**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**




Washington,
      D.C. 20549




**FORM
      10-QSB**




(MARK
      ONE)




x 
Quarterly
      Report
      Pursuant to Section 13 or 15(d) of Securities Exchange


Act
      of
      1934




For
      the
      quarterly period ended September 30, 2006




o 
Transition
      report under Section 13
      or 15(d) of the Securities Exchange Act


of
      1934




For
      the
      transition period from _______ to _______.




*Commission
      file number*


814-00631




**HOMELAND
      SECURITY CAPITAL CORPORATION**




(Name
      of
      small business issuer in its charter)


Delaware
              59-2050585(State
                  or Other Jurisdiction of Incorporation
              (I.R.S.
                  Employeror
                  Organization)
              Identification
                  No.)4100
                  N. Fairfax Drive, #1150Arlington,
                  VA
              22203(Address
                  of principal executive offices)
              (Zip
                  code)




(703)
          528-7073
 (Issuer's
          Telephone Number, Including Area Code)


Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of 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 o No  x




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes
o
      No x




**APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY**


**PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS**




Check
      whether the registrant filed all documents and reports required to be filed
      by
      Sections 12, 13 or 15(d)of the Exchange Act subsequent to the distribution
      of
      securities under a plan confirmed by a court. o Yes  o
      No




**APPLICABLE
      ONLY TO CORPORATE ISSUERS:**




Indicate
      the number of shares outstanding of each of the issuer's classes of common
      stock, as of the latest practicable date:




There
      were 4,155,380,536 par value $.001 per share, shares of common stock outstanding
      as of November 10, 2006.




Transitional
      Small Business Disclosure Format: Yes o  No x





**PART
      I**




**FINANCIAL
      INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS**




The
      accompanying interim condensed consolidated financial statements and notes
      to
      the consolidated financial statements for the interim periods as of September
      30, 2006 and for the three and nine months ended September 30, 2006 and 2005,
      are unaudited. The accompanying interim unaudited financial statements have
      been
      prepared by the Company in accordance with accounting principles generally
      accepted in the United States for interim financial statements and pursuant
      to
      the requirements for reporting on Form 10-QSB and Item 310 of Regulation S-B.
      Accordingly, these interim unaudited financial statements do not include all
      the
      information and footnotes required by generally accepted accounting principles
      for complete financial statements. In the opinion of management, all adjustments
      (consisting of normal recurring adjustments) considered necessary for a fair
      presentation have been included. Operating results for the three and nine month
      periods ended September 30, 2006, are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2006. The condensed
      consolidated financial statements should be read in conjunction with the
      financial statements and notes thereto included in the Form 10-K of the Company
      as of and for the year ended December 31, 2005. Certain September 30, 2005
      balances have been reclassified to conform to the September 30, 2006 financial
      statement presentation.





2




HOMELAND
                  SECURITIES CAPITAL CORPORATIONConsolidated
                  Balance Sheets(unaudited)Assets
              
              September
                  30,
                2006
              
              December
                  31,
                2005Cash
              
              $
              2,597,408
              
              $
              1,094,061Accounts
                  receivable
              
              
              4,332,009
              
              
              -Inventories
              
              
              649,917
              
              
              -Costs
                  in excess of billings on uncompleted contracts
              
              
              613,358
              
              
              -Other
                  current assets
              
              
              106,368
              
              
              144,656Total
                  current assets
              
              
              8,299,060
              
              
              1,238,717Fixed
                  assets, net
              
              
              427,492
              
              
              24,306Deferred
                  officers' compensation
              
              
              134,730
              
              
              -Deferred
                  financing costs - net
              
              
              958,483
              
              
              -Goodwill
              
              
              2,920,555
              
              
              -Total
                  assets
              
              $
              12,740,320
              
              $
              1,263,023Liabilities
                  and Stockholders' EquityAccounts
                  payable
              
              $
              2,100,025
              
              $
              384,791Judgments
                  and defaults payable
              
              
              44,000
              
              
              44,000Accrued
                  interest
              
              
              93,097
              
              
              64,911Billings
                  in excess of costs on uncompleted contracts
              
              
              576,294
              
              
              -Derivative
                  liability
              
              
              6,021,699
              
              
              -Other
                  current liabilities
              
              
              842,821
              
              
              4,601Total
                  current liabilities
              
              
              9,677,936
              
              
              498,303Convertible
                  debentures - related party,net
                  of $6,041,522 discount
              
              
              1,958,478
              
              
              -Convertible
                  debentures, net
              
              
              -
              
              
              222,5001,958,478
              
              
              222,500Total
                  liabilities
              
              
              11,636,414
              
              
              720,803Commitments
                  and contingencies
              
              
              -
              
              
              -Minority
                  interest in consolidated subsidiaries
              
              
              2,040,458
              
              
              -Stockholders'
                  Equity (Deficit)Preferred
                  stock Series F
              
              
              100,000
              
              
              100,000Preferred
                  stock Series G
              
              
              100,000
              
              
              -Common
                  stock, $.001 par value, 20,000,000,000 shares authorized,4,155,380,536
                  and 4,397,728,539 sharesissued
                  and outstanding, respectively
              
              
              4,155,381
              
              
              4,397,729Additional
                  paid-in capital
              
              
              42,774,010
              
              
              41,822,550Accumulated
                  deficit
              
              
              (48,065,943
              )
              
              (45,778,059
              )Total
                  stockholders' equity (Deficit)
              
              
              (936,552
              )
              
              542,220Total
                  liabilities and stockholders' equity
              
              $
              12,740,320
              
              $
              1,263,023The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements




3




HOMELAND
                  SECURITIES CAPITAL CORPORATIONConsolidated
                  Statements of Operations (unaudited)Three
                  Months
                Ended
                September
                  30,
                2006
              
              Three
                  Months
                Ended
                September
                  30,
                2005
              
              Nine
                  Months
                Ended
                September
                  30,
                2006
              
              Nine
                  Months
                Ended
                September
                  30,
                2005Sales
              
              $
              2,599,608
              
              $
              -
              
              $
              5,341,345
              
              $
              -Cost
                  of salesMaterials
              
              
              1,175,556
              
              
              -
              
              
              2,444,116
              
              
              -Labor
              
              
              516,518
              
              
              
              
              
