U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Amendment No. 1 to

FORM 10-K/A

(Mark one)

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

For the fiscal year ended June 30, 2010

OR

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

Commission File No. 000-23279

Homeland Security Capital Corporation

(Exact Name of Registrant as Specified in Charter)

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

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

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S- K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. þ

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

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

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on December 31, 2009 (as of the last business day of the registrant’s most recently completed second fiscal quarter), was $3,197,125 based on the closing price of the registrant’s common stock on Over-the-Counter Electronic Bulletin Board of $0.145 per share.

There were 54,194,268 shares of common stock outstanding as of September 24, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 

Explanatory Note

This Amendment No. 1 on Form 10-K/A (this “Amendment”) to the Annual Report on Form 10-K (the “Original Filing”) of Homeland Security Capital Corporation (“we, “us,” “our” or the “Company”) for the fiscal year ended June 30, 2010, originally filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2010, is being filed for the purpose of responding to certain comments made by the SEC by letter dated February 15, 2011 (the “Comment Letter”).

In response to the Comment Letter, the Company has amended Item 9T. (Controls and Procedures), Statement of Cash Flows for the fiscal year ended June 30, 2010 and Notes 1, 5 and 10 to the Financial Statements for the fiscal year ended June 30, 2010. The Company also filed an amended Report of Independent Registered Public Accounting Firm. Solely for ease of reference of its investors, all of the Company's financial statements for the fiscal year ended June 30, 2010 and notes thereto have been reproduced in their entirety. Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, the Company is also including with this Amendment certain certifications dated as of the date hereof.

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

ITEM 9T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of June 30, 2010, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely basis within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management’s Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13A-15(f) and 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP). Our internal control over financial reporting includes those policies and procedures that:

(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions involving our assets;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management, and

(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our internal control over financial reporting as of June 30, 2010. In making this assessment, management used the framework set forth in the reporting entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of June 30, 2010.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the Commission that permit the company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems. No change occurred in our internal controls over financial reporting during the year ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

		Page
Index to Financial Statements and Financial Statement Schedule			F-1
Report of Coulter & Justus, P.C.			F-2
Consolidated Balance Sheets as of June 30, 2010 and 2009			F-3
Consolidated Statements of Operations for the years ended June 30, 2010 and 2009			F-4
Consolidated Statements of Cash Flows for the years ended June 30, 2010 and 2009			F-5
Consolidated Statements of Stockholders’ Deficit and Comprehensive Loss for the years ended June 30, 2010 and 2009			F-6
Notes to Consolidated Financial Statements			F-7

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Homeland Security Capital Corporation

We have audited the accompanying consolidated balance sheets of Homeland Security Capital Corporation and subsidiaries (the “Company”) as of June 30, 2010 and 2009, and the related consolidated statements of operations, stockholders’ deficit and comprehensive loss, and cash flows for each of the years in the two-year period ended June 30, 2010. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Homeland Security Capital Corporation and subsidiaries as of June 30, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2010 in conformity with accounting principles generally accepted in the United States of America.

/s/ Coulter & Justus, P.C.

Knoxville, Tennessee
September 27, 2010

BALANCE SHEETS

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets

		June 30
		2010				2009
Assets:
Cash		$	1,829,429			$	2,356,534
Marketable fixed income securities			872,427				—
Accounts receivable — net			16,764,897				13,425,804
Cost in excess of billings on uncompleted contracts			7,333,931				3,937,086
Other current assets			447,925				613,348
Total current assets			27,248,609				20,332,772
Fixed assets — net			1,129,885				4,398,833
Equipment held for sale			1,455,142				—
Deferred financing costs — net			8,000				386,210
Notes receivable — related party			430,627				412,127
Securities available for sale			110,826				193,945
Other non-current assets			336,499				319,516
Intangible assets — net			346,814				391,372
Goodwill			6,403,982				6,403,982
Total assets		$	37,470,384			$	32,838,757
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable		$	8,457,186			$	10,003,336
Line of credit			—				512,000
Current portion of long term debt			536,025				735,016
Current portion of long term debt — related party			500,000				—
Notes payable — related party			—				50,110
Accrued compensation			2,568,857				2,664,662
Accrued other liabilities			436,906				593,241
Billings in excess of costs on uncompleted contracts			1,027,500				1,022,125
Income taxes payable			551,941				—
Current portion of deferred revenue			85,327				59,636
Total current liabilities			14,163,742				15,640,126
Line of credit			2,162,000				—
Long term debt — related party, less current maturities			17,755,890				16,365,001
Long term debt, less current maturities			688,593				1,421,272
Long term deferred revenue, less current portion			124,667				—
Dividends payable			3,464,934				1,869,107
Total liabilities			38,359,826				35,295,506
Warrants Payable — Series H Preferred Stock			169,768				169,768
Stockholders’ Deficit
Homeland Security Capital Corporation stockholders’ deficit:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, 1,559,985 and 1,918,080 shares issued and outstanding, respectively			14,225,110				14,261,207
Common stock, $0.001 par value, 2,000,000,000 shares authorized, 51,624,725 and 53,270,160 shares issued and 48,054,294 and 49,699,729 shares outstanding, respectively			51,625				53,270
Additional paid-in capital			55,297,972				54,131,548
Additional paid-in capital — warrants			272,529				272,529
Treasury stock — 3,570,431 shares at cost			(250,000	)			(250,000	)
Accumulated deficit			(70,509,228	)			(70,817,549	)
Accumulated comprehensive loss			(301,153	)			(141,591	)
Total Homeland Security Capital Corporation stockholders’ deficit			(1,213,145	)			(2,490,586	)
Noncontrolling interest			153,935				(135,931	)
Total stockholders’ deficit			(1,059,210	)			(2,626,517	)
Total liabilities and stockholders’ deficit		$	37,470,384			$	32,838,757

