to their non-institutional customers, broker-dealers must make
        reasonable efforts to obtain information about the customer’s financial status,
        tax status, investment objectives and other information. Under interpretations
        of these rules, the NASD believes that there is a high probability that
        speculative low priced securities will not be suitable for at least some
        customers. The NASD requirements make it more difficult for broker-dealers
        to
        recommend that their customers buy our Common Stock, which may limit your
        ability to buy and sell our stock.
  Stockholders
        should be aware that, according to the SEC, the market for penny stocks has
        suffered in recent years from patterns of fraud and abuse. Such patterns
        include
        (i) control of the market for the security by one or a few broker-dealers
        that
        are often related to the promoter or issuer; (ii) manipulation of prices
        through
        prearranged matching of purchases and sales and false and misleading press
        releases; (iii) “boiler room” practices involving high-pressure sales tactics
        and unrealistic price projections by inexperienced sales persons; (iv) excessive
        and undisclosed bid-ask differentials and markups by selling broker-dealers;
        and
        (v) the wholesale dumping of the same securities by promoters and broker-dealers
        after prices have been manipulated to a desired degree. The Company’s management
        is aware of the abuses that have occurred historically in the penny stock
        market. Although the Company does not expect to be in a position to dictate
        the
        behavior of the market or of broker-dealers who participate in the market,
        management will strive within the confines of practical limitations to prevent
        the described patterns from being established with respect to our securities.
  ***We
        Do Not Expect To Pay Dividends With Respect To Our Common Stock Which May
        Hinder
        Our Ability To Attract Additional Capital***
  The
        Company has not paid any dividends on its Common Stock to date. The payment
        of
        any dividends will be within the discretion of the Company’s Board of Directors.
        The Board of Directors expects to retain all earnings, if any, for use in
        the
        Company’s business operations and, accordingly, the Board of Directors does not
        anticipate declaring any dividends in the foreseeable future.
  ***We
        Have Historically Had Severe Working Capital Shortages, Even Following
        Significant Financing Transactions***
  Although
        we raised capital totaling approximately $9,400,000 (net of expenses) during
        the
        last two fiscal years we have had working capital shortages in the past,
        and our
        consolidated financial statements for the twelve months ended December 31,
        2007,
        indicate that we have a working capital deficit of $12,338,000.
  We
        issued
        12% Debentures aggregating $2.75 million in June 2007 (net proceeds of $2.56
        million after payment of fees and expenses). In August 2006 and in February
        2006, the same investor purchased Debentures aggregating $4 million (net
        proceeds of $3.585 million after payment of fees and expenses and $4 million
        (net proceeds of $3.580 million after payment of fees and expenses),
        respectively.
  Based
        on
        the amount of capital we have remaining and our current negative cash flow
        from
        operations and investing activities, we anticipate that we may continue to
        incur
        a working capital deficit unless we are able to substantially increase our
        revenue or reduce our expenses, thereby generating positive cash flow from
        operations and (ultimately) operating income. As a result of our recent
        financing activities, we believe we have sufficient working capital to finance
        our anticipated operations and projected negative cash flow throughout our 2008 fiscal
        year.
  19
  ***We
        Have Raised Capital And Issued Securities During The Years Ended December
        31,
        2007, 2006 And 2005, 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***
  During
        the course of the last two fiscal years, we have raised capital of approximately
        $11,750,000 (net proceeds of approximately $10.3 million after payment of
        fees
        and expenses) to finance our business operations and acquisitions. We have
        raised this capital by issuing convertible debentures, shares of Common Stock,
        convertible preferred stock and common stock warrants to accredited investors
        and as compensation to investment bankers making introductions to the accredited
        investors and the exercise of previously issued common stock warrants and
        stock
        options. During this same period of time, we issued common stock warrants
        and
        shares of Common Stock to several persons in exchange for their promises
        to
        perform investment banking and financial advisory services to us. In many
        cases,
        these issuances were below the then-current market prices and can be considered
        dilutive to our existing stockholders—both as a reduction of their percentage
        ownership in the Company and because of issuances that will be, when warrants
        are exercised or debentures are converted, at prices below the market.
  The
        Debentures, Series F Preferred Stock (the “Series F Stock”), the Series G
        Preferred Stock (the “Series G Stock”), the Series H Convertible Preferred
        Stock (the “Series H Stock”) and the Series I Convertible Preferred
        Stock (the “Series I Stock” and collectively with the Series F, G and
        H Stock, the “Preferred Stock”) have significant restrictions on our ability to
        raise any additional capital. If we raise additional working capital, we
        will
        likely have to issue additional shares of our Common Stock and common stock
        warrants at prices that may dilute the interests of our existing stockholders.
  ***Accounting
        Charges Resulting From Our Issuance Of Our Debentures May Lead To Significant
        Non-Cash Charges Which Would Adversely Impact Future Interest Expense, Net
        Income And Earnings Per Share And May Also Lead To Future Volatility In Our
        Financial Statement Components***
  The
        issuance of the Debentures has resulted in the classification of certain
        warrants and the conversion feature embedded in the Debentures as derivative
        liability instruments (a $7,263,204 current derivative liability at December
        31,
        2007). We are required to mark these instruments to market as of the end
        of each
        reporting period and to recognize the change in fair value in our consolidated
        statements of operations. Additionally, we will be required to record
        significant non-cash interest charges over the life of the Debentures (in
        addition to interest expense relating to the interest rate borne by the
        Debentures which will be paid in cash or shares of our Common Stock, at the
        holder’s option). The combination of these two factors will likely result in a
        significant adverse impact to future net income and earnings per share and
        will
        likely introduce additional volatility to our future operating
        results.
  ***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***
  If
        we are
        able to develop and market our products successfully, we may experience periods
        of rapid growth that place a significant strain on our financial and managerial
        resources. Through our research and development efforts we are also attempting
        to develop additional products and lines of business. Our ability to manage
        growth effectively, particularly given our increasing scope of operations,
        will
        require us to continue to implement and improve our management, operational
        and
        financial information systems, and will require us to develop the management
        skills of our personnel and to train, motivate and manage our employees.
        Our
        failure to effectively manage growth could increase our costs of operations
        and
        reduce our margins and liquidity, which could have a material adverse effect
        on
        our business, financial condition and results of operations.
  ***Our
        Common Stock Is Vulnerable To Pricing And Purchasing Actions That Are Beyond
        Our
        Control And, Therefore, Persons Acquiring Or Holding Our Shares Or Warrants
        May
        Be Unable To Resell Their Shares At A Profit As A Result Of This
        Volatility***
  The
        trading price of our securities has been subject to wide fluctuations in
        response to quarter-to-quarter variations in our operating results, our
        announcements of technological innovations or new products by us or our
        competitors, and other events and factors. The securities markets themselves
        have from time to time and recently experienced significant price and volume
        fluctuations that may be unrelated to the operating performance of particular
        companies. Announcements of delays in our testing and development schedules,
        technological innovations or new products by us or our competitors and
        developments or disputes concerning patents or proprietary rights could have
        a
        significant and adverse impact on such market prices. Regulatory developments
        in
        the United States and foreign countries, public concern as to the safety
        of
        products containing radioactive compounds, and economic and other external
        factors all affect the market price of our securities. **
  20
  ***Outstanding
        Preferred Stock , Options And Warrants May Make It Difficult For Us To Obtain
        Additional Capital On Reasonable Terms***
  As
        of
        December 31, 2007, we had Preferred Stock outstanding that is convertible
        into
        11,611,360 shares of Common Stock. The holders’ rights to convert the
        Series F Stock and the Series G Stock and associated warrants are,
        however, subject to certain share issuance limitations. In addition, we had
        outstanding options and warrants for the purchase of up to 9,660,000 million
        shares of Common Stock and 2,200,000 million shares of Common Stock,
        respectively, at exercise prices of between $0.08 and $1.00 per share
        respectively. If all of the outstanding options, Preferred Stock and common
        stock warrants were to be converted, they would represent approximately 32.2%
        of
        our outstanding common stock on a fully diluted basis. Future investors will
        likely recognize that the holders of the options and warrants will only exercise
        their rights to acquire our Common Stock when it is to their economic advantage
        to do so. Therefore, even with lower current market prices for our Common
        Stock,
        the market overhang of such a large number of warrants, options, and convertible
        preferred stock may adversely impact our ability to obtain additional capital
        because any new investors will perceive that the securities offer a risk
        of
        substantial potential future dilution.
  ***If
        We Fail To Effect And Maintain Registration Of The Common Stock Issued Or
        Issuable Pursuant To Conversion Of Our Preferred Stock, Or Certain Of Our
        Outstanding Common Stock Warrants, We May Be Obligated To Pay The Investors
        Of
        Those Securities Liquidated Damages***
  We
        have
        an obligation to file upon request of holders of our preferred stock and
        obtain
        the effectiveness of a registration statement which would include certain
        outstanding Common Stock and Common Stock underlying outstanding Preferred
        Stock
        and warrants. Once effective, the prospectus contained within a registration
        statement can only be used for a period of time as specified by statute without
        there being a post-effective amendment filed that has become effective under
        the
        Securities Act of 1933. These obligations relates to a requirement to file
        a new
        registration for shares issuable pursuant to the (a) Debentures issued in
        February 2006, certain shares of Common Stock and the Series F Stock and
        (b)
        Debentures issued in August 2006 and the related warrants, and to achieve
        effectiveness of that registration statement. If we are unable to meet these
        filing obligations (or effectiveness obligations), we would be obligated
        to pay
        the holder of these securities liquidated damages for each 30 day period
        after
        the applicable date as the case may be. The liquidated damages may be paid
        in
        cash or shares of our Common Stock if registered, at the holder’s
        option. We
        cannot offer any assurances that we will be able to maintain the required
        current information contained in a prospectus or to obtain the effectiveness
        of
        any registration statement or post-effective amendments that we may
        file.
  **Item
        2. Properties**
  The
        Company subleases approximately 2,260 square feet of office space, which
        serves
        as its and Polimatrix executive offices, at 1005 North Glebe Road, Suite
        550,
        Arlington, VA 22201 from Defense Holdings, Inc. The sublease is comprised
        of a
        one (1) year lease with four one (1) year extensions. Lease payments were
        $7,209.40 per
        month
        through December 31, 2007 and include utilities. Monthly lease payments are
        $7,386.43 per month in 2008.
  We
        lease
        approximately 2,500 square feet of office space at 7 West Cross Street,
        Hawthorne, NY 10532 which serves as Nexus’ administrative offices. On February
        29, 2008, Nexus renewed its lease for a three-year period expiring on February
        28, 2011. The new lease, which is for approximately 2,000 square feet, has
        lease
        payments totaling $2,766 per month in the first year, $2,926 per month in
        the
        second year and $3,096 per month in the third year. The new lease payments
        are
        inclusive of utilities and taxes.
  **Item
        3. Legal Proceedings**
  None.
  **Item
        4. Submission Of Matters To A Vote Of Security Holders** ****
  None.
  21
  **PART
        II**
  **Item
        5. Market For Common Equity, Related Stock Holder Matters and Issuer Purchases
        Of Equity Securities**
  **Market
        Information**
  Our
        Common Stock is currently traded on the OTC Electronic Bulletin Board under
        the
        symbol “HOMS.OB”. The following table sets forth, for the fiscal periods
        indicated, the high and low closing bid
        prices of a share of Common Stock for the last eight quarterly periods. Such
        quotations reflect inter-dealer prices, without retail mark-up, mark-down
        or
        commission and may not necessarily represent actual transactions. Fiscal
        year
        2006 and first and second quarter 2007 prices have been restated to reflect
        a 1
        for 100 reverse split effected by the Company in July 2007. This
        information was obtained from Bloomberg L.P.
  **Fiscal
                  Year 2007**
              
              **High**
              
              **Low**4thQuarter (October - December, 2007)
              
              $
              0.135
              
              $
              0.0453rdQuarter (July - September, 2007)
              
              $
              0.130
              
              $
              0.0402nd
                  Quarter (April - June, 2007)
              
              $
              0.120
              
              $
              0.0801stQuarter (January - March, 2007)
              
              $
              0.180
              
              $
              0.090
  **Fiscal
                  Year 2006**
              
              **High**
              
              **Low**4thQuarter (October - December, 2006)
              
              $
              1.000
              
              $
              0.0923rdQuarter (July - September, 2006)
              
              $
              0.288
              
              $
              0.1122nd
                  Quarter (April - June, 2006)
              
              $
              0.419
              
              $
              0.1811stQuarter (January - March, 2006)
              
              $
              0.488
              
              $
              0.137
  **Holders**
  As
        of
        March 28, 2008, there were approximately 347 holders of record of our Common
        Stock.
  **Dividends**
  We
        have
        not paid dividends on our Common Stock since inception and do not intend
        to pay
        any dividends to our stockholders in the foreseeable future. We currently
        intend
        to reinvest our earnings, if any, for the development and expansion of our
        business. The declaration of dividends in the future will be at the election
        of
        our Board of Directors and will depend upon our earnings, capital requirements
        and financial position, general economic conditions and other factors our
        Board
        of Directors deems relevant.
  22
  **Equity
        Compensation Plan Information**
  The
        following table sets forth certain information as of December 31, 2007,
        concerning our equity compensation plans:
  **Plan
                  category**
              
              **Number
                  ofsecurities tobe issuedupon
                  exerciseofoutstandingoptions**
              
              **Weightedaverageexercise
                  priceofoutstandingoptions**
              
              **Number
                  ofsecuritiesremainingavailable
                  forfutureissuance**Equity
                  compensation plans approved by security holders
              
              
              6,900,000
              
              $
              0.088
              
              
              300,000
              (1)Equity
                  compensation plans not approved by security holders (2)
              
              
              2,760,000
              
              $
              0.141
              
              
              -Total
              
              
              9,660,000
              
              $
              0.103
              
              
              300,000
  (1)
              Available
                  for issuance pursuant to the Company’s 2005 Stock Option Plan (the “2005
                  Plan”)
  (2)
              Includes
                  non-qualified options to purchase Common Stock issued to each of
                  our
                  non-employee directors and one
                  consultant.
  **Recent
        Sales Of Unregistered Securities**
  During
        the year ended December 31, 2007, we made the following issuances of our
        securities that were not registered under the Securities Act:
  On
        June
        1, 2007, we entered into a Securities Purchase Agreement with Yorkville Advisors
        (“YA”) pursuant to which we sold secured convertible debentures (the “2007 A
        Debentures”) in the amount of $2,750,000. The 2007 A Debentures are convertible
        into Common Stock at a conversion price equal to the lesser of (1) $0.40
        or (2)
        a ten percent discount to the lowest daily volume weighted average price
        of the
        Common Stock for the thirty days preceding conversion. The 2007 A Debentures
        bear interest at 12% per annum and the maturity date is June 1, 2010. The
        issuance and sale of the 2007 A Debentures is intended to be exempt from
        registration by virtue of Section 4(2) of the Securities Act and the provisions
        of Regulation D thereunder, based on the Company’s belief that the offer and
        sale of the 2007 A Debentures did not involve a public offering, as the
        purchaser was an “accredited” investor and no general solicitation was involved
        in the offering. These 2007 Debentures are no longer outstanding as they
        have
        been exchanged for senior secured notes.
  On
        June
        1, 2007, in conjunction with the sale of the 2007 A Debentures, the Company
        agreed to increase the interest rate from 5% to 10% on the two $4,000,000
        debentures sold to YA in 2006. These debentures are no longer outstanding
        as
        they have been exchanged for the Company’s senior secured notes and shares of
        the Series H Stock.
  On
        June
        1, 2007, in connection with the sale of the 2007 A Debentures, we issued
        to YA a
        warrant to purchase 800,000 shares of Common Stock. The warrant has an exercise
        price equal to $0.15 (subject to certain adjustments as set forth therein)
        and
        has a term that expires on May 31, 2012. This issuance was made in reliance
        upon
        the exemptions from registration provided by Section 4(2) of the Securities
        Act.
  On
        September 28, 2007,
        204,830 shares of our Series G Stock were converted into 921,735 shares of
        our
        Common Stock. Under the Series G Stock Agreement with YA, each share of Series
        G
        Stock converted into 4.5 shares of our Common Stock.
  On
        October 3, 2007, 437,090 shares of our Series G Stock were converted into
        1,966,905 shares of our Common Stock. Under the Series G Stock Agreement
        with
        YA, each share of Series G Convertible Preferred Stock converted into 4.5
        shares
        of our Common Stock.
  On
        November 9, 2007,
        $96,814 of our convertible debentures were converted into 2,151,422 shares
        of
        our Common Stock at an average conversion price of $0.045. These transactions
        were exempt from registration under Section 4(2) of the Securities Act.
  23
  On
        November 12, 2007, $90,000 of our convertible debentures were converted into
        1,969,365 shares of our Common Stock at an average conversion price of $0.0457.
        These transactions were exempt from registration under Section 4(2) of the
        Securities Act.
  **Item
        6. 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 or Plan of
        Operation and elsewhere in this annual report that are not statements of
        historical or current fact constitute “forward-looking
        statements.”*
  **Overview**
  Homeland
        Security Capital Corporation was incorporated in Delaware on August 12, 1997,
        and is located in Arlington, Virginia. The Company focuses on the acquisition
        and development of homeland security businesses.
  The
        Company’s original business from 1997 through 2003 was to develop and
        manufacture, at third party plants, digital set top boxes and digital video
        servers for the interactive television and high speed Internet
        markets.
  On
        September 3, 2003, the Company elected to become a business development company
        ("BDC"), to be regulated pursuant to Section 54 of the Investment Company
        Act of
        1940, as amended (the "Investment Company Act"). A business development company
        is an investment company designed to assist eligible portfolio companies
        with
        capital formation and management advice. The Company then changed its business
        plan to primarily seek investments in developing companies.
  On
        December 30, 2005, at a special stockholders meeting (the "Special Meeting"),
        the stockholders of the Company voted to amend the Certificate of Incorporation
        of the Company to change the name to “Homeland Security Capital Corporation” and
        voted to withdraw the Company's election as a BDC. Accordingly, the Company
        has
        changed its business plan to primarily seek acquisition of companies that
        provide homeland security products and services.
  The
        Company is seeking to build consolidated enterprises through the acquisition
        and
        integration of multiple businesses in the homeland security industry. We
        seek to
        create long-term shareholder value by taking controlling interests in companies
        that provide homeland security products and services and helping them develop
        through superior operations, management and acquisitions. Our value creation
        strategy is designed to foster significant growth at our platform companies
        by
        providing leadership and counsel, capital support and financial expertise,
        strategic guidance and operating discipline, access to best practices and
        industry knowledge. We target emerging companies in fragmented sectors of
        the
        homeland security industry. These target companies are generating revenues
        from
        promising security products and services but face challenges in scaling their
        businesses to capitalize on opportunities in the homeland security
        industry.
  As
        part
        of the Company's new business strategy, the Company acquired a majority interest
        in Nexus on February 8, 2006, through the purchase of $3.4 million in preferred
        stock of Nexus. Nexus is a mid-Atlantic security integrator for the corporate
        and governmental security markets. Based in Hawthorne, New
        York , Nexus'
        subsidiary, CSS, began operations in 2004. Nexus specializes in non-proprietary
        integrated security solutions, including access control, alarm, video,
        communication, perimeter protection and bomb and metal detection security
        systems.
  The
        Company acquired a majority interest in SHC on August 22, 2006 through the
        purchase of $3 million of preferred stock in SHC. SHC manufactures, designs
        and
        supports RFID security and access control devices for the commercial and
        governmental security markets. Based in Milwaukee, Wisconsin , SHC and
        its subsidiaries specialize in proprietary and non-proprietary RFID products,
        including access control, asset tracking and the integration of multiple
        disciplines of electronic security and environmental and operational systems.
        On
        August 30, 2007, the
        Company sold its preferred stock in SHC to Vuance (see
        Note
        7  to
        the
        Consolidated Financial Statements).
  On
        September 18, 2006, the Company entered into a joint venture with Polimaster,
        a
        leader in the development and manufacturing of equipment for monitoring,
        detecting, locating and identifying nuclear and radioactive materials. The
        joint
        venture will operate as Polimatrix, Inc., which will be owned 51% by the
        Company. The Polimatrix products and systems offer technology that provides
        a
        networked approach to hardware and software solutions for detection,
        identification, communication and mapping of nuclear and radioactive
        materials.
  24
  The
        following analysis of the results of operations compares the results of
        operations from the year ended December 31, 2007 with the year ended December
        31, 2006. The following information should be read in conjunction with the
        consolidated audited financial statements of the Company and the notes thereto
        appearing elsewhere in this annual report. Statements in this Management's
        Discussion and Analysis or Plan of Operations and elsewhere in this annual
        report that are not statements of historical or current fact constitute
        "forward-looking statements."
  **Results
        Of Operations**
  **Fiscal
        Year Ended December 31, 2007 Compared To Year Ended December 31,
        2006**
  **Revenues**
  For
        the
        fiscal year ended December 31, 2007, the Company had sales of $12,628,183
        consisting of fees earned on security systems installation, integration
        contracts and product sales as compared to sales of $6,963,939 for the fiscal
        year ended December 31, 2006. The increase in sales of $5,664,244, or 81%,
        is
        due to the increase in sales at our Nexus subsidiary of $5,414,511 and initial
        product sales of $249,733 in our PMX subsidiary.
  **Cost
        of goods sold**
  For
        the
        fiscal year ended December 31, 2007, cost of sales was $9,592,926 compared
        to
        $5,212,893 for the fiscal year ended December 31, 2006. The cost of sales
        consisted of materials, labor and other costs incurred by the Company and
        associated with security systems installation, integration contracts and
        product
        sales. The increase in cost of sales is due to the growth of revenues in
        our
        subsidiaries.
  **Operating
        expenses**
  Operating
        expenses for the year ended December 31, 2007 were $4,919,153 compared to
        $4,732,134 for the year ended December 31, 2006. The increase of $187,019,
        or
        4%, in operating expenses is primarily due to increases in insurance and
        facility costs of $214,672; professional services of $147,967; other operating
        costs of $71,040; and depreciation of fixed assets of $19,340, offset by
        decreases in administrative costs of $121,529; personnel costs of $117,431;
        marketing costs of $25,847; and travel costs of $1,193.
 