              1,055,617Other
              
              
              -
              
              
              -
              
              
              123,727
              
              
              -Total
                  cost of sales
              
              
              1,692,074
              
              
              -
              
              
              3,623,460
              
              
              -Gross
                  profit on sales
              
              
              907,534
              
              
              -
              
              
              1,717,885
              
              
              -General
                  and administrative expenses
              
              
              1,547,020
              
              
              271,477
              
              
              3,876,986
              
              
              664,397Operating
                  income (loss)
              
              
              (639,486
              )
              
              (271,477
              )
              
              (2,159,101
              )
              
              (664,397
              )Other
                  income (expense)Interest
                  expense
              
              
              (80,445
              )
              
              (2,930
              )
              
              (170,980
              )
              
              (71,042
              )Beneficial
                  conversion feature - convertible debentures
              
              
              -
              
              
              -
              
              
              -
              
              
              (242,988
              )Amortization
                  of debt discounts
              
              
              (385,282
              )
              
              -
              
              
              (868,615
              )
              
              -Amortization
                  of debt offering costs
              
              
              (59,160
              )
              
              -
              
              
              (131,380
              )
              
              (40,529
              )Adjustment
                  of fair value of derivitave liability
              
              
              83,361
              
              
              
              
              
              888,438Minority
                  interest in loss of consolidated subsidiary
              
              
              58,317
              
              
              -
              
              
              118,542
              
              
              -Settlement
                  of debt
              
              
              -
              
              
              61,236
              
              
              13,275
              
              
              1,372Other
                  income (expense)
              
              
              6,382
              
              
              2,016
              
              
              21,937
              
              
              41,960Total
                  other income (expense)
              
              
              (376,827
              )
              
              60,322
              
              
              (128,783
              )
              
              (311,227
              )Net
                  loss attributable to common stockholders
              
              $
              (1,016,313
              )
              $
              (211,155
              )
              $
              (2,287,884
              )
              $
              (975,624
              )Loss
                  per common share, basic and dilutedNet
                  loss per common share attributableto
                  common stockholders
              
              $
              0.00
              
              $
              0.00
              
              $
              0.00
              
              $
              0.00Weighted
                  average shares outstanding -basic
                  and diluted
              
              
              4,155,380,536
              
              
              4,390,579,206
              
              
              4,163,653,748
              
              
              4,457,791,843The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements




4




HOMELAND
                  SECURITIES CAPITAL CORPORATIONConsolidated
                  Statements of Cash Flows (unaudited)Nine
                  Months
                Ended
                September
                  30,
                2006
              
              Nine
                  Months
                Ended
                September
                  30,
                2005Cash
                  flows from operating
                  activities:Net
                  loss
              
              $
              (2,287,884
              )
              $
              (975,624
              )Adjustments
                  to reconcile net loss to netcash
                  used in operating activities:Settlement
                  of debt
              
              
              (3,785
              )
              
              (180,001
              )Equity
                  in earnings of subsidiaries
              
              
              (118,542
              )
              
              -Stock
                  issued for payment of expenses
              
              
              578,883
              
              
              -Depreciation
                  and amortization
              
              
              35,466
              
              
              8,400Beneficial
                  conversion - convertible notes
              
              
              -
              
              
              242,988Amortization
                  of debt discount
              
              
              (19,823
              )
              
              -Amortization
                  of debt offering costs
              
              
              131,380
              
              
              40,529Changes
                  in operating assets and liabilities:Accounts
                  Receivable
              
              
              (4,205,322
              )
              
              -Inventories
              
              
              (649,917
              )
              
              -Other
                  assets
              
              
              (701,757
              )
              
              (150,215
              )Accounts
                  payable
              
              
              1,710,633
              
              
              (79,067
              )Judgments
                  and defaults payable
              
              
              -
              
              
              (103,774
              )Accrued
                  interest
              
              
              39,700
              
              
              (307,090
              )Other
                  current liabilities
              
              
              1,419,115
              
              
              107,491Net
                  cash provided by (used in) operating activities
              
              
              (4,071,853
              )
              
              (1,396,363
              )Cash
                  flows from investing activities:Purchase
                  of fixed assets
              
              
              (438,652
              )
              
              -Increase
                  in goodwill of subsidiaries
              
              
              (3,055,285
              )
              
              -Minority
                  interest in consolidated subsidiaries
              
              
              2,159,000
              
              
              -Proceeds
                  from liquidation of Yorkville Advisors Management, LLC
              
              
              -
              
              
              5,240,000Net
                  cash provided by (used in) investing activities
              
              
              (1,334,937
              )
              
              5,240,000Cash
                  flows from financing activities:Proceeds
                  from convertible debentures - related party
              
              
              8,000,000
              
              
              -Cost
                  of convertible debentures - related party
              
              
              (1,089,863
              )
              
              -Payments
                  on notes payable
              
              
              -
              
              
              (1,542,500
              )Payments
                  on notes payable - related party
              
              
              -
              
              
              (1,255,000
              )Acquisition
                  of treasury stock
              
              
              -
              
              
              (417,967
              )Net
                  cash used in financing activities
              
              
              6,910,137
              
              
              (3,215,467
              )Net
                  increase (decrease) in cash
              
              
              1,503,347
              
              
              628,170Cash,
                  beginning of period
              
              
              1,094,061
              
              
              1,863Cash,
                  end of period
              
              $
              2,597,408
              
              $
              630,033Cash
                  paid for:Interest
              
              $
              115,674
              
              $
              -Taxes
              
              $
              -
              
              $
              -The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements




5




HOMELAND
                  SECURITIES CAPITAL CORPORATION AND SUBSIDIARIESConsolidated
                  Statement of Changes in Stockholders' EquityFor
                  the nine months ended September 30, 2006Additional
              
              
              
              TotalPreferred
              
              Common
                  Stock
              
              Paid-In
              
              Accumulated
              
              Stockholders'Stock
              
              Shares
              
              Amount
              
              Capital
              
              Deficit
              
              (Deficit)
                  EquityBalance
                  December 31, 2005
              
              $
              100,000
              
              
              4,397,728,539
              
              $
              4,397,729
              
              $
              41,822,550
              
              $
              (45,778,059
              )
              $
              542,220Issuance
                  of preferred stockSeries
                  G (unaudited)
              
              
              100,000
              
              
              
              
              
              
              
              
              710,000
              
              
              
              
              
              810,000Exchanged
                  for common
                stock
                  (unaudited)
              
              
              
              
              (450,000,000
              )
              
              (450,000
              )
              
              (360,000
              )
              
              
              
              
              (810,000
              )Conversion
                  of debentures
                to
                  common(unaudited)
              
