**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-KSB**




o
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the Fiscal Year Endedx
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**For
                the transition period from January 1, 2005 to June 30, 2005.


**Commission
      File Number 000-27023**




**Technest
      Holdings, Inc.**


( *Exact
      name of Registrant as specified in its Charter* )




**Nevada**
              (*State
                or other jurisdiction*
              *of
                incorporation or organization*)
              
              
              **88
                Royal Little Drive, Providence, RI**
              (*Address
                of principal executive offices*)
              
              
              **276
                Washington Street, No. 367, Boston, MA 02108**
              *(Mailing
                Address)*
            **88-0357272**
              (*I.R.S.
                Employer Identification No.*)
              
              
              **02904**
              *(Zip
                Code)*








**Issuer’s
      Telephone Number: (617) 973-5104**







Securities
      registered pursuant to Section 12(b) of the Act:




**Title
                of Class**
            
            **Name
                of each exchange on which registered**None
            
            Not
                Applicable





Securities
      registered pursuant to Section 12(g) of the Exchange Act:


**Common
      Stock, par value $0.001 per share**


(Title
      or
      Class)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act of 1934 during the preceding twelve (12) months (or
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past ninety (90) days.
      [  ] Yes [X] No





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB. [  ]





The
      issuer’s revenues for the six month transition period ended June 30, 2005 were
      $1,664,075.








The
      number of shares outstanding of the issuer’s class of Common Stock, as of
      September 12, 2005 is 14,302,721, $.001 par value. Of this number, a total
      of
      244,243 shares, having an aggregate market value of $1,660,852.40 based on
      the
      closing price of the issuer’s common stock of $6.80 on September 12, 2005 as
      quoted on the Electronic Over-the-Counter Bulletin Board (“OTCBB”), were held by
      non-affiliates* of the issuer.





*
            Affiliates
                for the purpose of this item refers to the issuer’s officers and directors
                and/or any persons or firms (excluding those brokerage firms and/or
                clearing houses and/or depository companies holding issuer’s securities as
                record holders only for their respective clienteles’ beneficial interest)
                owning 5% or more of the issuer’s Common Stock, both of record and
                beneficially.








**APPLICABLE
      ONLY TO CORPORATE REGISTRANTS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date:




14,302,721
      shares as of September 12, 2005, all of one class of common stock, $0.001 par
      value.







**DOCUMENTS
      INCORPORATED BY REFERENCE**





Documents
      Incorporated by reference: None





Transitional
      Small Business Disclosure Format (check one): Yes [ ] No [X]


















**TECHNEST
      HOLDINGS, INC.**


**FORM
      10-KSB**


**TABLE
      OF CONTENTS**


**June
      30, 2005**





**Part
                I**Item
                1.
            Description
                of Business
            1Item
                2.
            Description
                of Property
            7Item
                3.
            Legal
                Proceedings
            7Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            8**Part
                II**
            
            8Item
                5.
            Market
                for Common Equity and Related Stockholder Matters
            8Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            9Item
                7.
            Financial
                Statements
            16Item
                8.
            Changes
                in and Disagreements With Accountants on Accounting and Financial
                Disclosures
            17Item
                8a.
            Controls
                and Procedures
            17Item
                8b
            Other
                Information
            17**Part
                III**
            
            18Item
                9.
            Directors
                and Executive Officers of the Registrant
            18Item
                10.
            Executive
                Compensation
            20Item
                11.
            Security
                Ownership of Certain Beneficial Owners and Management
            21Item
                12.
            Certain
                Relationships and Related Transactions
            23Item
                13.
            Exhibits
            24Item
                14.
            Principal
                Accountant Fees and Services
            28








*NOTE
      REGARDING FORWARD-LOOKING STATEMENTS*





*This
      annual report on Form 10-KSB contains forward-looking statements, which involve
      risks and uncertainties, such as our plans, objectives, expectations and
      intentions. You can identify these statements by our use of words such as
“may,”“expect,”“believe,”“anticipate,”“intend,”“could,”“estimate,”“continue,”“plans,”
      or their negatives or cognates. Some of these statements include discussions
      regarding our future business strategy and our ability to generate revenue,
      income and cash flow. We wish to caution the reader that all forward-looking
      statements contained in this Form 10-KSB are only estimates and predictions.
      Our
      actual results could differ materially from those anticipated as a result of
      risks facing us or actual events differing from the assumptions underlying
      such
      forward-looking statements. Readers are cautioned not to place undue reliance
      on
      any forward-looking statements contained in this Annual Report on Form 10-KSB.
      We will not update these forward-looking statements unless the securities laws
      and regulations require us to do so.*









In
      this
      annual report on Form 10-KSB, and unless the context otherwise requires
“Technest,” the “Company,”“we,”“us” and “our” refer to Technest Holdings, Inc.
      and its subsidiaries, taken as a whole.







All
      dollar amounts in this Annual Report are in U.S. dollars, unless otherwise
      stated.









The
      information contained in this report has been retroactively adjusted to reflect
      a 1-for-211.18 reverse stock split of our common stock effective July 19, 2005,
      where we exchanged 211.18 shares of common stock for one new share of common
      stock, thereby reducing the number of shares outstanding.












**PART
      I**





**Item
      1. Description of Business**





**Overview**





On
      February 14, 2005, Markland Technologies, Inc., an integrated homeland security
      and defense company, acquired a controlling interest in Technest. 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.




Prior
      to
      the Genex transaction, we were a public “shell” company with no operations,
      nominal assets, accrued liabilities totaling $309,316 and 29,408,870 shares
      of
      common stock issued and outstanding. Our primary attraction to a potential
      merger partner or acquisition vehicle was expected to be our status as a public
      company. Our objective was to maintain good standing while exploring corporate
      and entity growth through merger and/or acquisition.




**Recent
      Developments**




*Acquisition
      of EOIR.* On
      August
      17, 2005, pursuant to a Stock Purchase Agreement with Markland Technologies,
      Inc., our majority stockholder, we purchased all of the outstanding stock of
      E-OIR Technologies, Inc., (“EOIR”), formerly one of Markland’s wholly-owned
      subsidiaries. As consideration for the stock of EOIR, we issued 12 million
      shares of our 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 our convertible
      securities and the exercise of all warrants to purchase Technest common stock).




EOIR
      offers products and services which include: (i) design and fabrication of
      customized remote sensor systems and platforms for U.S. Department of Defense,
      United States intelligence agencies and U.S. Department of 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. Markland acquired EOIR on June 30, 2004. EOIR generated approximately
      97%
      of Markland’s revenue for fiscal 2005.




*Reverse
      Stock Split* .
      On June
      2, 2005, our Board of Directors and the holders of a majority of our outstanding
      shares of common stock approved a recapitalization in the form of a one (1)
      for
      two hundred eleven and eighteen one hundredths (211.18) reverse stock split
      of
      our shares of common stock, par value $.001 per share, outstanding (the “Reverse
      Stock Split”) after considering and concluding that the Reverse Stock Split was
      in our best interests and the best interests of our stockholders, with all
      fractional shares rounded up to the nearest whole number. The Reverse Stock
      Split was effective as of the close of business on July 19, 2005. The Reverse
      Stock Split did not reduce the amount of authorized shares of our common stock,
      which remains at 495,000,000.




**Company
      History**





Technest
      Holdings, Inc. is the successor of a variety of businesses dating back to 1993.
      We were incorporated in 1993 as Alexis and Co. in the State of Nevada, and
      subsequently changed our name to Wee Wees Inc. Prior to December 17, 1996,
      we
      had no operations. Between December 1996 and May 2002, we were involved in
      a
      number of different businesses.




In
      May 2002, we discontinued our satellite business located in Atlanta, Georgia
      and
      closed and vacated those offices.




Between
      July and August 2002, with the approval of the Board of Directors, we sold
      all
      of our holdings of restricted securities in three investments for $100,000
      to
      Flamboro Court LLC. As of immediately prior to the closing of the August
      transaction, these holdings represented approximately 68% of the entire
      portfolio of our holdings of restricted securities.




1


In
      February 2003, we distributed to our stockholders an information statement
      on
      Schedule 14C in connection with the actions taken by written consent of the
      holders of 50.34% of our outstanding shares of common stock of record as of
      October 31, 2002. The actions approved by written consent were:




·
            withdrawal
                of our election to be treated as a business development company under
                the
                Investment Company Act of 1940;




·
            authorization
                to sell all or any part of the securities held by us in various companies
                or borrow funds, repayment of which was secured by all or any part
                of
                those portfolio securities, or any combination of such sales or
                borrowings; and




·
            authorization
                to effectuate a reverse split of our common stock, $.001 par value,
                where
                a number of such shares, (but not more than 100), issued and outstanding
                as of the date of the stock split would be reclassified as and converted
                into one (1) share of common stock immediately following the such
                reverse
                stock split.




On
      March 25, 2003, we sold all outstanding shares of Technest.com, Inc. (a
      subsidiary of Technest Holdings, Inc.) to Aberdeen Avenue LLC for the purchase
      price of $1.00. As a result of this sale we reversed $2,234,428 of the
      subsidiary’s liabilities which was recorded as other income during the second
      quarter 2003.




On
      April 1, 2003, we exchanged all of our shares in Corpfin.com, Inc. (“CFNC”) with
      six shareholders in return for 16,261,822 shares of our common stock. Thereafter
      we retired these shares. On October 10, 2003, the Company filed a Form N-54C
      withdrawing its election to be treated as a business development
      company.




Between
      October 10, 2003 and February 14, 2005, we had no operations.





**Our
      Business - Imaging and Surveillance**





Our
      acquisition of Genex on February 14, 2005, a company which provides remote
      sensing technology products and services to the U.S. Department of Defense,
      (“DOD”), to various other United States Intelligence Agencies (“INTEL”) and the
      National Institute of Health, is a significant part of our ongoing business
      strategy of creating an integrated portfolio of solutions for the Homeland
      Security, DOD and INTEL marketplaces.





Genex
      currently is engaged in programs to develop the following: disposable sensors
      for the U.S. Army Night Vision Laboratory; 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 weapons
      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* .
      Through Genex, we have targeted sensing technologies that are relevant to both
      DOD and Department of Homeland Security missions: Chemical/Biological
      (“Chem/Bio”) and Improvised Explosive Devices (“IED”) detection sensors. The
      Chem/Bio and IED Division 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. Under a Phase 2
      Small
      Business Innovative Research (“SBIR”) grant from the U.S. Army, Genex is
      developing a new sensor that can remotely detect the presence of chemical and
      biological weapons.





*Research
      and Development* .
      The Research and Development (“R&D”) division of Genex is focused on
      developing our imaging technology portfolio via advanced research in intelligent
      surveillance, three-dimensional imaging, and medical imaging. By integrating
      our
      marketing pursuits and our R&D efforts, we can bring to market technological
      advances that enhance customer value. Some of our targeted research areas
      include: (i) intelligent surveillance using two- and three-dimensional image
      processing to support homeland security, military, and commercial applications;
      (ii) detection of concealment of intent using thermal and three-dimensional
      imaging to support anti-terrorist efforts; (iii) early detection of cancer
      using
      non-invasive and non-radiological diffuse optical tomography; and (iv) more
      effective and less risky radiation treatment for cancer by use of
      three-dimensional imaging for patient positioning. Our R&D expense for the
      six months ended June 30, 2005 was $2,298,850, of which $2,095,000 was acquired
      in-process R&D.





Management
      believes that Genex, which has a patent portfolio of over 12 issued and 21
      pending U.S. patents for video and imaging technologies, is well positioned
      to
      capture additional sales in the United States in the areas of research and
      development within the Department of Homeland Security and the Department of
      Defense. There can be no assurance that we will be able to capture additional
      sales in the U.S.





Currently
      there are eight funded SBIR programs in Genex’s R&D division. Current
      contracts in place have the potential to produce approximately $2.7 million
      in
      revenue during the 2006 fiscal year.  In April 2004, Genex obtained
      a
      three-year grant potentially worth approximately $2.0 million from the National
      Institute for Health to develop three-dimensional optical tomography
      technologies for breast cancer detection.





2


*Commercial
      Division* .
      The Commercial Division of Genex is focused on growing commercial market
      opportunities for Genex’s technology portfolio. Its core technologies of
      three-dimensional imaging, three-dimensional display, and intelligent
      surveillance have broad application, and its commercial division is focused
      on
      finding markets which have: a high fit of application with our technology;
      high
      revenue potential; economic value added for markets to adopt our technology;
      and
      accessible customers and channels.  Management plans to generate further
      commercial growth primarily through strategic partnerships with customers in
      the
      markets having the characteristics described above to reduce technical risk
      while providing strong channels of distribution for market access.





The
      Commercial Division’s revenues since the date of acquisition to June 2005 were
      approximately $248,000. Current revenues for the Commercial Division derive
      primarily from our three-dimensional FaceCam product and associated software.
      This product is utilized by our customers to create personalized products for
      customers based on a three-dimensional image captured by our camera. The product
      is being marketed towards applications in digitized identification, such as
      employee ID and motor vehicle licenses, and in 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, while not a current source of significant revenue, 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 significant revenue based on Genex’s
      ability to generate accurate three-dimensional measurement data.  However,
      there can be no assurance that we will be able to generate significant revenue
      based on Genex’s ability to generate accurate three-dimensional measurement
      data.





**Competition**





The
      markets for our products and solutions are extremely competitive and are
      characterized by rapid technological change as a result of technical
      developments exploited by our competitors, changing technical needs of
      customers, and frequent introductions of new features. We expect competition
      to
      increase as other companies introduce products that are competitively priced,
      that may have increased performance or functionality, or that incorporate
      technological advances not yet developed or implemented by us. Some of our
      present and potential competitors may have financial, marketing, and research
      resources substantially greater than ours. In order to compete effectively
      in
      this environment, we must continually develop and market new and enhanced
      products at competitive prices, and have the resources to invest in significant
      research and development activities. There is a risk that we may not be able
      to
      make the technological advances necessary to compete successfully. Existing
      and
      new competitors may enter or expand their efforts in our markets, or develop
      new
      products to compete against ours. Our competitors may develop new technologies
      or enhancements to existing products or introduce new products that will offer
      superior price or performance features. New products or technologies may render
      our products obsolete. Many of our primary competitors are well-established
      companies that have substantially greater financial, managerial, technical,
      marketing, personnel and other resources than we do.





We
      have
      particular proprietary technologies, some that have been developed and others
      that are in development. We will focus on our proprietary technologies, or
      leverage our management experience, in order to differentiate ourselves from
      these organizations. There are many other technologies being presented to the
      Department of Homeland Security that directly compete with our technologies.
      The
      Department of Homeland Security may pursue solutions different from
      ours.





**Intellectual
      Property**





Our
      ability to compete effectively depends to a significant extent on our ability
      to
      protect our proprietary information. We rely primarily on patents and trade
      secret laws, confidentiality procedures and licensing arrangements to protect
      our intellectual property rights. We own 12 U.S. patents. We enter into
      confidentiality agreements with our consultants and key employees, and maintain
      controls over access to and distribution of our technology, software and other
      proprietary information. 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.





We
      do not
      generally 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 in the future. 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 seek to 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.





3


**Dependence
      On U.S. Government Contracts**





Approximately
      80% of our range of services and products are sold to agencies of the U.S.
      Government. Although we are continuously working to diversify our client base,
      we will continue to aggressively seek additional work from the U.S. Government.
      As with other government contractors, our business is subject to government
      client funding decisions and actions that are beyond our control.





Much
      of
      our business is won through submission of formal competitive bids. Commercial
      bids are frequently negotiated as to terms and conditions for schedule,
      specifications, delivery and payment. With respect to bids for government work,
      however, in most cases the client specifies the terms and conditions and the
      form of contract.





Essentially
      all contracts with the United States Government, and many contracts with other
      government entities, permit the government client to terminate the contract
      at
      any time for the convenience of the government or for default by the contractor.
      We operate under the risk that such terminations may occur and have a material
      impact on operations.





**Government
      Regulation**





Most
      of
      our U.S. Government business is subject to unique procurement and administrative
      rules based on both laws and regulations, including the U.S. Federal Acquisition
      Regulation that provide various profit and cost controls, rules for allocations
      of costs, both direct and indirect, to contracts and non-reimbursement of
      unallowable costs such as interest expenses and some costs related to business
      acquisitions, including for example the incremental depreciation and
      amortization expenses arising from fair value increases to the historical
      carrying values of acquired assets.





Companies
      supplying defense-related equipment to the U.S. Government are subject to some
      additional business risks specific to the U.S. defense industry. Among these
      risks are the ability of the U.S. Government to unilaterally suspend a company
      from new contracts pending resolution of alleged violations of procurement
      laws
      or regulations. In addition, U.S. Government contracts are conditioned upon
      the
      continuing availability of Congressional appropriations. Congress usually
      appropriates funds for a given program on a September 30 fiscal year basis,
      even
      though contract performance may take several years. Consequently, at the outset
      of a major program, the contract is usually partially funded, and additional
      monies are normally committed to the contract by the procuring agency only
      as
      appropriations are made by Congress for future fiscal years.





U.S.
      Government contracts are, by their terms, subject to unilateral termination
      by
      the U.S. Government either for its convenience or default by the contractor
      if
      the contractor fails to perform the contracts' scope of work. Upon termination
      other than for a contractor's default, the contractor will normally be entitled
      to reimbursement for allowable costs and an allowance for profit. Foreign
      defense contracts generally contain comparable provisions permitting termination
      at the convenience of the government. To date, none of our significant contracts
      have been terminated.





As
      is
      common in the U.S. defense industry, we are subject to business risks, including
      changes in the U.S. Government's procurement policies (such as greater emphasis
      on competitive procurement), governmental appropriations, national defense
      policies or regulations, service modernization plans, and availability of funds.
      A reduction in expenditures by the U.S. Government for products and services
      of
      the type we manufacture and provide, lower margins resulting from increasingly
      competitive procurement policies, a reduction in the volume of contracts or
      subcontracts awarded to us or the incurrence of substantial contract cost
      overruns could materially adversely affect our business.





**Sales
      and Marketing**





We
      currently divide the marketing efforts of our products and services into three
      areas: (1) directly to federal or local government agencies; (2) to large
      partners who may represent an opportunity for us as subcontractors; and (3)
      to
      commercial entities. These marketing duties are divided among upper
      management.





**Manufacturing**





We
      currently do not have any manufacturing capabilities.





**Employees**





As
      of
      June 30, 2005, Technest Holdings had a total of 29 employees, all of which
      are
      full-time.