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

STATEMENTS OF OPERATIONS

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations

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

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

STATEMENTS OF CASH FLOWS

HOMELAND SECURITIES CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows

		Years Ended June 30,
		2010				2009
Cash flows from operating activities:
Net income (loss)		$	2,180,737			$	(9,530,647	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Purchase of marketable fixed income securities			(1,656,471	)			—
Sales of marketable fixed income securities			784,044				—
Share-based compensation expense			1,075,625				2,150,773
Stock issued for services			38,333				—
Depreciation			1,863,333				1,842,723
Amortization of intangibles			44,558				106,250
Loss on disposal of assets			9,630				5,843
Impairment losses on securities available for sale			104,997				3,317,837
Impairment loss on equipment held for sale			425,267				—
Write off of note receivable — related party			—				90,400
Amortization of debt offering costs and discounts			412,263				552,943
Accrued interest on notes receivable — related parties			(18,500	)			—
Accrued interest due to related parties			1,856,836				1,799,291
Changes in operating assets and liabilities:
Accounts receivable			(3,339,093	)			(1,448,066	)
Costs in excess of billings on uncompleted contracts			(3,396,845	)			1,722,131
Other assets			43,443				(514,004	)
Accounts payable			(1,546,149	)			3,801,201
Billings in excess of costs on uncompleted contracts			5,375				197,723
Accrued compensation			(95,805	)			295,263
Accrued other liabilities			(156,335	)			(238,967	)
Income taxes payable			551,941				—
Deferred revenue			150,358				16,472
Net cash provided by operating activities			(662,458	)			4,167,166
Cash flows from investing activities:
Purchase of fixed assets			(383,206	)			(741,008	)
Proceeds from sale of assets			29,481				45,141
Investment in equity of subsidiaries			—				(113,403	)
Investment received for noncontrolling interest of subsidiary			28,000				—
Net cash used in investing activities			(325,725	)			(809,270	)
Cash flows from financing activities:
Net borrowings (payments) on line of credit			1,650,000				(1,853,935	)
Debt offering costs			—				(50,000	)
Repayments of debt			(1,062,369	)			(647,333	)
Proceeds from notes payable — related parties			—				50,000
Repayment of notes payable — related parties			(50,110	)			(1,608,247	)
Net cash provided by (used in) financing activities			537,521				(4,109,515	)
Effect of exchange rate changes on cash			(76,443	)			(74,204	)
Net decrease in cash			(527,105	)			(825,823	)
Cash, beginning of year			2,356,534				3,182,357
Cash, end of year		$	1,829,429			$	2,356,534

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

STATEMENTS OF STOCKHOLDERS’ EQUITY

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Deficit and Comprehensive Loss

		Homeland Security Capital Corporation Shareholders
																		Additional
														Additional				Paid-In												Accumulated								Total
		Preferred				Common Stock								Paid-In				Capital —				Treasury				Accumulated				Comprehensive				Noncontrolling				Stockholders’
		Stock				Shares Issued				Amount				Capital				Warrants				Stock				Deficit				Loss				Interest				(Deficit)
Balance, July 1, 2008
As previously reported		$	12,346,482				48,846,244			$	48,846			$	51,385,199			$	148,652			$	—			$	(59,339,836	)		$	(1,521,971	)		$	—			$	3,067,372
Adjustment for adoption of FASB ASC 810																											61,750								(61,750	)			—
Balance, July 1, 2008 as restated			12,346,482				48,846,244				48,846				51,385,199				148,652				—				(59,278,086	)			(1,521,971	)			(61,750	)			3,067,372
Amortization of Series H warrants			14,725				—				—				—				—				—				(14,725	)			—				—				—
Purchase of treasury stock			—				—				—				—				—				(250,000	)			—				—				—				(250,000	)
Dividends on Series H and Series I			—				—				—				—				—				—				(1,468,272	)			—				—				(1,468,272	)
Value of vested stock options			—				—				—				1,929,577				—				—				—				—				—				1,929,577
Stock options exercised			—				4,423,916				4,424				216,772				—				—				—				—				—				221,196
Reduction in value of securities available for sale			—				—				—				—				—				—				—				(1,863,253	)			—				(1,863,253	)
Realization of impairment in value of securities available for sale			—				—				—				—				—				—				—				3,317,837				—				3,317,837
Value of Series I shares released from escrow			1,900,000				—				—				600,000				123,877				—				(600,000	)			—				—				2,023,877
Currency translation			—				—				—				—				—				—				—				(74,204	)			—				(74,204	)
Net loss			—				—				—				—				—				—				(9,456,467	)			—				(74,180	)			(9,530,647	)
Balance, June 30, 2009			14,261,207				53,270,160				53,270				54,131,548				272,529				(250,000	)			(70,817,550	)			(141,591	)			(135,930	)			(2,626,517	)
Dividends on Series H and Series I			—				—				—				—				—				—				(1,595,826	)			—				—				(1,595,826	)
Amortization of Series H warrants			14,724				—				—				—				—				—				(14,724	)			—				—				—
Conversion of Series G to common			(35,808	)			1,611,360				1,612				34,196				—				—				—				—				—				—
Conversion of Series H to common			(15,013	)			500,010				500				14,513				—				—				—				—				—				—
Value of vested stock options			—				—				—				1,075,625				—				—				—				—				—				1,075,625
Rescission of option exercise			—				(4,405,720	)			(4,406	)			4,406				—				—				—				—				—				—
Issuance of stock for services							648,915				649				37,684				—				—				—				—				—				38,333
Noncontrolling interest’s investment in subsidiary			—				—				—				—				—				—				—				—				28,000				28,000
Decrease in value of securities available for sale			—				—				—				—				—				—				—				(83,119	)			—				(83,119	)
Currency translation			—				—				—				—				—				—				—				(76,443	)			—				(76,443	)
Net income			—				—				—				—				—				—				1,918,873				—				261,864				2,180,737
Balance, June 30, 2010		$	14,225,110				51,624,725			$	51,625			$	55,297,972			$	272,529			$	(250,000	)		$	(70,509,227	)		$	(301,153	)		$	153,934			$	(1,059,210	)

