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


WASHINGTON,
      D.C. 20549








**FORM
      10-QSB**








(Mark
      One)





**[X]
      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**


**ACT
      OF 1934**





For
      the
      quarterly period ended: September 30, 2005





OR





**[
       ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





For
      the
      transition period from ______________ to ______________





*COMMISSION
      FILE NUMBER 000-28863*





**MARKLAND
      TECHNOLOGIES, INC.**


(Exact
      name of registrant as specified in its charter)




FLORIDA
              84-1334434(STATE
                  OR OTHER JURISDICTION OF
              (IRS
                  EMPLOYERINCORPORATION
                  OR ORGANIZATION)
              IDENTIFICATION
                  NO.)
 88
        Royal
        Little Drive
 Providence,
        RI 02904
 (ADDRESS
        OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
 
 (617)973
        5104
 (REGISTRANT'S
        TELEPHONE NUMBER, INCLUDING AREA CODE)





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 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to filed such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes [X] No [ ]





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





As
      of
      November 21, 2005, there were 350,449,710 shares of common stock, $0.0001 par
      value, of the registrant issued and outstanding.





Transitional
      Small Business Disclosure Format (CHECK ONE):


Yes
      [ ]
      No [X]





**Table
          of Contents**


**MARKLAND
      TECHNOLOGIES, INC.**





**FORM
      10-QSB**





TABLE
      OF CONTENTS


September
      30, 2005





PAGEPART
                I. FINANCIAL INFORMATION:Item
                1.
            Financial
                Statements (Unaudited)Condensed
                Consolidated Balance Sheet at September 30, 2005
            2Condensed
                Consolidated Statements of Loss for the Three Months Ended September
                30,
                2005 and 2004
            3Condensed
                Consolidated Statement of Stockholders' Equity for the Three Months
                Ended
                September 30, 2005
            4Condensed
                Consolidated Statements of Cash Flows for the Three Months September
                30,
                2005 and 2004
            7Notes
                to Condensed Consolidated Financial Statements
            9Item
                2.
            Management's
                Discussion and Analysis or Plan of
                Operations
            31Item
                3.
            Controls
                and Procedures
            59PART
                II. OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            61Item
                2.
            Unregistered
                Sale of Equity Securities and Use of
                Proceeds
            62Item
                6.
            Exhibits
            64Signatures
            
            65








Statements
      contained in this quarterly report on Form 10-QSB, for the quarter ended
      September 30, 2005, which are not historical facts constitute forward-looking
      statements and are made under the safe harbor provisions of the Private
      Securities Litigation Reform Act of 1995. Forward-looking statements involve
      substantial risks and uncertainties. You can identify these statements by
      forward-looking words such as "may", "will", "expect", "anticipate", "believe",
      "estimate", "continue", and similar words. You should read statements that
      contain these words carefully. All forward-looking statements included in this
      quarterly report on Form 10-QSB, for the quarter ended September 30, 2005,
      are
      based on information available to us on the date hereof, and we assume no
      obligation to update any such forward-looking statements. Each forward-looking
      statement should be read in conjunction with the financial statements and notes
      thereto in Part I, Item 1, of this quarterly report and with the information
      contained in Item 2 together with Management's Discussion and Analysis or Plan
      of Operation contained in our annual report on Form 10-KSB for the year ended
      June 30, 2005, including, but not limited to, the section therein entitled
      "Risk
      Factors."


**Table
          of Contents**


PART
      I. FINANCIAL INFORMATION








MARKLAND
      TECHNOLOGIES, INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED BALANCE SHEET


AT
      SEPTEMBER 30, 2005


(UNAUDITED)


ASSETSCURRENT
                ASSETS:Cash
            
            $
            4,532,710Accounts
                receivable
            
            
            7,888,130Inventory
                and work in process
            
            
            291,312Restricted
                cash
            
            
            291,459Other
                current assets
            
            
            289,909TOTAL
                CURRENT ASSETS
            
            
            13,293,520PROPERTY
                AND EQUIPMENT- NET
            
            
            847,155OTHER
                ASSETS:Amortizable
                intangible assets, net
            
            
            12,931,139Goodwill
            
            
            14,035,551TOTAL
                OTHER ASSETS
            
            
            26,966,690TOTAL
                ASSETS
            
            $
            41,107,365LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            10,171,184Accrued
                expenses and other current liabilities
            
            
            3,604,324Convertible
                secured notes, net of discount of $69,344
            
            
            1,328,031Dividend
                payable
            
            
            1,885,529Current
                portion of long-term debt
            
            
            2,322,193TOTAL
                CURRENT LIABILITIES
            
            
            19,331,261NON-CURRENT
                LIABILITIESLong-term
                debt, less current portion and discount of $1,100,967
            
            
            5,484,435TOTAL
                LIABILITIES
            
            
            24,795,696MINORITY
                INTEREST
            
            
            5,071,079COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS'
                EQUITY:Series
                A redeemable convertible preferred stock - no par value; 30,000
                authorized, issued and outstanding; liquidation preference of
                $300,000
            
            
            300,000Series
                C 5% cumulative convertible preferred stock - $.0001 par value; 8,000
                authorized; 0 issued and outstanding;
            
            
            --Series
                D convertible preferred stock - $.0001 par value; 40,000 authorized;
                9,268
                issued and outstanding; liquidation preference of
                $9,268,000
            
            
            2Common
                stock - $.0001 par value; 500,000,000 authorized; 293,222,935 shares
                issued and outstanding
            
            
            29,322Additional
                paid-in capital
            
            
            76,623,747Unearned
                compensation
            
            
            (12,861,373
            )Accumulated
                deficit
            
            
            (52,851,108
            )TOTAL
                STOCKHOLDERS' EQUITY
            
            
            11,240,590TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            41,107,365




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


-2-
 **Table
          of Contents**





MARKLAND
      TECHNOLOGIES, INC. AND SUBSIDIARIES  CONDENSED
        CONSOLIDATED STATEMENTS OF LOSS
 FOR
        THE
        THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 (UNAUDITED)
 2005
              
              2004REVENUES
              
              $
              18,996,341
              
              $
              15,769,851COST
                  OF REVENUES
              
              
              15,590,455
              
              
              12,442,893GROSS
                  PROFIT
              
              
              3,405,886
              
              
              3,326,958OPERATING
                  EXPENSES:Selling,
                  general and administrative
              
              
              4,860,132
              
              
              3,593,619Research
                  and development
              
              
              171,935
              
              
              --Amortization
                  of intangible assets
              
              
              474,202
              
              
              481,992TOTAL
                  OPERATING EXPENSES
              
              
              5,506,269
              
              
              4,075,611OPERATING
                  LOSS
              
              
              (2,100,383
              )
              
              (748,653
              )OTHER
                  EXPENSESInterest
                  expense
              
              
              2,003,724
              
              
              503,215Other
                  income, net
              
              
              (38,731
              )
              
              (5,847
              )TOTAL
                  OTHER EXPENSES, NET
              
              
              1,964,993
              
              
              497,368NET
                  LOSS BEFORE MINORITY INTEREST
              
              
              (4,065,376
              )
              
              (1,246,021
              )MINORTITY
                  INTEREST
              
              
              23,266
              
              
              --NET
                  LOSS AFTER MINORITY INTEREST
              
              
              (4,042,110
              )
              
              (1,246,021
              )Deemed
                  Dividend to Preferred Stockholders - Series D
              
              
              159,552
              
              
              --NET
                  LOSS APPLICABLE TO COMMON STOCKHOLDERS
              
              $
              (4,201,662
              )
              $
              (1,246,021
              )BASIC
                  AND DILUTED LOSS PER COMMON SHARE
              
              $
              (0.02
              )
              $
              (0.03
              )WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
              
              
              215,804,637
              
              
              38,352,594
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements
   -3-
 **Table
            of Contents**
  MARKLAND
        TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONDENSED
          CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 FOR
          THE
          THREE MONTHS ENDED SEPTEMBER 30, 2005
 Series
                  A Convertible
              
              Series
                  C ConvertibleCommon
                  Stock
              
              Preferred
                  Stock
              
              Preferred
                  StockShares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              AmountBalance
                  - July 1, 2005
              
              
              184,215,208
              
              $
              18,421
              
              
              30,000
              
              $
              300,000
              
              
              -
              
              $
              -Conversion
                    of Series D convertible
                  preferred
                    stock into common stock
              
              
              45,840,657
              
              
              4,584
              
              
              -
              
              
              -
              
              
              -
              
              
              -Amortization
                  of employment and consulting
                agreements
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Repurchase
                  of common stock related to cancelled employment agreement
              
              
              (6,555,088
              )
              
              (656
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Stock
                  issued in settlement of liquidated damages related to registration
                  rights
              
              
              5,589,299
              
              
              559
              
              
              -
              
              
              -
              
              
              -
              
              
              -Stock
                  issued in connection with conversion of promissory notes
              
              
              63,244,562
              
              
              6,325
              
              
              -
              
              
              -
              
              
              -
              
              
              -Stock
                    issued in connection with interest on
                  promissory
                    notes
              
              
              888,297
              
              
              89
              
              
              -
              
              
              -
              
              
              -
              
              
              -Beneficial
                  conversion feature on convertible
                promissory
                  notes
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Exchange
                  of Series D convertible preferred stock
                for
                  Technest Series B convertible preferred stock
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Reclassification
                  of warrants from permanent
                equity
                  to liabilities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Dividend
                  payable
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  loss after minority interest
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Balance
                  - September 30, 2005
              
              
              293,222,935
              
              $
              29,322
              
              
              30,000
              
              $
              300,000
              
              
              -
              
              $
              -
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements
   -4-
 **Table
            of Contents**
  MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONDENSED
          CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 FOR
          THE
          THREE MONTHS ENDED SEPTEMBER 30, 2005
 Series
                  D Convertible
              
              UnearnedPreferred
                  Stock
              
              CompensationShares
              
              Amount
              
              AmountBalance
                  - July 1, 2005
              
              
              12,598
              
              $
              2
              
              $
              (13,778,332
              )Conversion
                    of Series D convertible preferred stock into common
                    stock
              
              
              (3,830
              )
              
              -
              
              
              -Amortization
                    of employment andconsulting agreements
              
              
              -
              
              
              -
              
              
              916,959Repurchase
                  of common stock related to cancelled employment agreement
              
              
              -
              
              
              -
              
              
              -Stock
                    issued in settlement of liquidated damagesrelated to registration
                    rights
              
              
              -
              
              
              -
              
              
              -Stock
                  issued in connection with conversionof
                  promissory notes
              
              
              -
              
              
              -
              
              
              -Stock
                    issued in connection with interest onpromissory
                    notes
              
              
              -
              
              
              -
              
              
              -Beneficial
                  conversion feature on convertible promissory notes
              
              
              -
              
              
              -
              
              
              -Exchange
                  of Series D convertible preferred stock for Technest
                Series
                  Bconvertible
                  preferred stock
              
              
              500
              
              
              -
              
              
              -Reclassification
                  of warrants from permanent equity to liabilities
              
              
              -
              
              
              -
              
              
              -Dividend
                  payable
              
              
              -
              
              
              -
              
              
              -Net
                  loss after minority interest
              
              
              -
              
              
              -
              
              
              -Balance
                  - September 30, 2005
              
              
              9,268
              
              $
              2
              
              $
              (12,861,373
              )
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements
   -5-
 **Table
            of Contents**
  MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES
 CONDENSED
          CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 FOR
          THE
          THREE MONTHS ENDED SEPTEMBER 30, 2005
 Additional
              
              
              
              TotalPaid-in
              
              Accumulated
              
              Stockholders'Capital
              
              Deficit
              
              EquityAmount
              
              Amount
              
              AmountBalance
                  - July 1, 2005
              
              $
              75,375,199
              
              $
              (48,808,998
              )
              $
              13,106,292Conversion
                    of Series D convertiblepreferred stock into common
                    stock
              
              
              (4,584
              )
              
              -
              
              
              -Amortization
                    of employment andconsulting agreements
              
              
              -
              
              
              -
              
              
              916,959Repurchase
                  of common stock related to cancelled employment agreement
              
              
              (64,895
              )
              
              -
              
              
              (65,551
              )Stock
                    issued in settlement of liquidated damagesrelated to registration
                    rights
              
              
              625,944
              
              
              -
              
              
              626,503Stock
                    issued in connection with conversionof promissory notes
              
              
              2,533,665
              
              
              -
              
              
              2,539,990Stock
                    issued in connection with interest onpromissory
                    notes
              
              
              67,791
              
              
              -
              
              
              67,880Beneficial
                  conversion feature on convertible promissory notes
              
              
              69,344
              
              
              -
              
              
              69,344Exchange
                  of Series D convertible preferred stock for Technest
                Series
                  Bconvertible
                  preferred stock
              
              
              61,812
              
              
              -
              
              
              61,812Reclassification
                  of warrants from permanent equity to liabilities
              
              
              (155,000
              )
              
              -
              
              
              (155,000
              )Dividend
                  payable
              
              
              (1,885,529
              )
              
              -
              
              
              (1,885,529
              )Net
                  loss after minority interest
              
              
              -
              
              
              (4,042,110
              )
              
              (4,042,110
              )Balance
                  - September 30, 2005
              
              $
              76,623,747
              
              $
              (52,851,008
              )
              $
              11,240,590
 
 The
        accompanying notes are an integral part of these condensed consolidated
        financial statements
   -6-
 **Table
            of Contents**
  MARKLAND
        TECHNOLOGIES, INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


FOR
      THE
      THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


(UNAUDITED)


2005
            
            2004CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss after minority interest
            
            $
            (4,042,110
            )
            $
            (1,246,021
            )Adjustment
                to reconcile net loss to net cash provided by (used in) operating
                activities:Minority
                interest in net loss of subsidiary
            
            
            (23,266
            )
            
            --Depreciation
                and amortization of property and equipment
            
            
            86,933
            
            
            77,456Amortization
                of intangible assets
            
            
            474,202
            
            
            481,992Loss
                on disposal of equipment
            
            
            29,615
            
            
            23,722Non-cash
                interest expense
            
            
            1,383,974
            
            
            314,166Amortization
                and remeasurement of compensatory stock compensation
            
            
            916,959
            
            
            (19,143
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (236,525
            )
            
            (834,641
            )Inventory
                and work in process
            
            
            85,475
            
            
            --Restricted
                cash
            
            
            (40,255
            )
            
            --Other
                current assets
            
            
            27,029
            
            
            (104,582
            )Accounts
                payable
            
            
            (651,201
            )
            
            4,069,967Accrued
                expenses and other current liabilities
            
            
            428,988
            
            
            (259,057
            )NET
                CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
            
            
            (1,560,182
            )
            
            2,503,859CASH
                USED IN INVESTING ACTIVITIES:Proceeds
                from sale of property and equipment
            
            
            --
            
            
            2,100Additional
                transaction costs relating to purchase of EOIR
            
            
            --
            
            
            (61,611
            )Purchase
                of property and equipment
            
            
            (55,409
            )
            
            (66,749
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (55,409
            )
            
            (126,260
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Repurchase
                of common stock
            
            
            (65,551
            )
            
            --Repayments
                of long-term debt
            
            
            (610,592
            )
            
            (325,024
            )Repayments
                of credit line
            
            
            --
            
            
            (600,000
            )Proceeds
                from convertible secured notes, net
            
            
            --
            
            
            3,458,780NET
                CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES
            
            
            (676,143
            )
            
            2,533,756NET
                (DECREASE)INCREASE IN CASH
            
            
            (2,291,734
            )
            
            4,911,355CASH
                - BEGINNING
            
            
            6,824,444
            
            
            1,101,088CASH
                - ENDING
            
            $
            4,532,710
            
            $
            6,012,443





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






-7-
 **Table
          of Contents**





MARKLAND
      TECHNOLOGIES, INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:


FOR
      THE
      THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004


(UNAUDITED)


2005
            
            2004Cash
                paid during the periods for:Interest
            
            $
            89,749
            
            $
            178,520Taxes
            
            $
            --
            
            $
            --Non-cash
                investing and financing activities:Stock
                issued for payment of accrued interest
            
            $
            67,880
            
            $
            --Beneficial
                conversion feature of convertible secured notes
            
            $
            69,344
            
            $
            --Stock
                issued in settlement of liquidated damages concerning
                registration statements
            
            $
            626,503
            
            $
            --Stock
                issued upon conversion of promissory notes
            
            $
            2,539,990
            
            $
            --Exchange
                of Series D preferred stock for Technest Series B preferred
                stock
            
            $
            61,812
            
            $
            --Dividend
                declared
            
            $
            1,885,529
            
            $
            --Warrants
                reclassified from permanent equity to liabilities
            
            $
            155,000
            
            $
            --





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


-8-
 **Table
          of Contents**


**MARKLAND
      TECHNOLOGIES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED AND CONSOLIDATED FINANCIAL STATEMENTS**





**For
      the Three Months Ended September 30, 2005 and 2004**


(Unaudited)





**1. BASIS
      OF
      PRESENTATION**





The
      accompanying unaudited condensed consolidated financial statements of Markland
      Technologies, Inc. and Subsidiaries ("Markland" or the "Company") have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America for interim financial information, without being
      audited, pursuant to the rules and regulations of the Securities and Exchange
      Commission. Accordingly, they do not include all of the information and
      footnotes required by accounting principles generally accepted in the United
      States of America for complete financial statements. In the opinion of
      management, all adjustments (consisting of normal recurring accruals) considered
      necessary to make the financial statements not misleading have been included.
      Operating results for the three months ended September 30, 2005 are not
      necessarily indicative of the result that may be expected for the year ending
      June 30, 2006. The unaudited condensed consolidated financial statements should
      be read in conjunction with the consolidated financial statements and footnotes
      included in the Company's 10-KSB for the year ended June 30, 2005 filed with
      the
      Securities and Exchange Commission.





**2. SUMMARY
      OF
      SIGNIFICANT ACCOUNTING POLICIES**





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of Markland and its
      wholly-owned subsidiaries, Security Technology, Inc. ("STI"), Ergo Systems,
      Inc.
      ("Ergo"), and Science and Technology Research Corporation, Inc. ("STR"), and
      its
      majority-owned subsidiary, Technest Holdings, Inc. (“Technest”), and Technest’s
      wholly-owned subsidiaries, E-OIR Technologies, Inc. ("EOIR"), and Genex
      Technologies, Inc. (“Genex”). The minority interest represents outsiders’
interest in preferred stock of Technest (see Note 8). All significant
      inter-company balances and transactions have been eliminated in consolidation.





Use
      of
      Estimates in Preparation of Financial Statements





The
      preparation of the accompanying consolidated financial statements in conformity
      with accounting principles generally accepted in the United States of America
      requires management to make certain estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosures of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenue and expenses during the reporting period. Actual results could differ
      from those estimates. Significant estimates that are particularly susceptible
      to
      change are the determination of the fair value of assets acquired and
      liabilities assumed in business combinations, impairment of identified
      intangible assets, goodwill and long lived assets, the fair value of equity
      instruments issued, valuation reserves on deferred tax assets, amounts due
      to
      contracting government agencies as a result of their audits and revenue and
      costs recognized on long-term, fixed-price contracts.





Concentrations





Markland
      has cash balances in banks in excess of the maximum amount insured by the FDIC
      as of September 30, 2005.





Substantially
      all revenue is generated from contracts with Federal government agencies.
      Consequently, substantially all accounts receivable are due from Federal
      government agencies either directly or through other government
      contractors.





Restricted
      Cash





Restricted
      cash represents one year certificates of deposit collateralizing letters of
      credit in the amount of $250,000 and $40,000 issued in favor of two banks in
      conjunction with the Company’s corporate credit cards.




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          of Contents**





Accounts
      Receivable




Accounts
      receivable represent the amount invoiced for product shipped and amounts
      invoiced by the Company under contracts. An allowance for doubtful accounts
      is
      determined based on management's best estimate of probable losses inherent
      in
      the accounts receivable balance. Management assesses the allowance based on
      known trouble accounts, historical experience and other currently available
      evidence. If management determines amounts to be uncollectible, they will be
      charged to operations when that determination is made. The Company has not
      experienced any material losses in accounts receivable and has provided no
      allowance at September 30, 2005. If management determines amounts to be
      uncollectible, they will be charged to operations when that determination is
      made.




Inventory
      and Work in Process




Inventories
      are stated at the lower of cost or market.  Cost is determined by the
      first-in, first-out method and market represents the lower of replacement costs
      or estimated net realizable value. Work in process represents allowable costs
      incurred but not billed related to contracts.




Property
      and Equipment




Property
      and equipment are valued at cost and are being depreciated over their useful
      lives using the straight-line method for financial reporting. Routine
      maintenance and repairs are charged to expense as incurred. Expenditures which
      materially increase the value or extend useful lives are
      capitalized.




Property
      and equipment are depreciated over the estimated useful lives of assets as
      follows:




Category
            
            Estimated
                Useful LifeSoftware
            
            3
                yearsComputers
                and equipment
            
            3
                yearsVehicles
            
            5
                yearsLeasehold
                improvements
            
            Shorter
                of useful life or lease termFurniture
                and fixtures
            
            5-7
                years





Property
      and equipment, net consisted of the following at September 30,
      2005:


Software
            
            $
            158,308Computers
                and equipment
            
            
            590,335Vehicles
            
            
            55,268Leasehold
                improvements
            
            
            222,338Furniture
                and fixtures
            
            
            205,197$
            1,231,446Less
                accumulated depreciation and amortization
            
            
            (384,291
            )$
            847,155







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Depreciation
      and amortization expense for the three months ended September 30, 2005 and
      2004
      was $86,933 and $77,456, respectively.




Income
      Taxes




The
      Company accounts for income taxes using the asset and liability method. Deferred
      tax assets and liabilities are recognized for the future tax consequences
      attributable to differences between the financial statement carrying amounts
      of
      existing assets and liabilities and their respective tax bases, and operating
      loss and tax credit carry forwards. Deferred tax assets and liabilities are
      measured using enacted tax rates expected to apply to taxable income in the
      years in which these temporary differences are expected to be recovered or
      settled. A deferred tax asset is recorded for net operating loss and tax credit
      carry forwards to the extent that their realization is more likely than not.
      The
      deferred tax benefit or expense for the period represents the change in the
      deferred tax asset or liability from the beginning to the end of the
      period.




Revenue
      Recognition




We
      recognize revenue when the following criteria are met: (1) we have persuasive
      evidence of an arrangement, such as contracts, purchase orders or written
      requests; (2) we have completed delivery and no significant obligations remain,
      (3) our price to our customer is fixed or determinable, and (4) collection
      is
      probable. We recognize revenues at the time we perform services related to
      border security logistic support.