4


**The
      Acquisition Of Genex Technologies, Inc.**





The
      acquisition of Genex Technologies, Inc. was effected pursuant to an Agreement
      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 (the then sole stockholder of Genex). In connection with this merger,
      Markland and Technest entered into agreements providing for the registration
      of
      shares to be issued to Jason Geng, a lock-up agreement with Jason Geng and
      an
      employment agreement with Jason Geng.





*Merger
      Agreement* .
      Technest paid $3,000,000 in cash and transferred 10,168,764 shares of Markland
      stock to Jason Geng, the sole stockholder of Genex for all of the capital stock
      of Genex. As a result of this transaction, Genex Technologies, Inc. became
      a
      wholly-owned subsidiary of Technest. Jason Geng's share consideration was to
      be
      adjusted to reflect changes in the closing bid price of our common stock in
      the
      10 trading days following February 14, 2005. In addition, the Merger Agreement
      provides for Mr. Geng to receive a six-month unsecured promissory note in the
      principal amount of $550,000 that accrues interest at the rate of 6% per year.
      Also, the Merger Agreement provides that if Genex meets specified revenue goals
      at the end of each of the first three years following February 14, 2005,
      Technest will pay to Mr. Geng contingent consideration of additional shares
      of
      Technest common stock equal to the fair market value of 30% of the difference
      in
      Genex's gross revenue during the year proceeding the payment and its gross
      revenue in 2004. Finally, the Merger Agreement provides that if the Intraoral
      Technologies are commercialized, Mr. Geng will be entitled to 50% of all profits
      generated from the Intraoral Technologies for a period of five years following
      February 14, 2005. Following the acquisition, it is Technest’s opinion that Mr.
      Geng omitted material representations from the Merger Agreement, and as a
      result, Markland and Technest have not issued and do not intend to issue the
      promissory note, the additional Markland share consideration or the contingent
      payments of Technest common stock





Markland,
      Technest and MTECH, on one hand, and Jason Geng, on the other hand have agreed
      to indemnify each other for breaches of representations, warranties and failures
      to perform covenants. Indemnity is available pursuant to the indemnity escrow
      agreement for any claim by us or Technest above $100,000. Jason Geng's liability
      is limited to the amount in the indemnity escrow fund, set at closing as $2
      million of Markland common stock taken from the consideration paid to Jason
      Geng
      at closing. There are 2,905,361 shares of Markland common stock held in the
      indemnity escrow fund, which as of September 19, 2005, had a market value of
      approximately $116, 2 1 4.
      Jason
      Geng has agreed to indemnify the Technest entities for all losses associated
      with disputes relating to the title of Genex shares, taxes, ERISA, environmental
      and intellectual property claims for amounts up to the full consideration for
      the merger. Jason Geng also agreed to pay Genex for any amount a governmental
      entity refuses to pay in relation to a regulatory audit currently being
      conducted.




*Technest
      Registration Obligations* .
      Technest entered into a Registration Rights Agreement with Jason Geng, on
      February 14, 2005. Pursuant to this agreement, Technest agreed to file with
      the
      SEC registration statements covering the resale of all of the Technest common
      stock Technest may ultimately be required to issue to Jason Geng as additional
      consideration for the sale of his Genex common stock if Genex recognizes gross
      revenues in excess of a particular dollar amount in each of the three years
      following Technest's acquisition of Genex. We would be required to file one
      such
      registration statement within forty-five (45) days following each of the three
      yearly determinations of whether earnout payments are due. Technest agreed
      to
      use commercially reasonable efforts to cause each registration statement to
      be
      declared effective within one hundred five (105) days following each such
      earnout payment determination. Pursuant to the agreement, Technest must also
      use
      commercially reasonable efforts to keep each registration statement effective
      until the date on which Jason Geng no longer holds any of the registrable
      securities, unless the shares of Technest common stock covered by the
      registration statement have been sold or may be sold pursuant to Rule 144 of
      the
      Securities Act without volume restrictions.





*Lock-Up
      Agreements.* We
      entered into a lock-up agreement with Jason Geng and Markland pursuant to which
      Jason Geng agreed (a) not to sell or dispose of any of Markland common stock
      issued to Jason Geng under the Merger Agreement through July 31, 2005 without
      the prior written consent of Markland, provided that Jason Geng may sell or
      transfer such shares to Markland, Technest or his immediate family members
      as a
      bona fide gift, (b) beginning on August 1, 2005, not to sell more than ten
      percent (10%) in the aggregate, of Markland common stock in any given thirty
      (30) day period, and (c) not to sell more than twenty-five percent (25%) of
      the
      aggregate Technest common stock that may be issued to him, in any given thirty
      (30) day period.





*Jason
      Geng Employment Agreement.* In
      connection with this acquisition, Genex entered in to an employment agreement
      with Jason Geng. The agreement contemplated the employment of Jason Geng by
      Genex for a period of three years as its Executive Vice President and Chief
      Scientist with a salary of $300,000 per year and eligibility to participate
      in
      any bonus or incentive compensation plans established by the Board of Directors
      of Genex, Markland or Technest. The employment agreement provided that Jason
      Geng's salary payments and health insurance benefits would continue until the
      earlier of (a) the date that Jason Geng has obtained other full-time engagement
      or (b) twelve (12) months from the date of termination of employment with Genex,
      in the event that Genex terminates his engagement without cause (as defined
      in
      the agreement) prior to the termination of the agreement or in the event that
      Jason Geng terminates his engagement for good reason (as defined in the
      agreement). The agreement also provided for a continuation, for the lesser
      of
      six months or through the end of the term of the agreement, of Jason Geng's
      salary in the event that he became permanently disabled during the term of
      the
      agreement. On March 18, 2005, as a result of claims made by Technest arising
      from the purchase of Genex, Mr. Geng’s employment with Genex was terminated and
      Genex has ceased paying his salary under the employment agreement.





*Broker
      Agreement.* Genex
      Technologies, Inc. entered into an agreement with Ocean Tomo, LLC, on October
      17, 2003. The agreement was extended for one year in a subsequent letter from
      Jason Geng to Ocean Tomo. Under this agreement, Genex paid Ocean Tomo as a
      finder in connection with the acquisition by Technest of Genex.





5


**Technest
      Financing of Genex Acquisition**





Technest
      financed the acquisition of Genex pursuant to a Securities Purchase Agreement,
      dated February 14, 2005. In connection with this agreement, Technest and
      Markland entered into agreements providing for the registration of shares of
      common stock to be issued by Markland or Technest upon conversion of Series
      B
      and Series C preferred stock and the exercise of warrants. In connection with
      the acquisition of Genex, the Board of Directors of Technest and the holders
      of
      a majority of the common stock of Technest approved a 1 for 211.18 reverse
      split
      of Technest's outstanding common stock, which became effective as of the close
      of business on July 19, 2005.





*Issuance
      of Units.* Technest
      financed the acquisition of Genex with the sale of 1,149,425 shares of Technest
      Series B preferred stock (which is convertible into Markland common stock),
      five-year warrants to purchase up to 1,149,425 shares of Technest common stock
      for an exercise price of $6.48 per share (after giving effect to the Reverse
      Stock Split), and 1,149,425 shares of Technest Series C preferred stock
      convertible into 1,149,425 shares of Technest's common stock (after giving
      effect to the Reverse Stock Split). Technest received gross proceeds of
      $5,000,000 in this offering. The purchasers in this offering included (i)
      Southridge Partners LP, DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
      Strategic Holding Fund, Ltd. (who are also selling stockholder named in this
      prospectus), (ii) ipPartners, Inc., a company controlled by Robert Tarini,
      our
      CEO, and (iii) other investors. The issuance of these securities was not
      registered under the Securities Act, but was made in reliance upon the
      exemptions from the registration requirements of the Securities Act set forth
      in
      Section 4(2) thereof. The proceeds of this financing were used to fund the
      acquisition of Genex Technologies, Inc., pay transactions costs and fund working
      capital.





If
      the
      units do not have a market value of $6.525 on February 14, 2006, we will be
      obligated to issue in exchange for each unit a number of shares of our common
      stock determined by dividing (i) the amount by which $6.525 exceeds the sum
      of
      the average closing bid prices of Markland’s and our common stock for the period
      beginning 10 trading days prior to the reset date and ending 10 trading days
      after the reset date by (ii) the average closing bid price of our common stock
      during that period.





*Series
      B Preferred Stock.* The
      Technest Series B preferred stock is convertible into Markland common stock
      upon
      the earlier to occur of February 14, 2006 or the trading day immediately
      following the first period of five trading days during which Markland common
      stock has a closing bid price of $2.50 or higher on each day, if any. The number
      of shares to be issuable upon conversion of each share of Series B preferred
      stock will be equal to approximately 4.35 divided by the lower of $0.60 and
      the
      average closing bid price for the 20 trading days preceding such conversion.





Each
      holder’s shares of Series B preferred stock may only be converted to the extent
      that after such conversion, the number of shares of Markland common stock held
      by such holder and its affiliates will not exceed 4.999% of the outstanding
      shares of our common stock. The holder may waive this limitation in favor of
      an
      unwaivable 9.999% cap, with any such waiver not to be effective until 65 days
      after the request. Shares of the Series B preferred stock have a liquidation
      preference of $2.175 per share, may only vote on changes to the rights,
      privileges and priority of the Series B preferred stock, do not accrue
      dividends, and are not redeemable.





On
      June
      20, 2005, Markland entered into definitive agreements with DKR Soundshore Oasis
      Holding Fund, Ltd., DKR Soundshore Strategic Holding Fund, Ltd., Verdi
      Consulting, Inc., and ipPartners, Inc. pursuant to which Markland exchanged
      632,182 shares of Technest Series B preferred stock (convertible into shares
      of
      Markland common stock) for 2,750 shares of Markland Series D Preferred Stock
      (also convertible into shares of Markland common stock). On August 19, 2005,
      Markland entered into a definitive exchange agreement with the Deer Creek Fund
      LLC, pursuant to which Markland exchanged 114,943 shares of Technest Series
      B
      preferred stock for 500 shares of Markland Series D Preferred Stock.





*Series
      C Preferred Stock.* The
      Technest Series C preferred stock is convertible at the option of the
      stockholder at any time. The number of shares of Technest common stock into
      which each share of Series C preferred stock is convertible is determined by
      dividing $2.175 by the Series C conversion price, currently $2.175.





Each
      holder’s shares of Series C preferred stock may only be converted to the extent
      that after such conversion, the number of shares our common stock held by such
      holder and its affiliates will not exceed 4.999% of the outstanding shares
      of
      our common stock. The holder may waive this limitation in favor of an unwaivable
      9.999% cap, with any such waiver not to be effective until 65 days after the
      request. Shares of the Series C preferred stock have a liquidation preference
      of
      approximately $2.175 per share, may only vote on changes to the rights,
      privileges and priority of the Series C preferred stock, receive dividends
      on an
      as converted basis whenever dividends are made to the Technest common stock
      holders, are not redeemable by Technest and are convertible into Technest common
      stock.





6


*Technest
      Registration Obligations.* Technest
      and the investors in the private placement entered into a Registration Rights
      Agreement dated February 14, 2005. Pursuant to this agreement, Technest agreed
      to file a registration statement covering the resale of all of the common stock
      issuable upon conversion of the Series C preferred stock, (b) all of the common
      stock issuable upon exercise of the common stock purchase warrants, and (c)
      common stock which may become issuable to selling stockholders as liquidated
      damages for breach of covenants contained in or as a result of adjustments
      contemplated by the securities purchase agreement and the registration rights
      agreement. Technest agreed to use its best efforts to cause the registration
      statement to be declared effective as promptly as possible thereafter, and
      to
      keep the registration statement effective until twenty-four (24) months
      following the date on which the shelf registration becomes effective, unless
      the
      shares of common stock covered by the registration statement have been sold
      or
      may be sold pursuant to Rule 144(k) of the Securities Act without volume
      restrictions. Technest will be required to amend such registration statement
      or
      file an additional registration statement as soon as reasonably practicable
      if
      the number of shares of common stock issuable in lieu of the payment of partial
      liquidated damages exceeds the number of such shares then registered in a
      registration statement.





Failure
      to comply with the terms of this agreement will trigger liquidated damages
      equal
      to two percent (2%) of the purchase price paid by each holder in connection
      with
      the investors' investments for each month (and pro rata for any portion of
      a
      month) that Technest fails to meet the relevant filing date, the relevant
      effective date, or for such failure to keep the registration statement
      effective. Technest may also pay any such liquidated damages by issuing
      registered shares of common stock valued at ninety (90%) percent of the average
      of the trailing five (5) trading days' closing prices before the
      payment.





*Brokers* .
      Greenfield Capital Partners LLC is a registered broker-dealer retained by
      Technest in connection with the Genex transaction. For its services, Greenfield
      Capital Partners LLC received a fee of approximately $650,000.





**Item
      2. Description of Property**





Technest
      has its executive offices in Providence, Rhode Island. Technest. Technest rents
      a single office on a month to month basis for $1,500 per month in Ridgefield,
      Connecticut from Southridge Holdings LLC, who is the beneficial owner of 34,827
      shares of Series C preferred stock and five-year warrants to purchase 344,827
      shares of common stock at $6.34 per share.





Genex
      Technologies, Inc., our wholly-owned subsidiary, leases offices with
      approximately 6,831 square feet in Kensington, Maryland, pursuant to a five-year
      lease which expires on January 31, 2006. The office space lease provides for
      annual increases of 3% to the base rent and requires Genex 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.





We
      believe that our present facilities are adequate to meet our current needs.
      If
      new or additional space is required, we believe that adequate facilities are
      available at competitive prices. However, we may not be able to relocate to
      a
      new facility without severely disrupting the production of our
      goods.




**Item
      3. Legal proceedings**





On
      or about July 23, 1998, H & H Acquisition Corporation, individually and
      purportedly on behalf of Technest Holdings, commenced an action in United States
      District Court, Southern District of New York entitled H & H Acquisition
      Corp., individually and on behalf of Technest Holdings, Inc. v. Financial
      Intranet Holdings, Inc. Technest Holdings, Inc., F/K /A Financial Intranet,
      Inc., Ben Stein, Interwest Transfer Co., Steven A. Sanders, Michael Sheppard,
      Maura Marx, Henry A. Schwartz, Leonard Gotshalk, Gotshalk Enterprises, Law
      Office of Steven A. Sanders, P.C. and Beckman, Millman & Sanders, LLP, 98
      Civ. 5269 The Judge is Judge Barbara S. Jones. The action’s principal basis
      appears to be plaintiff’s claim that Ben Stein wrongfully claims ownership of
      shares of common stock that Stein agreed to purchase from plaintiff. According
      to plaintiff, these shares belong to plaintiff. The plaintiff asserts sixteen
      causes of action. Only some make allegations against Technest Holdings, Inc.,
      Michael Sheppard and Maura Marx, former officers. The plaintiff alleges:




·
            that
                Mr. Sheppard and Ms. Marx assisted defendants Stein and Financial
                Intranet
                Holdings (a company owned by Mr. Stein) in converting stock which
                plaintiff allegedly owns. Plaintiff seeks damages allegedly sustained
                because of the alleged conversion.




·
            that
                Mr. Sheppard and Ms. Marx assisted in defrauding plaintiff with respect
                to
                the stock plaintiff claims. Plaintiff seeks damages allegedly sustained
                because of the alleged fraud.




·
            in
                a derivative claim, purportedly on behalf of Technest Holdings, Inc.,
                that
                Mr. Sheppard and Ms. Marx permitted issuance of shares to defendant
                Gotshalk without proper consideration and at a price lower than that
                offered to a company introduced by Plaintiff; that they refused to
                allow
                plaintiff to purchase additional shares; that Mr. Sheppard and Ms.
                Marx
                permitted Technest Holdings, Inc. to pay defendant Schwartz monies
                which
                should not have been paid, and authorized issuance of stock to Schwartz
                without proper authority; and that Mr. Sheppard and Ms. Marx caused
                the
                issuance of stock to themselves without proper authority. Plaintiff
                seeks
                damages allegedly sustained for these alleged wrongful acts.




7


·
            in
                a derivative claim, purportedly on behalf of Technest Holdings, Inc.,
                that
                actions taken at a December 1998 shareholders meeting were improper.
                The
                plaintiff seeks an order directing the rescission of actions determined
                by
                the Court or its designee.




·
            that
                Technest Holdings, Inc. and its former transfer agent wrongfully
                transferred shares belonging to plaintiff to a third party. The transfer
                agent has asserted a claim against us seeking indemnification for
                any
                liabilities incurred by the transfer agent in this action.




Plaintiff
      also seeks an accounting from Mr. Sheppard, among other defendants, for damages
      Technest Holdings, Inc. allegedly suffered.




Technest
      Holdings, Inc., Mr. Sheppard and Ms. Marx believe that the claims against
      Technest Holdings, Inc., Mr. Sheppard and Ms. Marx are without merit and are
      vigorously defending the action. Technest Holdings, Inc., Mr. Sheppard and
      Ms.
      Marx have filed responses to the claims against them. The responses deny all
      material allegations of the complaint and the claim asserted by the transfer
      agent, and asserts a variety of defenses. We cannot make any assurances about
      the litigation’s outcome. If the plaintiff prevails against us, we could be
      adversely affected.




In
      September 2002, Technest was served with a Summary Judgment Motion regarding
      H
& H Acquisition Corp. and we 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.




**Item
      4 - Submission of Matters to a Vote of Security Holders**





In
      connection with the Genex transaction, on June 2, 2005, the Board of Directors
      of Technest and the holders of a majority of the common stock of Technest by
      written consent approved a 1-for-211.18 reverse stock split of Technest's
      outstanding common stock. The Reverse Stock Split resulted in a decrease in
      the
      number of shares of common stock outstanding but did not change the number
      of
      shares authorized for issuance. Technest continues to have 495,000,000
      authorized shares of common stock. On June 17, 2005, Technest filed a definitive
      information statement on Schedule 14C with the SEC and the Reverse Stock Split
      became effective at the close of business on July 19, 2005.





**PART
      II**





**Item
      5.****Market
      for Common Equity and Related Stockholder Matters**





Until
      March 30, 2001 our common stock was traded on the OTC Bulletin Board under
      the
      symbol FNTN. On April 2, 2001, our trading symbol was changed to FNIT and in
      July 2001, it was changed to THNS. Prior to our initial public offering on
      December 16, 1996, there was no public trading market for such shares. On July
      19, 2005, as a result of our reverse stock split, we began trading under the
      symbol TCNH. The following table sets forth the high and low closing bid
      quotations for our common stock as set forth on Nasdaq.com:





**Calendar
                Year**
            **High**
            **Low****2003**First
                Quarter
            $4.22
            $.02Second
                Quarter
            $4.22
            $2.11Third
                Quarter
            $21.10
            $2.11Fourth
                Quarter
            $10.55
            $4.22**2004**First
                Quarter
            $27.43
            $4.22Second
                Quarter
            $4.22
            $4.22Third
                Quarter
            $12.66
            $2.11Fourth
                Quarter
            $21.10
            $2.11**2005**First
                Quarter
            $63.29
            $10.55Second
                Quarter
            $40.08
            $12.66




8


The
      above
      quotations reflect inter-dealer prices, without retail mark-up, markdown or
      commission. These quotes are not necessarily representative of actual
      transactions or of the value of our common stock, and are in all likelihood
      not
      based upon any recognized criteria of securities valuation as used in the
      investment banking community. As of September 12, 2005, there were approximately
      116 record holders of our common stock. During the transition period covered
      by
      this report, we did not purchase any of our equity securities.