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

HOMELAND SECURITY CAPITAL CORPORATION AND SUBSIDIARIES

1. Organization and Nature of Business

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

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

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

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

On March 13, 2008, the Company, entered into a merger agreement with Safety & Ecology Holdings Corporation (“Safety”) and certain persons named therein whereby the Company acquired 100% of Safety. Safety, through its subsidiaries, is a provider of global environmental, hazardous and radiological infrastructure remediation and advanced construction services in the United States and the United Kingdom. Safety’s main core business areas and service offerings include: (1) decommissioning and remediation environmental and remedial consultancy services, (2) environmental and consultancy services, (3) nuclear energy design, build, refurbishment and operational support services; and (4) instrumentation and measurement technologies.

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

2. Summary of Significant Accounting Policies

Fiscal Year-End — The Company’s fiscal year ends on June 30. During 2010, Safety changed its year end from June 30 to the Sunday closest to June 30 (June 27 in 2010). All references in these consolidated financial statements refer to the fiscal year end (June 30), unless otherwise specified.

Principles of Consolidation — The consolidated financial statements include the accounts of Homeland Security Capital Corporation and wholly owned subsidiary Safety (including Safety’s wholly owned United Kingdom subsidiary SECL and majority owned subsidiary Radcon Alliance, LLC) and majority owned subsidiaries Nexus (including its wholly owned subsidiary CSS) and PMX. All significant inter-company transactions and balances have been eliminated in consolidation. In July 2009, the Company adopted FASB ASC Topic 810 “Noncontrolling Interest” (“FASB ASC 810”) (formerly known as FASB 160), which amends ARB 51 to establish accounting and reporting standards for noncontrolling interests in a subsidiary, FASB ASC 810 further clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported in the financial statements. Accordingly, the Company has included the noncontrolling subsidiary minority interests in the current year financial statements and adjusted the previous year periods for comparative presentation.

Foreign Operations — SECL, a United Kingdom corporation, which is wholly owned by Safety, has total assets of $214,137 and $622,804, total liabilities of $0 and $30,999 and a net loss of $254,317 and $662,234 as of and for the periods ending June 30, 2010 and 2009, respectively, which are included in the Company’s consolidated financial statements for those periods.

The financial statements of SECL are translated using exchange rates in effect at year-end for assets and liabilities and average exchange rates during the year for results of operations. The related translation adjustments are reported as a separate component of shareholders’ equity.

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

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

Revenue Recognition — The Company recognizes revenue when it is realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable and earned when all of the following criteria are met:

	(i)		persuasive evidence of an arrangement exists,
	(ii)		the services have been rendered and all required milestones achieved,
	(iii)		the sales price is fixed or determinable, and
	(iv)		collectability is reasonably assured.

Revenues are derived primarily from services performed under time and materials and fixed fee contracts and products sold. Revenues and costs derived from fixed price contracts are recognized using the percentage of completion (efforts expended) method. Revenue and costs derived from time and material contracts are recognized when revenue is earned and costs are incurred. Revenue and costs based on sale of products are derived when the products have been delivered and accepted by the customer.

Deferred Revenue — Revenue from service contracts, for which the Company is obligated to perform, is recorded as deferred revenue and subsequently recognized over the term of the contract.

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

The asset, “costs in excess of billings on uncompleted contracts”, represents revenues recognized in excess of billed amounts. The liability, “billings in excess of costs on uncompleted contracts”, represents billings in excess of revenues recognized.

Cash and Cash Equivalents - The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents. Cash consists of cash on hand and deposits in banks. The Company has approximately $200,000 at risk for funds held in non-collateralized accounts subject to the Federal Deposit Insurance Corporation (FDIC) Guarantee.

Marketable Fixed-Income Securities — The Company owns shares of mutual funds which hold various marketable fixed income securities. The shares of the mutual funds are recorded at fair value based upon market prices. Realized and unrealized gains and losses are included in the consolidated statement of operations.

Recognition of Losses on Receivables - Trade accounts receivable are recorded at their estimated net realizable values using the allowance method. The Company generally does not require collateral from customers. Management periodically reviews accounts for collectability, including accounts determined to be delinquent based on contractual terms. An allowance for doubtful accounts is maintained at the level management deems necessary to reflect anticipated credit losses. When accounts are determined to be uncollectible, they are charged off against the allowance for bad debts. At June 30, 2010 and 2009 the Company had a consolidated bad debt allowance of $229,340 and $234,826, respectively.