Revenues
      from time and materials contracts are recognized as costs are incurred and
      billed. Allowable costs incurred but not billed as of a period end are recorded
      as work in process.




Revenues
      from firm fixed price contracts are recognized on the percentage-of-completion
      method, either measured based on the proportion of costs recorded to date on
      the
      contract to total estimated contract costs or measured based on the proportion
      of labor hours expended to date on the contract to total estimated contract
      labor hours, as specified in the contract.




Provisions
      for estimated losses on all contracts are made in the period in which such
      losses become known. Changes in job performance, job conditions, and estimated
      profitability, including those arising from contract penalty provisions, and
      final contract settlements may result in revision to cost and income and are
      recognized in the period in which the revisions are determined.




EOIR
      participates in teaming agreements where they are the primary contractor and
      they participate with other organizations to provide complex integrated remote
      sensor product and technology development services to the Federal government.
      EOIR has managerial and oversight responsibility for all team members as well
      as
      the responsibility for the ultimate acceptability of all integrated technical
      performance criteria under the contracts for deliverable services and products.
      EOIR includes as revenues the amounts that they bill under these teaming
      arrangements and include as direct costs amounts that are reimbursable or paid
      to team members.




Fair
      Value of Financial Instruments




The
      financial statements include various estimated fair value information at
      September 30, 2005, as required by Statement of Financial Accounting Standards
      No. 107, "Disclosures about Fair Value of Financial Instruments." Financial
      instruments are initially recorded at historical cost. If subsequent
      circumstances indicate that a decline in the fair value of a financial asset
      is
      other than temporary, the financial asset is written down to its fair
      value.




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Unless
      otherwise indicated, the fair values of financial instruments approximate their
      carrying amounts. By their nature, all financial instruments involve risk,
      including credit risk for non-performance by counterparties. The maximum
      potential loss may exceed any amounts recognized in the consolidated balance
      sheets.




The
      fair
      value of cash, accounts receivable, accounts payable and other long-term debt
      approximate their recorded amounts because of their relative market and
      settlement terms. The fair value of the notes payable issued to the former
      owners of EOIR have been recorded at their fair value, as determined by
      management with regard to a number of considerations including an independent
      valuation, which is less than the face value due to a below market interest
      rate. The convertible secured notes have been recorded at relative fair value
      which is less than face value as a result of the relative fair value of warrants
      issued in conjunction with the notes and the related beneficial conversion
      feature.




Shipping
      Costs




Delivery
      and shipping costs are included in cost of revenue in the accompanying
      consolidated statements of loss.





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          of Contents**


Research
      and Development




Research
      and development costs are charged to expense as incurred. Markland capitalizes
      costs related to acquired technologies that have achieved technological
      feasibility and have alternative uses. Acquired technologies which do not meet
      these criteria are expensed as in-process research and development costs.




Loss
      Per Share




Basic
      and
      diluted net loss per common share has been computed based on the weighted
      average number of shares of common stock outstanding during the periods
      presented.




Common
      stock equivalents, consisting of convertible debt, Series A and D Convertible
      preferred stock, Technest’s Series B preferred stock, options and warrants, were
      not included in the calculation of the diluted loss per share because their
      inclusion would have had the effect of decreasing the loss per share otherwise
      computed.




Impairment
      of Intangible Assets




The
      Company records as goodwill the excess of purchase price over the fair value
      of
      the identifiable net assets acquired. Statements of Financial Accounting
      Standards (SFAS ) No. 142, "Goodwill and Other Intangible Assets", prescribes
      a
      two-step process for impairment testing of goodwill, which is performed
      annually, as well as when an event triggering impairment may have occurred.
      The
      first step tests for impairment, while the second step, if necessary, measures
      the impairment. The Company has elected to perform its annual analysis during
      the fourth quarter of each fiscal year. No impairment charges were recorded
      in
      the three months ended September 30, 2005 and 2004.




Impairment
      of Long-Lived Assets




Pursuant
      to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
      Assets", Markland continually monitors events and changes in circumstances
      that
      could indicate carrying amounts of long-lived assets may not be recoverable.
      An
      impairment loss is recognized when expected cash flows are less than the asset's
      carrying value. Accordingly, when indicators or impairment are present, Markland
      evaluates the carrying value of such assets in relation to the operating
      performance and future undiscounted cash flows of the underlying assets.
      Markland's policy is to record an impairment loss when it is determined that
      the
      carrying amount of the asset may not be recoverable. No impairment charges
      were
      recorded in the three months ended September 30, 2005 and 2004.




Stock-Based
      Compensation




At
      September 30, 2005, as permitted under SFAS No. 148, "Accounting for Stock-Based
      Compensation - Transition and Disclosure", which amended SFAS No. 123,
      "Accounting for Stock-Based Compensation", Markland has elected to continue
      to
      follow the intrinsic value method in accounting for its stock-based employee
      compensation arrangements as defined by Accounting Principles Board Opinion
      ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
      interpretation including Financial Accounting Standards Board ("FASB")
      Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
      Compensation", an interpretation of APB No. 25. Had the Company followed the
      fair value method in accounting for its stock-based employee compensation it
      would have had the following effect on the net loss for the three months ended
      September 30, 2005 and 2004.




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Three
                  months endedSeptember
                  30,2005
              
              2004Net
                  loss as reported
              
              $
              (4,042,110
              )
              $
              (1,246,021Add:
                  stock-based employee compensation under intrinsic value method
                  included in
                  net loss
              
              
              96,339
              
              
              198,848Deduct:
                  stock-based employee compensation under fair value method
              
              
              (243,639
              )
              
              (258,710
              )Pro
                  forma net loss
              
              
              (4,189,410
              )
              
              (1,186,159
              )Deemed
                  dividends to preferred stockholders
              
              
              159,552
              
              
              --Pro
                  forma net loss to applicable to common stockholders
              
              $
              (4,348,932
              )
              $
              (1,186,159Basic
                  and diluted loss per share - as reported
              
              $
              (0.02
              )
              $
              (0.03Basic
                  and diluted loss per share - pro forma
              
              $
              (0.02
              )
              $
              (0.03





Impact
      of Recently Issued Accounting Standards




In
      December 2004, the FASB issued SFAS No. 123(R) (revised 2004), Share-Based
      Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
      Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
      Stock Issued to Employees, and Amends SFAS No. 95, Statement of Cash Flows.
      Generally, the approach in SFAS No. 123(R) is similar to the approach described
      in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments
      to
      employees, including grants of employee stock options, to be recognized in
      the
      income statement based on their fair values. Pro forma disclosure is not an
      alternative. SFAS No. 123(R) must be adopted no later than the first interim
      period for fiscal years beginning after December 15, 2005. The Company expects
      to adopt SFAS No. 123(R) on July 1, 2006.




SFAS
      No.
      123(R) permits public companies to adopt its requirements using one of two
      methods: a “modified prospective” approach or a “modified retrospective”
approach. Under the modified prospective approach, compensation cost is
      recognized beginning with the effective date based on the requirements of SFAS
      123(R) for all share-based payments granted after the effective date and the
      requirements of SFAS No. 123(R) for all awards granted to employees prior to
      the
      effective date of SFAS No. 123(R) that remain unvested on the effective date.
      The modified retrospective approach includes the requirements of the modified
      prospective approach but also permits entities to restate based on the amounts
      previously recognized under SFAS No. 123 for purposes of pro forma disclosures
      either for all prior periods presented or prior interim periods of the year
      of
      adoption. The Company is evaluating which method to adopt.




As
      permitted by SFAS No. 123, the Company currently accounts for the share-based
      payments to employees using APB Opinion No. 25’s intrinsic value method and, as
      such, generally recognize no compensation cost for employee stock options.
      However, grants of stock to employees have always been recorded at fair value
      as
      required under existing accounting standards. The Company expects the adoption
      of SFAS No. 123(R) to have a material effect on its results of operations.
      Additionally, the Company’s results of operations could be materially effected
      by share-based payments issued after the adoption of SFAS 123(R). The impact
      of
      the adoption of SFAS No. 123(R) cannot be predicted at this time because it
      will
      depend on levels of share-based payments granted in the future. However, had
      the
      Company adopted SFAS No. 123(R) in prior periods, the impact of that standard
      would have approximated the impact of SFAS No. 123 as described in Note 2 to
      the
      financial statements.




SFAS
      No.
      123(R) also requires the benefits of tax deductions in excess of recognized
      compensation cost to be reported as a financing cash flow, rather than an
      operating cash flow under current accounting literature. Since the Company
      does
      not have the benefit of tax deductions in excess of recognized compensation
      cost, because of net operating loss position, the change will have no immediate
      impact on the consolidated financial statements.




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**3. ACQUISITIONS**





Purchase
      of Technest Holdings, Inc. and Genex Technologies, Inc.




On
      February 14, 2005, Markland entered into definitive agreements with Technest,
      a
      public company with no revenue and minimal assets and operations, Genex, and
      certain investors, which resulted in Markland acquiring controlling interests
      in
      Technest simultaneously with and conditioned upon the Technest acquisition
      of
      Genex.




In
      accordance with a Securities Purchase Agreement between Technest and Markland,
      Technest issued 412,650,577 (1,954,023 post reverse split) shares of its common
      stock to Markland in exchange for 10,168,764 shares of Markland’s common stock
      (“the Markland Investment”). On February 14, 2005, the common stock received
      from Technest represents a 93% interest in Technest’s common stock on a primary
      basis. Consequently, Technest became a majority owned subsidiary of Markland
      on
      February 14, 2005. The Securities Purchase Agreement contains provisions for
      Markland to deliver additional shares of its common stock to Technest in
      conjunction with the conversion of the Technest Series B Convertible Preferred
      Stock (see below).




Immediately
      after the acquisition by Markland of a controlling interest in Technest, certain
      investors paid $5,000,000 in cash for shares of Technest Series B Preferred
      Stock, Technest Series C Convertible Preferred Stock and five-year warrants
      to
      purchase Technest common stock (see Note 9).




The
      acquisition of Genex was effected pursuant to an Agreement and Plan of Merger
      dated February 14, 2005, by and among Markland, Technest, MTECH Acquisition,
      Inc. ("MTECH"), a wholly-owned subsidiary of Technest, Genex and Jason Geng
      (“Dr. Geng”), the sole stockholder of Genex. As a result of the merger, all of
      the outstanding shares of the capital stock of Genex were automatically
      converted into the right to receive in the aggregate (i) $3 million of cash;
      (ii) 10,168,764 shares of Markland's common stock valued at $6,101,259 (the
      shares of Markland common stock issued to Technest); and (iii) if earned,
      contingent payments in the form of additional shares of Technest common stock.
      A
      brokerage fee in connection with this acquisition of $300,000 was also paid.
      In
      addition, Dr. Geng was to receive a twelve month unsecured promissory note
      in
      the principal amount of $550,000 that paid interest at the rate of 6% per annum.
      Dr. Geng's share consideration was to be adjusted to reflect changes in the
      closing bid price of Markland common stock in the 10 trading days following
      February 14, 2005, subject to limitations set forth in the Merger Agreement.
      Following the acquisition, the Company discovered what it believes were material
      misrepresentations made by Dr. Geng in the Merger Agreement. As a result of
      damages arising in connection with these breaches, the Company has refused
      to
      issue the promissory note, the additional shares of Markland common stock or
      the
      contingent consideration of Technest common stock, if any.




-15-
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Genex
      is
      a supplier of advanced imaging, surveillance and security sensor technologies.




Unaudited
      Condensed Pro Forma Information




Unaudited
      condensed pro forma information for Markland's acquisition of Genex assuming
      it
      was acquired on July 1, 2003 is as follows:




Three
                Months EndedSeptember
                30, 2004Revenues
            
            $
            17,103,000Loss
                from operations
            
            $
            (646,000
            )Net
                loss applicable to common stockholders
            
            $
            (1,142,000
            )Net
                loss applicable to common stockholders per common share
            
            $
            (0.03
            )






-16-
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Push
      Down Accounting




Based
      on
      the substantial change in ownership and control of Technest, as well as the
      fact
      that the investors in the Technest financing represent a collaborative group
      brought together to promote the acquisition of Genex, the push down basis of
      accounting has been applied to the acquisition of Technest by Markland. In
      accordance with the push down basis of accounting, Technest recorded Genex’s net
      assets, which are included in our consolidated financial statements, at their
      estimated fair values as of the date of acquisition which resulted in the basis
      of the net assets acquired being adjusted as disclosed above. Technest’s
      accumulated deficit was reset to zero as of the acquisition date. The purchase
      price was allocated to the estimated fair value of Genex’s assets and
      liabilities as determined by management based on a number of considerations
      including an independent purchase price allocation analysis.




Reorganization
      and Stock Dividend




On
      August
      17, 2005, Markland sold all of the outstanding stock of EOIR to its
      majority-owned subsidiary, Technest pursuant to a Stock Purchase Agreement
      with
      Technest.  As consideration for the stock of EOIR, Technest issued 12
      million shares of its common stock to Markland, and, as a result, Markland’s
      ownership of Technest increased from 85% immediately prior to the transaction
      to
      approximately 98% on a primary basis and from 39% to approximately 82% on a
      fully diluted basis (assuming the conversion of all of Technest’s convertible
      securities and the exercise of all warrants to purchase Technest common stock).
       This reorganization did not result in a change of control of EOIR and as a
      result, no pro forma financial information is considered necessary.  We did
      not need stockholder consent in order to complete this reorganization. Since
      this is a transaction between entities under common control, in accordance
      with
      Statement of Financial Accounting Standards (SFAS) No. 141, “Business
      Combinations”, Appendix D, Technest recorded the net assets of EOIR at their
      carrying value on the date of transfer and there was no impact on the
      consolidated group.




In
      connection with this reorganization, the Board declared a stock dividend of
      $10
      million worth of its Technest common stock to Markland common stockholders
      up to
      a maximum of 2.5 million shares of Technest common stock.  The record date
      for the dividend is May 1, 2006 and the dividend date is July 5, 2006.  The
      actual number of shares of Technest common stock to be distributed will be
      calculated based on a per share price equal to the average closing price of
      the
      Technest Stock as reported by the National Association of Securities Dealers
      Automatic Quotations service for the ten trading days ending June 30, 2006;
      however, in no event shall the number of shares of Technest common stock
      distributed exceed 2.5 million.




The
      distribution of shares of Technest common stock to the shareholders of Markland
      is considered a nonreciprocal transfer to the owners of Markland, as discussed
      in Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary
      Transactions” and part of a reverse spinoff as described in EITF 02-11,
“Accounting for Reverse Spinoffs”. As a result, the transfer is accounted for
      using Markland’s recorded amount of the Technest common stock
      distributed rather than the fair value of that stock. At September 30,
      2005, the Company recorded a dividend payable based on the estimated the number
      of Technest common shares that will be distributed using the most recent quoted
      price of Technest’s common stock. The final recorded amount of the dividend
      could differ from this amount.




**4. AMORTIZATION
      OF INTANGIBLE ASSETS**





Amortizable
      intangible assets consist of the following at September 30, 2005:





Amortizable
                intangibles - EOIR
            
            $
            11,755,000Amortizable
                intangibles - Ergo
            
            
            400,000Amortizable
                intangibles - STR
            
            
            1,551,944Amortizable
                intangibles - Technest
            
            
            1,731,111Total
                amortizable intangibles
            
            
            15,438,055Accumulated
                amortization
            
            
            (2,506,916
            )Net
                amortizable intangibles
            
            $
            12,931,139








-17-
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          of Contents**





Amortization
      expense was $474,202 and $481,992 for the nine months ended September 30, 2005
      and 2004, respectively.





**5. LONG-TERM
      DEBT**





**Notes
      Payable - EOIR Acquisition**





On
      June
      29, 2004, EOIR issued notes guaranteed by Markland in the face amount of
      $11,000,000 in connection with the acquisition of EOIR's common stock. These
      notes accrue interest at 6% compounded monthly and are payable in quarterly
      installments over 60 months. The fair market value of these notes is $9,532,044
      as determined by management based on a number of considerations including an
      independent valuation. The discount of $1,467,956 will be amortized to interest
      expense over the life of the note. During the three months ended September
      30,
      2005 and 2004, $73,399 and $73,398, respectively, were amortized to interest
      expense. The carrying value of the note and the unamortized discount at
      September 30, 2005 was $8,800,000 and $1,100,967, respectively.




**Other
      Long-Term Bank Debt**




EOIR's
      other long-term bank debt consists of the following as of September 30,
      2005:




First
                Market Bank, secured by research equipment, dated October, 2002 with
                monthly payments of $3,715 including interest of LIBOR plus 2.75%
                (6.80%
                at September 30, 2005)
            
            
            34,518First
                Market Bank, dated July, 2002 with monthly payments of $15,278 plus
                interest of LIBOR plus 2.75%, (6.80% at September 30, 2005)
            
            
            49,802First
                Market Bank, secured by leasehold improvements, dated March 19, 2003
                with
                monthly payments of $3,514 including interest of 5.05%
            
            
            11,588American
                Honda Finance, secured by vehicle, dated March 24, 2003 with monthly
                payments of $406 including interest of 4.70%
            
            
            11,687$
            107,595




**Convertible
      Notes and Warrant Purchase Agreements - September 21, 2004**





On
      September 21, 2004, Markland Technologies, Inc. entered into a Purchase
      Agreement with DKR Soundshore Oasis Holding Fund, Ltd. and DKR Soundshore
      Strategic Holding Fund, Ltd. (together the "Investors") pursuant to which the
      Company sold warrants to purchase shares of common stock (the "Warrants") and
      secured convertible promissory notes (the "Convertible Notes") for the aggregate
      consideration of $4,000,000. The Convertible Notes are initially convertible
      into $5,200,000 of common stock at a price of $0.80 per share, subject to
      certain adjustments as defined in the Purchase Agreement. The Warrants entitle
      the Investors to purchase an aggregate of 6,500,000 shares of our Common Stock
      at an initial conversion price of $.80 at any time and from time to time through
      September 21, 2009.




-18-
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The
      Purchase Agreement contains standard representations, covenants and events
      of
      default. Occurrence of an event of default allows the Investors to accelerate
      the payment of the Convertible Notes and/or exercise other legal remedies,
      including foreclosing on collateral.




The
      Convertible Notes are in the aggregate principal amount of five million two
      hundred thousand dollars ($5,200,000) and accrue interest daily at the rate
      of
      eight percent (8%) per year on the then outstanding and unconverted principal
      balance of the Convertible Notes. Under the terms of the Convertible Notes,
      $4,000,000 of the outstanding principal and interest is required to be prepaid
      by March 15, 2005. In the event the Investors do not receive such prepayment
      amount by March 15, 2005, then the Conversion Price shall automatically become
      the Adjusted Conversion Price which is the lower of $0.80 a share or 80% of
      the
      average of the Closing Prices during the five (5) Trading Days prior to the
      applicable Conversion Date. This shall not be an event of default. The Company
      did not make such prepayment by March 15, 2005. The remaining outstanding
      balance is due by September 21, 2005. At anytime, and at the option of the
      Investors, the outstanding principal and accrued interest of the Convertible
      Notes may be converted into shares of Markland's common stock at the lower
      of
      $0.80 per share or 80% of the average of the closing prices during the five
      trading days prior to the applicable conversion date.




On
      September 20, 2005, the due date of these Convertible Notes was extended to
      December 20, 2005.




The
      Company has granted a security interest in and a lien on substantially all
      of
      its assets to the Investors pursuant to the terms of a Security Agreement,
      dated
      September 21, 2004.




As
      part
      of this financing, James LLC, the largest holder of Series D Preferred Stock,
      agreed not to sell any of its holdings of Series D Preferred Stock until the
      earlier to occur of: (1) notice from the Company and the investors that the
      transactions contemplated in the Purchase Agreement had been terminated, or
      (2)
      March 15, 2005. However, pursuant to the terms of the lock-up agreement, James,
      LLC may still convert their Series D shares and sell the underlying shares
      of
      common stock in accordance with Rule 144 of the Securities Act of 1933, as
      amended. In exchange, Markland agreed that under certain conditions, if they
      did
      not redeem the Series D stock by January 15, 2005, they would issue to James
      LLC
      a warrant to purchase 1,088,160 shares of our common stock at $.80 per share.
      The Series D stock was not redeemed by January 15, 2005 and the warrant was
      subsequently issued.




In
      conjunction with this financing, the Company issued 833,333 shares of common
      stock to investors that participated in the Company's April 2, 2004 private
      placement in exchange for their waiver and release of certain
      rights.




On
      September 21, 2004, Markland estimated the fair value of the Warrants and
      allocated the gross proceeds of $4,000,000 on a relative fair value basis
      between the Convertible Notes and the Warrants. Based on this analysis, Markland
      estimated that the relative fair value of the Warrants and Convertible Notes
      were approximately $1,659,000 and $2,341,000, respectively. Based on the initial
      conversion price of $0.80 per share, Markland estimated that the Convertible
      Notes could convert into 6,500,000 shares of common stock and the effective
      conversion price was approximately $0.36 per share. Accordingly, Markland
      determined that there was a beneficial conversion feature of approximately
      $3,054,000. Since the beneficial conversion feature exceeded the carrying value
      of the Convertible Notes, the recognition of the beneficial conversion feature
      was limited to $2,341,000. As a result, the Convertible Notes were recorded
      net
      of the fair value of the Warrants and beneficial conversion feature at $0 and
      will be accreted to $5,200,000, the face value of the Convertible Notes, over
      the term of those notes. Non-cash interest expense related to the accretion
      of
      this discount was $133,657 for the three months ended September 30, 2005. The
      carrying value of the Convertible Notes and unamortized discount at September
      30, 2005 was $1,095,000 and $0, respectively.




-19-
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          of Contents**




In
      conjunction with the issuance of these Convertible Notes and Warrants, Markland
      incurred cash financing costs of $766,628. These costs have been recorded in
      Other Assets as deferred financing costs and are being amortized to interest
      expense over the term of the Convertible Notes. Non-cash interest expense
      related to the amortization of deferred financing costs was $39,987 in the
      three
      months ended September 30, 2005.




Warrants
      to purchase 1,500,000 shares of common stock at an initial exercise price of
      $1.50 and three year term were issued as finders fees. The fair value of these
      warrants have been calculated at $887,374 and have been recorded as additional
      deferred financing costs and are being amortized to interest expense over the
      term of the Convertible Notes. Non-cash interest expense related to the
      amortization of these deferred financing costs was $46,284 in the three months
      ended September 30, 2005.




During
      the three months ended September 30, 2005, notes with a face value of $2,055,000
      were converted into 55,118,491 shares of the Company’s common
      stock.