We
      have
      not paid and do not anticipate paying any cash dividends on our common stock
      in
      the foreseeable future. The payment of any cash dividends will be at the
      discretion of the board of directors and will be dependent upon our results
      of
      operations, financial condition, capital requirements, contractual restrictions
      and other factors deemed relevant by the board.




The
      following table sets forth certain information concerning all equity
      compensation plans previously approved by stockholders and all previous equity
      compensation plans not previously approved by stockholders, as of the most
      recently completed fiscal year:





**EQUITY
      COMPENSATION PLAN INFORMATION AS OF JUNE 30, 2005**




**Plan
                category**
            **Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights**
            **Weighted
                average exercise price of outstanding options, warrants and rights**
            **Number
                of securities remaining available for future issuance**(a)
            (b)
            (c)Equity
                compensation plans approved by security holders (1)
            0
            $0
            10,000,000Equity
                compensation plans
              not
                approved by security holders (2)
            3,817
            $422.36
            0Total
            3,817
            $422.36
            10,000,000




(1)
            2001
                Stock Option Plan Summary. Please refer to “Stock Compensation Programs”
                set forth in Item 10 for a description of the terms of this
                plan.


(2)
            Options
                and warrants issued without security holder approval as compensation
                to
                officers and contractors outside of the 2001 StockOption
                Plan.





**Item
      6. Management’s Discussion and Analysis**





*The
      following discussion and analysis of our financial condition and results of
      operations for the transition period beginning January 1, 2005 and ending June
      30, 2005 should be read together with our financial statements and related
      notes
      included elsewhere in this report.*





*When
      reviewing the discussion below, you should keep in mind the substantial risks
      and uncertainties that characterize our business. In particular, we encourage
      you to review the risks and uncertainties described under "Risk Factors " below.
      These risks and uncertainties could cause actual results to differ materially
      from those forecasted in forward-looking statements or implied by past results
      and trends. Forward-looking statements are statements that attempt to project
      or
      anticipate future developments in our business; we encourage you to review
      the
      examples of forward-looking statements under "Note Regarding Forward-Looking
      Statements." These statements, like all statements in this report, speak only
      as
      of the date of this report (unless another date is indicated) and we undertake
      no obligation to update or revise the statements in light of future
      developments.*




**OVERVIEW**




**Who
      we are**




On
      February 14, 2005, Markland Technologies, Inc., an integrated homeland security
      and defense company, acquired a controlling interest in Technest. 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.




Prior
      to
      the Genex transaction, we were a public “shell” company with no operations,
      nominal assets, accrued liabilities totaling $309,316 and 29,408,870 shares
      of
      common stock issued and outstanding. Our primary attraction to a potential
      merger partner or acquisition vehicle was expected to be our status as a public
      company. Our objective was to maintain good standing while exploring corporate
      and entity growth through merger and/or acquisition.




9


**Recent
      Developments**





*Change
      in Fiscal Year.* In
      June
      2005, we changed our fiscal year end from December 31 to June 30.





*Reverse
      Stock Split.* On
      June
      2, 2005, our Board of Directors and the holders of a majority of our outstanding
      shares of common stock approved a recapitalization in the form of a one (1)
      for
      two hundred eleven and eighteen one hundredths (211.18) reverse stock split
      of
      our shares of common stock, par value $.001 per share, outstanding after
      considering and concluding that the Reverse Stock Split was in our best
      interests and the best interests of our stockholders, with all fractional shares
      rounded up to the nearest whole number. The Reverse Stock Split was effective
      as
      of the close of business on July 19, 2005. The Reverse Stock Split did not
      reduce our authorized shares of common stock, which remains at 495,000,000
      shares. Based on the number of shares outstanding as of July 19, 2005, after
      giving effect to the Reverse Stock Split, we had approximately 2,302,193 shares
      of Technest common stock outstanding. Technest began trading under the symbol
      "TCNH" on July 20, 2005.





*Acquisition
      of EOIR.* On
      August
      17, 2005, pursuant to a Stock Purchase Agreement with Markland Technologies,
      Inc., our majority stockholder, we purchased all of the outstanding stock of
      E-OIR Technologies, Inc., formerly one of Markland’s wholly-owned subsidiaries.
      As consideration for the stock of EOIR, we issued 12 million shares of our
      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 our convertible securities and the exercise
      of all warrants to purchase Technest common stock).




EOIR
      offers products and services which include: (i) design and fabrication of
      customized remote sensor systems and platforms for U.S. Department of Defense,
      United States intelligence agencies and U.S. Department of 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. Markland acquired EOIR on June 30, 2004. EOIR generated approximately
      97%
      of Markland’s revenue for fiscal 2005.




Six
      months ended June 30, 2005 compared with the six months ended June 30,
      2004





The
      push-down basis of accounting has been applied to the acquisition of Technest
      by
      Markland and the acquisition of Genex by Technest. In accordance with the
      push-down basis of accounting, Technest’s and Genex’s net assets were adjusted
      to their estimated fair values as of the date of acquisition. The results of
      operations for the six months ended June 30, 2005 include the operations of
      Genex from February 15, 2005 through June 30, 2005. Prior to the acquisition
      of
      Genex, Technest had no operations. Therefore, the results for the six months
      ended June 30, 2005 are not directly comparable to the same period in the
      previous year or to the year ended December 31, 2004. The comparative amounts
      below for the six months ended June 30, 2004 are unaudited.





**Revenue**





Technest
      had $1,664,075 in revenue during the six months ended June 30, 2005 compared
      with no revenue for the same period in 2004. Of the 2005 revenue, $504,196
      was
      from sales to EOIR, a related party.





**Gross
      profit**





The
      gross
      profit for the six months ended June 30, 2005 was $798,136. Technest expects
      to
      expand its commercial product manufacturing capacity and refine its commercial
      product costing and, accordingly, gross profit on future commercial product
      sales may differ.





**Selling,
      general and administrative expenses**





Selling,
      general and administrative expenses for the six months ended June 30, 2005
      was
      $1,104,504 and consisted primarily of payroll and payments of $326,241 to EOIR,
      a related party, for management and accounting services. Selling, general and
      administrative expenses and net loss from operations for the six months ended
      June 30, 2004 was $5,787.





**Research
      and development**





Research
      and development expenses for the six months ended June 30, 2005 was $2,298,850.
      Of this amount, $2,095,000 was attributable to non-cash in process R & D
      written off on the acquisition of Genex. This amount was determined by an
      independent business valuation of Genex obtained as of the acquisition
      date  and
      related to research and development projects in-process as of the acquisition
      date which have not reached technological feasibility and for which no
      alternative use exists. The projects in process were in
      the areas of intelligent surveillance, three-dimensional imaging, and medical
      imaging.





10


**Net
      loss**





The
      net
      loss for the six months ended June 30, 2005 was $2,728,639 compared with $5,787
      for the period ended June 30, 2004.





**Net
      loss applicable to common stockholders**





The
      net
      loss applicable to common stockholders for the six months ended June 30, 2005
      was $4,903,487. This reflects the non-cash deemed dividends related to the
      beneficial conversion features of $124,848 for Series A convertible preferred
      stock and $2,050,000 for Series C convertible preferred stock. The net loss
      applicable to common stockholders for the six months ended June 30, 2004 was
      $5,787.





**LIQUIDITY
      AND CAPITAL RESOURCES**


**Cash
      and Working Capital**





Following
      our acquisition of Genex, Technest had net working capital of $357,255 on June
      30, 2005. Net cash used in operating activities was $741,554 for the six months
      ended June 30, 2005 compared with $9,654 for the period ended June 30, 2004.





**Cash
      Used in Investing Activities**





During
      the six months ended June 30, 2005, Technest used net cash of $2,517,243. The
      acquisition of Genex required $2,515,516 which represents the gross cash paid
      for Genex of $3,300,000, less the cash acquired of $784,484.





**Cash
      Provided By Financing Activities**





Net
      cash
      provided by financing activities for the six months ended June 30, 2005 was
      $3,562,422. This represented the proceeds from the issuance of Series A, B
      and C
      convertible preferred stock. Net cash provided by financing activities for
      the
      six months ended June 30, 2004 was $10,000.




**Sources
      of Liquidity**





During
      the six months ended June 30, 2005, we satisfied our cash requirements primarily
      through the issuance of preferred stock. On August 17, 2005, pursuant to a Stock Purchase Agreement with Markland
      Technologies, Inc., our majority stockholder, we purchased all of the
      outstanding stock of E-OIR Technologies, Inc., (“EOIR”), formerly one of
      Markland’s wholly-owned subsidiaries. EOIR is expected to generate positive cash
      flow to sustain the operations of Technest Holdings for fiscal year
      2006
      and beyond.




**COMMITMENTS
      AND CONTINGENCIES**




**Facilities**




Technest
      has its executive offices in Providence, Rhode Island. Technest rents a single
      office on a month to month basis for $1,500 per month in Ridgefield, Connecticut
      from Southridge Holdings LLC, who is the beneficial owner of 34,827 shares
      of
      Series C preferred stock and five-year warrants to purchase 344,827 shares
      of
      common stock at $6.34 per share. Genex Technologies, Inc., our wholly-owned
      subsidiary, leases offices with approximately 6,831 square feet in Kensington,
      Maryland, pursuant to a five-year lease which expires on January 31, 2006.
      The
      office space lease provides for annual increases of 3% to the base rent and
      requires Genex 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.





**Legal**





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 Technest, the founder and certain officers, among others.
      The complaint is an action to recover shares of common stock of Technest and
      unspecified damages. Management believes that the claims against Technest and
      certain officers are without merit and is vigorously defending the action.
      Technest cannot make any assurances about the litigation's outcome. However,
      Technest could be adversely affected if the plaintiff prevails.





On
      November 22, 2002, Bowne of Dallas obtained a default Judgment in the sum of
      $30,106 including interest and related costs against Technest. This amount
      is
      included in accounts payable as of June 30, 2005. ****




11


**OFF-BALANCE
      SHEET ARRANGEMENTS**




We
      have
      no off-balance sheet arrangements that have had or are reasonably likely to
      have
      a material effect on our financial condition, revenues or expenses, results
      of
      operations, liquidity, capital expenditures or capital resources.




**CRITICAL
      ACCOUNTING POLICIES**




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





**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 Genex acquisition over the
      remaining legal life of the underlying patents beginning with the date of
      acquisition.





**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 for the six months ended June 30, 2005.





**Revenue
      Recognition**





We
      recognize product 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.





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.





**Fair
      Value of Financial Instruments and Stock-based
      Compensation**





Technest
      records stock-based compensation to non-employees at fair value. Technest does
      not record expense relating to stock options granted to employees with an
      exercise price greater than or equal to market price of the underlying stock
      at
      the time of grant. Technest reports pro forma net loss and loss per share in
      accordance with the requirements of Statement of Financial Accounting Standard
      (“SFAS”) No. 148.





The
      fair value of options and warrants granted to non-employees is calculated using
      the Black-Scholes option pricing model. This option valuation model requires
      input of assumptions including the volatility of our stock price, the expected
      life of the option and the risk-free interest rate. Because our stock options
      have characteristics significantly different from those of traded options,
      and
      because changes in the input assumptions can materially affect the fair value
      estimate, the existing model may not necessarily provide a reliable single
      measure of fair value of our stock options.





12


Technest
      uses the quoted closing price of Technest’s common stock on the measurement date
      as the fair value of the underlying common stock.  For all non-employee
      options and warrants, Technest has used the contractual life as the expected
      life of the instrument.  The risk-free interest rate is the yield on
      a U.S.
      government security with a term approximating the life of the underlying equity
      instrument.





**Income
      Taxes**





Technest
      accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes”.
      Under SFAS No. 109, the asset and liability method is used in accounting for
      income taxes. Under this method, deferred tax assets and liabilities are
      determined based on differences between financial reporting and tax bases of
      assets and liabilities, and are measured using the enacted tax rates and laws
      that will be in effect when the differences are expected to reverse. As a result
      primarily of federal and state net operating loss carryforwards, Technest has
      a
      significant deferred tax asset. A valuation allowance against this asset is
      recognized if, based on the weight of available evidence, it is more likely
      than
      not (i.e., greater than 50% probability) that some portion or all of the
      deferred tax asset will not be realized. The United States Tax Reform Act of
      1986 contains provisions that may limit Technest’s net operating loss
      carryforwards available to be used in any given year in the event of significant
      changes in the ownership interests of significant stockholders, as
      defined.





Technest,
      in determining the amount of the gross deferred tax assets, estimates the
      enacted tax rates expected to be in effect in the periods in which the deferred
      tax asset is expected to be realized. In addition, Technest has determined
      that,
      as of June 30, 2005, it is more likely than not that Technest will not realize
      any portion of its deferred tax asset. This determination is based on the fact
      that Technest's recent change of control will limit Technest's ability to
      realize its deferred tax assets. Technest will reassess the realizability of
      the
      deferred tax assets each period.




**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.*




**RISKS
      RELATED TO BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
      CONDITION**




**We
      have no operating history on which investors may evaluate our operations and
      prospects for profitable operations and ability to produce a return on
      Genex.**




Technest
      does not have operating history on which a potential investor may base an
      evaluation of us nor of our prospects and ability to operate Genex
      profitably.  If Technest is unable to sustain profitable operations,
      investors may lose their entire investment in Technest.




**We
      have a history of operating losses and cannot give assurance of future revenues
      or operating profits; investors may lose their entire
      investment.**




Technest
      has had net operating losses each year since its inception. If Technest
      continues to suffer losses as it has in the past, investors may not receive
      any
      return on their investment and may lose their entire investment.




**If
      we are unable to keep up with rapid technological changes in its field or
      compete effectively, we will be unable to operate
      profitably.**




Technest
      is engaged in activities in a field that is characterized by extensive research
      efforts and rapid technological progress. If Technest fails to anticipate or
      respond adequately to technological developments, Technest’s ability to operate
      profitably could suffer. Research and discoveries by other companies may render
      our technologies or potential products or services uneconomical or result in
      products superior to those we develop. As a result, any technologies, products
      or services we do develop may not be competitive and our performance may
      suffer.




**RISKS
      RELATED TO “CONTROLLED COMPANIES”**




**We
      are a majority owned subsidiary of Markland. As a result, the ability of
      minority shareholders to influence our affairs is extremely
      limited.**




As
      of
      September 12, 2005, Markland controlled approximately 98% of outstanding
      Technest common stock on a primary basis.  As a result, Markland has
      the
      ability to control all matters submitted to the stockholders of Technest for
      approval (including the election and removal of directors) and to control
      Technest’s management and affairs.




13


This
      concentration of ownership may have the effect of delaying, deferring or
      preventing a change in control, impeding a merger, consolidation, takeover
      or
      other business combination involving us, or discouraging a potential acquirer
      from making a tender offer or otherwise attempting to obtain control, which
      in
      turn could materially and adversely affect the market price of the common
      stock.




Minority
      shareholders of Technest will be unable to affect the outcome of stockholder
      voting as long as Markland or any other party retains a controlling
      interest.




**Technest’s
      executive officers and directors will not spend full time operating our
      business, thereby potentially delaying the development of Technest’s business.**




Technest’s
      Chief Executive Officer, Chief Financial Officer and both of its directors
      are
      also officers and directors of other companies, including Markland.  As
      a
      result, they may not be able to devote their full time to Technest. As a result
      of their participation in business activities of other companies, their limited
      attention to Technest may delay the development of Technest’s **** business.




**RISKS
      RELATED TO CAPITAL STRUCTURE**




**Shares
      eligible for future sale, if sold into the public market, may adversely affect
      the market price of our common stock.**




Pursuant
      to the terms of the Merger Agreement and the Registration Rights Agreements
      executed on February 14, 2005, Technest is obligated to file three registration
      statements with the Securities and Exchange Commission within 75 to 105 days
      from February 14, 2005. These shares have not been registered as of September
      12, 2005 but it is Technest’s intention to do so in the near future. These
      registration statements will cover the subsequent resale of outstanding shares
      of common stock or shares of common stock underlying warrants or Preferred
      Stock
      issued or to be issued in connection with the acquisition of Genex and related
      transactions.   The average daily volume of Technest over the
      past six
      months is 168 shares.  The market may not be able to absorb all of the
      shares that we are obligated to register for resale.  This may cause
      the
      market price of our common stock to decrease.




**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
      its 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 our assessment by our independent registered public accounting
      firm. These requirements will first apply to our annual report for the fiscal
      year ended 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 our internal control
      over financial reporting. In addition, the attestation process by our
      independent registered public accountants is new and we may encounter problems
      or delays in completing the implementation of any requested improvements and
      receiving an attestation of our assessment by our independent registered public
      accounting firm. If we cannot assess our internal control over financial
      reporting as effective, or our independent registered public accounting firm
      is
      unable to provide an unqualified attestation report on such assessment, investor
      confidence and share value may be negatively impacted.




**Technest
      does not foresee paying cash dividends in the foreseeable
      future.**




Technest
      has not paid cash dividends on our stock and does not plan to pay cash dividends
      on our stock in the foreseeable future.






**RISKS
      RELATED TO INVESTING**


**IN
      LOW- PRICED STOCK**




**It
      may be difficult for you to resell shares of our common stock if an
      active
      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.




14


**Technest’s common
      stock is “penny stock,” with the result that trading of our common stock in any
      secondary market may be impeded.**




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 SEC 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 our stock
      as
      it is subject to these penny stock rules. Therefore, stockholders may have
      difficulty selling those securities.  These factors severely limit the
      liquidity, if any, of our common stock, and will likely continue to have a
      material adverse effect on its market price and on our ability to raise
      additional capital.




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 SEC, 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.





Also,
      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.




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




15




**Item
      7. Financial Statements**




Technest’s
      financial statements for the transition period, the notes to financial
      statements and the reports of independent registered public accounting firms
      with respect thereto, referred to in the Table of Contents to Financial
      Statements, appear elsewhere in this report beginning on page F-1.