              
              
              
              
              157,651,997
              
              
              157,652
              
              
              72,577
              
              
              
              
              
              230,229Value
                  of vested stock
                options
                  (unaudited)
              
              
              
              
              
              
              
              
              
              
              
              334,020
              
              
              
              
              
              334,020Value
                  of vested warrants
                (unaudited)
              
              
              
              
              
              
              
              
              
              
              
              154,863
              
              
              
              
              
              154,863Issuance
                  of common
                stock
                  for fees(unaudited)
              
              
              
              
              
              50,000,000
              
              
              50,000
              
              
              40,000
              
              
              
              
              
              90,000Net
                  loss (unaudited)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (2,287,884
              )
              
              (2,287,884
              )Balance,
                  September 30, 2006
              
              $
              200,000
              
              
              4,155,380,536
              
              $
              4,155,381
              
              $
              42,774,010
              
              $
              (48,065,943
              )
              $
              (936,552
              )The
                  accompanying notes are an integral part of these condensed consolidated
                  financial statements




6


**HOMELAND
      SECURITY CAPITAL CORPORATION**




**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


(UNAUDITED)




SEPTEMBER
      30, 2006




**Overview**




Homeland
      Security Capital Corporation (formerly Celerity Systems, Inc.) (the "Company"
      or
      "HMSC"), a Delaware corporation, is a consolidator in the fragmented homeland
      security industry. The Company is focused on long-term value by taking
      controlling interests in and developing its subsidiary companies through
      superior operations and management. The Company intends to acquire businesses
      that provide homeland security product and service solutions, growing
      organically and through acquisitions. The targets are emerging companies that
      are generating revenues from promising security products and services but face
      challenges in scaling their businesses to capitalize on the opportunities in
      the
      homeland security industry. Prior to changing its focus, the Company was a
      closed-end management investment company that was initially formed to design,
      develop, integrate, install, operate and support interactive video services
      hardware and software ("interactive video") systems. On June 3, 2003, the
      Company elected to become a Business Development Company ("BDC") that is
      regulated under the Investment Company Act of 1940, as amended ("Investment
      Company Act"). A BDC is an investment company designed to assist eligible
      portfolio companies with capital formation and which are required to offer,
      and
      many times do render, substantial and continuing management advice. As
      contemplated by this election, the Company materially changed its business
      plan
      to primarily seek investments in developing companies that offer attractive
      investment opportunities. However, at its stockholders' meeting on December
      30,
      2005, the Company approved the withdrawal of the Company's election as a BDC
      and
      the Company changed its focus to the homeland security industry.




**1.**  **Presentation
      of Unaudited Interim Financial Statements**




On
      May
      20, 2003, the Company formed a subsidiary, Celerity Systems, Inc., a Nevada
      corporation, ("Celerity NV"). The assets and liabilities related to the
      Company's existing interactive video business were transferred to Celerity
      NV
      for 100% of the common stock. As this subsidiary is not an investment company,
      between June 3, 2003 and December 31, 2005, it is not consolidated with the
      parent company.




During
      its designation as a BDC, the Company's principal investment was a minority
      ownership interest in Yorkville Advisors Management, LLC
      ("Yorkville").




In
      accordance with Article 6 of Regulation S-X under the Securities Act of 1933,
      as
      amended (the "Securities Act") and Securities Exchange Act of 1934, as amended
      (the "Exchange Act"), the Company does not consolidate portfolio company
      investments in which the Company has a controlling interest. However, for
      periods after December 31, 2005, the Company will consolidate controlled
      companies.




The
      results of operations for the three and nine months ended September 30, 2005
      reflect the Company's results as a BDC. Accounting principles used in the
      preparation of the financial statements between June 3, 2003 and December 31,
      2005 are different than those of prior or subsequent periods and, therefore,
      the
      financial position and results of operations of these periods are not directly
      comparable. The primary differences in accounting principles relate to the
      carrying value of investments.




At
      its
      annual meeting on December 30, 2005, the stockholders passed a resolution to
      withdraw the Company's election as a BDC under Section 54 of the Investment
      Company Act. The termination of the Company's BDC status occurred on January
      5,
      2006. Financial statements for periods subsequent to December 31, 2005 will
      be
      prepared on the basis used prior to becoming a BDC.




**2.**  **Stock-Based
      Compensation**




In
      December 2005, the Company issued to directors and an officer of the Company
      options to purchase 796,000,000 shares of common stock par value $0.001 per
      share (the "Common Stock") in the future. In February 2006, the Company issued
      60,000,000 options to a contractor and 10,000,000 options to an employee of
      the
      Company to purchase shares of Common Stock of the Company in the future. In
      July
      2006, the Company issued an aggregate of  85,000,000 options to two
      employees to purchase shares of Common Stock of the Company in the
      future.




7




Of
      the
      options granted in December 2005 and February and July 2006, options to purchase
      329,207,666 shares of Common Stock vested during the nine month period ended
      September 30, 2006 and the Company recorded $334,020 as compensation expense
      related to the vesting of these options.




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 and 2006; risk-free interest rate of 4.4%, volatility between
      180% and 456% and expected lives of ten years.




In
      September 2006 10,000,000 options issued to an employee in February 2006 were
      forfeited.




**3.**  **Investment
      in Celerity Systems, Inc. (A Nevada corporation)**




Celerity
      NV had no operations for the nine months ended September 30, 2006 or for the
      nine months ended September 30, 2005.




Because
      of lack of sales of systems and consequent lack of operating profits, the
      Company's directors decided in September 2004 to cease operations and dispose
      of
      the remaining business and related assets. Accordingly, the Company entered
      into
      a sales agreement with Escent Systems, Inc. whereby the Company transferred
      all
      the assets and business plus $15,000 for working capital in return for a 25%
      equity position in Escent Systems, Inc. Since the net assets of Celerity NV
      had
      been written to nil, there was no further loss recorded on the transaction.
      Because of the lack of operations and uncertainty of continued operations,
      Celerity NV has not assigned any value to the investment.




**4.**  **Investment
      in Sagamore Holdings, Inc.**




In
      September 2004, the Company entered into a business development agreement with
      Sagamore Holdings, Inc. ("Sagamore") with an effective date of October 4, 2004.
      The Company received 7,500,000 shares of Sagamore common stock as consideration
      for its agreement to provide future services regarding capital formation and
      management advice. The Company has reviewed the valuation of the Sagamore stock
      using fair value, and, based on the liquidation preference of the preferred
      stockholder, management has considered the value of the stock as nil. Also,
      the
      Company has rendered no specific services in 2006 or 2005. There have been
      no
      events or circumstances occurring in the nine months ended September 30, 2006
      that would change the valuation. Accordingly, the Board of Directors has
      continued to include the value of the Sagamore stock in its financial statements
      as nil and has not recognized any revenue from the transaction.