Extension
      of Convertible Notes




On
      September 20, 2005, Markland Technologies, Inc. entered into an agreement with
      DKR Soundshore Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding
      Fund, Ltd. (the “DKR entities”), the holders of Markland’s currently outstanding
      September 21, 2004 Secured 8% Convertible Notes (the “Notes”), to extend the
      maturity date of the Notes for ninety (90) days.  The Notes were due on
      September 21, 2005.  The Notes are now due on December 20, 2005.  As
      of September 30, 2005, the principal amount currently outstanding on these
      Notes
      was $1,095,000.




As
      consideration for the extension of the maturity date of the Notes, Markland
      agreed to issue to the DKR entities for no additional consideration secured
      convertible promissory notes identical in all respects to the Notes, but for
      the
      fact that the maturity date of such notes is January 20, 2006.  The
      original principal amount for the note to DKR Soundshore Oasis Holding Fund,
      Ltd. is $224,700 and the original principal amount for the note to DKR
      Soundshore Strategic Holding Fund, Ltd. is $52,675 (collectively, the “New
      Notes”).  The principal amount of the New Notes was recorded as a liability
      and charged to interest expense in the quarter ended September 30, 2005. The
      New
      Notes have all the rights and preferences of the Notes as set forth in the
      Securities Purchase Agreement, dated September 21, 2004, between Markland and
      the investors signatory thereto.  Markland also agreed to prepare and file
      with the Securities and Exchange Commission a registration statement on Form
      SB-2 covering the resale of the shares of Markland common stock, $.0001 par
      value per share, issuable upon conversion of the New Notes (the “Underlying
      Stock”).  The Underlying Stock is deemed Registrable Securities as defined
      in the Registration Rights Agreement, dated September 21, 2004, between Markland
      and the investors signatory thereto, and afforded all the rights and obligations
      of Registrable Securities, provided, however, that the Filing Date (as defined
      in the aforementioned Registration Rights Agreement) of the registration
      statement on Form SB-2 covering the resale of the Underlying Stock shall be
      no
      later than October 17, 2005. Based on the initial conversion price of $0.03
      per
      share, Markland estimated that the New Notes could convert into 11,557,292
      shares of common stock and the effective conversion price was approximately
      $0.024 per share. Accordingly, Markland determined that there was a beneficial
      conversion feature of $69,344 which was recorded as a discount on the New
      Note and will be amortized to interest expense over the term.




-20-
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          of Contents**




The
      carrying value of the New Notes and the unamortized discount at September 30,
      2005 was $277,375 and $69,344 respectively.




Markland
      also entered into a stock pledge agreement with the DKR entities pursuant to
      which Markland pledged 3,000,000 shares of Technest common stock currently
      owned by Markland to secure Markland’s obligations under the New
      Notes.




**Convertible
      Notes and Warrant Purchase Agreements - November 9, 2004**





On
      November 9, 2004, the Company entered into a Securities Purchase Agreement
      (the
      "Securities Purchase Agreement") with Harborview Master Fund, LP and Southridge
      Partners, LP (the "November Investors") pursuant to which the Company sold
      warrants to purchase shares of common stock (the "November Warrants") and
      secured convertible promissory notes (the "November Convertible Notes") for
      the
      aggregate consideration of $1,350,000. The November Convertible Notes are
      initially convertible into $1,755,000 of common stock at a price of $0.80 per
      share, subject to certain adjustments as defined in the Purchase Agreement.




The
      November Warrants entitle the November Investors to purchase an aggregate of
      2,531,250 shares of our common stock, at any time and from time to time, through
      November 9, 2009 at an initial exercise price of $1.50 per share. The November
      Convertible Notes are in the aggregate principal amount of $1,755,000 and accrue
      interest daily at the rate of eight percent (8%) per year on the then
      outstanding and unconverted principal balance of the notes. Under the terms
      of
      the November Convertible Notes $1,000,000 of the outstanding principal and
      interest is required to be prepaid by March 15, 2005. In the event the November
      Investors do not receive such prepayment amount by the prepayment date then
      the
      conversion price shall automatically become the adjusted conversion price which
      is the lower of $0.80 per share or 80% of the average of the closing prices
      during the five trading days prior to the applicable conversion date. This
      shall
      not be an event of default. The Company did not make such prepayment by March
      31, 2005. The notes will mature on November 9, 2005. At any time, and at the
      option of the November Investors, the outstanding principal and accrued interest
      of the notes may be converted into shares of our common stock at the lower
      of
      $0.80 per share or 80% of the average of the closing prices during the five
      trading days prior to the applicable conversion date.




On
      November 9, 2004, Markland estimated the fair value of the November Warrants
      and
      allocated the gross proceeds of $1,350,000 on a relative fair value basis
      between the November Convertible Notes and the November Warrants. Based on
      this
      analysis, Markland estimated that the relative fair value of the November
      Warrants and November Convertible Notes were approximately $571,513 and
      $778,487, respectively. Based on the initial conversion price of $0.80 per
      share, Markland estimated that the November Convertible Notes could convert
      into
      2,193,750 shares of common stock and the effective conversion price was
      approximately $0.36 per share. Accordingly, Markland determined that there
      was a
      beneficial conversion feature of approximately $713,263. As a result, the
      November Convertible Notes were recorded net of the fair value of the November
      Warrants and beneficial conversion feature at $65,224 and will be accreted
      to
      $1,755,000, the face value of the November Convertible Notes, over the term
      of
      those notes. Non-cash interest expense related to the accretion of this discount
      was $35,958 for the three months ended September 30, 2005. The carrying value
      of
      the November Convertible Notes and the unamortized discount at September 30,
      2005 was $25,000 and $0, respectively.




In
      conjunction with the issuance of these November Convertible Notes and November
      Warrants, Markland incurred financing costs of $175,530. These costs have been
      recorded in Other Assets as deferred financing costs and are being amortized
      to
      interest expense over the term of the November Convertible Notes. Non-cash
      interest expense related to the amortization of deferred financing costs was
      $85,931 in the three months ended September 30, 2005.




-21-
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The
      other
      terms of these notes and warrants are substantially the same as the Convertible
      Notes and Warrants Purchase agreement dated September 21, 2004 described above.




In
      the
      three months ended September 30, 2005, notes with a face value of $484,990
      were
      converted into 8,126,071 shares of the Company’s common stock.




Accrued
      interest of $67,880 related to both the September 21, 2004 and November 9,
      2004
      convertible notes was paid through the issuance of 888,297 shares of common
      stock.




**8. STOCKHOLDERS'
      EQUITY**





Preferred
      Stock





The
      Company is authorized to issue 5,000,000 shares of preferred stock which may
      be
      issued in series with such designations, preferences, stated values, rights
      qualifications, or limitations as determined by the Board of Directors.





Series
      A Redeemable Convertible Preferred Stock





On
      June
      30, 2003, Markland issued 30,000 shares of our Series A Non-Voting Redeemable
      Convertible Preferred Stock in satisfaction of our remaining obligations under
      a
      promissory note. The Series A Preferred Stock has no par value, is non-voting
      and has a stated value of $10 per share. The Preferred Stock is convertible
      at
      any time at the option of the Company, and cannot be converted by the holder.
      This stock is convertible at the rate of three shares of Series A Preferred
      Stock for each share of common stock. This conversion rate may be adjusted
      at
      any time by the Company as a result of either the sale of the Company or as
      a
      result of a stock split or stock dividend that is issued by the Company while
      these shares remain outstanding.





The
      Company shall have the right, but not the obligation to, at any time after
      the
      issuance of these shares to redeem all or any portion of the outstanding shares
      of Series A Preferred Stock from the holder in cash at the stated value of
      $10
      per share by sending notice to the holder. The Series A Preferred Stock has
      a
      liquidation preference of $10 per share. This stock does not accrue dividends.





Series
      C 5% Cumulative Convertible Preferred Stock





The
      Series C Preferred Stock is non-voting and has a liquidation preference of
      $1,000 per share. The holders of the Series C Preferred Stock are entitled
      to
      receive dividends on each share of preferred stock, which shall accrue on a
      daily basis at the rate of 5% per annum on the sum of the liquidation preference
      plus all accumulated and unpaid dividends thereon. These dividends shall accrue
      whether or not they have been declared or there are legally available funds
      with
      which to pay them, and at the option of the holders are payable either in cash
      or in unrestricted common stock. The Series C Preferred Stock is redeemable
      at
      any time by Markland, and cannot be converted by the holders without written
      permission for a period of 6 months following the issuance of the shares and
      then only 10% may be converted per month thereafter. The Series C Preferred
      Stock is convertible at the option of the holder at a conversion price ranging
      from 65% to 80% of the common stock's market price at the time of the
      conversion.





At
      September 30, 2005, there were no shares of Series C Preferred Stock issued
      or
      outstanding.





Series
      D Convertible Preferred Stock





Shares
      of
      the Series D Convertible Preferred Stock have a liquidation preference of $1,000
      per share, are non-voting, do not accrue dividends, are redeemable by Markland
      anytime and are convertible into shares of Markland's common stock at a
      conversion price ranging from 65% to 80% of the common stock's market price
      at
      the time of the conversion.




-22-
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The
      Series D preferred stock is convertible at the option of the stockholder at
      any
      time. The number of shares of our common stock into which each share of Series
      D
      preferred is convertible is determined by dividing $1,000 by the discounted
      bid
      price. The "discounted" bid price is the average closing bid




price
      of
      our common stock during the five business days immediately preceding the
      conversion date multiplied by the applicable discount factor, as set forth
      below.




AVERAGE
                CLOSING BID PRICE (1)
            
            DISCOUNT
                FACTOR$15.00
                or less
            
            
            80
            %more
                than $15.00, but less than or equal to $30.00
            
            
            75
            %more
                than $30.00, but less than or equal to $45.00
            
            
            70
            %more
                than $45.00
            
            
            65
            %


The
      Series D preferred stock can be converted only to the extent that the Series
      D
      stockholder will not, as a result of the conversion, hold in excess of 9.999%
      of
      the total outstanding shares of our common stock.




On
      August
      19, 2005, we entered into a definitive exchange agreement with the Deer Creek
      Fund LLC, pursuant to which we exchanged 114,942 shares of Technest Series
      B
      Preferred Stock (potentially convertible into 3,799,409 shares of Markland
      common stock based on the closing price of Markland’s common stock as of August
      19, 2005) for 500 shares of Markland Series D Preferred Stock (convertible
      into
      5,008,013 shares of Markland Common Stock as of August 19, 2005).  The
      Company has determined that as of the date of issuance there was a beneficial
      conversion feature in the aggregate amount of $159,552. The accretion of the
      beneficial conversion features on the Series D Preferred Stock has been recorded
      as a deemed dividend. The deemed dividends increases the loss applicable to
      common shareholders in the calculation of basic and diluted net loss per common
      share.




During
      the three months ended September 30, 2005, 3,830 shares of Series D were
      converted into 45,840,657 common shares of the Company.





At
      September 30, 2005, there were 9,268 shares of Series D outstanding. Please
      see
      Note 15 for an issuance of Series D after September 30, 2005.





Common
      Stock Issuances





Markland
      has entered into compensation agreements with certain officers and a consultant
      (see Note 11) which provide for, among other things, certain performance-based
      stock grants. Markland did not issue any shares under these agreements in the
      three months ended September 30, 2005. Markland amortized stock compensation
      expense of $916,959 in this period.





During
      the three months ended September 30, 2005, Markland issued the following:




·
              45,840,657
                  shares of its common stock on conversion of 3,830 Series D shares.
  ·
              5,589,299
                  shares  of its common stock with a fair value of $626,503 issued as
                  settlement of liquidated damages being charged to interest expense.
  ·
              63,244,562
                  shares of its common stock on conversion of secured convertible
                  notes.
  ·
              888,297
                  shares of its common stock in satisfaction of accrued interest
                  of $61,812
                  on secured convertible notes.





-23-
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          of Contents**





Markland
      has established the following reserves for the future issuance of common stock
      as follows:


Reserve
                for the exercise of warrants
            
            
            29,000,000Reserve
                for stock option plan
            
            
            50,000,000Reserve
                for conversion of Series A Preferred Stock
            
            
            10,000Reserve
                for conversion of Series D Preferred Stock
            
            
            386,000,000Reserve
                for conversion of Technest Series B preferred stock
            
            
            7,000,000Reserve
                for conversion of secured convertible notes
            
            
            98,000,000Total
                reserves
            
            
            570,010,000





The
      Company is also obligated to issue certain shares under employment and
      consulting agreements. The potential shares issuable as of September 30, 2005
      exceed the authorized share capital of Markland. The authorization to issue
      additional shares to satisfy these requirements is dependent on approval by
      a
      majority of Markland shareholders.





Technest
      Series B Convertible Preferred Stock





In
      conjunction with Markland’s acquisition of Technest and Technest’s acquisition
      of Genex (see Note 3), Technest issued, among other securites, 1,149,425 shares
      of Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series
      B Preferred Stock will be convertible into Markland common stock upon the
      earlier to occur of (a) February 14, 2006 or (b) a date which is the first
      trading day after the date on which Markland common stock has a closing bid
      price of $2.50 or more for five consecutive trading days. The number of shares
      to be issued will be determined by dividing the quotient of (a) $5,000,000
      divided by the lower of (i) $0.60 and (ii) the market price (as defined in
      the
      Merger Agreement) by (b) 1,149,425. As of September 30, 2005, 747,124 shares
      of
      Series B Convertible Preferred Stock have been converted to 3,250 shares of
      Markland Series D preferred stock and subsequently retired.





At
      September 30, 2005, Technest has incurred liquidated damages of $530,000 which
      was charged to interest expense related to the Company’s failure to file a
      registration statement.





Minority
      Interest





As
      of
      September 30, 2005, the minority interest in Technest is comprised of the
      following:


Outside
                investment in Technest common and preferred stock
            
            
            
            
            $
            3,512,273Deemed
                dividends related to beneficial conversion features of Technest preferred
                stock
            
            
            2,174,858Portion
              of outside investment converted into Markland Series D preferred
              stock
            
            
            (401,780
            )Minority
                interest in net loss of Technest
            
            
            (214,272
            )
            
            1,558,806Minority
                interest
            
            
            
            
            $
            5,071,079


**9. OPTIONS
      AND
      WARRANTS**





Options




In
      conjunction with the Company's acquisition of EOIR (see Note 3), the Company
      adopted the 2004 Stock Incentive Plan ("the Plan"). The Plan authorizes the
      Company to issue up to 25,000,000 of common shares in the form of options,
      stock
      awards, performance share awards or stock appreciation rights.




-24-
 **Table
          of Contents**




The
      Company also adopted the 2005 Stock Award Plan, which authorizes the Company
      to
      issue up to 25,000,000 shares of common stock in the form of stock
      awards.




On
      June
      29, 2004, the Company issued options to eleven former minority owners of EOIR
      who have continued employment with the Company. These options have a ten year
      term and vest ratably over a five year period. Ten of these employees received
      options to purchase 9,345,737 shares of common stock at a price of $.3775.
      On
      the date of grant, the intrinsic value of these options, $3,528,016, was
      recorded as unearned stock-based compensation and additional paid in capital.
      This intrinsic value will be amortized to stock compensation over the five
      year
      vesting period.




One
      employee received five options, each of which allows for the purchase of a
      number of shares equal to .11799575 times a fraction of $1,600,000 divided
      by
      the fair value of the stock on the vesting date. One of these options vests
      each
      year for the next five years. The exercise price of these options will be
      one-half the fair value of the stock on the vesting date. The intrinsic value
      of
      these options based on the fair value of the stock on September 30, 2005 is
      $471,983. This intrinsic value has been recorded as unearned stock-based
      compensation and additional paid in capital. Due to the variable nature of
      the
      exercise price and number of shares to be issued under these options, the
      intrinsic value will be remeasured each period until the terms are fixed. The
      intrinsic value of each option will be amortized over the vesting periods.
      As of
      September 30, 2005, the maximum number of shares issuable under these options
      is
      26,745,703.




For
      the
      three months ended September 30, 2005, the Company recorded $96,339 in
      amortization relating to the Plan options.




On
      May
      18, 2005, the Company entered into a Restricted Stock Grant Agreement with
      Dr.
      Mackin, pursuant to which Dr. Mackin exchanged vested options to purchase
      1,250,286 shares of the Company’s common stock at a price of $.3775 per share
      for 1,250,286 shares of Common Stock.  Subject to the terms of the
      Restricted Stock Grant Agreement, the shares of Common Stock issued to Dr.
      Mackin are subject to forfeiture in the event that Dr. Mackin’s tenure with the
      Company is terminated before a registration statement covering the shares has
      been declared effective by the Securities and Exchange Commission. In addition,
      four other employees also exchanged options to purchase 231,750 shares of common
      stock at $.3775 per share for 231,750 shares of the Company’s common stock. The
      Company charged to operations $166,613 relating to these exchanges of equity
      instruments.




Markland
      has also agreed to grant options to purchase an additional 5,000,000 shares
      of
      common stock to employees of EOIR in the future. Markland expects that these
      options will vest over five years after the date of grant and will have an
      exercise price equal to the fair market value of the common stock on the date
      of
      grant.




In
      connection with the acquisition of Genex (see Note 3), Markland agreed to
      replace options to purchase 312,000 shares of Genex common stock with fully
      vested options for the purchase of the same number of shares of Markland common
      stock with an exercise price equal to the fair value of Markland’s common stock
      on the closing date of the Genex acquisition ($0.60).




There
      were no options issued in the three months ended September 30, 2005 and
      5,222,790 were vested at September 30, 2005.






-25-
 **Table
          of Contents**




Warrants





At
      September 30, 2005, the Company had the following outstanding
      warrants:




Number
                ofShares
            
            Exercise
            
            Date
                ofExercisable
            
            Price
            
            ExpirationIssued
                in conjunction with April 2, 2004 private placement
            
            
            3,333,333
            
            $
            1.25
            
            
            April
                2, 2007333,333
            
            $
            1.40
            
            
            April
                2, 2007Issued
                in conjunction with April 16, 2004 private placement
            
            
            2,500,000
            
            $
            1.50
            
            
            April
                16,200725,000
            
            $
            2.00
            
            
            April
                16,2007Issued
                in conjunction with May 3, 2004 private placement
            
            
            7,098,750
            
            $
            1.50
            
            
            May
                3, 2007529,800
            
            $
            1.50
            
            
            May
                3, 2007Issued
                in conjunction with September 21, 2004 convertible note
            
            
            1,000,000
            
            $
            0.60
            
            
            September
                21, 2009Issued
                in conjunction with November 9, 2004 convertible note
            
            
            337,500
            
            $
            1.50
            
            
            November
                9, 2007Issued
                in conjunction with December 7, 2004 consulting agreement
            
            
            400,000
            
            $
            0.60
            
            
            November
                30, 2007Issued
                in conjunction with September 21, 2004 lock up agreement
            
            
            1,088,160
            
            $
            0.60
            
            
            January
                5, 2009Issued
                in conjunction with March 29, 2005 agreement
            
            
            8,443,750
            
            $
            0.60
            
            
            March
                8, 2010Total
            
            
            25,089,626




Weighted
                average exercise price
            
            $
            1.00Weighted
                average remaining life
            
            
            
            
            
            2.75
                years




All
      warrant agreements contain anti-dilution provisions which, upon exercise, may
      cause the exercise price and number of shares of common stock issued to differ
      from those listed above.




At
      September 30, 2005, the Company does not have sufficient authorized common
      shares available to deliver upon exercise of the warrants listed above. As
      a
      result, in accordance with EITF 00-19, Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, the
      warrants have been reclassified from permanent equity to a liability. The
      Company estimated the fair value of the warrants on the date of the change
      in
      classification using the Black-Scholes option pricing model. Therefore, $155,000
      was reclassified from permanent equity to accrued expenses and other current
      liabilities. A change in the fair value of the Company’s common stock by $0.01
      per share would increase or decrease the fair value of the warrants by
      approximately $70,000. The Company will continue to remeasure the fair value
      of
      the warrants each period and record any change in the statement of loss as
      long
      as the warrants continue to be classified as liabilities.




-26-
 **Table
          of Contents**




**10.**
            **NET
                LOSS PER SHARE**




All
      securities that could potentially dilute basic earnings per share ("EPS") were
      not included in the computation of diluted EPS because to do so would have
      been
      anti-dilutive for the periods presented.




**11. COMMITMENTS
      AND CONTINGENCIES**





Compensation
      Agreements





In
      the
      three months ended September 30, 2005, Markland amortized stock compensation
      of
      $916,959 related to its compensation agreements.





Facility
      Rental





We
      have
      an administrative office in Providence, Rhode Island which is utilized under
      a
      monthly sublease comprising approximately 4,000 square feet and an
      administrative office in Boston, MA. The monthly lease amount for these
      facilities is approximately $12,000




EOIR, Technest's
      wholly owned subsidiary, holds a three-year lease for its executive and
      administrative offices of approximately 5,420 square feet in Woodbridge,
      Virginia. The lease expires on September 30, 2008. EOIR leases approximately
      10,000 square feet in Spotsylvania, Virginia, where it houses its software
      development unit. The lease expires on October 31, 2009. EOIR also holds a
      five-year lease for 6,951 square feet in Spotsylvania, Virginia. The lease
      expires on October 15, 2010. EOIR also has several offices located in
      Fredericksburg, Virginia - one office with 1,200 square feet, with a two-year
      lease that expires on October 31, 2006, and one with 4,200 square feet, with
      a
      three-year lease that expires on June 30, 2007. Monthly lease amounts for these
      facilities total approximately $36,600.




Genex
      leases office space under the terms of a non-cancelable operating lease that
      expires in January 2006. The office space lease provides for annual increases
      of
      3% to the base rent and requires the Company to reimburse the landlord for
      its
      pro rata share of the increases in annual operating expenses and real estate
      taxes. Monthly lease amounts for this facility total approximately
      $10,100.




Rent
      expense for the three months ended September 30, 2005 and 2004, was $144,717
      and
      $72,965 respectively.





Income
      taxes




The
      Company expects that its net operating loss carryforwards will be sufficient
      to
      offset any taxable income. As a result, no provision for income taxes or any
      related penalties or interest has been recorded for the three months ended
      September 30, 2005 and 2004.




Government
      Contracts




The
      Company's billings related to certain U.S. Government contracts are based on
      provisional general & administrative and overhead rates which are subject to
      audit by the contracting government agency. During an audit conducted in
      November 2004 covering the fiscal year 2002, the Defense Contract Audit Agency
      (“DCAA”) discovered significant deficiencies in Genex’s accounting system that
      resulted in misclassified and unallowable costs. As a result of this audit,
      Genex could be prevented from completing certain previous contracts awarded
      by
      the Department of Defense and may be required to refund amounts overbilled
      to
      its customers.  The Company has accrued $ 68,017 for overpayments for 2002
      and has extended the analysis of misclassified and unallowed costs to September
      30, 2005. At September 30, 2005, the company has determined that $102,228 is
      repayable to the government. This amount is included in accrued expenses at
      September 30, 2005.