16





**TECHNEST
      HOLDINGS, INC.**


**CONSOLIDATED
      FINANCIAL STATEMENTS**





**INDEX**


**Page
                Number****REPORTS
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS**
            **F-2
                to F-3****CONSOLIDATED
                FINANCIAL STATEMENTS****Consolidated
                Balance Sheets**
            **F-4****Consolidated
                Statements of Loss**
            **F-5****Consolidated
                Statements of Changes in Stockholders’ Equity
                (Deficit)**
            **F-6
                to F-8****Consolidated
                Statements of Cash Flows**
            **F-9
                to F-11****Notes
                to Consolidated Financial Statements**
            **F-12
                to F-26**




F-1


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


Technest
      Holdings, Inc. and Subsidiary


Providence,
      Rhode Island





We
      have
      audited the accompanying consolidated balance sheet of Technest Holdings, Inc.
      and subsidiary as of June 30, 2005, and the related consolidated statements
      of
      loss, changes in stockholders' equity (deficit) and cash flows for the six
      months ended June 30, 2005. These financial statements are the responsibility
      of
      the Company's management. Our responsibility is to express an opinion on these
      financial statements based on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining on
      a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects the financial position of Technest Holdings, Inc. and
      subsidiary as of June 30, 2005, and the results of its operations and its cash
      flows for the six months ended June 30, 2005, in conformity with accounting
      principles generally accepted in the United States of America.











/s/
      Wolf
& Company, P.C.




Wolf
      & Company, P.C.


Boston,
      Massachusetts


September
      27, 2005
















F-2





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors


Technest
      Holdings, Inc. and Subsidiary





We
      have
      audited the accompanying balance sheet of Technest Holdings, Inc. as of December
      31, 2004, and the related consolidated statements of operations, stockholders'
      equity (deficit) and cash flows for the years ended December 31, 2004 and 2003.
      These financial statements are the responsibility of the Company's management.
      Our responsibility is to express an opinion on these consolidated financial
      statements based on our audit.





We
      conducted our audit in accordance with the standards the Public Company
      Accounting Oversight Board (Unites States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining on
      a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects the financial position of Technest Holdings, Inc.
      as of
      December 31, 2004, and the results of its operations, stockholders' equity
      (deficit) and its cash flows for the years ended December 31, 2004, and 2003,
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.





The
      accompanying financial statements have been prepared assuming the Company will
      continue as a going concern. The Company has negative working capital of
      $309,177 and an accumulated deficit of $15,531,599 at December 31, 2004, and
      has
      incurred significant recurring operating losses which raise substantial doubt
      about its ability to continue as a going concern without the raising of
      additional debt and/or equity financing to fund operations. The consolidated
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.














/s/
      Sherb & Co., LLP


Certified
      Public Accountants








New
      York,
      New York


March
      28,
      2005







F-3


**TECHNEST
          HOLDINGS, INC. AND SUBSIDIARY**
 **BALANCE
          SHEETS**
 JUNE
          30,
          2005 AND DECEMBER 31, 2004
  ASSETS
 
 2005
                
                
                2004CURRENT
                    ASSETSCash
                    and cash equivalents
                
                $
                303,764
                
                
                $
                139Accounts
                    receivable
                
                
                444,396
                
                
                
                --Inventory
                    and work in process
                
                
                374,859
                
                
                
                --Prepaid
                    expenses and other current assets
                
                
                17,475
                
                
                
                --Due
                    from related party
                
                
                117,615
                
                
                
                --TOTAL
                    CURRENT ASSETS
                
                
                1,258,109
                
                
                
                139PROPERTY
                    AND EQUIPMENT - Net of accumulated depreciation of $3,410 at
                    June 30,
                    2005
                
                
                42,317
                
                
                
                --OTHER
                    ASSETSDefinite-lived
                    intangible assets - net of accumulated amortization of $121,679
                    at June
                    30, 2005
                
                
                1,609,432
                
                
                
                --Goodwill
                
                
                4,876,038
                
                
                
                --TOTAL
                    OTHER ASSETS
                
                
                6,485,470
                
                
                
                --TOTAL
                    ASSETS
                
                $
                7,785,896
                
                
                $
                139LIABILITIES
                    AND STOCKHOLDERS’ EQUITY (DEFICIT)CURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                590,471
                
                
                $
                242,158Accrued
                    expenses and other current liabilities
                
                
                310,383
                
                
                
                --Notes
                    payable
                
                
                --
                
                
                
                67,158TOTAL
                    CURRENT LIABILITIES
                
                
                900,854
                
                
                
                309,316COMMITMENTS
                    AND CONTINGENCIESSTOCKHOLDERS’
                    EQUITY (DEFICIT)Series
                    A Convertible Preferred Stock - $.001 par value;150
                    shares authorized; 124.325 and 0 shares issued and
                    outstandingat
                    June 30, 2005 and December 31, 2004, respectively (preference
                    inliquidation
                    of $124,325 at June 30, 2005)
                
                
                --
                
                
                
                --Series
                    B Convertible Preferred Stock - $.001 par value;517,243
                    and 0 shares issued and outstanding at June 30, 2005and
                    December 31, 2004, respectively (preference in liquidation
                    of$2,500,000
                    at June 30, 2005)
                
                
                517
                
                
                
                --Series
                    C Convertible Preferred Stock - $.001 par value;1,149,425
                    and 0 shares issued and outstanding at June 30, 2005and
                    December 31, 2004, respectively (preference in liquidation
                    of$2,500,000
                    at June 30, 2005)
                
                
                1,149
                
                
                
                --Common
                    stock - par value $.001 per share; 495,000,000 sharesauthorized;
                    2,302,193 and 139,260 shares issued and outstandingat
                    June 30, 2005 and December 31, 2004, respectively
                
                
                2,302
                
                
                
                139Subscription
                    receivable
                
                
                --
                
                
                
                (7,035
                )Additional
                    paid-in capital
                
                
                9,607,463
                
                
                
                15,229,318Accumulated
                    deficit, from February 15, 2005
                
                
                (2,726,389
                )
                
                
                (15,531,599
                )TOTAL
                    STOCKHOLDERS’ EQUITY (DEFICIT)
                
                
                6,885,042
                
                
                
                (309,177
                )TOTAL
                    LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
                
                $
                7,785,896
                
                
                $
                139
 
 See
          notes
          to consolidated financial statements.
 (Reflects
          reverse stock split of 1 for 211.18 on July 19, 2005)
 
  THE
              PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC. TO
              RECORD THE
              ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES, INC.
              ON FEBRUARY
              14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING FINANCIAL
              STATEMENTS
              OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC. AS OF AND FOR
              PERIODS
              ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN ALL MATERIAL
              RESPECTS
              TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS OF AND FOR
              PERIODS
              ENDED PRIOR TO THE ACQUISITION.
 F-4
  **TECHNEST
          HOLDINGS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
          STATEMENTS OF LOSS**
 
 **FOR
          THE SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004
          and
          2003**
 
 2005
                
                
                2004
                
                2003REVENUES
                    (including $504,196 to a related party in 2005)
                
                $
                1,664,075
                
                
                $
                --
                
                $
                --COST
                    OF REVENUES
                
                
                865,939
                
                
                
                --
                
                
                --GROSS
                    PROFIT
                
                
                798,136
                
                
                
                --
                
                
                --OPERATING
                    EXPENSES:Selling,
                    general and administrative (including $326,241 to relatedparties
                    in the six months ended June 30, 2005)
                
                
                1,106,246
                
                
                
                104,818
                
                
                145,024Research
                    and development
                
                
                2,298,850
                
                
                
                --
                
                
                --Amortization
                    of intangible assets
                
                
                121,679
                
                
                
                --
                
                
                --TOTAL
                    OPERATING EXPENSES
                
                
                3,526,775
                
                
                
                (104,818
                )
                
                (145,024
                )OPERATING
                    LOSS
                
                
                (2,728,639
                )
                
                
                (104,818
                )
                
                (145,024
                )OTHER
                    (EXPENSES) INCOME:Gain
                    on sale of subsidiary
                
                
                --
                
                
                
                --
                
                
                2,234,428Interest
                    expense
                
                
                --
                
                
                
                (7,690
                )
                
                (21,652
                )--
                
                
                
                (7,690
                )
                
                2,212,776NET
                    (LOSS) INCOME
                
                
                (2,728,639
                )
                
                
                (112,508
                )
                
                2,067,752Deemed
                    dividend on Series A Convertible Preferred Stock
                
                
                124,848
                
                
                
                --
                
                
                --Deemed
                      dividend on Series C Convertible Preferred Stock
                
                2,050,000
                
                
                
                --
                
                
                --NET
                    (LOSS) INCOME APPLICABLE TO COMMON STOCKHOLDERS
                
                $
                (4,903,487
                )
                
                $
                (112,508
                )
                $
                2,067,752BASIC
                    AND DILUTED LOSS PER COMMON SHARE
                
                $
                (3.02
                )
                
                $
                (0.89
                )
                $
                0.07WEIGHTED
                      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
                
                
                1,624,918
                
                
                
                126,883
                
                
                141,937
 
 See
          notes
          to consolidated financial statements.
 (Reflects
          reverse stock split of 1 for 211.18 on July 19, 2005)
 
  THE
              PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC. TO
              RECORD THE
              ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES, INC.
              ON FEBRUARY
              14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING FINANCIAL
              STATEMENTS
              OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC. AS OF AND FOR
              PERIODS
              ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN ALL MATERIAL
              RESPECTS
              TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS OF AND FOR
              PERIODS
              ENDED PRIOR TO THE ACQUISITION.
 F-5
  **TECHNEST
          HOLDINGS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**
 **FOR
          THE SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004
          and
          2003**
 
 
 Series
                    A
                
                Series
                    BConvertible
                
                ConvertibleCommon
                    Stock
                
                Preferred
                    Stock
                
                Preferred
                    StockShares
                
                Amount
                
                Shares
                
                Amount
                
                Shares
                
                AmountBalance
                    - January 1, 2003
                
                
                194,955
                
                $
                195
                
                
                --
                
                $
                --
                
                
                --
                
                $
                --Retirement
                    of common stock
                
                
                (77,004
                )
                
                (77
                )
                
                --
                
                
                --
                
                
                --
                
                
                --Beneficial
                    conversion feature
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    income
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Balance
                    - December 31, 2003
                
                
                117,951
                
                
                118
                
                
                --
                
                
                --
                
                
                --
                
                
                --Issuance
                    of common stock for services
                
                
                21,309
                
                
                21
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    loss
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Balance
                    - December 31, 2004
                
                
                139,260
                
                
                139
                
                
                --
                
                
                --
                
                
                --
                
                
                --Issuance
                    of Series A Convertible Preferred Stock
                
                
                --
                
                
                --
                
                
                124
                
                
                --
                
                
                --
                
                
                --Net
                    loss through February 14, 2005
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Balance
                    - February 14, 2005
                
                
                139,260
                
                
                139
                
                
                124
                
                
                --
                
                
                --
                
                
                --Impact
                    of applying push down accounting
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Issuance
                    of common stock to Marklandin
                    connection with the Genex acquisition
                
                
                1,954,023
                
                
                1,954
                
                
                --
                
                
                --
                
                
                --
                
                
                --Issuance
                    of Series B and C Convertible Preferredstock
                    and warrants
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                1,149,425
                
                
                1,149Exchange
                  of Series B Convertible Preferred Stockfor
                    Markland Series D Preferred Stock
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                (632,182
                )
                
                (632
                )Issuance
                    of common stock in conjunction withwarrant
                    exercises
                
                
                208,910
                
                
                209
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    loss from February 15, 2005 toJune
                    30, 2005
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Balance
                    - June 30, 2005
                
                
                2,302,193
                
                $
                2,302
                
                
                124
                
                $
                --
                
                
                517,243
                
                $
                517
 
 See
          notes
          to consolidated financial statements.
 (Reflects
          reverse stock split of 1 for 211.18 on July 19, 2005)
  THE
                PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC.
                TO
                RECORD THE ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES,
                INC.
                ON FEBRUARY 14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING
                FINANCIAL
                STATEMENTS OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC.
                AS OF AND FOR
                PERIODS ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN
                ALL MATERIAL
                RESPECTS TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS
                OF AND FOR
                PERIODS ENDED PRIOR TO THE ACQUISITION.
 F-6
  **TECHNEST
          HOLDINGS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)**
 **FOR
          THE SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004
          and
          2003**
 
 
 Series
                    CConvertible
                
                SubscriptionPreferred
                    Stock
                
                ReceivableShares
                
                Amount
                
                AmountBalance
                    - January 1, 2003
                
                
                --
                
                $
                --
                
                $
                (7,035
                )Retirement
                    of common stock
                
                
                --
                
                
                --
                
                
                --Beneficial
                    conversion feature
                
                
                --
                
                
                --
                
                
                --Net
                    income
                
                
                --
                
                
                --
                
                
                --Balance
                    - December 31, 2003
                
                
                --
                
                
                --
                
                
                (7,035
                )Issuance
                    of common stock for services
                
                
                --
                
                
                --
                
                
                --Net
                    loss
                
                
                --
                
                
                --
                
                
                --Balance
                    - December 31, 2004
                
                
                --
                
                
                --
                
                
                (7,035
                )Issuance
                    of Series A Convertible Preferred Stock
                
                
                --
                
                
                --
                
                
                --Net
                    loss through February 14, 2005
                
                
                --
                
                
                --
                
                
                --Balance
                    - February 14, 2005
                
                
                --
                
                
                --
                
                
                (7,035
                )Impact
                    of applying push down accounting
                
                
                --
                
                
                --
                
                
                7,035Issuance
                    of common stock to Marklandin
                    connection with the Genex acquisition
                
                
                --
                
                
                --
                
                
                --Issuance
                    of Series B and C Convertible Preferred stockand
                    warrants
                
                
                1,149,425
                
                
                1,149
                
                
                --Exchange
                  of Series B Convertible Preferred Stockfor
                    Markland Series D Preferred Stock
                
                
                --
                
                
                --
                
                
                --Issuance
                    of common stock in conjunction withwarrant
                    exercises
                
                
                --
                
                
                --
                
                
                --Net
                      loss from February 15, 2005 to June
                      30, 2005
                
                
                --
                
                
                --
                
                
                --Balance
                    - June 30, 2005
                
                
                1,149,425
                
                $
                1,149
                
                
                --
 
 See
          notes
          to consolidated financial statements.
 (Reflects
          reverse stock split of 1 for 211.18 on July 19, 2005)
 
 THE
                PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC.
                TO RECORD THE
                ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES, INC.
                ON FEBRUARY
                14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING FINANCIAL
                STATEMENTS
                OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC. AS OF AND
                FOR PERIODS
                ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN ALL MATERIAL
                RESPECTS
                TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS OF AND
                FOR PERIODS
                ENDED PRIOR TO THE ACQUISITION.
 F-7
  **TECHNEST
          HOLDINGS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
          STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
          (DEFICIT)**
 **FOR
          THE SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004
          and
          2003**
 
 
 Additional
                
                
                
                TotalPaid-In
                
                Accumulated
                
                Stockholders'Capital
                
                Deficit
                
                Equity
                    (Deficit)Amount
                
                Amount
                
                AmountBalance
                    - January 1, 2003
                
                $
                15,120,262
                
                $
                (17,486,843
                )
                $
                (2,373,421
                )Retirement
                    of common stock
                
                
                77
                
                
                --
                
                
                --Beneficial
                    conversion feature
                
                
                19,000
                
                
                --
                
                
                19,000Net
                    income
                
                
                --
                
                
                2,067,752
                
                
                2,067,752Balance
                    - January 1, 2004
                
                
                15,139,339
                
                
                (15,419,091
                )
                
                (286,669
                )Issuance
                    of common stock for services
                
                
                89,979
                
                
                --
                
                
                90,000Net
                    loss
                
                
                --
                
                
                (112,508
                )
                
                (112,508
                )Balance
                    - December 31, 2004
                
                
                15,229,318
                
                
                (15,531,599
                )
                
                (309,177
                )Issuance
                    of Series A Convertible Preferred Stock
                
                
                124,848
                
                
                --
                
                
                124,848Net
                    loss through February 14, 2005
                
                
                --
                
                
                (2,250
                )
                
                (2,250
                )Balance
                    - February 14, 2005
                
                
                15,354,166
                
                
                (15,533,849
                )
                
                (186,579
                )Impact
                    of applying push down accounting
                
                
                (15,356,554
                )
                
                15,533,849
                
                
                184,330Issuance
                    of common stock to Marklandin
                    connection with the Genex acquisition
                
                
                6,099,304
                
                
                --
                
                
                6,101,258Issuance
                    of Series B and C Convertible Preferred stockand
                    warrants
                
                
                3,510,124
                
                
                --
                
                
                3,512,422Exchange
                  of Series B Convertible Preferred Stockfor Markland
                    Series D Preferred Stock
                
                
                632
                
                
                --
                
                
                --Issuance
                    of common stock in conjunction withwarrant
                    exercises
                
                
                (209
                )
                
                --
                
                
                --Net
                    loss from February 15, 2005 to June
                    30, 2005
                
                
                --
                
                
                (2,726,389
                )
                
                (2,726,389
                )Balance
                    - June 30, 2005
                
                $
                9,607,463
                
                $
                (2,726,389
                )
                $
                6,885,042
 
 See
          notes
          to consolidated financial statements.
 (Reflects
          reverse stock split of 1 for 211.18 on July 19, 2005)
 
 THE
                PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC.
                TO RECORD THE
                ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES, INC.
                ON FEBRUARY
                14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING FINANCIAL
                STATEMENTS
                OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC. AS OF AND
                FOR PERIODS
                ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN ALL MATERIAL
                RESPECTS
                TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS OF AND
                FOR PERIODS
                ENDED PRIOR TO THE ACQUISITION.
 F-8
  
 **TECHNEST
          HOLDINGS, INC. AND SUBSIDIARY**
 **CONSOLIDATED STATEMENTS OF CASH FLOWS**
 FOR
          THE
          SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004 and
          2003
 
 2005
                
                
                2004
                
                2003CASH
                    FLOWS FROM OPERATING ACTIVITIES:Net
                    income(loss)
                
                $
                (2,728,639
                )
                
                $
                (112,508
                )
                $
                2,067,752Adjustment
                    to reconcile net loss to netcash
                    used in operating activities:Gain
                    on sale of subsidiary
                
                
                --
                
                
                
                --
                
                
                (2,234,428
                )Beneficial
                    conversion factor
                
                
                --
                
                
                
                --
                
                
                19,000Depreciation
                    of property and equipment
                
                
                3,410
                
                
                
                --
                
                
                --Accrued
                    interest on note payable paid inSeries
                    A Convertible Preferred Stock
                