 **Other
        income and expense**
  The
        Company had net other expense of $2,702,103 for the year ended December 31,
        2007
        compared to $2,062,757 for the year ended December 31, 2006 for an increase
        in
        net expenses of $639,346, or 31%. Other income and expense consisted of an
        increase in amortization of debt discount expense of $1,109,208; an increase
        in
        interest expense of $684,298; an increase in the amortization of debt offering
        costs of $194,321; and a decrease in income from settlement of debt of $85,244,
        offset by an increase in the derivative liability valuation of $1,419,210
        and
        other income of $14,515.
  **Net
        income (loss)**
  As
        a
        result of the foregoing, the Company recorded a net loss from continuing
        operations of $4,585,999 and an overall net loss of $2,951,266 including
        a net
        gain on discontinued operations of $1,634,733 for the year ended December
        31,
        2007 compared to a net loss from continuing operations of $5,043,845 and
        an
        overall net loss of $6,489,757 including a loss from discontinued operation
        of
        $1,445,912 for the year ended December 31, 2006. The decrease in net loss
        from
        continuing operations was $457,846, or 9%, and the decrease in overall loss
        was
        $3,538,491, or 55%.
  **Liquidity
        And Capital Resources**
  The
        primary source of financing for the Company since its inception has been
        through
        the issuance of common stock, preferred stock and convertible debt. The Company
        had cash on hand of $57,521 at December 31, 2007 and $1,214,183 at December
        31,
        2006. Our primary needs for cash are to fund our ongoing operations until
        such
        time as they begin to generate sufficient cash flow to fund operations and
        to
        have cash available to make additional acquisitions of businesses that provide
        homeland security products and services. While we believe that we have
        sufficient cash on hand to satisfy our current operating commitments, we
        will
        require significant additional funding in order to make additional acquisitions
        (see Note 27 to the Consolidated Audited Financial Statements).
  The
        Company entered into a Securities Purchase Agreement with YA, dated as of
        February 6, 2006, which provided for the purchase by YA of a Convertible
        Debenture (the "2006 A Debenture") in the amount of $4,000,000, which debenture
        is convertible into Common Stock. These 2006A Debentures were exchanged for
        shares of the Company’s Series H Preferred Stock on March 14, 2008.
  25
  On
        February 6, 2006, the Company entered into an Investment Agreement with YA,
        pursuant to which the Company exchanged with YA 1,000,000 shares of Series
        G
        Convertible Preferred Stock (the "Series G Preferred Shares") for 4,500,000
        shares of the Company's Common Stock owned by YA. The Series G Preferred
        Stock
        is senior to all Common Stock and all series of preferred stock of the Company.
        Each share of Series G Preferred Shares has a liquidation preference of $0.10
        plus any accrued and unpaid dividends. The holders of Series G Preferred
        Stock
        are not entitled to receive any dividends. The Company paid a $10,000
        structuring fee to Yorkville Advisors Management, LLC in connection with
        the
        transaction.
  On
        August
        21, 2006, the Company entered into a Securities Purchase Agreement with YA,
        which provided for the purchase by YA of a secured Convertible Debenture
        (the
        "2006 B Debenture") in the amount of $4,000,000, which debenture is convertible
        into Common Stock. The conversion price of the 2006 B Debenture shall be
        equal
        to the lesser of (1) $1.00 or (2) a ten percent discount to the lowest daily
        volume weighted average price of the Common Stock for the thirty days preceding
        conversion. When originally issued the 2006 B Debenture’s interest rate was 5%
        per annum and the principal amount will be payable on the third anniversary
        of
        the effective date of the 2006 B Debenture. If the Common Stock is trading
        below
        the conversion price at the date of a redemption notice, the Company will
        pay an
        amount equal to the principal amount being redeemed plus a redemption premium
        equal to twenty percent of the amounts redeemed and accrued interest. Pursuant
        to a Security Agreement between the Company and YA, the Company's obligations
        under the 2006 B Debenture are secured by a pledge of all of its assets.
        On June
        1, 2007, in connection with, the 2007 A Debenture, the Company agreed to
        raise
        the interest rate on both the 2006 A and the 2006 B Debentures to 10% per
        annum
        and to modifying the registration rights associated with these debentures
        to
        require the Company to file a registration statement covering the resale
        of the
        shares of Common Stock issuable upon conversion of the debenture only upon
        the
        demand by YA of such filing and waiving any penalty due for the failure to
        register the shares of Common Stock through the date of the Agreement. The
        2006
        B Debenture was exchanged for the Company’s secured senior notes on
        March 14, 2008.
  In
        connection with the August 21, 2006 Securities Purchase Agreement, the Company
        issued a warrant to YA for 1,000,000 shares of the Company’s Common Stock (the
“2006 B Warrant”). The 2006 B Warrant has an exercise price equal to $1.00,
        which may be adjusted under the terms of the 2006 B Warrant and has a term
        of
        five years from the date of issuance on August 21, 2006. The Company entered
        into a Registration Rights Agreement with YA pursuant to which the Company
        agreed to file a registration statement covering the resale of the shares
        of
        Common Stock issuable upon the exercise of the 2006 B Warrant.
  On
        June
        1, 2007, the Company entered into a Securities Purchase Agreement (“June 2007
        Purchase Agreement”) with YA, which provided for the purchase by YA of a secured
        Convertible Debenture, the 2007 A Debenture, in the amount of $2,750,000
        and an
        interest rate of 12%, which debenture is convertible into the Company’s Common
        Stock. The 2007 Debentures were exchanged for the Company’s secured senior notes
        on March 14, 2008.
  In
        connection with the June 1, 2007 Securities Purchase Agreement, the Company
        issued a warrant to YA for 800,000 shares of the Company’s Common Stock (the
“2007 A Warrant”). The 2007 A Warrant has an exercise price equal to $0.15,
        which may be adjusted under the terms of the 2007 A Warrant and has a term
        of
        five years from the date of issuance on June 1, 2007. The Company entered
        into a
        Registration Rights Agreement with YA pursuant to which the Company agreed
        to
        file a registration statement covering the resale of the shares of Common
        Stock
        issuable upon the exercise of the 2007 A Warrant.
  During
        the year ended December 31, 2007, we had a net decrease in cash of $ 1,156,662. Our
        sources and uses of funds were as follows:
  **Cash
        Flows From Operating Activities**
  We
        used
        net cash of $3,286,870 in our operating activities during the year ended
        December 31, 2007. Our net cash provided by operating activities resulted
        primarily from the amortization of debt discount and debt offering costs
        of
        $2,799,123, stock issued for payment of expenses of $352,056, equity valuation
        of subsidiaries of $582,470, depreciation and amortization of $71,480, and
        changes in the operation assets and liabilities of $580,821. Cash was used
        by
        the Company's net loss of $2,951,266 for the year ended December 31, 2007,
        settlement of debt income of $6,024, a reduction in the valuation reserve
        for
        accounts receivable of $57,407, and the valuation change in the derivative
        liability of $1,000,193 and the gain on sale of our discontinued operations
        of
        $3,657,930.
  26
  **Cash
        Flows From Investing Activities**
  We
        provided net cash of $141,480 in our investing activities during the year
        ended
        December 31, 2007, consisting primarily of $743,142 in investing activities
        of
        discontinued operations and disposal of fixed assets of $17,144. Cash was
        used
        in purchases of fixed assets in the amount of $114,307, and the funding of
        $504,499 in notes receivable from a related party.
  **Cash
        Flows From Financing Activities**
  We
        provided cash of $1,988,728 from financing activities during the year ended
        December 31, 2007, consisting of $2,750,000 in proceeds from convertible
        debentures issued less $190,000 in costs associated with the issuance of
        those
        debentures, and proceeds of $514,277 from operating notes. We used cash in
        payments on notes payable of $474,402 and in financing activities from
        discontinued operations of $611,147.
  As
        of
        December 31, 2007, we had a deficit in net working capital of
        $12,338,458.
  **Subsequent
        Events**
 
 ***Acquisition
        of Safety & Ecology Holdings Corporation*** *.* On March
        13, 2008, the Company entered into an Agreement and Plan of Merger and Stock
        Purchase Agreement (the “Merger Agreement”) with Safety & Ecology Holdings
        Corporation (“Safety”), HSCC Acquisition Corp. (“MergerSub”) and certain persons
        named therein. The transactions contemplated by the Merger Agreement closed
        on
        March 17, 2008.
 
 Pursuant
        to the Merger Agreement, the Company purchased 10,550,000 shares of Safety
        Series A Convertible Preferred Stock (the “Preferred Shares”) for an aggregate
        purchase price of $10,550,000. Each Preferred Share will accrue dividends
        cumulatively at the rate of eight percent (8%) per annum and is convertible
        into
        one (1) share of the Safety common stock at any time by the Company, subject
        to
        adjustment for stock dividends, stock splits, and similar events. Each Preferred
        Share will be entitled to one vote as if converted into Safety common stock.
        The
        holders of the outstanding Preferred Shares, as a class, so long as they
        maintain voting control of Safety, will have the right to designate a majority
        of the board of directors of Safety. Each Preferred Share will have a
        liquidation preference of $1.00 per share plus any accrued and unpaid
        dividends.
 
 Pursuant
        to the Merger Agreement, MergerSub was merged with and into Safety (the
        "Merger"), with Safety surviving the Merger. In exchange for all of the issued
        and outstanding Safety common stock, the shareholders of Safety (the
“Shareholders”) initially received: (1) an aggregate of 550,000 shares of
        Company Series I Convertible Preferred Stock (“Series I Stock”) with
        an initial value of $3,300,000, (2) warrants to purchase up to 22,000,000
        shares
        of the Company common stock (the “Warrants”), (3) unsecured promissory notes of
        Safety in an aggregate principal amount of $2,000,000 (the “Notes”) and (4)
        $3,900,000 in cash (collectively, the “Merger Consideration”). Pursuant to the
        Merger Agreement, this Merger Consideration received by the Shareholders
        may be:
        (1) reduced based on Safety’s stockholders’ equity (as determined at closing)
        and (2) reduced or increased based on Safety’s working capital (as determined at
        closing). In addition, in the future, the Shareholders may receive up to
        an
        aggregate of $6,000,000 in Company common stock if certain performance criteria
        are achieved by Safety in 2008 and 2009. The Series I Stock and Warrants
        will be
        held is escrow for twelve months to offset any indemnification claims or
        purchase price adjustments pursuant to the Merger Agreement.
 
 Also
        pursuant to the Merger Agreement, (1) $6,650,000 in existing indebtedness
        of
        Safety was paid off, (2) $2,000,000 in Safety preferred stock was redeemed
        and
        (3) $2,400,000 of existing indebtedness of Safety was permitted to remain
        outstanding.
 
 On
        March
        17, 2008, the Company amended its Certificate of Incorporation to designate
        550,000 shares of its authorized preferred stock as Series I Convertible
        Preferred Stock. Each share of Series I Stock accrues a dividend of 12% per
        annum. The Series I Stock ranks *pari
        passu* with the
        Company’s Series H Convertible Preferred Stock and senior to all other series of
        the Company’s preferred stock and the Company common stock. The holder of the
        Series I Stock may convert the accrued dividends into Company common stock
        at a conversion price of $0.06 per share or receive a cash payment on
        liquidation or sale of the Company. Each share of Series I Stock is convertible
        into 200 shares of Common Stock (effectively a conversion price of $0.03
        per
        share) and has a liquidation preference of $6.00 per share.
 
 The
        Warrants have an exercise price equal to $0.03, which may be adjusted under
        the
        terms of the Warrants, and has a term of five years from the date of issuance
        on
        March 17, 2008. The Notes accrue interest at a rate of 6% per annum and are
        subordinate to the existing indebtedness of Safety. Immediately following
        the
        Merger, the Company controlled 100% of the voting power of Safety.
  27
  ***Additional
        Financing*** .
        On
        March 14, 2008, the Company entered into a Securities Purchase Agreement
        (“Purchase Agreement”) with YA, which provides for the transactions set forth
        below.
  Pursuant
        to the Purchase Agreement, the Company has authorized the designation of
        its
        Series H Convertible Preferred Stock, par value $.01 per share (the "Series
        H
        Stock") consisting of 10,000 Shares of Series H Stock, which are convertible
        into shares of the Common Stock, in accordance with the terms of the Certificate
        of Designations of the Series H Convertible Preferred Stock of the Company
        (the
        "Certificate of Designation").
  Pursuant
        to the Purchase Agreement, the Company sold to YA (1) $6,310,000 of secured
        notes (the “New Notes”) for a purchase price of $6,310,000, (2) 6,190 Shares of
        Series H Stock (the “New Preferred Shares”) for a purchase price of $6,190,000,
        and (3) a warrant (the “Warrant”) to be initially exercisable to acquire
        83,333,333 shares of Common Stock (the “Warrant Shares”).
  The
        Company and YA are parties to:
  (1)  a
        Securities Purchase Agreement, dated as of February 6, 2006, (“February 2006
        Purchase Agreement”), pursuant to which, among other things, YA purchased from
        the Company an aggregate original principal amount of $4,000,000 of senior
        secured convertible debentures (the “February 2006 Debentures”), which had an
        outstanding principal balance at March 17, 2008 of $3,810,000, plus accrued
        and
        unpaid interest thereon.
  (2)  Securities
        Purchase Agreement, dated as of August 21, 2006 the (“August 2006 Purchase
        Agreement”), pursuant to which, among other things, YA purchased from the
        Company an aggregate original principal amount of $4,000,000 of senior secured
        convertible debentures (the “August 2007 Debentures”), which had an outstanding
        principal balance at March 17, 2008 of $4,000,000, plus accrued and unpaid
        interest thereon.
  (3)  Securities
        Purchase Agreement, dated as of June 1, 2007 the (“2007 Purchase Agreement”),
        pursuant to which, among other things, YA purchased from the Company an
        aggregate original principal amount of $2,750,000 of senior secured convertible
        debentures (the “2007 Debentures”), which are convertible into shares of Common
        Stock in accordance with the terms thereof, and which as of the date hereof
        has
        an outstanding principal balance at March 17, 2008 of $2,750,000, plus accrued
        and unpaid interest thereon.
  Pursuant
        to the Purchase Agreement, YA also exchanged (1) its February 2006 Debentures
        (but not accrued and unpaid interest thereon) in the amount of $3,810,000
        for 3,810
        Shares of Series H Stock (the “Exchanged Preferred Shares” and collectively
        along with the New Preferred Shares, the “Preferred Shares”); and (2)
        its
        August 2006 Debentures and the 2007 Debentures (but not accrued and unpaid
        interest thereon) for an
        aggregate original principal amount of $6,750,000 of senior secured notes
        in
        (the “Exchanged Notes” and collectively along with the New Notes, the
“Notes”).
  Each
        share of Series H Stock accrues a dividend of 12% per annum. The holder of
        the Shares of Series H Stock (a “Series H Holder”) may convert the accrued
        dividends into Common Stock at a conversion price of $0.06 per share or receive
        a cash payment on liquidation or sale of the company. The Series H Stock
        will
        rank *pari
        passu* with the
        Company’s Series I Convertible Preferred Stock and senior to all other series of
        the Company’s preferred stock and the Common Stock. Each share of Series H
        Stock is convertible into 33,334 shares of Common Stock (effectively a
        conversion price of $0.03 per share) and has a liquidation preference of
        $1,000
        per share. Each share of Series H Stock may be voted on as-converted basis
        with
        the Common Stock but in no instance will the voting power of a Series H Holder
        with respect to its Series H Stock (when aggregated with all other Common
        Stock
        beneficially owned by he, she or it) be permitted to exceed 9.9% of the shares
        permitted to vote at a meeting of the Company’s stockholders. In
        addition, Series H Holders are restricted from conversions of the Series
        H Stock
        that will result in it beneficially owning more than 9.99% of the outstanding
        Common Stock following such conversion.
  The
        Notes
        accrue interest at a rate of 13% per annum and have a maturity date of
        March 13, 2010. The obligations of the Company pursuant to the Purchase
        Agreement and the Note have been guaranteed by Celerity Systems, Inc.
        (“Celerity”), Nexus Technologies Group, Inc. and Homeland Security Advisory
        Services, Inc. (“HSAS”) pursuant to a Guaranty. The Notes are secured by the
        assets of the Company, Celerity and HSAS.
  In
        connection with the Securities Purchase Agreement, the Company issued to YA the
        Warrant to purchase up to 83,333,333 shares of Common Stock. The Warrant
        has an
        exercise price equal to $0.03, which may be adjusted under the terms of the
        warrant, and has a term of five years from the date of issuance on
        March 14, 2008. In
        addition, the holder of the Warrant is restricted from exercises of the Warrant
        that will result in it then beneficially owning more than 9.99% of the
        outstanding Common Stock following such exercise.
 
 28
 The
        Company also entered into a Registration Rights Agreement with the YA pursuant
        to which the Company is obligated, upon request of YA (or its
        successors and assigns), to file a registration statement covering the resale
        of
        shares of Common Stock issuable upon the conversion of the Series
        H
        Stock and
        exercise of the Warrant.
 
 In
        connection with the transactions pursuant to the Purchase Agreement, an
        affiliate of YA will
        receive a monitoring fee of $800,000 in the aggregate for its monitoring
        and
        managing the YA investment. In addition, such affiliate will receive $50,000 for its structuring
        of the transaction and its due diligence costs.
 
 On
        March
        17, 2008, the Company amended its Certificate of Incorporation to designate
        10,000 shares of its authorized preferred stock as Series H Stock.
 
 **New
        Accounting Pronouncements**
 
 In
        December 2004, the FASB issued SFAS No. 123R "Shared Based Payment". This
        statement is a revision of SFAS Statement No. 123, "Accounting for Stock-Based
        Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued
        to
        Employees," and its related implementation guidance. SFAS 123R addresses
        all
        forms of shared based payment ("SBP") awards, including shares issued under
        employee stock purchase plans, stock options, restricted stock and stock
        appreciation rights. Under SFAS 123R, SBP awards result in a cost that will
        be
        measured at fair value on the awards' grant date, based on the estimated
        number
        of awards that are expected to vest and will be reflected as compensation
        cost
        in the historical financial statements. This statement is effective for public
        entities that file as small business issuers as of the beginning of the first
        interim or annual reporting period that begins after June 15, 2005. The Company
        began reporting its SBP awards under SFAS No. 123R in December 2005.
 
 In
        March
        2006, the FASB issued SFAS No. 156 *“Accounting
        for Servicing of Financial Assets, an amendment of FASB No. 140,”* which
        modifies the accounting for and reporting of servicing asset and servicing
        liabilities. This statement is effective as of the beginning of our first
        fiscal
        year that begins after September 15, 2006. SFAS No. 156 is not currently
        applicable to the Company and, we believe that the adoption of SFAS No. 156
        will
        not have a material impact on our results of operations.
 
 In
        June
        2006, the FASB issued Financial Interpretation No. (FIN) 48, “ *Accounting
        for Uncertainty in Income Taxes – an interpretation of FASB Statement
        109* .”
FIN
        48
        prescribes a recognition threshold and a measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. This interpretation also provides guidance on
        de-recognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition. This interpretation is effective for
        fiscal
        years beginning after December 15, 2006. The Company does not believe the
        there
        is currently any impact in applying the various provisions of FIN 48.
 
 In
        September 2006, the FASB issued SFAS No. 157, “ *Fair
        Value Measurements* ,”
that
        provides guidance for using fair value to measure assets and liabilities.
        Under
        SFAS 157, fair value refers to the price that would be received to sell an
        asset
        or paid to transfer a liability in an orderly transaction between market
        participants in the market in which the reporting entity transacts. SFAS
        157
        establishes a fair value hierarchy that prioritizes the information used
        to
        develop the assumptions that market participants would use when pricing the
        asset or liability. The fair value hierarchy gives the highest priority to
        quoted prices in active markets and the lowest priority to unobservable data.
        In
        addition, SFAS 157 requires that fair value measurements be separately disclosed
        by level within the fair value hierarchy. This standard will be effective
        for
        financial statements issued for fiscal periods beginning after November 15,
        2007
        and interim periods within those fiscal years. The Company is currently
        evaluating the impact of applying the various provisions of SFAS 157.
 
 In
        February 2007, the FASB issued SFAS No. 159, “ *The
        Fair Value Option for Financial Assets and Financial
        Liabilities* ,”
which
        provides companies with an option to report selected financial assets and
        liabilities at fair value in an attempt to reduce both complexity in accounting
        for financial instruments and the volatility in earnings caused by measuring
        related assets and liabilities differently. This Statement is effective as
        of
        the beginning of an entity’s first fiscal year beginning after November 15,
        2007. The Company is currently evaluating the impact of applying the various
        provisions of SFAS 159.
 
 In
        December 2007, the FASB issued SFAS No. 160, “ *Non-controlling
        Interests in Consolidated Financial Statement-amendments of ARB No. 51* (“FAS
        160”).” FAS 160 states that accounting and reporting for minority interests will
        be recharacterized as non-controlling interests and classified as a component
        of
        equity. This Statement also establishes reporting requirements that provide
        sufficient disclosures that clearly identify and distinguish between the
        interests of the parent company and the interests of the non-controlling
        owners.
        FAS 160 applies to all entities that prepare consolidated financial statements,
        except not-for-profit organizations, but will affect only those entities
        that
        have an outstanding non-controlling interest in one or more subsidiaries
        or that
        deconsolidate a subsidiary. This Statement is effective as of the beginning
        of
        an entity’s first fiscal year beginning after December 15, 2008. The Company is
        currently evaluating the impact of applying the various provisions of SFAS
        160.
 