**5.**  **Investment
      in Yorkville Advisors Management, LLC.**




On
      December 1, 2003, the Company purchased a minority interest in Yorkville, which
      is the investment manager of a private equity fund that is a principal holder
      of
      equity securities of the Company. The purchase price amounted to $5,240,000.
      In
      2005, the Company was informed that Yorkville was in the process of an orderly
      liquidation of its business. Under the terms of a Preferential Rights Agreement,
      the Company's membership interest in Yorkville has been converted into a new
      class with certain preferential rights and shall receive consideration equal
      to
      the original purchase price less certain debt of approximately $1,500,000 due
      to
      an affiliated company of Yorkville. The Company received this consideration
      in
      full and in cash by May 3, 2005.




**6.****Acquisition
      of Nexus Preferred Shares**




On
      February 8, 2006, the Company entered into a Series A Convertible Preferred
      Stock Purchase Agreement (the "Purchase Agreement") with Nexus Technologies
      Group, Inc. ("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. 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.




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.




8




The
      following is an unaudited condensed statement of operations for the nine months
      ended September 30, 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
                  FormaHMSC
              
              Nexus
              
              Adjustments
              
              Pro
                  FormaSales
              
              $
              392,841
              
              $
              4,948,504
              
              
              
              
              $
              5,341,345Net
                  loss
              
              $
              (1,761,563
              )
              $
              (526,321
              )
              $
              60,225
              
              $
              (2,348,109
              )Net
                  loss per share
              
              
              0.00
              
              
              0.00
              
              
              —
              
              
              0.00





Since
      the
      Company operated during 2005 as a BDC with an entirely different business
      strategy and had no meaningful operations for the nine months ended September
      30, 2005, we believe that it would not provide a meaningful comparison to
      provide a pro forma unaudited condensed statement of operations showing the
      combined results of operations of the Company and Nexus as though the Company
      had acquired the Nexus Preferred Shares on January 1, 2005.




**7.**  **Investment
      in Nexus Technology Group**




On
      February 8, 2006, Nexus, a subsidiary of the Company, completed its acquisition
      of Corporate Security Solutions, Inc., a Pennsylvania corporation ("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 July
      2006, as part of a restructuring and post closing adjustments, 3,000,000 shares
      of Nexus restricted common stock were cancelled and 450,000 shares of Nexus
      common stock was forfeited pursuant to agreements with the stockholders of
      CSS.
      Following this transaction, the Company controlled 92.9% of the voting
      power of Nexus.




**8.**  **Series
      G Preferred Stock**




On
      February 6, 2006, the Company entered into an Investment Agreement with Cornell
      Capital Partners, LP, pursuant to which the Company exchanged with Cornell
      Capital Partners 1,000,000 shares of Series G Convertible Preferred Stock (the
      "Series G Preferred Shares") for 450,000,000 shares of the Company's Common
      Stock owned by Cornell Capital Partners. Each share of Series G Preferred Shares
      may be converted, at Cornell Capital Partners' discretion, into 450 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 plus any accrued and
      unpaid dividends. 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.




In
      connection with the Investment Agreement, the Company entered into an Investor
      Registration Rights Agreement with the Cornell Capital Partners 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.





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




On
      February 6, 2006, the Company entered into a Securities Purchase Agreement
      with
      Cornell Capital Partners, which provided for the purchase by Cornell Capital
      Partners 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) $0.01 or
      (2) a
      ten percent discount to the lowest daily volume weighted average price of the
      Common Stock for the thirty days preceding conversion. Cornell Capital Partners
      is entitled to convert the 2006 A Debenture at a conversion price into Common
      Stock, provided that Cornell Capital Partners cannot convert into shares of
      Common Stock that would cause Cornell Capital Partners 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.




9




Pursuant
      to a Security Agreement between the Company and Cornell Capital Partners, 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 Cornell Capital Partners 50,000,000 shares of Common Stock pursuant
      to
      this transaction.




In
      connection with the Securities Purchase Agreement, the Company entered into
      an
      Investor Registration Rights Agreement with Cornell Capital Partners 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
      fair value recorded in earnings each period.





**10.**  **Acquisition
      of Security Holding Corp.**





On
      August
      21, 2006, the Company entered into a Series A Convertible Preferred Stock
      Purchase Agreement (the “Purchase Agreement”) with Security Holding Corp.
      (“Security”). 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 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.





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 Security 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 Security common stock. The holders of the outstanding
      Preferred Shares, as a class, so long as they maintain voting control of
      Security, will have the right to designate a majority of the board of directors
      of Security. Each Preferred Share will have a liquidation preference of $1.00
      per share plus any accrued and unpaid dividends.




The
      following is an unaudited condensed statement of operations for the nine months
      ended September 30, 2006 showing the combined results of operations of the
      Company and Security as though the Company had acquired the Security Preferred
      Shares on January 1, 2006:


Pro
                  FormaHMSC
              
              Security
              
              Adjustments
              
              Pro
                  FormaSales
              
              $
              4,948,504
              
              $
              392,841
              
              $
              86,541
              
              $
              5,427,886Net
                  loss
              
              $
              (2,125,986
              )
              $
              (161,898
              )
              $
              (222,663
              )
              $
              (2,510,547
              )Net
                  loss per share
              
              
              0.00
              
              
              0.00
              
              
              —
              
              
              0.00





Since
      the
      Company operated during 2005 as a BDC with an entirely different business
      strategy and had no meaningful operations for the nine months ended September
      30, 2005, we believe that it would not provide a meaningful comparison to
      provide a pro forma unaudited condensed statement of operations showing the
      combined results of operations of the Company and Security as though the Company
      had acquired the Security Preferred Shares on January 1, 2005.