-27-
 **Table
          of Contents**




**12. INCOME
      TAXES**





There
      was
      no provision for federal or state income taxes for the three months ended
      September 30, 2005 and 2004, due to the Company's operating losses and a full
      valuation reserve.




The
      Company's deferred tax asset before valuation allowance is approximately
      $16,000,000, and at September 30, 2005 consisted primarily of net operating
      loss
      carry forwards. The change in the valuation allowance for the year ended June
      30, 2005 was approximately $6,000,000. The Company's net operating loss carry
      forwards of approximately $34,000,000 will expire in varying amounts through
      2025. The use of the federal net operating loss carry forwards may be limited
      in
      future years as a result of ownership changes in the Company's common stock,
      as
      defined by section 382 of the Internal Revenue Code. The Company has not
      completed an analysis of these changes.




The
      Company has provided a full valuation reserve against the deferred tax asset
      because of the Company's loss history and significant uncertainty surrounding
      the Company's ability to utilize its net operating loss and tax credit
      carryforward.




**13. RELATED
      PARTY
      TRANSACTIONS**





Robert
      Tarini, our chief executive officer is also chief executive officer of SyQwest,
      Inc. SyQwest performs software and engineering development for the Company
      and
      provides approximately 4000 sq ft of office space to the Company in Providence,
      RI. During the three months ended September 30, 2005, $214,280 was paid to
      SyQwest for these services and there was no balance outstanding with SyQwest
      at
      September 30, 2005.




ipPartners,
      Inc. a corporation majority owned and controlled by Mr. Tarini, Markland's
      Chief
      Executive Officer and Chairman, participated in 12.5% of the February 14,
      2005 investor financing related to the acquisition of Genex by Technest.
      This financing was negotiated on behalf of Markland by senior management of
      Markland, including Mr. Tarini. The Markland Investment was approved by a
      unanimous vote of the Board of Directors of Markland including, Mr. Mackin
      and
      Mr. Ducey, neither of whom has an interest in the transaction. ipPartners,
      Inc.
      is also a participant in the exchange agreement to exchange Markland Series
      D
      preferred stock for Technest Series B preferred stock.





The
      Company believes that all transactions described above were made on terms no
      less favorable to it than those obtainable from unaffiliated third parties.
      All
      future transactions, if any, with its executive officers, directors and
      affiliates will be on terms no less favorable to it than those that will be
      obtainable from unrelated third parties at the time such transactions are
      made.





**14. LITIGATION**





Charles
      Wainer




On
      June
      28, 2004, Charles Wainer filed a civil suit against Markland in Florida state
      court alleging breach of a stock purchase agreement and breach of an employment
      agreement stemming from Wainer's sale of his business to a predecessor of
      Markland and his subsequent employment thereat. In the complaint, Wainer alleges
      Markland owes him $300,000 cash, some unspecified portion of $700,000 in stock,
      some unspecified portion of $86,000 cash for lease payments, and approximately
      $20,000 in back-pay. On August 11, 2004, Markland answered the complaint and
      denied any liability. In September 2005 the trial of this matter was concluded.
      As a result, Markland anticipates that judgment will be entered against Markland
      and in favor of Mr. Wainer in an amount of approximately $482,000. At June
      30,
      2005, the Company charged to Selling, General and Administrative expense
      $482,000 related to this matter.




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Joseph
      R. Moulton




On
      or
      about September 16, 2004, Joseph R. Moulton, Sr. initiated a lawsuit in the
      Circuit Court of Spotsylvania County, Virginia, against the Company, EOIR,
      and
      our Chief Executive Officer and Director, Robert Tarini. Mr. Moulton was the
      largest single shareholder of EOIR prior to its acquisition by the Company,
      owning approximately 67% of the EOIR capital stock. Mr. Moulton received
      approximately $5,863,000 in cash and a promissory note of EOIR in the
      approximate principal amount of $6,967,000 for his shares of EOIR at the closing
      of the acquisition of EOIR by the Company. In his complaint Mr. Moulton asserts,
      among other things, that the Company breached its obligations under the Stock
      Purchase Agreement, dated June 29, 2004, pursuant to which the Company acquired
      EOIR, by terminating Mr. Moulton's employment with EOIR and removing him from
      the EOIR board of directors. Mr. Moulton is seeking damages allegedly suffered
      by his loss of employment, extreme emotional distress, and costs incurred to
      enforce his contractual rights. In addition, he is seeking certain other
      equitable relief including, the appointment of a receiver to oversee the
      management of EOIR until these promissory notes issued to former EOIR
      shareholders at the closing of the acquisition are paid in full and a
      declaratory judgment that the Company's actions constitute an event of default
      under these promissory notes allowing for the acceleration of all amounts
      (approximately $11,000,000) due thereunder. The Company is a guarantor of these
      notes. The Company believes that the allegations in this lawsuit are entirely
      without merit and expects to file an answer denying Mr. Moulton's allegations
      and opposing vigorously all equitable relief sought. The Company is considering
      bringing various claims against Mr. Moulton either by counterclaim or in a
      separate action.




Deer
      Creek




Markland
      and Technest were notified on July 21, 2005 by counsel for Deer Creek LLC,
      or
      Deer Creek, an investor in the February 15, 2005 transaction involving Technest,
      Markland and Genex, that Deer Creek filed an order to show cause requesting
      a
      temporary restraining order in the Supreme Court for New York County, naming
      Technest and Markland as defendants. Deer Creek is seeking to enjoin Markland
      from issuing its common stock upon conversion of certain shares of Markland's
      Series D Preferred Stock issued pursuant to certain exchange agreements dated
      June 20, 2005. Technest and Markland retained the firm of Pryor, Cashman,
      Sherman & Flynn LLP, 410 Park Avenue, 10th Floor, New York, New York 10022
      to represent their interests in this matter. On July 25, 2005 Technest and
      Markland removed the matter to the United States District Court for the Southern
      District of New York. This matter was settled on August 19, 2005. Markland
      entered into an exchange agreement and a registration rights agreement with
      Deer
      Creek on August 19, 2005.




Greg
      and Mary Williams




Markland
      and EOIR were notified on July 11, 2005 by counsel for Greg and Mary Williams,
      former shareholders and employees of EOIR and, in the case of Mr. Williams,
      a
      former director of Markland, that the Williamses filed a lawsuit in the
      Commonwealth of Virginia, naming EOIR and Markland as a defendant, regarding
      a
      number of contractual disputes involving the registration of shares of Markland
      common stock underlying certain options issued to the Williamses in connection
      with the acquisition of EOIR by Markland and severance payments called for
      pursuant to severance agreements by and among the Williamses, EOIR and Markland.
      On August 3, 2005, EOIR and Markland filed an answer and a demurrer denying
      all
      liability.




H
      & H Acquisition Corp.




On
      July
      23, 1998, H & H Acquisition Corp., individually and purportedly on behalf of
      Technest Holdings, commenced an action in federal court in the Southern District
      of New York against the Company, the founder and certain officers, among others.
      The complaint is an action to recover shares of common stock of the Company
      and
      unspecified damages. Management believes that the claims against the Company
      and
      certain officers are without merit and is vigorously defending the action.
      The
      Company cannot make any assurances about the litigation's outcome. However,
      the
      Company could be adversely affected if the plaintiff prevails.




In
      September 2002 the Company was served with a Summary Judgment Motion regarding
      H
& H Acquisition Corp. and the Company answered the motion in November 2002.
      On January 3, 2005, the court denied the motion for summary judgment. Trial
      of
      this matter is scheduled to begin in January 2006.




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Other




I n
      addition, we are subject to legal proceedings, claims, and litigation arising
      in
      the ordinary course of business. While the outcome of these matters is currently
      not determinable, we do not expect that the ultimate costs to resolve these
      matters will have a material adverse effect on our consolidated financial
      position, results of operations, or cash flows




**15. SUBSEQUENT
      EVENTS**





Subsequent
      stock issuances




Subsequent
      to September 30, 2005, convertible promissory notes with a face value
      of $925,000 were converted into 37,809,372 shares of our common
      stock.




Subsequent
      to September 30, 2005, 275 shares of Series D Convertible Preferred Stock
      were converted into 12,001,099 shares of our common stock.




On
      October 4, 2005, we entered into exchange agreements with Southridge Partners,
      LP and Southshore Captial Fund, Ltd., pursuant to which we issued 1,750 shares
      of Series D preferred stock in exchange for 402,301 shares of Technest Series
      B
      preferred stock.





On
      October 4, 2005, we issued a warrant to purchase 750,000 shares of our common
      stock to Greenfield Capital Partners LLC.  The warrants expire on February
      10, 2010 and have an exercise price of $0.34 per share and are substantially
      in
      the form attached to our current report on Form 8-K filed on October 7, 2005
      as
      Exhibit 10.5.  These warrants are exercisable immediately.







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**Item
      2.****Management’s
      Discussion and Analysis or Plan of Operation**








*The
      following discussion and analysis of our financial condition and results of
      operations for our financial quarter ending September 30, 2005 should be
      read together with our financial statements and related notes included elsewhere
      in this report.*





**Forward
      Looking Statements**




The
      information in this discussion contains forward-looking statements. These
      forward-looking statements involve risks and uncertainties, including but not
      limited, to statements regarding Technest Holdings, Inc.’s capital needs,
      business strategy and expectations. Any statements contained herein that are
      not
      statements of historical facts may be deemed to be forward-looking statements.
      In some cases, you can identify forward-looking statements by terminology such
      as “may”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”,
“estimate”, “predict”, “potential” or “continue”, the negative of such terms or
      other comparable terminology. Actual events or results may differ materially.
      In
      evaluating these statements, you should consider various factors, including
      the
      risks outlined in the Risk Factors section below, and, from time to time, in
      other reports we file with the Securities and Exchange Commission (the “SEC”).
      These factors may cause our actual results to differ materially from any
      forward-looking statement. Readers are cautioned not to place undue reliance
      on
      any forward looking statements contained in this report. We will not update
      these forward looking statements unless the securities laws and regulations
      require us to do so.




**Business**




**Overview**




Our
      business, as it exists today, consists of five business areas: intelligent
      surveillance, chemical and explosives detection, advanced technologies research
      and development, remote sensor systems and technologies, and border security.
      Our primary sources of operating revenue are from our indirect subsidiaries,
      EOIR and Genex.




Through
      EOIR and Genex, we offer remote sensing technology products and services,
      providing complete solutions for three-dimensional (3D) imaging and display,
      intelligent surveillance, and 3D facial recognition to the United States
      Department of Defense ("DOD") and various other United States intelligence
      agencies ("INTEL"), educational and medical institutions and private commercial
      entities. These acquisitions are a very important part of our ongoing business
      strategy of creating a world class integrated portfolio of solutions for the
      Homeland Security, DOD and INTEL marketplaces.




Genex
      offers products which include: (i) design and fabrication of customized remote
      sensor systems and platforms for DOD, INTEL and Homeland Security applications;
      (ii) design and fabrication of 3D facial recognition products tools for law
      enforcement; and (iii) design and fabrication of non-invasive 3D medical imaging
      tools. EOIR offers products and services which include: (i) design and
      fabrication of customized remote sensor systems and platforms for DOD, INTEL
      and
      Homeland Security applications; (ii) remote sensor data collection, data signal
      processing and data exploitation; and (iii) training in the use of remote sensor
      systems and data. These efforts of EOIR and Genex involve systems engineering,
      system integration, prototyping, manufacturing and field data collections as
      well as data analysis and processing.




**Intelligent
      Surveillance**




Genex’s
      intelligent surveillance portfolio is anchored by its real-time embedded image
      processing technology and its 3D facial recognition technology. Our products
      include OmniEyeTM Wellcam, OmniEyeTM Cerberus, Smart Optical Sensor (SOS), Smart
      SuiteTM and Omnivision.




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The
      OmniEyeTMWellcam is an ultra light, portable 360 degree field of view camera
      which can be used in field applications, such as detection of underground weapon
      caches and search and rescue beneath building rubble, due to its durability.
      The
      OmniEyeTM Cerberus is a re-configurable multi-sensor system that is designed for
      long distance infrared and visible light detection. The OmniEyeTM Cerberus
      delivers this flexibility while still maintaining seamless panoramic coverage
      up
      to 360 degrees.





The
      Smart
      Optical Sensor high speed image processing platform powers Genex’s Smart SuiteTM
algorithms, enhancing both new and existing sensor systems with capabilities
      including: reliable target detection, motion tracking, and object classification
      and recognition. Smart SuiteTM algorithms by Genex are a portfolio of advanced
      video analysis and augmentation modules. The SOS is a powerful system that
      allows multiple cameras to be deployed easily in a distributed, scaleable
      network that provides autonomous surveillance.





OmniVision
      is a software platform for Genex’s wide range of security and surveillance
      camera products. Built as a modular system, OmniVision can operate as a
      standalone application or easily integrate into existing systems. The unique
      architecture of OmniVision puts next-generation capabilities within reach of
      traditional camera and digital video recorder systems. The system includes
      software application modules for many different end user needs.




Genex
      currently is engaged in programs to develop: disposable sensors for the U.S.
      Army Night Vision Lab; a miniature general purpose sensor processor for the
      U.S.
      Army Picatinny Arsenal; SmartMTI Motion Detection for the U.S. Army Armament
      Research, Development and Engineering Center; a weapon’s flash detection system
      for the U.S. Navy Office of Naval Research; and a smart object avoidance system
      for the U.S. Navy Naval Surface Warfare System.




**Chemical
      and Explosive Detection**




We
      are
      targeting key sensing technologies that are critical to both DOD and Homeland
      Security missions: Chemical/Biological (Chem/Bio) and Improvised Explosive
      Devices (IED) detection sensors. Our Chem/Bio and IED group concentrates on
      the
      research and development of technologies that can reliably detect the presence
      of chemical, biological, and explosive devices or components from a stand-off
      distance  utilizing
      multi spectral electro optical sensing methods .
      Under a
      Phase 2 Small Business Innovation Research (“SBIR”) grant from the U.S. Army,
      Genex is developing a new and unique sensor that can remotely detect the
      presence of chemical and biological weapons. We intend
      to
      offer these standoff detection sensors in an integrated system solution approach
      which also includes point detection capability provided by the EOIR manufactured
      ACADA system. The ACADA system utilizes Ion Mobility Spectroscopy cell based
      point detection chemical sensor technology.




**Advanced
      Technologies Research and Development**




The Advanced
      Technologies Research
      and Development group of Genex is focused on developing our imaging technology
      portfolio via advanced research in 3D
      facial
      recognition, intelligent
      surveillance 3D imaging, and medical imaging. By integrating our marketing
      pursuits with our R&D efforts, we can bring to market technological advances
      that have enhanced customer value. Some of our targeted research areas
      include :
      (i)
      fully integrated SurematchTM suite of 3D facial recognition software application
      programs, ( i i)
      intelligent surveillance using two- and three-dimensional image processing
      to support homeland security, military, and commercial applications;
      (ii i )
      detection of concealment of intent using thermal and 3D imaging to support
      anti-terrorist efforts; (i v )
      early
      detection of cancer using non-invasive and non-radiological diffuse optical
      tomography; and (v) more effective and less risky radiation treatment for cancer
      by use of 3D imaging for patient positioning.




Currently
      we have eight funded SBIR ongoing programs. The
      R
& D efforts include maintenance and capture of intellectual property in the
      form of patents and licensing agreements. Presently, we have a patent portfolio
      covering the areas of 3D imaging. Our strategy is to transform our captive
      intellectual property into proprietary products and services, which will create
      recurring revenue streams derived from our government customer
      base.




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In
      some
      cases, our technologies and intellectual property have application in the
      commercial sector. With respect to the commercial sector, we are focused
      on finding markets which have: high fit of application with our technology;
      high
      revenue potential; economic value add for market to adopt our technology; and
      accessible customers and channels. Management plans to generate further
      commercial growth primarily through strategic partnerships with customers in
      markets passing the above screen to reduce technical risk while providing strong
      channels of distribution for market access. Efforts
      here are focused on our 3D
      FaceCam product and associated software. This product is utilized by our
      customers to create personalized products for customers based on a 3D image
      captured by our camera. The product is being marketed towards applications
      in
      digitized identification such as employee ID and motor vehicle licenses as
      well
      into the medical market place. Efforts are underway to reduce product costs
      to
      encourage broader market adoption, to improve channels of distribution for
      this
      product, and to establish commercial agreements for mass market
      deployment.




In
      addition, we are targeting manufacturers of products who would benefit
      strategically by adopting our technology to produce custom fitted products
      for
      their customers. We believe this strategy has the potential to generate a
      sustainable competitive advantage based
      on
      Genex’s ability to generate accurate 3D measurement data.




**Remote
      Sensor Systems and Technologies for Military and Intelligence
      Applications**




EOIR
      provides advanced remote sensing technology products and services to the DOD
      and
      to various other United States intelligence agencies. EOIR’s remote sensor
      systems are a very important core function in our ongoing business strategy
      of
      creating a world-class integrated portfolio of solutions for the Homeland
      Security, DOD and INTEL marketplaces.





EOIR's
      most significant source of revenues is an Omnibus Contract with the United
      States Army Night Vision and Electronic Sensors Directorate. The Omnibus
      Contract has an extensive and varied scope that requires us to provide a very
      broad range of products and technical services. For those products and technical
      services that EOIR does not possess in-house, we subcontract to our team members
      and other subcontractors as necessary. As a
      prime contractor, EOIR is responsible for the technical performance of all
      of
      its products and services delivered to the customer. Primary revenue streams
      are
      derived from the delivery of products and services which provide the customer
      with: advanced development product concepts; low volume produced prototypes;
      advanced signal processing algorithms and software; advanced systems
      integration; engineering and evaluation services; data collection and processing
      capabilities and other highly differentiated and proprietary products and
      services.




EOIR
      intellectual property lies in trade secrets and the experience and capabilities
      of its technical staff whom support these government
      contracts. We
      protect EOIR intellectual property and our competitive position
      through patent
      applications, non-disclosure agreements with our business partners, and non-compete agreements
      with our employees.




*Products*




EOIR
      develops and produces highly advanced remote sensing hardware and software
      system products for our government customer base. Our products extend the range
      of our remote sensor services, encompassing the full spectrum of sensor science,
      systems integration, and system support. Below is a list of our current
      products:




·
            ACADA
                (Automatic Chemical Agent Detection and Alarm)- Man portable chemical
                agent point detector sensor system which utilizes Ion Mobility
                Spectroscopy technology to detect chemical agents such as Tabun,
                Sarin,
                and classic nerve agents. This unit has been mass produced and deployed
                throughout the US Navy.






-33-
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·
            SERTSTM
                (Safety Evaluation Range Training System) -Audio and video recording
                system that allows instructors to instruct, review, and qualify trainees.
                SERTS is a minimally intrusive, multi-platform compatible, audio/video
                monitoring system that brings range evaluators to the action inside
                a host
                of live fire exercise vehicles. It transmits live audio and video
                from the
                exercise vehicle directly to a range tower for exercise monitoring,
                recording, and post exercise
                review.




·
            Embedded
                system that allows multiple sensors to be remotely controlled. USRD
                is
                designed to remotely control and retrieve data from multiple sensors
                and
                transfer data to a base station through wired and wireless communications.




·
            Pelco
                Camera Translators- Embedded system that allows non-Pelco cameras
                to be
                integrated into Pelco networks, that is, it****allows
                non-Pelco cameras to be controlled by a standard Pelco control
                network**.**




·
            A
                thermal imaging display and analysis software based tool****designed
                for viewing and analyzing thermal images. It offers a range of features
                including Fourier analysis, high and low pass filters, thermal image
                calibration, image statistics, and advanced digital display
                algorithms.






·
            An
                interferogram processing and analysis software based tool****that
                permits analysis of interferograms from spectrometers. Designed for
                the
                analysis of remotely captured chemical emission spectral information,
                the
                analysis tool enables the recognition of targeted chemical signatures.




·
            A
                software based tool that can be used to keep accurate positioning
                information for multiple vehicles during field tests.




·
            A
                software based tool that assists predictive modeling of thermal targets
                and is used to calculate detection probabilities of targets at arbitrary
                angles and ranges.




*Services*




EOIR
      has
      been providing highly differentiated services to government customers for nearly
      20 years. Our scientific support spans a wide range of services, including
      the
      full spectrum of sensor sciences, systems integration, system support and
      software development, as more fully described below:




·
            *Sensor
                Science*.
                Sensor science services at EOIR involve a multitude of spectral regions,
                ranging from visible to far infrared, developing, using and interpreting
                data from a number of different sensors including acoustic, radar,
                thermal, multi-spectral and hyper-spectral calibrated imagers.




·
            *Systems
                Integration*.
                EOIR has the electrical and mechanical engineering design experience
                necessary to integrate laboratory prototypes into existing military
                sensor
                systems.




·
            *Technical
                Training*.
                EOIR has the ability to develop classroom courses and computer-based
                and
                web-based trainers to satisfy unique customer requirements. EOIR
                is able
                to train on the use of sensor and detection equipment as well as
                teaching
                students how to interpret sensor signature data.




·
            *Software
                Development*.
                EOIR develops customized sensor and data collection software platforms
                to
                satisfy a variety of unique customer
                requirements.




**Border
      Security**




We
      acquired the assets of Ergo Systems, Inc. in January 2003. This acquisition
      provided us with contracts with the Department of Homeland Security to maintain,
      integrate, and implement design enhancements to border security systems
      installed at U.S. ports of entry for the Dedicated Commuter Lane, which is
      part
      of a larger U.S. Customs and Immigration and Naturalization Service initiative
      to reduce wait times, improve data accuracy, and improve overall efficiencies
      at
      all border crossings for both freight and passengers.




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The
      Dedicated Commuter Lane (DCL) integrates several important security checks.
      It
      employs automatic vehicle identification technology, which allows participants
      to pass through the border crossing more efficiently than without automatic
      screening. Participants run a card through a swipe card reader, which
      instantaneously sends patron information, including a photograph, to the
      inspector's screen for clearance. The gate rises and allows the patron through.
      The whole process takes about 30 seconds. The Dedicated Commuter Lane software
      also controls a variety of security subsystems, including video surveillance,
      gates, and tire shredders.




In
      conjunction with the DCL maintenance contract awarded by the Department of
      Homeland Security, we were also awarded a contract by Computer Sciences
      Corporation to perform border maintenance services in multiple ports of entry
      in
      the southern United States. During fiscal year 2005, our subsidiary, Ergo,
      recognized approximately $247,850 of revenue from these contracts.