                
                7,690
                
                
                
                --
                
                
                --Amortization
                    of intangible assets
                
                
                121,679
                
                
                
                --
                
                
                --Acquired
                    in-process research and development
                
                
                2,095,000
                
                
                
                --
                
                
                --Stock-based
                    compensation
                
                
                --
                
                
                
                90,000
                
                
                --Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (277,839
                )
                
                
                --
                
                
                --Inventory
                    and work in process
                
                
                (151,902
                )
                
                
                --
                
                
                --Prepaid
                    expenses and other current assets
                
                
                7,928
                
                
                
                --
                
                
                --Due
                    from related parties
                
                
                (117,615
                )
                
                
                --
                
                
                --Accounts
                    payable
                
                
                217,924
                
                
                
                11,659
                
                
                84,631Accrued
                    expenses and other current liabilities
                
                
                80,810
                
                
                
                --
                
                
                --NET
                    CASH USED IN OPERATING ACTIVITIES
                
                
                (741,554
                )
                
                
                (10,849
                )
                
                (63,045
                )CASH
                    FLOWS FROM INVESTING ACTIVITIES:Cash
                    used for acquisition of Genex Technologies, Inc.,net
                    of cash acquired
                
                
                (2,515,516
                )
                
                
                --
                
                
                --Purchase
                    of property and equipment
                
                
                (1,727
                )
                
                
                --
                
                
                --NET
                    CASH USED IN INVESTING ACTIVITIES
                
                
                (2,517,243
                )
                
                
                --
                
                
                --CASH
                    FLOWS FROM FINANCING ACTIVITIES:Proceeds
                    from sale of Series A convertiblepreferred
                    stock
                
                
                50,000
                
                
                
                --
                
                
                --Proceeds
                    from sale of Series B and C convertiblepreferred
                    stock and warrants, net
                
                
                3,512,422
                
                
                
                --
                
                
                --Proceeds
                    from note payable
                
                
                --
                
                
                
                10,000
                
                
                57,158NET
                    CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                3,562,422
                
                
                
                10,000
                
                
                57,158NET
                    INCREASE(DECREASE) IN CASH
                
                
                303,625
                
                
                
                (849
                )
                
                (5,887
                )CASH
                    - BEGINNING OF PERIOD
                
                
                139
                
                
                
                988
                
                
                6,875CASH
                    - END OF PERIOD
                
                $
                303,764
                
                
                $
                139
                
                $
                988
 See
          notes
          to consolidated financial statements.
   THE
                PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC.
                TO RECORD THE
                ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES, INC.
                ON FEBRUARY
                14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING FINANCIAL
                STATEMENTS
                OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC. AS OF AND
                FOR PERIODS
                ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN ALL MATERIAL
                RESPECTS
                TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS OF AND
                FOR PERIODS
                ENDED PRIOR TO THE ACQUISITION.
 F-9
  
 **TECHNEST
          HOLDINGS, INC. AND SUBSIDIARY**
 **CONSOLIDATED
          STATEMENTS OF CASH FLOWS (continued)**
 FOR
          THE
          SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004 and
          2003
 
 2005
                
                
                2004
                
                2003SUPPLEMENTAL
                    DISCLOSURES OF CASH FLOW INFORMATION:Cash
                    paid during the periods for:Interest
                
                $
                --
                
                
                $
                --
                
                $
                --Taxes
                
                $
                500
                
                
                $
                --
                
                
                --Non-cash
                    investing and financing activities:Conversion
                    of notes payable and accrued interest into Series Apreferred
                    stock
                
                $
                74,848
                
                
                $
                --
                
                
                --Common
                    stock issued in exchange for shares of MarklandTechnologies,
                    Inc. used in conjunction with the acquisition ofGenex
                    Technologies, Inc.
                
                $
                6,101,258
                
                
                $
                --
                
                
                --Deemed
                    dividend preferred stock - beneficial conversionfeature
                    - Series A
                
                $
                124,848
                
                
                $
                --
                
                
                --Deemed
                    dividend preferred stock - beneficial conversionfeature
                    - Series C
                
                $
                2,050,00
                
                
                $
                --
                
                
                --
 
 
 See
          notes
          to consolidated financial statements.
 
  
 
  THE
                PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC.
                TO RECORD THE
                ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES, INC.
                ON FEBRUARY
                14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING FINANCIAL
                STATEMENTS
                OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC. AS OF AND
                FOR PERIODS
                ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN ALL MATERIAL
                RESPECTS
                TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS OF AND
                FOR PERIODS
                ENDED PRIOR TO THE ACQUISITION.
 F-10
  **TECHNEST
        HOLDINGS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (concluded)**


FOR
      THE
      SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004 and
      2003











On
      February 14, 2005, the Company acquired 100% of the outstanding common stock
      of
      Genex Technologies, Inc. The transaction had the following non-cash impact
      on
      the balance sheet:





Accounts
                receivable
            
            $
            166,557Inventory
                and work in process
            
            
            222,957Prepaid
                expenses and other current assets
            
            
            25,403Property
                and equipment
            
            
            44,000Intangible
                  assets, goodwill and in-process research and
                  development
            
            
            8,702,149Accounts
                payable
            
            
            (314,718
            )Accrued
                expenses and other current liabilities
            
            
            (229,574
            )Equity
                issued
            
            
            (6,101,258
            )Net
                cash used for acquisition, net of
                cash acquired of $784,484
            
            $
            2,515,516





On
      the
      date of the acquisition of Genex Technologies, Inc. and the application of
      push-down accounting (see Note 3), Technest Holdings, Inc. had net accounts
      payable of $184,300.





See
      notes
      to consolidated financial statements.








THE
            PURCHASE METHOD OF ACCOUNTING WAS USED BY TECHNEST HOLDINGS, INC. TO
            RECORD THE
            ASSETS ACQUIRED AND LIABILITIES ASSUMED OF GENEX TECHNOLOGIES, INC. ON
            FEBRUARY
            14, 2005 (SEE NOTE 3).  ACCORDINGLY, THE ACCOMPANYING FINANCIAL
            STATEMENTS
            OF TECHNEST HOLDINGS, INC. AND GENEX TECHNOLOGIES, INC. AS OF AND FOR
            PERIODS
            ENDED SUBSEQUENT TO THE ACQUISITION ARE NOT COMPARABLE IN ALL MATERIAL
            RESPECTS
            TO THE FINANCIAL STATEMENTS OF TECHNEST HOLDINGS, INC. AS OF AND FOR
            PERIODS
            ENDED PRIOR TO THE ACQUISITION.
 F-11


**TECHNEST
      HOLDINGS INC. AND SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE SIX MONTHS ENDED JUNE 30, 2005 AND THE YEARS ENDED DECEMBER 31, 2004 and
      2003**













**1.
      NATURE OF OPERATIONS**





Business





Technest
      Holdings, Inc. (“Technest” or “the Company”) had no operations between October
      10, 2003 and February 14, 2005.





On
      February 14, 2005, Technest became a majority owned subsidiary of Markland
      Technologies, Inc. (“Markland”), a homeland defense, armed services and
      intelligence contractor. Markland is a public company with a class of equity
      securities registered pursuant to Section 12(g) of the Exchange Act. Technest
      issued to Markland 1,954,023 shares of its common stock, representing a 93%
      ownership interest in Technest’s common stock, in exchange for 10,168,764 shares
      of Markland common stock valued at $6,101,258 which were used as partial
      consideration for the concurrent acquisition of Genex Technologies, Inc.
      (“Genex”) (see Note 3).





In
      connection with these acquisitions, the accounts of Technest and Genex have
      been
      adjusted using the push down basis of accounting to recognize the allocation
      of
      the consideration paid to the respective net assets acquired (see Note
      3).





Genex
      Technologies, Inc. offers imaging products and complete solutions for
      three-dimensional (3D) Imaging and Display, Intelligent Surveillance, and
      three-dimensional Facial Recognition.





Imaging
      and Surveillance


Genex
      currently is engaged in programs to develop: disposable sensors for the U.S.
      Army Night Vision Laboratory; 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


Through
      Genex, we have targeted sensing technologies that are relevant to both DOD
      and
      Department of Homeland Security missions: Chemical/Biological (Chem/Bio) and
      Improvised Explosive Devices (IED) detection sensors. The Chem/Bio and IED
      Division 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.





Research
      and Development


The
      Research and Development (“R&D”) division of Genex is focused on developing
      our imaging technology portfolio via advanced research in intelligent
      surveillance, three-dimensional imaging, and medical imaging. By integrating
      our
      marketing pursuits and with our R&D efforts, we expect to bring to market
      technological advances that enhance customer value. Some of our targeted
      research areas include: (i) intelligent surveillance using two- and
      three-dimensional image processing to support homeland security, military,
      and
      commercial applications; (ii) detection of concealment of intent using thermal
      and three-dimensional imaging to support anti-terrorist efforts; (iii) early
      detection of cancer using non-invasive and non-radiological diffuse optical
      tomography; and (iv) more effective and less risky radiation treatment for
      cancer by use of three-dimensional imaging for patient positioning.





Commercial
      Division


The
      Commercial Division of Genex is focused on growing commercial market
      opportunities for Genex’s technology portfolio. Our core technologies of
      three-dimensional imaging, three-dimensional display, and intelligent
      surveillance have broad application, thus Genex’s commercial division is focused
      on finding markets which have: a high fit of application with our technology;
      high revenue potential; economic value added for markets to adopt our
      technology; and accessible customers and channels.


F-12





**2.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Principles
      of Consolidation





The
      consolidated financial statements include the accounts of Technest and its
      wholly-owned subsidiary, Genex Technologies, Inc. from the date of acquisition
      on February 14, 2005. All significant inter-company balances and transactions
      have been eliminated in consolidation.





The
      purchase method of accounting was used by Technest Holdings, Inc. to record
      the
      assets acquired and liabilities assumed of Genex Technologies, Inc. on February
      14, 2005 (see Note 3).  Accordingly, the accompanying financial statements
      of Technest Holdings, Inc. and Genex Technologies, Inc. as of and for periods
      ended subsequent to the acquisition are not comparable in all material respects
      to the financial statements of Technest Holdings, Inc. as of and for periods
      ended prior to the acquisition.




Fiscal
      Year-end





On
      June
      30, 2005, the Board of Directors of Technest unanimously voted to change the
      fiscal year-end from December 31 to June 30.





Use
      of
      Estimates





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
      revenue recognized under the percentage completion method on firm fixed price
      contracts, allowance for doubtful accounts, the estimated useful lives of
      property and equipment, useful lives of intangible assets, the amount due to
      contracting government agencies as a result of their audits, the fair value
      allocation of consideration paid to the net assets of businesses acquired,
      the
      realizability of deferred tax assets and the fair value of equity instruments
      issued.





Concentrations
      and Risks





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





A
      significant portion of revenue is generated from contracts with Federal
      government agencies. Consequently, a significant portion of accounts receivable
      are due from Federal government agencies either directly or through other
      government contractors.




Technest
        is subject to risks common to companies in the Homeland Defense Technology
        industry, including, but not limited to, development by its competitors of
        new
        technological innovations, dependence on key personnel, protection of
        proprietary technology and loss of significant customers.





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.


F-13





A
      significant portion of the Company's receivables are due from government
      contracts, either directly or as a subcontractor. The Company has not
      experienced any material losses in accounts receivable related to these
      contracts and has provided no allowance at June 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  purposes.
      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:





Software
            
            
            3
                yearsComputer
                equipment
            
            
            3
                yearsFurniture
                and fixtures
            
            
            5-7
                years








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








Software
            
            $
            35,196Computer
                equipment
            
            
            5,909Furniture
                and fixtures
            
            
            4,622$
            45,727Less
                accumulated depreciation
            
            
            (3,410
            )$
            42,317





Depreciation
      expense for the six months ended June 30, 2005 and the year s ended
      December 31, 2004 and 2003 was $3,410 and $0, respectively.





Definite-lived
      Intangible Assets





Definite-lived
      intangible assets 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.





With
      the acquisition of Genex, Technest 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.





Fair
      Value of Financial Instruments





The
      financial statements include various estimated fair value information at June
      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.





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.


F-14





The
      fair value of cash, accounts receivable and accounts payable approximate their
      recorded amounts because of their relative market and settlement terms.





Revenue
      Recognition





We
      recognize product 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.





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.





Research
      and Development




Research
      and development costs are charged to expense as incurred. The Company
      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. For the period ended June 30, 2005, the Company expensed $2,095,000
      of
      acquired in-process research and development related to the acquisition of
      Genex
      (see Note 3).





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.





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, Series A and C Convertible 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.





Loss
      per
      share for all prior periods have been retroactively restated to reflect a 1
      for
      211.18 reverse stock split effective
      at the close of business on July 19, 2005.





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 indicators of impairment were identified in the six months
      ended June 30, 2005.


F-15





Impairment
      of Long-Lived Assets





Pursuant
      to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
      Assets", Technest 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 of impairment are present, Technest
      evaluates the carrying value of such assets in relation to the operating
      performance and future undiscounted cash flows of the underlying assets.
      Technest’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 six months ended June 30, 2005.





Stock-Based
      Compensation





As
      permitted under SFAS No. 148, "Accounting for Stock-Based Compensation -
      Transition and Disclosure", which amended SFAS No. 123, "Accounting for
      Stock-Based Compensation", Technest 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 no material effect on the
      net loss for the six months ended June 30, 2005 or the year ended December
      31,
      2004.





Recent
      Accounting Pronouncements





In
      December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),
      "Share-Based Payment, an Amendment of FASB Statements No. 123 and 95." SFAS
      No.
      123(R) establishes standards for the accounting for transactions in which an
      entity exchanges its equity instruments for goods or services or incurs
      liabilities in exchange for goods or services that are based on the fair value
      of the entity's equity instruments. SFAS No. 123(R) requires public entities
      to
      measure the cost of employee services received in exchange for an award of
      equity instruments based on the grant-date fair value of the award (with limited
      exceptions) and recognize the cost over the period during which an employee
      is
      required to provide service in exchange for the award. Adoption requires a
      modified prospective application whereby compensation expense is recognized
      on
      or after the required effective date for the portion of the outstanding awards
      for which the requisite service has not yet been rendered, based on the
      grant-date fair value of those awards, calculated on a basis consistent with
      the
      SFAS No. 123 pro forma disclosures. The Company will adopt SFAS No.
      123  (R)
      on
      its effective date, commencing with the quarter beginning January 1, 2006.
      The
      Company does not expect the adoption of SFAS No. 123(R) to have a material
      effect on its results of operations. The Company’s results of operations could
      be materially effected by share-based payments issued after the adoption of
      SFAS
      123(R).





**3.
      ACQUISITIONS**





Purchase
      by Markland Technologies, Inc.





On
      February 14, 2005, in conjunction with a Securities Purchase Agreement between
      Technest and Markland, Technest issued 1,954,023 shares of common stock to
      Markland Technologies, Inc. in exchange for 10,168,764 shares of Markland’s
      common stock valued at $6,101,258 (“the Markland Investment”). The common stock
      issued to Markland represented 93% of Technest’s outstanding common stock.
      Consequently, Technest became a majority owned subsidiary of Markland on that
      date. The Securities Purchase Agreement contains provisions that may require
      Markland to deliver additional shares of its common stock to Technest in
      conjunction with the acquisition of Genex Technologies, Inc. (see below) and
      conversion of the Series B Convertible Preferred Stock (see Note
      6).





Purchase
      of Genex Technologies, Inc.




The
      acquisition of Genex was effected pursuant to an Agreement and Plan of Merger
      dated February 14, 2005 (the "Merger Agreement"), by and among Markland,
      Technest, MTECH Acquisition, Inc. ("MTECH"), a wholly-owned subsidiary of
      Technest, Genex and Jason Geng, the sole stockholder of Genex. A copy of the
      Merger Agreement was included as an exhibit to our current report on Form 8-K
      filed with the SEC on February 15, 2005.




F-16




In
      accordance with the terms of the Merger Agreement, on February 14, 2005, MTECH
      merged with and into Genex, with Genex surviving the merger as a wholly-owned
      subsidiary of Technest. 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 (the shares of Markland common stock issued to Technest
      in the Markland Investment); 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, Mr.
      Geng was to receive a twelve month unsecured promissory note in the principal
      amount of $550,000 bearing interest at the rate of 6% per annum. Mr. 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, it is the Company’s opinion that Mr. Geng omitted material
      representations from the Merger Agreement, and as a result, the Company has
      not
      issued and does not intend to issue the promissory note, the additional Markland
      share consideration or the contingent payments of Technest common stock. In
      addition, Mr. Geng’s employment with Genex was terminated and the Company has
      ceased paying his salary under the employment agreement.




A
      summary
      of the allocation, as determined by an independent valuation, of the aggregate
      consideration for the merger to the fair value of the assets acquired and
      liabilities assumed is as follows :








Cash
            
            $
            3,300,000Shares
                of Markland Technologies, Inc. common stock
            
            
            6,101,259Total
                Purchase Price
            
            $
            9,401,259Fair
                value allocation to net assets acquired:Fair
                value of assets acquired -Current
                assets, including cash of $784,484
            
            $
            1,199,401Property
                and equipment
            
            
            44,000Fair
                value of liabilities assumed -Accounts
                payable & accrued expenses
            
            
            (544,291
            )Fair
                value of identifiable net tangible assets acquired
            
            
            699,111Intangible
                assets - intellectual property
            
            
            161,110In-process
                research and development
            
            
            2,095,000Commercialized
                patents
            
            
            440,000Contracts
                and customer relationships
            
            
            1,130,000Goodwill
            
            
            4,876,038Total
            
            $
            9,401,259





As
      a
      result of the transaction being structured as a stock acquisition, Technest
      does
      not expect any goodwill resulting from the transaction to be deductible for
      income tax reporting purposes. Consequently, no deferred tax assets were
      recorded in connection with the merger.





In
      connection with the Genex acquisition, Technest also raised gross proceeds
      of
      $5,000,000 through a private placement of units consisting of 1,149,425 shares
      of Series B Convertible Preferred Stock, 1,149,425 shares of Series C
      Convertible Preferred Stock and warrants to purchase 1,149,425 shares of
      Technest’s common stock (see note 6).


F-17





Unaudited
      pro forma financial information for the six months ended June 30, 2005 and
      the
      year ended December 31, 2004, had the acquisition Genex been completed as of
      January 1, 2004, is as follows:





Six
                  months endedJune 30, 2005
            
            Year
                  endedDecember 31, 2004Revenues
            
            $
            1,888,459
            
            $
            5,165,536Loss
                from operations
            
            $
            (2,905,604
            )
            $
            (2,747,087
            )Deemed
                dividends on beneficial conversionto
                preferred stockholders
            
            $
            (2,174,848
            )
            $
            (2,174,848
            )Net
                loss applicable to common stockholders
            
            $
            (5,080,452
            )
            $
            (4,921,935
            )Net
                  loss applicable to common stockholders per
                  common share
            
            $
            (3.13
            )
            $
            (3.64
            )





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 (see Note 6) 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 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 and 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 based on an independent purchase
      price allocation analysis.