On
      August
      22, 2006, Security completed its acquisition of Security Holding Enterprises,
      Inc., a Wisconsin corporation ("SHEI"), pursuant to the terms of an Agreement
      and Plan of Merger (the “Agreement"), dated August 21, 2006, by and among
      Security, SHEI and certain other persons named therein (the “Sellers”).
      Immediately following the Merger and the Offering, the Company will control
      61.2% of the voting power of Security. Pursuant to the Merger Agreement, SHEI
      merged with and into Security (the "Merger") with Security surviving the Merger.
      Security issued 1,900,000 of its common stock to the former owners of Security
      resulting in a minority interest of 38.8%. The former owners, by achieving
      certain performance thresholds, can earn an additional 600,000 shares of
      Security common stock (the “Escrowed Shares”) based on performance in the 2007.
      If the Escrowed Shares are earned, the minority interest would be 45.5%.
      Further, Security issued 10,000,000 restricted shares of Security common stock
      (the “Restricted Shares”) to the former owners of Security and certain Security
      employees. The Restricted Shares will vest upon Security achieving a specific
      enterprise valuation, as determined by an independent valuation company by
      the
      second quarter of 2010. In addition, in the future, the Sellers may receive
      up
      to an aggregate 2,500,000 shares of Security common stock (“Earn Out Shares”) if
      certain performance criteria are achieved by Security. If the Escrowed Shares
      and all of the Restricted Shares and Earn Out Shares are issued to the former
      owners the Company would have a minority interest in Security of
      19.4%.




10




**11.**  **Series
      A Preferred Stock of Security Holding Corp.**





On
      August
      21, 2006, the Company entered into a Purchase Agreement with Security. On August
      22, 2006, pursuant to the Purchase Agreement, the Company purchased 3,000,000
      shares of Security Preferred Shares for an aggregate purchase price of
      $3,000,000. The Company also committed 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. Management reviewed the allocation
      of the purchase price among the assets acquired considering any intangible
      assets with a finite life and concluded the allocation of $2,462,297 to goodwill
      was reasonable under the circumstances.





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 Security 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 Security common stock. The holders of the outstanding
      Preferred Shares, as a class, so long as they maintain voting control of
      Security, will have the right to designate a majority of the board of directors
      of Security. Each Preferred Share will have a liquidation preference of $1.00
      per share plus any accrued and unpaid dividends.





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




On
      August
      21, 2006, the Company entered into a Securities Purchase Agreement with Cornell
      Capital Partners, which provided for the purchase by Cornell Capital Partners
      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) $0.01 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 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 Cornell Capital Partners, 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.




In
      connection with the Securities Purchase Agreement, the Company issued a warrant
      to Cornell Capital Partners exercisable into 100,000,000
      shares of the Company’s Common Stock. The warrant has an exercise price
      equal to $0.01, 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 Cornell Capital
      Partners 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
      fair value recorded in earnings each period.




**13.**  **Entry
      into Polimatrix Joint Venture**




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.




11




**14.**  **Income
      or Loss Per Share**




Basic
      and
      diluted income or loss per share were computed by dividing net income or loss
      attributable to Common Stock by the weighted average number of common shares
      outstanding during each period.




**15.**  **Long-term
      Debt**




The
      long-term debt of the Company includes the following items:


September
                  30, 2006
              
              December
                  31, 20055%
                  convertible debentures - 2004
              
              $
              -
                  0 -
              
              $
              222,5005%
                  convertible debentures – 2006 A
              
              
              1,293,333
              
              
              -
                  0 -5%
                  convertible debentures – 2006 B
              
              
              665,145
              
              
              -
                  0 -Long-term
                  debt less current maturities
              
              $
              1,958,478
              
              $
              222,500





During
      the nine months ended September 30, 2006, $222,500 in face value of convertible
      debentures plus accrued interest of $19,243 were presented for conversion,
      accordingly, 157,651,997 shares of Common Stock were issued.




**16.**  **Stock
      Buyback Program**




In
      September 2004, the Board of Directors authorized the Company to establish
      a
      stock buyback program whereby the Company would acquire up to 500,000,000 shares
      of its Common Stock over a twelve month period from the open market at favorable
      prices. There was no obligation to acquire any specific number of shares or
      purchase at any specific price. At December 31, 2004, the Company had acquired
      226,843,599 shares at a cost of $561,334 and from January through March 2005,
      the Company acquired 87,180,000 shares at a cost of $228,321. The acquisitions
      have been accounted for as treasury stock. The funding was provided primarily
      through a short term note of $500,000 from a related party through December
      2004. In the three month period ended March 31, 2005, the purchases were funded
      from proceeds from the liquidation of its Yorkville investment. When the buyback
      program was complete, the Company retired all shares acquired under the
      program.





**17.**  **Judgments
      and Defaults Payable**




In
      January 2002, the Company terminated the Equity Line of Credit entered into
      on
      September 14, 2001 due to delays in getting related shares registered and in
      order to pursue other types of financing arrangements. As a result, the Company
      does not have an effective registration statement including common shares to
      be
      issued in connection with certain debentures issued in 2001 and the first
      quarter of 2002 under the 1999 Line of Credit Agreement, entered into with
      Cornell Capital Partners. The Company is required to pay liquidated damages
      in
      the form of increased interest on the convertible debentures as a result of
      not
      filing an effective registration statement for these debentures at a rate of
      2%
      of the principle plus interest per month. The liability for liquidated damages
      has been accrued at its maximum amount. The Company has remaining accrued
      liquidated damages of $36,000 at September 30, 2006 and 2005.




In
      2003,
      Del Rio Enterprises sued the Company for non-payment of services rendered.
      During 2003, a judgment was rendered against the Company in the amount of
      $8,000. This amount has been accrued at September 30, 2006.




**18.**  **Warrants**




As
      part
      of the cost of issuance of its 2006 B Debenture, the Company issued 100,000,000
      warrants for the purchase of shares of Common Stock at $0.01 per share over
      the
      next five years. The fair value of the warrants is estimated on the date of
      grant using the Black-Scholes option-pricing model with the following
      assumptions; risk-free interest rate of 4.4%, volatility of 181% and expected
      life of five years. The resultant value of $154,863 was added to the cost of
      the
      issuance and is being amortized over the three year life of the 2006 B
      Debenture.




**19.****Common
      Stock**




During
      the nine months ended September 30, 2006, the Company issued 50,000,000 shares
      of Common Stock valued at $90,000 in partial payment for costs of issuance
      on
      its 2006 A Debenture.