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

Debt Offering Costs — Debt offering costs are related to private placements and are amortized on a straight line basis over the term of the related debt, most of which is in the form of senior secured notes. Should there be an early extinguishment of the debt prior to the stated maturity date; the remaining unamortized cost is expensed. Amortization expense amounted to $378,210 and $504,869 in 2010 and 2009, respectfully. At June 30, 2010 all debt offering costs were fully amortized.

Investments in Assets Held for Sale — As of June 30, 2010 and 2009 the shares in Vuance Ltd. held by the Company were classified as assets held for sale. Under this classification, securities are carried at fair value (period end market closing prices) with unrealized gains and losses excluded from earnings and reported in a separate component of shareholder’s equity until the gains or losses are realized or a provision for impairment is recognized.

The table below reflects the value of our assets held for sale as of June 30, 2010 and 2009:

						Gross Unrealized				Recognized				Estimated
		Cost				Loss				Impairment Loss				Fair Value
June 30, 2010		$	3,581,047			$	152,384			$	3,317,837			$	110,826
June 30, 2009		$	3,581,047			$	69,265			$	3,317,837			$	193,945

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 recorded at the lower of cost or a value determined in good faith by management and approved by the Board of Directors, based on assets and revenues of the underlying investee companies as well as the general market trends for businesses in the same industry. Because of the inherent uncertainty of valuations, managements estimates of the value of our investments may differ significantly from the values that would have been used had a ready market for the investment existed and the differences could be material. At June 30, 2010, the Company’s membership interests in Secure America Acquisition Holdings, LLC (“SAAH”) reflect the market value of the securities underlying the membership interests. (See Note 6 to the Consolidated Financial Statements)

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

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

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

Stock Based Compensation — Share based payments are measured at fair value on the awards’ grant date, based on the estimated number of awards that are expected to vest and are reflected as compensation cost in the financial statements.

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

Employee Benefit Plans - Safety has a 401(k) profit sharing plan covering substantially all its employees. Employees are allowed to make before-tax contributions to the plan, through salary reductions, up to the legal limits as described under the Internal Revenue Code. Any company match is discretionary. Safety contributed $332,307 and $516,078 to its plan during 2010 and 2009, respectively.

SECL, a wholly owned subsidiary of Safety, has a group stakeholder pension scheme for the benefit of its employees. The plan covers substantially all SECL employees and provides for SECL to contribute at least three percent of the eligible employee’s compensation to the plan. SECL contributed $582 and $4,549 to their plan during 2010 and 2009, respectively.

The holding company and Nexus both have salary deferral plans which allow each company to make a discretionary match to their plan. Neither the holding company nor Nexus made contributions to their plans during 2010 or 2009.

Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing (Topic 470). This Accounting Standards Update amends Subtopic 470-20, Debt with Conversion and Other Options and Subtopic 260-10, Earnings Per Share. This ASU requires that at the date of issuance of the shares in a share-lending arrangement entered into in contemplation of a convertible debt offering or other financing, the shares issued shall be measured at fair value and be recognized as an issuance cost, with an offset to additional paid-in capital. Further, loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in the basic and diluted earnings-per-share calculation. This ASU is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company is currently assessing the impact of this ASU on its consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 requiring new disclosures for transfers in and out of Level I and Level II fair value measurements by separately disclosing the amounts of significant transfers in and out of Level I and Level II fair value measurements and describes the reasons for the transfers. Also this update provides that a reporting entity should present separately information about purchases, sales, issuances and settlements (present information on a gross basis) in the reconciliation for fair value measurements using significant unobservable inputs (Level III). This update additionally provides for a level of disaggregation of fair value measurement disclosures for each set of assets and liabilities and requires a reporting entity to provide disclosures about valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements that fall within either Level II or Level III. The new disclosures and clarifications of existing disclosures was effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level III fair value measurements and has not had a material effect on the financial position, results of operations, cash flows of the Company or previous or current disclosures. The remaining disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company does not expect this ASU to have a material effect on the financial position, results of operations or the cash flows of the Company.

Impairment of Long-Lived Assets — The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Advertising — The Company follows the policy of charging the costs of advertising to expense as incurred. Expenses incurred were $278,298 and $443,402 in 2010 and 2009, respectively.

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

Reclassifications — During the current year it was determined that transactions previously recognized as agent transactions are actual obligations of Safety and the revenues and related costs should have been recorded gross. As a result, $1,349,838 has been added to net contract revenue and contract costs for 2009. In addition, certain other prior year’s balances have been reclassified to conform to the current year presentation.

3. Fixed Assets, net

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

		June 30,
		2010				2009
Office equipment		$	398,599			$	382,293
Operating equipment			1,026,496				3,622,584
Computer equipment			2,166,648				1,951,472
Vehicles			930,706				908,124
Total cost			4,522,449				6,864,473
Less accumulated depreciation			(3,392,564	)			(2,465,640	)
Fixed assets, net		$	1,129,885			$	4,398,833

Depreciation expense was $1,863,333 (including $488,877 recorded in cost of contracts) in 2010 and $1,842,723 (including $556,970 recorded in cost of contracts) in 2009.

During 2010, Safety completed a contract and began to seek buyers for certain equipment used for the completed contract. The equipment has been classified as held for sale on the accompanying consolidated balance sheet at fair value and an impairment loss of $425,268 has been recognized on the accompanying consolidated statement of operations. Subsequent to June 30, 2010, the equipment was sold for approximately $1,550,000 and the related equipment note of $1,058,860 was satisfied with the proceeds from the sale.