 29
 In
        December 2007, the FASB issued SFAS No. 141 (revised 2007), “ *Business
        Combinations* ”
(“FAS
        141R”), which replaces FASB Statement No. 141. FAS 141R establishes principles
        and requirements for how an acquirer recognizes and measures in its financial
        statements the identifiable assets acquired, the liabilities assumed, and
        non-controlling interest in the acquiree and the goodwill acquired. This
        Statement also establishes disclosure requirements which will enable users
        to
        evaluate the nature and financial effects of the business combination. FAS
        141R
        is effective as of the beginning of an entity’s fiscal year that begins after
        December 15, 2008. The Company is currently evaluating the impact of applying
        the various provisions of SFAS 141R.
  **Off-Balance
        Sheet Arrangements**
  There
        are
        no off-balance sheet arrangements entered into by the Company.
  **Critical
        Accounting Policies And Estimates**
  ***Revenue
        Recognition –*** Nexus
        recognizes revenue on their security system installation and integration
        contracts using the percentage of completion method. PMX recognizes revenue
        based on the sale of its products and services.
  ***Use
        of Estimates –*** The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Actual results could differ from those estimates.
  ***Fair
        Value of Financial Instruments –*** The
        carrying amount of items included in working capital approximates fair value
        because of the short maturity of those instruments. The carrying value of
        the
        Company’s debt approximates fair value because it bears interest at rates that
        are similar to current borrowing rates for loans of comparable terms, maturity
        and credit risk that are available to the Company.
  ***Investments
        in Available-for*** - ***Sale
        Securities –*** The
        Company classifies certain investments in securities as available-for-sale.
        Under this classification securities are reported at fair value (period end
        market closing prices) with unrealized gains and losses excluded from earnings
        and reported in a separate component of shareholder’s equity until the gains or
        losses are realized or a provision for impairment is recognized.
  ***Debt
        Offering Costs*** ****** ***–*** Debt
        offering costs are related to private placements and are being amortized
        on a
        straight line basis over the term of the related debt, most of which is in
        the
        form of convertible debentures. Should conversion occur prior to the stated
        maturity date, the remaining unamortized cost is expensed.
  ***Investment
        Valuation –*** Investments in equity securities are recorded at fair value, represented
        as
        cost, plus or minus unrealized appreciation or depreciation, respectively.
        The
        fair value of investments that have no ready market, are determined in good
        faith by management, and approved by the Board of Directors, based upon assets
        and revenues of the underlying investee companies as well as the general
        market
        trends for businesses in the same industry. Because of the inherent uncertainty
        of valuations, management estimates of the value of the investments may differ
        significantly from the values that would have been used had a ready market
        for
        the investments existed and the differences could be material.
  ***Income
        Taxes –*** Deferred
        income taxes are provided using the liability method whereby deferred tax
        assets
        are recognized for deductible temporary differences and operating loss and
        tax
        credit carryforwards and deferred tax liabilities are recognized for taxable
        temporary differences. Temporary differences are the differences between
        the
        reported amounts of assets and liabilities and their tax bases. Deferred
        tax
        assets are reduced by a valuation allowance when, in the opinion of management,
        it is more likely than not that some portion or all of the deferred tax assets
        will not be realized. Deferred tax assets and liabilities are adjusted for
        the
        effects of the changes in tax laws and rates on the date of the
        enactment.
  30
  When
        tax
        returns are filed, it is highly certain that some positions taken would be
        sustained upon examination by the taxing authorities, while others are subject
        to uncertainty about the merits of the position taken or the amount of the
        position that would be ultimately sustained. The benefit of a tax position
        is
        recognized in the financial statements in the period during which, based
        on all
        available evidence, management believes it is more likely than not that the
        position will be sustained upon examination, including the resolution of
        appeals
        or litigation processes, if any. Tax positions taken are not offset or
        aggregated with other positions. Tax positions that meet the
        more-likely-than-not recognition threshold are measured as the largest amount
        of
        tax benefit that is more than 50 percent likely of being realized upon
        settlement with the applicable taxing authority. The portion of the benefits
        associated with tax positions taken that exceeds the amount measured as
        described above is reflected as a liability for unrecognized tax benefits
        in the
        accompanying balance sheet along with any associated interest and penalties
        that
        would be payable to the taxing authorities upon examination.
  Interest
        and penalties associated with unrecognized tax benefits are classified as
        additional income taxes in the statement of income.
  **Item
        7. Financial Statements**
  Th e
        information required by this item is included in the Appendix attached
        hereto.
  **Item
        8. Changes In And Disagreements With Accountants On Accounting And Financial
        Disclosure**
  On
        May 3,
        2005, the Company engaged HJ & Associates, LLC as its principal accountant
        to audit the Company's financial statements. There have been no disagreements
        between us and HJ & Associates on any matter of accounting principles,
        practices or financial statement disclosure.
  **Item
        8A** **(T)** **.** **Controls And Procedures**
  ***Disclosure
        Controls And Procedures***
 
 The
        Company, under
        the
        supervision and with the participation of the Company’s
        management, including the Company’s Chief
        Executive Officer and Chief
        Financial Officer, has
        evaluated the effectiveness of the
        Company’s disclosure controls and procedures as of the end of the period covered
        by this report. Based on that evaluation, the Chief Executive Officer and
        the
        Chief Financial Officer
        have concluded that the
        Company’s disclosure controls
        and procedures are effective to
        ensure that information required to be disclosed in
        reports filed under
        the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), is
        recorded, processed, summarized and reported within
        the time periods specified in the rules and forms of the  Securities
        and Exchange Commission, and that such information is accumulated and
        communicated to the Company’s management, including its principal executive
        officer and principal financial officer, as appropriate, to allow timely
        decisions regarding required disclosure. Because of the
        inherent limitations in all control systems, any
        controls and procedures , no
        matter how well designed and operated, can provide only reasonable assurance of
        achieving the desired control objectives, and management necessarily is required
        to apply its judgment in evaluating the cost-benefit relationship of possible
        controls and procedures. Furthermore, our controls and procedures
        can be
        circumvented by the individual acts of some persons, by collusion of two
        or more
        people or by management override of the control,
        and misstatements due to error or fraud may
        occur and not be detected on a timely basis.
 
 ***Management’s
        Report On Internal Control Over Financial Reporting***
 
 Management
        of the Company is responsible for establishing and maintaining adequate
        internal control over financial reporting for the Company as defined in Rule
        13a-15(f) under the Exchange Act. The Company’s internal control over financial
        reporting is designed to provide reasonable assurance to the Company’s
        management and board of directors regarding the preparation and fair
        presentation of published financial statements and the
        reliability of financial reporting .
  Our
        management has evaluated the effectiveness of our internal controls and
        procedures as of December 31, 2007 (under the supervision and with the
        participation of the Chief Executive Officer and the Chief Financial Officer),
        pursuant to Rule 13a-15(b) promulgated under the Exchange Act. As part of
        such evaluation, management considered the matters discussed below relating
        to
        internal control over financial reporting. Based on this evaluation, our
        company’s Chief Executive Officer and Chief Financial Officer have concluded
        that our company’s disclosure controls and procedures were not effective as of
        December 31, 2007, due to certain material weaknesses in internal control
        over financial reporting.
  The
        term
“internal control over financial reporting” is defined as a process designed by,
        or under the supervision of, the registrant’s principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        registrant’s board of directors, management and other personnel, to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles and includes those policies and
        procedures that:
  31
  ·
              pertain
                  to the maintenance of records that in reasonable detail accurately
                  and
                  fairly reflect the transactions and dispositions of the assets
                  of the
                  registrant;
  ·
              provide
                  reasonable assurance that transactions are recorded as necessary
                  to permit
                  preparation of financial statements in accordance with generally
                  accepted
                  accounting principles, and that receipts and expenditures of the
                  registrant are being made only in accordance with authorizations
                  of
                  management and directors of the registrant;
                  and
  ·
              provide
                  reasonable assurance regarding prevention or timely detection of
                  unauthorized acquisition, use or disposition of the registrant’s assets
                  that could have a material effect on the financial
                  statements.
  The
        Company and its auditors believe that our methodology for measuring percent
        of
        completed contracts for our Nexus subsidiary could lead to a material
        misstatement of revenue. We believe that increased coordination between our
        financial group, our project managers and our engineers in estimating the
        completion of our projects, along with the appropriate detailed documentation,
        will eliminate this weakness in the future. We intend to continue to cooperate
        with our auditors in 2008 to address this or any other material weaknesses
        that
        may arise.
  ***Changes
        In Internal Control Over Financial Reporting***
 
 There
        were no changes in the Company’s internal control over financial reporting in
        the quarter ended December 31, 2007 that materially affected, or are reasonably likely to materially affect,
        the Company’s internal control over financial reporting.
  **Item
        8b. Other Information**
  None.
  32
  **PART
        III**
  **Item
        9. Directors And Executive Officers**
  The
        following sets forth the name, age and positions of our executive officers
        and
        directors as of March 28, 2008. Also set forth below is information as to
        the
        principal occupation and background for such persons. No family relationships
        exist between these individuals and they have not been a party to any bankruptcy
        or receivership proceeding, any criminal proceeding, or been enjoined from
        participating in any business, including the securities industry or otherwise
        during the last five years.
  **Executive
        Officers And Directors**
  Our
        executive officers and directors are as follows:
  **Name**
              
              **Age**
              
              **Position**
              
              **Period
                  Served**C.
                  Thomas McMillen
              
              55
              
              Chief
                  Executive Officer andChairman of the Board
              
              August
                  30, 2005 to PresentChristopher
                  P. Leichtweis
              
              48
              
              President
                  and Director
              
              March
                  19, 2008 to PresentMichael
                  T. Brigante
              
              53
              
              Vice
                  President of Finance and ChiefFinancial Officer
              
              July
                  14, 2006 to PresentZev
                  E. Kaplan
              
              55
              
              Director
              
              December
                  30, 2005 to PresentPhilip
                  A. McNeill
              
              48
              
              Director
              
              December
                  30, 2005 to PresentBrian
                  C. Griffin
              
              54
              
              Director
              
              May
                  16, 2007 to Present
  Below
        are
        biographies of our executive officers and directors:
  ***C.
        Thomas McMillen, Chief Executive Officer And Chairman Of The
        Board***
  Mr.
        McMillen has served as the Company’s Chief Executive Officer and Chairman
        of the Board since August 30, 2005 and served as the Company’s President
        from August 30, 2005 until March 19, 2008. Mr. McMillen also currently serves
        as
        Vice Chairman of Fortress International Group, a mission-critical firm and
        the
        successor company to Fortress America Acquisition Corporation, which completed
        its initial public offering in July 2005. In addition, Mr. McMillen serves
        as Chairman and Co-Chief Executive Officer of SAAC, a blank check company
        focused on the homeland security industry that completed its initial public
        offering in October 2007. In March 2003, Mr. McMillen co-founded Global Secure
        Corp., a homeland security company providing integrated products and services
        for critical incident responders, and served as its Chief Executive Officer
        until February 2004. From February 2004 until February 2005, Mr. McMillen
        served
        as a consultant to Global Secure Corp. From December 2003 to February 2004,
        Mr.
        McMillen served as Vice Chairman and Director of Sky Capital Enterprises,
        Inc.,
        a venture firm, and until February 2005 served as a consultant. From March
        2003
        to February 2004, Mr. McMillen served as Chairman of Sky Capital Holdings,
        Ltd,
        Sky Capital Enterprises’ London stock exchange listed brokerage affiliate. Mr.
        McMillen has also been Chief Executive Officer of Washington Capital Advisors,
        a
        merchant bank and one of our stockholders since 2003. Mr. McMillen also served
        as Chairman of TPF Capital, its predecessor company, from 2001 through 2002.
        Mr.
        McMillen has also been an independent consultant throughout his career. Mr.
        McMillen received a Bachelor of Science in Chemistry from the University
        of
        Maryland and a Bachelor and Master of Arts from Oxford University as a Rhodes
        Scholar.
  ***Christopher
        P. Leichtweis, President and Director***
  Mr.
        Leichtweis has served as the Company’s President and as a director of the
        Company since March 19, 2008. Mr. Leichtweis
        has been serving as chairman and chief executive officer of Safety & Ecology
        Holdings Corporation (“Safety”) since 1991. Mr. Leichtweis founded Safety in
        1991 and over the last decade has grown the Company to its present state
        of over
        $50 million in revenue. Prior to founding Safety, he was employed by Bechtel
        National and Bechtel Environmental, Inc. (various business units) starting
        in
        1985 and was a key contributor to major federal nuclear legacy programs.
        Mr.
        Leichtweis earned a B.S. in Engineering Physics from SUNY Brockport in 1983
        and
        received his M.B.A. from the University of Tennessee in December 2003. In
        addition, he is a Certified Industrial Hygienist by the American Board of
        Industrial Hygiene. Mr. Leichtweis was nationally recognized as the Southeast
        United States 2005 Ernst & Young Entrepreneur of the Year
        award.
  33
  ***Michael
        T. Brigante, Vice President of Finance And Chief Financial
        Officer***
  Mr.
        Brigante has served as the Company’s Vice President of Finance since July 14,
        2006 and the Company’s Chief Financial Officer since May 10, 2007. In January
        2003, Mr. Brigante joined Sky Capital Enterprises, a venture firm, and Sky
        Capital Holdings, a NASD registered broker dealer, which are both London
        Stock
        Exchange listed companies and served as their Chief Financial Officer until
        June
        2006. From December 1999 until December 2002, Mr. Brigante was the Managing
        Partner of Pilot Rock Consulting, a diversified financial consulting practice
        to
        public and private companies, which he founded. From December 1995 until
        December 1996, Mr. Brigante served as the Controller and from January 1997
        until
        June 1999 served as Chief Financial Officer of Complete Wellness Centers,
        Inc. a
        publicly held healthcare services company. Prior to his position with Complete
        Wellness Centers, Inc. Mr. Brigante served in a variety of Senior Financial
        positions with public and private companies. Mr. Brigante is a graduate of
        James
        Madison University, with a Bachelor of Science degree in Accounting and
        Economics and is a Certified Public Accountant.
  ***Zev.
        E. Kaplan, Director***
  Mr.
        Kaplan has served as a director of the Company since December 30, 2005. Mr.
        Kaplan is the founder of a law firm concentrating its practice in the areas
        of
        transportation, infrastructure, government relations, business and
        administrative law. Mr. Kaplan is currently General Counsel to Cash Systems
        Inc., a publicly traded company in the financial services business, a position
        he has held since March 2005. From April 1995 to the present, Mr. Kaplan
        has
        been General Counsel to the Regional Transportation Commission of Southern
        Nevada, where he played a key policy role in the start-up of the local transit
        systems and their facilities. In addition, Mr. Kaplan has had a key role
        in the
        planning and financing of numerous major public infrastructure projects in
        Las
        Vegas. Prior to starting his law firm, Mr. Kaplan spent 15 years in government
        service in the following capacities: Senior Deputy District Attorney with
        the
        Clark County District Attorney’s Office-Civil Division; General Counsel to the
        Nevada Public Service Commission; and Staff Attorney to the U.S. Senate
        Committee on Commerce, Science and Transportation. Mr. Kaplan received his
        J.D.
        from Southwestern University School of Law and attended Georgetown University
        for post-graduate legal studies; received an MBA from the University of Nevada,
        Las Vegas; and received a B.S. from the Smith School of Business at the
        University of Maryland in 1974.
  ***Philip
        A. McNeill, Director***
  Mr.
        McNeill has served as a director of the Company since December 30, 2005.
        Mr.
        McNeill is a Managing Partner and the Chief Investment Officer of SPP Mezzanine
        Partners, the General Partner of SPP Mezzanine Funding, LP, a position he
        has
        held since November 2003. Prior to forming SPP Mezzanine Partners, Mr. McNeill
        served as Managing Director of Allied Capital Corporation, where he was co-head
        of its Private Finance and Mezzanine activities and a member of its Investment
        Committee. From the time of his appointment as Managing Director in 1998
        until
        he left Allied Capital in 2002, the company grew from approximately $740
        million
        in assets to nearly $2.4 billion. Mr. McNeill joined Allied Capital directly
        from M&T Capital, the SBIC investment division of M&T Bank, where he was
        a Vice President of M&T Capital/M&T Bank and an investment professional
        from 1988 to 1993. Mr. McNeill graduated from Syracuse University in 1981
        with a
        B.S. in Business Administration, with concentrations in Accounting, Finance,
        and
        Law & Public Policy. Mr. McNeill earned his MBA from Harvard Business School
        in 1985.
  ***Brian
        C. Griffin, Director***
  Dr.
        Griffin has served as a director of the Company since May 16, 2007. Dr. Griffin
        has served since January 2006 as Chairman of the Board of Clean Energy Systems.
        Dr. Griffin served two terms as Oklahoma’s Secretary of Environment from April
        1997 to January 2003. During that time, he chaired and was a member of several
        committees sponsored by the U.S. Environmental Protection Agency, the U.S.
        Department of Energy and the Southern States Energy Board. He was also a
        member
        of the Biomass & Bio-Energy Research and Development Federal Advisory
        Committee, which was sponsored by the U.S. Environmental Protection Agency
        and
        the U.S. Department of Agriculture. Dr. Griffin also served as a member of
        the
        Coal & Advanced Power Systems Committee sponsored by the U.S. Department of
        Energy and the Southern States Energy Board from January 1999 to January
        2003.
        In addition, he served as the National Chairman of the Interstate Technology
        and
        Regulatory Council from March 2001 to October 2003. In April 2003, President
        Bush appointed him to serve as the Federal Representative to the Southern
        States
        Energy Board, a position he still holds. Dr. Griffin received a Bachelor
        of Arts
        degree from Harvard University and was selected as a Rhodes Scholar. As a
        Rhodes
        Scholar, he attended Oxford University where he received his Master of
        Jurisprudence degree. He also earned a Juris Doctor degree from University
        of
        Oklahoma College of Law and a Master of Laws degree from Southern Methodist
        University.
  34
  **Term
        of Office**
  Each
        director holds office until our annual meeting of stockholders and until
        his
        successor is duly elected and qualified. Officers are elected by our Board
        of
        Directors and hold office at the discretion of our Board of
        Directors.
  **Family
        Relationships**
  To
        our
        knowledge, there are no family relationships between any of the directors
        or
        executive officers of the Company.
  **Legal
        Proceedings**
  To
        our
        knowledge, none of the Company’s directors have been involved in legal
        proceedings.
  **Committees
        Of The Board Of Directors**
  ***Audit
        Committee.*** Zev
        Kaplan and Phillip McNeill serve as members of the Audit Committee. Both
        are
        independent members of the Board and our Board has determined that Mr. McNeill
        satisfies the criteria for an audit committee financial expert under Rule
        401(e)
        of Regulation S-B of the rules of the SEC. Each Audit Committee member is
        able
        to read and understand fundamental financial statements, including our company’s
        consolidated balance sheet, statement of operations and statement of cash
        flows.
        The functions of the Audit Committee are primarily to: (i) provide advice
        to the
        Board in selecting, evaluating or replacing outside auditors, (ii) review
        the
        fees charged by the outside auditors for audit and non-audit services, (iii)
        ensure that the outside auditors prepare and deliver annually a Statement
        as to
        Independence, (iv) meet with outside auditors to discuss the results of their
        examination and their evaluation of internal controls and the overall quality
        of
        financial reporting, and (v) meet with the outside auditors to discuss the
        scope
        of the annual audit, to discuss the audited financial statements. The Audit
        Committee met 3 times in 2007.
  ***Audit
        Committee Reports.*** **** Phillip
        McNeill, a member of the Audit Committee, has reviewed and discussed with
        our
        independent auditors the matters required to be discussed by SAS 61. The
        Audit
        Committee has received the written disclosures and the letter from the
        independent accountants required by Independence Standards Board Standard
        No. 1,
        and has discussed with the independent accountant the independent accountant’s
        independence. Based on these reviews and discussions, the Audit Committee
        recommended to the Board that the audited financial statements be included
        in
        the Company’s Annual Report on Form 10-KSB for the most recent fiscal
        year.
  ***Compensation
        Committee.*** Zev
        Kaplan, Brian Griffin and Phillip McNeill serve as members of the Compensation
        Committee. All are independent members of the Board. The Compensation Committee
        met one time in 2007.
  **Section
        16(a) Beneficial Ownership Reporting Compliance**
  Section
        16(a) of the Exchange Act, requires the Company’s Directors and executive
        officers, and persons who beneficially own more than 10% of a registered
        class
        of the Company’s equity securities, to file with the SEC initial reports of
        ownership and reports of changes in ownership of Common Stock and the other
        equity securities of the Company. Officers, Directors, and persons who
        beneficially own more than 10% of a registered class of the Company’s equity
        securities are required by the regulations of the SEC to furnish the Company
        with copies of all Section 16(a) forms they file. Based
        solely on a review of reports filed with the Company, it appears that only
        one
        required report under Section 16(a) of the 1934 Act was not filed timely
        for the
        fiscal year 2007.
  **Code
        of Ethics**
  On
        March
        16, 2004, the Board of Directors of the Company adopted a written Code of
        Ethics
        designed to deter wrongdoing and promote honest and ethical conduct, full,
        fair
        and accurate disclosure, compliance with laws, prompt internal reporting
        and
        accountability to adherence to the Code of Ethics. This Code of Ethics has
        been
        filed with SEC as an Exhibit to the Company’s Form 10-K for the year ended
        December 31, 2003.
  35
  **Item
        10. Executive Compensation**
  **Summary
        Compensation Table**
  The
        following table sets forth the annual and long-term compensation of our officers
        for services in all capacities for the fiscal years ended December 31, 2007
        and
        2006.
  **Name
                  andPrincipalPosition**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **StockAwards**
              
              **OptionAwards**
              
              **Non-EquityIncentivePlanCompensation**
              
              **NonqualifiedDeferredCompensationEarnings**
              
              **All
                  OtherAnnual Compensation(1)**
              
              **Total**C.
                  Thomas
              
              2007
              
              $
              200,000
              
              $
              100,000
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              6,238
              
              $
              306,238McMillen,
                  Chairman of the Board and Chief Executive Officer
              
              2006
              
              $
              191,667
              
              $
              100,000
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              5,526
              
              $
              297,193Michael
                  T. Brigante
              
              2007
              
              $
              178,750
              
              $
              5,000
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              7,270
              
              $
              191,020Vice
                  President of Finance and Chief Financial Officer
              
              2006
              
              $
              73,333
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              0
              