12


**ITEM
      2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**




**Introductory
      Statements**




*Forward-Looking
      Statements and Associated Risks. This Report contains forward-looking
      statements. Such forward-looking statements include statements regarding, among
      other things, (a) our projected sales and profitability, (b) our growth
      strategies, (c) anticipated trends in our industry, (d) our future financing
      plans, (e) our anticipated needs for working capital, (f) our lack of
      operational experience, and (g) the benefits related to ownership of our common
      stock. 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. These forward-looking
      statements are based largely on our company's expectations and are subject
      to a
      number of risks and uncertainties, including those described in "Business Risk
      Factors" of our Form 10-K for the year ended December 31, 2005. Actual results
      could differ materially from these forward-looking statements as a result of
      changes in trends in the economy and our company's industry, demand for our
      products, competition, reductions in the availability of financing and
      availability of raw materials, and other factors. In light of these risks and
      uncertainties, there can be no assurance that the forward-looking statements
      contained in this Report will in fact occur as projected.*




**Overview**




Homeland
      Security Capital Corporation (together with any subsidiaries shall be referred
      to as the ‘Company’, ‘we’, ‘us’ and ‘our’) 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 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. The
      Company seeks 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.
      The Company’s 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. The company is targeting 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 Technologies Group, Inc. ("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, N.Y., Nexus' subsidiaries began operations in 2001. 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 Security Holding Corporation
      (“Security”) on August 22, 2006 through the purchase of $3 million of preferred
      stock in Security. Security manufactures, designs and supports radio frequency
      identification (“RFID”) security and access control devices for the commercial
      and governmental security markets. Based in Milwaukee, Wisconsin, Security
      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.




13




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.




Where
      applicable in this quarterly report, references to the ‘Company’, ‘we’, ‘us’ and
‘our’ shall include Nexus, Security and Polimatrix.




**Critical
      Accounting Policies**




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires our management to make
      assumptions, estimates and judgments that affect the amounts reported in the
      financial statements, including the notes thereto, and related disclosures
      of
      commitments and contingencies, if any. We consider our critical accounting
      policies to be those that are complex and those that require significant
      judgments and estimates in the preparation of our financial statements,
      including valuation of our investments. Management relies on historical
      experience and on other assumptions believed to be reasonable under the
      circumstances in making its judgment and estimates. Actual results could differ
      materially from those estimates.





Revenue
      Recognition - Nexus recognize revenues on their security system installation
      and
      integration contracts using the percentage of completion method. Security and
      Polimatrix recognize revenue based on sale of their products and
      services.




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.




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
      general market trends for businesses in the same industry. Because of the
      inherent uncertainty of valuations, management's estimates of the values 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 - The Company accounts for income taxes using the asset and liability
      method, whereby deferred tax assets and liabilities are determined based upon
      the differences between financial reporting and tax bases of assets and
      liabilities and are measured using the enacted tax rates and laws that will
      be
      in effect when the differences are expected to reverse. A valuation allowance
      related to the deferred tax assets is also recorded when it is more likely
      than
      not that some or all of the deferred tax asset will not be
      realized.




14




**Results
      of Operations**




***Three
      Months Ended September 30, 2006 Compared With the Three Months Ended September
      30, 2005***




**Revenues**




For
      the
      three months ended September 30, 2006, the Company had sales of $2,599,608
      consisting of fees earned on security systems installation, integration
      contracts and product sales. The Company had no sales for the three month period
      ended September 30, 2005. The increase in sales is due to the implementation
      of
      the Company's new business strategy of acquiring and integrating businesses
      that
      provide homeland security products and services.




**Cost
      of goods sold**




For
      the
      three months ended September 30, 2006, cost of sales was $1,692,074 consisting
      of materials, labor and other costs incurred by the Company and associated
      with
      security systems installation, integration contracts and product sales. The
      Company had no cost of sales for the three months ended September 30, 2005.
      The
      increase in cost of sales is due to the implementation of the Company's new
      business strategy of acquiring and integrating businesses that provide homeland
      security products and services.




**General
      and administrative expenses**




General
      and administrative expenses for the three months ended September 30, 2006 were
      $1,547,020 compared to $271,477 for the three months ended September 30, 2005.
      The increase of $1,275,543 or 470% in general and administrative expenses is
      primarily due to general and administrative expenses that were incurred in
      the
      acquisitions and operations of Nexus and Security. The increase consisted of
      additional professional fees of $113,382, additional personnel costs of
      $840,145, increases of marketing costs of $90,304, increases in travel cost
      of
      $157,256 and general administrative costs of $74,456. These costs and other
      expenses were incurred in connection with the Company's change in business
      strategy for the three month period.





**Other
      income and expense**




The
      Company had net other expense of $376,827 for the three months ended September
      30, 2006 compared to net other income of $60,322 for the three months ended
      September 30, 2005 for an increase in expenses of $437,149 or 725%. Income
      was
      increased by interest income of $4,366 and recording of minority interest in
      the
      consolidated losses of subsidiaries of $58,317. Other income and expense was
      decreased by a decrease in the settlement of trade payables of $61,236 and
      increases in interest expense of $77,515, amortization of debt discounts of
      $385,282, amortization of debt offering costs of $59,160 and offset by a
      positive change in the derivative valuation of $83,361.




**Net
      income (loss)**




As
      a
      result of the foregoing, the Company recorded a net loss of $1,016,313 for
      the
      three months ended September 30, 2006 compared to a net loss of $211,155 for
      the
      three months ended September 30, 2005. This represents an increase in the net
      loss of $805,158 or 381%.




***Nine
      Months Ended September 30, 2006 Compared With the Nine Months Ended September
      30, 2005***




**Revenues**




For
      the
      nine months ended September 30, 2006, the Company had sales of $5,341,345,
      consisting of fees earned by the Company on security systems installation,
      integration contracts, and product sales. The Company had no sales for the
      nine
      month period ended September 30, 2005. The increase in sales is due to the
      implementation of the Company's new business strategy of acquiring and
      integrating businesses that provide homeland security products and
      services.




**Cost
      of goods sold**




For
      the
      nine months ended September 30, 2006, cost of sales was $3,623,460, consisting
      of materials, labor and other costs incurred by the Company associated with
      security systems installation, integration contracts and product sales. The
      Company had no cost of sales for the nine months ended September 30, 2005.
      The
      increase in cost of sales is due to the implementation of the Company's new
      business strategy of acquiring and integrating businesses that provide homeland
      security products and services.