During
      fiscal year 2004, we entered into a teaming agreement with Accenture, who was
      recently awarded the US VISIT contract. The purpose of this contract is to
      secure our borders and expedite the entry/exit process while enhancing the
      integrity of our immigration system and respecting the privacy of visitors
      to
      the United States. We have recently been appointed a subcontractor which may
      enable us to derive revenues from the US VISIT contract.




The
      US
      VISIT program is part of a larger Department of Homeland Security initiative
      to
      increase security, reduce wait times, improve data accuracy, and improve overall
      efficiencies at all border crossings for both freight and passengers by creating
      and implementing a "trusted traveler" concept of traffic flow. The "trusted
      traveler" concept is designed for frequent border crossers who are willing
      to
      undergo a background check and travel under some restrictions in exchange for
      the use of a commuter lane. This dedicated commuter lane substantially decreases
      the amount of time it takes to drive through the border. We believe that our
      experience in integrating solutions will be attractive to the Department of
      Homeland Security as it confronts the various issues of protecting our borders
      although there can be no assurances that the trusted traveler concept will
      result in an increase in sales or revenues.




**Business
      History**




Markland
      Technologies, Inc. is the successor to A. P. Sales Inc., a corporation
      incorporated in Colorado in 1995. In December 1998, A. P. Sales was dissolved
      as
      a Colorado corporation and re-domiciled in Florida under the name Quest Net
      Corporation ("Quest Net"). In March 2000, Quest Net acquired CWTel, Inc., a
      Florida corporation ("CWTel"). CWTel filed a voluntary bankruptcy petition
      in
      November 2001 and was issued a final decree in March 2002. In March 2001, Quest
      Net acquired all of the outstanding stock of Vidikron of America, Inc., a
      Delaware corporation ("Vidikron"). As a result, Vidikron's sole stockholder,
      Market LLC, a Cayman Islands limited liability company, became Quest Net's
      majority stockholder and Vidikron became a wholly-owned subsidiary of Quest
      Net.
      Quest Net subsequently changed its name to Markland Technologies, Inc. In order
      to cure a default in our obligations to Market LLC, we transferred all of our
      interest in Vidikron to Market LLC in June 2002. As a result, at the end of
      fiscal 2002, we had no active business operations.




In
      December 2002, we entered into a transaction with Eurotech, Ltd., ipPartners,
      Inc., Market LLC, and James LLC. Pursuant to this transaction the following
      took
      place:




·
              We
                  formed a subsidiary corporation called Security Technology,
                  Inc.
  ·
              Eurotech
                  transferred particular rights to its acoustic core technology relating
                  to
                  illicit material detection to our
                  subsidiary.




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·
              Crypto.com
                  Inc. (a subsidiary of Eurotech) and ipPartners transferred particular
                  rights to their cryptology technologies to our
                  subsidiary.
  ·
              90%
                  of the shares of our common stock held by Market LLC and James
                  LLC were
                  retired.
  ·
              We
                  issued 80% of our then issued and outstanding common stock to Eurotech
                  and
                  shares of common stock representing 10% of our then issued and
                  outstanding
                  shares of common stock to
                  ipPartners.
  ·
              We
                  issued $5,225,000 in stated value of our Series C 5% cumulative
                  convertible preferred stock to Market LLC and James LLC in satisfaction
                  of
                  $5,225,000 of convertible notes held by Market LLC and James LLC
                  and in
                  exchange for their agreement to surrender 4,498,638 shares of our
                  common
                  stock.




In
      January 2003, we acquired all the common stock of Ergo Systems, Inc., a company
      in the business of providing border security logistic support and product
      development services to the U.S. government. Ergo Systems Inc. has a contract
      with the Department of Homeland Security to maintain, integrate and implement
      design enhancements to border security systems. In consideration for this
      acquisition we agreed to pay $400,000 in cash, payable at milestones which
      are
      related to research efforts.




In
      March
      2003, we entered into an agreement to acquire the intellectual property
      (including patents), equipment, and government contracts for some particular
      gas
      plasma antenna technology from ASI Technology Corporation. We closed this
      transaction in September 2003. We paid a purchase price of $150,000 in cash
      and
      283,333 shares of our common stock valued at $850,000.




In
      October 2003, we acquired all of the common stock of Science and Technology
      Research Corporation, Inc. This company is the producer of the U.S. Navy's
      Shipboard Automatic Chemical Agent Detection and Alarm System. In consideration
      for this acquisition, we issued 1,539,779 shares of common stock valued at
      $5,100,000, paid $900,000 in cash and issued a promissory note for $375,000.
      We
      also entered into a consulting agreement with the former principal shareholder
      and employee.




On
      June
      29, 2004, we acquired all of the outstanding stock of EOIR for $8,000,000 in
      cash and $11,000,000 in principal amount of five-year notes secured by the
      assets and stock of EOIR. EOIR is a provider of technology and services to
      the
      United States Army Night Vision and Electronic Sensors Directorate, as well
      as
      other United States Department of Defense and Intelligence Agencies. It has
      significant expertise in wide-area remote sensing using both electro-optic
      and
      infrared technologies.




On
      February 14, 2005, we acquired a controlling interest in Technest, a public
      company with no operations. In connection with this transaction, and, at the
      same time, Technest acquired all of the capital stock of Genex Technologies,
      Inc., a private company with expertise in imaging and surveillance whose primary
      customer is the U.S. Department of Defense. Technest financed the acquisition
      of
      Genex through the private placement of securities to sophisticated investors.
      We
      structured the acquisition of Genex in this manner to comply with covenants
      in
      our financing agreements and to facilitate the financing of the
      acquisition.




On
      August
      17, 2005, pursuant to a stock purchase agreement with Technest Holdings, Inc.,
      our majority owned subsidiary, we sold all of the outstanding stock of EOIR
      to
      Technest. As consideration for our stock of EOIR, Technest issued 12 million
      shares of its common stock to us, and, as a result, our ownership of Technest
      increased from 85% immediately prior to the transaction to approximately 98%
      on
      a primary basis and from 39% to approximately 82% on a fully diluted basis
      (assuming the conversion of all of Technest’s convertible securities and the
      exercise of all warrants to purchase Technest common stock). This reorganization
      did not result in a change of control for EOIR. We did not need stockholder
      consent in order to complete this reorganization. EOIR generated approximately
      97% of our revenue for fiscal 2005.




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          of Contents**




**RECENT
      EVENTS**





Subsequent
      to September 30, 2005, convertible promissory notes with a face value
      of $900,000 were converted into 36,712,881 shares of our common
      stock.




Subsequent
      to September 30, 2005, 275 shares of Series D Convertible Preferred Stock
      were converted into 12,001,099 shares of our common stock.




On
      October 4, 2005, we entered into exchange agreements with Southridge Partners,
      LP and Southshore Captial Fund, Ltd., pursuant to which we issued 1,750 shares
      of Series D preferred stock in exchange for 402,301 shares of Technest Series
      B
      preferred stock.





On
      October 4, 2005, we issued a warrant to purchase 750,000 shares of our common
      stock to Greenfield Capital Partners LLC.  The warrants expire on February
      10, 2010 and have an exercise price of $0.34 per share and are substantially
      in
      the form attached to our current report on Form 8-K filed on October 7, 2005
      as
      Exhibit 10.5.  These warrants are exercisable immediately.




**RESULTS
      OF OPERATIONS**





**REVENUE:**





Revenue
      for the quarter ended September 30, 2005 increased by 20% to $18,996,341
      compared to $15,769,851 for the same period in 2004, which was prior to our
      acquisition of Genex. Our EOIR subsidiary accounted for approximately 96% of
      these revenues in the three months ended September 30, 2005.





EOIR's
      most significant source of revenues is a contract with the United States Army
      Night Vision and Electronic Sensors Directorate. Approximately 89% of our
      revenues were received from this contract in the last quarter. We expect orders
      to continue at or above current levels under this contract, however, no
      assurance can be given that this will be the case.





**COST
      OF REVENUES:**





Cost
      of
      revenues for the quarter ended September 30, 2005 increased by 25% to
      $15,590,455, compared to $12,442,893 for the same period in 2004. Cost of
      revenues increased as a result of costs from our acquisition of Genex and a
      slight change in the mix of contract revenues.





Gross
      profits for the quarter ended September 30, 2005 increased by 2% to $3,405,886
      compared to $3,326,958 for the same period in 2004.





Gross
      profit as a percentage of revenue for the quarter ended September 30, 2005
      was
      approximately 18% compared to 21% for the same period in 2004. Most of our
      revenues for the quarter are from variable cost contracts which enjoy greater
      certainty of profit, compared to fixed price contracts but at lower margins.
      It
      is our intention to create a balanced portfolio of contracts and products as
      the
      Company matures.





**SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES:**





Selling,
      general and administrative expense for the quarter ended September 30, 2005
      increased by 35% to $4,860,132 compared to $3,593,619 in the same period in
      2004. Selling, general and administrative expense was primarily composed of
      payroll, consultants, and legal and accounting fees. Included in this amount
      was
      a $916,959 charge for compensatory element of stock issuances for the quarter
      ended September 30, 2005, compared with $(19,143) for the same period in the
      previous year. This non cash charge accounted for 73% of the increase in
      selling, general and administrative expenses for the quarter. Costs related
      to
      Genex which were not present in the prior comparative period accounted for
      another 20% of the increase in selling, general and administrative expenses
      for
      the quarter ended September 30, 2005.




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**RESEARCH
      AND DEVELOPMENT:**





During
      the quarter ended September 30, 2005, we spent $171,935 on research and
      development activities compared to no expenditure for the quarter September
      30,
      2004 as we begin to develop products from our intellectual property
      portfolio.





**OPERATING
      LOSS:**





Loss
      from
      operations for the quarter ended September 30, 2005 increased by 181% to
      $2,100,383 compared to $748,653 for the comparative period in 2004. The increase
      in the loss of $1,351,730 was accounted for by an increase in the non cash
      amortization of the compensatory element of stock issuances and costs incurred
      by Genex, our new subsidiary.





**INTEREST
      EXPENSE:**





Interest
      expense for the quarter ended September 30, 2005 increased to $2,003,724
      compared to $503,215 for the quarter ended September 30, 2004. The non-cash
      element of these interest charges amounted to $1,383,974. In addition, we
      accrued $530,000 of interest in the quarter ended September 30, 2005 related
      to
      liquidated damages incurred by Technest. Interest and financing expense was
      from
      notes payable issued for bridge financing, and other financing costs. These
      charges represent the accretion of debt discount to the fair market value of
      the
      notes and amortization of deferred financing costs over the term of the
      convertible notes. We issued two convertible notes on September 21, 2004 and
      November 9, 2004. As this short-term financing has a term of one year, these
      charges are accreted over a relatively short period of time resulting in
      substantial non-cash interest charges. In connection with our acquisition of
      EOIR, EOIR issued, and we guaranteed, $11,000,000 in original principal amount
      of notes due to the former stockholders of EOIR. These notes bear interest
      at
      the rate of six (6%) percent per annum and must be repaid within the next five
      years. The carrying value of these notes is $8,800,000 at September 30, 2005.
      Also included in interest expense is $626,503 related to common stock issued
      in
      payment of liquidated damages to the holders of our convertible
      notes.




**MINORITY
      INTEREST IN NET LOSS OF SUBSIDIARY AND PREFERRED STOCK DIVIDENDS:**





The
      minority interest in the net loss of Technest was $23,266 for the quarter ended
      September 30, 2005.





Deemed
      preferred stock dividends for the quarter ended September 30, 2005 were
      $159,552. These deemed dividends resulted from the beneficial conversion
      features of Series D preferred stock stock issued by Markland in exchange for
      Series B preferred stock of Technest.





**NET
      LOSS APPLICABLE TO COMMON STOCKHOLDERS:**





Net
      loss
      applicable to common stockholders for the quarters ended September 30, 2005
      and
      September 30, 2004 was $4,201,662 ($0.02 per share) and $1,246,021 ($0.03 per
      share), respectively. Our weighted average number of shares outstanding for
      the
      quarters ended September 30, 2005 and September 30, 2004 were 215,804,637 and
      38,352,594, respectively.





The
      reduction in net loss per share from the prior period is due primarily to the
      significant increase in number of shares outstanding. Shares outstanding
      increased primarily as a result of our financing activities.





**LIQUIDITY
      AND CAPITAL RESOURCES**





**Cash
      and Working Capital**





On
      September 30, 2005, Markland had a negative working capital balance of
      $5,332,741. Net cash used in operating activities was $1,560,182 for the three
      months ended September 30, 2005. Non-cash expenses included in the net loss
      of
      $3,528,010 totaled $2,884,317, while changes in the components of working
      capital used cash of $916,489. Most of this change in working capital was
      related to a reduction in trade payables and an increase in trade
      receivables.




-38-
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**Cash
      Used in Investing Activities**





Markland
      used net cash of $55,409 for the acquisition of equipment





**Cash
      Used in Financing Activities**





In
      the
      three months ended September 30, 2005, $610,592 was used for loan repayments
      and
      $65,551 for the repurchase of common stock.




**Sources
      of Liquidity**





During
      the three months ended September 30, 2005, we have satisfied our cash
      requirements primarily through operating cash flows and our cash
      reserves.




**OFF-BALANCE
      SHEET ARRANGEMENTS**





We
      have
      issued letters of credit to banks in the amount of $290,000 related to our
      corporate credit cards which are collateralized by a restricted cash balance
      in
      the same amount. We have no other significant off-balance sheet arrangements
      that have or are reasonably likely to have a current or future effect on our
      financial condition, changes in financial condition, revenues or expenses,
      results of operations, liquidity, capital expenditures or capital resources
      that
      is material to stockholders.





**EFFECT
      OF INFLATION AND CHANGES IN PRICES**





Management
      does not believe that inflation and changes in price will have a material effect
      on operations.





**CRITICAL
      ACCOUNTING POLICIES**





The
      preparation of Markland's financial statements and related disclosures 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 the disclosure of contingent
      assets and liabilities as of the date of the financial statements and the
      amounts of revenues and expenses recorded during the reporting periods. We
      base
      our estimates on historical experience, where applicable, and other assumptions
      that we believe are reasonable under the circumstances. Actual results may
      differ from our estimates under different assumptions or conditions.





The
      sections below present information about the nature of and rationale for our
      critical accounting policies.





**PRINCIPLES
      OF CONSOLIDATION**





Our
      consolidated financial statements include the accounts of Markland and its
      wholly-owned subsidiaries, Security Technology, Inc., Ergo Systems, Inc.,
      Science and Technology Research Corporation, Inc, , and majority owned
      subsidiaries Technest Holdings, Inc., E-OIR Technologies, Inc., and Genex
      Technologies, Inc. We have eliminated all significant inter-company balances
      and
      transactions.




**CONCENTRATIONS**




Statement
      of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of Information
      about Financial Instruments with Off-Balance-Sheet Risk and Financial
      Instruments with Concentrations of Credit Risk," requires that we disclose
      any
      significant off-balance-sheet and credit risk concentrations. We are subject
      to
      concentrations of credit risk because the majority of our revenues and accounts
      receivable are derived from the U.S. government, including the Department of
      Defense, who is not required to provide collateral for amounts owed to us.
      We do
      not believe that we are subject to any unusual credit risks, other than the
      normal level of risk attendant to operating our business.




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          of Contents**
  As
        of
        September 30, 2005, we had cash balances in banks in excess of the maximum
        amount insured by the FDIC. In addition, we derive substantially all of our
        contract revenue from contracts with Federal government agencies. Consequently,
        substantially all of our accounts receivable are due from Federal government
        agencies either directly or through other government
        contractors.




**RESEARCH
      AND DEVELOPMENT**




We
      charge
      research and development costs to expense as incurred. We capitalize costs
      related to acquired technologies that have achieved technological feasibility
      and have alternative uses. We expense as research and development costs the
      technologies we acquire if they are in process at the date of acquisition or
      have no alternative uses.




**IMPAIRMENT
      OF GOODWILL AND AMORTIZABLE INTANGIBLES**




In
      accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we review
      goodwill and amortizable intangibles for impairment annually, or more frequently
      if an event occurs or circumstances change that would more likely than not
      reduce the fair value of our business enterprise below its carrying value.
      The
      impairment test requires us to estimate the fair value of our overall business
      enterprise down to the reporting unit level. We estimate fair value using either
      a discounted cash flows model, or an approach using market comparables, to
      determine fair value. Under the discounted cash flows method, we utilize
      estimated long-term revenue and cash flows forecasts developed as part of our
      planning process, together with an applicable discount rate, to determine fair
      value. Under the market approach, fair value is determined by comparing us
      to
      similar businesses (or guideline companies). Selection of guideline companies
      and market ratios require management's judgment. The use of different
      assumptions within our discounted cash flows model or within our market approach
      model when determining fair value could result in different valuations for
      goodwill.




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**ESTIMATED
      USEFUL LIVES OF AMORTIZABLE INTANGIBLE ASSETS**




We
      amortize our amortizable intangible assets over the shorter of the
      contractual/legal life or the estimated economic life. We are amortizing the
      intangible assets acquired as of a result of the Ergo and ASI acquisitions
      over
      a three-year life commencing with the date of acquisition. With respect to
      the
      Science & Technology Research, Inc. and EOIR Technologies, Inc.
      acquisitions, consistent with independent business valuations, we are amortizing
      the intangible assets over ten years and nine years respectively.




Definite-lived
      intangible assets acquired from Genex represent costs of outside legal counsel
      related to obtaining new patents.  Patent costs are amortized over the
      legal life of the patents, generally twenty years, starting on the patent issue
      date.  The costs of unsuccessful and abandoned patent applications are
      expensed when abandoned.  The cost to maintain existing patents are
      expensed as incurred.  The nature of the technology underlying these
      patents relates to 3-D imaging, intelligent surveillance and 3-D facial
      recognition technologies.




Markland
      also acquired Commercialized Technology relating to 3D facial recognition
      cameras and Contracts and Customer Relationships from the application of 3D
      imaging technologies to breast cancer research for the National Institute of
      Health and disposable sensors and 3D face mapping for the Department of Defense.
      The amounts assigned to definite-lived intangible assets were determined based
      on an independent purchase price allocation analysis. These assets have an
      estimated useful life of five years.




**IMPAIRMENT
      OF LONG-LIVED ASSETS**




Pursuant
      to SFAS No. 144, we continually monitor events and changes in circumstances
      that
      could indicate carrying amounts of long-lived assets may not be recoverable.
      We
      recognize an impairment loss when the carrying value of an asset exceeds
      expected cash flows. Accordingly, when indicators or impairment of assets are
      present, we evaluate the carrying value of such assets in relation to the
      operating performance and future undiscounted cash flows of the underlying
      business. Our policy is to record an impairment loss when we determine that
      the
      carrying amount of the asset may not be recoverable. No impairment charges
      were
      recorded in the three months ended September 30, 2005 or 2004.




**REVENUE
      RECOGNITION**




We
      recognize revenue when the following criteria are met: (1) we have persuasive
      evidence of an arrangement, such as agreements, purchase orders or written
      requests, (2) we have completed delivery and no significant obligations remain,
      (3) our price to our customer is fixed or determinable, and (4) collection
      is
      probable. Revenues from time and materials contracts are recognized as costs
      are
      incurred. Revenues from firm fixed price contracts are recognized on the
      percentage-of-completion method, either measured based on the proportion of
      costs recorded to date on the contract to total estimated contract costs or
      measured based on the proportion of labor hours expended to date on the contract
      to total estimated contract labor hours, as specified in the contract.
      Provisions for estimated losses on all contracts are made in the period in
      which
      such losses become known. Changes in job performance, job conditions, and
      estimated profitability, including those arising from contract penalty
      provisions, and final contract settlements may result in revision to cost and
      income and are recognized in the period in which the revisions are determined.
      Markland participates in teaming agreements where they are the primary
      contractor and they participate with other organizations to provide complex
      integrated remote sensor product and technology development services to the
      Federal government. Markland has managerial and oversight responsibility for
      all
      team members as well as the responsibility for the ultimate acceptability of
      all
      integrated technical performance criteria under the contracts for deliverable
      services and products. Markland as the prime contractor whom accepts risks
      for
      these customer funded tasks includes as revenues the amounts that they bill
      under the teaming arrangements and include as direct costs amounts that are
      reimbursable or paid to team members




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**IMPACT
      OF RECENTLY ISSUED ACCOUNTING STANDARDS**




In
      December 2004, the FASB issued SFAS No. 123(R) (revised 2004), Share-Based
      Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
      Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
      Stock Issued to Employees, and Amends SFAS No. 95, Statement of Cash Flows.
      Generally, the approach in SFAS No. 123(R) is similar to the approach described
      in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments
      to
      employees, including grants of employee stock options, to be recognized in
      the
      income statement based on their fair values. Pro forma disclosure is not an
      alternative. SFAS No. 123(R) must be adopted no later than the first interim
      period for fiscal years beginning after December 15, 2005. We expect to adopt
      SFAS No. 123(R) on July 1, 2006.




SFAS
      No.
      123(R) permits public companies to adopt its requirements using one of two
      methods: a “modified prospective” approach or a “modified retrospective”
approach. Under the modified prospective approach, compensation cost is
      recognized beginning with the effective date based on the requirements of SFAS
      123(R) for all share-based payments granted after the effective date and the
      requirements of SFAS No. 123(R) for all awards granted to employees prior to
      the
      effective date of SFAS No. 123(R) that remain unvested on the effective date.
      The modified retrospective approach includes the requirements of the modified
      prospective approach but also permits entities to restate based on the amounts
      previously recognized under SFAS No. 123 for purposes of pro forma disclosures
      either for all prior periods presented or prior interim periods of the year
      of
      adoption. We are evaluating which method to adopt.




As
      permitted by SFAS No. 123, we currently account for the share-based payments
      to
      employees using APB Opinion No. 25’s intrinsic value method and, as such,
      generally recognize no compensation cost for employee stock options. However,
      grants of stock to employees have always been recorded at fair value as required
      under existing accounting standards. We expect the adoption of SFAS No. 123(R)
      to have a material effect on its results of operations. Additionally, Our
      results of operations could be materially effected by share-based payments
      issued after the adoption of SFAS 123(R). The impact of the adoption of SFAS
      No.
      123(R) cannot be predicted at this time because it will depend on levels of
      share-based payments granted in the future. However, had we adopted SFAS No.
      123(R) in prior periods, the impact of that standard would have approximated
      the
      impact of SFAS No. 123 as described in Note 2 to our financial statements.




SFAS
      No.
      123(R) also requires the benefits of tax deductions in excess of recognized
      compensation cost to be reported as a financing cash flow, rather than an
      operating cash flow under current accounting literature. Since we do not have
      the benefit of tax deductions in excess of recognized compensation cost, because
      of our net operating loss position, the change will have no immediate impact
      on
      our consolidated financial statements.