The
      excess of the purchase price of Genex over the fair value of net tangible assets
      acquired is $8,702,148. Of this amount, $4,876,038 was allocated to goodwill,
      $2,095,000 to in-process research and development and $1,570,000 to amortizable
      intangible assets (see Note 4) comprised of contracts, customer relationships
      and commercialized patents.





Included
      in the statement of loss for the six months ended June 30, 2005 is selling,
      general and administrative expenses of approximately $2,250 related to the
      period from January 1, 2005 to February 14, 2005 prior to the application of
      push-down accounting.





**4.
      DEFINITE-LIVED INTANGIBLE ASSETS**





Definite-lived
      intangible assets consist of the following at June 30, 2005:




Patents
            
            $
            161,111Commercialized
                patents
            
            
            440,000Contracts
                and relationships
            
            
            1,130,000Accumulated
                amortization
            
            
            (121,679
            )Net
                definite-lived intangible asset
            
            $
            1,609,432





Future
      amortization expense related to the definite-lived intangible assets over the
      next five years is as follows:





Years
                EndingJune
                30,
            
            Amount2006
            
            326,5742007
            
            326,5742008
            
            326,5742009
            
            326,5742010
            
            208,824$1,515,120





Amortization
      expense was $121,679 and $0 for the six months ended June 30, 2005 and years
      ended December 31, 2004 and 2003, respectively.


F-18





**5.
      NOTES PAYABLE**





During
      2003, the Company issued an 8% convertible demand note in the principal amount
      of $57,158. In April 2004, the Company issued an 8% demand note in the principal
      amount of $10,000. On February 8, 2005, these notes and accrued interest of
      $7,690 were satisfied by the issuance of Series A Convertible Preferred Stock
      (see Note 6).





Interest
      expense related to these notes for the six months ended June 30, 2005 and the
      year ended December 31, 2004, was $0 and $7,690, respectively.





**6.
      STOCKHOLDERS' EQUITY (DEFICIT)**





Series
      A Convertible Preferred Stock




On
      February 8, 2005, the Company's Board of Directors designated 150 shares of
      preferred stock as Series A Convertible Preferred Stock (“Series A Preferred
      Stock”). The Series A Preferred Stock is non-interest bearing, is not entitled
      to receive dividends and is not redeemable. The Series A Preferred Stock has
      a
      liquidation preference of $1,000 per share. The holders of Series A Preferred
      Stock have no voting rights except that they will be entitled to vote as a
      separate class on any amendment to the terms or authorized number of shares
      of
      Series A Preferred Stock, the issuance of any equity security ranking senior
      to
      the Series A Preferred Stock and the redemption of or the payment of a dividend
      in respect of any junior security. At any time, holders of Series A Preferred
      Stock may elect to convert their Series A Preferred Stock into common stock.
      Each share of Series A Preferred Stock is currently convertible into 1,000,000
      shares of common stock provided that, following such conversion, the total
      number of shares of common stock then beneficially owned by such holder and
      its
      affiliates and any other persons whose beneficial ownership of Common Stock
      would be aggregated with the holder's for purposes of Section 13(d) of the
      Exchange Act, does not exceed 4.999% of the total number of issued and
      outstanding shares of common stock. The Series A Preferred Stock ranks pari
      passu with the Company's Series B and C Preferred Stock.




On
      February 8, 2005, we entered into an Exchange Agreement and a Securities
      Purchase Agreement with Garth LLC pursuant to which we agreed to issue 99.325
      shares of our Series A Preferred Stock in exchange for $25,000 in cash and
      the
      surrender of certain of our 8% Promissory Notes held by Garth LLC (the "Notes").
      Immediately prior to their surrender, the Notes had an aggregate outstanding
      principal balance plus accrued interest of $74,848. We received net cash
      proceeds of $25,000 from this private placement.




On
      February 8, 2005, we entered into a Securities Purchase Agreement with Verdi
      Consulting, Inc. pursuant to which we sold twenty five (25) shares of our Series
      A Preferred Stock for the aggregate consideration of $25,000.




The
      proceeds from the issuance of the Series A Preferred Stock were used to reduce
      accounts payable.




Verdi
      Consulting has certain piggy-back registration rights with respect to the common
      stock issuable upon conversion of the Series A Preferred Stock. These piggy-back
      registration rights expire when the shares of Common Stock issued pursuant
      to
      conversion of the Series A Shares can be sold without volume restrictions
      pursuant to Rule 144(k) of the Act.




At
      June
      30, 2005 there were 124.325 shares of Series A Preferred Stock issued and
      outstanding.




Series
      B and C Convertible Preferred Stock




On
      February 14, 2005, immediately after the acquisition by Markland of a
      controlling interest in Technest (see Note 3), an investor group consisting
      of
      Southridge Partners LP, Southshore Capital Fund Limited, Verdi Consulting,
      Inc.,
      ipPartners, Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
      Strategic Holding Fund, Ltd. and Deer Creek Fund, LP (collectively, the
      "Investors") paid $5,000,000 in cash to Technest for 1,149,425 shares of Series
      B Convertible Preferred Stock (“Series B Preferred Stock”), 1,149,425 shares of
      Series C Convertible Preferred Stock (“Series C Preferred Stock), and five-year
      warrants to purchase up to 1,149,425 shares of Technest’s common stock at an
      exercise price of $6.48 per share (“the Investor Financing”) after adjusting for
      a 211.18 for one reverse stock split on July 19, 2005.




These
      securities were sold in units for a price of $4.35 per unit. Each unit consists
      of one share of Series B Preferred Stock; one share of Series C Preferred Stock
      and a warrant to purchase up to one share of Technest's common stock. Gross
      proceeds received from the sale of the units was $5,000,000. From these
      proceeds, the Company paid a finder’s fee of $1,200,000 and legal fees related
      to the financing of $287,578.




The
      Series B Preferred Stock will be convertible into Markland common stock upon
      the
      earlier to occur of February 14, 2006 or the trading day immediately following
      the first period of five trading days during which Markland common stock has
      a
      closing bid price of $2.50 or higher on each day, if any. The number of shares
      to be issuable upon conversion of each share of Series B preferred stock will
      be
      equal to approximately 4.35 divided by the lower of $0.60 and the average
      closing bid price for the 20 trading days preceding such conversion. Shares
      of
      the Series B Preferred Stock have a liquidation preference of $2.175 per share,
      may only vote on changes to the rights, privileges and priority of the Series
      B
      Preferred Stock, do not accrue dividends and are not redeemable. The Series
      B
      Preferred Stock shall rank pari passu with the Company's Series A and C
      Preferred Stock.




F-19


The
      Series C Preferred Stock is convertible into Technest common stock at any time
      at the option of the stockholder. The number of shares of Technest common stock
      into which each share of Series C Preferred Stock is convertible is determined
      by dividing $2.175 by the Series C Conversion Price. The Series C Conversion
      Price is $2.175. Shares of the Series C Preferred Stock have a liquidation
      preference of approximately $2.175 per share, may only vote on changes to the
      rights, privileges and priority of the Series C Preferred Stock, receive
      dividends on an as converted basis whenever dividends are made to the Technest
      common stock holders, and are not redeemable. The Series C Preferred Stock
      shall
      rank pari passu with the Company's Series A and B Preferred Stock.




Technest
      and the Investors entered into a Registration Rights Agreement dated February
      14, 2005. Pursuant to this agreement, Technest agreed to file a registration
      statement covering the resale of all of the common stock issuable upon
      conversion of the Series C preferred stock, (b) all of the common stock issuable
      upon exercise of the common stock purchase warrants, and (c) common stock which
      may become issuable to selling stockholders as liquidated damages for breach
      of
      covenants contained in or as a result of adjustments contemplated by the
      securities purchase agreement and the registration rights agreement. Technest
      agreed to use its best efforts to cause the registration statement to be
      declared effective as promptly as possible thereafter.




Technest
      has agreed to issue additional shares of its common stock to the Investors
      if
      the units do not have a market value of $6.525 at the end of one year. If the
      units do not have a market value of $6.525 on February 14, 2006, Technest will
      be obligated to issue in exchange for each unit a number of shares of common
      stock determined by dividing (i) the amount by which $6.525 exceeds the sum
      of
      the average closing bid prices of Markland’s and Technest’s common stock for the
      period beginning 10 trading days prior to the reset date and ending 10 trading
      days after the reset date by (ii) the average closing bid price of our common
      stock during that period.




On
      June
      20, 2005, Markland entered into definitive exchange agreements with
      DKR
      Soundshore Oasis Holding Fund, Ltd., DKR Soundshore Strategic Holding Fund,
      Ltd., Verdi Consulting, Inc. ("Verdi"), and ipPartners, Inc., pursuant to
      which Markland exchanged 632,182 shares of Technest Series B Preferred
      Stock for 2,750 shares of Markland Series D Preferred Stock.  Subsequently,
      the Technest Series B Preferred shares held by Markland were
      cancelled.




On
      June
      30, 2005, the Company had 517,243 shares of Series B Preferred Stock
      and
      1,149,425 shares of Series C Preferred Stock issued and
      outstanding.




Beneficial
      Conversion Features




Based
      on
      the effective conversion price of the Series A Preferred Stock, the Company
      determined that there was a beneficial conversion feature of approximately
      $8,500,000. The beneficial conversion feature was limited to $124,848, the
      proceeds received from the Series A Preferred Stock. This beneficial conversion
      feature has been reflected as a deemed dividend to the Series A Preferred
      stockholders in the statement of loss for the six months ended June 30,
      2005.




The
      Company allocated the proceeds received in the Investor Financing, on a relative
      fair value basis, to the Series B Preferred Stock, the Series C Preferred stock
      and the warrants. For purposes of this allocation, the Company estimated the
      fair value of the Series B and C Preferred Stock based on the fair value of
      the
      common stock into which these shares could convert. The Company estimated the
      fair value of the warrants using the Black-Scholes pricing model. Using the
      effective conversion price of the Series C Preferred Stock, the Company
      determined that there was a beneficial conversion feature of $10,177,295. The
      beneficial conversion feature was limited to $2,050,000, the allocated proceeds
      received from the Series C Preferred Stock. This beneficial conversion feature
      has been reflected as a deemed dividend to the Series C Preferred stockholders
      in the statement of loss for the six months ended June 30, 2005. As additional
      paid in capital includes amounts from both common and preferred stock, there
      is
      no net impact to stockholders’ equity as a result of the deemed dividend. Since
      the Series B Preferred Stock converts into common stock of Markland, there
      was
      considered to be no beneficial conversion feature or deemed dividend with
      respect to the common stockholders of Technest.




Common
      Stock Issuances




On
      July
      28, 2004, the Company issued 5,919 restricted shares to Mark Allen, a director
      and principal officer of the company and 5,919 restricted shares to Michael
      Sheppard, a consultant and former director of the Company for services rendered.
      The Company valued these shares at their market value on the date of issuance
      of
      $4.22 per share and recorded consulting expense of $50,000 related to these
      services.





On
      August
      9, 2004 the Company issued 4,735 restricted shares each to Verdi Consulting
      and
      Gary Wolff, two consultants for the Company, in lieu of cash compensation for
      services rendered. The Company valued these shares at their market value on
      the
      date of issuance of $4.22 per share and recorded consulting expense of $40,000
      related to these services.





On
      February 14, 2005, Technest issued to Markland 1,954,023 shares of its common
      stock in exchange for 10,168,764 shares of Markland common stock in accordance
      with the
      terms
      of a Securities Purchase Agreement between Markland and Technest (see Note 3). On this date, Technest
      became a majority owned subsidiary of Markland. Markland
      also agreed to issue additional shares of its common stock with a value of
      $5,000,000 to Technest upon conversion of Technest's Series B Preferred
      Stock.


F-20





In
      conjunction with this Securities Purchase Agreement, Technest and Markland
      entered into a Registration Rights Agreement, dated February 14, 2005. Technest
      has agreed to use its best efforts to file a registration statement on Form
      SB-2
      as soon as possible after it receives a request for registration from Markland
      (or the holder of a majority of the registrable securities if Markland transfers
      some or all of its shares) and to cause the registration statement to be
      declared effective. Pursuant to this agreement, Technest also agreed to keep
      the
      registration statement effective until the earlier of (a) thirty-six (36) months
      following the date of the agreement or (b) such time that the securities cease
      to be registrable securities due to the elimination of their transfer
      restrictions.





Markland,
      a homeland defense, armed services and intelligence contractor, is a public
      company with a class of equity securities registered pursuant to Section 12(g)
      of the Exchange Act.





On
      June
      22, 2005, the Company issued 104,455 shares each to ipPartners and Verdi
      Consulting in a net-share exercise of warrants issued in conjunction with the
      Company Series B and C Convertible Preferred Stock to purchase 267,366 shares
      of
      the Company’s common stock. The net-share settlement feature was permitted as
      the Company failed to effect a registration statement by the prescribed date
      there under.





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





Reserve
                for the exercise of options and warrants
            
            
            885,875Reserve
                for conversion of Series A Convertible Preferred Stock
            
            
            588,716Reserve
                for conversion of Series C Convertible Preferred Stock
            
            
            1,149,428Total
                reserves
            
            
            2,624,019





Reverse
      stock split





On
      June 2, 2005, the Board of Directors of Technest and the holders of a majority
      of the common stock of Technest approved a 1-for-211.18 reverse split (the
      "Reverse Split"). The Reverse Split became effective at the close of business
      on
      July 19, 2005. All share and per share information has been retroactively
      restated to reflect the Reverse Split. The total authorized shares of common
      stock of 495,000,000 did not change as a result of the Reverse
      Split.





**7.
      OPTIONS AND WARRANTS**





In
      June
      2001, the Company established the 2001 Stock Option Plan ("Plan") which provides
      for the granting of options which are intended to qualify either as incentive
      stock options ("Incentive Stock Options") within the meaning of Section 422
      of
      the Internal Revenue Code of 1986, as amended, or as options which are not
      intended to meet the requirements of such section ("Non-Statutory Stock
      Options"). The total number of shares of common stock for issuance under the
      2001 Plan shall not exceed 10,000,000. Options to purchase shares may be granted
      under the Plan to persons who, in the case of Incentive Stock Options, are
      key
      employees (including officers) of the Company or, in the case of Non-statutory
      Stock Options, are key employees (including officers) or nonemployee directors
      of, or nonemployee consultants to, the Company.





The
      exercise price of all Incentive Stock Options granted under the Plan must be
      at
      least equal to the fair market value of such shares on the date of the grant
      or,
      in the case of Incentive Stock Options granted to the holder of more than 10%
      of
      the Company's common stock, at least 110% of the fair market value of such
      shares on the date of the grant. The maximum exercise period for which Incentive
      Stock Options may be granted is ten years from the date of grant (five years
      in
      the case of an individual owning more than 10% of the Company's common stock).
      The aggregate fair market value (determined at the date of the option grant)
      of
      shares with respect to which Incentive Stock Options are exercisable for the
      first time by the holder of the option during any calendar year shall not exceed
      $100,000.





The
      exercise price of all Non-Statutory Stock Options granted under the Plan must
      be
      at least equal to 80% of the fair market value of such shares on the date of
      the
      grant.





No
      options were granted pursuant to the Plan during the six months ended June
      30,
      2005 nor the year ended December 31, 2004.


F-21





Summary
      information with respect to stock options and warrants granted is as follows:





Weighted
                AverageNumber
                of Shares
            
            Exercise
                PriceBalance,
                December 31, 2003
            
            
            4,352
            
            $
            644.10Expired
            
            
            (456
            )
            
            (232.18
            )Balance,
                December 31, 2004
            
            
            3,896
            
            $
            504.72Issued
            
            
            1,149,425
            
            
            6.33Expired
            
            
            (80
            )
            
            (4,434.78
            )Exercised
            
            
            (267,366
            )
            
            (6.33
            )Balance,
                June 30, 2005
            
            
            885,875
            
            $
            8.12





The
      following table summarizes the Company's stock options and warrants outstanding
      at June 30, 2005:





Options
      and warrants outstanding and exercisable





Exercise
                price
            
            Number
            
            Expiration
                Date$2,033.66
            
            678
            
            07/23/2005$73.91
            
            3,138
            
            12/31/2005$
                6.33
            
            882,059
            
            02/14/2010885,875Weighted
              average remaining life
            
            
            4.7
              years





As
      of
      June 30, 2005 all options and warrants are exercisable.




In
      connection with the Investor Financing on February 14, 2005 (see Note 6), the
      Company issued five year warrants to purchase 1,149,425 shares of Technest
      common stock at an exercise price of $6.33 per share. In accordance with the
      stock purchase warrant agreement, in the event a registration statement covering
      these shares is not declared effective within four months of the warrant
      issuance date, the warrant holders may exercise the warrants on a net share
      settlement basis. The Company did not have an effective registration statement
      covering these shares as of June 30, 2005. The relative fair value of these
      warrants of $2,070,000 was estimated using the Black-Scholes model and the
      following assumptions:





Fair
                value of stock
            $10.56Exercise
                price
            $6.33Expected
                dividend yield
            0%Expected
                lives of warrants (in years)
            4.7Risk-free
                interest rate
            3.53%





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 grant date. The fair value of these options was considered to be
      immaterial for purposes of determining the total consideration paid for
      Genex.


F-22





**8.
      NET LOSS PER SHARE**





Securities
      that could potentially dilute basic earnings per share ("EPS") in the future,
      and that were not included in the computation of diluted EPS because to do
      so
      would have been anti-dilutive for the periods presented, consists of the
      following:





Shares
                PotentiallyIssuableSeries
                A Convertible Preferred Stock
            
            
            588,716Series
                C Convertible Preferred Stock
            
            
            1,149,425Stock
                options
            
            
            3,816Warrants
            
            
            882,059Total
                as of June 30, 2005
            
            
            2,624,016




**9.
      COMMITMENTS AND CONTINGENCIES**





Facility
      Rental





Technest
      has its executive offices in Providence, Rhode Island. Technest rents a single
      office on a month-to-month basis for $1,500 per month in Ridgefield, Connecticut
      from Southridge Holdings LLC, who is the beneficial owner of 34,827 shares
      of
      Series C preferred stock and five-year warrants to purchase 344,827 shares
      of
      common stock at $6.34 per share. Genex Technologies, Inc., a wholly-owned
      subsidiary of Technest, leases offices with approximately 6,831 square feet
      in
      Kensington, Maryland, pursuant to a five-year lease which expires January 31,
      2006. The office space lease provides for annual increases of 3% to the base
      rent and requires Genex 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 six months ended June 30, 2005 and the year ended December
      31,
      2004, was $54,450 and $ 3,000, respectively.





