**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
  **FORM
        10-KSB**
   x
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**For
                  the Fiscal Year Ended June 30, 2007.o
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 **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*)
                
                **10411
                  Motor City Drive, Suite 650, Bethesda, MD**
                (*Address
                  of principal executive offices*)
                
                **10411
                  Motor City Drive, Suite 650, Bethesda, MD**
                *(Mailing
                  Address)*
              **88-0357272**
                (*I.R.S.
                  Employer Identification No.*)
                
                
                **20817**
                *(Zip
                  Code)*
 
 **Issuer’s
        Telephone Number: (301) 767-2810**
  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 is required to file reports pursuant to Section 13 or
        15(d)
        of the Exchange Act  [X] Yes [  ] No
 
 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.
        [ X ] Yes [   ] 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. [  ]
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). [  ]  Yes  [
        X ] No
 
 The
        issuer’s revenues for the year ended June 30, 2007, excluding discontinued
        operations in accordance with Statement of Financial Accounting Standard
        No.
        144, were $3,396,795.


The
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates* computed by reference to the price at which the common equity
        was sold, or the average bid and asked price of such common equity, as of
        September 21, 2007 (See definition of affiliate in Rule 12b-2 of the Exchange
        Act.) was: $2,807,315.
 
  *
              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:
  20,030,979
        shares as of September 21, 2007, all of one class of common stock, $0.001
        par
        value.
  
  **DOCUMENTS
        INCORPORATED BY REFERENCE**
  Documents
        Incorporated by reference:  Proxy Statement for the 2007 annual
        meeting of stockholders
  Transitional
        Small Business Disclosure Format (check one): Yes [   ]  No
        [X]
  
  **TECHNEST
        HOLDINGS, INC.**
 **FORM
        10-KSB**
 **TABLE
        OF CONTENTS**
 **June
        30, 2007**
 **Part
                    I**Item
                    1.
                Description
                    of Business
                1Item
                    2.
                Description
                    of Property
                9Item
                    3.
                Legal
                    Proceedings
                10Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                11**Part
                    II**Item
                    5.
                Market
                    for Common Equity and Related Stockholder Matters
                12Item
                    6.
                Management’s
                    Discussion and Analysis
                13Item
                    7.
                Financial
                    Statements
                F-1Item
                    8.
                Changes
                    in and Disagreements With Accountants on Accounting and Financial
                    Disclosures
                33Item
                    8A.
                Controls
                    and Procedures
                33Item
                    8B
                Other
                    Information
                33**Part
                    III**Item
                    9.
                Directors
                    and Executive Officers of the Registrant; Compliance with Section
                    16(a) of
                    the Exchange Act
                33Item
                    10.
                Executive
                    Compensation
                33Item
                    11.
                Security
                    Ownership of Certain Beneficial Owners and Management
                33Item
                    12.
                Certain
                    Relationships and Related Transactions
                33Item
                    13.
                Exhibits
                34Item
                    14.
                Principal
                    Accountant Fees and Services
                40
   -i-
  *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.
 
 **IMPORTANT
        ADDITIONAL INFORMATION WILL BE FILED WITH THE SEC**
 
 Technest
        will file a proxy statement or information statement, as applicable, with
        the
        SEC in connection with the proposed sale of EOIR.  Investors and
        security holders are urged to read the proxy statement or information statement
        when it becomes available and any other relevant documents filed with the
        SEC
        because they will contain important information.  Investors and
        security holders will be able to obtain these documents free of charge at
        the
        website maintained by the SEC at www.sec.gov.  Technest and its
        respective directors, executive officers and other possible employees and
        advisors, may be deemed to be participants in the solicitation of proxies
        from
        the stockholders of Technest in connection with the proposed sale of
        EOIR.
  -ii-
  **PART
        I**
 
 **Item
        1. Description of Business**
 
 **Recent
        Developments**
 
 **Proposed
        Sale of EOIR Technologies, Inc.**
 
 On
        September 10, 2007, Technest Holdings, Inc. (the “Company” or “Technest”) and
        its wholly owned subsidiary, E-OIR Technologies, Inc. (“EOIR”), entered into a
        Stock Purchase Agreement with EOIR Holdings LLC, a Delaware limited liability
        company ( “LLC”), pursuant to which Technest will sell EOIR to
        LLC.  LLC is an entity formed on August 9, 2007 by The White Oak
        Group, Inc., an Atlanta, Georgia based private investment firm, for the purposes
        of facilitating this transaction.  The White Oak Group, Inc. is a
        private investment firm focused on investments in the aerospace and defense
        industry, with an emphasis on the following sectors: Homeland security
        (detection and deterrence); avionics and instrumentation; command and control;
        and communication networks and services.
 
 The
        sale of EOIR to LLC will be
        structured as a stock sale in which LLC will acquire all of the outstanding
        stock of EOIR in exchange for approximately $34 million in cash, $11 million
        of
        which will be paid at closing and $23 million of which will be paid upon
        the
        successful re-award to EOIR of the contract with the U.S. Army's Night Vision
        and Electronics Sensors Directorate.
 
 In
        accordance with Statement of Financial Accounting Standard No. 144 (“SFAS 144”),
        EOIR is presented as a discontinued operation in the consolidated financial
        statements.
 
 *Summary
        of the Transaction*
 
 Pursuant
        to the terms of the Stock Purchase Agreement, at the closing, LLC will acquire
        all of the outstanding common stock of EOIR from Technest and LLC will pay
        Technest $11 million in cash.  The initial cash payment due at closing
        will be subject to adjustment (up or down) depending on EOIR’s net working
        capital on the closing date.  In addition to the initial cash payment,
        LLC has agreed to pay Technest an additional contingent payment of $23 million
        if, on or prior to December 31, 2009, EOIR is awarded the follow-on of EOIR’s
        current contract with the U.S. Army's Night Vision and Electronics Sensors
        Directorate. We estimate that the contract will be awarded during fiscal
        2008.
 
 Technest
        and LLC have agreed to deposit $200,000 of the initial purchase price payment
        and $2.3 million of the contingent purchase price payment (if any) in an
        escrow
        account to secure indemnification obligations of Technest under the Stock
        Purchase Agreement.
 
 As
        a
        condition of the sale, the proceeds will be used to extinguish debt from
        Silicon
        Valley Bank, Shelter Island and the former EOIR note holders. As of June
        30,
        2007, the face value of these loans was $9,785,616.
 
 The
        transaction has been approved unanimously by the board of directors of Technest
        and EOIR. The board of directors of Technest was advised by Rodman &
Renshaw, LLC who acted as a financial advisor to Technest and provided a
        fairness opinion to the Technest board as to the fairness of the consideration
        to be received by Technest.
 
 *Conditions
        to Completion of the Transaction*
 
 Technest
        and LLC will complete the transaction when all of the conditions to closing
        are
        satisfied or waived, including among other things, approval of the transaction
        by the stockholders of Technest.  In addition, as a condition to
        closing, LLC, which is in the process of applying for a small business
        investment company license under the Small Business Investment Company Act
        of
        1958, must obtain the approval of the transaction as a “pre-license investment”
from the Small Business Administration.
 
 In
        connection with the Stock Purchase
        Agreement, certain stockholders of Technest representing approximately 42%
        of
        Technest’s outstanding Common Stock, entered into Voting Agreements, pursuant to
        which such stockholders agreed to vote their Technest shares in favor of
        the
        proposed transaction.
 
 The
        foregoing summary of the Stock Purchase Agreement and the transactions
        contemplated therein is qualified in its entirety by reference to the full
        text
        of the Stock Purchase Agreement, which was filed as Exhibit 2.1 to a current
        report on Form 8-K (SEC File # 000-27023) filed with the SEC on September
        13,
        2007.  The Form 8-K and exhibits thereto are publicly available on the
        SEC’s web site at www.sec.gov. We urge you to obtain and read carefully copies
        of this report and documents before making an investment
        decision.
  -1-
  **Termination
        of Certain Sections
        of Stockholder Agreement and of License Agreement.**
 
 On
        August 31, 2007, Technest Holdings,
        Inc. entered into a Release Agreement with Southridge Partners, LP, a Delaware
        limited partnership (“Southridge”), a current stockholder of the Company,
        pursuant to which the parties agreed, among other things, to the
        following:
 
 ·
              Technest
                  and Markland Technologies, Inc. (“Markland”) were parties to a Stockholder
                  Agreement, dated March 13, 2006 (the “Stockholder Agreement”), and a
                  License Agreement dated March 13, 2006 (the “License
                  Agreement”).  Pursuant to an Assignment and Assumption Agreement
                  dated as of August 30, 2007 between Markland and Southridge, Markland
                  assigned all of its rights in the Stockholder Agreement and the
                  License
                  Agreement to Southridge. As part of the Release Agreement, Southridge
                  and
                  Technest agreed to (a) terminate the obligations set forth in Section
                  1 of
                  the Stockholder Agreement that restrict the ability of Technest
                  to issue
                  equity securities, convertible debt or derivative securities, (b)
                  terminate the obligations set forth in Section 5 of the Stockholder
                  Agreement relating to a right of co-sale and (c) terminate the
                  License
                  Agreement in its entirety.  All rights, title and interest in
                  the intellectual property that was subject to the License Agreement
                  reverts back to Technest and its
                  subsidiaries.
 
 ·
              *Voting
                  Agreement.* Southridge agreed that it will vote all shares of Technest
                  Common Stock owned by it and to cause its Affiliates that own shares
                  of
                  Technest Common Stock or Technest Preferred Stock to vote all of
                  their
                  shares, in favor of certain transactions entered into by September
                  10,
                  2007 that are approved and recommended by a majority of the directors
                  of
                  Technest under certain conditions.
 
 ·
              *Board
                  Representation.*The Board of Directors of Technest agreed to increase
                  the size of the board from five to six and fix the number of directors
                  of
                  Technest at six and to elect two reasonably qualified individuals
                  representing Southridge to fill the newly created directorships
                  in
                  accordance with Technest’s Bylaws.
 
 ·
              *Other
                  Terms.*Until March 31, 2008 or upon the satisfaction of
                  certain conditions, whichever is earlier, Technest agreed that
                  it would
                  refrain from (a) issuing any shares of its Common Stock or securities
                  convertible into its Common Stock, other than (i) shares to be
                  issued in
                  certain permissible offerings; (ii) certain shares already awarded
                  under
                  Technest’s 2006 Stock Award Plan, and (iii) 250,000 shares to be issued
                  under the 2006 Stock Award Plan; (b) entering into any transaction
                  with
                  its officers, directors, stockholders or any of their Affiliates,
                  except
                  for transactions that are in the ordinary course of Technest’s business,
                  upon fair and reasonable terms that are no less favorable to Technest
                  than
                  would be obtained in an arm’s length transaction with a non-Affiliated
                  person or entity.
 
 ·
              *Consideration.*  As
                  consideration for the Release Agreement, Technest agreed to issue
                  Southridge 3,000,000 shares of Technest Common Stock, $0.001 par
                  value per
                  share.  The issuance of these securities was not registered
                  under the Securities Act of 1933, as amended, but was made in reliance
                  upon the exemptions from the registration requirements of the Securities
                  Act set forth in Section 4(2)
                  thereof.
 
 The
        foregoing description summarizes
        the material terms of the Release Agreement and is qualified in its entirety
        by
        reference to the full text of the Release Agreement, which was filed as Exhibit
        10.1 to a current report on Form 8-K (SEC File # 000-27023) filed with the
        SEC
        on September 7, 2007. The Form 8-K and exhibits thereto are publicly available
        on the SEC’s web site at www.sec.gov. We urge you to obtain and read carefully
        copies of this report and documents before making an investment
        decision.
 
 **Shelter
        Island Debt Financing**
 
 On
        June
        1, 2007, Technest Holdings, Inc. closed on a financing pursuant to a Securities
        Purchase Agreement dated May 31, 2007 with Shelter Island Opportunity Fund,
        LLP
        (“Shelter Island”). Pursuant to the Securities Purchase Agreement, the Company
        issued to Shelter Island a Secured Original Issue Discount Debenture bearing
        interest at the rate of 11.25% (or Prime +3%) with an aggregate principal
        amount
        of $1,650,000 (the “Debenture”) for a subscription amount of $1,500,000. The
        Debenture is due on May 31, 2010, unless otherwise accelerated by its
        terms.  The outstanding principal amount and all accrued interest
        thereon will be payable in 33 equal monthly installments commencing on August
        31, 2007. On the maturity date of the Debenture, the Company also agreed
        to pay,
        as a termination fee (and not as a penalty), an amount equal to the product
        of
        (i) $45,000 and (ii) the number of months that have elapsed between May 31,
        2007
        and the date such payment is made by the Company to Shelter Island. This
        loan
        will be repaid in full on the closing of the sale of EOIR and as a result
        has
        been classified as part of discontinued operations.
  -2-
  The
        Debenture is secured by (i) the assets of the Company, including its securities
        in its wholly-owned subsidiaries, (ii) all rights of Markland Technologies,
        Inc.
        in and to the License Agreement dated March 31, 2006 between the Company
        and
        Markland, and (iii) the assets of the Company’s wholly-owned subsidiary, Genex
        Technologies Incorporated (“Genex”).  Other than the security interest
        from Markland, Shelter Island’s security interests are subordinated to the
        interests of Silicon Valley Bank pursuant to a Subordination Agreement entered
        into between Shelter Island and Silicon Valley Bank. The Company’s wholly-owned
        subsidiaries, Genex and E-OIR Technologies, Inc., guaranteed the
        Debenture.
 
 The
        outstanding EOIR note holders subordinated their security interest and their
        right to receive payment in the event of default under the terms of the
        Debenture to Shelter Island. As consideration for this subordination, Technest
        agreed to pay the outstanding EOIR note holders a total of $82,795 on the
        closing of the transaction and an additional $82,795 on July 1, 2008 or the
        earlier payment of the EOIR note. Our Chief Executive Officer and one of
        our
        directors, Joseph P. Mackin, received $30,447.87 on the closing and will
        receive
        the same amount on July 1, 2008.
 
 The
        Debenture, the Securities Purchase
        Agreement, along with the Security Agreements, and the Guaranty of Genex
        and
        EOIR were attached to the current report on Form 8-K (SEC File # 000-27023)
        filed with the SEC on June 5, 2007 as Exhibits 4.1, 10-1 through 10.7. The
        agreement between Technest and Dr. Mackin is attached as Exhibit 10.8 to
        that
        current report on Form 8-K. The Form 8-K and exhibits thereto are publicly
        available on the SEC’s web site at www.sec.gov. We urge you to obtain and read
        carefully copies of this report and documents before making an investment
        decision.
 
 **Markland’s
        Ownership of Technest Common Stock**
 
 Markland
        Technologies, Inc. filed a current report on Form 8-K (SEC File # 000- 28863)
        on
        June 29, 2007 to announce the entry into definitive agreements involving
        Markland’s ownership of certain shares of our common stock (the “June 15, 2007
        Agreements”).  Among other things, the Form 8-K reported that Markland
        (i) sold 3,155,949 shares of its Technest common stock, (ii) issued a new
        series
        of preferred stock in exchange for Markland’s previously issued Series E
        preferred stock, referred to as the Markland Series G preferred stock, and
        (iii)
        granted Mr. Robert Tarini and Mr. Gino Pereira each 375,000 shares of its
        Technest common stock (collectively, the “Transferred Shares”).  In
        addition, Markland issued 443,592 shares of its Technest Common Stock as
        payment
        in full for liquidated damages Markland owed in connection with a registration
        rights agreement dated March 24, 2006 between Markland and its Series E
        investors.
 
 Each
        share of Markland’s Series G preferred stock is convertible, at the option of
        the holder, into either (i) 20,000 shares of Technest common stock, currently
        outstanding and held by Markland, up to a maximum of 3,696,600 shares of
        Technest common stock, or (ii) a certain number of shares of Markland common
        stock.  Based solely on the disclosures in Markland’s Form 8-K, we
        understand that Markland has issued approximately 1,973.91 shares of Series
        G
        preferred stock to four institutional investors, which is potentially
        convertible into 3,696,600 shares of our common stock.
 
 In
        connection with the issuance of the Transferred Shares, Markland agreed to
        cause
        us to file a registration statement with the SEC to register the resale of
        the
        Transferred Shares. Pursuant to our Stockholder Agreement with Markland,
        dated
        March 13, 2006, we are contractually required to prepare and file certain
        types
        of resale registration statements at Markland’s request. In that connection, we
        will be registering (i) the 3,155,949 shares of Technest common stock sold
        by
        Markland pursuant to the June 15, 2007 Agreements, (ii) the 750,000 shares
        of
        Technest common stock granted to Messrs. Tarini and Pereira, and (iii) the
        443,492 shares of Technest common stock issued by Markland as liquidated
        damages. The availability of these shares for sale in the public markets
        pursuant to an effective registration statement may cause a significant drop
        in
        the market price of our common stock.
 