              $
              6,956
              
              $
              80,289
  (1)  Reflects
        Company-paid health insurance.
  **Long-Term
        Incentive Plans Awards In Last Fiscal Year**
  The
        Company did not grant any long-term incentive plan awards in the fiscal year
        ended December 31, 2007.
  **Stock
        Option Plans**
  The
        Company established a stock option plan (the “1995 Plan”) in 1995 to provide
        additional incentives to its officers and employees. Eligible persons are
        all
        employees employed on the date of grant. Management may vary the terms,
        provisions and exercise price of individual options granted, with both incentive
        stock options and non-qualified options authorized for grant. In 1995, the
        Board
        approved the issuance of up to 89 options to acquire common shares of which
        21
        were outstanding at December 31, 2002. There were no outstanding options
        under
        the 1995 Plan at December 31, 2007.
  In
        1997,
        the Company established an additional stock option plan (the “1997 Plan”), under
        which 100 options to acquire shares of Common Stock were reserved for issuance.
        There were no options to purchase shares of Common Stock outstanding under
        the
        1997 Plan at December 31, 2007. In 2001, the Company established an additional
        stock option plan (the “2001 Plan”), under which 5,000 options to acquire shares
        of Common Stock were reserved for issuance. There were no options to purchase
        shares of Common Stock outstanding under the 2001 Plan at December 31,
        2007.
  36
  In
        2002,
        the Company established an additional stock option plan (the “2002 Plan”) under
        which 100,000 options to acquire shares of Common Stock were reserved for
        issuance. There were no options to purchase shares of Common Stock outstanding
        under the 2002 Plan at December 31, 2007.
  On
        August
        29, 2005, the Board adopted a stock option plan (the” 2005 Plan”), under which
        the Company reserved 7,200,000 shares of Common Stock for issuance. Participants
        eligible under the 2005 Plan are officers and key employees. There were a
        total
        of 6,900,000 options outstanding under the 2005 Plan at December 31,
        2007.
  In
        connection with his employment by the Company and appointment to the Board
        on
        August 29, 2005, Mr. McMillen was previously granted options to purchase
        5,800,000 shares of Common Stock (the “McMillen Options”). The McMillen Options
        vested 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 additional
        shares of Common Stock vested at the end of each of the first, second, third
        and
        fourth calendar quarters following the initial vesting date.
  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 (the
        “Brigante Options”). The Brigante Options vested as follows: (i) options to
        acquire 57,720 shares of Common Stock vested on July 5, 2006, and (ii) options
        to acquire 57,690 additional shares of Common Stock vested at the end of
        each of
        the next twelve (12) calendar quarters following the initial vesting date.
        In
        connection to his appointment as Chief Financial Officer, on May 15, 2007,
        Mr.
        Brigante was granted options to purchase 519,210 shares of Common Stock (the
        “Additional Brigante Options”) and the Company cancelled 519,210 unvested
        options from his July 5, 2006 grant. The Additional Brigante 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 next eight (8) calendar quarters following
        the
        initial vesting date.
  The
        Company has also granted options to members of the Board and to a consultant
        of
        the Company which are outside the aforementioned stock plans. The exercise
        price
        for the stock options granted to the directors and the Consultant were $0.14
        and
        $$0.17, respectively, which represented the closing share price on the date
        of
        grant. These options expire 10 years from their grant date. There were 2,760,000
        options issued outside of stock plans outstanding at December 31,
        2007.
  **Employment
        Contracts**
  On
        August
        29, 2005, the Company and Mr. McMillen entered into the McMillen Employment
        Agreement whereby the Company hired Mr. McMillen to serve as its Chief Executive
        Officer and President for a term of two years, and renewable by mutual agreement
        of the Company and Mr. McMillen. Mr. McMillen’s initial annual salary under this
        agreement was $120,000 with the possibility of a performance bonus. Pursuant
        to
        the McMillen Employment Agreement, Mr. McMillen was awarded options to acquire
        a
        total of 5,800,000 shares of Common Stock as described above. Mr. McMillen
        also
        received a sign-on bonus of $125,000.
  On
        September 1, 2007, the Company and Mr. McMillen agreed to a two year extension
        of the McMillen Employment Agreement. Under the terms of the extension Mr.
        McMillen’s annual salary was increased to $200,000 with the possibility of a
        performance bonus. Additionally, the base salary shall be increased by twenty
        thousand dollars ($20,000) or pro rata for every ten million dollars
        ($10,000,000) or pro rata of equity (“New Equity”) the Company sells during the
        term of the McMillen Employment Agreement; provided, however, that any equity
        securities (i) issued to employees or consultants as compensation, (ii) issued
        in acquisition or merger or (ii) purchased by employees, consultants or
        directors upon the exercise or conversion of any Company stock option or
        other
        security issued for compensatory purposes, shall not be deemed New
        Equity.
  On
        May
        10, 2007, the Company and Mr. Brigante entered into the Brigante Employment
        Agreement whereby the Company appointed Mr. Brigante to serve as Chief Financial
        Officer for a term of three years and renewable by mutual agreement of the
        Company and Mr. Brigante. Mr. Brigante’s initial annual salary under this
        agreement was $190,000 with the possibility of a performance bonus. Pursuant
        to
        the Brigante Employment Agreement, Mr. Brigante was awarded options to acquire
        a
        total of 519,210 shares of Common Stock as described above. Mr. Brigante
        also
        received a sign-on bonus of $5,000.
  37
  **Outstanding
        Equity Awards at Fiscal Year-End**
  **Outstanding
        Equity Awards at Fiscal Year-End Table**
  **Option
                    Awards**
                
                **Stock
                    Awards****Name**
                
                **NumberofSecuritiesUnderlyingUnexercisedOptions**
                  **(#)Exercisable**
                
                **NumberofSecurities
                    Underlying Unexercised
                    Options(#)Unexercisable**
                
                **EquityIncentivePlan
                    Awards: Number of Securities Underlying Unexercised Unearned
                    Options(#)**
                
                **OptionExercisePrice**
                  **($
                    pershare)**
                
                **OptionExpirationDate**
                
                **Numberof**
                  **Shares**
                  **or
                    Units**
                  **of
                    Stock That**
                  **Have**
                  **Not**
                  **Vested**
                  **(#)**
                
                **Market
                    Value of Shares or Units of Stock That Have Not Vested
                    ($)**
                
                **Equity
                    Incentive Plan Awards: Number of Unearned Shares, Units or Other
                    Rights
                    That Have Not Vested (#)**
                
                **Equity
                    Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                    Units or
                    Other Rights That Have Not Vested ($)**C.
                    Thomas McMillen
                  Chief
                    Executive Officer
                
                
                5,800,000
                
                
                0
                
                
                —
                
                $
                .0.08
                
                
                8/29/2015
                
                
                —
                
                
                —
                
                
                —
                
                
                —Michael
                    T. Brigante
                  Vice
                    President and Chief Financial Officer
                
                
                230,790
                
                
                0
                
                
                -
                
                $
                0.17
                
                
                7/10/2016
                
                
                -
                
                
                -
                
                
                -
                
                
                -173,070
                
                
                346,140
                
                
                -
                
                $
                0.12
                
                
                5/10/2017
                
                
                -
                
                
                -
                
                
                -
                
                
                -
  **Director
        Compensation**
  **Name**
                
                **Fees
                    Earned or Paid in Cash**
                
                **Stock
                    Awards**
                
                **Option
                    Awards (1)**
                
                **Non-Equity
                    Incentive**
                  **Plan
                    Compensation**
                
                **Nonqualified
                    Deferred Compensation Earnings**
                
                **All
                    Other Compensation**
                
                **Total**Zev
                    E. Kaplan
                
                $
                20,000
                
                $
                0
                
                
                —
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                20,000Philip
                    A. McNeill
                
                $
                20,000
                
                $
                0
                
                
                —
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                20,000Brian
                    C. Griffin
                
                $
                15,000
                
                $
                0
                
                
                720,000
                
                $
                0
                
                $
                0
                
                $
                0
                
                $
                15,000
  38
  (1)
        Reflects option award in May 2007 granted to Mr. Griffin upon joining the
        Board.
  **Director
        Compensation**
  Each
        Director of the Company, except Mr. McMillen, is entitled to receive his
        $5,000
        per scheduled board meeting attended. Each Director of the Company will be
        reimbursed for reasonable expenses incurred in connection with their service
        on
        the Board.
  Upon
        election to the Board of Directors on December 30, 2005, each director except
        Mr. McMillen, was granted options to purchase 720,000 shares of Common Stock,
        of
        which 80,000 vested upon their election to the Board, and the remainder vests
        in
        80,000 increments at the end of each calendar quarter thereafter. At December
        31, 2007 each of the director’s option grants are fully vested with the
        exception of Mr. Rickertsen’s, who left the board in April 2007 and forfeited
        all his options. The exercise price for the stock options granted upon election
        was $0.14 per share, which represents the closing share price on the date
        of the
        grant. These options expire 10 years from their grant date.
  On
        May
        16, 2007, Brian C. Griffin was elected to the Board of Directors and was
        granted
        options to purchase 720,000 shares of Common Stock, which vest in 90,000
        increments each calendar quarter beginning in June 2007. At December 31,
        2007,
        270,000 of Mr. Griffin’s options were vested. The exercise price for Mr.
        Griffin’s stock options was $0.12 per share, which represents the closing share
        price on the date of the grant. These options expire 10 years from their
        grant
        date.
  **Item
        11. Security Ownership Of Certain Beneficial Owners And Management And Related
        Stockholder**
  ***Principal
        Stockholders.*** The
        following table sets forth, information with respect of the beneficial ownership
        as of March 28, 2008, for any person who is known to the Company to be the
        beneficial owner of more than five percent (5%) of the Common Stock .
 **Name
                    and Address**
                
                **Title
                    of Class**
                
                **Shares**
                  **Beneficially**
                  **Owned**
                
                **Percent**
                  **of
                    Class****(1)**YA
                    Global Investments, L.P.
                
                Common
                  Stock
                
                
                5,411,177
                (2)
                
                9.9
                %101
                    Hudson StJersey
                    City, NJ 07302
  (1)
              Applicable
                  percentage of ownership is based on 49,246,244 shares of Common
                  Stock
                  outstanding as of March 28, 2008 together with securities convertible
                  or
                  exercisable into shares of Common Stock within 60 days for the
                  stockholder. Beneficial ownership is determined in accordance with
                  the
                  rules of the SEC 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 March
                  28, 2008,
                  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)
              Out
                  of these shares, 500,000 shares of Common Stock were acquired as
                  compensation pursuant to a Securities Purchase Agreement, dated
                  February
                  6, 2006, by and between the Company and YA.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 shares of our Series F Preferred
                  Stock
                  convertible into approximately 10,000,000 shares of our Common
                  Stock at
                  $0.10 per share, 358,080 shares of our Series G Preferred Stock
                  convertible into 1,611,360 shares of our Common Stock and 9,675
                  shares of
                  our Series H Stock convertible into 322,500,000 shares of our Common
                  Stock. YA cannot convert either our debentures, warrants or preferred
                  stock into shares of Common Stock that would cause YA to own more
                  than
                  9.9% of the issued and outstanding Common Stock. The Series H Stock
                  vote on an as-converted basis but YA Global’s voting power may not exceed
                  9.9% with respect it its Series H Stock. The Series F Stock and
                  the Series G Stock have no voting rights. The remaining shares of
                  Common Stock beneficially owned by YA were acquired from us through
                  various private placement
                  transactions.
  39
  ***Management.*** The
        following table shows the amount of capital stock of the Company beneficially
        owned by the Company’s directors, executive officers named in the Summary
        Compensation Table and by all directors and executive officers as a group
        as of
        March 28, 2008.
 **Name
                    and Address**
                
                **Title
                    of Class**
                
                **Shares**
                  **Beneficially**
                  **Owned**
                
                **Percent**
                  **of
                    Class**C.
                    Thomas McMillen
                
                Common
                  Stock
                
                
                31,300,000
                (1)
                
                46.0
                %Christopher
                    P. Leichtweis
                
                Common
                  Stock
                
                
                121,313,523
                (2)
                
                71.2
                %Michael
                    T. Brigante
                
                Common
                  Stock
                
                
                461,550
                (3)
                
                0.9
                %Zev
                    E. Kaplan
                
                Common
                  Stock
                
                
                720,000
                (4)
                
                1.4
                %Philip
                    A. McNeill
                
                Common
                  Stock
                
                
                720,000
                (5)
                
                1.4
                %Brian
                    C. Griffin
                
                Common
                  Stock
                
                
                360,000
                (6)
                
                0.7
                %All
                    Officers and Directors as Group
                
                Common
                  Stock
                
                
                154,875,073
                
                
                80.8
                %
 
 The
        applicable percentage of beneficial ownership is based on 49,246,244 shares
        of
        Common Stock outstanding as of March 28, 2008, together with securities
        convertible or exercisable into shares of Common Stock within 60 days for
        each
        stockholder. Shares of Common Stock subject to securities that are currently
        exercisable or exercisable within 60 days of March 28, 2008 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. Beneficial ownership, which is determined in accordance with the
        rules
        and regulations of the SEC, means the sole or shared power to vote or direct
        the
        voting or to dispose or direct the disposition of our Common Stock. Unless
        otherwise indicated, all of the shares are owned directly, and the person
        has
        sole voting and dispositive power. Except as otherwise indicated, the business
        address for each of the following persons is 1005 North Glebe Road, Suite
        550,
        Arlington, Virginia 22201.
  (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 are currently exercisable.
                  Mr. McMillen also owns warrants to purchase 2,166,667 shares of
                  common stock at $0.03 per share.
  (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 warrant to purchase20,218,923
                  shares of Common Stock.
  (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 March 28, 2008. On May 10, 2007, Mr.
                  Brigante
                  was separately granted options to purchase 519,210shares
                  of Common Stock, of which 230,760 were exercisable on March 28,2008.The balance vests in 57,690 increments at the end of each calendar
                  quarter.
  (4)
              Mr.
                  Kaplan was granted options to purchase 720,000 shares of Common
                  Stock in
                  December 2005. All of these options were exercisable on March 28,2008
  (5)
              Mr.
                  McNeill was granted options to purchase 720,000 shares of Common
                  Stock in
                  December 2005.All
                  of these options were exercisable at March 28,2008.
  40
  (6)
              Mr.
                  Griffin was granted options to purchase 720,000 shares of Common
                  Stock in
                  May 2007, of which360,000were exercisable on March 28,2008.The balance vests in 90,000 increments at the end of each calendar
                  quarter.
  **Item
        12. Certain Relationships And Related Transactions**
  On
        June
        7, 2005, Washington Capital Advisors, a private equity firm owned by McMillen,
        and Global Defense Corp. executed a lease with Cambridge Associates LLC for
        our
        office space located at 4100 North Fairfax Drive, Suite 1150, Arlington,
        VA
        22203-1664. McMillen served as Chairman of the Board and Chief Executive
        Officer
        of Global Defense Corp. until July 2005, when he stepped down as CEO. Washington
        Capital Advisors leased the equipment and provided it and the space to FAAC
        with
        a separate sublease arrangement that started July 2005. We moved into this
        office space on September 1, 2005 and did not pay any rent because of BDC
        limitations on doing business with affiliates. On March 1, 2006, Global Defense
        Corp. assigned its interest in the lease to us with Washington Capital Advisor’s
        approval. On March 1, 2006, HSCC started paying a monthly rent (which includes
        utilities, furniture and equipment) in the amount of $4,600 to Cambridge
        Associates LLC. On
        July
        14, 2007, HSCC moved its offices to its present location, in which it has
        directly subleased the office space.
  On
        June
        1, 2007, the Company loaned five hundred thousand dollars ($500,000) to Secure
        America Acquisition Holdings LLC (“SAAH”) an entity controlled by C. Thomas
        McMillen, our President and Chief Executive Officer. The loan was for working
        capital purposes and is evidenced by a note bearing 5% interest per annum
        and is
        due on or before May 31, 2011, with no prepayment penalties. The loan is
        guaranteed in its entirety by Mr. McMillen. SAAH is the initial principal
        stockholder in Secure America Acquisition Corporation (“SAAC”), a blank check
        company, whose primary purpose is to seek an acquisition or business combination
        in the homeland security industry, excluding companies whose primary focus
        is
        secure data facilities or whose enterprise value is less than $60,000,000.
        As an
        additional inducement for granting the loan, the Company received a membership
        interest in SAAH, which entitles it to receive two hundred fifty thousand
        (250,000) shares of common stock in SAAC, if and when SAAC completes an
        acquisition or business combination, which it has 24 months to do
        so.
  On
        October 22, 2007, the Company purchased seventy five thousand (75,000)
        membership interests in SAAH in the amount of $150,000. These membership
        interests entitle the Company to receive 75,000
        shares of common stock in SAAC, if and when SAAC completes an acquisition
        or
        business combination, which it has twenty four months to do so.
  On
        October 22, 2007, the Company loaned SAAH $65,000. The unsecured loan was
        for
        working capital purposes, is evidenced by a note and is due October 22, 2008,
        with no prepayment penalties. The loan was repaid on October 29, 2007 in
        its
        entirety.
  In
        addition to Mr. McMillen’s control of SAAH, he also serves as co-Chief Executive
        Officer of SAAC. Mr. McNeill, our Director, is also a director of SAAC and
        an
        investor in SAAH. Mr. Griffin, our Director, is a special advisor to
        SAAC
        and an investor in SAAH. Mr. Brigante, our Chief Financial Officer, is an
        investor in SAAH.
  The
        Company has also entered into an agreement (the “SAAC Agreement”) with SAAC to
        receive a monthly fee of up to $7,500 for providing SAAC with office space
        and
        certain office and administrative services for up to 24 months. The SAAC
        Agreement became effective upon the effectiveness of the SAAC registration
        statement with the Securities and Exchange Commission. Certain employees
        of the
        Company will perform required services pursuant to the SAAC Agreement. The
        Company has collected $16,694 for the aforementioned services through December
        31, 2007.
  We
        believe that each of the above referenced transactions was made on terms
        no less
        or more favorable to us than could have been obtained from an unaffiliated
        third
        party. Furthermore, any future transactions between us and officers, directors,
        principal stockholders or affiliates, will be on terms no less favorable
        to us
        than could be obtained from an unaffiliated third party, and will be approved
        by
        a majority of our directors, including a majority of our independent and
        disinterested directors who have access at our expense to our legal
        counsel.
  **Where
        You Can Find More Information**
  Statements
        contained in this annual report as to the contents of any contract, agreement
        or
        other document referred to include those terms of such documents that we
        believe
        are material, whenever a reference is made in this annual report to any contract
        or other document of ours, you should refer to the exhibits that are a part
        of
        the annual report for a copy of the contract or document.
  41
  You
        may
        read and copy all or any portion of the annual report or any other information
        that the Company files at the SEC’s public reference room at One Station Place,
        100 F Street NE, Washington, DC 20549. You can request copies of these
        documents, upon payment of a duplicating fee, by writing to the SEC. Please
        call
        the SEC at 1-800-SEC-0330 for further information on the operation of the
        public
        reference room. Our SEC filings, including this annual report, are also
        available to you on the SEC’s website at www.sec.gov .
  42
  **PART
        V**
  **Item
        13. Exhibits** ****
  **(a)**  **Documents
        filed as part of this report:**
  See
        index
        to Consolidated Financial Statements attached, which are filed as part of
        this
        report.
  **(b)**  **Exhibits:**
 **Exhibit No**
                
                **Description**
                
                **Location**2.1
                
                Agreement
                    and Plan of Merger and Stock Purchase Agreement, dated March 13,
                    2008, by and among the Company, Safety & Ecology Holdings Corporation,
                    HSCC Acquisition Corp. and certain other persons named
                    therein.
                
                Incorporated
                    by reference as Exhibit 2.1 to Form 8-K filed with theSECon
                    March 19, 20083.1
                
                Certificate
                    of Amendment to Certificate of Incorporation
                
                Incorporated
                    by reference as Exhibit 3.1 to Form 8-K filed with theSECon
                    February 6, 2006
  43
  **Exhibit No**
                
                **Description**
                
                **Location**3.2
                
                Certificate
                    of Designation for the Series G Convertible Preferred
                    Stock
                
                Incorporated
                    by reference as Exhibit 3.1 to Form 8-K filed with theSECon
                    February 14, 20063.3
                
                Bylaws
                    of the Company
                
                Incorporated
                    by reference as Exhibit 3.2 to the Registration Statement on
                    Form SB-2
                    filed with theSECon
                    August 13, 19973.4
                
                Certificate
                    of Designation of Series C Preferred Stock
                
                Incorporated
                    by reference to the Registration Statement on Form SB-2 filed
                    with theSECon
                    October 18, 20013.5
                
                Certificate
                    of Designation of Series D Preferred Stock
                
                Incorporated
                    by reference as Exhibit 3.4 to Form 10-KSB filed with theSECon
                    March 27, 20023.6
                
                Certificate
                    of Designation of Series E Preferred Stock
                
                Incorporated
                    by reference as Exhibit 3.4 to Form 10-KSB filed with theSECon
                    March 27, 20023.7
                
                Certificate
                    of Amendment to Certificate of Incorporation of the Company,
                    dated August
                    23, 2002
                
                Incorporated
                    by reference as Exhibit 3.6 to Form 10-KSB filed with theSECon
                    April 15, 20053.8
                
                Certificate
                    of Amendment to Certificate of Incorporation of the Company,
                    dated April
                    17, 2002
                
                Incorporated
                    by reference as Exhibit 3.7 to Form 10-KSB filed with theSECon
                    April 15, 20053.9
                
                Certificate
                    of Amendment to Certificate of Incorporation, dated January 5,
                    2006
                
                Incorporated
                    by reference as Exhibit 3.1 to Form 8-K filed with theSECon
                    February 2, 20063.10
                
                Certificate
                    of Designation of Series F Convertible Preferred Stock
                
                Incorporated
                    by reference as Exhibit 99.2 to Form 8-K filed with theSECon
                    October 7, 20053.11
                
                Company’s
                    Certificate of Designation for Series H Convertible Preferred
                    Stock
                
                Incorporated
                    by reference as Exhibit 3.1 to Form 8-K filed with theSECon
                    March 19, 20083.12
                
                Certificate
                    of Designation for Homeland Security Capital Corporation’s Series I
                    Convertible Preferred Stock
                
                Incorporated
                    by reference as Exhibit 3.1 to Form 8-K filed with theSECon
                    March 19, 200810.1
                
                Securities
                    Purchase Agreement, dated as of March 14, 2008 between the Company
                    and
                    YA Global Investments, L.P.
                