**RISK
      FACTORS**




*Any
      investment in our common stock involves a high degree of risk. You should
      consider carefully the risks and uncertainties described below, and all other
      information contained in this report, before you decide whether to purchase
      our
      common stock. Additional risks and uncertainties not currently known to us
      or
      that we currently deem immaterial may also become important factors that may
      harm our business. The occurrence of any of the following risks could harm
      our
      business. The trading price of our common stock could decline due to any of
      these risks and uncertainties, and you may lose part or all of your investment.* *In
      addition, our future operating results could differ materially from the results
      described in this report due to the risks and uncertainties related to our
      business, including those discussed below.*




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**Risks
      Related to Markland’s Operating Losses**




**We
      have a history of operating losses, and there is no assurance that we will
      achieve profitability in the future. If we do not achieve profitability, our
      financial condition and our stock price could suffer.**




We
      have a
      history of operating losses.  We cannot predict when, or if, we will ever
      achieve profitability.  Our current business operations began in 2002 and
      have resulted in losses in each fiscal year.  Our accumulated deficit as of
      September 30, 2005 was $52,337,008.  We will need to generate significantly
      greater revenues than we have in the past to achieve profitability.  There
      can be no assurance that we will be able to do so.  Even if we do achieve
      profitability, we may not be able to sustain or increase profitability on a
      quarterly or annual basis in the future.  If we continue to experience
      operating losses, you may lose all or part of your investment.




**Given
      our recent acquisitions, it is difficult to evaluate our business and future
      operating results.**




We
      derive
      substantially all of our revenues from the operations of our indirect
      subsidiary, EOIR. Markland acquired this company on June 29, 2004. Our limited
      operating history makes it difficult to evaluate our business and expected
      results.




**If
      we cannot obtain additional capital required to fund our operations and finance
      the growth our business, operating results and financial condition may suffer
      and the price of our stock may decline.**




The
      development of our technologies will require additional capital, and our
      business plan is to acquire additional revenue-producing assets. We incurred
      net
      losses applicable to our common stockholders of $ 4,201,662 and
      $1,246,021 for the quarters ended September 30, 2005 and 2004, respectively.
      Additionally, net cash used in our operating activities for the quarter ended
      September 30, 2005 was $1,560,182. We may be unable to obtain additional funds
      in a timely manner or on acceptable terms, which would render us unable to
      fund
      our operations or expand our business. If we are unable to obtain capital when
      needed, we may have to restructure our business or delay or abandon our
      development and expansion plans. If this occurs, the price of our common stock
      may decline and you may lose part or all of your investment.




Although
      we have been successful in the past in obtaining financing for working capital
      and acquisitions, we will have ongoing capital needs as we expand our business.
       If we raise additional funds through the sale of equity or convertible
      securities, your ownership percentage of our common stock will be reduced.
      In
      addition, these transactions may dilute the value of our common stock.  We
      may have to issue securities that have rights, preferences and privileges senior
      to our common stock.  The terms of any additional indebtedness may include
      restrictive financial and operating covenants that would limit our ability
      to
      compete and expand.




**We
      have grown quickly; if we cannot effectively manage our growth, our business
      may
      suffer.**




We
      have
      rapidly and significantly expanded operations through the acquisitions of
      Science Technology Research Corporation ("STR") in October 2003, EOIR in June
      2004 and Genex in February 2005.  This growth has placed, and is expected
      to continue to place, a strain on our personnel, management, financial and
      other
      resources.  Some of our officers have no prior senior management experience
      at public companies.  Our new employees include a number of key managerial,
      technical and operations personnel who have not yet been fully integrated into
      our operations.  To manage our growth effectively, we must, among other
      things:




·
            upgrade
                and expand our manufacturing facilities and capacity in a timely
                manner;




·
            successfully
                attract, train, motivate and manage a larger number of employees
                for
                manufacturing, sales and customer support
                activities;




·
            control
                higher inventory and working capital requirements;
                and




·
            improve
                the efficiencies within our operating, administrative, financial
                and
                accounting systems, procedures and
                controls.






-43-
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          of Contents**




To
      meet
      our growth objectives we must attract and retain highly skilled technical,
      operational, managerial and sales and marketing personnel.  If we fail to
      attract and retain the necessary personnel, we may be unable to achieve our
      business objectives and may lose our competitive position, which could lead
      to a
      significant decline in net sales.  We face significant competition for
      these skilled professionals from other companies, research and academic
      institutions, government entities and other organizations.




If
      we
      fail to manage our growth properly, we may incur unnecessary expenses and the
      efficiency of our operations may decline, adversely affecting our business
      and
      the price of our stock.




**Future
      acquisitions of other companies, if any, may disrupt our business and additional
      expenses. As a result, our business could suffer.**




We
      have
      completed the acquisitions of several companies.  We plan to review
      potential acquisition candidates, and our business and our strategy may include
      building our business through acquisitions. However, acceptable acquisition
      candidates may not be available in the future or may not be available on terms
      and conditions acceptable to us.




Acquisitions
      involve numerous risks including among others, difficulties and expenses
      incurred in the consummation of acquisitions and assimilations of the
      operations, personnel, and services and products of the acquired companies.
      Additional risks associated with acquisitions include the difficulties of
      operating new businesses, the diversion of management's attention from other
      business concerns and the potential loss of key employees of the acquired
      company. If we do not successfully integrate the businesses we may acquire
      in
      the future, our business will suffer.




**If
      we fail to realize some or all of the anticipated benefits from our acquisition
      of indirect subsidiary, EOIR, our business will suffer.**




Our
      combined company may fail to realize some or all of the anticipated benefits
      and
      synergies of the transaction as a result of, among other things, lower than
      expected order rates from customers of EOIR, unanticipated costs, deterioration
      in the U.S. economy and other factors. There can be no assurance that we will
      receive new orders under EOIR’s existing contract with the United States Army
      Night Vision and Electronic Sensors Directorate.




**Our
      current and future expected revenues are derived from a small number of
      customers within the U.S. government such that the loss of any one ultimate
      customer could materially reduce our revenues. As a result, our financial
      condition and our stock price would be adversely affected.**




We
      currently derived substantially all of our revenue from contracts with the
      U.S.
      Government, including the DOD, Homeland Security and various INTEL within the
      U.S. Government. We have a contract with the United States Army Night Vision
      and
      Electronic Sensors Directorate that may provide for revenues of up to
      approximately $406,000,000 depending upon the U.S. Army's needs of which our
      indirect subsidiary, EOIR, recognized in excess of approximately $56.2 million
      in revenues for the year ended June 30, 2005.  We expect this contract to
      account for a substantial majority of our revenues going forward.




The
      loss
      of this customer due to cutbacks, competition, or other reasons would materially
      reduce our revenue base. Annual or quarterly losses may occur if there are
      material gaps or delays in orders from one of our largest customers that are
      not
      replaced by other orders or other sources of income.




-44-
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          of Contents**




**Many
      of our technologies are unproven and their success in the marketplace is
      unknown. If we do not successfully exploit these technologies, our business
      and
      our prospects would be adversely affected.**




Although
      we currently sell automatic chemical detection and alarm systems, we do not
      know
      for how long the U.S. Navy will continue to buy this product, nor do we know
      if
      we will be able to sell this product or others like it to other customers.
      If we
      do not successfully exploit our technology, our financial condition, results
      of
      operations and business prospects would be adversely affected.




The
      development of our technology is subject to factors beyond our control,
      including the production of components by our suppliers. We do not have long
      term supply agreements. As a result, products incorporating our technology
      may
      not be successfully and timely produced by our original equipment manufacturers
      due to the inherent risk of technology development, new product introduction,
      limitations on financing, competition, obsolescence, loss of key technical
      personnel or other factors. The development and introduction of our technologies
      could be subject to additional delays. For instance, unanticipated technical
      obstacles can arise at any time and result in lengthy and costly delays or
      a
      determination that further exploitation is unfeasible.




**Some
      of our competitors are much larger than we are, have better name recognition
      than we do and have far greater financial and other resources than we do. If
      we
      cannot effectively compete, our business may suffer and the price of our stock
      would decrease.**




With
      the
      U.S. government's large appropriation of money for homeland security programs,
      many companies are competing for the same homeland security contracts and there
      can be no assurance that Markland will effectively compete with large companies
      who have more resources and funds than we do. Several companies have been
      working on issues relevant to the safety of the American people for the past
      several years. Because of the services and additional human and financial
      resources that these larger companies can provide, they may be more attractive
      to the U.S. government. Lockheed Martin and Northrop Grumman are providers
      of
      hardware engineering and systems engineering solutions. Computer Sciences
      Corporation and EDS provide computer and computer software solutions. Defense
      companies, such as General Dynamics, Boeing and Raytheon, are solutions
      providers that could easily expand their businesses into the homeland security
      business and are currently allocating resources to develop programs in this
      area.




**Our
      success depends on the services of our chief executive officer and chief
      operating officer. The loss of key personnel or any inability to attract and
      retain additional personnel could affect our ability to successfully grow our
      business.**




Our
      future success depends to a significant degree on the skills and efforts of
      Robert Tarini, our Chief Executive Officer and Dr. Joseph P. Mackin, our
      president and chief operating officer. If we lost the services of Mr. Tarini
      or
      Dr. Mackin, our business and operating results could be adversely affected.
      On
      December 30, 2004, we entered into a five year employment agreements with Mr.
      Tarini and Dr. Mackin, which were subsequently amended.




We
      also
      depend on the ability of our other executive officers and members of senior
      management to work effectively as a team. The loss of one or more of our
      executive officers or senior management members could impair our ability to
      manage our business effectively and could harm our business, prospects,
      financial condition and results of operations.




**Our
      management will spend time on other activities with other entities. As a result,
      our business may suffer, adversely affecting the price of our common
      stock.**




Robert
      Tarini, our chief executive officer, also serves as an officer and director
      of
      other entities. These entities include Technest Holdings, Inc., Syqwest, Inc.,
      ipPartners, Inc., and Ocean Data Equipment Corporation. These entities may
      share
      similar investment objectives and policies. Dr. Mackin, our president and chief
      operating officer, serves as president of Technest and Genex and the president
      and chief executive officer of EOIR. Finally, Gino Pereira, our chief financial
      officer is also the chief financial officer of Technest and Genex. Mr. Tarini,
      Dr. Mackin and Mr. Pereira may disproportionately allocate their time and
      resources between these other entities and us. Neither our organizational
      documents nor our policies specify a minimum standard of time and attention
      that
      Mr. Tarini, Dr. Mackin and Mr. Pereira are required to devote to
      us.




-45-
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**Our
      largest customers are the DOD, Homeland Security, and various other INTEL whose
      operations are subject to unique political and budgetary constraints, involve
      competitive bidding, and our contacts with these customers may be subject to
      cancellation with or without penalty, which may produce volatility in our
      earnings and revenue.**




Our
      largest customers are the DOD, Homeland Security, and various other INTEL.
      Due
      to political and budgetary processes and other scheduling delays that may
      frequently occur relating to the contract or bidding process, some government
      agency orders may be canceled or delayed, and the receipt of revenues or
      payments may be substantially delayed. This irregular and unpredictable revenue
      stream makes it difficult for our business to operate smoothly. Obtaining
      contracts from government agencies is challenging, and government contracts
      often include provisions that are not standard in private commercial
      transactions. For example, government contracts may:




·
            include
                provisions that allow the government agency to terminate the contract
                without penalty under some
                circumstances;




·
            be
                subject to purchasing decisions of agencies that are subject to political
                influence;




·
            contain
                onerous procurement procedures; and




·
            be
                subject to cancellation if government funding becomes
                unavailable.




In
      addition, federal government agencies routinely audit government contracts.
      These agencies review a contractor's performance on its contract, pricing
      practices, cost structure and compliance with applicable laws, regulations
      and
      standards. These audits may occur several years after completion of the audited
      work. An audit could result in a substantial adjustment to our revenues because
      we would not be reimbursed for any costs improperly allocated to a specific
      contract, and we would be forced to refund any improper costs already
      reimbursed. If a government audit uncovers improper or illegal activities,
      we
      may be subject to civil and criminal penalties and administrative sanctions,
      including termination of contracts forfeiture of profits, suspension of
      payments, fines and suspension or debarment from doing business with federal
      government agencies. In addition, our reputation could be harmed if allegations
      of impropriety were made against us.




**Our
      business may suffer if we cannot protect our proprietary
      technology.**




Our
      ability to compete depends significantly upon our patents, our trade secrets,
      our source code and our other proprietary technology.  Any misappropriation
      of our technology or the development of competing technology could seriously
      harm our competitive position, which could lead to a substantial reduction
      in
      net sales.




The
      steps
      we have taken to protect our technology may be inadequate to prevent others
      from
      using what we regard as our technology to compete with us. Our patents could
      be
      challenged, invalidated or circumvented, in which case the rights we have under
      our patents could provide no competitive advantages. Existing trade secrets,
      copyright and trademark laws offer only limited protection. In addition, the
      laws of some foreign countries do not protect our proprietary technology to
      the
      same extent as the laws of the United States, which could increase the
      likelihood of misappropriation.  Furthermore, other companies could
      independently develop similar or superior technology without violating our
      intellectual property rights.




-46-
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          of Contents**




If
      we
      resort to legal proceedings to enforce our intellectual property rights, the
      proceedings could be burdensome, disruptive and expensive, distract the
      attention of management, and there can be no assurance that we would
      prevail.




**Claims
      by others that we infringe their intellectual property rights could increase
      our
      expenses and delay the development of our business. As a result, our business
      and financial condition could be harmed.**




Our
      industries are characterized by the existence of a large number of patents
      and
      frequent claims and related litigation regarding patent and other intellectual
      property rights. We cannot be certain that our products do not and will not
      infringe issued patents, patents that may be issued in the future, or other
      intellectual property rights of others.




We
      do not
      conduct exhaustive patent searches to determine whether the technology used
      in
      our products infringes patents held by third parties. In addition, product
      development is inherently uncertain in a rapidly evolving technological
      environment in which there may be numerous patent applications pending, many
      of
      which are confidential when filed, with regard to similar
      technologies.




We
      may
      face claims by third parties that our products or technology infringe their
      patents or other intellectual property rights. Any claim of infringement could
      cause us to incur substantial costs defending against the claim, even if the
      claim is invalid, and could distract the attention of our management. If any
      of
      our products are found to violate third-party proprietary rights, we may be
      required to pay substantial damages. In addition, we may be required to
      re-engineer our products or obtain licenses from third parties to continue
      to
      offer our products. Any efforts to re-engineer our products or obtain licenses
      on commercially reasonable terms may not be successful, which would prevent
      us
      from selling our products, and, in any case, could substantially increase our
      costs and have a material adverse effect on our business, financial condition
      and results of operations.




**Fluctuations
      in our quarterly net sales and results of operations could depress the market
      price of our common stock.**




Our
      future net sales and results of operations are likely to vary significantly
      from
      quarter to quarter due to a number of factors, many of which are outside our
      control. Accordingly, you should not rely on quarter-to-quarter comparisons
      of
      our results of operations as an indication of future performance. It is possible
      that our net sales or results of operations in a quarter will fall below the
      expectations of securities analysts or investors. If this occurs, the market
      price of our common stock could fall significantly. Our results of operations
      in
      any quarter can fluctuate for many reasons, including:




·
            timing
                of orders from our largest customers - the DOD, Homeland Security,
                various
                INTEL and the United States Night Vision and Electronic Sensors
                Directorate;




·
            our
                ability to manufacture, test and deliver products in a timely and
                cost-effective manner;




·
            our
                success in winning competitions for
                orders;




·
            the
                timing of new product introductions by us or our
                competitors;




·
            the
                mix of products we sell;




·
            competitive
                pricing pressures; and




·
            general
                economic climate






-47-
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          of Contents**




A
      large
      portion of our expenses, including expenses for facilities, equipment, and
      personnel, are relatively fixed. Accordingly, if our net sales decline or do
      not
      grow as much as we anticipate, we might be unable to maintain or improve our
      operating margins. Any failure to achieve anticipated net sales could therefore
      significantly harm our operating results for a particular fiscal
      period.




**Risks
      Related to the Dilutive Effect of Our Agreements with Investors and Other
      Arrangements**




**Our
      stock price could decline significantly if we issue substantial shares of our
      common stock (i) upon conversion of the outstanding Series D Preferred Stock,
      (ii) upon exercise of our warrants, (iii) upon conversion of our notes, or
      (iv)
      pursuant to our employment agreements, our consulting agreements, our equity
      compensation plans, and our private equity credit
      agreement.**




We
      are
      obligated to issue a substantial number of shares of common stock pursuant
      to
      the terms of the arrangements described above.  Should a significant number
      of these securities be issued, exercised or converted, the resulting increase
      in
      the amount of the common stock in the public market could have a substantial
      dilutive effect on our outstanding common stock. The conversion and exercise
      of
      a substantial amount of the aforementioned securities or the issuance of new
      shares of common stock may also adversely affect the terms under which we could
      obtain additional equity capital. The price, which we may receive for the shares
      of common stock, that are issuable upon conversion or exercise of such
      securities, may be less than the market price of the common stock at the time
      of
      such conversions or exercise.




We
      cannot
      predict the actual number of shares of common stock that will be issued pursuant
      to these arrangements, in part, because the conversion price of some of these
      securities will fluctuate based on prevailing market conditions and we have
      not
      determined the total amount of advances we intend to draw.  Nonetheless, we
      can estimate the number of shares of common stock that will be required to
      issue
      using the certain assumptions including (1) the recent price of our common
      stock
      of $.0221 on November 15, 2005, (2) our recent average closing bid price of
      our
      common stock for the last five trading days ending November 15, 2005, and (3)
      the number of shares outstanding as of November 16, 2005.




·
            As
                of November 16, 2005, the outstanding Series D Preferred Stock would
                convert into approximately 607,095,196 shares of our Common Stock,
                and our
                secured convertible promissory notes would convert into approximately
                30,645,296 shares of our common
                stock.





·
            In
                addition, as provided in Section 2(b) of the Terms and Conditions
                of the
                September 21, 2004 and November 9, 2004 notes, interest payments
                may be
                made with shares in lieu of cash.  As of November 16, 2005, we had
                issued 3,703,091 shares of our common stock as payment of interest
                accrued
                on the notes.  As a result, existing investors will experience
                significant dilution, and may experience further dilution if the
                price of
                our stock continues to decline.







**Our
      stockholders will experience significant dilution upon the conversion of our
      Series D Preferred Stock because the Series D Preferred Stock converts at a
      discount to the market price of our common stock at the time of conversion.**




Shares
      of
      Series D preferred stock are convertible at the option of the stockholder at
      any
      time. The number of shares of our common stock into which each share of Series
      D
      preferred is convertible is determined by dividing $1,000 by the discounted
      bid
      price. The "discounted" bid price is the average closing bid price of our common
      stock during the five business days immediately preceding the conversion date
      multiplied by the applicable discount factor, as set forth
      below.




**Average
                Closing Bid Price (1)**
            
            **Discount
                Factor**$15.00
                or less
            
            
            80
            %more
                than $15.00, but less than or equal to $30.00
            
            
            75
            %more
                than $30.00, but less than or equal to $45.00
            
            
            70
            %more
                than $45.00
            
            
            65
            %


__________


(1)   After
      an
      adjustment for a 1-for-60 reverse stock split effective October 27,
      2003.




-48-
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The
      Series D preferred stock can be converted only to the extent that the Series
      D
      stockholder and its affiliates will not, as a result of the conversion, hold
      in
      excess of 9.999% of the total outstanding shares of our common
      stock.




There
      is
      an inverse relationship between our stock price and the number of shares
      issuable upon conversion or our Series D Preferred Stock. That is, as our stock
      price declines, we would be required to issue a greater number of shares upon
      conversion of the Series D Preferred Stock.  The conversion price is based
      on the then-existing market price.  This inverse relationship is
      demonstrated by the table set forth below, which shows the number of shares
      to be issued upon conversion of the Series D Preferred Stock at certain prices
      per share.




**Average
                Closing Price of**
              **Common
                Stock for Five**
              **Preceding
                Trading Days**
            **Conversion
                Price**
            **Shares
                of Common Stock**
              **Issued
                upon Conversion of**
              **One
                Share of Series D**
              **Preferred
                Stock**$0.04
            $0.032
            31,250$0.03
            $0.024
            41,667$0.02
            $0.016
            62,500$0.01
            $0.008
            125,000




**Our
      stockholders will experience significant dilution upon the conversion of our
      8%
      convertible notes issued on September 21, 2004 because these notes convert
      at a
      discount to the market price of our common stock at the time of
      conversion.**




All
      or
      any portion of the principal amount of the 8% convertible notes then outstanding
      together with any accrued and unpaid interest thereunder may be converted into
      shares of common stock at the conversion price, at the option of the holder
      of
      the notes, at any time and from time to time.  The number of shares
      issuable upon any conversion will be equal the outstanding principal amount
      of
      the note to be converted, divided by the conversion price on the conversion
      date, plus (if indicated in the applicable conversion notice) the amount of
      any
      accrued but unpaid interest on the note through the conversion date, divided
      by
      the conversion price on the conversion date.  As of March 15, 2005, the
      conversion price of the notes has been adjusted to the lower of (i) $0.80 and
      (ii) a floating rate equal to 80% of average closing price per share of our
      common stock for the five trading days preceding conversion.  Due to the
      conversion mechanics of the note, decreases in the conversion price result
      in an
      increase in the total number of shares issuable upon conversion.




The
      number of shares to be acquired by each of the holders of the notes upon
      conversion cannot exceed the number of shares that, when combined with all
      other
      shares of common stock and securities then owned by each holder and its
      affiliates, would result in any one of them owning more than 9.999% of our
      outstanding common stock at any point in time. The holders of the notes may
      not
      waive this limitation.




-49-
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There
      is
      an inverse relationship between our stock price and the number of shares
      issuable upon conversion or these convertible notes.  That is, as our stock
      price declines, we would be required to issue a greater number of shares upon
      conversion of these notes.  The conversion price is based on the
      then-existing market price.  This inverse relationship is demonstrated by
      the table set forth below, which shows the number of shares to be issued upon
      conversion of the notes at certain prices per share.