 It
        is
        important to note that Technest is not a party to any of the agreements
        involving the Markland Series G preferred stock or the issuance of Technest
        shares of Common Stock by Markland.  The issuance of the Markland
        Series G preferred stock does not require Technest to issue any additional
        securities. Conversions of the Markland Series G preferred stock will be
        satisfied entirely by shares of our common stock that are currently outstanding
        and held by Markland.
 
 A
        description of the June 15, 2007 Agreements is set forth in Markland’s current
        report on Form 8-K filed with the SEC on June 29, 2007. The Form 8-K and
        exhibits thereto are publicly available on the SEC’s web site at www.sec.gov.
        Although we did not participate in the preparation of this current report
        and
        can therefore provide no assurances as to the accuracy of the information
        they
        contain, we urge you to obtain and read carefully copies of the report and,
        in
        particular, the agreements included as exhibits to the report, before making
        a
        decision to invest in our common stock.
  -3-
  **General**
 
 As
        a
        result of the proposed sale of EOIR, the remaining business of Technest
        Holdings, Inc. is engaged in the design, research and development, integration,
        analysis, modeling, system networking, sales and support of intelligent
        surveillance, three-dimensional facial recognition and three-dimensional
        imaging
        devices and systems primarily in the security and healthcare industries.
        Historically, the Company’s largest customers have been the Department of
        Defense and the National Institute of Health.
  Our
        products leverage several core technology platforms, including:
   **·**
              **3D
                  Imaging Technology
                  Platforms:**
 -3D
                  capture using patented Rainbow 3D
                  technology
 -3D
                  processing, data manipulation, and advanced
                  modeling
 -3D
                  display in volumetric space
  **·**
              **Intelligent
                  Surveillance Technology
                  Platforms:**
 **-**360-degree
                  video acquisition using mirror, lens, and array
                  configurations
 -2D
                  video detection, tracking, recognition and enhancement
                  software
  **·**
              **3D
                  Facial Recognition Technology
                  Platforms:**
 **-**3D
                  facial image acquisition and recognition algorithms and
                  software
  **·**
              **General
                  Technology Platforms:**
 -High-speed
                  imaging processing hardware and embedded
                  algorithms
  Our
        major
        products, developed and in development, include our OmniEyeTM Wellcam, OmniEyeTM
Cerberus, Smart Optical Sensor (SOS), Smart SuiteTM, Omnivision, Small Tactical
        Ubiquitous Detection System (STUDS), 3D SketchArtist, 3D FaceCam, 3D Digitizer
        System, EI DigitizerTM and Dental DigitizerTM.
 
 OmniEyeTM
        Wellcam is an ultra light, portable 360 degree field of view camera which
        can be
        used in field applications, such as detection of underground weapon caches
        and
        search and rescue beneath building rubble, due to its durability. OmniEyeTM
Cerberus is a re-configurable multi-sensor system that is designed for long
        distance infrared and visible light detection. OmniEyeTM Cerberus delivers this
        flexibility while still maintaining seamless panoramic coverage up to 360
        degrees.
 
 SOS
        high
        speed image processing platform powers our Smart SuiteTM algorithms, enhancing
        both new and existing sensor systems with capabilities including: reliable
        target detection, motion tracking, and object classification and recognition.
        Smart SuiteTM algorithms are a portfolio of advanced video analysis and
        augmentation modules. The SOS is a powerful system that allows multiple cameras
        to be deployed easily in a distributed, scaleable network that provides
        autonomous surveillance.
 
 OmniVision
        is a software platform for a wide range of security and surveillance camera
        products. Built as a modular system, OmniVision can operate as a standalone
        application or easily integrate into existing systems. The unique architecture
        of OmniVision puts next-generation capabilities within reach of traditional
        camera and digital video recorder systems. The system includes software
        application modules for many different end user needs.
 
 STUDS
        are
        state-of-the-art, miniature, disposable, low-cost motion-tracking, positioning
        and imaging sensors that permit long-range surveillance at high resolution.
        The
        system also includes rapidly deployable wireless networking and GPS mapping
        for
        integration with legacy sensors, among other advantages.
 
 3D
        SketchArtist is a three-dimensional composite sketch tool that uses our patented
        three-dimensional morphing technology. The tool allows you to transform ordinary
        two-dimensional sketches into rapidly evolving mock-ups that can be modified
        via
        facial features, poses, expressions, and lighting in seconds.
  3D
        FaceCam changes the way we capture photographs. The 3D FaceCam uses three
        sensors to create precise, complete 3D face images at light speed. By capturing
        the very highly detailed geometric and texture information on a face, the
        3D
        FaceCam overcomes a photo’s traditional limitations of pose, lighting, and
        expression. Capture speed is less than half a second, enabling rapid processing
        of large numbers of people. 3D FaceCam is also highly accurate, making 3D
        FaceCam ideal for facial recognition. In
        addition, with 3D
        FaceCam, medical professionals can capture and measure physical features
        in 3D (e.g., volume, surface area, projection, linear distance, and asymmetry),
        provide pre- and post-operation analysis to patients, and document surgical
        or
        treatment plans and results.  Time consuming and inaccurate
        measurements using calipers and reference points are no longer necessary.
        New
        techniques, such as symmetry analysis and implant volume calculations, are
        also
        now possible. Popular applications may include:
 ·
                **Biomedical
                    Engineering**– Production of custom-fitting
                    prostheses.
  ·
                **Plastic
                    and Reconstructive Surgery**– Surgical planning, simulation, and
                    pre/post-operation comparison.
  ·
                **Patient
                    Communication**– Simulation, explanation, and modification of
                    treatment plans based upon 3D morphing and customer
                    feedback.
  -4-
  3D
        Digitizer System is a turnkey three-dimensional (3D) imaging
        solution.
 
 EI
        DigitizerTM****(Ear Impression) system has been customized for
        applications in the custom hearing aid and ear mold markets. The system
        automates the process of converting a physical ear impression into a 3D model
        for streamlined production and quality control.
 
 Dental
        DigitizerTM****has been developed for applications in the
        dental industry. The system automates the process of creating 3D models from
        dental molds and impressions in a rapid and accurate process. This system
        offers
        significant benefits in cost, quality, and turnaround times for dental labs,
        dentists, and orthodontists in the creation of dental crowns, bridges, aligners,
        braces, and other dental solutions.
 
 **Technest
        Business Strategy**
 
 Moving
        forward it is our goal to establish the Company as the leading supplier of
        3-D
        imaging products and solutions. The broad strategies that we have in place
        to
        achieve this goal are outlined below:
 
 ·
              Focus
                  on commercialization of pipeline
                  products;
 
 ·
              Utilize
                  relationships with current industry partners to bring technology
                  to
                  market;
 
 ·
              Develop
                  and expand upon our existing technologies and
                  products;
 
 ·
              Consolidate
                  our position as a leading innovator in 3-D imaging through continued
                  research and development
 
 ·
              Continue
                  to develop a robust intellectual property portfolio ;
                  and
 
 ·
              Seek
                  strategic acquisitions.
 
 **Discontinued
        Operations - EOIR Business**
 
 EOIR
        currently operates in four principal technical areas: Advanced Sensor Systems,
        Imaging and Intelligence Solutions, Operational Management, and Chemical
        and
        Explosive Detection.
 
 **Advanced
        Sensor Systems**
 
 Advanced
        Sensor Systems is engaged in design, research and development, systems
        integration, sustainment, support, and upgrade of advanced sensor systems
        for
        the U.S. military; this includes high performance targeting and surveillance
        sensors, driving enhancements, rifle sights, fusion and automatic target
        recognition, mine and minefield detection, mine neutralization, minefield
        breaching, sensor system performance modeling and analysis, virtual prototyping,
        simulation-based analyses, high-performance multi-color Focal Plane Arrays
        (FPA), multi-function lasers, distributed sensor networks, Long Wavelength
        Infrared (LWIR) and Short Wavelength Infrared (SWIR) arrays, unattended ground
        sensors, and rapid prototyping.
 
 The
        majority of the work performed by Advanced Sensor Systems is carried out
        through
        an Omnibus Contract with the United States Army Night Vision and Electronic
        Sensors Directorate. EOIR retains non exclusive rights to sell the technologies
        that it develops under this contract.
 
 **Imaging
        and Intelligence Solutions**
 
 Imaging
        and Intelligence Solutions is engaged in the design, research and development,
        integration, analysis, modeling, and training of classified solutions in
        support
        of the United States’ intelligence community and homeland
        security.
  -5-
  EOIR
        provides support to the National Geospatial-Intelligence Agency (NGA) College,
        including program management support, curriculum development and instruction
        in
        Geospatial and Imaging Analysis, Advanced Geospatial Intelligence, and
        Measurements and Signal Intelligence. EOIR develops core curriculum: platform,
        web- and computer-based training; and maintains the Soft Copy Keys Program.
        EOIR
        develops specialized tools and algorithms for atmospheric computation and
        full-spectrum signal processing, promotes imaging standards, evaluates new
        technology, assists users with Advanced Geospatial Intelligence technologies,
        and maintains spectral libraries used throughout the Intelligence Community.
        For
        the National Ground Intelligence Center, EOIR provides systems modeling,
        intelligence analysis for military operations and disaster relief, and it
        develops and integrates remote triggering devices and monitoring stations
        used
        in field testing and air-and ground-based sensor analysis. EOIR supports
        maritime advanced geospatial imagery exploitation and counter drug operations,
        as well as all-source analysis for Army operational forces.
 
 **Operational
        Management**
 
 Operational
        Management is engaged in the program management, integration, training,
        logistics, analysis, and field support of numerous projects for the U.S.
        military.
 
 EOIR
        provides program management support for the Marine Corps Systems Command
        (MCSC),
        which includes providing logistical support of current projects and integration
        with legacy systems. EOIR also is assisting in the development of the
        Electro-Optical Test Facility (EOTF) for the Program Manager Optics and
        Non-Lethal Systems (PM ONLS). This encompasses the full life-cycle of the
        test
        facility; as EOIR will design the facility, oversee the procurement of
        equipment, develop standard operating procedures, and manage the thermal
        testing
        portion of the lab. EOIR provides systems integration, board design, training,
        and field support for products, such as DoubleShot, which is currently actively
        deployed in Operation Iraqi Freedom (OIF) in support of the Marine Corps
        Warfighting Lab (MCWL). In addition, EOIR represents the Marine Corps in
        the
        joint development of Joint Chemical Agent Detector (JCAD), Joint Service
        Light
        Standoff Chemical Agent Detector (JSLSCAD), Joint Service Light Nuclear,
        Biological, Chemical, Reconnaissance System (JSLNBCRS), as well as other
        engineering technology in support of the MCSC Chemical, Biological,
        Radiological, Nuclear Defense (CBRND) team. This support consists of testing
        emerging technology, providing logistical support and management of legacy
        systems. EOIR also provides systems integration support for the Directed
        Energy
        Technology Office (DETO) at Naval Surface Warface Center Dahlgren Division
        (NSWCDD) integrating various sensors, such as Driver Viewer Enhancer and
        Blue
        Force Tracker, into a prototype directed energy system in support of
        OIF.
 
 **Chemical
        and Explosive Detection**
 
 Chemical
        and Explosive Detection is engaged in the design, research and development,
        software and hardware engineering, integration, training, and networking
        of
        advanced Chemical/Biological and Improvised Explosive Devices (IED) detection
        sensors.
 
 EOIR
        provides technologies that reliably detect the presence of chemical, biological,
        and explosive devices or components from stand-off distances utilizing
        multi-spectral electro-optical sensing methods. EOIR also provides
        Chemical/Biological and IED simulators and real-time training devices with
        product specific specifications. Our major products include our Shipboard
        Automatic Chemical Agent Detection and Alarm (ACADA), Automated, Adaptive
        Chemical Examination System (AACES), and M22 Simulator.
 
 **Technest
        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.
  Between
        October 10, 2003 and February
        14, 2005, we had no operations, nominal assets, accrued liabilities totaling
        $184,468 and 139,620 (post-reverse stock split) shares of common stock issued
        and outstanding.
  -6-
  *Acquisition
        of Genex*. On February 14, 2005, Technest became a majority owned subsidiary
        of Markland Technologies, Inc., a homeland defense, armed services and
        intelligence contractor. Technest issued to Markland 1,954,023 shares of
        its
        common stock in exchange for 10,168,764 shares of Markland common stock which
        were used as partial consideration for the concurrent 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. (a wholly-owned subsidiary of
        Technest), Genex and Jason Geng (the then sole stockholder of Genex). Technest
        paid $3,000,000 in cash and transferred the 10,168,764 shares of Markland
        common
        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. Technest financed the acquisition of
        Genex
        with the sale of 1,149,425 shares of Technest Series B preferred stock (which
        were 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 $6.50
        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 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
        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 regarding the status of regulatory audits, the impact of
        certain internal control deficiencies and the non-disclosure of ongoing
        government investigations into certain conduct by Mr. Geng and Genex prior
        to
        the acquisition of Genex by Technest, 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. To date, Mr. Geng has not contested Technest's position, has not sought
        payment and Technest believes that the possibility that it will have to issue
        additional shares or other consideration is remote.
 
 *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.
 
 *Acquisition
        of
        EOIR*. On August 17,
        2005, pursuant to a Stock Purchase Agreement with Markland, our majority
        stockholder, we purchased all of the outstanding stock of 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 at the time of the transaction 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).
        This reorganization did not result in a change of control of EOIR. We did
        not
        need stockholder consent in order to complete this reorganization.
 Markland acquired EOIR on June 29, 2004.
 
 **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.
  -7-
  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
        our customers that directly compete with our technologies.
 
 **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 and confidentiality procedures to protect our intellectual property
        rights. We own 19 U.S. patents, which we will continue to own after the proposed
        EOIR sale. 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.
 
 **Dependence
        on U.S. Government Contracts**
 
 Almost
        all 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.
 
 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.
 
 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.
  -8-
  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, 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 commercial
        security applications; and (3) to commercial healthcare applications. These
        marketing duties are divided among senior management.
 
 **Manufacturing**
 
 After
        the
        sale of EOIR, our primary manufacturing facilities are located in Bethesda,
        Maryland.
 
 **Employees**
 
 As
        of
        September 21, 2007, Technest had a total of 180 employees, 17 of which are
        full-time employees of Technest. The other employees are employees of EOIR,
        which is in the process of being sold. We believe our future success will
        depend
        upon the continued service of our key technical and senior management personnel
        and upon our continued ability to attract and retain highly qualified technical
        and managerial personnel. None of our employees is represented by a labor
        union.
        We have never experienced a work stoppage and consider our relationship with
        our
        employees to be good.
 
 **Item
        2. Description of Property**
 
 Technest
        has a three-year lease for executive offices of approximately 2,000 square
        feet
        in Boston, Massachusetts, which expires December 31, 2009. The monthly rental
        amount for this facility is approximately $4,500. In May 2007 this facility
        was
        vacated and subleased.
  Technest
        currently also leases offices with approximately 6,848 square feet in Bethesda,
        Maryland, pursuant to a five-year lease which expires March 31, 2011. Monthly
        lease amounts for this facility total approximately $14,263, increasing annually
        by 3%. Technest’s wholly owned subsidiary, Genex Technologies, Inc. had moved
        into this space on April 1, 2006. Genex had leased offices with approximately
        6,831 square feet in Kensington, Maryland, pursuant to a five-year lease
        which
        expired on January 31, 2006, which we had been extending on a monthly basis.
        Monthly lease amounts for this facility totaled approximately
        $10,100.
 
 EOIR,
        our
        wholly owned subsidiary, holds a three-year lease for its executive and
        administrative offices of approximately 5,420 square feet in Woodbridge,
        Virginia. The lease expires on September 30, 2008. EOIR leases approximately
        10,000 square feet in Spotsylvania, Virginia, where it houses its software
        development unit. The lease expires on October 31, 2009. EOIR also holds
        a
        five-year lease for 6,951 square feet in Spotsylvania, Virginia. The lease
        expires on October 15, 2010. EOIR also has several offices located in
        Fredericksburg, Virginia - one office with 1,200 square feet, with a two-year
        lease that expires on October 31, 2006, and one with 4,200 square feet, with
        a
        three-year lease that expires on June 30, 2007. Monthly lease amounts for
        these
        facilities total approximately $36,600.
 
 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.
  -9-
  **Item
        3. Legal Proceedings**
 
 *Technest
        Holdings, Inc.*
 
 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 plaintiffs are purporting to act on behalf of Technest in
        the
        context of a shareholder’s derivative suit. The action’s principal basis appears
        to be a claim that Ben Stein, a former director and Secretary of Technest,
        wrongfully claims ownership of shares of common stock that Stein agreed to
        purchase from H&H. According to H&H, these shares belong to them.
        H&H asserts sixteen causes of action. Only some make allegations against
        Technest Holdings, Inc., Michael Sheppard and Maura Marx, former officers
        of
        Technest.
  Technest,
        Mr. Sheppard and Ms. Marx believe that the claims against Technest, Mr. Sheppard
        and Ms. Marx are without merit and are vigorously defending the action.
        Technest, 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.
 