Government
      Contracts





The
      Company's billings and revenue on time and material contracts are based on
      provisional fringe, 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. Their
      examination disclosed eight significant deficiencies in Genex’s accounting
      system that resulted in misclassified costs. They were as follows:





1.
            Contractor
                does not follow policies and procedures concerning accounting for
                unallowable costs.


2.
            Contractor
                does not follow policies and procedures concerning accounting for
                material
                costs.


3.
            Contractor
                lacks adequate written policies and procedures concerning capitalization
                of assets.


4.
            Contractor
                does not have adequate policies and procedures to ensure proper
                segregation of duties in handling its labor
                costs.


5.
            Contractor’s
                procedure for calculating the proposed hourly labor rate of its employees
                results in overstated labor costs.


6.
            Contractor
                fails to maintain policies and procedures for classifying the labor
                categories of its employees.


7.
            Employees
                fail to follow the contractor’s policies and procedures in regards to
                maintaining timesheets on a current
                basis.


8.
            Contractor’s
                policy of billing labor costs results in billing the Government for
                employees that are not employees of Genex.





Since
      the acquisition of Genex, the management of Technest has terminated the Genex
      employees responsible for this function and rapidly installed appropriate
      internal controls and oversight over Genex’s accounting system to ensure that
      they comply with applicable laws and regulations and are adequate and operating
      effectively. The DCAA has since re-audited the Genex financial systems and
      has
      communicated to Genex that the revised procedures are satisfactory. Genex will
      be allowed to complete certain previous contacts awarded by the Department
      of
      Defense but 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 June 30, 2005. T he
      Company has determined that $102,228 is the total amount repayable to the
      government (inclusive of $68,017 accrued for 2002 overpayments). This amount
      is
      included in accrued expenses at June 30, 2005.





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.


F-23


**10.
      INCOME TAXES**





There
      was
      no provision for federal or state income taxes for the six months ended June
      30,
      2005 and year ended December 31, 2004, due to the Company's operating losses
      and
      a full valuation reserve on deferred tax assets.





The
      Company's deferred tax assets consist primarily of the tax effects of its net
      operating loss carry forwards. 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 carryforward.





Prior
      to its acquisition by Technest, Genex had elected to have its earnings taxed
      under Subchapter S of Chapter 1 of the Internal Revenue Code of 1986, as
      amended. On the effective date of the acquisition, Genex forfeited its status
      as
      a Subchapter S corporation.





At
      December 31, 2004, the Company had net operating loss carryforwards for federal
      income tax purposes of approximately $10,000,000, which will expire in various
      amounts through 2023.





A
      reconciliation of the provision for income taxes (benefit) to the federal
      statutory rate is as follows:




2005
            
            2004Tax
                benefit at statutory rate
            
            $
            (955,000
            )
            $
            (39,000
            )Permanent
                differences
            
            
            733,000
            
            
            39,000Increase
                in valuation allowance
            
            
            222,000
            
            
            --$
            --
            
            $
            --





Deferred
      income taxes reflect the net tax effects of temporary differences between the
      carrying amounts of assets and liabilities for financial reporting purposes
      and
      the amounts used for income tax purposes. Significant components of the
      Company's deferred tax assets and liabilities at June 30, 2005 are as follows:





Net
                operating loss carryforward
            
            $
            4,130,000Valuation
                allowance
            
            
            (4,130,000
            )Net
                deferred tax assets
            
            $
            -





For
      financial reporting purposes, the Company has recorded a valuation allowance
      against deferred tax assets as management has determined that it is not more
      likely than not that the deferred tax assets for which the allowance has been
      established will materialize.





**11.
      RELATED PARTY TRANSACTIONS**





With
      the
      exception of Deer Creek Fund LP, ipPartners Inc., and Southshore Capital Fund
      Limited, all of the Investors in the Investor Financing on February
      14,  2005
      are
      either shareholders, officers and/or Directors of Markland. ipPartners, Inc.
      is
      a corporation majority owned and controlled by Mr. Tarini, Markland's Chief
      Executive Officer and Chairman. The Investor 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.





During
      the six months ended June 30, 2005, the Company billed $504,196 to EOIR, a
      wholly owned subsidiary of Markland, for services performed on a sub-contract
      of
      EOIR. EOIR also provides administrative and accounting services to Technest.
      For
      the period ended June 30, 2005, the charge for these administrative and
      accounting services amounted to $326,241 which is based on actual time incurred
      by EOIR personnel on behalf of Technest and Genex. Technest also made cash
      advances to Markland in the amount of $273,885. The net amount due from Markland
      and its wholly-owned subsidiaries is $117,615.





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 the Company than those that
      will be obtainable from unrelated third parties at the time such transactions
      are made.


F-24





**12.
       EMPLOYEE BENEFIT PLANS**





Genex
      maintains a Simplified Employee Pension (the SEP Plan) for all employees who
      have attained the age of 21 and have completed three years of service.
      Participants may make voluntary contributions up to the maximum amount allowed
      by law, but not to exceed 15% of each participant’s eligible compensation. The
      combined totals of participant and Genex contributions may not exceed $30,000
      by
      law. Genex contributions vest immediately to the participants.




Genex
      also maintains a defined contribution 401(k) profit sharing plan (the 401(k)
      Plan) for all employees except those who are non-resident aliens or are covered
      by a collective bargaining agreement.  Participants may make voluntary
      contributions up to the maximum amount allowable by law but not to exceed 20%
      of
      the participant's eligible compensation.  Genex contributions to the
      401(k)
      Plan are at the discretion of management and vest to the participants ratably
      over a five-year period, beginning with the second year of participation.





Genex
      made no contributions to either plan in the six months ended June 30, 2005
      or in
      the year ended December 31, 2004.





**13.
      LITIGATION**





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 Technest, 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.




On
      November 22, 2002, a default Judgment in the sum of $30,106 including interest
      and related costs was entered against the Company regarding Bowne of Dallas.
      This amount is included in accounts payable as of June 30, 2005.




**14.
      GAIN ON SALE OF SUBSIDIARY**





On
      March
      25, 2003, the Company sold all the outstanding shares held by it in Technest,
      Inc. (subsidiary) to Aberdeen Avenue LLC for $1.00. As a result of the sale
      the
      Company reversed $2,234,423 of the subsidiary's liabilities, which was recorded
      as a gain on sale of subsidiary.





**15.
      TRANSITION PERIOD**




On
      June
      30, 2005, the Company elected to change its fiscal year-end from December 31
      to
      June 30 resulting in a six -month transition period. As a result, the unaudited
      statements for the comparable period in 2004 are set forth below.




TECHNEST
                HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF OPERATIONS(Unaudited)Six
                Months EndedJune
                30, 2004Revenues
            
            $
            -General
                and administrative expenses
            
            
            5,787Loss
                from operations
            
            
            (5,787
            )Net
                loss
            
            $
            (5,787
            )NET
                LOSS PER COMMON SHARE:BASIC
                AND DILUTED
            
            $
            (0.05
            )WEIGHTED
                AVERAGE NUMBER OF SHARES:
            
            
            117,951




F-25







TECHNEST
                HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED
                STATEMENTS OF CASH FLOWS(Unaudited)Six
                Months Ended June 30, 2004CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income (loss) from operations
            
            $
            (5,787
            )Changes
                in assets and liabilities:Accounts
                payable and accrued expenses
            
            
            (3,867
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (9,654
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from notes payable
            
            
            10,000NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            10,000NET
                INCREASE IN CASH
            
            
            346CASH
                - BEGINNING OF PERIOD
            
            
            988CASH
                - END OF PERIOD
            
            $
            1,334





**16** . **SUBSEQUENT
      EVENTS**





Reverse
      Stock Split


On
      June 2, 2005, the Board of Directors of Technest Holdings, Inc. and the holders
      of a majority of our outstanding shares of common stock approved a
      recapitalization in the form of a one (1) for two hundred eleven and eighteen
      one hundredths (211.18) reverse stock split of our shares of common stock,
      par
      value $.001 per share, outstanding (the “Reverse Stock Split”) after considering
      and concluding that the Reverse Stock Split was in our best interests and the
      best interests of our stockholders, with all fractional shares rounded up to
      the
      nearest whole number.  The Reverse Stock Split was effective as of the
      close of business on July 19, 2005.  The Reverse Stock Split will not
      reduce our authorized shares of common stock, which will remain at 495,000,000
      shares  Based on the number of shares outstanding as of July 19, 2005,
      after giving effect to the Reverse Stock Split, we will have approximately
      2,302,193 shares of Technest common stock outstanding. All share and per share
      information has been retroactively restated to reflect the Reverse Stock Split.





Acquisition
      of EOIR


On
      August 17, 2005, pursuant to a Stock Purchase Agreement with Markland
      Technologies, Inc., our majority stockholder, we purchased all of the
      outstanding stock of E-OIR Technologies, Inc., (“EOIR”), formerly one of
      Markland’s wholly-owned subsidiaries. As consideration for the stock of EOIR, we
      issued 12 million shares of our common stock to Markland. We obtained a fairness
      opinion related to the consideration given to Markland for EOIR. Markland’s
      ownership of Technest increased from 85% to approximately 98% on a primary
      basis
      and from 39% to approximately 82% on a fully diluted basis (assuming the
      conversion of all of our convertible securities and the exercise of all warrants
      to purchase Technest common stock). Accordingly, this reorganization did not
      result in a change of control of EOIR and did not need stockholder consent
      in
      order to complete this reorganization.  Since this is a transaction
      between entities under common control, the historical carrying value of EOIR's
      assets and liabilities will be carried over and no purchase price adjustments
      will be made.




EOIR
        offers products and services which include: (i) design and fabrication of
        customized remote sensor systems and platforms for U.S. Department of Defense,
        United States intelligence agencies and U.S. Department of 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. Markland acquired EOIR on June 30, 2004.  EOIR generated
        approximately 97% of Markland’s revenue for its latest fiscal year ended June
        30, 2005.




Exchange
      of Series B Convertible Preferred
      Stock


On
      August 19, 2005, Markland entered into a definitive
      exchange agreement with the Deer Creek Fund LLC, pursuant to which Markland
      exchanged 500 shares of Markland Series D Preferred Stock for 114,943 shares
      of
      Technest Series B Convertible Preferred Stock. Subsequently, the Technest Series
      B Convertible Preferred shares held by Markland were cancelled.




F-26





**Item
      8. Changes in and Disagreements with Accountants on Accounting and Financial
      Disclosure**





None.





**Item
      8a. Controls and Procedures**





Based
      on
      our management's evaluation, 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.




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 prior to the Genex transaction,
      Technest 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, which include
      additional administrative personnel provided by Markland, the risks associated
      with limited staff have been largely mitigated. However, management will
      periodically re-evaluate the situation and, as necessary, put in place
      additional internal staff and controls to prevent a lack of discipline around
      policies and procedures in our administrative and financial matters.







**Changes
      in Internal Controls Over Financial Reporting**





There
      was
      no change in our internal control over financial reporting during the quarter
      ended June 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.




**ITEM
      8B. OTHER INFORMATION.** ****




None.


17





**PART
      III**





**Item
      9. Directors and Executive Officers of the Registrant**





The
      following table set forth information regarding our current executive officers
      and the current members of our board of directors. The name, age and present
      principal occupation or employment, and material occupations, positions, offices
      or employment for the past five years, for each of our directors and executive
      officers, are set forth below.




**DIRECTORS
      AND OFFICERS FOR SIX MONTHS ENDED JUNE 30, 2005**




**Name**
            **Age**
            **Position**
            **Year
                Began**Robert
                Tarini
            46
            Chief
                Executive Officer and Chairman of the Board of Directors
            2005Joseph
                P. Mackin
            55
            President,
                Director
            2005Gino
                M. Pereira
            47
            Chief
                Financial Officer
            2005





ROBERT
      TARINI was appointed Chief Executive Officer and Chairman of the Board of
      Directors of Technest on February 14, 2005 . He  has
      served as Markland's Chief Executive Officer since November 14, 2003 and as
      Markland's Chairman of the Board of directors since December 9, 2002. In April
      2003, Mr. Tarini founded Syqwest Inc., a firm which specializes in the design
      and manufacture of acoustic remote sensing devices utilized in marine and land
      based applications. In April 2001, Mr. Tarini founded Trylon Metrics Corp.,
      a
      developer of acoustic remote sensing technology, and acted as President of
      Trylon from April 2001 to present. In May 2001, Mr. Tarini founded ipPartners
      Inc. and has served as its President to present. ipPartners Inc. 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 oversaw 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
      applied to detecting illicit materials. From June 1982 to July 1990, Mr. Tarini
      worked at Raytheon, where he designed active sonar and sonar trainers for US
      and
      foreign customers which were installed onto every 688 class attack submarine
      and
      every SQQ-89 surface ship combat system, in total, over 100 seafaring
      vessels.





DR.
      JOSEPH P. MACKIN was appointed President of Technest on April 1, 2005. 
      He
      has been a member of our Board of Directors since April 1, 2005. He has been
      a
      member of the Board of Directors of Markland since July 13, 2004 and has served
      as Markland's Chief Operating Officer since December 7, 2004. Dr. Mackin has
      been with EOIR, one of Markland's wholly-owned subsidiaries, for 4 years and
      is
      currently the President and CEO of EOIR. Dr. Mackin is responsible for strategic
      technology development and Homeland Security initiatives as well as a key
      participant in corporate day-to-day operations at EOIR. He has served on
      numerous government panels and committees, and has had an extensive
      career
      in the military in weapons systems development and
      acquisition.  Prior to joining EOIR, Dr. Mackin was an Assistant
      Sensor Systems Group Leader at MIT Lincoln Laboratories where, among other
      things, he served as the system integration lead for the Smart Sensor Web
      program. Dr. Mackin holds a PhD in Physics from the Massachusetts Institute
      of
      Technology and a BS in Engineering from the United States Military Academy
      at
      West Point.  He is a graduate of the Defense Systems Management College,
      and holds a DoD level 3 certification (the highest) in both R&D and Project
      Management.  He is a retired Colonel in the United States
      Army.





GINO
      M.
      PEREIRA has served as our Chief Financial Officer since February 14, 2005.
      Mr.
      Pereira has served as Markland's Chief Financial Officer since December 7,
      2004.
      Mr. Pereira currently serves on the Board of Directors of Teletrak Environmental
      Systems. From 1991 through 2000, Mr. Pereira was employed by CDC Technologies,
      Inc., located in Oxford, Connecticut. From 1991 through 1998, Mr. Pereira was
      CDC Technologies' Executive Vice President and Chief Financial Officer. In
      1999,
      Mr. Pereira assumed the role of Chief Operating Officer of CDC Technologies.
      Mr.
      Pereira remained in that role through 2000. In January 2001, Mr. Pereira assumed
      the position of Chief Operating Officer of CDC Acquisition Corporation, a
      subsidiary company of Drew Scientific Group plc. Mr. Pereira remained in that
      position until November 2001, when he became a principal at Interim Management
      Solutions in Oxford, Connecticut. During his tenure at Interim Management
      Solutions, Mr. Pereira has acted as an interim or part-time Chief Financial
      Officer or Chief Operations Officer for numerous small and emerging companies.
      In January 2003, Mr. Pereira also became a Managing Director of Kiwi Securities,
      Inc., an independently owned investment banking firm, a post he held until
      December 7, 2004. Mr. Pereira is a Fellow of the Chartered Association of
      Certified Accountants (UK).


18





**Family
      Relationships**





There
      are
      no family relationships between any of the directors or executive
      officers.





**BOARD
      OF DIRECTORS**




**Board
      Composition**





All
      directors hold office until the next annual meeting of shareholders and the
      election and qualification of their successors.





**Process
      for Recommending Nominees to the Board**




We
      do not
      have in place a process by which our stockholders may recommend nominees to
      our
      board of directors. However, our board would consider any candidate proposed
      by
      a stockholder in accordance with the by-laws, certificate of incorporation
      and
      the laws of the State of Nevada. We do not pay fees to any third party to assist
      in the process of identifying or evaluating director candidates.




**Criteria
      used by our Board to Consider Potential Nominees**




Our
      directors take a critical role in guiding our strategic direction and oversee
      the company. Board candidates are considered based upon various criteria, such
      as their broad-based business and professional skills and experiences. In
      addition, directors must have time available to devote to board activities
      and
      to enhance their knowledge of the industry.




**Committees
      of the Board**




During
      the six months ended June 30, 2005, we did not have an audit committee,
      compensation or nomination committee, due to the lack of operation
      activity.




As
      of
      September 12, 2005 we do not have an audit committee. The full Board of
      Directors serves as the audit committee. On February 14, 2005, the Board of
      Directors established an executive committee consisting of Robert Tarini. This
      committee has responsibility for the day to day management of our business.
      The
      Company presently has no compensation or nominating committee.




**CORPORATE
      GOVERNANCE**




**Financial
      Expert**




During
      the six months ended June 30, 2005 and as of September 12, 2005, we did not
      have
      and do not have an “audit committee financial expert.” We believe the cost
      related to retaining a financial expert at this time is
      prohibitive.




**Compliance
      With Section 16(a) of the Securities Exchange Act of 1934**





Based
      solely on a review of the Forms 3, 4 and 5, and amendment thereto and written
      representations provided to us, we believe that during the six months ended
      June
      30, 2005, the following Reporting Persons either filed or will file late
      reports:





o
            An
                initial report under Section 16(a) of the Securities Exchange Act
                of 1934
                was not timely filed by Markland Technologies, Inc. This delayed
                report
                involved a transaction in our common stock by which Markland acquired
                greater than ten percent of our outstanding Common Stock and for
                which a
                From 4 was timely filed. Markland included a transaction on its Form
                4
                filed on August 19, 2005, that we believe should have been reported
                earlier on Form 4. Technest is not aware of any outstanding report
                required to be filed by Markland.





o
            Robert
                Tarini, our Chief Executive Officer and Director, included one transaction
                in his Form 4 filed on June 15, 2005, that we believe should have
                been
                reported earlier on Form 4. Mr. Tarini included one transaction in
                his
                Form 4 filed on June 30, 2005, that we believe should have been reported
                earlier on Form 4. Mr. Tarini reported one transaction in his Form
                4 filed
                on September 27, 2005 that we believe should have been reported earlier
                on
                Form 4. Technest is not aware of any outstanding report required
                to be
                filed by Mr. Tarini.****




19





**Code
      of Ethics**




Given
      Technest’s current size and the short period for which we have been an operating
      company, our board of directors has not adopted a code of ethics that applies
      to
      our principal executive officer, principal financial officer, principal
      accounting officer, or controller, or other persons performing similar
      functions.