4. Intangible Assets, net

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

		June 30,
		2010				2009
Depreciable intangibles:
Non-compete agreements		$	92,665			$	92,665
Contracts			445,823				445,823
			538,488				538,488
Less accumulated amortization			(196,674	)			(152,116	)
			341,814				386,372
Non-depreciable intangibles
Trademarks			5,000				5,000
Total intangible assets, net of amortization		$	346,814			$	391,372

Amortization expense for intangibles was $44,558 and $106,250 in 2010 and 2009, respectively. Amortization expense for contracts, the only remaining amortizable intangible asset, is $44,558 for each of the next five years through June 30, 2015 and $119,024 in total thereafter.

5. Goodwill

Goodwill on acquisition is initially measured at cost being the excess of the cost of the business acquired including directly related professional fees over the Company’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities.

Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. The impairment review requires management to undertake certain judgments, including estimating the recoverable value of the business acquired, safety, to which the goodwill relates, based on either fair value less costs to sell or the value in use, in order to reach a conclusion on whether it deems the goodwill to be recoverable. Estimating the fair value less costs to sell is based on the best information available, and refers to the amount at which the business acquired could be sold in a current transaction between willing parties. The valuation methods are based on an earnings multiple approach. The earnings multiple approach uses transaction multiples, obtained from comparable businesses in the industry sector in which the acquired business operates. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects management’s estimate of return on capital employed, which is subject to a value in use calculation.

Any impairment is recognized immediately in the income statement and is not subsequently reversed. At June 30, 2010 and 2009, all of the goodwill recorded by the Company is related to the acquisition of Safety. No goodwill impairment has been recognized in 2010 or in 2009.

6. Minority Interest in Ultimate Escapes, Inc.

The Company has indirectly acquired a minority equity interest in Ultimate Escapes, Inc., a luxury destination club (“UEI”) (OTCBB: ULEI; formerly known as Secure America Acquisition Corporation, or “SAAC”), as a result of the business combination between SAAC and Ultimate Escapes Holdings, LLC, which was consummated on October 29, 2009. Through its membership interests in Secure America Acquisition Holdings, LLC (“SAAH”), the Company is deemed to beneficially own 40,912 shares, or approximately 1.5% of the outstanding capital stock of UEI, at June 30, 2010, and is entitled to receive such shares of common stock in UEI upon the release of SAAH’s shares from escrow, which is expected in October 2010.

In addition to the Company’s ownership in SAAH, our Chief Executive Officer and Chairman beneficially owns 149,867 membership interests in SAAH, or approximately 50.5% of SAAH’s membership interests; our Chief Financial Officer beneficially owns 10,385 membership interests, or approximately 3.5% of SAAH’s membership interests; and two of our directors collectively beneficially own 15,735 membership interests in SAAH, or approximately 5.3% of SAAH’s membership interests.

Management of the Company believes it is appropriate to measure its investment in SAAH membership units at the current market price of UEI common shares, only if such measurement results in an impairment of the carrying value of its investment. Since the Company will not receive such shares until October 2010, management believes there is still uncertainty as to what market price might be achievable at the end of the escrow period and therefore has chosen to carry its investment in SAAH at the lower of its cost or current market price of the UEI common shares. During 2010, the Company recognized an impairment of $104,997 because the current market price of UEI was below its cost of $150,000. The membership interests are valued at $45,003 and $150,000 at June 30, 2010 and 2009, respectively and are included in the accompanying consolidated balance sheets. Subsequent to June 30, 2010 UEI filed bankruptcy. See Note 23 for further discussion.

7. Income Taxes

The Company and certain of its subsidiaries file income tax returns in the US and in various state jurisdictions. With few exceptions, the Company is no longer subject to US federal, state and local, or non-US income tax examinations by tax authorities for years before 2006.

The Internal Revenue Service (IRS) has not notified the Company of any scheduled examination of the Company’s US income tax returns for 2006 through 2009. As of September 27, 2010, the IRS has proposed no adjustments to the Company’s tax positions.

There are no amounts included in the balance at June 30, 2010 or 2009 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

It is the Company’s policy to recognize any interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses. During 2010 and 2009, the Company recognized no interest or penalties.

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

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

As a result of significant historical pretax losses, management cannot conclude that it is more likely than not that the deferred tax asset will be realized. Accordingly, a full valuation allowance has been established against the total net deferred tax asset. Prior to 2010, the Company’s income tax position had been that during the period ended June 30, 2008, the Company decreased its valuation allowance by $10,729,865 primarily due to loss limitations from a change in control of a subsidiary. As of June 30, 2010, the Company has made the determination that a change in control had not taken place and has restored the $10,729,865 valuation allowance previously reduced. The above reconciliation of deferred tax assets and liabilities has been restated for the year ended June 30, 2009 to reflect a change in position. Approximately $874,000 of the valuation allowance was allocated to reduce the goodwill of Safety, related to its acquisition. Because the benefit of the deferred tax assets offset any provision for income tax purposes, the entire provision for income tax expense represents amounts currently due state tax jurisdictions. The valuation allowance decreased by $1,140,055 to $16,574,871 in 2010 and increased by $3,006,453 to $6,985,061 in 2009 before the restatement discussed above.