 In
        June
        2006, the court directed the parties to address the court’s continuing subject
        matter jurisdiction over Technest in the H&H matter. Technest has responded
        to the court’s direction and believes that as a result of intervening corporate
        actions, the injunctive relief sought by the plaintiff which gives rise the
        court’s subject matter jurisdiction in this case has been rendered moot, thereby
        depriving the court of continuing subject matter jurisdiction. Technest believes
        that the case as currently styled is fundamentally a dispute between H&H
        Acquisition Corp. and Ben Stein.
 
 As
        of
        September 21, 2007, Technest has not been notified of a trial date for this
        matter.
 
 On
        or
        about May 30, 2006, Deer Creek Fund LLC filed a claim for Interference with
        Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing
        against Technest, seeking unspecified monetary damages.  Deer Creek alleges
        misconduct on the part of Technest related to a proposed sale by Deer Creek
        of
        157,163 shares of Technest common stock at $7.00 per share and the applicability
        of certain selling restrictions under a registration rights agreement entered
        into between the parties. Technest believes that the allegations in this
        lawsuit are entirely without merit. Technest has been aggressively defending
        this action, and has filed an answer denying Deer Creek’s allegations and
        vigorously opposes all relief sought.  A trial date for this claim had
        been set for July 10, 2007, which had to be unexpectedly
        rescheduled.  Technest has not been notified of a new trial
        date.
 
 *EOIR
        Technologies, Inc.*
 
 Markland
        and EOIR were notified on July 11, 2005 by counsel for Greg and Mary Williams,
        former shareholders and employees of EOIR and, in the case of Mr. Williams,
        a
        former director of Markland, that the Williams’ filed a lawsuit in the
        Commonwealth of Virginia, naming EOIR and Markland as defendants, seeking
        damages in the amount of $3,000,000 regarding a number of contractual disputes
        involving the registration of shares of Markland common stock underlying
        certain
        options issued to the Williams’ in connection with the acquisition of EOIR by
        Markland and severance payments pursuant to severance agreements by and among
        the Williams’, EOIR and Markland. On August 3, 2005, EOIR and Markland filed an
        answer and a demurrer denying all liability. On November 4, 2005, the Court
        heard the demurrer filed by EOIR Technologies, Inc. and Markland Technologies,
        Inc. and denied it. On April 6, 2006, a hearing was held in the Circuit Court
        for the City of Fredericksburg, Virginia on the Williams’ motion for summary
        judgment. On May 4, 2006, the court granted the Williams’ motion for summary
        judgment with regard to liability on Count I of the Williams’ claim regarding
        severance payment and Count III of their claim regarding Markland’s failure to
        register shares of Markland’s common stock underlying their options. We have,
        and continue to assert that Count III of the Williams’ complaint does not allege
        wrongdoing by EOIR and thus, we believe that we have no liability on that
        claim.
        Count II of the claim, which seeks a declaration that the promissory notes
        issued to Mr. and Mrs. Williams in connection with the acquisition of EOIR
        by
        Markland on June 29, 2004 are in default and an acceleration of the payments
        due
        under those notes, was not addressed by the court’s order.
 
 On
        July
        27, 2006, we entered into an agreement with the Williams pursuant to which
        we
        paid them $246,525 in satisfaction of their claims for severance under Count
        I
        and agreed to pay the outstanding balance of their promissory notes, along
        with
        all accrued but unpaid interest, in satisfaction of Count II which was paid
        on
        August 10, 2006. The Williams continue to assert claims against us for
        attorney’s fees and costs on all three counts of their complaint. Count III was
        not addressed by this agreement.
  -10-
  On
        September 1, 2006, we entered into an agreement with Markland pursuant to
        which
        we agreed to indemnify Markland against any judgment for damages or attorney’s
        fees ordered by the Court pursuant to Counts I or II and Markland agreed
        to
        indemnify us against any judgment for damages or attorney’s fees ordered by the
        Court pursuant to Count III.
 
 On
        March
        21, 2007, EOIR and the Williams entered into a settlement agreement pursuant
        to
        which EOIR agreed to pay to the Williams $100,000 in 10 monthly installments
        of
        $10,000 each beginning on April 1, 2007 in exchange for the Williams to dismiss,
        with prejudice, their request for attorney’s fees against EOIR on Counts I and
        II of their motion for judgment and Count III as it pertained to
        EOIR.
 
 
 **Item
        4.
        Submission of Matters to a Vote of Security Holders**
  We
        did
        not submit any matters to a vote of security holders during the three months
        ended June 30, 2007, which is the fourth quarter of our fiscal
        year.
  -11-
 
 **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. In June 2005, we changed our fiscal year end from December 31
        to
        June 30; however, the following table sets forth the high and low closing
        bid
        quotations for our common stock as set forth on Nasdaq.com for the calendar
        years listed below:
 
 **Calendar
                  Year**
              **High**
              
              **Low****2005**First
                  Quarter
              $63.29
              
              $10.55Second
                  Quarter
              $40.08
              
              $12.66Third
                  Quarter
              $52.74
              
              $5.15Fourth
                  Quarter
              $5.50
              
              $4.50**2006**First
                  Quarter
              $11.35
              
              $4.40Second
                  Quarter
              $4.80
              
              $2.20Third
                  Quarter
              $3.52
              
              $1.60Fourth
                  Quarter
              $2.22
              
              $1.42**2007**First
                  Quarter
              $2.10
              
              $1.31Second
                  Quarter
              $1.50
              
              $0.31
  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 21, 2007, there were approximately
        318 record holders of our common stock.
 
 We
        have
        not paid any cash dividends on our common stock in the past. 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.
 
 **Issuer
        Purchases of Equity Securities**
 
 We
        did
        not make any purchases of our common stock during the three months ended
        June
        30, 2007, which is the fourth quarter of our fiscal year.
  -12-
  **Item
        6.  Management’s Discussion and Analysis**
 
 *The
        following discussion and analysis of our financial condition and results
        of
        operations for the years ending June 30, 2007 and June 30, 2006 should be
        read
        together with our financial statements and related notes included elsewhere
        in
        this annual report on Form 10-KSB.*
  *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 in the section entitled
        "Risk Factors” beginning on page 18 of this annual report on Form 10-KSB. 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 annual report
        on Form
        10-KSB, speak only as of June 30, 2007 and we undertake no obligation to
        update
        or revise the statements in light of future developments.*
  ***Recent
        Developments***
  **Sale
        of EOIR
        Technologies, Inc.**
 
 In
        May
        2007, in order to realize the value of E-OIR Technologies Inc. (“EOIR”) for the
        benefit of our shareholders, the Board of Directors adopted a plan to sell
        this
        wholly owned subsidiary of Technest Holdings, Inc. (the “Company” or
“Technest”). On September 10, 2007, Technest and  E-OIR Technologies,
        Inc., entered into a Stock Purchase Agreement with EOIR Holdings LLC, a Delaware
        limited liability company ( “LLC”), pursuant to which Technest will sell EOIR to
        LLC.  LLC is an entity formed on August 9, 2007 by The White Oak
        Group, Inc., an Atlanta, Georgia based private investment firm, for the purposes
        of facilitating this transaction.
 
 The
        sale of EOIR to LLC will be
        structured as a stock sale in which LLC will acquire all of the outstanding
        stock of EOIR in exchange for approximately $34 million in cash, $11 million
        of
        which will be paid at closing and $23 million of which will be paid upon
        the
        successful re-award to EOIR of the contract with the U.S. Army's Night Vision
        and Electronics Sensors Directorate. A majority of the contingent payment
        of $23
        million will be distributed to shareholders in the form of a cash dividend
        should it be received.
 
 Accordingly,
        in accordance with SFAS 144, we have classified EOIR’s results of operations as
        discontinued operations for all periods presented in the accompanying
        consolidated financial statements.  All debt required to be repaid
        upon the sale of EOIR has been included in the liabilities of discontinued
        operations.  Interest expense on this debt has been included in the
        net loss from discontinued operations.
 
 **Year
        ended June 30, 2007 compared with the year ended June 30,
        2006**
  **Revenues**
  Technest
        had $3,396,795 in revenues from continuing operations during the year ended
        June
        30, 2007 compared with $3,542,393 during the year ended June 30, 2006. These
        revenues were largely generated by Small Business Innovative Research Grants
        (SBIR’s) in the field of 3-dimensional imaging. We use the revenue from these
        grants to develop future potential products for our business.
 
 **Gross
        profit**
  The
        gross
        profit from continuing operations for the year ended June 30, 2007 was
        $1,276,790 or 38% of revenues. The gross profit for the year ended June 30,
        2006
        was $1,348,070 or 38% of revenues. Technest expects to expand its revenue
        base
        to include commercial product revenues and, accordingly, gross profit on
        future
        revenues may differ.
  -13-
  **Selling,
        general and administrative expenses**
  Selling,
        general and administrative expenses for the year ended June 30, 2007 were
        $3,600,562 and consisted primarily of legal and professional fees of
        approximately $401,341 and amortization of stock-based compensation related
        granted to directors and officers amounting to $1,170,432.
 
 Selling,
        general and administrative expenses for the year ended June 30, 2006 were
        $2,850,678, and consisted primarily of legal and professional fees of
        approximately $594,000 and amortization of stock-based compensation amounting
        to
        $279,428.
 
 Certain
        general and administrative expenses of the Company that are clearly associated
        with EOIR totaling approximately $726,000 and $300,000 in the years ended
        June
        30, 2007 and 2006, respectively, have been included in the net loss from
        discontinued operations.
 
  **Amortization
        of intangible assets**
  Amortization
        of intangible assets for the year ended June 30, 2007 was $324,741. Amortization
        of intangible assets for the year ended June 30, 2006 was $324,841. Amortization
        expense relates to the definite-lived intangible assets acquired in conjunction
        with Genex Technologies.
 
 **Operating
        loss**
 
 The
        operating loss for the year ended June 30, 2007 was $2,649,606. The operating
        loss for the year ended June 30, 2006 was $1,881,273.
 
 **Other
        (expenses) income**
  In
        the
        year ended June 30, 2007, Technest charged to interest expense $1,744,102,
        including $1,531,430 paid in common stock related to liquidated damages incurred
        for failure to have an effective registration statement.
 
 In
        the
        year ended June 30, 2006, Technest charged to interest expense $2,303,662,
        including $2,104,461 paid in common stock related to liquidated damages incurred
        for failure to have an effective registration statement.
 
 Derivative
        income represents the changes in the fair value of certain warrants issued
        by
        Technest on February 14, 2005. These warrants did not meet the requirements
        for
        classification as equity instruments since the Company could not conclude
        that
        the warrants were settleable in unregistered shares of its common stock.
        As a
        result, the Company was required to reflect these warrants as derivative
        liabilities on the balance sheet. Each period, the change in the fair value
        of
        the warrants was charged (credited) to the statement of operations. In the
        year
        ended June 30, 2006 changes in the fair value of the warrants recorded as
        derivative income in the statement of operations was $25,046,489. Derivative
        income had no impact of the Company’s cash flows and none of the warrants have
        been settled in cash. The Company determined the fair value of the warrants
        using the Black-Scholes option pricing model. Excluding derivative income
        would
        have resulted in pro forma net loss applicable to common shareholders of
        ($4,793,825) for the year ended June 30, 2006. Pro forma basic and diluted
        loss
        per common share would have been ($0.31) for the year ended June 30,
        2006.
 
 On
        September 30, 2005, the Company amended the terms of its Registration Rights
        Agreement such that any liquidated damages would only be payable in common
        stock. As a result of this amendment, the Company was able to conclude that
        the
        warrants could be settled in unregistered shares. Therefore, the warrants
        were
        no longer required to be recorded as derivative liabilities and there have
        been
        no additional derivative income (loss) recorded related to these warrants
        since
        that date.
 
 **Discontinued
        Operations**
 
 Revenues
        from EOIR’s operation in the
        year ended June 30, 2007 were $68,349,121 compared with $77,533,227 for the
        year
        ended June 30, 2006. Although EOIR’s order book remained strong, EOIR
        experienced a slow down in the release of orders from the Government resulting
        in lower revenue.
 
 The
        net
        loss from EOIR’s operations was $395,939 in the year ended June 30, 2007
        compared with a net loss of $625,837 for the year ended June 30,
        2006.
  -14-
  **Net
        income (loss) applicable to common shareholders**
 
 The
        net
        loss attributable to common shareholders for the year ended June 30, 2007
        was
        $4,786,696.
 
 The
        net
        income applicable to common stockholders for the year ended June 30, 2006
        was
        $20,252,664. As previously described, the net income was entirely due to
        derivative income of $25,046,489.
 
 **Liquidity
        and Capital Resources**
  **Cash
        and Working Capital**
 
 On
        June
        30, 2007, Technest had a negative working capital balance from continuing
        operations of $253,430. Net cash used in operating activities from continuing
        operations for the year ended June 30, 2007 was $2,032,613. Most of the cash
        used was attributable to a reduction in accounts payable and accruals of
        $1,498,136.
 
 Net
        cash
        used in operating activities from discontinued operations for the year ended
        June 30, 2007 was $2,052,746.  A significant portion of the cash used
        was to reduce accounts payable and accruals in the amount of
        $4,845,048.
 
 **Cash
        Used in Investing Activities**
 
 In
        the
        year ended June 30, 2007, Technest used cash of $39,609 for the acquisition
        of
        property and equipment.
 
 **Cash
        Used in Financing Activities**
 
 In
        the
        year ended June 30, 2007, $6,086,499 was used for loan repayments, primarily
        related to the EOIR seller notes. This was replaced by net borrowings of
        $9,062,809.  Debt issuance costs and loan guarantee fees paid amounted
        to $1,073,325.
  **Sources
        of Liquidity**
 
 During
        the year ended June 30, 2007, we satisfied our operating and investing cash
        requirements primarily from financing activities and cash reserves. As discussed
        elsewhere, EOIR will be sold, subject to certain conditions, with $11 million
        being payable in cash to the Company on closing and a further $23 million
        payable contingent on the re-award of the NVESD contract. There are expected
        to
        be no further cash obligations relating to discontinued operations after
        the
        sale. Our current expectation is for the sale to close prior to December
        31,
        2007.  The initial proceeds will be used to extinguish debt from Silicon
        Valley Bank, Shelter Island and the former EOIR note holders. As of June
        30,
        2007, the face value of these loans was $9,785,616. The balance of the initial
        proceeds will be used for working capital.  The decision on the
        contingent payment is also expected during fiscal 2008. EOIR has won this
        contract three times in a row and management believes that the Company is
        well
        positioned to do so again although there can be no assurances that it will
        do
        so. The Company is also expanding its efforts in commercial sales and believes
        that these activities will contribute positively in fiscal 2008. As a result
        of
        the forgoing, management believes that Technest has sufficient sources of
        liquidity to satisfy its obligations for at least the next 12
        months.
  **Commitments
        and Contingencies**
  **Facilities**
  Technest
        has a three-year lease for executive offices of approximately 2,000 square
        feet
        in Boston, Massachusetts, which expires December 31, 2009. The monthly rental
        amount for this facility is approximately $4,500. In May 2007 this facility
        was
        vacated and subleased.
  Technest
        currently also leases offices with approximately 6,848 square feet in Bethesda,
        Maryland, pursuant to a five-year lease which expires March 31, 2011. Monthly
        lease amounts for this facility total approximately $14,263, increasing annually
        by 3%. Technest’s wholly owned subsidiary, Genex Technologies, Inc. had moved
        into this space on April 1, 2006. Genex had leased offices with approximately
        6,831 square feet in Kensington, Maryland, pursuant to a five-year lease
        which
        expired on January 31, 2006, which we had been extending on a monthly basis.
        Monthly lease amounts for this facility totaled approximately
        $10,100.
  -15-
  **Legal**
  *Technest
        Holdings,
        Inc.*
 
 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 plaintiffs are purporting to act on behalf of Technest in
        the
        context of a shareholder’s derivative suit. The action’s principal basis appears
        to be a claim that Ben Stein, a former director and Secretary of Technest,
        wrongfully claims ownership of shares of common stock that Stein agreed to
        purchase from H&H. According to H&H, these shares belong to them.
        H&H asserts sixteen causes of action. Only some make allegations against
        Technest Holdings, Inc., Michael Sheppard and Maura Marx, former officers
        of
        Technest.
  Technest,
        Mr. Sheppard and Ms. Marx believe that the claims against Technest, Mr. Sheppard
        and Ms. Marx are without merit and are vigorously defending the action.
        Technest, 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.
 
 In
        June
        2006, the court directed the parties to address the court’s continuing subject
        matter jurisdiction over Technest in the H&H matter. Technest has responded
        to the court’s direction and believes that as a result of intervening corporate
        actions, the injunctive relief sought by the plaintiff which gives rise the
        court’s subject matter jurisdiction in this case has been rendered moot, thereby
        depriving the court of continuing subject matter jurisdiction. Technest believes
        that the case as currently styled is fundamentally a dispute between H&H
        Acquisition Corp. and Ben Stein.
 