In
      the
      near future, our board of directors expects to (i) assess ethics and compliance
      risks within the organization, and (ii) evaluate our corporate culture, our
      internal reporting mechanisms in light of Sarbanes-Oxley, and the time and
      financial resources necessary to put in place an ethics compliance
      program.





If
      we
      decide to adopt a code of ethics, we intend to satisfy the disclosure
      obligations set for in SEC Release No.33-8180 and in the Form 8-K.





**Item
      10. Executive Compensation**





**Director
      and Executive** **Compensation** **Prior to Genex Transaction**




Prior
      to the consummation of the Genex transaction, directors who were not employees
      of our company were
      compensated for their services in the amount of $350.00 and expenses incurred
      for attending each meeting of the Board of Directors. Directors who were
      employees or officers of our company were not compensated for their services
      as
      directors. Prior to the consummation of the Genex transaction, other than the restricted
      stock grant described below, our executive officers were not compensated. On
      July
      28, 2004, Technest issued 1,250,000 restricted shares to Mark Allen, a director
      and principal officer (not giving effect to the Reverse Stock Split). At the
      time, Technest valued these shares at their market value on the date of issuance
      of $.02 per share. Mr. Allen resigned on March 30, 2005.




**Executive** **Compensation** **After the Genex transaction**




The
      following table sets forth information regarding the executive compensation
      for
      the six months ended June 30, 2005 .




**SUMMARY
      COMPENSATION TABLE**




**ANNUAL
                COMPENSATION****NAME
                AND PRINCIPAL POSITION**
            **YEAR**
            **SALARY**
            **BONUS**
            **OTHER
                ANNUAL COMPENSATION****Robert
                Tarini**
            **2005**
            **(1)****Joseph
                P. Mackin**
            **2005**
            **(1)****Gino
                Pereira**
            **2005**
            **(1)**





(1)
      These
      executive officers are also the executive officers of Markland Technologies,
      Inc. and are parties to individual employment agreements with Markland. Markland
      acquired Technest in February 2005. For the period from February through June
      2005, Markland and Technest did not have any special arrangements with regard
      to
      these individuals’ compensation as executive officers of Technest.





**Stock
      option plans**





Technest
      Holdings, Inc. has established the 2001 Stock Option Plan which provides for
      the
      granting of options which are intended to qualify either as incentive stock
      options within the meaning of Section 422 of the Internal Revenue Code or as
      options which are not intended to meet the requirements of such section. The
      total number of shares of common stock reserved for issuance under the plan
      is
      10,000,000. Options to purchase shares may be granted under the plan to persons
      who, in the case of incentive stock options, are key employees (including
      officers) or, in the case of non-statutory stock options, are key employees
      (including officers) or non-employee directors or non-employee consultants.


The
      exercise price of all incentive stock options granted under the plan must be
      at
      least equal to the fair market value of such shares on the date of the grant
      or,
      in the case of incentive stock options granted to the holder of more than 10%
      of
      Technest Holdings common stock, at least 110% of the fair market value of such
      shares on the date of the grant. The maximum exercise period for which incentive
      stock options may be granted is ten years from the date of grant (five years
      in
      the case of an individual owning more than 10% of the Company's common stock).
      The aggregate fair market value (determined at the date of the option grant)
      of
      shares with respect to which incentive stock options are exercisable for the
      first time by the holder of the option during any calendar year shall not exceed
      $100,000.


20





The
      exercise price of all non-statutory stock options granted under the plan must
      be
      at least equal to the 100% of the fair market value of such shares on the date
      of the grant





As
      of
      today, no options have been granted under the plan.




**Stock
      option grants and stock appreciation rights**




We
      did
      not grant any stock options or stock appreciation rights to the executive
      officers or directors during the fiscal year ended June 30, 2005.




**Exercises
      of stock options and stock appreciation rights with year-end values**




No
      stock
      options or stock appreciation rights were exercised by our officers, directors
      or employees during the fiscal year ended June 30, 2005.





**Long-term
      incentive plans**




During
      fiscal year 2005, we did not have any long-term incentive plans, pension plans,
      or similar compensatory plans for our directors or executive
      officers .





**Item
      11. Security Ownership of Certain Beneficial Owners and Management**





The
      following tables sets forth information regarding the beneficial ownership
      of
      our Common Stock as of September 12, 2005 by:


-
      each of
      the individuals listed on the "Summary Compensation Table" below;


-
      each of
      our directors, officers and nominees;


-
      each
      person (including any group) who is known by us to own beneficially 5% or more
      of our Common Stock; and


-
      all
      directors and executive officers as a group.





Beneficial
      ownership is determined in accordance with the rules of the SEC. In computing
      the number of shares beneficially owned by a person


and
      the
      percentage ownership of that person, shares of Common Stock subject to options
      warrants and any other type of convertible securities


held
      by
      that person that are currently exercisable or exercisable within 60 days of
      September 12, 2005, are deemed issued and outstanding. These shares, however,
      are not deemed outstanding for purposes of computing percentage ownership of
      each other shareholder. Percentage of


ownership
      is based on 14,302,721 shares of Common Stock outstanding on September 12,
      2005.





Except
      as
      indicated in the footnotes to this table and subject to applicable community
      property laws, each shareholder named in the table has


sole
      voting and investment power with respect to the shares shown as beneficially
      owned by them. This table also includes shares owned by a


spouse
      as
      community property.


21


BENEFICIAL
                  OWNERSHIP OF TECHNESTNAME
                  AND ADDRESS OF BENEFICIAL OWNER
              NUMBER
                  OF SHARES BENEFICIALLY
                OWNED
              PERCENT
                  OF CLASS BENEFICIALLY
                OWNEDROBERT
                  TARINI, Chief Executive Officer and Director
                88
                  Royal Little Drive
                Providence,
                Rhode
                  Island 02904
              376,510(1)
              2.56GINO
                  M. PEREIRA, Chief Financial Officer
                88
                  Royal Little Drive
                Providence,
                Rhode
                  Island
                02904
              0
              0JOSEPH
                  P. MACKIN, President and Director
                88
                  Royal Little Drive
                Providence,
                Rhode
                  Island
                06877
              0
              0ALL
                  CURRENT DIRECTORS
                AND
                  EXECUTIVE
                OFFICERS
                  AS A GROUP
              376,510(1)
              2.56MARKLAND
                  TECHNOLOGIES, INC.
                88
                  Royal Little Drive,
                Providence,
                  Rhode Island 06877
              13,954,023
              98%
 SHARES
        ISSUABLE PURSUANT TO OPTIONS AND WARRANTS EXERCISABLE AND CONVERTIBLE
        SECURITIES





Warrants
            Price
            Series
                A
            %
                of class
            Series
                C
            %
                of class
            Total
                Fully DilutedRobert
                Tarini
            9,995
            $6.50
            25
            20.1%
            143,678
            12.5%
            2.2%Joseph
                Mackin
            0
            0
            0
            0
            0
            0
            0Gino
                Pereira
            0
            0
            0
            0
            0
            0
            0





(1)
      Includes 104,455 shares currently outstanding, 9,995 shares issuable upon
      exercise of Common Stock purchase Warrants with an exercise price of $6.50,
      143,678 shares issuable upon conversion of Series C Preferred Stock and 118,382
      shares issuable upon conversion of Series A Preferred Stock.


22





**Item
      12. Certain Relationships and Related Transactions**





As
      described in the Business section of this Annual Report under the heading
“Technest Financing of Genex Acquisition,” we completed a financing on February
      14, 2005 in connection with the Genex transaction. Mr. Robert Tarini was an
      investor in that financing through ipPartners, Inc., a company owned by Mr.
      Tarini. ipPartners Inc. invested $625,000 in this financing and received 143,678
      shares of Technest Series B preferred stock, 143,678 shares of Technest Series
      C
      preferred stock, and warrants to purchase 30,341,920 shares of Technest common
      stock. The Technest Series B preferred stock is convertible into shares of
      Markland common stock. On June 20, 2005, ipPartners, Inc. exchanged all of
      its
      Technest Series B preferred stock for Markland Series D preferred
      stock.





On
      August
      17, 2005, pursuant to a Stock Purchase Agreement with Markland Technologies,
      Inc., our majority stockholder, we purchased all of the outstanding stock of
      E-OIR Technologies, Inc., (“EOIR”), formerly one of Markland’s wholly-owned
      subsidiaries. As consideration for the stock of EOIR, we issued 12 million
      shares of our 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 our convertible
      securities and the exercise of all warrants to purchase Technest common stock).




During
      the six months ended June 30, 2005, Technest, through its wholly-owned
      subsidiary, Genex, had entered into certain transactions with EOIR as more
      fully
      described in the Management’s Discussion and Analysis section of this Annual
      Report under the heading “Six months ended June 30, 2005 compared with the six
      months ended June 30, 2004.”





23





**Item
      13. Exhibits.**





Exhibit
                No.
            Description
            Filed
                with this 10-KSB
            Incorporated
                by referenceForm
            Filing
                Date
            Exhibit
                No.2.1
            Securities
                Purchase Agreement by and among Technest Holdings, Inc. and Southridge
                Partners LP, Southshore Capital Fund Limited, ipPartners, Inc, Verdi
                Consulting, Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
                Strategic Holding Fund, Ltd. and Deer Creek Fund, LP, dated February
                14,
                2005
            
            8-K
            February
                15, 2005
            2.12.2
            Securities
                Purchase Agreement between Markland Technologies, Inc. and Technest
                Holdings, Inc., dated February 14, 2005
            
            8-K
            February
                15, 2005
            2.22.3
            Agreement
                and Plan of Merger by and between Technest Holdings, Inc., MTECH
                Acquisition, Inc., Genex Technologies, Inc. and Jason Geng, dated
                February
                14, 2005
            
            8-K
            February
                15, 2005
            2.32.4
            2001
                Stock Option Plan
            
            DEF
                14A
            June
                14, 2001
            C3.1
            Restated
                Articles of Incorporation dated December 22, 1998
            
            SB-2
            February
                26, 1999
            3.13.2
            Restated
                Articles of Incorporation of Registrant, dated as of December 14,
                2000, as
                filed with the Secretary of State of the State of Nevada on March
                2,
                2001.
            
            10-KSB
            April
                16, 2001
            3.23.3
            Certificate
                of Amendment to Articles of Incorporation
            
            8-K
            August
                9, 2001
            3.1





24





3.4
            Amended
                and Restated By-Laws dated May 21, 2001.
            
            DEF
                14A
            June
                14, 2001
            B4.1
            Form
                of Common Stock Certificate
            
            SB-2
            February
                26, 1999
            4.14.2
            Series
                A Convertible Preferred Stock Certificate of Designations, filed
                with the
                Secretary of State of Nevada on February 8, 2005.
            
            8-K
            February
                14, 2005
            4.14.3
            Registration
                Rights Agreement between Markland Technologies, Inc. and Southridge
                Partners LP, Southshore Capital Fund Limited, ipPartners, Inc, Verdi
                Consulting, Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
                Strategic Holding Fund, Ltd. and Deer Creek Fund, LP for Markland
                Common
                Stock, dated February 14, 2005
            
            8-K
            February
                15, 2005
            4.14.4
            Registration
                Rights Agreement between Technest Holdings, Inc. and Markland
                Technologies, Inc., dated February 14, 2005
            
            8-K
            February
                15, 2005
            4.24.5
            Registration
                Rights Agreement between Technest Holdings, Inc. and Southridge Partners
                LP, Southshore Capital Fund Limited, ipPartners, Inc, Verdi Consulting,
                Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore Strategic
                Holding Fund, Ltd. and Deer Creek Fund, LP for Technest Series C
                Preferred
                Stock and Warrants for Technest common stock, dated February 14,
                2005
            
            8-K
            February
                15, 2005
            4.34.6
            Registration
                Rights Agreement between Technest Holdings, Inc. and Jason Geng for
                registration of Earnout Shares, dated February 14, 2005
            
            8-K
            February
                15, 2005
            4.4





25





4.7
            Registration
                Rights Agreement between Markland Technologies, Inc. and Jason Geng,
                dated
                February 14, 2005
            
            8-K
            February
                15, 2005
            4.54.8
            Form
                of Technest Common Stock Purchase Warrant
            
            8-K
            February
                15, 2005
            4.64.9
            Technest
                Series B Convertible Preferred Stock Certificate of Designations
                filed
                with the Secretary of State of Nevada on February 14, 2005.
            
            8-K
            February
                15, 2005
            4.74.10
            Technest
                Series C Convertible Preferred Stock Certificate of Designations
                filed
                with the Secretary of State of Nevada on February 14, 2005
            
            8-K
            February
                15, 2005
            4.84.11
            Promissory
                Note issued to Jason Geng by Genex Technologies, Inc., dated February
                14,
                2005
            
            8-K
            February
                15, 2005
            4.910.1
            Form
                of Purchase and Sale Agreement by and between Technest Holdings,
                Inc., and
                Aberdeen Avenue LLC dated March 25, 2003.
            
            10-KSB
            April
                15, 2005
            10.3710.2
            Form
                of Purchase and Sale Agreement by and among Technest Holdings, Inc.,
                and
                Cache Capital (USA) L.P., the Rearden Trust, the Four Life Trust,
                J.P.
                Carey Enterprises, Inc., J.P. Carey Securities, Inc., and Atlantis
                Capital
                Fund Limited, dated April 1, 2003.
            
            10-KSB
            April
                15, 2005
            10.3810.3
            Form
                of lease by and between Technest Holdings, Inc. and Southridge Holdings,
                LLC, dated November 1, 2004.
            
            10-KSB
            April
                15, 2005
            10.3910.4
            Securities
                Purchase Agreement between the registrant and Verdi Consulting dated
                February 8, 2005.
            
            8-K
            February
                14, 2005
            10.110.5
            Form
                of 8% Promissory Note between the registrant and Garth
                LLC.
            
            8-K
            February
                14, 2005
            10.2





26





10.6
            Exchange
                Agreement between the registrant and Garth LLC dated February 8,
                2005.
            
            8-K
            February
                14, 2005
            10.310.7
            Securities
                Purchase Agreement between the registrant and Garth LLC dated February
                8,
                2005.
            
            8-K
            February
                14, 2005
            10.410.8
            Escrow
                Agreement between Markland Technologies, Inc. Technest Holdings,
                Inc.
                Genex Technologies, Inc., Jason Geng, and Wilmington Trust Company,
                dated
                February 14, 2005.
            
            8-K
            February
                15, 2005
            10.110.9
            Lock-Up
                Agreement of Jason Geng, dated February 14, 2005
            
            8-K
            February
                15, 2005
            10.210.10
            Employment
                Agreement between Genex Technologies, Inc. and Jason Geng, dated
                February
                14, 2005.
            
            8-K
            February
                15, 2005
            10.310.11
            Lock-up
                Agreement between Technest Holdings, Inc. Garth LLC and Southshore
                Capital
                Fund Ltd., dated February 14, 2005
            
            8-K
            February
                15, 2005
            10.410.12
            Form
                of Option to be granted under the 2004 Markland Stock Incentive
                Plan
            
            8-K
            February
                15, 2005
            10.610.13
            Agreement
                between Genex Technologies, Inc. and Ocean Tomo
            
            8-K
            February
                15, 2005
            10.710.14
            Stock
                Purchase Agreement between Markland Technologies, Inc. and Technest
                Holdings, Inc. dated August 17, 2005
            
            8-K
            August
                18, 2005
            10.116.1
            Letter
                from Sherb & Co.
            
            8-K/A
            August
                25, 2005
            16.121.1
            List
                of the Subsidiaries of Technest Holdings, Inc.
            x31.1
            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





27





**Item
      14. Principal Accountant Fees and Services**





1.
      Audit
      Fees





The
      aggregate fees billed for professional services rendered by Wolf & Company,
      P.C, our principal accountant, for the audit of our annual financial statements
      and review of our quarterly financial statements was $95,000 for the six
      months ended June 30, 2005.  The aggregate fees billed for professional
      services rendered by Sherb & Co, LLP for the audit of our annual financial
      statements and review of our quarterly financial statements was $15,000 for
      the
      2004 fiscal year.





2.
      Audit-Related Fees





The
      aggregate fees billed to the Company by Wolf & Company, P.C. for services in
      connection with audits of Genex Technologies, Inc.’s financial statements for
      the years ended December 31, 2004 and 2003 for inclusion in our Form 8-K was
      $78,500. There were no other fees billed during each of the past two fiscal
      years for assurance and related services rendered by Wolf & Company, P.C,
      our principal accountant and Sherb & Co, LLP, our former accountants,
      reasonably related to the audit or review of our financial statements, that
      were
      not included in Item 14(1) above.





3.
      Tax-Related Fees





The
      aggregate fees billed to the Company by Wolf & Company, P.C. for services in
      connection with tax compliance for fiscal year 2005 was $0. The aggregate fees
      billed to the Company by Sherb & Co., LLP for services in connection with
      tax compliance during the years ended December 31, 2004 totaled $2,500.





4.
      Other
      Fees





None.





5.
      Policy
      on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
      of
      Independent Registered Public Accounting Firm




At
      present, it is the practice of our board of directors to approve each engagement
      for audit or non-audit services before we engage our independent registered
      public accounting firm to provide those services. None of the services provided
      by our independent registered public accounting firm for the period ended June
      30, 2005 was obtained in reliance on the waiver of the pre-approval requirement
      afforded in SEC regulations.




28


**Signatures**   In
        accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused
        this Report to be signed on its behalf by the undersigned, thereunto duly
        authorized.
  
 **TECHNEST
        HOLDINGS, INC.**
 (Registrant)
 
 *By:*
              */s/
                  Robert Tarini**Robert
                  Tarini**Director**Date:*
              *September
                  28, 2005*
 
 In
        accordance with the Exchange Act, this Report has been signed below by the
        following persons on behalf of the Registrant and in the capacities and on
        the
        dates indicated.
 *Signatures*
              
              *Titles*
              
              *Dates**By:
                  /s/ Robert Tarini*
                *Robert
                  Tarini*
              
              *CEO,
                  Director*
              
              *September
                  28, 2005**By:
                  /s/ Joseph P. Mackin*
                *Joseph
                  P. Mackin*
              
              *President,
                  Director*
              
              *September
                  28, 2005**By:
                  /s/ Gino M. Pereira*
                *Gino
                  M. Pereira*
              
              *Chief
                  Financial Officer*
                  *and
                    principal accounting *officer**
              
              *September
                  28, 2005*
 
 
 29