15




**General
      and administrative expenses**




General
      and administrative expenses for the nine months ended September 30, 2006 were
      $3,876,986 compared to $664,397 for the nine months ended September 30, 2005.
      The increase of $3,212,589 or 484% in general and administrative expenses is
      primarily due to general and administrative expenses that were incurred in
      the
      acquisition of Nexus and Security and increased operating costs. The increase
      consisted of additional professional fees of $355,470 for the acquisition of
      Nexus and Security, additional personnel costs of $2,095,603, increases in
      facility and insurance expenses of $185,159, increase in marketing costs of
      $101,575, increase in travel costs of $254,468 and general administrative costs
      of $220,314. These costs and other expenses were incurred in connection with
      the
      Company's change in business strategy for the nine month period.




**Other
      income and expense**




The
      Company had net other expenses of $128,783 for the nine months ended September
      30, 2006 compared to net other expenses of $311,227 for the nine months ended
      September 30, 2005 for a decrease of $182,444 or 59%. Income was increased
      by a
      positive change in the derivative valuation of $888,438, recording a minority
      interest in the loss of the consolidated subsidiaries of $118,542 and settlement
      of debts of $11,903. Other income and expense was decreased by a reduction
      of
      investment income of $20,023, increases in interest expense of $99,938,
      amortization of debt discounts of $625,627 and amortization of debt offering
      costs of $90,851.




**Net
      loss**




As
      a
      result of the foregoing, the Company recorded a net loss of $2,287,884 for
      the
      nine months ended September 30, 2006 and a net loss of $975,624 for the nine
      months ended September 30, 2005. This represents an increase in the net loss
      of
      $1,312,260 or 131%.




**Liquidity
      and Capital Resources**




The
      primary source of financing for the Company since its inception has been through
      the issuance of common and preferred stock and debt. The Company had cash on
      hand of $2,597,408 at September 30, 2006 and $1,094,061 at December 31, 2005.
      Our primary needs for cash are to fund our ongoing operations until such time
      as
      they begin to generate sufficient cash 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.




While
      we
      currently do not have any commitments in place for additional funding, on August
      29, 2005, the Company entered into term sheet agreement with Cornell Capital
      Partners to enter into a $50 million standby equity distribution agreement
      (the
      "SEDA Financing"). Based on the SEDA term sheet, Cornell Capital Partners shall
      commit to purchase up to $50 million of Common Stock of the Company over the
      course of 24 months after an effective registration of the Company's common
      stock, par value $.001 per share (the "Common Stock"). The Company shall have
      the right, but not the obligation, to sell Common Stock to Cornell Capital
      Partners, in advances up to $1,000,000 each. Upon closing, the Company shall
      issue to Cornell restricted shares and/or warrants of the Company's Common
      Stock
      in an amount equal to 2% of the commitment amount based on a share price of
      $0.001 per share. The number of restricted shares issued shall be limited to
      less than 4.9% of the total outstanding shares of the Company at closing. Upon
      each advance, Cornell Capital Partners shall receive directly from escrow cash
      compensation equal to 5% of the gross proceeds of such advance. The Company
      shall sell to Cornell Capital Partners the Common Stock at a purchase price
      equal to 98% of the market price, which is defined as the lowest closing bid
      price of the Common Stock during the five consecutive trading days after the
      date an advance notice is given to Cornell Capital Partners. As of November
      14,
      2006, the Company has not received any definitive documents in connection with
      the SEDA Financing. The final terms and conditions of the SEDA Financing may
      be
      subject to modification as mutually agreed upon by the Company and Cornell
      Capital Partners at the time of entering into definitive
      agreements.




The
      Company entered into a Securities Purchase Agreement with Cornell Capital
      Partners, dated as of February 6, 2006, which provided for the purchase by
      Cornell Capital Partners 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)
      $0.01 or (2) a ten percent discount to the lowest daily volume weighted average
      price of the Common Stock for the thirty days preceding conversion. Cornell
      Capital Partners will be entitled to convert the 2006 A Debenture at a
      conversion price into Common Stock, provided that Cornell Capital Partners
      cannot convert into shares of Common Stock that would cause Cornell Capital
      to
      own more than 4.9% of the issued and outstanding Common Stock. The 2006 A
      Debenture will bear interest at 5% per annum and the principal amount will
      be
      payable on the third anniversary of the effective date of the 2006 A 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.




16




On
      February 6, 2006, the Company entered into an Investment Agreement with Cornell
      Capital Partners, pursuant to which the Company exchanged with Cornell Capital
      Partners 1,000,000 shares of Series G Convertible Preferred Stock (the "Series
      G
      Preferred Shares") for 450,000,000 shares of the Company's Common Stock owned
      by
      Cornell Capital Partners. Each share of Series G Preferred Shares may be
      converted, at Cornell Capital Partners' discretion, into 450 shares of the
      Common Stock. The Series G Preferred Shares are senior 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 plus any accrued and unpaid
      dividends. The holders of Series G Preferred Shares 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
      22, 2006, the Company entered into a Securities Purchase Agreement with Cornell
      Capital Partners, which provided for the purchase by Cornell Capital Partners
      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) $0.01 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 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 Cornell Capital Partners, the Company's obligations under the 2006
      B
      Debenture are secured by a pledge of all of its assets.




During
      the nine months ended September 30, 2006, we had a net increase in cash of
      $1,503,347. Our sources and uses of funds were as follows:




**Cash
      Flows from Operating Activities**




We
      used
      net cash of $4,071,853 in our operating activities during the nine month period
      ended September 30, 2006. Our net cash used in operating activities resulted
      primarily from the Company's net loss of $2,287,884 for the nine months ended
      September 30, 2006, a use of $2,379,819 from net changes in current operating
      assets and liabilities for the nine months ended September 30, 2006 and the
      minority interests in the losses of the subsidiaries and settlement of debt
      totaling $130,056 and change in derivative and debt discounts of $19,823. These
      uses have been offset by $424,020 from the use of stock issued as compensation
      and for payment of expenses, $154,863 from the issuance of warrants as part
      of
      the cost of issue of debt, $35,466 in depreciation and amortization and $131,380
      in amortization of debt offering costs for the nine months ended September
      30,
      2006.




**Cash
      Flows from Investing Activities**




We
      used
      net cash of $1,334,937 in our investing activities during the nine month period
      ended September 30, 2006, consisting primarily $438,652 in purchases of fixed
      assets and an increase of $3,055,285 in goodwill in subsidiaries, offset by
      an
      increase of $2,159,000 in minority interest in consolidated
      subsidiaries.




**Cash
      Flows from Financing Activities**




We
      provided cash of $6,910,137 from financing activities during the nine month
      period ended September 30, 2006, consisting of $8,000,000 in proceeds from
      convertible debentures issued less $1,089,863 in costs associated with the
      issuance of those debentures.