 As
        of
        September 21, 2007, Technest has not been notified of a trial date for this
        matter.
 
 On
        or
        about May 30, 2006, Deer Creek Fund LLC filed a claim for Interference with
        Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing
        against Technest, seeking unspecified monetary damages.  Deer Creek alleges
        misconduct on the part of Technest related to a proposed sale by Deer Creek
        of
        157,163 shares of Technest common stock at $7.00 per share and the applicability
        of certain selling restrictions under a registration rights agreement entered
        into between the parties. Technest believes that the allegations in this
        lawsuit are entirely without merit. Technest has been aggressively defending
        this action, and has filed an answer denying Deer Creek’s allegations and
        vigorously opposes all relief sought.  A trial date for this claim had
        been set for July 10, 2007, which had to be unexpectedly
        rescheduled.  Technest has not been notified of a new trial
        date.
 
 *EOIR
        Technologies, Inc.*
 
 Markland
        and EOIR were notified on July 11, 2005 by counsel for Greg and Mary Williams,
        former shareholders and employees of EOIR and, in the case of Mr. Williams,
        a
        former director of Markland, that the Williams’ filed a lawsuit in the
        Commonwealth of Virginia, naming EOIR and Markland as defendants, seeking
        damages in the amount of $3,000,000 regarding a number of contractual disputes
        involving the registration of shares of Markland common stock underlying
        certain
        options issued to the Williams’ in connection with the acquisition of EOIR by
        Markland and severance payments pursuant to severance agreements by and among
        the Williams’, EOIR and Markland. On August 3, 2005, EOIR and Markland filed an
        answer and a demurrer denying all liability. On November 4, 2005, the Court
        heard the demurrer filed by EOIR Technologies, Inc. and Markland Technologies,
        Inc. and denied it. On April 6, 2006, a hearing was held in the Circuit Court
        for the City of Fredericksburg, Virginia on the Williams’ motion for summary
        judgment. On May 4, 2006, the court granted the Williams’ motion for summary
        judgment with regard to liability on Count I of the Williams’ claim regarding
        severance payment and Count III of their claim regarding Markland’s failure to
        register shares of Markland’s common stock underlying their options. We have,
        and continue to assert that Count III of the Williams’ complaint does not allege
        wrongdoing by EOIR and thus, we believe that we have no liability on that
        claim.
        Count II of the claim, which seeks a declaration that the promissory notes
        issued to Mr. and Mrs. Williams in connection with the acquisition of EOIR
        by
        Markland on June 29, 2004 are in default and an acceleration of the payments
        due
        under those notes, was not addressed by the court’s order.
 
 On
        July
        27, 2006, we entered into an agreement with the Williams pursuant to which
        we
        paid them $246,525 in satisfaction of their claims for severance under Count
        I
        and agreed to pay the outstanding balance of their promissory notes, along
        with
        all accrued but unpaid interest, in satisfaction of Count II which was paid
        on
        August 10, 2006. The Williams continue to assert claims against us for
        attorney’s fees and costs on all three counts of their complaint. Count III was
        not addressed by this agreement.
  -16-
  On
        September 1, 2006, we entered into an agreement with Markland pursuant to
        which
        we agreed to indemnify Markland against any judgment for damages or attorney’s
        fees ordered by the Court pursuant to Counts I or II and Markland agreed
        to
        indemnify us against any judgment for damages or attorney’s fees ordered by the
        Court pursuant to Count III.
 
 On
        March
        21, 2007, EOIR and the Williams entered into a settlement agreement pursuant
        to
        which EOIR agreed to pay to the Williams $100,000 in 10 monthly installments
        of
        $10,000 each beginning on April 1, 2007 in exchange for the Williams to dismiss,
        with prejudice, their request for attorney’s fees against EOIR on Counts I and
        II of their motion for judgment and Count III as it pertained to
        EOIR.
 
 **Off
        Balance Sheet Arrangements**
  We
        have
        no off-balance sheet arrangements that have or are reasonably likely to have
        a
        current or future effect on our financial condition, changes in financial
        condition, revenues or expenses, results of operations, liquidity, capital
        expenditures or capital resources that is material to stockholders. As of
        June
        30, 2007, Technest had warrants outstanding for the purchase of 649,286 shares
        of common stock. However, due to the net share settlement provisions of these
        warrants, Technest does not expect any material cash proceeds upon
        exercise.
  **Effect
        of inflation and changes in prices**
  Management
        does not believe that inflation and changes in price will have a material
        effect
        on operations.
  **Critical
        Accounting Policies**
  The
        preparation of Technest's financial statements and related disclosures in
        conformity with accounting principles generally accepted in the United States
        of
        America requires management to make estimates and assumptions that affect
        the
        reported amounts of assets and liabilities, and the disclosure of contingent
        assets and liabilities as of the date of the financial statements and the
        amounts of revenues and expenses recorded during the reporting periods. We
        base
        our estimates on historical experience, where applicable, and other assumptions
        that we believe are reasonable under the circumstances. Actual results may
        differ from our estimates under different assumptions or
        conditions.
  The
        sections below present information about the nature of and rationale for
        our
        critical accounting policies.
  **Principles
        of Consolidation and Discontinued Operation**
  Our
        consolidated financial statements for the periods presented include the accounts
        of Technest, and our wholly-owned subsidiary, Genex Technologies, Inc. We
        have
        eliminated all significant inter-company balances and transactions.
 
 In
        May
        2007,  the Company’s Board of Directors approved a plan to divest the
        operations of our subsidiary, EOIR Technologies, Inc.  In accordance
        with SFAS No. 144, the assets, liabilities and results of operations of this
        subsidiary have been classified as a discontinued operation for all periods
        presented in the accompanying consolidated financial statements.
 
 **Concentrations**
  Statement
        of Financial Accounting Standards 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.
 
 Technest
        has cash balances in banks in excess of the maximum amount insured by the
        FDIC
        as of June 30, 2007.
 
 Substantially
        all of Technest revenues are currently generated from individual customers
        within the Department of Defense and the National Institute for Health under
        Small Business Innovative Research contracts.
 
 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.
  -17-
  We
        are
        subject to concentrations of credit risk because the majority of our revenues
        and accounts receivable are derived from the U.S. government, including the
        Department of Defense, who is not required to provide collateral for amounts
        owed to us. We do not believe that we are subject to any unusual credit risks,
        other than the normal level of risk attendant to operating our
        business.
  **Impairment
        of Goodwill**
  In
        accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we
        review
        goodwill for impairment annually, or more frequently if an event occurs or
        circumstances change that would more likely than not reduce the fair value
        of
        our business enterprise below its carrying value. The impairment test requires
        us to estimate the fair value of our overall business enterprise down to
        the
        reporting unit level. We identify and record our intangible assets at the
        reporting unit level and also conduct our impairment tests at the reporting
        unit
        level as required by paragraphs 30-31 of SFAS No. 142, “Goodwill and Other
        Intangible Assets”.
  We
        estimate fair value using either a discounted cash flows model, or an approach
        using market comparables, to determine fair value. Under the discounted cash
        flows method, we utilize estimated long-term revenue and cash flow forecasts
        developed as part of our planning process, together with an applicable discount
        rate, to determine fair value. Under the market approach, fair value is
        determined by comparing us to similar businesses (or guideline companies).
        Selection of guideline companies and market ratios require management's
        judgment. The use of different assumptions within our discounted cash flows
        model or within our market approach model when determining fair value could
        result in different valuations for goodwill.
  **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.
 
 Definite-lived
        intangible assets acquired from Genex represent costs of outside legal counsel
        related to obtaining new patents.  Patent costs are amortized over the
        legal life of the patents, generally fifteen 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 3D imaging, intelligent surveillance and 3D facial
        recognition technologies.
  Technest
        also acquired commercialized technology relating to 3D facial recognition
        cameras and contracts and customer relationships from the application of
        3D
        imaging technologies to breast cancer research for the National Institute
        of
        Health and disposable sensors and 3D face mapping for the Department of Defense.
        The amounts assigned to definite-lived intangible assets were determined
        by
        management based on a number of factors including an independent purchase
        price
        allocation analysis. These assets have an estimated useful life of five
        years.
 
 Contracts
        and Customer relationships acquired as a result of business combinations
        have
        been valued by management considering various factors including independent
        appraisals done by valuation and financial advisory firms in accordance with
        SFAS No. 141, “Business Combinations”, SFAS No. 142, “Goodwill and Other
        Intangible Assets”, FASB Concepts Statement Number 7 and Emerging Issues Task
        Force (“EITF”) Issue No. 02-17, “Recognition of Customer Relationship Assets
        Acquired in a Business Combination”. These assets are being amortized over the
        contractual terms of the existing contracts plus anticipated contract renewals
        in accordance with EITF Issue No. 02-17.
  **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, including amortizable
        intangible assets, may not be recoverable. We recognize an impairment loss
        when
        the carrying value of an asset exceeds expected cash flows. Accordingly,
        when
        indicators or impairment of assets are present, we evaluate the carrying
        value
        of such assets in relation to the operating performance and future undiscounted
        cash flows of the underlying business. Our policy is to record an impairment
        loss when we determine that the carrying amount of the asset may not be
        recoverable. No impairment charges were recorded in any of the periods
        presented.
  -18-
  **Derivative
        Instruments**
 
 Technest
        generally does not use derivative instruments to hedge exposures to cash-flow
        or
        market risks. However, certain warrants to purchase common stock that are
        indexed to the Company's common stock are classified as liabilities when
        the
        Company is not permitted to settle the instruments in unregistered shares.
        In
        such instances, in accordance with EITF Issue No. 00-19, net-cash settlement
        is
        assumed for financial reporting purposes, even when the terms of the underlying
        contracts do not provide for net-cash settlement. Such financial instruments
        are
        initially recorded at relative fair value with subsequent changes in fair
        value
        charged (credited) to operations in each reporting period. If the Company
        subsequently achieves the ability to settle the instruments in unregistered
        shares, the instruments are reclassified to equity at their fair
        value.
  **Revenue
        Recognition**
  Revenues
        from products are recognized when the following criteria are met: (1) there
        is
        persuasive evidence of an arrangement, such as contracts, purchase orders
        or
        written requests; (2) delivery has been completed and no significant obligations
        remain; (3) price to the customer is fixed or determinable; and (4) collection
        is probable.
  Revenues
        from time and materials contracts are recognized as costs are incurred and
        billed. Allowable costs incurred but not billed as of a period end are recorded
        as work in process.
  Revenues
        from firm fixed price contracts are recognized on the percentage-of-completion
        method, either measured based on the proportion of costs recorded to date
        on the
        contract to total estimated contract costs or measured based on the proportion
        of labor hours expended to date on the contract to total estimated contract
        labor hours, as specified in the contract.
  Provisions
        for estimated losses on all contracts are made in the period in which such
        losses become known. Changes in job performance, job conditions, and estimated
        profitability, including those arising from contract penalty provisions,
        and
        final contract settlements may result in revisions to costs and income and
        are
        recognized in the period in which the revisions are determined.
 
 **Impact
        of Recently Issued Accounting Standards**
 
 In
        July 2006, the FASB issued Interpretation No. 48, “Accounting for
        Uncertain Tax Positions”, an Interpretation of SFAS No. 109 (“FIN 48”),
        which clarifies the criteria for recognition and measurement of benefits
        from
        uncertain tax positions. Under FIN 48, an entity should recognize a tax benefit
        when it is “more-likely-than-not”, based on the technical merits, that the
        position would be sustained upon examination by a taxing authority. The amount
        to be recognized, given the “more likely than not” threshold was passed, should
        be measured as the largest amount of tax benefit that is greater than 50
        percent
        likely of being realized upon ultimate settlement with a taxing authority
        that
        has full knowledge of all relevant information. Furthermore, any change in
        the
        recognition, derecognition or measurement of a tax position should be recognized
        in the interim period in which the change occurs. The Company expects to
        adopt
        FIN 48 as of July 1, 2007, and any change in net assets as a result of
        applying the Interpretation will be recognized as an adjustment to retained
        earnings on that date. The Company does not expect the adoption of FIN 48
        to
        have a material effect on the consolidated financial position or results
        of
        operations.
  In
        September 2006, the FASB issued SFAS No. 157, “Fair Value
        Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework
        for measuring fair value in generally accepted accounting principles, and
        expands disclosures about fair value measurements. This statement is effective
        for financial statements issued for fiscal years beginning after November
        15,
        2007. The Company is currently evaluating the impact of SFAS 157 on the
        consolidated financial statements.
 
 In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
        108”). SAB 108 considers the effects of prior year misstatements when
        quantifying misstatements in current year financial statements. It is effective
        for fiscal years ending after November 15, 2006. The adoption of SAB 108
        did not
        have a material impact on the Company’s consolidated financial
        statements.
  -19-
  On
        December 15, 2006 the Securities and Exchange Commission announced that it
        is has modified reporting requirements for smaller public companies under
        Section 404 of the Sarbanes-Oxley Act (SOX 404) of 2002. The Commission
        granted relief to smaller public companies by extending the date by which
        non-accelerated filers must start providing a report by management assessing
        the
        effectiveness of the company's internal control over financial reporting.
        The
        compliance date for these companies was moved from fiscal years ending on
        or
        after July 15, 2007, to fiscal years ending on or after December 15,
        2007. The Commission also extended the date by which non-accelerated filers
        must
        begin to comply with the Section 404(b) requirement to provide an auditor's
        attestation report on internal control over financial reporting in their
        annual
        reports. This deadline was moved to the first annual report for a fiscal
        year
        ending on or after December 15, 2008. The extension requires all
        non-accelerated filers to complete only management's portion of the internal
        control requirements in their first year of compliance with SOX 404. This
        modification is intended to provide cost savings and efficiency opportunities
        to
        smaller public companies and to assist them as they prepare to comply fully
        with
        SOX 404 reporting requirements. The extension will provide these issuers
        and
        their auditors an additional year to consider, and adapt to, the changes
        in
        Auditing Standard No. 5 that the Public Company Accounting Oversight Board
        has issued, as well as the guidance for management the Commission has issued,
        to
        improve the efficiency of the Section 404(b) auditor attestation report
        process.
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities”, including an amendment of FASB
        Statement No. 115 (“SFAS 159”). This pronouncement permits entities to choose to
        measure many financial instruments and certain other items at fair value
        that
        are not currently required to be measured at fair value and to recognize
        the
        resulting gains and losses in the results of operations. SFAS 159 is effective
        as of the beginning of an entity’s first fiscal year that begins after November
        15, 2007. The Company is currently evaluating the impact of SFAS 159 on the
        Company’s consolidated financial statements, if any.
  -20-
  **RISK
        FACTORS**
  *Any
        investment in our common stock involves a high degree of risk. You should
        consider carefully the risks described below and elsewhere in this report
        and
        the information under “Note Regarding Forward-Looking Statements,” before you
        decide to buy our common stock. If any of the following risks, or other risks
        not presently known to us or that we currently believe are not material,
        develop
        into an actual event, then our business, financial condition and results
        of
        operations could be adversely affected. In that case, 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 Our Business, Results Of Operations And Financial
        Condition**
 
 **We
        have a limited operating history. As a result, it may be difficult to evaluate
        our prospects for profitable operations.**
  Technest
        has a limited operating history on which a potential investor may base an
        evaluation of us, our prospects and our ability to operate 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. As of June 30,
        2007,
        our accumulated deficit was $20,224,635. 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 cannot obtain additional capital required to fund our operations and finance
        the growth our business, operating results and financial condition may suffer
        and the price of our stock may decline.**
  The
        development of our technologies will require additional capital, and our
        business plan is to acquire additional revenue-producing assets. Although
        we
        believe that we have sufficient sources of liquidity to satisfy our obligations
        for at least the next 12 months, we may be unable to obtain additional funds,
        if
        needed, in a timely manner or on acceptable terms, which may render us unable
        to
        fund our operations or expand our business. If we are unable to obtain capital
        when needed, we may have to restructure our business or delay or abandon
        our
        development and expansion plans. If this occurs, the price of our common
        stock
        may decline and you may lose part or all of your investment.
  We
        will
        have ongoing capital needs as we expand our business.  If we raise
        additional funds through the sale of equity or convertible securities, your
        ownership percentage of our common stock will be reduced. In addition, these
        transactions may dilute the value of our common stock.  We may have to
        issue securities that have rights, preferences and privileges senior to our
        common stock.  The terms of any additional indebtedness may include
        restrictive financial and operating covenants that would limit our ability
        to
        compete and expand. Although we have been successful in the past in obtaining
        financing for working capital and acquisitions, there can be no assurance
        that
        we will be able to obtain the additional financing we may need to fund our
        business, or that such financing will be available on acceptable
        terms.
 