                Incorporated
                    by reference as Exhibit 10.1 to Form 8-K filed with theSECon
                    March 19, 200810.2
                
                Registration
                    Rights Agreement, dated as of March 14, 2008 between the Company
                    and
                    YA Global Investments, L.P.
                
                Incorporated
                    by reference as Exhibit 10.2 to Form 8-K filed with theSECon
                    March 19, 200810.3
                
                Employment
                    Agreement by and between C. Thomas McMillen and the
                    Company
                
                Filed
                    herewith10.4
                
                Indemnification
                    Agreement by and between C. Thomas McMillen and the
                    Company
                
                Incorporated
                    by reference as Exhibit 10.4 to Form 8-K filed with the SEC on
                    August 31,
                    200510.5
                
                Securities
                    Purchase Agreement dated as of October 6, 2005, by and between
                    the Company
                    and Cornell Capital Partners, LP
                
                Incorporated
                    by reference to Exhibit 99.1 to Form 8-K filed with the SEC on
                    October 7,
                    2005
  44
  **Exhibit No**
                
                **Description**
                
                **Location**10.6
                
                Escrow
                    Agreement, dated as of October 6, 2005, by and between the Company
                    and
                    Cornell Capital Partners, LP
                
                Incorporated
                    by reference to Exhibit 99.3 to Form 8-K filed with the SEC on
                    October 7,
                    200510.7
                
                2005
                    Stock Option Plan
                
                Incorporated
                    by reference to Exhibit 10.13 to Form 10-KSB filed with the SEC
                    on April
                    17, 200610.8
                
                Securities
                    Purchase Agreement dated February 6, 2006, by and between Homeland
                    Security Capital Corporation and Cornell Capital Partners LP
                
                Incorporated
                    by reference as Exhibit 10.1 to Form 8-K filed with the SEC on
                    February
                    14, 200610.9
                
                Investor
                    Registration Rights Agreement dated February 6, 2006, by and
                    between
                    Homeland Security Capital Corporation and Cornell Capital Partners
                    LP
                
                Incorporated
                    by reference as Exhibit 10.2 to Form 8-K filed with the SEC on
                    February
                    14, 200610.10
                
                Investment
                    Agreement dated February 6, 2006, by and between Homeland Security
                    Capital
                    Corporation and Cornell Capital Partners LP
                
                Incorporated
                    by reference as Exhibit 10.3 to Form 8-K filed with the SEC on
                    February
                    14, 200610.11
                
                Security
                    Agreement dated February 6, 2006, by and between Homeland Security
                    Capital
                    Corporation and Cornell Capital Partners, LP.
                
                Incorporated
                    by reference as Exhibit 10.4 to Form 8-K filed with the SEC on
                    February
                    14, 200610.12
                
                Agreement
                    and Plan of Merger, dated February 8, 2006, by and among Nexus
                    Technologies Group, Inc., Corporate Security Solutions, Inc.,
                    CSS
                    Acquisitions, Inc. and certain other persons named
                    therein.
                
                Incorporated
                    by reference as Exhibit 10.1 to Form 8-K filed with the SEC on
                    February
                    14, 200610.13
                
                Series
                    A Convertible Preferred Stock Purchase Agreement, dated February
                    8, 2006,
                    by and between Homeland Security Capital Corporation and Nexus
                    Technologies Group, Inc.
                
                Incorporated
                    by reference as Exhibit 10.2 to Form 8-K filed with the SEC on
                    February
                    14, 200610.14
                
                Securities
                    Purchase Agreement, dated as of August 21, 2006 between the Company
                    and
                    Cornell Capital Partners, LP
                
                Incorporated
                    by reference as Exhibit 10.1 to Form 8-K filed with the SEC on
                    August 24,
                    200610.15
                
                Investor
                    Registration Rights Agreement, dated as of August 21, 2006 between
                    the
                    Company and Cornell Capital Partners, LP
                
                Incorporated
                    by reference as Exhibit 10.2 to Form 8-K filed with the SEC on
                    August 24,
                    200610.16
                
                Pledge
                    and Security Agreement, dated as of August 21, 2006 between the
                    Company
                    and Cornell Capital Partners, LP
                
                Incorporated
                    by reference as Exhibit 10.3 to Form 8-K filed with the SEC on
                    August 24,
                    200610.17
                
                Security
                    Agreement, dated as of March 14, 2008 between the Company, YA Global
                    Investments, L.P. and certain subsidiaries of the Company
                
                Incorporated
                    by reference as Exhibit 10.3 to Form 8-K filed with theSECon
                    March 19, 200810.18
                
                Warrant
                    dated as of August 21, 2006 issued to Cornell Capital Partners,
                    LP
                
                Incorporated
                    by reference as Exhibit 10.5 to Form 8-K filed with the SEC on
                    August 24,
                    200610.21
                
                Purchase
                    Agreement, dated as of July 3, 2007, between the Company, the
                    other
                    shareholders of Security Holding Corp., and SuperCom, Inc.
                
                Files
                    as Exhibit 10.1 to the Current Report of Form 8-K filed on July
                    10,
                    2007
  45
  **Exhibit No**
                
                **Description**
                
                **Location**10.22
                
                Employment
                    Agreement by and between Michael T. Brigante and the
                    Company.
                
                Filed
                    as Exhibit 10.1 to the Quarterly Report on Form 10-QSB on May
                    15,
                    200710.23
                
                Form
                    of Company Warrant, dated March 17, 2008
                
                Incorporated
                    by reference as Exhibit 4.1 to Form 8-K filed with theSECon
                    March 19, 200810.24
                
                Form
                    of Company Senior Secured Note, dated as of March 14, 2008 issued
                    to
                    YA Global Investments, L.P.
                
                Incorporated
                    by reference as Exhibit 10.4 to Form 8-K filed with theSECon
                    March 19, 200810.25
                
                Guaranty,
                    dated as of March 14, 2008, in favor of YA Global Investments, L.P.
                    from certain subsidiaries of the Company
                
                Incorporated
                    by reference as Exhibit 10.6 to Form 8-K filed with theSECon
                    March 19, 200810.26
                
                Warrant
                    dated as of March 14, 2008 issued to YA Global Investments,
                    L.P.
                
                Incorporated
                    by reference as Exhibit 4.1 to Form 8-K filed with theSECon
                    March 19, 200814.1
                
                Code
                    of Business Conduct and Ethics
                
                Incorporated
                    by reference as Exhibit 14.1 to Form 10-KSB filed with the SEC
                    on April
                    14, 200431.1
                
                Certification
                    by Chief ExecutiveOfficer pursuant to 15 U.S.C. Section 7241, as adopted pursuant
                    to Section
                    302 of the Sarbanes-Oxley Act of 2002
                
                Provided
                    herewith31.2
                
                Certification
                    by Chief Executive Officerpursuant to15U.S.C. Section7241,as
                    adopted pursuant to Section302of
                    the Sarbanes-Oxley Act of 2002
                
                Provided
                    herewith32.1
                
                Certification
                    by Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                
                Provided
                    herewith32.2
                
                Certification
                    by Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
                    as adopted
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                
                Provided
                    herewith
  **Item
        14. Principal Accountant Fees And Services**
  HJ
&
        Associates, LLC audited our financial statements for the years ended December
        31, 2007 and 2006.
  ***Audit
        Fees.*** During
        the year ended December 31, 2007, HJ & Associates, LLC billed us an
        aggregate of $ 120,000 for
        professional services rendered for:
  ·
              Audit
                  of our annual financial statements included in our Annual Report
                  on Form
                  10-KSB for the year ended December 31,
                  2007.
  ·
              Review
                  of our financial statements included in our Quarterly Reports on
                  Form
                  10-QSB for the year ended December 31,
                  2007.
  During
        the year ended December 31, 2006, HJ & Associates, LLC billed us an
        aggregate of $153,000 for professional services rendered for:
  ·
              Audit
                  of our annual financial statements included in our Annual Report
                  on Form
                  10-KSB for the year ended December 31,
                  2006.
  46
  ·
              Review
                  of our financial statements included in our Quarterly Reports on
                  Form
                  10-QSB for the year ended December 31,
                  2006.
  ***Audit-Related
        Fees.*** ** During
        the years ended December 31, 2007 and 2006, HJ & Associates, LLC billed us
        an aggregate of $0 for services rendered other than those described above
        under
        the heading “Audit Fees.”
  ***Tax
        Fees.*** During
        the years ended December 31, 2007 and 2006, HJ & Associates, LLC billed us
        an aggregate of $0 for services rendered other than those described above
        under
        the heading “Audit Fees.”
  ***All
        Other Fees.*** ** During
        the years ended December 31, 2007 and 2006, and HJ & Associates, LLC billed
        us an aggregate of $0 for services rendered other than those described above
        under the heading “Audit Fees.”
  All
        services provided by HJ & Associates, LLC have been pre-approved by the
        Audit Committee before HJ & Associates, LLC began to perform those
        services.
  No
        services were rendered by HJ & Associates, LLC pursuant to paragraph
        (c)(7)(ii)C of Rule 2-01 of Regulation S-X.
  **Audit
        Committee Pre-Approval of Audit and Permissible Non-Audit Services of
        Independent Auditors**
  Effective
        May 6, 2003, the Securities and Exchange Commission adopted rules that require
        that before an independent registered public accounting firm is engaged by
        us to
        render any auditing or permitted non-audit related service, the engagement
        must
        first be:
  ·
              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.
  Our
        audit
        committee was formed in February 2006, and has assumed responsibility for
        the
        pre-approval of audit and permitted non-audit services to be performed by
        our
        company’s independent auditor. The audit committee will, on an annual basis,
        consider and, if appropriate, approve the provision of audit and non-audit
        services by HJ & Associates, LLC. Thereafter, the audit committee will, as
        necessary, consider and, if appropriate, approve the provision of additional
        audit and non-audit services by HJ & Associates, LLC which are not
        encompassed by the audit committee’s annual pre-approval and are not prohibited
        by law. The audit committee has delegated to the chair of the audit committee
        the authority to pre-approve, on a case-by-case basis, non-audit services
        to be
        performed by HJ & Associates.
  Since
        we
        did not have an audit committee in 2005, our full board of directors considered
        the nature of services performed by HJ & Associates and found them to be
        compatible with maintaining HJ & Associates’ independence.
  47
  **SIGNATURES**
  In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  **HOMELAND
                  SECURITY CAPITALCORPORATION***/s/
                  C. Thomas McMillen*C.
                  Thomas McMillen
              Chief
                  Executive Officer
              March
                  31, 2008*/s/**Michael
                  T. Brigante*
              Vice
                  President and Chief Financial Officer
              March31,2008Michael
                  T. Brigante
  In
        accordance with the Exchange Act of 1934, this report has been signed below
        by
        the following persons on behalf of the registrant in the capacities and on
        the
        dates indicated.
  **Signature**
              
              **Title**
              
              **Date***/s/
                  C. Thomas McMillen*
              
              Chief
                  Executive Officer
              
              March
                  31, 2008C.
                  Thomas McMillen
              
              and
                  Chairman of the Board(Principal
                Executive Officer)*/s/
                  Christopher P. Leichtweis*
              
              President
                  and Director
              
              March
                  31, 2008Christopher
                  P. Leichtweis*/s/**Brian
                  C. Griffin*
              
              Director
              
              March
                  31, 2008Brian
                  C. Griffin*/s/
                  Zev E. Kaplan*
              
              Director
              
              March
                  31, 2008Zev
                  E. Kaplan*/s/
                  Philip A. McNeill*
              
              Director
              
              March
                  31, 2008Philip
                  A. McNeill
  48


**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  To
        the
        Board of Directors and Stockholders
 of
        Homeland Security Capital Corporation
 Arlington,
        Virginia
 
 We
        have
        audited the accompanying consolidated balance sheet of Homeland Security
        Capital
        Corporation and Subsidiaries as of December 31, 2007, and the
        related consolidated statements of operations, stockholders' equity (deficit),
        and cash flows for the two years ended December 31, 2007 and 2006. These
        consolidated financial statements are the responsibility of the Company's
        management. Our responsibility is to express an opinion on these consolidated
        financial statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall consolidated financial statement
        presentation. We believe that our audits provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Homeland
        Security Capital Corporation and Subsidiaries as of December 31, 2007 and
        the
        results of their operations and their cash flows for the two years ended
        December 31, 2007 and 2006, in conformity with U.S. generally accepted
        accounting principles.
 
 We
        were
        not engaged to examine management’s assertion about the effectiveness of
        Homeland Security Capital Corporation’s and its Subsidiaries’ internal control
        over financial reporting as of December 31, 2007 and, accordingly, we do
        not express an opinion thereon.
  /s/
        HJ
& Associates, LLC
 HJ
&
        Associates, LLC
 Salt
        Lake
        City, Utah
 March 26, 2008
 
 B-i




HOMELAND
        SECURITY CAPITAL CORPORATION AND
        SUBSIDIARIES
  Consolidated
        Balance Sheet
 December
        31, 2007
 
 AssetsCash
              
              $
              57,521Accounts
                  receivable - net
              
              
              3,993,723Cost
                  in excess of billings on uncompleted contracts
              
              
              538,540Other
                  current assets
              
              
              101,611Total
                  current assets
              
              
              4,691,395Fixed
                  assets, net
              
              
              269,255Deferred
                  financing costs - net
              
              
              733,626Notes
                  receivable (related party)
              
              
              504,499Assets
                  available for sale
              
              
              3,248,571Other
                  non-current assets
              
              
              150,000Total
                  assets
              
              $
              9,597,346Liabilities
                  and Stockholders' Equity (Deficit)Current
                  liabilitiesAccounts
                  payable
              
              $
              2,639,721Derivative
                  liability
              
              
              7,263,204Current
                  portion of long term debt
              
              
              6,325,206Accrued
                  interest
              
              
              656,837Billings
                  in excess of costs on uncompleted contracts
              
              
              144,885Total
                  current liabilities
              
              
              17,029,853Long
                  term debtConvertible
                  debentures - related party, net of $4,310,299 discount
              
              
              6,252,887Installment
                  obligations
              
              
              207,007Total
                  long term debt
              
              
              6,459,894Less:
                  Current portion
              
              
              (6,325,206
              )Long
                  term debt
              
              
              134,688Total
                  liabilities
              
              
              17,164,541Stockholders'
                  Equity (Deficit)Preferred
                  stock, $0.01 par value, 3,000,000 shares authorizedPreferred
                  stock Series F - 1,000,000 shares issued and outstanding
              
              
              100,000Preferred
                  stock Series G - 358,080 shares issued and outstanding
              
              
              35,808Common
                  stock, $0.001 par value, 200,000,000 shares authorized, 48,764,677
                  issued
                  and outstanding
              
              
              48,765Additional
                  paid-in capital
              
              
              47,799,790Accumulated
                  deficit
              
              
              (55,219,082
              )Accumulated
                  other comprehensive loss
              
              
              (332,476
              )Total
                  stockholders' equity (deficit)
              
              
              (7,567,195
              )Total
                  liabilities and stockholders' equity (deficit)
              
              $
              9,597,346
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-1
 
 HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
 Consolidated
        Statements of Operations
 For
        the
        years ended December 31, 2007 and 2006
 
 2007
              
              2006Sales
              
              $
              12,628,183
              
              $
              6,963,939Cost
                  of salesMaterials
              
              
              7,657,495
              
              
              3,436,706Labor
              
              
              1,935,431
              
              
              1,776,187Total
                  cost of sales
              
              
              9,592,926
              
              
              5,212,893Gross
                  profit on sales
              
              
              3,035,257
              
              
              1,751,046Operating
                  expensesMarketing
              
              
              28,499
              
              
              54,346Personnel
              
              
              3,037,205
              
              
              3,154,636Insurance
                  and facility costs
              
              
              352,796
              
              
              138,124Travel
                  and transportation
              
              
              352,994
              
              
              354,187Other
                  operating costs
              
              
              114,160
              
              
              43,120Depreciation
                  and amortization
              
              
              71,480
              
              
              52,140Professional
                  services
              
              
              698,616
              
              
              550,649Administrative
                  costs
              
              
              263,403
              
              
              384,932Total
                  operating expenses
              
              
              4,919,153
              
              
              4,732,134Operating
                  loss
              
              
              (1,883,896
              )
              
              (2,981,088
              )Other
                  income (expense)Interest
                  expense
              
              
              (954,846
              )
              
              (270,548
              )Amortization
                  of debt discounts
              
              
              (2,382,601
              )
              
              (1,273,393
              )Amortization
                  of debt offering costs
              
              
              (416,522
              )
              
              (222,201
              )Adjustment
                  of fair value of derivative liability
              
              
              1,000,193
              
              
              (419,017
              )Settlement
                  of debt
              
              
              6,024
              
              
              91,268Other
                  income (expense)
              
              
              45,649
              
              
              31,134Total
                  other income (expense)
              
              
              (2,702,103
              )
              
              (2,062,757
              )Loss
                  from continuing operations
              
              
              (4,585,999
              )
              
              (5,043,845
              )Income
                  (loss) from discontinued operationsLoss
                  from discontinued operations
              
              
              (2,023,197
              )
              
              (1,445,912
              )Gain
                  from sale of operating segment
              
              
              3,657,930
              
              
              -Income
                  (loss) from discontinued operations
              
              
              1,634,733
              
              
              (1,445,912
              )Net
                  loss attributable to common stockholders
              
              $
              (2,951,266
              )
              $
              (6,489,757
              )Income
                  (loss) per common shareLoss
                  per share from continuing operations
              
              $
              (0.11
              )
              $
              (0.12
              )Income
                  (loss) per share from discontinued operations
              
              
              0.04
              
              
              (0.04
              )Net
                    loss per common share attributable to common stockholders
              
              $
              (0.07
              )
              $
              (0.16
              )Weighted
                  average shares outstanding
              
              
              43,043,114
              
              
              41,764,674
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-2
 
 HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
 Consolidated
        Statements of Cash Flows
 For
        the
        years ended December 31, 2007 and 2006
 
 2007
              
              2006Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,951,266
              )
              $
              (6,489,757
              )Adjustments
                    to reconcile net loss to net cash used in operating activities:Gain
                  on sale of operating segment
              
              
              (3,657,930
              )
              
              -Settlement
                  of debt
              
              
              (6,024
              )
              
              (91,268
              )Stock
                  issued for payment of expenses
              
              
              352,056
              
              
              519,550Depreciation
                  and amortization
              
              
              71,480
              
              
              112,048Valuation
                  reserve for accounts receivable
              
              
              (57,407
              )
              
              309,988Equity
                  valuation in subsidiaries
              
              
              582,470
              
              
              -Amortization
                  of debt discount
              
              
              2,382,601
              
              
              1,273,393Amortization
                  of debt offering costs
              
              
              416,522
              
              
              222,201Valuation
                  losses for changes in derivative liability
              
              
              (1,000,193
              )
              
              419,017Changes
                  in operating assets and liabilities:Accounts
                  Receivable
              
              
              (120,888
              )
              
              (4,041,554
              )Net
                  assets of discontinued operations
              
              
              476,741
              
              
              (2,071,285
              )Costs
                  in excess of billings on uncompleted contracts
              
              
              (272,568
              )
              
              (265,972
              )Other
                  assets
              
              
              (137,430
              )
              
              478,422Accounts
                  payable
              
              
              352,269
              
              
              2,869,557Billings
                  in excess of costs on uncompleted contracts
              
              
              (356,196
              )
              
              501,081Other
                  liabilities
              
              
              638,893
              
              
              164,537Net
                  cash used in operating activities
              
              
              (3,286,870
              )
              
              (6,090,042
              )Cash
                  flows from investing activities:Disposal
                  of fixed assets
              
              
              17,144
              
              
              -Purchase
                  of fixed assets
              
              
              (114,307
              )
              
              (57,263
              )Increase
                  in notes receivable - related party
              
              
              (504,499
              )
              
              -Purchase
                  of subsidiary
              
              
              -
              
              
              (500,000
              )Investing
                  activity from discontinued operations
              
              
              743,142
              
              
              -Net
                  cash provided by (used in) investing activities
              
              
              141,480
              
              
              (557,263
              )Cash
                  flows from financing activities:Proceeds
                  from convertible debentures - related party
              
              
              2,750,000
              
              
              8,000,000Cost
                  of convertible debentures - related party
              
              
              (190,000
              )
              
              (1,089,863
              )Proceeds
                  from notes payable
              
              
              514,277
              
              
              -Payments
                  on notes payable
              
              
              (474,402
              )
              
              (142,710
              )Financing
                  activity from discontinued operations
              
              
              (611,147
              )
              
              -Net
                  cash provided by financing activities
              
              
              1,988,728
              
              
              6,767,427Net
                  increase (decrease) in cash
              
              
              (1,156,662
              )
              
              120,122Cash,
                  beginning of period
              
              
              1,214,183
              
              
              1,094,061Cash,
                  end of period
              
              $
              57,521
              
              $
              1,214,183Cash
                  paid for:Interest
              
              $
              345,620
              
              $
              115,674Taxes
              
              $
              -
              
              $
              -
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-3
 
 HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
 Consolidated
        Statements of Changes in Stockholders' Equity (Deficit)
 For
        the
        years ended December 31, 2007 and 2006
 
 Additional
              
              
              
              Accumulated Other
              
              TotalPreferred
              
              Common Stock
              
              Paid-In
              
              Accumulated
              
              Comprehensive
              
              Stockholders'Stock
              
              Shares
              
              Amount
              
              Capital
              
              Deficit
              
              Loss
              
              (Deficit)Balance,
                  December 31, 2005
              
              $
              100,000
              
              
              43,977,285
              
              $
              43,977
              
              $
              46,176,302
              
              $
              (45,778,059
              )
              $
              -
              
              $
              542,220Issuance
                  of preferred stockSeries
                  G
              
              
              100,000
              
              
              
              
              
              
              
              
              710,000
              
              
              
              
              
              
              
              
              810,000Exchanged
                  for common stock
              
              
              
              
              
              (4,500,000
              )
              
              (4,500
              )
              
              (805,500
              )
              
              
              
              
              
              
              
              (810,000
              )Conversion
                    of debentures to common stock
              
              
              
              
              
              1,777,965
              
              
              1,778
              
              
              254,624
              
              
              
              
              
              
              
              
              256,402Value
                  of vested stock options
              
              
              
              
              
              
              
              
              
              
              
              387,010
              
              
              
              
              
              
              
              
              387,010Value
                  of vested warrants
              
              
              
              
              
              
              
              
              
              
              
              42,540
              
              
              
              
              
              
              
              
              42,540Issuance
                  of common stock for fees
              
              
              
              
              
              500,000
              
              
              500
              
              
              89,500
              
              
              
              
              
              
              
              
              90,000Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (6,489,757
              )
              
              
              
              
              (6,489,757
              )Balance,
                  December 31, 2006
              
              
              200,000
              
              
              41,755,250
              
              
              41,755
              
              
              46,854,476
              
              
              (52,267,816
              )
              
              -
              
              
              (5,171,585
              )Conversion
                    of debentures to common stock
              
              
              
              
              
              4,120,787
              
              
              4,121
              
              
              531,955
              
              
              
              
              
              
              
              
              536,076Conversion
                    of preferred stock - Series G
              
              
              (64,192
              )
              
              2,888,640
              
              
              2,889
              
              
              61,303
              
              
              
              
              
              
              
              
              -Value
                  of vested stock options
              
              
              
              
              
              
              
              
              
              
              
              352,056
              
              
              
              
              
              
              
              
              352,056Net
                    loss in value of assets available for sale
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (332,476
              )
              
              (332,476
              )Net
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,951,266
              )
              
              
              
              
              (2,951,266
              )Balance,
                  December 31, 2007
              
              $
              135,808
              
              
              48,764,677
              
              $
              48,765
              
              $
              47,799,790
              
              $
              (55,219,082
              )
              $
              (332,476
              )
              $
              (7,567,195
              )
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
 F-4




**HOMELAND
      SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**


**Notes
      to Consolidated Financial Statements**




**1.
      Organization and Nature of Business**





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




The
      Company was incorporated in Delaware in August 1997 under the name “Celerity
      Systems, Inc.” The Company’s original business was to develop and manufacture
      digital set top boxes and digital video servers for interactive television
      and
      high speed internet networks ("interactive video"). The Company also designed,
      developed, installed, and supported CD-ROM software products for business
      applications. In February 2001, the Company completed the sale of its CD-ROM
      segment.