**Average
                Closing Price of**
              **Common
                Stock for Five**
              **Preceding
                Trading Days**
            **Conversion
                Price**
            **Shares
                of Common Stock**
              **Issued
                per $1,000 dollars of**
              **note
                principal converted**$0.04
            $0.032
            31,250$0.03
            $0.024
            41,667$0.02
            $0.016
            62,500$0.01
            $0.008
            125,000




**Risk
      Related to Our Equity Line**




**Existing
      shareholders may experience significant dilution from the sale of shares under
      our private equity credit agreement with Brittany Capital Management.**




Any
      sale
      of shares pursuant to our private equity credit agreement will have a dilutive
      effect on the percentage ownership of our existing stockholders. Based on the
      last reported sale price of our common stock of $.0207 on November 16, 2005,
      we
      would have to issue 259,726,768 shares of common stock to draw down the entire
      $5 million available to us under the private equity credit agreement. These
      shares would represent approximately 74% of our currently outstanding common
      stock upon issuance. Upon effectiveness of the registration statement
      registering 11,727,713 shares under the private equity credit agreement and
      assuming all 11,727,713 shares registered thereunder are resold in the public
      market, there will be an additional 11,727,713 shares of common stock
      outstanding.




The
      offering price of our common stock for any put under the private equity credit
      agreement is based on a discounted market price calculated at the time of the
      put. As a result, t here
      is
      an inverse relationship between our stock price and the number of shares we
      may
      issue under this agreement. That is, any decline in the price of our common
      stock would require us to put additional shares for a given draw. The inverse
      relationship is demonstrated by the table set forth below, which shows the
      number of shares to be issued under the private equity credit agreement for
      a
      hypothetical $50,000 draw-down at hypothetical market prices of $0.05; $0.04;
      $0.03; $0.02 and $0.01 per share.




**Price
      sensitivity of dilution resulting from Private Equity Credit
      Agreement**




**Hypothetical
                Draw Amount**
            **Hypothetical
                Market Price**
            **Discounted
                Market Price**
            **Shares
                to be issued**$50,000
            $0.05
            $0.0465
            1,075,268$50,000
            $0.04
            $0.0372
            1,344,086$50,000
            $0.03
            $0.0279
            1,792,114$50,000
            $0.02
            $0.0186
            2,688,172$50,000
            $0.01
            $0.0093
            5,376,344




Subsequent
      sales of these shares in the open market by Brittany may also have the effect
      of
      lowering our stock price, thereby increasing the number of shares issuable
      under
      the equity line facility (should we choose to sell additional shares to
      Brittany) and consequently further diluting our outstanding shares. These sales
      could have an immediate adverse effect on the market price of the shares and
      result in dilution to the holders of our shares.




-50-
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**We
      believe that Brittany and other stockholders intend to sell their shares of
      common stock in the market, which sales may cause our stock price to decline.**




Brittany
      may sell in the public market up to 11,727,713 shares of common stock upon
      the
      effectiveness of the registration statement covering the resale of those shares.
      Such sales may cause our stock price to decline. Specifically,




·
            Existing
                stockholders will experience substantial dilution if we draw down
                the
                maximum amount of shares of common stock currently being registered
                under
                a separate registration statement (approximately 3.3% of our currently
                outstanding shares on November 16, 2005). This means that up to 11,727,713
                shares of common stock may be sold. The perceived risk associated
                with the
                possible sale of a large number of shares issued under the equity
                line
                could cause some of our stockholders to sell their stock, thus causing
                the
                price of our stock to decline.




·
            Because
                Brittany is purchasing our shares at a discount, it will have an
                incentive
                to sell immediately so that it can realize a gain on the difference.
                If
                our common stock market price does decline, this could further accelerate
                sales of our common stock.




·
            To
                the extent Brittany sells its common stock, the common stock price
                may
                decrease due to the additional shares in the market. This could allow
                Brittany to sell greater amounts of common stock, the sales of which
                would
                further depress the stock price.




·
            Actual
                or anticipated downward pressure on our stock price due to actual
                or
                anticipated sales of stock under the private equity credit agreement
                could
                cause some institutions or individuals to engage in short sales of
                our
                common stock, which may itself cause the price of our stock to
                decline.




**The
      sale of material amounts of common stock could encourage short sales by third
      parties and further depress the price of our common stock. As a result, you
      may
      lose all or part of your investment.**




The
      significant downward pressure on our stock price caused by the sale of a
      significant number of shares under the private equity credit agreement could
      cause our stock price to decline, thus allowing short sellers of our stock
      an
      opportunity to take advantage of any decrease in the value of our stock. The
      presence of short sellers in our common stock may further depress the price
      of
      our common stock.




**Other
      Risks Related to Our Capital Structure and our Common Stock**




**If
      we default on any of our outstanding notes, some or all of our assets could
      be
      liquidated, our operations will be disrupted and you may lose all or part of
      your investment.**




All
      of
      our assets are subject to security agreements. Our obligations under notes
      issued to the former stockholders of EOIR, are secured by all the assets of
      EOIR
      and are guaranteed by Markland, and our obligations under the notes issued
      to
      the investors in our September 21, 2004 private placements are secured by all
      of
      the assets of Markland and its subsidiaries - EOIR, Ergo Systems, Inc. and
      STR.
      As a result, if we default under the terms of any of these notes, the holders
      of
      the notes could foreclose under the security interest and liquidate some or
      all
      of our assets.




-51-
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**Future
      sales by our stockholders may adversely affect our stock price and our ability
      to raise funds in new stock offerings.**




Future
      sales of our common stock in the public market could lower the market price
      of
      our common stock. Such sales may also make it more difficult for us to sell
      equity securities or equity-related securities in the future at a time and
      price
      that our management deems acceptable or at all. Some of our shareholders hold
      securities issued and sold in private transactions in reliance upon exemptions
      from the registration requirements of the Securities Act.




These
      securities may be resold in the public market only if the resale is registered
      or pursuant to an exemption from registration. As of November 16,
      2005:




·
            approximately
                21,895,614 shares of our common stock are restricted securities;
                and




·
            we
                have four effective registration statements covering the resale of
                up to
                362,453,983 shares of our common
                stock.




We
      do not
      know when these shares will be sold since sales will depend upon the market
      price for our common stock, the circumstances, needs and decisions of the
      selling stockholders, and other factors.




**The
      holders of our preferred stock have some rights and privileges that are senior
      to our common stockholders, and we may issue additional shares of preferred
      stock without stockholder approval that could adversely affect the price of
      our
      common stock.**




Our
      board
      of directors has the authority to issue, without any further vote or action
      by
      you and the other common stockholders, a total of up to 5,000,000 shares of
      preferred stock and to fix the rights, preferences, privileges, and
      restrictions, including voting rights, of the preferred stock, which typically
      are senior to the rights of the common stockholders. As of November 16, 2005,
      we
      have outstanding 30,000 shares of our Series A non-voting redeemable convertible
      preferred stock, 10,918 shares of our Series D convertible preferred stock
      and
      may, from time to time in the future, issue additional preferred stock for
      financing or other purposes with rights, preferences or privileges senior to
      the
      common stock. Your rights will be subject to, and may be adversely affected
      by,
      the rights of the holders of the preferred stock that have been issued or might
      be issued in the future. Preferred stock also could make it more difficult
      for a
      third party to acquire a majority of our outstanding voting stock. This could
      delay, defer or prevent a change in control.  Furthermore, holders of
      preferred stock may have other rights, including economic rights, senior to
      the
      holders of our common stock. As a result, the existence and issuance of
      preferred stock could have a material adverse effect on the market value of
      the
      common stock.




**The
      issuance of preferred stock may entrench management or discourage a change
      of
      control.**




Our
      Articles of Incorporation authorize the issuance of preferred stock that would
      have designations rights, and preferences determined from time to time by our
      Board of Directors. Accordingly, our Board of Directors is empowered, without
      stockholder approval, to issue preferred stock with dividends, liquidation,
      conversion, voting, or other rights that could adversely affect the voting
      power
      or other rights of the holders of our common stock.




In
      the
      event of issuance, the preferred stock could be used, under some circumstances,
      as a method of discouraging, delaying or preventing a change in control of
      the
      company or, alternatively, granting the holders of preferred stock such rights
      as to entrench management. Current members of our management that are large
      stockholders and members of our Board may have interests that are different
      from
      other stockholders. Therefore, conflicting interests of some members of
      management and our stockholders may lead to stockholders desiring to replace
      these individuals. In the event this occurs and the holders of our common stock
      desired to remove current management, it is possible that our Board of Directors
      could issue preferred stock and grant the holders thereof such rights and
      preferences so as to discourage or frustrate attempts by the common stockholders
      to remove current management. In doing so, management would be able to severely
      limit the rights of common stockholders to elect the Board of Directors. In
      addition, by issuing preferred stock, management could prevent other
      shareholders from receiving a premium price for their shares as part of a tender
      offer.




-52-
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**We
      have never paid cash dividends on our capital stock, and we do not anticipate
      paying cash dividends in the foreseeable future.  Investors should not rely
      on an investment in our stock for the payment of cash
      dividends.**




We
      have
      not paid cash dividends on any of our classes of capital stock to date, and
      we
      currently intend to retain our future earnings, if any, to fund the development
      and growth of our business. As a result, capital appreciation, if any, of our
      common stock will be your sole source of gain for the foreseeable future.
      Pursuant to the Purchase Agreement between Markland, DKR Soundshore Oasis
      Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd., dated
      September 21, 2004, we have covenanted that so long as any of the notes issued
      pursuant to such agreement are outstanding, we will not declare, pay or make
      any
      provision for any cash dividend or cash distribution with respect to our common
      stock or preferred stock, without first obtaining the approval of the investors
      who are parties to the agreement.




**Issuance
      of shares of common stock upon conversion of our Series D Preferred Stock and
      our September 21, 2004 notes could have an adverse effect on our ability to
      make
      acquisitions with our common stock, thereby adversely affecting our business
      and
      future prospects.**




Our
      strategy is to grow through organic means by increasing acceptance by our
      customers of our present products and services offerings and also through
      acquisitions of assets that provide products or services to Homeland Security,
      DOD, or INTEL.   As we issue shares of common stock pursuant to our
      current obligations, we may not have sufficient shares of our common stock
      available to successfully attract and consummate future acquisitions.  It
      may be necessary for our stockholders to approve an increase of our authorized
      common stock in order to have sufficient authorized shares available to issue
      as
      consideration for acquisitions.  There can be no assurance that we will
      obtain shareholder approval to increase the number of authorized shares or
      that
      such approval will be timely.




**We
      may have an insufficient number of authorized shares of common stock to allow
      for conversion of all of our secured convertible notes, which could cause us
      to
      restructure the notes or to pay cash at maturity — neither of which we may be
      able to accomplish.**




We
      currently have 500 million shares of common stock authorized for issuance.
      As of
      November 16, 2005, approximately 350 million shares were
      outstanding.




If
      the
      holders of our secured convertible notes issued on September 21, 2004 and
      September 20, 2005 elect to convert the outstanding principal and interest
      of
      such notes for shares of our common stock, these conversions may result in
      an
      issuance of shares that exhausts the amount of shares currently authorized
      for
      issuance. At an annual or special stockholders meeting, we may include a
      proposal to increase our authorized common stock. However, absent receiving
      stockholder approval at a stockholder meeting, we may be required to otherwise
      restructure the then-outstanding notes prior to maturity or pay cash at maturity
      if, at the time of conversion, the amount of shares required for redemption
      of
      those notes exceeds our then-authorized shares. There can be no assurance that,
      in such an event, we will be successful in restructuring our obligations under
      the outstanding notes prior to maturity.




**We
        have committed to issue more shares of our common stock than we are currently
        authorized to issue and we may be forced to redeem outstanding securities
        as a
        result. We may be required to seek an increase in the number of our authorized
        shares of common stock in order to avoid possible redemption of securities
        and
        to obtain any available future financing.**
 
 Through the issuance of convertible debt, convertible preferred stock, options,
        warrants and other securities, we have made commitments to reserve and issue
        shares of our common stock that exceed the number of shares we are authorized
        to
        issue under our certificate of incorporation. Many of the instruments related
        to
        our derivative securities include mandatory redemption provisions, triggered
        by
        our failure to reserve a certain number of shares of our common stock, to
        honor
        valid conversion or exchange requests or to comply with resale registration
        obligations. We may receive valid conversion, exchange and share issuance
        requests that we are unable to fulfill. There is no upper limit on the number
        of
        shares that we may be required to issue to satisfy our commitments.
 
 In addition, the holders of our common stock are subject to the low-risk
        short
        selling strategies that may be adopted by third parties and that could
        contribute to the future decline of our stock price. A substantial number
        of our
        convertible and exchangeable securities are convertible or exchangeable at
        a
        price per share that is 20% to 25% less than the five-day average closing
        bid
        price of our common stock immediately prior to conversion or exchange. In
        addition, the terms of these derivative securities generally do not prohibit
        the
        holders of these securities from short selling our common stock. Short selling
        is the act of borrowing stock to sell with the expectation of the price dropping
        and the intent of buying the stock back at a cheaper price to replace the
        borrowed stock. As a result of these factors, holders of these derivative
        securities may decide to sell our common stock short in an effort to drive
        down
        the price of the common stock by creating an imbalance of sell-side interest.
        Such a strategy involves low risk to the holder of these derivative securities
        due to the discounted conversion or exchange prices they enjoy that provides
        a
        hedge against potential price increases. The use of such a strategy by one
        or
        more of the holders of these derivative securities could cause a significant
        reduction in the market price of our common stock.
 
 In order to fulfill all of our commitments, our stockholders would need to
        approve an amendment to our certificate of incorporation to significantly
        increase the number of our authorized shares of common stock. We can give
        no
        assurance that any increase will occur. If approved, any further increase
        could
        lead to further dilution for our existing stockholders.
 
 In addition, we may need to seek an increase in our authorized shares of
        common
        stock in order to obtain future financing, if such financing would be available
        to us on acceptable terms, or at all. Any additional financing involving
        our
        common stock or derivative securities convertible into our common stock could
        also lead to further dilution for our existing stockholders.




**The
      sale of material amounts of common stock could encourage short sales by third
      parties and further depress the price of our common stock.  As a result,
      you may lose all or part of your investment.**




The
      significant downward pressure on our stock price caused by the sale of a
      significant number of registered shares could cause our stock price to decline,
      thus allowing short sellers of our stock an opportunity to take advantage of
      any
      decrease in the value of our stock. The presence of short sellers in our common
      stock may further depress the price of our common stock.




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**Risks
      Relating to Our Investment in Technest**




**Technest's
      lack of operating history on which investors may evaluate its operations,
      prospects and ability to produce a return on investment makes an investment
      in
      Markland highly speculative.**




Prior
      to
      February 14, 2005, Technest did not have any operations on which a potential
      investor may base an evaluation of its prospects and ability to operate Genex
      profitably. If Technest is unable to sustain profitable operations, Markland's
      return on its investment in Technest may suffer and the price of Markland's
      common stock may decline.




**Robert
      Tarini is the Chief Executive Officer and Chairman of the Board of Directors
      of
      Technest and Markland.  In addition, Mr. Tarini, has an investment in
      Technest. Dr. Mackin and Mr. Pereira also serve as officers of Technest.
      Conflicts of interest could arise as a result of these overlapping positions.**




Technest
      and Markland share similar investment objectives and policies. There may be
      instances where the business of these companies overlap or compete.  Mr.
      Tarini, Dr. Mackin and Mr. Pereira may disproportionately allocate time and
      resources between these other entities and us. Neither our organizational
      documents nor our policies specify a minimum standard of time and attention
      that
      these officers and directors, as applicable, are required to devote to us.
      However, we do not believe that having the same board of directors or doing
      business in the same markets will present a conflict of interest. There can
      be
      no assurances that there will be no conflicts of interest.  The board will
      endeavor to act in the best interests of each company.




In
      addition, Mr. Tarini, through his wholly-owned company ipPartners, Inc., is
      one
      of the investors that participated in the transactions pursuant to which Genex
      Technologies was acquired. On February 14, 2005, ipPartners, Inc. received
      143,678 shares of Technest Series B preferred stock, 143,678 shares of Technest
      Series C preferred stock convertible into 143,678 shares of Technest common
      stock and warrants to purchase 143,678 Technest common stock in exchange for
      $625,000.  On June 20, 2005, ipPartners, Inc. exchanged all of its Technest
      Series B preferred stock for 625 shares of Markland Series D preferred stock.
      On
      August 23, 2005, ipPartners converted its 625 shares of Markland Series D
      preferred stock into 6,510,417 shares of Markland common stock. The resale
      of
      these shares of common stock were registered pursuant to a registration
      statement on Form SB-2 that was effective on August 10, 2005.




**It
      may be difficult for us to resell shares of common stock of Technest if an
      active market for Technest common stock does not develop.**




Due
      to
      the current price of Technest common stock, many brokerage firms may not be
      willing to effect transactions in its securities, particularly because
      low-priced securities are subject to SEC rules imposing additional sales
      requirements on broker-dealers who sell low-priced securities (generally defined
      as those having a per share below $5.00). These disclosure requirements may
      have
      the effect of reducing the trading activity in the secondary market for Technest
      common stock as it is subject to these penny stock rules. These factors severely
      limit the liquidity, if any, of Technest common stock, and will likely continue
      to have a material adverse effect on its market price and on our ability to
      raise additional capital through selling Technest common stock we
      hold.




The
      common stock of Technest is not actively traded on a securities exchange and
      will not be able to cause its securities to be listed because Technest does
      not
      meet the initial listing criteria for any registered securities exchange or
      the
      Nasdaq National Market System. The common stock of Technest is quoted on the
      less recognized OTC Bulletin Board. This factor may further impair our ability
      to sell our shares when we want and/or could depress the stock price of Technest
      common stock. As a result, we may find it difficult to dispose of, or to obtain
      accurate quotations of the price of, Technest common stock because smaller
      quantities of shares could be bought and sold, transactions could be delayed
      and
      security analyst and news coverage of our Technest may be limited. These factors
      could result in lower prices and larger spreads in the bid and ask prices for
      shares of Technest common stock.




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          of Contents**




We
      cannot
      predict the extent to which investor interest in Technest common stock or a
      business combination, if any, will lead to an increase in its market price
      or
      the development of an active trading market or how liquid that market, if any,
      might become.




**Markland
      may become an investment company if our controlling interest in Technest falls
      below 51%. If so, our compliance and registration costs will
      increase.**




If
      Markland's ownership of Technest falls below 51%, Technest will no longer meet
      the definition of "majority-owned subsidiary" as contemplated by the Investment
      Company Act of 1940 (the "Investment Company Act") and Markland could be subject
      to regulation under the Investment Company Act. In such event, Markland may
      be
      required to register as an investment company, unless an exemption is available.
      We may incur significant registration and compliance costs and we may become
      subject to liability under the Investment Company Act, the Securities Act and
      the Exchange Act and rules and regulations adopted thereunder. Compliance with
      these rules could adversely affect Markland and Technest because it would
      require additional management and financial resources.  On November 16,
      2005, Markland was the beneficial owner of 13,954,023 shares of Technest common
      stock (after giving effect to Technest's reverse stock split), which represented
      approximately 91% of the shares of Technest common stock on a primary
      basis.




**Risks
      Relating to Investing in a Controlled Company**




**Other
      business ventures of our chief executive officer may present demands on his
      time
      or possible conflicts of interest which could materially and adversely affect
      our business.**




Robert
      Tarini, our chief executive officer and a director of our company is involved
      in
      other business activities and may, in the future, become involved in additional
      business opportunities.  Mr. Tarini currently holds positions and is
      involved in the following activities.




·
            Mr.
                Tarini is the founder and president of ipPartners, Inc., a firm
                specializing in the design and manufacture of acoustic remote sensing
                devices utilized in marine and land based applications. He is also
                the
                sole shareholder.




·
            Mr.
                Tarini is the chief executive officer, the chief operating officer
                and a
                minority shareholder of Syqwest, Inc., a company that specializes
                in the
                development of acoustic remote sensing
                devices.




·
            Since
                1999, Mr. Tarini has served as the chief executive officer of Ocean
                Data
                Equipment Corporation, where he has overseen the design and development
                of
                a complete line of scientific instruments targeted for geophysical
                and
                hydrographic research, and developed a remote sensing technique,
                which is
                currently being developed for application in detecting illicit materials.
                He is also a minority shareholder.




·
            On
                February 14, 2005, Mr. Tarini was appointed chief executive officer
                and a
                director of Technest.




Mr.
      Tarini may face a potential conflict of interest in how he allocates his
      available time to each company. We have not formally adopted a plan to resolve
      any potential or actual conflicts of interest that exist or that may arise
      related to this matter. There can be no assurance that we will have a policy
      in
      place to address potential conflicts of interests.




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**Risks
      Related to the Homeland Security and Defense Industries**




**The
      homeland security and defense industries are characterized by rapid
      technological change and evolving industry standards, and unless we keep pace
      with the changing technologies, we could lose customers and fail to win new
      customers.**




Our
      future success will depend, in part, upon our ability to develop and introduce
      a
      variety of new products and services and enhancements to these new product
      and
      services in order to address the changing and sophisticated needs of the
      homeland security marketplace. Delays in introducing new products, services
      and
      enhancements, the failure to choose correctly among technical alternatives
      or
      the failure to offer innovative products and services at competitive prices
      may
      cause customers to forego purchases of our products and services and purchase
      those of our competitors. Frequently, technical development programs in the
      homeland security industry require assessments to be made of the future
      directions of technology and technology markets generally, which are inherently
      risky and difficult to predict.




**We
      face intense competition, which could result in lower revenues and higher
      research and development expenditures and could adversely affect our results
      of
      operations.**




Current
      political tensions throughout the world have heightened interest in the homeland
      security industry, and we expect competition in this field, which is already
      substantial, to intensify. If we do not develop new and enhanced products,
      or if
      we are not able to invest adequately in our research and development activities,
      our business, financial condition and results of operations could be negatively
      impacted. Many of our competitors have significantly more cash and resources
      than we have. Our competitors may introduce products that are competitively
      priced, have increased performance or functionality, or incorporate
      technological advances that we have not yet developed or implemented. To remain
      competitive, we must continue to develop, market and sell new and enhanced
      systems and products at competitive prices, which will require significant
      research and development expenditures.




We
      cannot
      assure you that we will be able to compete successfully against current and
      future competitors.




**Risks
      Relating to New Corporate Governance Standards**




**We
      are not subject to the same corporate governance standards as listed companies.
      This may affect market confidence and company performance. As a result, our
      business could be harmed and the price of our stock could
      decrease.**




Registered
      exchanges and the Nasdaq National Market have adopted enhanced corporate
      governance requirements that apply to issuers that list their securities on
      those markets. These standards deal with the rights and responsibilities of
      a
      company's management, its board, shareholders and various stakeholders. How
      well
      companies are run may affect market confidence as well as company performance.
      Our common stock is quoted on the OTC Bulletin Board, which does not have
      comparable requirements. As a result, our business and the price of our stock
      may be adversely affected.




For
      instance, we are not required to have any independent directors and we do not
      have independent directors. Therefore management has significant influence
      over
      decisions made by the Board on behalf of the stockholders.