 **Our
        ability to service our debt and meet our cash requirements depends on many
        factors, some of which are beyond our control.**
  Although
        there can be no assurances, we believe that the level of borrowings available
        to
        us, combined with cash provided by our operations, will be sufficient to
        provide
        for our cash requirements for the foreseeable future. However, our ability
        to
        satisfy our obligations will depend on our future operating performance and
        financial results, which will be subject, in part, to factors beyond our
        control, including interest rates and general economic, financial and business
        conditions. If we are unable to generate sufficient cash flow to service
        our
        debt, we may be required to:
  -21-
 
 ·
              refinance
                  all or a portion of our debt;
  ·
              obtain
                  additional financing;
  ·
              sell
                  some of our assets or operations;
  ·
              reduce
                  or delay capital expenditures and/or acquisitions;
                  or
  ·
              revise
                  or delay our strategic plans.
  If
        we are
        required to take any of these actions, it could have a material adverse effect
        on our business, financial condition, results of operations and liquidity.
        In
        addition, we cannot assure you that we would be able to take any of these
        actions, that these actions would enable us to continue to satisfy our capital
        requirements or that these actions would be permitted under the terms of
        our
        credit facilities.
  **The
        covenants in our term loan facility with Silicon Valley Bank and those in
        our
        debenture with Shelter Island Opportunity Fund, LLC impose restrictions that
        may
        limit our ability and the ability of our subsidiaries to take certain actions
        and our failure to comply with these covenants could result in an acceleration
        of our indebtedness.**
  The
        covenants in our term loan facility with Silicon Valley Bank restrict our
        ability and the ability of our subsidiaries to, among other things:
  ·
              sell,
                  transfer or lease certain parts of our business and property or
                  that of
                  our subsidiaries;
  ·
              incur
                  additional debt;
  ·
              pay
                  dividends and make other restricted payments and restricts our
                  subsidiaries from doing the same;
  ·
              make
                  certain investments, loans and
                  advances;
  ·
              create
                  or permit certain liens;
  ·
              enter
                  into transactions with affiliates;
  ·
              engage
                  in certain business activities; and
  ·
              consolidate
                  or merge or sell all or substantially all of our assets or those
                  of our
                  subsidiaries.
  Our
        debenture with Shelter Island Opportunity Fund, LLC contains similar
        covenants.
 
 Our
        term
        loan facility contains other covenants customary for credit facilities of
        this
        nature, including requiring us to meet specified financial ratios and financial
        tests. Our ability to borrow under our term loan facility will depend upon
        satisfaction of these covenants. Events beyond our control can affect our
        ability to meet those covenants.
 
 If
        we are
        unable to meet the terms of our financial covenants, or if we violate any
        of
        these covenants, a default could occur under these agreements. A default,
        if not
        waived by our lenders, could result in the acceleration of our outstanding
        indebtedness and cause our debt to become immediately due and payable. If
        acceleration occurs, we would not be able to repay our debt, and it is unlikely
        that we would be able to borrow sufficient funds to refinance our debt. Even
        if
        new financing is made available to us, it may not be on terms acceptable
        to
        us.
  -22-
  **Our
        credit facilities with Silicon Valley Bank are based on variable rates of
        interest, which could result in higher interest expenses in the event of
        an
        increase in interest rates.**
  The
        interest rate that we pay on our credit facilities with Silicon Valley Bank
        depend on the Bank’s prime rate. This increases our exposure to fluctuations in
        market interest rates. If the Bank’s prime rate rises, the interest rate on our
        credit facilities also may increase. Therefore, an increase in the Bank’s prime
        rate may increase our interest payment obligations and have a negative effect
        on
        our cash flow and financial position.
 
  **Future
        acquisitions of other companies, if any, may disrupt our business and result
        in
        additional expenses, which could harm our business.**
  We
        have
        made significant acquisitions in the past, and we plan to continue to review
        potential acquisition candidates, and our business plan includes building
        our
        business through strategic acquisitions. However, acceptable acquisition
        candidates may not be available in the future or may not be available on
        terms
        and conditions acceptable to us.
  Acquisitions
        involve numerous risks including among others, difficulties and expenses
        incurred in the consummation of acquisitions and the assimilation of the
        operations, personnel, and services and products of the acquired companies.
        Additional risks associated with acquisitions include the difficulties of
        operating new businesses, the diversion of management's attention from other
        business concerns and the potential loss of key employees of the acquired
        company. If we do not successfully integrate the businesses we may acquire
        in
        the future, our business will suffer.
  **Our
        business may suffer if we cannot protect our proprietary
        technology.**
  Our
        ability to compete depends significantly upon our patents, our trade secrets,
        our source code and our other proprietary technology.  Any misappropriation
        of our technology or the development of competing technology could seriously
        harm our competitive position, which could lead to a substantial reduction
        in
        revenue.
  The
        steps
        we have taken to protect our technology may be inadequate to prevent others
        from
        using what we regard as our technology to compete with us. Our patents could
        be
        challenged, invalidated or circumvented, in which case the rights we have
        under
        our patents could provide no competitive advantages. Existing trade secrets,
        copyright and trademark laws offer only limited protection. In addition,
        the
        laws of some foreign countries do not protect our proprietary technology
        to the
        same extent as the laws of the United States, which could increase the
        likelihood of misappropriation.  Furthermore, other companies could
        independently develop similar or superior technology without violating our
        intellectual property rights.
 
 If
        we
        resort to legal proceedings to enforce our intellectual property rights,
        the
        proceedings could be burdensome, disruptive and expensive, distract the
        attention of management, and there can be no assurance that we would
        prevail.
  **Claims
        by others that we infringe their intellectual property rights could increase
        our
        expenses and delay the development of our business. As a result, our business
        and financial condition could be harmed.**
  Our
        industries are characterized by the existence of a large number of patents
        and
        frequent claims and related litigation regarding patent and other intellectual
        property rights. We cannot be certain that our products do not and will not
        infringe issued patents, patents that may be issued in the future, or other
        intellectual property rights of others.
 
 We
        do not
        conduct exhaustive patent searches to determine whether the technology used
        in
        our products infringes patents held by third parties. In addition, product
        development is inherently uncertain in a rapidly evolving technological
        environment in which there may be numerous patent applications pending, many
        of
        which are confidential when filed, with regard to similar
        technologies.
  We
        may
        face claims by third parties that our products or technology infringe their
        patents or other intellectual property rights. Any claim of infringement
        could
        cause us to incur substantial costs defending against the claim, even if
        the
        claim is invalid, and could distract the attention of our management. If
        any of
        our products are found to violate third-party proprietary rights, we may
        be
        required to pay substantial damages. In addition, we may be required to
        re-engineer our products or obtain licenses from third parties to continue
        to
        offer our products. Any efforts to re-engineer our products or obtain licenses
        on commercially reasonable terms may not be successful, which would prevent
        us
        from selling our products, and, in any case, could substantially increase
        our
        costs and have a material adverse effect on our business, financial condition
        and results of operations.
  -23-
  **Fluctuations
        in our quarterly revenue and results of operations could depress the market
        price of our common stock.**
  Our
        future net sales and results of operations are likely to vary significantly
        from
        quarter to quarter due to a number of factors, many of which are outside
        our
        control. Accordingly, you should not rely on quarter-to-quarter comparisons
        of
        our results of operations as an indication of future performance. It is possible
        that our revenue or results of operations in a quarter will fall below the
        expectations of securities analysts or investors. If this occurs, the market
        price of our common stock could fall significantly. Our results of operations
        in
        any quarter can fluctuate for many reasons, including:
  ·
              timing
                  of orders from our largest customers - the DOD, Homeland Security
                  and various INTEL;
  ·
              our
                  ability to perform under contracts and manufacture, test and deliver
                  products in a timely and cost-effective
                  manner;
  ·
              our
                  success in winning competitions for
                  orders;
  ·
              the
                  timing of new product introductions by us or our
                  competitors;
  ·
              the
                  mix of products we sell;
  ·
              competitive
                  pricing pressures; and
  ·
              general
                  economic climate.
 
 A
        large
        portion of our expenses, including expenses for facilities, equipment, and
        personnel, are relatively fixed. Accordingly, if our revenues decline or
        do not
        grow as much as we anticipate, we might be unable to maintain or improve
        our
        operating margins. Any failure to achieve anticipated revenues could therefore
        significantly harm our operating results for a particular fiscal
        period.
  **Risks
        related to the Stock Purchase Agreement for the sale of
        EOIR**
  **We
        will incur significant costs in connection with the sale of EOIR, whether
        or not
        we complete it.**
  We
        expect
        to incur significant costs related to the sale of EOIR.  These
        expenses include financial advisory, legal and accounting fees and expenses,
        severance and employee benefit related expenses, filing fees, printing expenses
        and other related charges. We may also incur additional unanticipated expenses
        in connection with the transaction.  A portion of the costs related to
        the sale, such as legal and accounting fees, will be incurred regardless
        of
        whether the transaction is completed.  These expenses will reduce the
        assets of Technest will have to operate its business after the
        sale.
  **Because
        our revenues depend heavily on EOIR, the sale of this subsidiary will have
        a
        negative impact on our operating results.**
  Virtually
        all of the Company’s revenues have been derived from EOIR’s contract with the
        United States Army Night Vision and Electronic Sensors
        Directorate.  EOIR contributed approximately $68,349,121 and
        $77,533,227 in revenues in fiscal 2007 and 2006, respectively.  Thus,
        the sale of EOIR will have an adverse effect on our revenues and cash flow
        from
        operations.
  **EOIR’s
        contract with the United States Army Night Vision And Electronic Sensors
        Directorate expires in January 2008. EOIR is in the “re-compete” process. If
        EOIR is not awarded a new contract, Technest will not receive the $23,000,000
        contingent purchase price under the Stock Purchase
        Agreement.**
  The
        payment of $23,000,000 of the purchase price being paid for EOIR is payable
        only
        upon the award to EOIR of the follow-on NVESD contract.  Although the
        Stock Purchase Agreement requires the acquiror to operate EOIR in a commercially
        reasonable manner post-closing which includes applying adequate and appropriate
        resources commensurate with previous efforts by EOIR to win award of the
        NVESD,
        there is no guarantee that EOIR will be awarded the follow-on
        contract.  It is also unclear what impact, if any, the sale of EOIR to
        the acquiror will have on EOIR’s ability to win the follow-on
        contract.
  -24-
  Although
        the U.S. Army has not announced the evaluation criteria for the replacement
        contract, there are several factors that are likely to be considered during
        the
        re-compete process, such as EOIR’s ability to do the work or find subcontractors
        that can do the work; EOIR’s competitive pricing; EOIR’s reputation, the
        Government’s prior experience with EOIR’s work; EOIR’s competition; changes in
        Government programs or requirements; budgetary priorities; changes in fiscal
        policies; curtailment of the Government’s use of technology solutions firms; new
        contract requirements; and the government’s need for a diverse contracting
        base.  If EOIR is not able to satisfy the Government’s requirements,
        it may not be awarded a new contract and Technest may not receive the contingent
        portion of the purchase price to be paid in the transaction.
  **The
        Stock Purchase Agreement limits Technest's ability to pursue alternatives
        to the
        sale.**
  The
        Stock
        Purchase Agreement contains provisions that make it more difficult for Technest
        to sell EOIR to a party other than the acquiror.  These provisions
        include the general prohibition on Technest soliciting any acquisition proposal
        or offer for a competing transaction, the requirement that Technest pay a
        termination fee of $1,450,000 if the Stock Purchase Agreement is terminated
        in
        specified circumstances and the requirement that Technest’s board of directors
        not withdraw or change its recommendation to the stockholders, except in
        certain
        specified circumstances.
  These
        provisions might discourage a third party that might have an interest in
        acquiring EOIR from considering or proposing that acquisition, even if that
        party were prepared to pay consideration with a higher per share market price
        than the current proposed sale consideration. Furthermore, the termination
        fee
        may result in a potential competing acquiror proposing to pay a lower per
        share
        price to acquire EOIR than it might otherwise have proposed to pay. The payment
        of the termination fee could also have an adverse effect on Technest's financial
        condition.
  **Certain
        directors and executive officers of Technest have interests in the sale that
        may
        be different from, or in addition to, the interests of Technest
        stockholders.**
  Some
        directors and executive officers of Technest have interests in the sale that
        may
        be different from, or in addition to, the interests of Technest stockholders.
        These interests include, among other things, payments in connection with
        employment agreements and the right to continued indemnification and insurance
        coverage by the Company for acts or omissions occurring prior to the sale.
        As a
        result of these interests, these directors and officers could be more likely
        to
        recommend a vote in favor of approval of the sale than if they did not hold
        these interests, and may have reasons for doing so that are not the same
        as the
        interests of other Technest stockholders.
  **Failure
        to complete the sale could negatively impact Technest's stock price and future
        business and operations.**
  If
        the
        sale is not completed for any reason, Technest may be subject to a number
        of
        material risks, including the following:
  ·
              Technest
                  may be required to pay the acquiror a termination fee of up to
                  $1,450,000;
 ·
              the
                  price of Technest common stock may decline to the extent that the
                  current
                  market price of Technest common stock reflects an assumption that
                  the sale
                  will be completed; and
 ·
              Technest
                  must pay its accrued costs related to the sale, such as legal and
                  accounting fees, even if the sale is not
                  completed.
  **Risks
        Related to EOIR Contracting with the United States
        Government**
 
 **EOIR’s
        contract with the United States Army Night Vision and Electronic Sensors
        Directorate expires in January 2008. EOIR is in the “re-compete” process. If
        EOIR is not awarded a new contract, its revenues would decrease significantly
        and its financial condition, as well as ours, would be adversely
        affected.**
 
 EOIR
        has
        a contract with the United States Army Night Vision and Electronic Sensors
        Directorate that may provide for revenues of up to approximately $406 million
        (including revenue already recognized) depending upon the U.S. Army's needs
        of
        which our subsidiary, EOIR, recognized in excess of approximately $68 million
        in
        revenues for the year ended June 30, 2007 .This contract expires in January
        2008
        (with deliveries under the contract allowed until January 2009); it was recently
        extended for six months - the original contract was to expire in July 2007.
        We
        anticipate that the U.S. Army will competitively award a replacement contract.
        We will expend substantial cost and managerial time and effort to prepare
        for
        the bid and proposal for this new contract. Although we believe that it is
        likely that EOIR will be awarded a new contract, if EOIR is not awarded a
        new
        contract, its revenues would significantly decrease and its financial condition
        as well as ours could be adversely affected.
  -25-
  Although
        the U.S. Army has not announced the evaluation criteria for the replacement
        contract, there are several factors that are likely to be considered during
        the
        re-compete process, such as EOIR’s ability to do the work or find subcontractors
        that can do the work; EOIR’s competitive pricing; EOIR’s reputation, the
        Government’s prior experience with EOIR’s work; EOIR’s competition; changes in
        Government programs or requirements; budgetary priorities; changes in fiscal
        policies; curtailment of the Government’s use of technology solutions firms; new
        contract requirements; and the government’s need for a diverse contracting base.
        If EOIR is not able to satisfy the Government’s requirements, EOIR may not be
        awarded a new contract.
 
 **EOIR’s
        largest customers are the DOD, Homeland Security, and various other INTEL
        whose
        operations are subject to unique political and budgetary constraints, involve
        competitive bidding, and EOIR’s contacts with these customers may be subject to
        cancellation with or without penalty, which may produce volatility in earnings
        and revenue.**
  EOIR’s
        largest customers are the DOD, Homeland Security, and various other INTEL.
        Due
        to political and budgetary processes and other scheduling delays that may
        frequently occur relating to the contract or bidding process, some government
        agency orders may be canceled or delayed, and the receipt of revenues or
        payments may be substantially delayed. This irregular and unpredictable revenue
        stream makes it difficult for our business to operate smoothly. Obtaining
        contracts from government agencies is challenging, and government contracts
        often include provisions that are not standard in private commercial
        transactions. For example, government contracts may:
 
 ·
              include
                  provisions that allow the government agency to terminate the contract
                  without penalty under some
                  circumstances;
  ·
              be
                  subject to purchasing decisions of agencies that are subject to
                  political
                  influence;
  ·
              contain
                  onerous procurement procedures; and
  ·
              be
                  subject to cancellation if government funding becomes
                  unavailable.
 
 In
        addition, federal government agencies routinely audit government contracts.
        These agencies review a contractor's performance on its contract, pricing
        practices, cost structure and compliance with applicable laws, regulations
        and
        standards. These audits may occur several years after completion of the audited
        work. An audit could result in a substantial adjustment to revenues because
        EOIR
        would not be reimbursed for any costs improperly allocated to a specific
        contract, and EOIR would be forced to refund any improper costs already
        reimbursed. If a government audit uncovers improper or illegal activities,
        EOIR
        may be subject to civil and criminal penalties and administrative sanctions,
        including termination of contracts forfeiture of profits, suspension of
        payments, fines and suspension or debarment from doing business with federal
        government agencies. In addition, EOIR’s reputation could be harmed if
        allegations of impropriety were made against EOIR.
 