On
      June
      3, 2003, the Company elected to become a business development company (“BDC”),
      to be regulated pursuant to Section 54 of the Investment Company Act of 1940,
      as
      amended (the “Investment Company Act”). A business development company is an
      investment company designed to assist eligible portfolio companies with capital
      formation and management advice. Accordingly, the Company changed its business
      plan to primarily seek investments in developing companies.




As
      a BDC,
      the Company had three investments. First, the Company entered into a business
      development agreement with Sagamore Holdings, Inc. ("Sagamore") and received
      7,500,000 shares of Sagamore common stock as consideration for its agreement
      to
      provide future services regarding capital formation and management advice.
      These
      shares have no value. Second, the Company had direct investments in two
      companies, the first being in a wholly-owned subsidiary named Celerity Systems,
      Inc., a Nevada corporation ("Celerity-Nevada"), and the other a minority
      interest in Yorkville Advisors Management, LLC ("Yorkville"). In the fourth
      quarter of 2004, Celerity-Nevada was closed and the business and related assets
      sold. Yorkville returned the Company’s investment in Yorkville to the Company as
      a liquidating distribution.





On
      December 30, 2005, at a special stockholders meeting, the stockholders of the
      Company voted to amend the Certificate of Incorporation of the Company to change
      the name to “Homeland Security Capital Corporation” and voted to withdraw the
      Company’s election as a BDC. Accordingly, the Company changed its business plan
      to primarily seek acquisition of and joint ventures with, companies that provide
      homeland security products and services.





On
      February 7, 2006, the Company organized Nexus Technologies Group, Inc. (“Nexus”)
      as a new subsidiary and purchased $3,400,000 of Nexus’ convertible preferred
      stock. Simultaneously with its formation, Nexus acquired 100% of the outstanding
      common stock of Corporate Security Solutions, Inc. (“CSS”), a Pennsylvania
      corporation doing business as Nexus Technologies Group. Nexus, through CSS,
      which was organized in 2004, provides integrated security systems for the
      corporate and governmental security markets, through engineering, design and
      installation of open-ended technologically advanced applications. CSS currently
      has a strong presence in the Mid-Atlantic region with a focus on the New York
      City market.




On
      August
      21, 2006, the Company organized Security Holding Corp. (“SHC”) and purchased
      $3,000,000 of SHC’s convertible preferred stock. Simultaneously with its
      formation SHC acquired 100% of the outstanding stock of Security Holdings
      Enterprises, Inc. (“SHEI”). SHEI owned 100% of the outstanding equity of three
      subsidiaries. SHEI merged with SHC, with SHC remaining as the surviving
      corporate entity. SHC, through its subsidiaries, has been involved in RFID
      technology, enterprise security software systems, access control devices and
      secure internet portals. In August 2006, SHC acquired the assets of Compass
      Technologies, Inc. for $500,000 in cash. As further described in Note 7, the
      Company has sold its ownership interest in SHC and discontinued operations
      in
      the RFID, access control and security software components of the business.




1




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


On
      September 15, 2006, the Company formed Polimatrix, Inc. (“PMX”), and on
      September 18, 2006 entered into a US-based joint venture with Polimaster, Inc.,
      an Arlington, Virginia company involved in the field of nuclear and radiological
      detection and isotope identification. PMX uses technology licensed from
      Polimaster, Inc. in the development of hand-held, networked detection devices
      intended to be sold to governmental and commercial customers. PMX did not have
      any material operations in 2006.





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





**2.
      Summary of Significant Accounting Policies**




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




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




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




Revenue
      Recognition - Nexus is involved in system design and recognizes revenue using
      the percentage completion method of accounting for long-term contracts.
      Percentage of completion is based on comparing actual costs expended, measured
      against managements estimate of the cost to complete a project. Revenue from
      service contracts lasting for up to one year are recognized when earned. Cash
      payments in advance are recorded as deferred revenue, which is reduced as
      it is earned. Polimatrix is involved in product sales and recognizes revenue
      when products are shipped to the customers. Accounts receivable are reviewed
      and
      valued periodically by management and a reserve is established for accounts
      that
      may not be collectable. Bad debts are recognized when the account becomes
      worthless. At December 31, 2007 the Company has a consolidated bad debt
      allowance of $130,000.




Cash
      and
      Cash Equivalents - Cash and cash equivalents includes short-term investments,
      such as money markets accounts, which are highly liquid.




Cost
      in
      Excess of Billing/Billing in Excess of Cost on Uncompleted Contracts - The
      Company uses the percentage of completion method in accounting for long-term
      contracts. Actual invoicing of services and payments for products or labor
      may
      differ from management’s estimate of the completeness of a project. The Company
      adjusts its revenues and/or costs to reflect the projects percent completion
      based on projected estimates of profitability prior to starting the project.
      At
      December 31, 2007, the Company recorded costs in excess of customer billing
      of
      $538,540 and billings in excess of costs of $144,885.




2




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


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




Debt
      Offering Costs - Debt offering costs are related to private placements and
      are
      being amortized on a straight line basis over the term of the related debt,
      most
      of which is in the form of convertible debentures. Should conversion occur
      prior
      to the stated maturity date the remaining unamortized cost is expensed.
      Amortization expense amounted to $416,522 for 2007 and $222,201 for
      2006.





The
      table
      below reflects the unamortized debt offering at December 31, 2007:




January
                  1, 2007
              
              $
              867,662New
                  debt offering costs
              
              
              282,486Amortized
                  with converted debt
              
              
              (24,286
              )Amortization
                  expense
              
              
              (392,236
              )December
                  31, 2007
              
              $
              733,626




Investments
      in Available-for-Sale Securities - The Company classifies certain investments
      in
      securities as available-for-sale. Under this classification securities are
      reported at fair value (period end market closing prices) with unrealized gains
      and losses excluded from earnings and reported in a separate component of
      shareholder’s equity until the gains or losses are realized or a provision for
      impairment is recognized.





Investment
      Valuation - The value of investments that have no ready market are recorded
      at
      cost. Periodically management makes an assessment as to impairment of the
      Company’s investment and accordingly adjusts the investment to record the other
      than temporary change in value.





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




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




3


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




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





Stock
      Based Compensation - In December 2004, the FASB issued SFAS No. 123R "Shared
      Based Payment". This statement is a revision of SFAS Statement No. 123,
      "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
      "Accounting for Stock Issued to Employees," and its related implementation
      guidance. SFAS 123R addresses all forms of shared based payment ("SBP") awards,
      including shares issued under employee stock purchase plans, stock options,
      restricted stock and stock appreciation rights. Under SFAS 123R, SBP awards
      result in a cost that will be measured at fair value on the awards' grant date,
      based on the estimated number of awards that are expected to vest and will
      be
      reflected as compensation cost in the historical financial
      statements.




In
      August
      2005, the Company granted, under the 2005 Plan, 5,800,000 options to an officer
      to purchase 5,800,000 shares of Common Stock of the Company and 2,160,000
      options, outside the 2005 Plan, to three directors to purchase 2,160,000 shares
      of Common Stock of the Company. The Company recorded $219,638 and $389,502
      in
      compensation expense in 2007 and 2006, respectively, relative to these option
      grants.




The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following assumptions used for
      grants in 2006 and 2007 risk-free interest rates of between 4.4% and 4.81%,
      volatility between 122% and 456% and expected lives of ten years.




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




Recent
      Accounting Pronouncements -  In March 2006, the FASB issued SFAS No. 156 *“Accounting
      for Servicing of Financial Assets, an amendment of FASB No.
      140,”* which
      modifies the accounting for and reporting of servicing asset and servicing
      liabilities. This statement is effective as of the beginning of our first fiscal
      year that begins after September 15, 2006.  SFAS No. 156 is not currently
      applicable to the company and, we believe that the adoption of SFAS No. 156
      will
      not have a material impact on our results of operations.




In
      June
      2006, the FASB issued Financial Interpretation No. (FIN) 48, “ *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement
      109* .” 
      FIN 48 prescribes a recognition threshold and a measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. This interpretation also provides guidance
      on de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition.  This interpretation is effective for
      fiscal years beginning after December 15, 2006.  We believe that the
      adoption of FIN 48 will not have a material impact on our results of
      operations.




In
      September 2006, the FASB issued SFAS No. 157, “*Fair
      Value Measurements*,”
that
      provides guidance for using fair value to measure assets and liabilities. 
Under SFAS 157, fair value refers to the price that would be received to sell
      an
      asset or paid to transfer a liability in an orderly transaction between market
      participants in the market in which the reporting entity transacts.  SFAS
      157 establishes a fair value hierarchy that prioritizes the information used
      to
      develop the assumptions that market participants would use when pricing the
      asset or liability.  The fair value hierarchy gives the highest priority to
      quoted prices in active markets and the lowest priority to unobservable
      data.  In addition, SFAS 157 requires that fair value measurements be
      separately disclosed by level within the fair value hierarchy.  This
      standard will be effective for financial statements issued for fiscal periods
      beginning after November 15, 2007 and interim periods within those fiscal years.
      The Company is currently evaluating the impact of applying the various
      provisions of SFAS 157.





4
 
 **HOMELAND
          SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**


In
      February 2007, the FASB issued SFAS No. 159, “ *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* ,”
which
      provides companies with an option to report selected financial assets and
      liabilities at fair value in an attempt to reduce both complexity in accounting
      for financial instruments and the volatility in earnings caused by measuring
      related assets and liabilities differently. This Statement is effective as
      of
      the beginning of an entity’s first fiscal year beginning after November 15,
      2007. The Company is currently evaluating the impact of applying the various
      provisions of SFAS 159.





In
      December 2007, the FASB issued SFAS No. 160, “ *Non-controlling
      Interests in Consolidated Financial Statement-amendments of ARB No. 51* (“FAS
      160”).” FAS 160 states that accounting and reporting for minority interests will
      be recharacterized as non-controlling interests and classified as a component
      of
      equity. This Statement also establishes reporting requirements that provide
      sufficient disclosures that clearly identify and distinguish between the
      interests of the parent company and the interests of the non-controlling owners.
      FAS 160 applies to all entities that prepare consolidated financial statements,
      except not-for-profit organizations, but will affect only those entities that
      have an outstanding non-controlling interest in one or more subsidiaries or
      that
      deconsolidate a subsidiary. This Statement is effective as of the beginning
      of
      an entity’s first fiscal year beginning after December 15, 2008. The Company is
      currently evaluating the impact of applying the various provisions of SFAS
      160.





In
      December 2007, FASB issued SFAS No. 141 (revised 2007), “ *Business
      Combinations* ”
(“FAS
      141R”), which replaces FASB Statement No. 141. FAS 141R establishes principles
      and requirements for how an acquirer recognizes and measures in its financial
      statements the identifiable assets acquired, the liabilities assumed, and
      non-controlling interest in the acquiree and the goodwill acquired. This
      Statement also establishes disclosure requirements which will enable users
      to
      evaluate the nature and financial effects of the business combination. FAS
      141R
      is effective as of the beginning of an entity’s fiscal year that begins after
      December 15, 2008. The Company is currently evaluating the impact of applying
      the various provisions of SFAS 141R.




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




Advertising
      - The Company follows the policy of charging the costs of advertising to expense
      as incurred. Expenses incurred were $28,499 and $54,346 for the years ended
      December 31, 2007 and 2006, respectively.




Reclassifications
      - Certain prior year balances have been reclassified to conform with the current
      year presentation.




The
      Company has had recurring losses since inception of approximately $55,219,000,
      and continues to suffer cash flow and working capital shortages. As of December
      31, 2007, the Company had negative net working capital of approximately
      $12,338,000. Management believes we will be able to execute our new business
      plan as our subsidiaries develop their businesses, products and customer base.
      We believe the Company, as a whole, will be able to access additional funding,
      if necessary, to continue implementing its strategy of complementary
      acquisitions, organic growth and building shareholder value.




5




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




**3.
      Fixed Assets, net**




Cost
      and
      related accumulated depreciation of the fixed assets are as follows:




2007Property
                  and equipment
              
              $
              411,548Accumulated
                  depreciation
              
              
              (142,292
              )$
              269,256


Depreciation
      expense in 2007 and 2006 was $71,480 and $52,140, respectively.




**4.
      Purchase of Nexus Preferred Shares**





On
      February 8, 2006, the Company organized Nexus as a new subsidiary and entered
      into a Series A Convertible Preferred Stock Purchase Agreement (the "Purchase
      Agreement") with Nexus. Pursuant to the Purchase Agreement, the Company
      purchased 3,400,000 shares of Nexus Series A Convertible Preferred Stock (the
      "Nexus Preferred Shares") for an aggregate purchase price of $3,400,000.
      Simultaneously with its formation, Nexus, through a merger with a wholly-owned
      acquisition subsidiary, acquired 100% of the outstanding common stock of
      Corporate Security Solutions, Inc. (“CSS”), a Pennsylvania corporation,
      organized in 2004, doing business as Nexus Technologies Group. Nexus, through
      its subsidiary, provides integrated security systems for the corporate and
      governmental security markets. The Company also committed to purchase an
      additional 6,400,000 Nexus Preferred Shares, in one or more transactions, at
      a
      purchase price of $1.00 per share at any time prior to February 8, 2008. The
      Company has not purchased any additional shares under this agreement and the
      commitment expired at February 8, 2008.





Each
      Nexus Preferred Share accrues dividends cumulatively at the rate of eight
      percent (8%) per annum and is convertible into one (1) share of the Nexus common
      stock at any time by the Company, subject to adjustment for stock dividends,
      stock splits, and similar events. Each Nexus Preferred Share is entitled to
      one
      vote as if converted into Nexus common stock. The holders of the outstanding
      Nexus Preferred Shares, as a class, have the right to elect a majority of the
      board of directors of Nexus. Each Nexus Preferred Share has a liquidation
      preference of $1.00 per share plus any accrued and unpaid
      dividends.




The
      following is a condensed pro forma statement of operations for the year ended
      December 31, 2006 showing the combined results of operations of the Company
      (including all other consolidated subsidiaries) and Nexus as though the Company
      had acquired the Nexus Preferred Shares on January 1, 2006:




Pro
                  FormaAdjustmentsHMSC
              
              Nexus
              
              (Unaudited)
              
              Pro
                  FormaSales
              
              $
              —
              
              $
              6,963,939
              
              $
              693,170
              
              $
              7,657,109Net
                  loss from continued operations
              
              $
              (3,920,887
              )
              $
              (1,122,958
              )
              $
              (503,807
              )
              $
              (5,547,652)
              )Net
                  loss per share
              
              $
              (0.09
              )
              
              (0.03
              )
              
              (0.01
              )
              
              (0.13)
              )




6




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




**5.
      Acquisition of CSS**




On
      February 8, 2006, Nexus, a subsidiary of the Company, completed its acquisition
      of CSS pursuant to the terms of an Agreement and Plan of Merger (the "Merger
      Agreement"), dated February 8, 2006, by and among Nexus, CSS, CSS Acquisition,
      Inc. and certain other persons named therein. Pursuant to the Merger Agreement,
      CSS Acquisition, Inc., a wholly owned subsidiary of Nexus, merged with and
      into
      CSS (the "Merger") with CSS surviving the Merger. The stockholders of CSS
      received an aggregate of 3,675,000 shares of Nexus common stock in exchange
      for
      all of the issued and outstanding CSS common stock. Of these shares, 3,000,000
      are deemed restricted stock and are subject to vesting and performance
      provisions. Upon the effectiveness of the Merger, the Company maintained control
      of Nexus with its 82.1% of the voting power of Nexus. In May 2006, based on
      a
      reorganization of the Nexus management team, Nexus cancelled all of the
      restricted stock and 450,000 shares of the non-restricted stock.




**6.
      Purchase of Security Holding Corp. Preferred Shares**




On
      August
      21, 2006, the Company entered into a Series A Convertible Preferred Stock
      Purchase Agreement (the “Purchase Agreement”) with SHC. On August 22, 2006,
      pursuant to the Purchase Agreement, the Company purchased 3,000,000 shares
      of
      Security Series A Convertible Preferred Stock (the “Preferred Shares”) for an
      aggregate purchase price of $3,000,000 (the “Offering”). The Company also
      committed, subject to certain conditions, to purchase an additional 2,000,000
      Preferred Shares, in one or more transactions, at a purchase price of $1.00
      per
      share at any time prior to August 21, 2008. The Company has purchased no
      additional shares under this agreement.





Each
      Preferred Share will accrue dividends cumulatively at the rate of eight percent
      (8%) per annum and is convertible into one (1) share of the SHC common stock
      at
      any time by the Company, subject to adjustment for stock dividends, stock
      splits, and similar events. Each Preferred Share will be entitled to one vote
      as
      if converted into SHC common stock. The holders of the outstanding Preferred
      Shares, as a class, so long as they maintain voting control of SHC, will have
      the right to designate a majority of the board of directors of SHC. Each
      Preferred Share will have a liquidation preference of $1.00 per share plus
      any
      accrued and unpaid dividends.





As
      further described in Note 7, the Company has discontinued the operations of
      this
      business segment with the closing of the sale of its SHC subsidiary effective
      August 29, 2007.





**7.
      Discontinued operations**





On
      April
      2, 2007, the Company’s and SHC’s boards of directors approved the sale of
      Cyberlynk, Inc. (a subsidiary of SHC) to Bridgestone Capital, LLC, a company
      owned by Joel Konicek, the Chief Executive Officer of SHC, and Jim Peroutka,
      the
      Chief Technology Officer of SHC.





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





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





7




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




Management
      has recognized the SHC activity as discontinued operations for the years ended
      December 31, 2007 and 2006.  The following table reflects selected elements
      of SHC’s results for the periods ended December 31, 2007 and 2006.





**2007**
              
              **2006**Revenue
              
              $
              3,029,306
              
              $
              1,718,306Gross
                  Margin
              
              
              1,279,261
              
              
              288,546Operating
                  expenses(includes $483,942 of goodwill impairment write-down for the year
                  ended
                  December 31, 2007, and $0 for the year ended December 31, 2006)
              
              
              3,300,480
              
              
              1,707,130Other
                  Income (Expense)
              
              
              (1,978
              )
              
              (27,328
              )Net
                  Loss from Discontinued Operations
              
              
              (2,023,197
              )
              
              (1,445,912
              )Gain
                  on Sale of Operating Segment
              
              
              3,657,930
              
              
              —Income
                  (loss) from Discontinued Operations
              
              
              1,634,733
              
              
              (1,445,912
              )Net
                  Assets
              
              
              
              
              
              3,364,844Net
                  Liabilities
              
              
              
              
              
              1,728,728





In
      2007,
      the Company has separately disclosed the operating, investing and financing
      portions of the cash flows attributable to its discontinued operations, which
      in
      prior periods were reported on a combined basis. Additionally, certain December
      31, 2006 balances have been reclassified to conform to the December 31, 2007
      financial statement presentation including restatements for the discontinued
      operations and the minority interests which are now included in the Company’s
      retained deficit.





**8.
      Entry into Polimatrix (PMX) Joint Venture**





On
      September 18, 2006, the Company entered into a US-based joint venture with
      Polimaster, Inc., an Arlington, Virginia company involved in the field of
      nuclear and radiological detection and isotope identification. The joint venture
      will operate as Polimatrix, Inc. (PMX) and is owned 51% by the Company. PMX
      will
      use technology licensed from Polimaster, Inc. in the development of hand-held,
      networked nuclear and radiological detection devices intended to be sold to
      governmental and commercial customers. PMX also intends to sell other products
      manufactured by Polimaster, Inc. and other manufacturer’s radiological,
      biological, chemical and bacteriological detection equipment.