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

		June 30,
		2010				2009
Federal income taxes at 34%		$	942,129			$	(3,335,726	)
Effect of permanent differences			506,500				376,289
Other			(107,896	)			—
State income tax			389,552				(47,016	)
Change in valuation allowance — current year			(1,140,055	)			3,006,453
Net income tax expense (benefit)		$	590,230			$	—

At June 30, 2010, the Company had an available net operating loss carryforward of approximately $41,184,682. This amount is available to reduce the Company’s future taxable income and expires in the years 2014 through 2028 as follows:

Year of		Capital Loss				NOL				Total
Expiration		Carryover				Carryover				Carryover
2014		$	90,400			$	—			$	90,400
2017			—				3,171,774				3,171,774
2018			—				7,017,587				7,017,587
2019			—				5,878,720				5,878,720
2020			—				4,942,777				4,942,777
2021			—				4,434,157				4,434,157
2022			—				3,438,195				3,438,195
2023			—				14,695				14,695
2024			—				4,031,488				4,031,488
2025			—				1,055,115				1,055,115
2026			—				3,066,650				3,066,650
2027			—				2,415,265				2,415,265
2028			—				1,627,859				1,627,859
		$	90,400			$	41,094,282			$	41,184,682

8. Long-Term Debt

The Company’s long term debt is as follows:

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

Safety maintains a bank line of credit, which has subsequent to June 30, 2010 been renewed through September 2011, and among other features includes:

(a) An $8,000,000 Revolving Line of Credit (duration of one year) available for working capital financing for Safety and all of its current and future subsidiaries including an inter-company facility for credit to foreign operations.

(b) A monthly borrowing base determination based upon domestic accounts receivable (availability at June 27, 2010 was approximately $5,838,000).

(c) Interest rate determined as the greater of LIBOR plus applicable margin in effect from time to time based on funded debt ratio to domestic EBITDA ratio and 3.00%. Margin range is 2.15% to 2.75% for an EBITDA ratio of over 2.25:1. Maximum ratio is 2.25:1.

(d) The ability to issue letters of credit in an aggregate principal amount not to exceed $4,000,000 subject to certain provisions.

(e) Requirement that consolidated net income of Safety and its subsidiaries shall not be less than $1 for each fiscal year and for each of the first three fiscal quarters of each fiscal year of Safety.

Principal maturities for the next five years as of June 30 are as follows:

2011		$	536,025
2012			662,322
2013			24,655
2014			1,616
Total		$	1,224,618

9. Related Party Senior Notes Payable

In June 2009 the Company entered into an agreement with YA extending the due date on its senior notes payable, and accrued interest, to YA from March 14, 2010 until October 1, 2010 with respect to $2,500,000 and April 1, 2011 for the balance of the principal and accrued interest through that date. In exchange for the extension agreement, the Company agreed to an increase in the interest rate, from 13% to 15%, on the senior notes payable and certain other debt due to YA, effective January 1, 2010, if the Company failed to secure a certain contract by March 2010. In December 2009, the Company was informed that it had been eliminated from the award process for this contract. Accordingly, the Company began recording interest expense at the increased rate effective January 1, 2010.

In September 2010, the Company entered into a debt extension agreement with YA to extend the due dates for all senior notes payable and all accrued interest to July 15, 2011. As part of the agreement, the Company agreed to prepay $500,000 of the accrued interest due at June 30, 2010. The table below reflects the elements of the Company’s outstanding senior notes payable.

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

10. Convertible Preferred Stock

At June 30, 2010, the Company had three series of convertible preferred stock outstanding. The information below sets out certain information about each series.

Series F

On October 6, 2005, the Company issued 1,000,000 shares of Series F Convertible Preferred Stock, par value $0.01 per share (the “Series F Preferred Stock”), to YA, a related party, pursuant to a securities purchase agreement. Proceeds from the issuance amounted to $1,000,000 less costs of $154,277, or $845,723. The Series F Preferred Stock provides for preferential liquidating dividends at an annual rate of 12%. Also, the Series F Preferred Stock has a preferential liquidation amount of $0.10 per share or $100,000. The Series F Preferred Stock is convertible into shares of common stock at a conversion price equal to $0.10 per share, subject to availability. In 2005, the Company recorded a $1,000,000 dividend relative to the beneficial conversion feature. As of June 30, 2010, none of the Series F Preferred Stock has been converted into shares of common stock.

Series G

During 2010, 358,080 shares of our Series G Convertible Preferred Stock representing the entire amount outstanding under that series, were converted into 1,611,360 shares of our Common Stock.

Series H

On March 17, 2008, the Company issued 10,000 shares of Series H Convertible Preferred Stock, par value $0.01 per share (the “Series H Preferred Stock”), to YA, a related party, pursuant to a securities purchase agreement. Proceeds from the issuance amounted to $10,000,000. The Series H Preferred Stock provides for preferential dividends at an annual rate of 12%. Also, the Series H Preferred Stock has a preferential liquidation amount of $1,000 per share or $10,000,000, plus all accumulated and unpaid dividends, which at June 30, 2010 amounted to $2,745,033. Each share of Series H Preferred Stock is initially convertible into 33,334 shares of common stock at a conversion price equal to $0.03 per share, subject to availability. In 2008, the Company recorded a $2,740,540 dividend relative to the beneficial conversion feature. As of June 30, 2010, 15 shares of the Series H Preferred Stock have been converted into 500,010 shares of common stock and 9,985 shares of Series H Preferred Stock are outstanding.

As described above, the Series H Stock was convertible into shares of common stock at an initial ratio of 33,334 shares of common stock for each share of Series H Stock, subject to adjustments, including Safety achieving certain earnings milestones, as defined, for the calendar years ending December 31, 2009 and 2008. Safety operates its business on a fiscal year ending near June 30. Safety achieved the first milestone for the calendar year ending December 31, 2008. However, based upon information available as of the date of this filing, the second financial milestone for the calendar year ended December 31, 2009, has not been satisfied, resulting in a potential adjustment to the conversion ratio yielding approximately 56,300 shares of common stock for each share of Series H Stock, or approximately a potential additional 230,000,000 shares of our common stock in the aggregate. If the conversation ratio increases to 56,300 shares of common stock for each share of Series H Preferred Stock, then approximately $8,727,000 would be recognized as additional intrinsic value of the preferred stock.