 **EOIR’s
        business could be adversely affected by changes in budgetary priorities of
        the
        Government.**
 
 Because
        EOIR derives a substantial majority of its revenue from contracts with the
        Government, we believe that the success and development of its business will
        continue to depend on its successful participation in Government contract
        programs. Changes in Government budgetary priorities could directly affect
        its
        financial performance. A significant decline in government expenditures,
        or a
        shift of expenditures away from programs that its support, or a change in
        Government contracting policies, could cause Government agencies to reduce
        their
        purchases under contracts, to exercise their right to terminate contracts
        at any
        time without penalty or not to exercise options to renew contracts. Any such
        actions could cause actual results to differ materially from those anticipated.
        Among the factors that could seriously affect EOIR’s Government contracting
        business are:
  ·
              changes
                  in Government programs or
                  requirements;
  ·
              budgetary
                  priorities limiting or delaying Government spending generally,
                  or specific
                  departments or agencies in particular, and changes in fiscal policies
                  or
                  available funding, including potential Governmental shutdowns (as
                  occurred
                  during the Government’s 1996 fiscal
                  year);
  ·
              curtailment
                  of the Government’s use of technology solutions
                  firms.
  -26-
  **EOIR’s
        Government contracts may be terminated by the Government at any time and
        may
        contain other provisions permitting the Government not to continue with contract
        performance. If lost contracts are not replaced, EOIR’s operating results may
        differ materially from those anticipated.**
  EOIR
        derives substantially all of its revenue from Government contracts that
        typically span one or more base years and one or more option years. The option
        periods typically cover more than half of the contract’s potential duration.
        Government agencies generally have the right not to exercise these option
        periods. In addition, EOIR’s contracts typically also contain provisions
        permitting a government client to terminate the contract for its convenience.
        A
        decision not to exercise option periods or to terminate contracts could result
        in significant revenue shortfalls from those anticipated.
 
 **EOIR’s
        Government contracts contain numerous provisions that are unfavorable to
        EOIR.**
  Government
        contracts, including EOIR’s, contain provisions and are subject to laws and
        regulations that give the Government rights and remedies, some of which are
        not
        typically found in commercial contracts, including allowing the Government
        to:
  ·
              
              cancel
                  multi-year contracts and related orders if funds for contract performance
                  for any subsequent year become
                  unavailable;
  ·
              
              claim
                  rights in systems and software developed by
                  EOIR;
  ·
              
              suspend
                  or debar EOIR from doing business with the Government or with a
                  Government
                  agency, impose fines and penalties and subject EOIR to criminal
                  prosecution; and
  ·
              
              control
                  or prohibit the export of data and
                  technology.
  If
        the
        Government terminates any of EOIR’s contracts for convenience, EOIR may recover
        only its incurred or committed costs, settlement expenses and profit on work
        completed prior to the termination. If the Government terminates any of its
        contracts for default, EOIR may be unable to recover even those amounts,
        and
        instead may be liable for excess costs incurred by the Government in procuring
        undelivered items and services from another source. Depending on the value
        of
        the particular contract, that type of termination could cause EOIR’s actual
        results to differ materially from those anticipated. EOIR’s Government contracts
        also contain organizational conflict of interest clauses that limit EOIR’s
        ability to compete for certain related follow-on contracts. For example,
        when
        EOIR works on the design of a particular system, EOIR may be precluded from
        competing for the contract to install that system. As EOIR grows its business,
        EOIR expects to experience organizational conflicts of interest more frequently.
        Depending upon the value of the matters affected by an organizational conflict
        of interest issue that precludes EOIR’s participation in a program or contract
        could cause its actual results to differ materially from those
        anticipated.
 
 **EOIR’s
        business may suffer if EOIR or its employees are unable to obtain the security
        clearances or other qualifications it or they need to perform services for
        its
        clients.**
  Many
        of
        EOIR’s Government contracts require EOIR to have security clearances and employ
        personnel with specified levels of education, work experience and security
        clearances. High-level security clearances can be difficult and time-consuming
        to obtain. If EOIR or its employees lose or are unable to obtain necessary
        security clearances, EOIR may not be able to win new business and its existing
        clients could terminate their contracts with EOIR or decide not to renew
        them.
        To the extent EOIR cannot obtain or maintain the required security clearances
        for its employees working on a particular contract, EOIR may not derive the
        revenue anticipated from the contract, which could cause its results to differ
        materially from those anticipated.
  -27-
  **EOIR’s
        contracts and administrative processes and systems are subject to audits
        and
        cost adjustments by the Government, which could reduce EOIR’s revenue, disrupt
        its business or otherwise adversely affect its results of
        operations.**
  Government
        agencies, including the Defense Contract Audit Agency, or DCAA, routinely
        audit
        and investigate Government contracts and Government contractors’ administrative
        processes and systems. These agencies review EOIR’s performance on contracts,
        pricing practices, cost structure and compliance with applicable laws,
        regulations and standards. They also review EOIR’s compliance with regulations
        and policies and the adequacy of its internal control systems and policies,
        including purchasing, property, estimating, compensation and management
        information systems. Any costs found to be improperly allocated to a specific
        contract will not be reimbursed, and any such costs already reimbursed must
        be
        refunded. Moreover, if any of the administrative processes and systems is
        found
        not to comply with requirements, EOIR may be subjected to increased government
        oversight and approval that could delay or otherwise adversely affect its
        ability to compete for or perform contracts. Therefore, an unfavorable outcome
        to an audit by the DCAA or another agency could cause actual results to differ
        materially from those anticipated. If an investigation uncovers improper
        or
        illegal activities, EOIR may be subject to civil and criminal penalties and
        administrative sanctions, including termination of contracts, forfeitures
        of
        profits, suspension of payments, fines and suspension or debarment from doing
        business with the Government. In addition, EOIR could suffer serious
        reputational harm if allegations of impropriety were made against EOIR. Each
        of
        these results could cause actual results to differ materially from those
        anticipated.
 
 **Unfavorable
        government audit results could force EOIR to adjust previously reported
        operating results and could subject EOIR to a variety of penalties and
        sanctions.**
  The
        federal government audits and reviews EOIR’s performance on awards, pricing
        practices, cost structure, and compliance with applicable laws, regulations,
        and
        standards. Like most large government vendors, EOIR’s awards are audited and
        reviewed on a continual basis by federal agencies, including the Defense
        Contract Management Agency and the Defense Contract Audit Agency. An audit
        of
        our work, including an audit of work performed by companies EOIR has acquired
        or
        may acquire or subcontractors EOIR has hired or may hire, could result in
        a
        substantial adjustment in EOIR’s operating results for the applicable period.
        For example, any costs which were originally reimbursed could subsequently
        be
        disallowed. In this case, cash EOIR has already collected may need to be
        refunded and its operating margins may be reduced. To date, EOIR has not
        experienced any significant adverse consequences as a result of government
        audits.
  If
        a
        government audit uncovers improper or illegal activities, EOIR may be subject
        to
        civil and criminal penalties and administrative sanctions, including termination
        of contracts, forfeiture of profits, suspension of payments, fines and
        suspension or debarment from doing business with U.S. Government
        agencies.
 
 **Employee
        misconduct, including security breaches, could result in the loss of clients
        and
        EOIR’s suspension or disbarment from contracting with the
        Government.**
  EOIR
        may
        be unable to prevent its employees from engaging in misconduct, fraud or
        other
        improper activities that could adversely affect its business and reputation.
        Misconduct could include the failure to comply with procurement regulations,
        regulations regarding the protection of classified information and legislation
        regarding the pricing of labor and other costs in government contracts. Many
        of
        the systems EOIR develops involve managing and protecting information involved
        in national security and other sensitive functions. A security breach in
        one of
        these systems could prevent EOIR from having access to such critically sensitive
        systems. Other examples of employee misconduct could include time card fraud
        and
        violations of the Anti-Kickback Act. The precautions EOIR takes to prevent
        and
        detect this activity may not be effective, and EOIR could face unknown risks
        or
        losses. As a result of employee misconduct, EOIR could face fines and penalties,
        loss of security clearance and suspension or debarment from contracting with
        the
        Government, which could cause EOIR’s actual results to differ materially from
        those anticipated.
 
 **If
        EOIR’s subcontractors or vendors fail to perform their contractual obligations,
        EOIR’s performance as a prime contractor and its ability to obtain future
        business could be materially and adversely impacted and its actual results
        could
        differ materially from those anticipated.**
  EOIR’s
        performance of Government contracts may involve the issuance of subcontracts
        or
        purchase orders to other companies upon which EOIR relies to perform all
        or a
        portion of the work EOIR is obligated to deliver to its clients. A failure
        by
        one or more of is subcontractors or vendors to satisfactorily deliver on
        a
        timely basis the agreed-upon supplies and/or perform the agreed-upon services
        may materially and adversely impact EOIR’s ability to perform its obligations as
        a prime contractor.
  -28-
  A
        performance deficiency by a subcontractor or a vendor could result in the
        Government terminating EOIR’s contract for default. A default termination could
        expose EOIR to liability for excess costs of re-procurement by the Government
        and have a material adverse effect on EOIR’s ability to compete for future
        contracts and task orders.
  Depending
        upon the level of problem experienced, such problems with subcontractors
        could
        cause EOIR’s actual results to differ materially from those
        anticipated.
 
 **Some
        of  EOIR’s competitors are much larger than EOIR , have better name
        recognition and have far greater financial and other resources than EOIR
        . If we
        cannot effectively compete, our business may suffer and the price of our
        stock
        would decrease.**
  With
        the
        U.S. government's large appropriation of money for homeland security programs,
        many companies are competing for the same homeland security contracts and
        there
        can be no assurance that EOIR will effectively compete with large companies
        who
        have more resources and funds than we do. Several companies have been working
        on
        issues relevant to the safety of the American people for the past several
        years.
        Because of the services and additional human and financial resources that
        these
        larger companies can provide, they may be more attractive to the U.S.
        Government. Lockheed Martin and Northrop Grumman are providers of hardware
        engineering and systems engineering solutions. Computer Sciences Corporation
        and
        EDS provide computer and computer software solutions. Defense companies,
        such as
        General Dynamics, Boeing and Raytheon, are solutions providers that could
        easily
        expand their businesses into the homeland security business and are currently
        allocating resources to develop programs in this area.
 
 **Risks
        Related To “Controlled Companies”**
 
 **A
        very small number of investors hold a controlling interest in our stock.
        As a
        result, the ability of minority shareholders to influence our affairs is
        extremely limited.**
  A
        very
        small number of investors collectively owned more than 50% of Technest’s
        outstanding common stock on a primary basis.  As a result, those investors
        have the ability to control all matters submitted to the stockholders of
        Technest for approval (including the election and removal of
        directors).  A significant change to the composition of our board
        could lead to a change in management and our business plan. Any such transition
        could lead to, among other things, a decline in service levels, disruption
        in
        our operations and departures of key personnel, which could in turn harm
        our
        business.
 
 Moreover,
        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 these investors or any other party retains a controlling
        interest.
 
 **Gino
        Pereira serves as a director and Chief Financial Officer of Technest and
        Markland. Conflicts of interest could arise as a result of these overlapping
        positions.**
  While
        Mr.
        Pereira’s is currently spending 90% of his time working for Technest, there can
        be no assurance competing demands on Mr. Pereira at a given time will not
        result
        in an allocation of time and resources unfavorable to us. Neither our
        organizational documents nor our policies specify a minimum standard of time
        and
        attention that our officers and directors are required to devote to us, and
        there can be no assurance that conflicts of interest will not
        arise.
 
 **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 in connection with our acquisition of Genex,
        Technest was obligated to file a registration statement with the Securities
        and Exchange Commission; such registration statement went effective on
        February 7, 2007. In addition, we are obligated to register shares held by
        Markland or any of its transferees. Our common stock is thinly traded. The
        registration of these shares for public resale may result in a greater number
        of
        shares being available for trading than the market can absorb. This may cause
        the market price of our common stock to decrease.
  -29-
  **The
        sale of material amounts of common stock could encourage short sales by third
        parties and further depress the price of our common stock.  As a result,
        you may lose all or part of your investment.**
  The
        significant downward pressure on our stock price caused by the sale of a
        significant number of shares could cause our stock price to decline, thus
        allowing short sellers of our stock an opportunity to take advantage of any
        decrease in the value of our stock. The presence of short sellers in our
        common
        stock may further depress the price of our common stock.
 
 **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.
  **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.
  -30-
  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.
  **The
        market price of our common stock may be volatile. As a result, you may not
        be
        able to sell our common stock in short time periods, or possibly at
        all.**
  Our
        stock
        price has been volatile. From January 2003 to September, 2007, the trading
        price
        of our common stock ranged from a low price of $0.02 per share to a high
        price
        of $63.29 per share. Many factors may cause the market price of our common
        stock
        to fluctuate, including:
  ·
              variations
                  in our quarterly results of
                  operations;
  ·
              the
                  introduction of new products by us or our
                  competitors;
  ·
              acquisitions
                  or strategic alliances involving us or our
                  competitors;
  ·
              future
                  sales of shares of common stock in the public market;
                  and
  ·
              market
                  conditions in our industries and the economy as a
                  whole.
  In
        addition, the stock market has recently experienced extreme price and volume
        fluctuations. These fluctuations are often unrelated to the operating
        performance of particular companies. These broad market fluctuations may
        adversely affect the market price of our common stock. When the market price
        of
        a company's stock drops significantly, stockholders often institute securities
        class action litigation against that company. Any litigation against us could
        cause us to incur substantial costs, divert the time and attention of our
        management and other resources or otherwise harm our business.
  **Risks
        Relating to New Corporate Governance Standards**
  **We
        expect our administrative costs and expenses resulting from certain regulations
        to increase, adversely affecting our financial condition and results of
        operations.**
  We
        face
        new corporate governance requirements under the Sarbanes-Oxley Act of 2002,
        the
        NASDAQ Capital Market requirements and SEC rules adopted thereunder. These
        regulations when we become subject to them will increase our legal and financial
        compliance and make some activities more difficult, time-consuming and
        costly.
 
 **New
        corporate governance requirements have made it more difficult to attract
        qualified directors. As a result, our business may be harmed and the price
        of
        our stock may be adversely affected.**
  New
        corporate governance requirements have increased the role and responsibilities
        of directors and executive officers of public companies. These new requirements
        have made it more expensive for us to maintain director and officer liability
        insurance. We may be required to accept reduced coverage or incur significantly
        higher costs to maintain coverage. As a result, although we recently elected
        directors that satisfy the “independence” standards of NASDAQ, it may be more
        difficult for us to attract and retain other qualified individuals to serve
        as
        members of our board of directors.
  **If
        we fail to maintain effective internal controls over financial reporting,
        the
        price of our common stock may be adversely affected.**
  We
        are
        required to establish and maintain appropriate internal controls over financial
        reporting. Our internal controls over financial reporting may have weaknesses
        and conditions that need to be addressed, the disclosure of which may have
        an
        adverse impact on the price of our common stock.
  -31-
  Failure
        to establish those controls, or any failure of those controls once established,
        could adversely impact our public disclosures regarding our business, financial
        condition or results of operations. In addition, management's assessment
        of
        internal controls over financial reporting may identify weaknesses and
        conditions that need to be addressed in our internal controls over financial
        reporting or other matters that may raise concerns for investors. Any actual
        or
        perceived weaknesses and conditions that need to be addressed, disclosure
        of
        management's assessment of our internal controls over financial reporting
        or
        disclosure of our independent registered public accounting firm's attestation
        to
        or report on management's assessment of our internal controls over financial
        reporting may have an adverse impact on the price of our common
        stock.
  **Standards
        for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
        and if we fail to comply in a timely manner, our business could be harmed
        and
        our stock price could decline.**
  Rules
        adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
        require annual assessment of our internal control over financial reporting,
        and
        attestation of this assessment by our independent registered public accountant.
        We expect that these requirements will first apply to our annual report for
        the
        fiscal year ending June 30, 2008 and June 30, 2009, respectively. The standards
        that must be met for management to assess the effectiveness of the internal
        control over financial reporting are new and complex, and require significant
        documentation, testing and possible remediation to meet the detailed standards.
        We may encounter problems or delays in completing activities necessary to
        make
        an assessment of its internal control over financial reporting. In addition,
        we
        may encounter problems or delays in completing the implementation of any
        requested improvements and receiving an attestation of its assessment by
        our
        independent registered public accountants. If management cannot assess our
        internal control over financial reporting as effective, or our independent
        registered public accounting firm is unable to issue an unqualified attestation
        report on such assessment, investor confidence and share value may be negatively
        impacted.
  -32-
  **Item
      7.  Financial Statements**




**TECHNEST
      HOLDINGS, INC.**


**CONSOLIDATED
      FINANCIAL STATEMENTS**





**INDEX**








**Page
                Number****Technest
                Holdings, Inc. and Subsidiaries****Periods
                ended June 30, 2007 and June 30, 2006**Report
                of Independent Registered Public Accounting Firm
            F-2Consolidated
                Balance Sheet
            F-3Consolidated
                Statements of Operations
            F-5Consolidated
                Statements of Changes in Stockholders’ Equity
            F-6Consolidated
                Statements of Cash Flows
            F-9Notes
                to Consolidated Financial Statements
            F-11





F-1


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors


Technest
      Holdings, Inc. and Subsidiaries


Bethesda,
      Maryland








We
      have
      audited the accompanying consolidated balance sheet of Technest Holdings, Inc.
      and subsidiaries as of June 30, 2007, and the related consolidated statements
      of
      operations, changes in stockholders' equity and cash flows for the years ended
      June 30, 2007 and 2006. 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 audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audits 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
      audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects the financial position of Technest Holdings, Inc. and
      subsidiaries as of June 30, 2007, and the results of its operations and its
      cash
      flows for the years ended June 30, 2007 and 2006, in conformity with accounting
      principles generally accepted in the United States of America.