**9.
      Minority Interest in Secure America Acquisition Corporation**





The
      Company has indirectly acquired a minority equity interest in Secure America
      Acquisition Corporation (“SAAC”). SAAC is a blank check company formed for the
      purpose of acquiring one or more operating businesses in the homeland security
      industry. On June 1, 2007, the Company loaned $500,000 to Secure America
      Acquisition Holdings, LLC (“SAAH”), the principal initial stockholder of SAAC,
      pursuant to a promissory note (the “SAAH Note”). The SAAH Note has a maturity
      date of May 31, 2011 and bears interest at a rate of 5% per annum. All principal
      and accrued interest on the SAAH Note is due upon maturity. The obligations
      of
      SAAH under the SAAH Note have been guaranteed by C. Thomas McMillen, our
      President, Chief Executive Officer and Chairman. As consideration for the
      issuance of the SAAH Note, the Company received 250,000 membership interests
      in
      SAAH. On October 22, 2007, the Company purchased 75,000 Class C membership
      interests in SAAH, through an investment in SAAH in the amount of $150,000.
      Also, on October 22, 2007, the Company loaned SAAH $65,000. The unsecured
      loan was for working capital purposes, was evidenced by a note and was due
      before October 22, 2008 with no prepayment penalties. The loan was repaid
      on October 29, 2007 in its entirety. Through its membership interests in
      SAAH, the Company is deemed to beneficially own 2.6% of the outstanding capital
      stock of SAAC at March 28, 2008 and is entitled to receive 325,000 shares
      of common stock in SAAC if and when SAAC completes an acquisition or business
      combination which it has 24 months to consummate.




8


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




In
      addition to the Company’s ownership in SAAH, Mr. McMillen, our Chief Executive
      Officer and Chairman beneficially owns 1,309,000 membership interests in SAAH
      or
      approximately 55.46%, Mr. Brigante our Chief Financial Officer owns 82,500
      membership interests in SAAH or 3.51%, Mr. McNeill, our Director, owns 100,000
      membership interests in SAAH or 4.24% and Mr. Griffin, our Director, owns 25,000
      membership interests in SAAH or 1.06%.





On
      June
      25, 2007, SAAC filed a registration statement (the “Registration Statement”)
      with the Securities Exchange Commission relating to an initial public offering
      (the “Offering”) of 10,000,000 units, each unit comprised of one common share
      and one warrant to purchase a common share, priced at $8.00/unit. SAAH agreed
      to
      purchase, in a private placement that will occur immediately prior to SAAC’s
      Offering, 2,075,000 warrants at a purchase price of $1.00 per warrant. Each
      warrant purchased in the private placement entitles the holder to purchase
      one
      share of SAAC common stock at a purchase price of $5.25 per share.





The
      Company has also entered into an agreement (the “SAAC Agreement”) with SAAC to
      receive a monthly fee of up to $7,500 for providing SAAC with office space
      and
      certain office and administrative services. The SAAC Agreement became effective
      on October 23, 2007, the effective date of the Registration Statement as filed
      with the Securities and Exchange Commission. Certain employees of the Company
      will perform required services pursuant to the SAAC Agreement.





Notwithstanding
      the completion of the SAAC IPO, the Company does not value at market prices
      the
      shares of common stock in SAAC it is entitled to receive as a result of its
      membership interests in SAAH Management believes some uncertainty to the
      successful completion of an acquisition or business combination exists and
      therefore values its loan to SAAH at the principal amount plus accrued interest
      and its investment in SAAH at the original investment amount. The Company
      measures impairment of these amounts on a monthly basis and adjusts the amounts
      accordingly.




**10.
      Income Taxes**




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




The
      Internal Revenue Service (IRS) has not notified the Company of any scheduled
      examination of the Company’s US income tax returns for 2004 through 2006. As of
      December 31, 2007, the IRS has proposed no adjustments to the Company’s tax
      positions.




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





There
      are
      no amounts included in the balance at December 31, 2007 for which the ultimate
      deductibility is highly certain but for which there is uncertainty about the
      timing of such deductibility. Because of the impact of deferred tax accounting,
      other than interest and penalties, the disallowance of the shorter deductibility
      period would not affect the annual effective tax rate but would accelerate
      the
      payment of cash to the taxing authority to an earlier period.




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





The
      tax
      effects of temporary differences giving rise to the Company's deferred tax
      assets (liabilities) at December 31 are as follows:




9




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


**2007**
              
              **2006**Current:Related
                  party accruals
              
              
              256,200
              
              
              175,600Allowance
                  for doubtful accounts
              
              
              50,700Valuation
                  allowance for net current deferred tax assets
              
              
              (306,900
              )
              
              (175,600
              )Total
                  net current deferred tax asset
              
              $
              —
              
              $
              —Noncurrent:Net
                  operating loss and research credit carryforwards
              
              $
              16,493,000
              
              $
              16,540,00016,493,000
              
              
              16,540,000Valuation
                  allowance for net noncurrent deferred tax assets
              
              
              (16,493,000
              )
              
              (16,540,000
              )Total
                  net noncurrent deferred tax asset
              
              $
              —
              
              $
              —




As
      a
      result of significant historical pretax losses, management cannot conclude
      that
      it is more likely than not that the deferred tax asset will not be realized.
      Accordingly, a full valuation allowance has been established against the total
      net deferred tax asset.




The
      Company's income tax benefit differs from that obtained by using the federal
      statutory rate of 39% as a result of the following:


**2007**
              
              **2006******Computed
                  "expected" tax (benefit)
              
              $
              (1,015,700
              )
              $
              (2,531,100
              )State
                    income tax (benefit), net of federal income tax
                    benefit
              
              
              (135,800
              )
              
              (298,500
              )Keyman
                  Insurance
              
              
              7,100Beneficial
                  conversion feature expense
              
              
              —
              
              
              496,623Allowance
                  for doubtful accounts
              
              
              (22,400
              )
              
              120,895Compensation
                  from options
              
              
              137,300
              
              
              151,905Amortization
                    debt discount costs
              
              
              
              
              
              —and
                  valuation of derivative liability
              
              
              539,139
              
              
              163,400Accrued
                  expenses
              
              
              201,500
              
              
              54,700Meals
                  and entertainment
              
              
              11,800
              
              
              7,700Political
                  contributions
              
              
              4,700
              
              
              5,752Stock
                  for expenses
              
              
              —
              
              
              202,625Contributions
              
              
              3,400
              
              
              3,646Goodwill
              
              
              —
              
              
              10,247Penalties
              
              
              30,413Loss
                  of benefit of deferred tax asset
              
              
              238,548
              
              
              1,612,107$
              —
              
              $
              —




At
      December 31, 2006, the Company had an available net operating loss carryforward
      of approximately $41,000,000. Increases in 2007, were increased by losses in
      the
      Company’s acquired subsidiaries. These deductions create net operating loss
      carryforwards which in certain circumstances could become limited due to a
      change in control of the subsidiary. These amounts are available to reduce
      the
      Company's future taxable income and expire in the years 2011 through 2027.




10


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


**11.
      Sale of Convertible Debentures (2006 A)**




On
      February 6, 2006, the Company entered into a Securities Purchase Agreement
      with
      Yorkville Advisors, LP (“Yorkville”), which provided for the purchase by
      Yorkville of a Convertible Debenture (the "2006 A Debenture") in the amount
      of
      $4,000,000, which debenture is convertible into Common Stock. The conversion
      price of the 2006 A Debenture shall be equal to the lesser of (1) $1.00 or
      (2) a
      ten percent discount to the lowest daily volume weighted average price of the
      Common Stock for the thirty trading days preceding conversion. Yorkville is
      entitled to convert the 2006 A Debenture at a conversion price into Common
      Stock, provided that Yorkville cannot convert into shares of Common Stock that
      would cause Yorkville to own more than 4.9% of the issued and outstanding Common
      Stock. The 2006 A Debenture has an interest rate of 5% per annum and the
      principal amount will be payable on the third anniversary of the effective
      date
      of the Debenture. If the Common Stock is trading below the conversion price,
      the
      Company may redeem the 2006 A Debenture at any time upon the payment of a
      redemption premium equal to twenty percent of the amounts redeemed.




Pursuant
      to a Security Agreement between the Company and Yorkville, the Company's
      obligations under the 2006 A Debenture are secured by a pledge of all of its
      assets. Pursuant to the Securities Purchase Agreement, the Company paid a
      commitment fee of $400,000 and $20,000 in structuring fees and diligence fees,
      all to Yorkville. Accordingly, the Company received net proceeds of
      approximately $3,580,000 upon issuance of the Debenture. The Company has also
      issued to Yorkville 500,000 shares of Common Stock pursuant to this transaction.
      On November 8 and 12, 2007, Yorkville converted $96,814 and $90,000 of the
      debentures at a conversion rate of $0.0450 and $0.0457 per share into 2,151,422
      and 1,969,365 shares of the Company’s common stock. As a result of the
      conversion, the Company recognized a write-off of deferred finance charges
      of
      $12,586 and $11,700, a reduction of the related debt discount of $32,926 and
      $29,669 and derivative liability of $172,924 and $176,338.




In
      connection with the Securities Purchase Agreement, the Company entered into
      an
      Investor Registration Rights Agreement with Yorkville pursuant to which the
      Company agreed to file a registration statement covering the resale of shares
      of
      Common Stock issuable upon the conversion of the Debenture.




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





**12.
      Sale of Convertible Debentures (2006 B)**




On
      August
      21, 2006, the Company entered into a Securities Purchase Agreement with
      Yorkville, which provided for the purchase by Yorkville of a secured Convertible
      Debenture (the "2006 B Debenture") in the amount of $4,000,000, which debenture
      is convertible into Common Stock. The conversion price of the 2006 B Debenture
      shall be equal to the lesser of (1) $1.00 or (2) a ten percent discount to
      the
      lowest daily volume weighted average price of the Common Stock for the thirty
      trading days preceding conversion. The 2006 B Debenture has an interest at
      rate
      of 5% per annum and the principal amount will be payable on the third
      anniversary of the effective date of the 2006 B Debenture. If the Common Stock
      is trading below the conversion price at the date of redemption notice, the
      Company shall pay an amount equal to the principal amount being redeemed plus
      a
      redemption premium equal to twenty percent of the amounts redeemed and accrued
      interest. Pursuant to a Security Agreement between the Company and Yorkville,
      the Company's obligations under the 2006 B Debenture are secured by a pledge
      of
      all of its assets.




Pursuant
      to the Securities Purchase Agreement, the Company paid a commitment fee of
      $400,000 and $15,000 in structuring fees and diligence fees, all to Yorkville.
      Also, the Company paid interest due on the 2006 A Debenture in the amount of
      $107,945 out of the proceeds. Accordingly, the Company received net proceeds
      of
      $3,477,055 upon issuance of the 2006 B Debenture.




11


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


In
      connection with the Securities Purchase Agreement, the Company issued a warrant
      to Yorkville for 1,000,000 of the Company’s Common Stock. The warrant has an
      exercise price equal to $1.00, which may be adjusted under terms of the warrant,
      and has a term of five years from the date of issuance on August 21, 2006.
      The
      Company also entered into an Investor Registration Rights Agreement with
      Yorkville pursuant to which the Company agreed to file a registration statement
      covering the resale of shares of Common Stock issuable upon the conversion
      of
      the Debenture.




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





**13.**  **Sale
      of Convertible Debentures (2007 A)**




On
      June
      1, 2007, the Company entered into a Securities Purchase Agreement with Yorkville
      Capital Partners, LP (“Yorkville”), which provides for the purchase by Yorkville
      of a secured convertible debenture (the “Debenture”) in the amount of
      $2,750,000. The Debenture is convertible into the Company’s common stock, par
      value $0.001 per share (the “Common Stock”), based on a conversion price which
      shall be equal to the lesser of (1) $0.40 or (2) a ten percent discount to
      the
      lowest daily volume weighted average price of the Common Stock for the thirty
      days preceding conversion. The Debenture bears interest at 12% per annum and
      the
      principal amount will be payable on the third anniversary of the effective
      date
      of the Debenture. If the closing bid price of the Common Stock is trading below
      the conversion price at the time of the redemption notice, the Company shall
      pay
      an amount equal to the principal amount being redeemed plus a redemption premium
      equal to ten percent (10%) of the principal amount being redeemed, and accrued
      interest. Pursuant to a Security Agreement between the Company and Yorkville
      and
      a Pledge and Escrow Agreement between the Company, Yorkville and the escrow
      agent, issued in connection with the Debenture, the Company's obligations under
      the Debenture are secured by a pledge of all of its assets. In connection with
      the sale of the Debenture, the Company also entered into an Agreement with
      Yorkville (the “Agreement”) increasing the interest rate payable under certain
      existing convertible debentures issued by the Company to Yorkville in an
      aggregate amount of $8,000,000 (2006 A and 2006 B Debentures) from 5% to
      10% per annum, modifying the registration rights associated with such existing
      debentures to require the Company to file a registration statement covering
      the
      resale of shares of Common Stock issuable upon conversion of the existing
      debentures only upon demand by Yorkville of such filing and waiving any penalty
      due for the failure to register the shares through the date of the Agreement.





In
      connection with the Securities Purchase Agreement, the Company issued a warrant
      to Yorkville for 800,000 shares of the Company’s Common Stock (the “Warrant”).
      The Warrant has an exercise price equal to $0.15, which may be adjusted under
      the terms of the Warrant, and has a term of five years from the date of issuance
      on June 1, 2007. The Company also entered into a Registration Rights Agreement
      with Yorkville pursuant to which the Company is obligated to file a registration
      statement covering the resale of shares of Common Stock issuable upon the
      conversion of the Debenture.




12




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


**14.
      Long Term Debt and Convertible Debentures**




**Long-Term
      Debt**





The
      table
      below reflects the Company’s long-term debt obligations through
      2012:


Capitalized
                  lease obligation due through 2011 for the purchase of equipment
              
              $
              14,432Capitalized
                  lease obligation due through 2010 for the purchase of vehicles
              
              
              42,914Vehicle
                  purchase notes bearing interest at rates from7.5%
                  to 12.0% with monthly payments aggregatingapproximately
                  $5,000 through 2011 and collateralized by vehicles with an original
                  cost
                  of $202,990
              
              
              109,361Vehicle
                  purchase note bearing interest at a rate of 7.24% collateralized
                  by a
                  vehicle with an original cost of $45,905
              
              
              40,300Total
              
              
              207,007Less:
                  Current maturities
              
              
              72,319Long
                  Term Notes Payable
              
              $
              134,688
  Principal
        maturities for the next five years are as follows:




2008
              
              $
              72,3192009
              
              
              57,9332010
              
              
              51,1692011
              
              
              15,5742012
              
              
              10,012Total
              
              $
              207,007




**Convertible
      Debentures**




The
      Company issued $537,500 aggregate principal amount of 5% convertible debentures
      in 2004. The debentures have a term of two years and are convertible into the
      Company's Common Stock, at the option of the holder, at a price equal to $0.001.
      Since there was substantially no difference in the market value of the stock
      at
      the date of the debenture compared to the conversion price, there was no
      beneficial conversion feature for the convertible debentures. In 2004, $25,000
      of the debentures was repaid. In 2005, $10,000 of the debentures was converted
      into 71,493 shares of Common Stock and $280,000 was repaid leaving $222,500
      remaining outstanding at December 31, 2005. In 2006 all of the remaining
      debentures were converted into 1,777,958 shares of Common Stock.





13




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




The
      table
      below reflects the carrying values of the current Debentures of the
      Company:


**Yorkville10%**
              
              **Yorkville10%**
              
              **Yorkville12%**
              
              **Yorkville**
              
              **Yorkville****Debenture**
              
              **Debenture**
              
              **Debenture**
              
              **Warrant**
              
              **Warrant****2006
                  A**
              
              **2006
                  B**
              
              **2007
                  A**
              
              **2006
                  B**
              
              **2007
                  A**
              
              **Total**Face
                  amount
              
              $
              4,000,000
              
              $
              4,000,000
              
              $
              2,750,000
              
              $
              
              
              $
              
              
              $
              10,750,000Less:
                  Cost of issuance
              
              
              (520,000
              )
              
              (569,863
              )
              
              (282,491
              )
              
              
              
              
              
              
              
              (1,372,354
              )Net
                  proceeds
              
              $
              3,480,000
              
              $
              3,430,137
              
              $
              2,467,509
              
              $
              
              
              $
              
              
              $
              9,377,646Value
                  of derivative liability at issue date
              
              $
              3,331,544
              
              $
              2,298,787
              
              $
              2,335,962
              
              $
              154,863
              
              $
              92,486
              
              $
              8,213,642Gain
                  (Loss) of value of derivative
              
              
              (623,087
              )
              
              401,915
              
              
              (193,784
              )
              
              (121,334
              )
              
              (64,886
              )
              
              (601,176
              )Converted
                  debt
              
              
              (349,262
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (349,262
              )Value
                  at December 31, 2007
              
              $
              2,359,195
              
              $
              2,700,702
              
              $
              2,142,178
              
              $
              33,529
              
              $
              27,600
              
              $
              7,263,204Face
                  amount
              
              $
              4,000,000
              
              $
              4,000,000
              
              $
              2,750,000
              
              $
              
              
              $
              
              
              $
              10,750,000Less
                  debentures converted
              
              
              (186,814
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (186,814
              )Face
                  Amount December 31, 2007
              
              
              3,813,186
              
              
              4,000,000
              
              
              2,750,000
              
              
              
              
              
              
              
              
              10,563,186Debt
                  discount
              
              
              3,331,544
              
              
              2,298,787
              
              
              2,335,962
              
              
              
              
              
              
              
              
              7,966,293Less
                  amortization of discount
              
              
              (2,117,501
              )
              
              (1,021,683
              )
              
              (454,215
              )
              
              
              
              
              
              
              
              (3,593,399
              )Converted
                  debt
              
              
              (62,595
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              (62,595
              )Net
                  debt discount
              
              
              1,151,448
              
              
              1,277,104
              
              
              1,881,747
              
              
              
              
              
              
              
              
              4,310,299Net
                  Convertible Debentures
              
              $
              2,661,738
              
              $
              2,722,896
              
              $
              868,253
              
              $
              
              
              $
              
              
              $
              6,252,887




As
      further described in Note 27 to the financial statements, on March 13, 2008,
      the
      Company completed an acquisition and restructuring of the Company’s liabilities
      and equities and the convertible debentures outlined above are being converted
      into fixed debt and the Company’s equity. Accordingly, the debentures are
      classified as current liabilities at December 31, 2007.





**15.
      Series F Preferred Stock**




On
      October 6, 2005, the Company issued 1,000,000 shares of Series F Convertible
      Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”), to
      Yorkville,, a related party, pursuant to a securities purchase agreement. Net
      proceeds from the issuance amounted to $1,000,000 less costs of $154,277, or
      $845,723. The Series F Preferred Stock provides for preferential dividends
      at an
      annual rate of 12%. Also, the Series F Preferred Stock has a preferential
      liquidation amount of $0.10 per share or $100,000. The preferred stock is
      convertible into shares of Common Stock at a conversion price equal to $0.10
      per
      share, subject to availability. In 2005, the Company recorded a $1,000,000
      dividend relative to the beneficial conversion feature. As of December 31,
      2007,
      none of the Series F Preferred Stock has been converted into shares of Common
      Stock.




14


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




**16.
      Series G Preferred Stock**




On
      February 6, 2006, the Company entered into an Investment Agreement with
      Yorkville pursuant to which the Company exchanged with Yorkville 1,000,000
      shares of Series G Convertible Preferred Stock (the "Series G Preferred Shares")
      for 4,500,000 shares of the Company's Common Stock owned by Yorkville. Each
      share of Series G Preferred Shares may be converted, at Yorkville' discretion,
      into 4.5 shares of the Common Stock. The Series G Preferred Shares are senior
      in
      rank to all Common Stock and all series of preferred stock of the Company.
      Each
      share of Series G Preferred Share has a liquidation preference of $0.10. The
      holders of Series G Preferred Shares are not entitled to receive any dividends.
      The Company paid a $10,000 structuring fee to Yorkville in connection with
      the
      transaction. During 2007, Yorkville requested conversion of 641,920 shares
      of
      the Series G Shares which resulted in the issuance of 2,888,640 shares of the
      Company’s common stock.




In
      connection with the Investment Agreement, the Company entered into an Investor
      Registration Rights Agreement with the Yorkville pursuant to which the Company
      agreed to file a registration statement covering the resale of shares of Common
      Stock issuable upon the conversion of the Series G Preferred Shares. The Company
      also filed a Certificate of Designation with the State of Delaware amending
      its
      Certificate of Incorporation to include the rights and terms of the Series
      G
      Preferred Shares.




**17.
      Stock Options**





In
      2005,
      the Company issued to directors and an officer of the Company options to
      purchase 7,960,000 shares of common stock par value $0.001 per share (the
      "Common Stock") in the future. In January and February 2006, the Company issued
      100,000 and 600,000 options to an employee and a contractor respectively, to
      purchase shares of Common Stock of the Company in the future. Of these options
      100,000 were forfeited in September 2006. In May and July 2006, the Company
      issued 100,000 and 750,000 options to two employees respectively, to purchase
      shares of Common Stock of the Company in the future.. In December 2006, the
      Company issued 250,000 options to an employee to purchase shares of Common
      Stock
      of the Company in the future. On May 10, 2007, the Company modified the terms
      of
      519,210 of the options previously issued to an employee, upon the appointment
      of
      that employee to the position of Chief Financial Officer. Also, on May 10,
      2007
      a director resigned forfeiting 720,000 options and on May 16, 2007 a new
      director was approved and granted 720,000 options to purchase shares of Common
      Stock of the Company in the future, vesting at 90,000 per quarter for eight
      quarters.





Of
      the
      options granted in 2005, 2006 and 2007, options to purchase 1,529,093 shares
      of
      Common Stock vested and 521,667 vested options were forfeited during the twelve
      month period ended December 31, 2007 and the Company recorded $219,638 as
      compensation expense related to the vesting of these options. During the twelve
      month period ended December 31, 2006, options to purchase 3,698,933 shares
      of
      Common Stock vested and the Company recorded $389,502 as compensation expense
      related to the vesting of these options.