In
      some
      circumstances, management may not have the same interests as the shareholders
      and conflicts of interest may arise. We do not have a policy to resolve
      conflicts of interest and we are not required to have one. Notwithstanding
      the
      exercise of their fiduciary duties as directors and executive officers and
      any
      other duties that they may have to us or our other stockholders in general,
      these persons may have interests different than yours.




-56-
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**Our
      administrative costs and expenses resulting from new regulations have increased,
      adversely affecting our financial condition and results of
      operations.**




We
      face
      new corporate governance requirements under the Sarbanes-Oxley Act of 2002
      and
      SEC rules adopted thereunder. These regulations increased our legal and
      financial compliance and made some activities more difficult, time-consuming
      and
      costly. Our expenses will continue to increase as we continue to implement
      these
      new regulations.




**New
      corporate governance requirements have made it more difficult to attract
      qualified directors. As a result, our business may be harmed and the price
      of
      our stock may be adversely affected**




New
      corporate governance requirements have increased the role and responsibilities
      of directors and executive officers of public companies. These new requirements
      will make it more difficult and more expensive for us to obtain director and
      officer liability insurance. We may be required to accept reduced coverage
      or
      incur significantly higher costs to obtain coverage. As a result, it may be
      more
      difficult for us to attract and retain qualified individuals to serve as members
      of our board of directors.




**If
      we fail to maintain effective internal controls over financial reporting, the
      price of our common stock may be adversely affected.**




We
      are
      required to establish and maintain appropriate internal controls over financial
      reporting. Our internal controls over financial reporting may have weaknesses
      and conditions that need to be addressed, the disclosure of which may have
      an
      adverse impact on the price of our common stock.




Failure
      to establish those controls, or any failure of those controls once established,
      could adversely impact Markland's public disclosures regarding our business,
      financial condition or results of operations. In addition, management's
      assessment of internal controls over financial reporting may identify weaknesses
      and conditions that need to be addressed in our internal controls over financial
      reporting or other matters that may raise concerns for investors. Any actual
      or
      perceived weaknesses and conditions that need to be addressed, disclosure of
      management's assessment of our internal controls over financial reporting or
      disclosure of our independent registered public accounting firm's attestation
      to
      or report on management's assessment of our internal controls over financial
      reporting may have an adverse impact on the price of our common
      stock.




**Standards
      for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
      and if we fail to comply in a timely manner, our business could be harmed and
      our stock price could decline.**




Rules
      adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
      require annual assessment of our internal control over financial reporting,
      and
      attestation of this assessment by our independent registered public accountant.
      We expect that this requirement will first apply to our annual report for the
      fiscal year ending June 30, 2007. The standards that must be met for management
      to assess the effectiveness of the internal control over financial reporting
      are
      new and complex, and require significant documentation, testing and possible
      remediation to meet the detailed standards. We may encounter problems or delays
      in completing activities necessary to make an assessment of its internal control
      over financial reporting. In addition, we may encounter problems or delays
      in
      completing the implementation of any requested improvements and receiving an
      attestation of its assessment by our independent registered public accountants.
      If management cannot assess Markland's internal control over financial reporting
      as effective, or our independent registered public accounting firm is unable
      to
      issue an unqualified attestation report on such assessment, investor confidence
      and share value may be negatively impacted.




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**Risks
      Related to Investing in Illiquid and Low-Priced Securities**




**Our
      common stock is deemed to be "penny stock," which may make it more difficult
      for
      investors to sell these shares due to suitability and disclosure
      requirements.**




Due
      to
      the current price of our common stock ($0.0207 on November 16, 2005), many
      brokerage firms may not be willing to effect transactions in our securities,
      particularly because low-priced securities are subject to SEC rules (referred
      to
      as the "penny stock rules") imposing additional sales requirements on
      broker-dealers who sell low-priced securities (generally defined as those having
      a per share price below $5.00). These disclosure requirements may have the
      effect of reducing the trading activity in the secondary market for Markland
      common stock as it is subject to these penny stock rules. These rules severely
      limit the liquidity, if any, of our common stock, and will likely continue
      to
      have a material adverse effect on our market price and on our ability to raise
      additional capital through selling Markland common.




The
      penny
      stock rules require a broker-dealer, prior to a transaction in a penny stock,
      to
      deliver a standardized risk disclosure document prepared by the Commission,
      that: (a) contains a description of the nature and level of risk in the market
      for penny stocks in both public offerings and secondary trading; (b) contains
      a
      description of the broker's or dealer's duties to the customer and of the rights
      and remedies available to the customer with respect to a violation to such
      duties or other requirements of Securities' laws; (c) contains a brief, clear,
      narrative description of a dealer market, including bid and ask prices for
      penny
      stocks and the significance of the spread between the bid and ask price; (d)
      contains a toll-free telephone number for inquiries on disciplinary actions;
      (e)
      defines significant terms in the disclosure document or in the conduct of
      trading in penny stocks; and (f) contains such other information and is in
      such
      form, including language, type, size and format, as the SEC may require by
      rule
      or regulation.




In
      addition, the broker-dealer also must provide, prior to effecting any
      transaction in a penny stock, the customer with: (a) bid and ask quotations
      for
      the penny stock; (b) the compensation of the broker-dealer and its salesperson
      in the transaction; (c) the number of shares to which such bid and ask prices
      apply, or other comparable information relating to the depth and liquidity
      of
      the market for such stock; and (d) monthly account statements showing the market
      value of each penny stock held in the customer's account.




Finally,
      the penny stock rules require that prior to a transaction in a penny stock
      not
      otherwise exempt from those rules, the broker-dealer must make a special written
      determination that the penny stock is a suitable investment for the purchaser
      and receive the purchaser's written acknowledgment of the receipt of a risk
      disclosure statement, a written agreement to transactions involving penny
      stocks, and a signed and dated copy of a written suitability
      statement.




These
      requirements may reduce the potential market for our common stock by reducing
      the number of potential investors, brokers and traders. This may make it more
      difficult for investors in our common stock to sell shares to third parties
      or
      to otherwise dispose of them. This could cause our stock price to
      decline.




We
      cannot
      predict the extent to which investor interest in Technest common stock or a
      business combination, if any, will lead to an increase in its market price
      or
      the development of an active trading market or how liquid that market, if any,
      might become.




**It
      may be difficult for you to resell your shares if an active and liquid market
      for our common stock does not develop.**




Our
      common stock is not actively traded on a securities exchange and we do not
      meet
      the initial listing criteria for any registered securities exchange or the
      Nasdaq National Market System. It is quoted on the less recognized OTC Bulletin
      Board. This factor may further impair your ability to sell your shares when
      you
      want and/or could depress our stock price. As a result, you may find it
      difficult to dispose of, or to obtain accurate quotations of the price of,
      our
      securities because smaller quantities of shares could be bought and sold,
      transactions could be delayed and security analyst and news coverage of our
      company may be limited. These factors could result in lower prices and larger
      spreads in the bid and ask prices for our shares.




-58-
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Due
      to
      the current price of our common stock, many brokerage firms may not be willing
      to effect transactions in our securities, particularly because low-priced
      securities are subject to an SEC rule that imposes additional sales requirements
      on broker-dealers who sell low-priced securities (generally defined as those
      having a per share price below $5.00).




These
      factors severely limit the liquidity of our common stock, and would likely
      have
      a material adverse effect on its market price and on our ability to raise
      additional capital. We cannot predict the extent to which investor interest
      in
      our stock, if any, will lead to an increase in its market price or the
      development of a more active trading market or how liquid that market might
      become.




**The
      market price of our common stock may be volatile. As a result, you may not
      be
      able to sell our common stock in short time periods, or possibly at
      all.**




Our
      stock
      price has been volatile. From July 1, 2003 to November 16, 2005, the trading
      price of our common stock ranged from a low price of $0.019 per share to a
      high
      price of $9.00 per share. Many factors may cause the market price of our common
      stock to fluctuate, including:




·
            variations
                in our quarterly results of
                operations;




·
            the
                introduction of new products by us or our
                competitors;




·
            acquisitions
                or strategic alliances involving us or our
                competitors;




·
            future
                sales of shares of common stock in the public market;
                and




·
            market
                conditions in our industries and the economy as a
                whole.




In
      addition, the stock market has recently experienced extreme price and volume
      fluctuations. These fluctuations are often unrelated to the operating
      performance of particular companies. These broad market fluctuations may
      adversely affect the market price of our common stock. When the market price
      of
      a company's stock drops significantly, stockholders often institute securities
      class action litigation against that company. Any litigation against us could
      cause us to incur substantial costs, divert the time and attention of our
      management and other resources or otherwise harm our business.




**ITEM
      3. CONTROLS AND PROCEDURES.**





**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES.**





Based
      on
      our management's evaluation (with the participation of our principal executive
      officer and principal financial officer), as of the end of the period covered
      by
      this report, our principal executive officer and principal financial officer
      have concluded that our disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
      (the "Exchange Act")) are effective to ensure that information required to
      be
      disclosed by us in reports that we file or submit under the Exchange Act is
      recorded, processed, summarized and reported within the time periods specified
      in Securities and Exchange Commission **** rules
      and
      forms.  The limited size of our internal financial and controls staff did
      not permit a significant amount of time or expense on monitoring and oversight
      of our general administrative and financial functions. In the course of
      management's ongoing evaluation of our controls and procedures, management
      has
      concluded that, due to the limited amount of resources available for general
      administrative and financial matters, the Company: (i) had a less than
      desirable number of people performing a majority of the financial duties, (ii)
      lacked the desired internal financial and controls staff resources for a
      comprehensive internal audit function, and (iii) and in some cases had not
      been
      able to promptly accumulate and process all of our data and reports on a timely
      basis. Management believes that at this time, in light of existing newly
      instituted staff and controls, the risks associated with a lack of segregation
      of duties and limited staff have been largely mitigated. However, management
      will periodically reevaluate the situation, and as necessary, will put in place
      additional internal staff and controls to prevent a lack of discipline around
      policies and procedures in our administrative and financial
      matters.




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**CHANGES
      IN INTERNAL CONTROL OVER FINANCIAL REPORTING.**




There
      is
      no change in our internal control over financial reporting during our quarter
      ended September 30, 2005 that has materially affected, or is reasonably likely
      to materially affect, our internal control over financial reporting. It should
      be noted that any system of controls, however well designed and operated, can
      provide only reasonable, and not absolute, assurance that the objectives of
      the
      system are met. In addition, the design of any control system is based in part
      upon certain assumptions about the likelihood of future events. Because of
      these
      and other inherent limitations of control systems, there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions, regardless of how remote.




With
      the
      acquisition of Technest and Genex, we have integrated the accounting and
      controls for these two small companies into our group accounting function at
      EOIR in Virginia. The larger scale of this operation allows for more timely
      recording of transactions and greater separation of duties than would otherwise
      be possible.




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**PART
      II.****OTHER
      INFORMATION**




**ITEM
      1. LEGAL PROCEEDINGS**





Charles
      Wainer




On
      June
      28, 2004, Charles Wainer filed a civil suit against Markland in Florida state
      court alleging breach of a stock purchase agreement and breach of an employment
      agreement stemming from Wainer's sale of his business to a predecessor of
      Markland and his subsequent employment thereat. In the complaint, Wainer alleges
      Markland owes him $300,000 cash, some unspecified portion of $700,000 in stock,
      some unspecified portion of $86,000 cash for lease payments, and approximately
      $20,000 in back-pay. On August 11, 2004, Markland answered the complaint and
      denied any liability. In September 2005 the trial of this matter was concluded.
      As a result, Markland anticipates that judgment will be entered against Markland
      and in favor of Mr. Wainer in an amount of approximately $482,000. At June
      30,
      2005, the Company has charged to Selling, General and Administrative expense
      $482,000 related to this matter.




Joseph
      R. Moulton




On
      or
      about September 16, 2004, Joseph R. Moulton, Sr. initiated a lawsuit in the
      Circuit Court of Spotsylvania County, Virginia, against the Company,
      EOIR, and our Chief Executive Officer and Director, Robert Tarini. Mr.
      Moulton was the largest single shareholder of EOIR prior to its acquisition
      by
      the Company, owning approximately 67% of the EOIR capital stock. Mr. Moulton
      received approximately $5,863,000 in cash and a promissory note of EOIR in
      the
      approximate principal amount of $6,967,000 for his shares of EOIR at the closing
      of the acquisition of EOIR by the Company. In his complaint Mr. Moulton asserts,
      among other things, that the Company breached its obligations under the Stock
      Purchase Agreement, dated June 29, 2004, pursuant to which the Company acquired
      EOIR, by terminating Mr. Moulton's employment with EOIR and removing him from
      the EOIR board of directors. Mr. Moulton is seeking damages allegedly suffered
      by his loss of employment, extreme emotional distress, and costs incurred to
      enforce his contractual rights. In addition, he is seeking certain other
      equitable relief including, the appointment of a receiver to oversee the
      management of EOIR until these promissory notes issued to former EOIR
      shareholders at the closing of the acquisition are paid in full and a
      declaratory judgment that the Company's actions constitute an event of default
      under these promissory notes allowing for the acceleration of all amounts
      (approximately $11,000,000) due thereunder. The Company is a guarantor of these
      notes. The Company believes that the allegations in this lawsuit are entirely
      without merit and expects to file an answer denying Mr. Moulton's allegations
      and opposing vigorously all equitable relief sought. The Company is considering
      bringing various claims against Mr. Moulton either by counterclaim or in a
      separate action.




Deer
      Creek




Markland
      and Technest were notified on July 21, 2005 by counsel for Deer Creek LLC,
      or
      Deer Creek, an investor in the February 15, 2005 transaction involving Technest,
      Markland and Genex, that Deer Creek filed an order to show cause requesting
      a
      temporary restraining order in the Supreme Court for New York County, naming
      Technest and Markland as defendants. Deer Creek is seeking to enjoin Markland
      from issuing its common stock upon conversion of certain shares of Markland's
      Series D Preferred Stock issued pursuant to certain exchange agreements dated
      June 20, 2005. Technest and Markland retained the firm of Pryor, Cashman,
      Sherman & Flynn LLP, 410 Park Avenue, 10th Floor, New York, New York 10022
      to represent their interests in this matter. On July 25, 2005 Technest and
      Markland removed the matter to the United States District Court for the Southern
      District of New York. This matter was settled on August 19, 2005. Markland
      entered into an exchange agreement and a registration rights agreement with
      Deer
      Creek on August 19, 2005. Such agreements were filed as exhibits to our current
      report on Form 8-K filed on August 25, 2005.




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Greg
      and Mary Williams




Markland
      and EOIR were notified on July 11, 2005 by counsel for Greg and Mary Williams,
      former shareholders and employees of EOIR and, in the case of Mr. Williams,
      a
      former director of Markland, that the Williamses filed a lawsuit in the
      Commonwealth of Virginia, naming EOIR and Markland as a defendant, regarding
      a
      number of contractual disputes involving the registration of shares of Markland
      common stock underlying certain options issued to the Williamses in connection
      with the acquisition of EOIR by Markland and severance payments called for
      pursuant to severance agreements by and among the Williamses, EOIR and Markland.
      On August 3, 2005, EOIR and Markland filed an answer and a demurrer denying
      all
      liability.




H
      & H Acquisition Corp.




On
      July
      23, 1998, H & H Acquisition Corp., individually and purportedly on behalf of
      Technest Holdings, commenced an action in federal court in the Southern District
      of New York against the Company, the founder and certain officers, among others.
      The complaint is an action to recover shares of common stock of the Company
      and
      unspecified damages. Management believes that the claims against the Company
      and
      certain officers are without merit and is vigorously defending the action.
      The
      Company cannot make any assurances about the litigation's outcome. However,
      the
      Company could be adversely affected if the plaintiff prevails.




In
      September 2002 the Company was served with a Summary Judgment Motion regarding
      H
& H Acquisition Corp. and the Company answered the motion in November 2002.
      On January 3, 2005, the court denied the motion for summary judgment. Trial
      of
      this matter is scheduled to begin in January 2006.




Other




I n
      addition, we are subject to legal proceedings, claims, and litigation arising
      in
      the ordinary course of business. While the outcome of these matters is currently
      not determinable, we do not expect that the ultimate costs to resolve these
      matters will have a material adverse effect on our consolidated financial
      position, results of operations, or cash flows




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





During
      the quarter ending September 30, 2005, the holders of our Series D convertible
      preferred stock converted an aggregate of 3,830 shares of Series D convertible
      preferred stock into 45,840,657 shares of common stock. The following table
      lists each holder of Series D convertible preferred stock who effectuated such
      a
      conversion during the quarter ended September 30, 2005, the number of shares
      of
      Series D convertible preferred stock that were converted and the number of
      shares of common stock that were issued upon those conversions.





Holder
            Number
                of Shares of Series D Convertible Preferred Stock Converted during
                quarter
                ended
              September
                30, 2005
            Number
                of shares of Common Stock issued to Holder pursuant to conversions
                of
                Series D Convertible Preferred Stock during quarter ended
              September
                30, 2005James,
                LLC
            1,080
            12,503,111DKR
                Soundshore Oasis Holding Fund, Ltd.
            950
            12,933,710DKR
                Soundshore Strategic Holding Fund, Ltd.
            50
            623,130ipPartners,
                Inc.
            625
            6,510,417Verdi
                Consulting, Inc.
            1,125
            13,270,289





The
      issuance of these securities was exempt from registration under Section 4(2)
      of
      the Securities Act of 1933, as amended, as a sale not involving a public
      offering.




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During
      the quarter ending September 30, 2005, the holders of our outstanding Secured
      8%
      Convertible Notes converted an aggregate of $2,539,990 of the outstanding
      principal on those notes into 63,244,562 shares of common stock. During the
      same
      period, we issued 888,297 shares of our common stock to the holders of our
      Secured 8% Convertible Notes in satisfaction of interest and an aggregate of
      5,589,299 shares of our common stock in satisfaction of liquidated damages
      incurred pursuant to registration rights agreements dated September 21, 2004
      and
      November 9, 2004. The following table lists each holder of our outstanding
      Secured 8% Convertible Notes who effectuated a conversion during the quarter
      ended September 30, 2005, the amount of principal that was converted, the number
      of shares of common stock that were issued as a result of those conversions,
      the
      number of shares of common stock issued to the holder in satisfaction of
      interest and the number of shares issued to the holder in satisfaction of
      liquidated damages.





Holder
            
            Amount
                of Principal Converted
            
            Number
                of shares of Common Stock issued to Holder pursuant to conversions
                of
                Secured 8% Convertible Notes during quarter ended September 30,
                2005
            
            Number
                of Shares issued as interest payments on outstanding Secured 8%
                Convertible Notes during quarter ended September 30, 2005
            
            Number
                of shares issued in satisfaction of liquidated damagesDKR
                Soundshore Oasis Holding Fund, Ltd.
            
            $
            1,600,000
            
            
            43,745,551
            
            
            626,998
            
            
            3,537,039DKR
                Soundshore Strategic Holding Fund, Ltd.
            
            $
            435,000
            
            
            11,372,940
            
            
            159,468
            
            
            884,260Harborview
                Fund LLP
            
            $
            485,000
            
            
            8,189,741
            
            
            101,831
            
            
            1,168,000





The
      issuance of these securities was exempt from registration under Section 4(2)
      of
      the Securities Act of 1933, as amended, as a sale not involving a public
      offering.




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**ITEM
      6. EXHIBITS**




Exhibit
                No.
            Description
            Filed
                with this Quarterly Report
            Incorporated
                by referenceForm
            Filing
                Date
            Exhibit
                No.10.1
            Stock
                Purchase Agreement between Technest Holdings, Inc. and Markland
                Technologies, Inc. dated August 17, 2005
            
            8-K
            August
                18, 2005
            10.110.2
            Exchange
                Agreement dated August 19, 2005 by and between Markland Technologies,
                Inc.
                and Deer Creek Fund LLC
            
            8-K
            August
                25, 2005
            10.110.3
            Registration
                Rights Agreement dated August 25, 2005 between Markland Technologies,
                Inc.
                and Deer Creek Fund LLC
            
            8-K
            August
                25, 2005
            10.210.4
            Agreement
                between Markland Technologies, Inc. and DKR Soundshore Oasis Holding
                Fund,
                Ltd. dated September 20, 2005
            
            8-K
            September
                20, 2005
            10.110.5
            Agreement
                between Markland Technologies, Inc. and DKR Soundshore Strategic
                Holding
                Fund, Ltd. dated September 20, 2005
            
            8-K
            September
                20, 2005
            10.210.6
            Stock
                Pledge Agreement by and among Markland Technologies, Inc., DKR Soundshore
                Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holdings Fund,
                Ltd.
                dated September 20, 2005
            
            8-K
            September
                20, 2005
            10.310.7
            Agreement
                relating to Certain Securities Issued by Markland Technologies, Inc.
                and
                Technest Holdings, Inc. dated October 4, 2005 by and among James
                LLC,
                Southridge Partners, LP, Southshore Capital Fund, Ltd., Greenfield
                Capital
                Partners LLC, Markland Technologies, Inc. and Technest Holdings,
                Inc.
            
            8-K
            October
                7, 2005
            10.110.8
            Agreement
                to Terminate Leases dated October 4, 2005 by and among Markland
                Technologies, Inc., Technest Holdings, Inc. and Southridge Holdings
                LLC.
            
            8-K
            October
                7, 2005
            10.210.9
            Form
                of Exchange Agreement dated October 4, 2005 between Markland Technologies,
                Inc. and Southridge Partners, LP.
            
            8-K
            October
                7, 2005
            10.310.10
            Form
                of Exchange Agreement dated October 4, 2005 between Markland Technologies,
                Inc. and Southshore Capital Fund, Ltd.
            
            8-K
            October
                7, 2005
            10.410.11
            Form
                of Warrant Issued to Greenfield Capital Partners LLC.
            
            8-K
            October
                7, 2005
            10.510.12
            Private
                Equity Credit Agreement dated October 13, 2005 between Markland
                Technologies, Inc. and Brittany Capital Management, Ltd.
            
            SB-2
                (1)
            October
                14, 2005
            10.9210.13
            Registration
                Rights Agreement dated October 13, 2005 between Markland Technologies,
                Inc. and Brittany Capital Management, Ltd.
            
            SB-2
                (1)
            October
                14, 2005
            10.9331.1
            Certification
                by CFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule
                15d-14(a).
            X31.2
            Certification
                by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule
                15d-14(a).
            X32.1
            Certification
                by CEO and CFO of Periodic Report Pursuant to 18 U.S.C. Section
                1350
            X





(1)  SEC
      File
      # 333-129017


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**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      his
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.


**MARKLAND
                TECHNOLOGIES, INC.**Date: November
                21, 2005
              By:
              /s/ Robert
                TariniRobert
                  Tarini
                Chief Executive Officer


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