As
      discussed in Note 3 to the financial statements, the Company’s board of
      Director’s approved a plan to divest the operations of its primary subsidiary,
      EOIR Technologies, Inc. (“EOIR”).  As a result, EOIR has been
      presented in these financial statements as a discontinued
      operation.








/s/
      Wolf
& Company, P.C.




Boston,
      Massachusetts


October
      1, 2007




F-2





**TECHNEST
                HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET****AS
                OF JUNE 30, 2007**






**ASSETS****Current
                Assets**Cash
                and cash equivalents
            
            $
            111,688Accounts
                receivables
            
            
            675,953Unbilled
                receivables
            
            
            306,178Inventory
                and work-in-process
            
            
            11,253Due
                from related parties, net
            
            
            2,604Prepaid
                expenses and other current assets
            
            
            55,526Assets
                related to discontinued operations
            
            
            30,809,759**Total
                Current Assets**
            
            
            31,972,961**Property
                and Equipment**– Net of accumulated depreciation
                $64,726
            
            
            106,418**Other
                Assets**Deposits
            
            
            28,525Definitive-lived
                intangible assets – Net of accumulated amortization
                $771,259
            
            
            959,851Goodwill
            
            
            4,876,038**Total
                Other Assets**
            
            
            5,864,414**Total
                Assets**
            
            $
            37,943,793**LIABILITIES
                AND STOCKHOLDERS’ EQUITY****Current
                Liabilities**Accounts
                payable
            
            $
            620,496Accrued
                expenses and other current liabilities
            
            
            796,136Liabilities
                related to discontinued operations
            
            
            20,419,257**Total
                Current Liabilities**
            
            
            21,835,889**Total
                Liabilities**
            
            
            21,835,889


F-3


**TECHNEST
        HOLDINGS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEET (concluded)**


**Commitments
              and Contingencies****Stockholders’
                Equity**Series
                A Convertible Preferred Stock - $.001 par value; 150 shares
                authorized;64.325
                shares issued and outstanding (preference in liquidation
                of$64,325
                at June 30, 2007)
            
            ****
            **-**Series
                C Convertible Preferred Stock - $.001 par value; 1,149,425
                sharesauthorized;
                632,185 issued and outstanding (preference in liquidationof
                $1,375,002 at June 30, 2007)
            
            
            632Common
                stock - par value $.001 per share; 495,000,000 shares
                authorized;16,878,451
                shares issued and outstanding
            
            
            16,877Additional
                paid-in capital
            
            
            36,115,030Accumulated
                deficit
            
            
            (20,024,635
            )**Total
                Stockholders’ Equity**
            
            
            16,107,904**Total
                Liabilities and Stockholders’ Equity**
            
            $
            37,943,793


See
        notes
        to consolidated financial statements.


F-4





**TECHNEST
                HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF OPERATIONS****FOR
                THE YEARS ENDED JUNE 30**





**2007**
            
            
            **2006****Revenues**
            
            $
            3,396,795
            
            
            $
            3,542,393**Cost
                of Revenues**
            
            
            2,120,005
            
            
            
            2,194,323**Gross
                Profit**
            
            
            1,276,790
            
            
            
            1,348,070**Operating
                Expenses**Selling,
                general and administrative
            
            
            3,600,562
            
            
            
            2,850,678Research
                and development
            
            
            1,093
            
            
            
            53,824Amortization
                of intangible assets
            
            
            324,741
            
            
            
            324,841**Total
                Operating Expenses**
            
            
            3,926,396
            
            
            
            3,229,343**Operating
                Loss from Continuing Operations**
            
            
            (2,649,606
            )
            
            
            (1,881,273
            )**Other
                (Expense) Income, Net**Other
                income
            
            
            2,951
            
            
            
            16,947Interest
                expense
            
            
            (1,744,102
            )
            
            
            (2,303,662
            )Derivative
                income
            
            
            -
            
            
            
            25,046,489**Total
                Other (Expense) Income, Net**
            
            
            (1,741,151
            )
            
            
            22,759,774**Net
                Income (Loss) from Continuing Operations**
            
            
            (4,390,757
            )
            
            
            20,878,501**Net
                Loss from Discontinued Operations**
            
            
            (395,939
            )
            
            
            (625,837
            )**Net
                Income (Loss) Applicable to Common Shareholders**
            
            $
            (4,786,696
            )
            
            $
            20,252,664**Basic
                Income (Loss) Per Common Share**From
                continuing operations
            
            $
            (0.27
            )
            
            $
            1.37From
                discontinued operations
            
            
            (0.02
            )
            
            
            (0.04
            )**Net
                Income (Loss) Per Share - Basic**
            
            $
            (0.29
            )
            
            $
            1.33**Diluted
                Income (Loss) Per Common Share**From
                continuing operations
            
            $
            (0.27
            )
            
            $
            1.29From
                discontinued operations
            
            
            (0.02
            )
            
            
            (0.04
            )**Net
                Income (Loss) Per Share - Diluted**
            
            $
            (0.29
            )
            
            $
            1.25**Weighted
                Average Number of Common Shares Outstanding**Basic
            
            
            16,536,917
            
            
            
            15,228,294Diluted
            
            
            16,536,917
            
            
            
            16,266,487






See
        notes
        to consolidated financial statements.
 (Reflects
        reverse stock split of 1 for 211.18 on July 19, 2005)


F-5


**TECHNEST
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED JUNE 30, 2007 AND 2006**







Series
                  A
              
              
              Series
                  BConvertible
              
              
              ConvertibleCommon
                  stock
              
              
              Preferred
                  stock
              
              
              Preferred
                  stockShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              AmountBalance
                  - July 1, 2005
              
              
              14,302,193
              
              
              $
              14,302
              
              
              
              124
              
              
              $
              -
              
              
              
              517,243
              
              
              $
              517Conversion
                  of Series A Convertible Preferred Stock into common stock
              
              
              282,669
              
              
              
              283
              
              
              
              (60
              )
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
                  of Series C Convertible Preferred Stock into common stock
              
              
              517,240
              
              
              
              517
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Common
                  Stock issued in conjunction with warrant exercises
              
              
              354,921
              
              
              
              355
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Common
                  Stock issued in connection with liquidated damages associated with
                  registration rights agreements
              
              
              410,888
              
              
              
              410
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Exchange
                  of Series B Convertible Preferred Stock for Markland Series D Preferred
                  Stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (517,243
              )
              
              
              (517
              )Amortization
                  and forfeiture of stock based compensation
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock
                  based compensation related to restricted stock grants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Reclassification
                  of derivative liability to equity
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
                  income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
                  - June 30, 2006
              
              
              15,867,911
              
              
              
              15,867
              
              
              
              64
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock
                  issued in connection with penalties for failure to effect registration
                  rights
              
              
              850,761
              
              
              
              850
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Stock
                  issued to note holders in connection with subordination of security
                  interest for bank financing
              
              
              99,779
              
              
              
              100
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
                  and amortization of stock-based compensation related to restricted
                  stock
                  grants
              
              
              60,000
              
              
              
              60
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Fair
                  value of warrants issued in connection with bank financing
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Fair
                  value of warrants issued in connection with independent research
                  report
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
                  loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Balance
                  - June 30, 2007
              
              
              16,878,451
              
              
              $
              16,877
              
              
              
              64
              
              
              $
              -
              
              
              
              -
              
              
              $
              -











See
      notes
      to consolidated financial statements.


(Reflects
      reverse stock split of 1 for 211.18 on July 19, 2005)




F-6




**TECHNEST
      HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED JUNE 30, 2007 AND 2006**








Series
                CConvertible
            
            
            UnearnedPreferred
                stock
            
            
            CompensationShares
            
            
            Amount
            
            
            AmountBalance
                - July 1, 2005
            
            
            1,149,425
            
            
            $
            1,149
            
            
            $
            (1,541,490
            )Conversion
                of Series A Convertible Preferred Stockinto
                common stock
            
            
            -
            
            
            
            -
            
            
            
            -Conversion
                of Series C Convertible Preferred Stockinto
                common stock
            
            
            (517,240
            )
            
            
            (517
            )
            
            
            -Common
                Stock issued in conjunction withwarrant
                exercises
            
            
            -
            
            
            
            -
            
            
            
            -Common
                Stock issued in connection with liquidateddamages
                associated with registration rights agreements
            
            
            -
            
            
            
            -
            
            
            
            -Exchange
                of Series B Convertible Preferred Stock forMarkland
                Series D Preferred Stock
            
            
            -
            
            
            
            -
            
            
            
            -Amortization
                and forfeiture of stock based compensation
            
            
            -
            
            
            
            -
            
            
            
            1,541,490Stock
                based compensation related torestricted
                stock grants
            
            
            -
            
            
            
            -
            
            
            
            -Reclassification
                of derivative liability to equity
            
            
            -
            
            
            
            -
            
            
            
            -Net
                income
            
            
            -
            
            
            
            -
            
            
            
            -Balance
                - June 30, 2006
            
            
            632,185
            
            
            
            632
            
            
            
            -Stock
                issued in connection with penalties for failureto
                effect registration rights
            
            
            -
            
            
            
            -
            
            
            
            -Stock
                issued to note holders in connection withsubordination
                of security interest for bank financing
            
            
            -
            
            
            
            -
            
            
            
            -Issuance
                and amortization of stock-basedcompensation
                related to restricted stock grants
            
            
            -
            
            
            
            -
            
            
            
            -Fair
                value of warrants issued in connection withbank
                financing
            
            
            -
            
            
            
            -
            
            
            
            -Fair
                value of warrants issued in connection withindependent
                research report
            
            
            -
            
            
            
            -
            
            
            
            -Net
                loss
            
            
            -
            
            
            
            -
            
            
            
            -Balance
                - June 30, 2007
            
            
            632,185
            
            
            $
            632
            
            
            $
            -






See
      notes
      to consolidated financial statements.


(Reflects
      reverse stock split of 1 for
      211.18 on July 19, 2005)




F-7




**TECHNEST
      HOLDINGS, INC. AND
      SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY**


**FOR
      THE YEARS ENDED JUNE 30, 2007 AND 2006**







Additional
            
            
            
            
            
            TotalPaid-In
            
            
            Accumulated
            
            
            Stockholders'Capital
            
            
            Deficit
            
            
            EquityAmount
            
            
            Amount
            
            
            AmountBalance
                - July 1, 2005
            
            $
            29,548,840
            
            
            $
            (35,490,603
            )
            
            $
            (7,467,285
            )Conversion
                of Series A Convertible Preferred Stockinto
                common stock
            
            
            (283
            )
            
            
            -
            
            
            
            -Conversion
                of Series C Convertible Preferred Stockinto
                common stock
            
            
            -
            
            
            
            -
            
            
            
            -Common
                Stock issued in conjunction withwarrant
                exercises
            
            
            (355
            )
            
            
            -
            
            
            
            -Common
                Stock issued in connection with liquidateddamages
                associated with registration rights agreements
            
            
            2,104,051
            
            
            
            -
            
            
            
            2,104,461Exchange
                of Series B Convertible Preferred Stock forMarkland
                Series D Preferred Stock
            
            
            517
            
            
            
            -
            
            
            
            -Amortization
                and forfeiture of stock based compensation
            
            
            (1,445,151
            )
            
            
            -
            
            
            
            96,339Stock
                based compensation related torestricted
                stock grants
            
            
            279,428
            
            
            
            -
            
            
            
            279,428Reclassification
                of derivative liability to equity
            
            
            1,917,127
            
            
            
            -
            
            
            
            1,917,127Net
                income
            
            
            -
            
            
            
            20,252,664
            
            
            
            20,252,664Balance
                - June 30, 2006
            
            
            32,404,174
            
            
            
            (15,237,939
            )
            
            
            17,182,734Stock
                issued in connection with penalties for failureto
                effect registration rights
            
            
            1,725,576
            
            
            
            -
            
            
            
            1,726,426Stock
                issued to note holders in connection withsubordination
                of security interest for bank financing
            
            
            344,138
            
            
            
            -
            
            
            
            344,238Issuance
                and amortization of stock-basedcompensation
                related to restricted stock grants
            
            
            1,170,372
            
            
            
            -
            
            
            
            1,170,432Fair
                value of warrants issued in connection withbank
                financing
            
            
            217,732
            
            
            
            -
            
            
            
            217,732Fair
                value of warrants issued in connection withindependent
                research report
            
            
            253,038
            
            
            
            -
            
            
            
            253,038Net
                loss
            
            
            -
            
            
            
            (4,786,696
            )
            
            
            (4,786,696
            )Balance
                - June 30, 2007
            
            $
            36,115,030
            
            
            $
            (20,024,635
            )
            
            $
            16,107,904






See
      notes
      to consolidated financial statements.


(Reflects
      reverse stock split of 1 for 211.18 on July 19, 2005)


F-8





**TECHNEST
                HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE YEARS ENDED JUNE 30, 2007 AND
                2006**






**2007**
            
            
            **2006****Cash
                Flows From Operating Activities:**Net
                income (loss)
            
            $
            (4,786,696
            )
            
            $
            20,252,664Adjustment
                to reconcile net income (loss) to net cash provided by(used
                in) operating activities:Derivative
                income
            
            
            -
            
            
            
            (25,046,489
            )Depreciation
                and amortization of property and equipment
            
            
            427,673
            
            
            
            385,032Amortization
                of intangible assets
            
            
            1,586,046
            
            
            
            1,747,347Common
                stock issued in settlement of liquidated damages
            
            
            1,726,426
            
            
            
            2,104,461Non-cash
                interest expense
            
            
            1,127,792
            
            
            
            293,592Stock-based
                compensation to employees and directors
            
            
            1,170,432
            
            
            
            375,767Fair
                value of warrants issued to a consultant
            
            
            253,038
            
            
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (5,005
            )
            
            
            (1,778,017
            )Unbilled
                receivables
            
            
            538,563
            
            
            
            (2,054,121
            )Inventory
                and work in process
            
            
            8,982
            
            
            
            281,211Deposits
                and prepaid expenses and other current assets
            
            
            (39,426
            )
            
            
            (83,824
            )Restricted
                cash
            
            
            250,000
            
            
            
            -Accounts
                payable
            
            
            (4,973,676
            )
            
            
            2,795,528Accrued
                expenses and other current liabilities
            
            
            (1,063,762
            )
            
            
            3,183,845Due
                to related parties
            
            
            (305,746
            )
            
            
            (1,553,960
            )**Net
                Cash Provided by (Used In) Operating Activities**
            
            
            (4,085,359
            )
            
            
            903,036**Cash
                Flows From Investing Activities:**Proceeds
                from sale of property and equipment
            
            
            -
            
            
            
            29,956Purchase
                of property and equipment
            
            
            (39,609
            )
            
            
            (324,499
            )**Net
                Cash Used In Investing Activities**
            
            
            (39,609
            )
            
            
            (294,543
            )**Cash
                Flows From Financing Activities:**Proceeds
                from term loan
            
            
            3,000,000
            
            
            
            -Proceeds
                from revolving line of credit, net
            
            
            4,562,809
            
            
            
            -Proceeds
                from note payable – Shelter Island
            
            
            1,500,000
            
            
            
            -Payment
                of debt issuance costs
            
            
            (492,953
            )
            
            
            -Payment
                of loan guarantee fee to Markland
            
            
            (580,372
            )
            
            
            -Repayment
                of term loan
            
            
            (833,333
            )
            
            
            -Payments
                of notes payable and long-term debt
            
            
            (5,253,166
            )
            
            
            (2,858,891
            )**Net
                Cash Provided by (Used In) Financing Activities**
            
            
            1,902,985
            
            
            
            (2,858,891
            )**Net
                Decrease In Cash**
            
            
            (2,221,983
            )
            
            
            (2,250,398
            )**Cash
                and Cash Equivalents - Beginning of Period-**including
                $2,859,055
              and
                $5,558,644, respectively, of cash related to discontinued
                operations
            
            
            3,362,210
            
            
            
            5,612,608**Cash
                and Cash Equivalents
                - End of Period-**including $1,028,539
              and
                $2,859,055, respectively, of cash related to discontinued
                operations
            
            $
            1,140,227
            
            
            $
            3,362,210





F-9





**TECHNEST
                HOLDINGS, INC. AND SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****FOR
                THE YEARS ENDED JUNE 30, 2007 AND
                2006**






**2007**
            
            
            **2006****Supplemental
                Disclosures Of Cash Flow Information:**Cash
                paid during the periods for:Interest
            
            $
            691,438
            
            
            $
            576,620Taxes
            
            
            -
            
            
            
            -Non-cash
                investing and financing activities:Fair
                value of common stock and warrants issued asdeferred
                financing costs
            
            $
            561,970
            
            
            $
            -Reclassification
                of derivative liability to equity
            
            $
            -
            
            
            $
            1,917,127Inventory
                transferred to Markland
            
            $
            -
            
            
            $
            105,218See
                notes to consolidated financial statements




F-10


**TECHNEST
      HOLDINGS INC. AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED JUNE 30, 2007 AND 2006**







**1. 
      NATURE OF OPERATIONS**





Business





Technest
      Holdings, Inc. and its subsidiaries (“Technest” or “the Company”) are engaged in
      the design, research and development, integration, analysis, modeling, system
      networking, sales and support of intelligent surveillance, three-dimensional
      facial recognition and three-dimensional imaging devices and systems primarily
      in the security and healthcare industries. Historically, the Company’s largest
      customers have been the Department of Defense and the National Institute of
      Health.