15
 
  **HOMELAND
          SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**


The
      following table reflects options outstanding at the beginning of 2006 and 2007;
      options granted during 2006 and 2007; options exercised during, 2006 and 2007;
      options forfeited during 2006 and 2007; options outstanding at December 31,
      2006
      and 2007; and options exercisable at December 31, 2006 and December 31, 2007,
      along with their weighted average exercise price:


**2007**
              
              **2006**Weighted
              
              WeightedAverage
              
              AverageExercise
              
              ExerciseOptions
              
              Price
              
              Options
              
              PriceOutstanding
                  at beginning of Year
              
              
              9,660,000
              
              $
              0.098
              
              
              7,960,000
              
              $
              0.096Granted
              
              
              1,239,210
              
              
              0.120
              
              
              1,800,000
              
              
              0.161Exercised
              
              
              —
              
              
              —
              
              
              —
              
              
              —Forfeited
              
              
              (1,239,210
              )
              
              0.140
              
              
              (100,000
              )
              
              0.170Outstanding
                  at end of year
              
              
              9,660,000
              
              $
              0.103
              
              
              9,660,000
              
              $
              0.098Options
                  exercisable at year end
              
              
              8,418,026
              
              $
              0.100
              
              
              7,410,600
              
              $
              0.095


All
      of
      the options reflected in the table above have been restated to reflect a 1
      for
      100 reverse split of the Company’s common stock (See Note 19).





The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes option-pricing model with the following assumptions used for
      grants in 2005, 2006 and 2007; risk-free interest rate of between 4.4% and
      4.95%
      and volatility between 178% and 456% and expected lives of ten
      years.





Not
      included in the table above, but included in compensation expense are options
      issued by our subsidiaries to purchase 685,000 shares of the subsidiaries’
common stock in the future. Compensation expense for these options is calculated
      by comparing our subsidiaries to comparable publicly traded companies in their
      industry for stock volatility purposes and using the Black-Scholes
      option-pricing model.




**18.
      Common Stock Warrants**




During
      2007 and 2006, the Company granted 800,000 and 1,400,000 warrants, respectively,
      to two entities and one consultant. The warrants vested when granted and were
      issued in connection with our debenture financing, financial advisory services
      and investor relations consultation. The exercise price of these warrants range
      from $0.11 to $1.00.




**19.
      Reverse Stock Split**





At
      the
      Company’s stockholders meeting held on July 10, 2007, the common stockholders
      approved a resolution to amend the Certificate of Incorporation to effect a
      combination, or reverse split, of the Company’s Common Stock at a ratio of
      1-for-100 and accordingly the Company filed an amendment to the Certificate
      of
      Incorporation with the Secretary of State of Delaware which provided that the
      shares of Common Stock then issued and outstanding will be combined at a ratio
      of 1-for-100. The reverse split reduced number of authorized shares of Common
      Stock from 20,000,000,000 to 200,000,000 but did not change the par value of
      our
      Common Stock. Except for any changes resulting from the treatment of fractional
      shares, each stockholder held the same percentage of Common Stock outstanding
      immediately after the reverse stock split as such stockholder did immediately
      prior to the reverse stock split. Stockholders holding fractional shares will
      be
      entitled to receive cash in the amount of $0.001/share in lieu of their
      fractional shares. As of December 31, 2007 and December 31, 2006, the accounts
      of the Company and results of operations and cash flows have been computed
      giving effect to the reverse stock split.





**20.
      Settlement of Trade Payable and Convertible Debentures**




During
      2007, the Company settled certain trade payables, convertible debentures and
      accrued interest in the amount of $6,000. Such settlements resulted in a gain
      on
      forgiveness of debt of approximately $6,000.




16




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


During
      2006, the Company settled certain trade payables, convertible debentures and
      accrued interest in the amount of $217,000. Such settlements resulted in a
      gain
      on forgiveness of debt of approximately $91,000.




**21.
      Business Segments**




The
      Company analyzes its assets, liabilities, cash flows and results of operations
      by operating unit or subsidiary. In the case of our platform companies, which
      are our first level subsidiaries, the Company relies on local management to
      analyze each of its subsidiaries and report to us based on a consolidated
      entity. As a result, the Company, in its application of SFAS 131, will make
      its
      financial decisions based on the overall performance of a first level
      subsidiary. In the past, our subsidiaries derived their revenues and cash flow
      from different activities, services in the case of Nexus and products in the
      case of SHC and PMX. However, on July 3, 2007, the Company entered into an
      agreement to sell its SHC subsidiary. Accordingly, the SHC product sales segment
      activity is no longer included in results from continuing operations and is
      no
      longer included as segment information.





The
      following table reflects the Company’s segments at December 31, 2007, excluding
      the discontinued operations of SHC:




**Homeland
                  Security Capital Corporation Consolidated**
              
              **HoldingCompanyHomelandSecurityCapitalCorporation**
              
              **ServicesCompanyNexusTechnologyGroup**
              
              **ProductsCompanyPolimatrix,Inc.**
              
              **Consolidated**Revenues
              
              
              -
              
              
              12,378,450
              
              
              249,733
              
              
              12,628,183Gross
                  margin
              
              
              -
              
              
              3,026,863
              
              
              8,394
              
              
              3,035,257Operating
                  expenses
              
              
              1,984,569
              
              
              2,680,536
              
              
              254,048
              
              
              4,919,153Other
                  expenses - net
              
              
              2,602,646
              
              
              99,457
              
              
              -
              
              
              2,702,103Net
                  income/(loss) from continuing operations
              
              
              (4,587,215
              )
              
              246,870
              
              
              (245,654
              )
              
              (4,585,999
              )Current
                  assets
              
              
              66,572
              
              
              4,624,610
              
              
              213
              
              
              4,691,395Total
                  assets
              
              
              4,715,460
              
              
              4,881,673
              
              
              213
              
              
              9,597,346




**22.
      Loss Per Share**




The
      basic
      loss per share was computed by dividing the net loss applicable to common
      shareholders by the weighted average common shares outstanding during each
      period. Potential common equivalent shares of 10,618,026 and 8,802,267 at
      December 31, 2007 and 2006, respectively, are not included in the computation
      of
      per share amounts in the periods as the effect would be
      anti-dilutive.




**23.
      Cash Flows**




Supplemental
      disclosure of cash flow information for the years ended December 31, 2007 and
      2006, are as follows:


2007
              
              2006Cash
                  paid during the year for:Interest
              
              $
              345,620
              
              $
              115,674Taxes
              
              $
              0
              
              $
              0




17
 
 **HOMELAND
          SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**


Non
      Cash
      Investing and Financing activities include:





**Year
      ended 2007**





On
      June
      1, 2007, the Company entered into a Securities Purchase Agreement with
      Yorkville, which provides for the purchase by Yorkville of a secured convertible
      debenture (the “Debenture”) in the amount of $2,750,000. The Debenture is
      convertible into the Company’s common stock, par value $0.001 per share (the
“Common Stock”), based on a conversion price which shall be equal to the lesser
      of (1) $0.40 or (2) a ten percent discount to the lowest daily volume weighted
      average price of the Common Stock for the thirty days preceding conversion.
      The
      Debenture bears interest at 12% per annum and the principal amount will be
      payable on the third anniversary of the effective date of the Debenture. If
      the
      closing bid price of the Common Stock is trading below the conversion price
      at
      the time of the redemption notice, the Company shall pay an amount equal to
      the
      principal amount being redeemed plus a redemption premium equal to ten percent
      (10%) of the principal amount being redeemed, and accrued interest. Pursuant
      to
      a Security Agreement between the Company and Yorkville and a Pledge and Escrow
      Agreement between the Company, Yorkville and the escrow agent, issued in
      connection with the Debenture, the Company's obligations under the Debenture
      are
      secured by a pledge of all of its assets. In connection with the sale of the
      Debenture, the Company also entered into an Agreement with Yorkville (the
“Agreement”) increasing the interest rate payable under certain existing
      convertible debentures issued by the Company to Yorkville in an aggregate amount
      of $8,000,000 from 5% to 10% per annum, modifying the registration rights
      associated with such existing debentures to require the Company to file a
      registration statement covering the resale of shares of Common Stock issuable
      upon conversion of the existing debentures only upon demand by Yorkville of
      such
      filing and waiving any penalty due for the failure to register the shares
      through the date of the Agreement.




In
      connection with the June 1, 2007 Securities Purchase Agreement, the Company
      issued a warrant to Yorkville for 800,000 shares of the Company’s Common Stock
      (the “2007 A Warrant”). The 2007 A Warrant has an exercise price equal to $0.15,
      which may be adjusted under the terms of the 2007 A Warrant, and has a term
      of
      five years from the date of issuance on June 1, 2007. The Company also entered
      into a Registration Rights Agreement with the Yorkville pursuant to which the
      Company is obligated to file a registration statement covering the resale of
      shares of Common Stock issuable upon the conversion of the
      Debenture.





**Year
      ended 2006**





On
      February 6, 2006, we entered into an Investment Agreement with
      Yorkville pursuant to which we exchanged 1,000,000 shares of our Series G
      Convertible Preferred Stock (the “Series G Stock”) for 4,500,000 shares of our
      Common Stock held by Yorkville. Each share of Series G Stock is convertible,
      at
      the discretion of Yorkville, into 4.5 shares of Common Stock. The holders of
      the
      Series G Stock are not entitled to receive any dividends. As of December 31,
      2006, none of the Series G Stock had been converted into shares of Common Stock.




On
      February 6, 2006, we entered into a Securities Purchase Agreement with Yorkville
      pursuant to which we sold secured convertible debentures (the “2006 A
      Debentures”) in the amount of $4,000,000. The 2006 A Debentures are convertible
      into Common Stock at a conversion price equal to the lesser of (1) $1.00 or
      (2)
      a ten percent discount to the lowest daily volume weighted average price of
      the
      Common Stock for the thirty trading days preceding conversion. The 2006 A
      Debentures bear interest at 5% per annum and the maturity date is February
      6,
      2009.




On
      August
      21, 2006, we entered into a Securities Purchase Agreement with Yorkville
      pursuant to which we sold secured convertible debentures (the “2006 B
      Debentures”) in the amount of $4,000,000. The August Debentures are convertible
      into Common Stock at a conversion price equal to the lesser of (1) $1.00 or
      (2)
      a ten percent discount to the lowest daily volume weighted average price of
      the
      Common Stock for the thirty trading days preceding conversion. The 2006 B
      Debentures bear interest at 5% per annum and the maturity date is August 21,
      2009.




18
 
 **HOMELAND
          SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
          to Consolidated Financial Statements**


On
      August
      21, 2006, in connection with the sale of the August Debentures, we issued to
      Yorkville a warrant to purchase 1,000,000 shares of Common Stock. The warrant
      has an exercise price equal to $1.00 (subject to certain adjustments as set
      forth therein) and has a term that expires on August 20, 2011.




In
      December 2006, we issued to our financial advisor warrants to purchase 200,000
      of our Common Stock. These warrants have an exercise price of $0.11 per share
      and have a term of five years from the date of issuance. These warrants were
      issued as consideration for financial advisory services.




In
      December 2006, we issued to our investor relations firm warrants to purchase
      200,000 of our Common Stock. These warrants have an exercise price of $0.36
      per
      share and have a term of four years from the date of issuance. These warrants
      were issued as part of the consideration for investor relations
      services.




In
      2006,
      $222,500 of our convertible debentures were converted into 1,777,958 shares
      of
      Common Stock at an average conversion price of $0.13. These transactions were
      exempt from registration under Section 4(2) of the Securities
      Act.




**24.
      Commitments and Contingencies**




**Leases**




The
      Company and its subsidiaries routinely enter into lease agreements for office
      space used in the normal course of business. Certain leases include escalation
      clauses that adjust rental expense to reflect changes in price indices, as
      well
      as renewal options. In addition to minimum rental payments, certain of our
      leases require additional payments to reimburse lessor for operating expenses
      such as real estate taxes, maintenance and utilities. At December 31, 2007
      the
      Company occupied office and warehouse space under two (2) separate leases.
      The
      following table shows the future minimum obligations under lease commitments
      in
      effect at December 31, 2007:




OperatingLeases2008
              
              $
              114,1732009
              
              
              80,2072010
              
              
              36,8122011
              
              
              6,192Thereafter
              
              
              -




Rent
      expense for the years ended December 31, 2007 and 2006 was $131,286 and
      $205,973, respectively.




Our
      leases have various termination dates between June 2009 and February 2011.
      We
      believe that any of our subsidiaries can find suitable office and warehouse
      accommodations on short notice.




**Commitments**




The
      Company and its subsidiaries in the normal course of business routinely enter
      into consulting agreements for services to be provided to the Company. These
      agreements are generally of short terms and are terminable by either party
      on
      thirty (30) days notice. As a result, the Company does not believe it has any
      material commitments to consultants.




**Licenses
      and Royalties**




The
      Company and its subsidiaries routinely licensed technology and manufacturing
      rights in the normal course of business. Payments under these licenses are
      due
      upon the sale of the specific product(s) for which the license was obtained.
      The
      Company is not committed to fixed payment schedules or is it required to make
      minimum sales under any license.




19


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


**Insurance**




The
      Company and its subsidiaries maintain various insurance policies for product
      liability, general liability, health, worker’s compensation and automobile
      insurance, as well as excess umbrella insurance policies. The Company believes
      that its insurance carriers are highly rated companies and does not believe
      that
      it has any financial risk as to insurance.




**Litigation**




The
      Company and its subsidiaries do not believe, they are the subject of any
      litigation.




**25.
      Related Party Transactions**




The
      Company believes that it conducts its related party business on terms no less
      favorable to us than could have been obtained from unaffiliated third parties.
      Furthermore, any future transactions or loans between us and officers,
      directors, principal stockholders or affiliates, and any forgiveness of such
      loans, will be on terms no less favorable to us than could be obtained from
      an
      unaffiliated third party, and will be approved by a majority of our directors,
      including a majority of our independent and disinterested directors who have
      access at our expense to our legal counsel.




On
      June
      7, 2005, Washington Capital Advisors, a private equity firm owned by C. Thomas
      McMillen, our CEO, and Global Defense Corp. executed a lease with Cambridge
      Associates LLC for our then current office space located at 4100 North Fairfax
      Drive, Suite 1150, Arlington, VA 22203-1664. Mr. McMillen served as Chairman
      of
      the Board and Chief Executive Officer of Global Defense Corp. until July 2005,
      when he stepped down as CEO. Washington Capital Advisors leased the equipment
      and provided it and the space to Fortress America Acquisition Corporation with
      a
      separate sublease arrangement that started July 2005. We moved in the then
      current office space on September 1, 2005 and did not pay any rent because
      of
      the BDC limitations on doing business with affiliates. On March 1, 2006, Global
      Defense Corp. assigned its interest in the lease to us with Washington Capital
      Advisors’ approval. On March 1, 2006, the Company started paying a monthly rent
      (which includes utilities, furniture and equipment) in the amount of $4,600
      to
      Cambridge Associates LLC.





**26.
      Concentration of Customers and Suppliers**




**Significant
      Customers**




As
      of
      December 31, 2007, Greystone Psychiatric Hospital accounted for greater
      than 10% of our consolidated revenues and consolidated net accounts
      receivable.




**Significant
      Suppliers**




As
      of
      December 31, 2007, we did not have a concentration of suppliers in any of
      our subsidiaries that accounted for greater than 10% of our consolidated
      revenues or consolidated net accounts receivable.




**27.
      Liquidity and Capital Resources**





The
      primary source of financing for the Company since its inception has been through
      the issuance of common stock, preferred stock and convertible debt. Our
      financial statements are prepared using generally accepted accounting principles
      applicable to a going concern which contemplates the realization of assets
      and
      liquidation of liabilities in the normal course of business. We have
      historically incurred losses which have resulted in a total retained deficit
      of
      $55,219,082 at December 31, 2007. In connection with the preparation of our
      financial statements for the year ended December 31, 2007, we have analyzed
      our cash needs for fiscal 2008. Based on this analysis, we concluded that our
      available cash will be sufficient to meet our current working capital, capital
      expenditure and other cash requirements for fiscal 2008.




20




**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


**28.
      Subsequent Events**




*Acquisition
      of Safety & Ecology Holdings Corporation.* On March
      13, 2008, the Company entered into an Agreement and Plan of Merger and Stock
      Purchase Agreement (the “Merger Agreement”) with Safety & Ecology Holdings
      Corporation (“Safety”), HSCC Acquisition Corp. (“MergerSub”) and certain persons
      named therein. The transactions contemplated by the Merger Agreement closed
      on
      March 17, 2008.





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





Pursuant
      to the Merger Agreement, MergerSub was merged with and into Safety (the
      "Merger"), with Safety surviving the Merger. In exchange for all of the issued
      and outstanding Safety common stock, the shareholders of Safety (the
“Shareholders”) initially received: (1) an aggregate of 550,000 shares of
      Company Series I Convertible Preferred Stock (“Series I Stock”) with
      an initial value of $3,300,000, (2) warrants to purchase up to 22,000,000 shares
      of the Company common stock (the “Warrants”), (3) unsecured promissory notes of
      Safety in an aggregate principal amount of $2,000,000 (the “Notes”) and (4)
      $3,900,000 in cash (collectively, the “Merger Consideration”). Pursuant to the
      Merger Agreement, this Merger Consideration received by the Shareholders may
      be:
      (1) reduced based on Safety’s stockholders’ equity (as determined at closing)
      and (2) reduced or increased based on Safety’s working capital (as determined at
      closing). In addition, in the future, the Shareholders may receive up to an
      aggregate of $6,000,000 in Company common stock if certain performance criteria
      are achieved by Safety in 2008 and 2009. The Series I Stock and Warrants will
      be
      held is escrow for twelve months to offset any indemnification claims or
      purchase price adjustments pursuant to the Merger Agreement.





Also
      pursuant to the Merger Agreement, (1) $6,650,000 in existing indebtedness of
      Safety was paid off, (2) $2,000,000 in Safety preferred stock was redeemed
      and
      (3) $2,400,000 of existing indebtedness of Safety was permitted to remain
      outstanding.





On
      March
      17, 2008, the Company amended its Certificate of Incorporation to designate
      550,000 shares of its authorized preferred stock as Series I Convertible
      Preferred Stock. Each share of Series I Stock accrues a dividend of 12% per
      annum. The Series I Stock ranks *pari
      passu* with the
      Company’s Series H Convertible Preferred Stock and senior to all other series of
      the Company’s preferred stock and the Company common stock. The holder of the
      Series I Stock may convert the accrued dividends into Company common stock
      at a conversion price of $0.06 per share or receive a cash payment on
      liquidation or sale of the Company. Each share of Series I Stock is convertible
      into 200 shares of Common Stock (effectively a conversion price of $0.03 per
      share) and has a liquidation preference of $6.00 per share.





The
      Warrants have an exercise price equal to $0.03, which may be adjusted under
      the
      terms of the Warrants, and have a term of five years from the date of issuance
      on March 17, 2008. The Notes accrue interest at a rate of 6% per annum and
      are subordinate to the existing indebtedness of Safety. Immediately following
      the Merger, the Company controlled 100% of the voting power of
      Safety.




21


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**


*Additional
      Financing* .
      On
      March 14, 2008, the Company entered into a Securities Purchase Agreement
      (“Purchase Agreement”) with YA Global Investments, L.P. (“YA Global”),
      which provides for the transactions set forth below.




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




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




The
      Company and YA Global are parties to:




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




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




(3)
      Securities Purchase Agreement, dated as of June 1, 2007 the (“2007 Purchase
      Agreement”), pursuant to which, among other things, YA Global purchased from the
      Company an aggregate original principal amount of $2,750,000 of senior secured
      convertible debentures (the “2007 Debentures”), which are convertible into
      shares of Common Stock in accordance with the terms thereof, and which as of
      March 17, 2008 has an outstanding principal balance of $2,750,000, plus accrued
      and unpaid interest thereon.




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




Each
      Series H Preferred Share accrues a dividend of 12% per annum. The holder of
      the Series H Preferred Shares (a “Series H Holder”) may convert the accrued
      dividends into Common Stock at a conversion price of $0.06 per share or receive
      a cash payment on liquidation or sale of the company. The Series H Preferred
      Shares will rank *pari
      passu* with the
      Company’s Series I Convertible Preferred Stock and senior to all other series of
      the Company’s preferred stock and the Common Stock. Each Series H Preferred
      Share is convertible into 33,334 shares of Common Stock (effectively a
      conversion price of $0.03 per share) and has a liquidation preference of $1,000
      per share. Each Series H Preferred Share may be voted on as-converted basis
      with
      the Common Stock but in no instance will the voting power of a Series H Holder
      with respect to its Series H Preferred Shares (when aggregated with all other
      Common Stock beneficially owned by he, she or it) be permitted to exceed 9.9%
      of
      the shares permitted to vote at a meeting of the Company’s stockholders. In
      addition, Series H Holders are restricted from conversions of the Series H
      Preferred Shares that will result in it beneficially owning more than 9.99%
      of
      the outstanding Common Stock following such conversion.




22


**HOMELAND
        SECURITY CAPITAL CORPORATION AND SUBSIDIARIES**
 **Notes
        to Consolidated Financial Statements**




The
      Notes
      accrue interest at a rate of 13% per annum and have a maturity date of
      March 13, 2010. The obligations of the Company pursuant to the Purchase
      Agreement and the Note have been guaranteed by Celerity Systems, Inc.
      (“Celerity”), Nexus Technologies Group, Inc. and Homeland Security Advisory
      Services, Inc. (“HSAS”) pursuant to a Guaranty. The Notes are secured by the
      assets of the Company, Celerity and HSAS.




In
      connection with the Securities Purchase Agreement, the Company issued to
      YA Global the Warrant to purchase up to 83,333,333 shares of Common Stock.
      The Warrant has an exercise price equal to $0.03, which may be adjusted under
      the terms of the warrant, and has a term of five years from the date of issuance
      on March 14, 2008. In
      addition, the holder of the Warrant is restricted from exercises of the Warrant
      that will result in it then beneficially owning more than 9.99% of the
      outstanding Common Stock following such exercise.





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





In
      connection with the transactions pursuant to the Purchase Agreement, an
      affiliate of YA Global will receive a monitoring fee of $800,000 in the
      aggregate for its monitoring and managing the YA Global investment. In addition,
      such affiliate will receive $50,000 for its structuring of the transaction
      and
      its due diligence costs.





On
      March
      17, 2008, the Company amended its Certificate of Incorporation to designate
      10,000 shares of its authorized preferred stock as Series H Convertible
      Preferred Stock.




*Nexus* .
      On
      March 1, 2008, Nexus renewed its lease for its offices in Hawthorne, New York.
      The renewal is for an additional three-year term with a monthly rental rate
      of
      $2,766 for the first 12 months, $2,926 for the second 12 months and $3,096
      for
      the final 12 months.




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