As
      of
      September 30, 2006, we had a deficit in net working capital of
      $1,378,876.




17




**ITEM
      3. CONTROLS AND PROCEDURES**




**(a)
      Evaluation of Disclosure Controls and Procedures:**




As
      of the
      end of the period covered by this Report, the Company carried out an evaluation,
      under the supervision and with the participation of the Company's Chief
      Executive Officer/Principal Accounting Officer (which is one person), of the
      effectiveness of the design and operation of the Company's disclosure controls
      and procedures. The Company's disclosure controls and procedures are designed
      to
      produce a reasonable level of assurance of achieving the Company's disclosure
      control objectives. The Company's Chief Executive Officer/Principal Accounting
      Officer have concluded that the Company's disclosure controls and procedures
      were, in fact, adequate and effective to ensure that material information
      relating to the Company that is required to be disclosed by the Company in
      reports that it files or submits under the Securities Exchange Act of 1934,
      as
      amended, is recorded, processed, summarized and reported within the time periods
      specified in rules of the U. S. Securities and Exchange Commission (the
      "Commission") and accumulated and communicated to the Company's management,
      including its Chief Executive Officer/ Principal Accounting Officer, to allow
      timely decisions regarding required disclosure.




**(b)
      Changes In Internal Controls Over Financial Reporting**




In
      connection with the evaluation of the Company's internal controls during the
      Company's last fiscal quarter, the Company’s Chief Executive Officer/Principal
      Accounting Officer has determined that there are no changes to the Company's
      internal controls over financial reporting that has materially affected, or
      is
      reasonably likely to materially effect, the Company's internal controls over
      financial reporting.





18




**PART
      II**




**ITEM
      1. LEGAL PROCEEDINGS**




None.





**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**





On
      August
      21, 2006, the Company entered into a Securities Purchase Agreement with Cornell
      Capital Partners, LP (“Cornell Capital”), which provides for the purchase by
      Cornell Capital of a secured convertible debenture (the “Debenture”) in the
      amount of $4,000,000. 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) $0.01 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 5%
      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 twenty percent (20%) of the principal amount being
      redeemed, and accrued interest. Pursuant to a Pledge and Security Agreement
      between the Company and Cornell Capital, issued in connection with the
      Debenture, the Company's obligations under the Debenture are secured by a pledge
      of all of its assets. The Company will use the proceeds from this sale of
      securities primarily to purchase the Series A Convertible Preferred Stock of
      Security Holding Corp.





In
      connection with the Securities Purchase Agreement, the Company issued a warrant
      to Cornell Capital for 100,000,000 shares of the Company’s Common Stock. The
      warrant has an exercise price equal to $0.01, which may be adjusted under the
      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 the Cornell Capital 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.




**ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**




None.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.




**ITEM
      5. OTHER INFORMATION**




None.




**ITEM
      6. EXHIBITS**




**Exhibit
                No**
            
            **Description**
            
            **Location**3.1
            
            Certificate
                of Amendment to Certificate of Incorporation
            
            Incorporated
                by reference as Exhibit 3.1 to Form 8-K filed with the Commission
                on
                February 6, 20063.2
            
            Certificate
                of Designation for the Series G Convertible Preferred
                Stock
            
            Incorporated
                by reference as Exhibit 3.1 to Form 8-K filed with the Commission
                on
                February 14, 20064.1
            
            Form
                of Convertible Debenture due February 2009
            
            Incorporated
                by reference as Exhibit 4.1 to Form 8-K filed with the Commission
                on
                February 14, 06




19


**Exhibit
                  No**
              
              **Description**
              
              **Location**


10.1
            
            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 Commission
                on
                February 14, 200610.2
            
            Investment
                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 Commission
                on
                February 14, 200610.3
            
            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 10.3 to Form 8-K filed with the Commission
                on
                February 14, 200610.4
            
            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 10.4 to Form 8-K filed with the Commission
                on
                February 14, 200610.5
            
            Security
                Agreement dated February 6, 2006, by and between Homeland Security
                Capital
                Corporation and Cornell Capital Partners, LP.
            
            Incorporated
                by reference as Exhibit 10.5 to Form 8-K filed with the Commission
                on
                February 14, 200610.6
            
            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 Commission
                on
                February 14, 200610.7
            
            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 Commission
                on
                February 14, 200610.8
            
            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 Commission
                on
                August 24, 200610.9
            
            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 Commission
                on
                August 24, 200610.10
            
            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 Commission
                on
                August 24, 200610.11
            
            Secured
                Convertible Debenture, dated as of August 21, 2006 issued to Cornell
                Capital Partners, LP
            
            Incorporated
                by reference as Exhibit 10.4 to Form 8-K filed with the Commission
                on
                August 24, 200610.12
            
            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 Commission
                on
                August 24, 2006




20




**Exhibit
                  No**
              
              **Description**
              
              **Location**


10.13
            
            Agreement
                and Plan of Merger, dated August 21, 2006, by and among Security
                Holding
                Corp., Security Holding Enterprises, Inc. and certain other persons
                named
                therein.
            
            Incorporated
                by reference as Exhibit 10.1 to Form 8-K filed with the Commission
                on
                August 29, 200610.14
            
            Series
                A Convertible Preferred Purchase Agreement, dated August 21, 2006,
                among
                Homeland Security Capital Corporation and Security Holding
                Corp.
            
            Incorporated
                by reference as Exhibit 10.2 to Form 8-K filed with the Commission
                on
                August 29, 200631.1
            
            Certification
                by Chief Executive Officer/Principal Accounting Officer pursuant
                to 15
                U.S.C. Section 7241, as adopted pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002
            
            Provided
                herewith32.1
            
            Certification
                by Chief Executive Officer/Principal Accounting Officer pursuant
                to 18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002
            
            Provided
                herewith





21


**SIGNATURES**




Pursuant
      to the requirements of the Securities Exchange Act of 1934, as amended, the
      Registrant has duly caused this Report to be signed in its behalf by the
      undersigned, thereunto duly authorized.





**HOMELAND
                SECURITY CAPITAL CORPORATION**By:
            */s/
              C. Thomas McMillen*Name:C.
                Thomas McMillenTitle:President,
                Chief Executive Officer,
              Principal
                Accounting Officer
              and
                Interim Chief Financial OfficerDate:
            November
              14, 2006




22