Management is discussing with YA the possibility of a waiver or amendment of any adjustment to the Series H Stock conversion ratio, however there can be no assurances YA will waive or amend the adjustment, if any, to the Series H Stock conversion ratio. YA has not exercised any of its conversion rights pertaining to the adjusted conversion ratio as of the date of this filing.

Series I

On March 13, 2008, the Company issued 550,000 shares of Series I Convertible Preferred Stock, par value $0.01 per share (the “Series I Preferred Stock”), to Safety and certain named individuals pursuant to a merger agreement. The initial value of the stock issued as merger consideration was $3,300,000. Upon issuance, a portion of the Series I Preferred Stock was placed in escrow to offset any indemnification claims or purchase price adjustments pursuant to the merger agreement. As of June 30, 2010, all of the Series I Preferred Stock has been released from escrow. The Series I Preferred Stock provides for preferential dividends at an annual rate of 12%. Also, the Series I Preferred Stock has a preferential liquidation amount of $6.00 per share or $3,303,300, plus all accumulated and unpaid dividends, which at June 30, 2010 amounted to $719,901. Each share of Series I Preferred Stock is convertible into 200 shares of common stock at a conversion price of $0.03 per share, subject to availability. As of June 30, 2010, none of the Series I Preferred Stock has been converted into shares of common stock.

The table below reflects the number of shares of common stock that would potentially be outstanding if: i) all series of preferred stock were to be converted into common stock; and ii) the Company was unable to obtain a waiver or amendment in the Series H Preferred Stock conversion ratio for the years ended June 30, 2010 and 2009, respectively, including accrued but unpaid dividends as of those dates.

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

11. Stock Options

Stock Options Awarded Under the 2005 Plan

There are 7,200,000 shares of common stock reserved for issuance upon exercise of options under the Company’s 2005 stock option plan (the “2005 Plan”). From August 2005 through October 2006, 6,800,000 options were granted under the 2005 Plan at strike prices ranging from $0.08 to $0.17. Of the options granted, all have fully vested through June 30, 2010, and $629,096 of total compensation expense has been recognized in the financial statements of the Company through that date. During the years ended June 30, 2010 and 2009, the Company recorded $2,500 and $49,175 as compensation expense, respectively, under the 2005 Plan. At June 30, 2010, there were 400,000 options available for award under the 2005 Plan. There have been no exercises of vested options under the 2005 Plan.

Stock Options Awarded Under the 2008 Plan

There are 75,000,000 shares of common stock reserved for issuance upon exercise of options under the Company’s 2008 stock option plan (the “2008 Plan”). In July 2008, 73,850,000 options were granted under the 2008 Plan at a strike price of $0.05. Of the options granted, all have fully vested, 33,360 have been exercised and 66,640 have been forfeited through June 30, 2010 and $2,669,709 of total compensation expense has been recognized in the financial statements of the Company through that date. During the years ended June 30, 2010 and 2009, the Company recorded $1,000,575 and $1,669,134 as compensation expense, respectively, under the 2008 Plan. At June 30, 2010, there are 1,216,640 options available for award under the 2008 Plan.

Stock Options Awarded Outside of the 2005 Plan and the 2008 Plan

From December 2005 through May 2007, the Company granted 2,760,000 options to three directors and one consultant outside of the 2005 Plan and the 2008 Plan at strike prices ranging from $0.12 to $0.17. All of these options have vested through June 30, 2010, and $390,000 of total compensation expense has been recognized in the financial statements of the Company through that date.

As of June 30, 2010, all previously granted options under all option plans have fully vested and $3,688,805 of total compensation expense has been recognized in the financial statements of the Company through that date.

Additional information about the Company’s stock option plans is summarized below:

		June 30, 2010												June 30, 2009
						Weighted Average												Weighted Average
						Exercise				Grant Date								Exercise				Grant Date
		Options				Price				Fair Value				Options				Price				Fair Value
Outstanding at beginning of period			75,669,374			$	0.057			$	0.049				9,560,000			$	0.103			$	0.107
Granted			—												73,850,000				0.050				0.036
Rescinded (Exercised)			7,640,626				0.050				0.036				(7,673,986	)			0.050				0.036
Forfeited			—												(66,640	)			0.050				0.036
Outstanding at end of period			83,310,000			$	0.056			$	0.044				75,669,374			$	0.057			$	0.049
Options exercisable at end of period			83,310,000			$	0.056			$	0.044				47,992,293			$	0.060			$	0.050

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of between 4.0% and 4.95%, volatility between 60% and 456% and expected lives of ten years. All options granted have a maximum three year service period.

Not included in the table above, but included in consolidated compensation expense, are options issued by our subsidiaries to purchase shares of the subsidiaries’ common stock in the future or accept cash settlements in exchange for the increased value of any vested subsidiary options. Compensation expense for these options is calculated by comparing our subsidiaries to comparable publicly traded companies in their industry for stock volatility purposes and using the Black-Scholes option-pricing model.

12. Common Stock Warrants

On March 14, 2008, in connection with a securities purchase agreement with YA Global Investments, L.P., the Company issued to YA a warrant to purchase up to 83,333,333 shares of its common stock. The YA warrant vested when granted and has an exercise price equal to $0.03 with a term of five years from the date of issuance of March 14, 2008.

On March 17, 2008, the Company issued warrants to purchase up to 22,000,000 shares of its common stock as part of the purchase consideration in the acquisition of Safety. A portion of the warrants were held in escrow, along with the Series I Preferred Stock to offset any indemnification claims or purchase price adjustments. As of June 30, 2010, all of the warrants have been released from escrow. The warrants have an exercise price of $0.03 with a term of five years from the date of issuance of March 17, 2008.

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

All warrants were valued using the Black Scholes pricing model with the following assumptions; risk-free interest rate of between 2.2% and 4.95%, volatility of between 60% and 456% and expected life of five years.

13. Fair Value Measurements

The Company follows Topic 820 — Fair Value Measurements and Disclosures (“FASB ASC 820”), formerly known SFAS 157 Fair Value Measurements, which, among other things, requires enhanced disclosures about assets and liabilities carried at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to utilize the best available information. FASB ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and lowest priority to unobservable inputs (level 3 measurements). The three levels of fair value hierarchy are as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.

Level 2 — Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.

Level 3 — Unobservable inputs for the asset or liability.

As of June 30, 2010, the Company’s assets held for sale, consisting entirely of Vuance common stock and the Company’s indirect minority investment in UEI and the Company’s marketable fixed-income securities had carrying values of $110,825, $45,003 and $872,427, respectively, all of which were measured by quoted prices in active markets for identical assets.

14. Business Segments

The Company analyzes its assets, liabilities, cash flows and results of operations by operating unit or subsidiary. In the case of our platform companies, which are our first level subsidiaries, the Company relies on local management to analyze each of its subsidiaries and report to us based on a consolidated entity. As a result, the Company will make its financial decisions based on the overall performance of a first level subsidiary. Our subsidiaries derive their revenues and cash flow from different activities, (i) engineering and environmental remediation services in the case of Safety, (ii) design, installation and maintenance of electronic security systems in the case of Nexus, and (iii) sales of radiological detection products and services in the case of PMX.

The following table reflects the Company’s segments at June 30, 2010:

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

The following table reflects the Company’s segments at June 30, 2009:

For the Year Ended June 30, 2009
Homeland Security		Holding				Services				Services				Products
Capital Corporation -		Company				Company				Company				Company
Consolidated		(HSCC)				(Safety)				(Nexus)				(PMX)				Consolidated
Revenues		$	—			$	72,106,878			$	6,462,511			$	2,269,958			$	80,839,347
Gross margin			—				9,931,852				1,658,522				92,477				11,682,851
Operating expenses			4,099,586				9,763,645				1,154,272				—				15,017,503
Other expense — net			(5,396,764	)			(795,173	)			(4,058	)			—				(6,195,995	)
Income tax (benefit) expense			—				—				—				—				—
Net (loss) income			(9,496,350	)			(342,340	)			500,192				(192,149	)			(9,530,647	)
Current assets			413,578				16,890,714				2,279,900				748,580				20,332,772
Total assets			631,412				28,954,567				2,504,198				748,580				32,838,757
Interest expense			1,717,435				276,776				17,780				—				2,011,991
Depreciation expense			7,593				1,792,014				43,116				—				1,842,723
Capital expenditures			—				737,979				61,165				—				799,144

15. Earnings (Loss) Per Share

The basic earnings (loss) per share was computed by dividing the net income or loss applicable to common stockholders by the weighted average shares of common stock outstanding during each period.

Diluted earnings per share are computed using outstanding shares of common stock plus the Convertible Preferred Shares, common stock options and warrants that can be exercised or converted, as applicable, into common stock at June 30, 2010. Diluted earnings per share are not indicated for the year ending June 30, 2009, because this period indicates a loss and the computation would be anti-dilutive.

The reconciliations of the basic and diluted income (loss) per share for income (loss) attributable to the Company’s stockholders are as follows:

		Year Ended June 30,
		2010				2009
Basic and Diluted Earnings (Loss) Per Share:
Income (Loss) (Numerator)		$	1,918,873			$	(9,456,467	)
Less: Series H Preferred Stock beneficial conversion feature			(14,724	)			(14,724	)
Less: Preferred stock dividends			(1,595,827	)			(1,468,274	)
Less: Series I Preferred Stock beneficial conversion feature			—				(600,000	)
Income (Loss) attributable to common stockholders		$	308,322			$	(11,539,465	)
Shares (Denominator)
Weighted-average number of common shares:
Basic			51,291,270				47,664,614
Diluted			699,666,666				47,664,614
Earnings Per Common Share
Basic income (loss) per share		$	0.01			$	(0.24	)
Diluted income (loss) per share		$	0.00			$	(0.24	)

16. Cash Flows

Supplemental disclosure of cash flow information for the twelve months ended June 30, 2010 and 2009 are as follows:

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

17. Commitments and Contingencies

Leases

The Company and its subsidiaries routinely enter into lease agreements for office space used in the normal course of business. Certain leases include escalation clauses that adjust rental expense to reflect changes in price indices, as well as renewal options. In addition to minimum rental payments, certain of our leases require additional payments to reimburse the lessor for operating expenses such as real estate taxes, maintenance and utilities. At June 30, 2010 the Company occupied office and warehouse space under 11 separate leases. The following table shows the future minimum obligations under lease commitments in effect at June 30, 2010:

Year Ended June 30,
2011		$	548,092
2012			391,703
2013			344,028
2014			344,028
2015			344,028
Thereafter			1,003,775
		$	2,975,654