Proposed
      Sale of EOIR Technologies, Inc.





On
      September 10, 2007, Technest and its wholly owned subsidiary, E-OIR
      Technologies, Inc. (“EOIR”), entered into a Stock Purchase Agreement with EOIR
      Holdings LLC, a Delaware limited liability company ( “LLC”), pursuant to which
      Technest will sell EOIR to LLC (see Note 15).  LLC is an entity formed
      on August 9, 2007 by The White Oak Group, Inc., an Atlanta, Georgia based
      private investment firm, for the purposes of facilitating this
      transaction.  The White Oak Group, Inc. is a private investment firm
      focused on investments in the aerospace and defense industry, with an emphasis
      on the following sectors: Homeland security (detection and deterrence); avionics
      and instrumentation; command and control; and communication networks and
      services.





The
      sale of EOIR to LLC will be
      structured as a stock sale in which LLC will acquire all of the outstanding
      stock of EOIR in exchange for approximately $34 million in cash, $11 million
      of
      which will be paid at closing and $23 million of which will be paid upon the
      successful re-award to EOIR of the contract with the U.S. Army's Night Vision
      and Electronics Sensors Directorate.





EOIR
      is
      presented as a discontinued operation in the consolidated financial statements
      in accordance with Statement of Financial Accounting Standards (“SFAS”)
      No. 144, “Accounting
      for the
      Impairment or Disposal of Long-Lived Assets” (see Note
      3).





**2. 
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





Basis
      of  Presentation





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





In
      May
      2007, the Company’s Board of Directors approved a plan to divest the operations
      of its subsidiary, EOIR Technologies, Inc.  In accordance with SFAS
      No. 144, the assets, liabilities and results of operations of this consolidated
      subsidiary have been classified as a discontinued operation for all periods
      presented in the accompanying consolidated financial statements (see Note
      3).





Reclassification





Certain
      amounts in the 2006 financial statements have been reclassified to conform
      with
      2007 presentations (see Note 3).




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, carrying value of goodwill and long-lived
      assets, useful lives of intangible assets, fair value of assets and liabilities
      presented as discontinued operation, the amount due to contracting government
      agencies as a result of their audits, the realizability of deferred tax assets
      and the fair value of derivative liability and equity instruments
      issued.


F-11


Concentrations
      and Risks





Technest
      has cash balances in banks in excess of the maximum amount insured by the FDIC
      as of June 30, 2007.





Substantially
      all of Technest’s revenues are currently generated from individual customers
      within the Department of Defense and the National Institute for Health under
      Small Business Innovative Research contracts.





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.





Cash
      and Cash Equivalents





The
      Company considers all highly liquid investments with maturities of ninety days
      or less to be cash equivalents. Cash equivalents consist of money market funds
      as of June 30, 2007.





Accounts
      Receivable





Accounts
      receivable represent the 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.




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, 2007. If management
      determines amounts to be uncollectible, they will be charged to operations
      when
      that determination is made.





Unbilled
      receivables represent amounts
      earned related to allowable costs incurred under contracts but not
      billed.





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, 2007:




Software
              
              $
              35,194Computer
                  equipment
              
              
              24,665Furniture
                  and fixtures
              
              
              111,285171,144Less
                  accumulated depreciation
              
              
              (64,726
              )$
              106,418




Depreciation
      expense from continuing operations for the years ended June 30, 2007 and 2006
      was $40,590 and $20,726, respectively.


F-12


Definite-lived
      Intangible Assets




Included
      in definite-lived intangible assets are the amounts assigned to customer
      relationships and contracts and patents acquired in connection with business
      combinations. Also included are certain costs of outside legal counsel related
      to obtaining new patents.




Patent
      costs are amortized over the legal life of the patents, generally fifteen 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 (patents)
      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 by management based on a number of factors
      including 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, 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.




The
      fair
      value of cash, accounts receivable, accounts payable and the revolving line
      of
      credit approximate their recorded amounts because of their relatively short
      settlement terms.




Operating
      Segments




The
      Company operates in one Operating Segment as defined in paragraph 10 of SFAS
      No.
      131, “Disclosures about Segments of an Enterprise and Related Information”. This
      is the business of research and development, design and fabrication of 3D
      imaging and of intelligent surveillance products.




Revenue
      Recognition




Revenues
      from products are recognized when the following criteria are met: (1) there
      is
      persuasive evidence of an arrangement, such as contracts, purchase orders or
      written requests; (2) delivery has been completed and no significant obligations
      remain; (3) price to the customer is fixed or determinable; and (4) collection
      is probable.




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




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




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




Shipping
      Costs





Delivery
      and shipping costs are included in contract revenue and direct costs in the
      accompanying statements of operations.


F-13


Research
      and Development




The
      Company charges unfunded research and development costs to expense as incurred.
      Funded research and development is part of the Company’s revenue base and the
      associated costs are included in cost of revenues. 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.




Income
      Taxes




In
      accordance with SFAS No. 109, “Accounting for Income Taxes,” the Company
      allocates current and deferred taxes to its subsidiaries as if each were a
      separate tax payer.




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.





Income
      (Loss) Per Share




Basic
      and
      diluted net income (loss) per common share has been computed based on the
      weighted average number of shares of common stock outstanding during the periods
      presented. Basic net income (loss) per share is computed by dividing net income
      (loss) by weighted-average common shares outstanding during the year. Diluted
      net income (loss) per share is computed by dividing net income (loss) by the
      weighted-average number of common and dilutive option and warrant shares
      outstanding based on the average market price of Technest’s common stock (under
      the treasury stock method).




Common
      stock equivalents, consisting of Series A and C Convertible Preferred Stock
      and
      warrants were not included in the calculation of the diluted loss per share
      in
      the year ended June 30, 2007 because their inclusion would have had the effect
      of decreasing the loss per share otherwise computed (see Note 9).





The
      following table sets forth the computation of the weighted-average number of
      shares used in calculating basic and diluted net income per share in the year
      ended June 30, 2006:





**2006**Weighted-average
                shares outstanding for basic net income per share
            
            
            15,228,294Series
                A Convertible Preferred Stock
            
            
            306,047Series
                C Convertible Preferred Stock
            
            
            632,178Warrants
                to purchase common stock
            
            
            99,968Total
                shares for diluted net income per share
            
            
            16,266,487





Impairment
      of Intangible Assets




The
      Company records as goodwill the excess of purchase price over the fair value
      of
      the identifiable net assets acquired. Goodwill is identified and recorded at
      the
      reporting unit level as required by paragraphs 30-31 of SFAS No. 142, "Goodwill
      and Other Intangible Assets". SFAS No. 142 prescribes a two-step process for
      impairment testing, at the reporting unit level, 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 determined that its reporting unit is its
      operating segment since this is the lowest level at which discrete financial
      information is available and regularly reviewed by management. The Company
      has
      elected to perform its annual analysis during the fourth quarter of each fiscal
      year. No indicators of impairment were identified in years ended June 30, 2007
      and 2006.


F-14


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 years ended June 30, 2007 and 2006.




Derivative
      Instruments





Technest
      generally does not use derivative instruments to hedge exposures to cash-flow
      or
      market risks. However, certain warrants to purchase common stock that are
      indexed to the Company's common stock are classified as liabilities when the
      Company is not permitted to settle the instruments in unregistered shares.
      In
      such instances, in accordance with Emerging Issues Task Force (“EITF”) Issue No.
      00-19, net-cash settlement is assumed for financial reporting purposes, even
      when the terms of the underlying contracts do not provide for net-cash
      settlement. Such financial instruments are initially recorded at relative fair
      value with subsequent changes in fair value charged (credited) to operations
      in
      each reporting period. If the Company subsequently achieves the ability to
      settle the instruments in unregistered shares, the instruments are reclassified
      to equity at their fair value.





Stock-Based
      Compensation




On
      July 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
“Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for
      Stock Based Compensation”. There was no cumulative effect to the Company as a
      result of adopting this new accounting principle. Under SFAS No. 123(R),
      the Company now recognizes compensation costs resulting from the issuance of
      stock-based awards to employees and directors as an expense in the statement of
      operations over the service period based on a measurement of fair value for
      each
      stock award. As permitted under SFAS No. 123, prior to July 1, 2006, the
      Company accounted for its stock-based employee and director awards under the
      recognition and measurement principles of Accounting Principles Board (“APB”)
      Opinion 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. Under this intrinsic value
      method, compensation expense represented the excess, if any, of the quoted
      market price of the Company’s common stock at the grant date over the exercise
      price.




SFAS
      No. 123(R) permits public companies to adopt one of two transition methods:
      a “modified prospective” approach or a “modified retrospective” approach. Under
      the modified prospective approach, compensation cost is recognized beginning
      with the effective date of SFAS 123(R) for all share-based payments granted
      after the effective date of SFAS No. 123(R) and for all awards granted to
      employees prior to the effective date of SFAS No. 123(R) that remain
      unvested on the effective date. The Company adopted the modified prospective
      approach.





Had
      the
      Company followed the fair value method in accounting for its stock-based
      employee compensation it would have had the following effect on the net income
      for the year ended June 30, 2006.




June
                  30, 2006Net
                  income, as reported
              
              $
              20,252,664Add:
                  stock-based employee compensation under intrinsic value method
                  included in
                  net income
              
              
              96,339Deduct:
                  stock-based employee compensation under fair value method
              
              
              (118,232
              )Pro
                  forma net income applicable to common stockholders
              
              $
              20,230,771Basic
                  income applicable to common stockholders per common share
              
              $
              1.33Diluted
                  income applicable to common stockholders per common share
              
              $
              1.25Pro
                  forma basic income applicable to common stockholders per common
                  share
              
              $
              1.33Pro
                  forma diluted income applicable to common stockholders per common
                  share
              
              $
              1.24




F-15


The
      assumptions used and weighted average information for the years ended June
      30,
      2007 and 2006 were as follows:




2007
            
            2006Exercise
                price
            $2.97
            
            $0.06Expected
                dividend yield
            0%
            
            0%Expected
                lives (in years)
            5.5
            
            9Volatility
            110%
            
            69%Risk-free
                interest rate
            4.78%
            
            3.53%





Recent
      Accounting Pronouncements




In
      July 2006, the FASB issued Interpretation No. 48, “Accounting for
      Uncertain Tax Positions”, an Interpretation of SFAS No. 109 (“FIN 48”),
      which clarifies the criteria for recognition and measurement of benefits from
      uncertain tax positions. Under FIN 48, an entity should recognize a tax benefit
      when it is “more-likely-than-not”, based on the technical merits, that the
      position would be sustained upon examination by a taxing authority. The amount
      to be recognized, given the “more likely than not” threshold was passed, should
      be measured as the largest amount of tax benefit that is greater than 50 percent
      likely of being realized upon ultimate settlement with a taxing authority that
      has full knowledge of all relevant information. Furthermore, any change in
      the
      recognition, derecognition or measurement of a tax position should be recognized
      in the interim period in which the change occurs. The Company expects to adopt
      FIN 48 as of July 1, 2007, and any change in net assets as a result of
      applying the Interpretation will be recognized as an adjustment to retained
      earnings on that date. The Company does not expect the adoption of FIN 48 to
      have a material effect on the consolidated financial position or results of
      operations.




In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework
      for measuring fair value in generally accepted accounting principles, and
      expands disclosures about fair value measurements. This statement is effective
      for financial statements issued for fiscal years beginning after November 15,
      2007. The Company is currently evaluating the impact of SFAS 157 on the
      consolidated financial statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB
      108”). SAB 108 considers the effects of prior year misstatements when
      quantifying misstatements in current year financial statements. It is effective
      for fiscal years ending after November 15, 2006. The adoption of SAB 108 did
      not
      have a material impact on the consolidated financial statements.




On
      December 15, 2006 the Securities and Exchange Commission announced that it
      is has modified reporting requirements for smaller public companies under
      Section 404 of the Sarbanes-Oxley Act (SOX 404) of 2002. The Commission
      granted relief to smaller public companies by extending the date by which
      non-accelerated filers must start providing a report by management assessing
      the
      effectiveness of the company's internal control over financial reporting. The
      compliance date for these companies was moved from fiscal years ending on or
      after July 15, 2007, to fiscal years ending on or after December 15,
      2007. The Commission also extended the date by which non-accelerated filers
      must
      begin to comply with the Section 404(b) requirement to provide an auditor's
      attestation report on internal control over financial reporting in their annual
      reports. This deadline was moved to the first annual report for a fiscal year
      ending on or after December 15, 2008. The extension requires all
      non-accelerated filers to complete only management's portion of the internal
      control requirements in their first year of compliance with SOX 404. This
      modification is intended to provide cost savings and efficiency opportunities
      to
      smaller public companies and to assist them as they prepare to comply fully
      with
      SOX 404 reporting requirements. The extension will provide these issuers and
      their auditors an additional year to consider, and adapt to, the changes in
      Auditing Standard No. 5 that the Public Company Accounting Oversight Board
      has issued, as well as the guidance for management the Commission has issued,
      to
      improve the efficiency of the Section 404(b) auditor attestation report
      process.




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities”, including an amendment of FASB
      Statement No. 115 (“SFAS 159”). This pronouncement permits entities to choose to
      measure many financial instruments and certain other items at fair value that
      are not currently required to be measured at fair value and to recognize the
      resulting gains and losses in the results of operations. SFAS 159 is effective
      as of the beginning of an entity’s first fiscal year that begins after November
      15, 2007. The Company is currently evaluating the impact of SFAS 159 on the
      Company’s consolidated financial statements, if any.


F-16


**3. 
      DISCONTINUED OPERATIONS**





In
      May
      2007, in order to realize the value of E-OIR Technologies, Inc. for the benefit
      of shareholders, the Company’s Board of Directors approved a plan to divest the
      operations of EOIR.  On September 10, 2007, Technest Holdings, Inc.
      and its wholly owned subsidiary, E-OIR Technologies, Inc. entered into a Stock
      Purchase Agreement with EOIR Holdings LLC, a Delaware limited liability company
      (“LLC”), pursuant to which Technest will sell EOIR to LLC.  LLC is an
      entity formed on August 9, 2007 by The White Oak Group, Inc., an Atlanta,
      Georgia based private investment firm, for the purposes of facilitating this
      transaction.   The Company expects the sale of EOIR to close by
      December 31, 2007.





The
      sale
      of EOIR to LLC will be structured as a stock sale in which LLC will acquire
      all
      of the outstanding stock of EOIR in exchange for approximately $34 million
      in
      cash, $11 million of which will be paid at closing and $23 million of which
      will
      be paid upon the successful re-award to EOIR of the contract with the U.S.
      Army's Night Vision and Electronics Sensors Directorate.  The Company
      expects a decision on this re-award within fiscal 2008.





In
      accordance with SFAS No. 144, paragraph 30, the Company determined that in
      May
      2007, EOIR represented a disposal group that should be presented in the
      financial statements as held for sale.  As a result, the assets and
      liabilities of EOIR have been presented separately as a discontinued operation
      in the consolidated Balance Sheet at June 30, 2007.  The net assets of
      EOIR have been measured at the lower of their carrying amount or fair value
      less
      costs to sell.  As of June 30, 2007, there was no write-down of
      EOIR’s
      carrying value.  EOIR’s goodwill has been accounted for under SFAS No.
      142 (see Note 2).





The
      major
      classes of assets and liabilities associated with discontinued operations
      were:





June
                30, 2007Assets
                related to discontinued operations:Cash
            
            $
            1,028,539Accounts
                receivable
            
            
            8,703,931Unbilled
                receivable
            
            
            1,209,380Prepaid
                expenses and other current assets
            
            
            134,765Total
                current assets
            
            
            11,076,615Property
                and equipment, net
            
            
            277,802Deposits
            
            
            50,212Deferred
                financing costs
            
            
            1,238,985Definitive
                lived intangible assets, net
            
            
            9,006,632Goodwill
            
            
            9,159,513Total
                non-current assets
            
            
            19,733,144Total
                assets related to discontinued operations
            
            $
            30,809,759Liabilities
                related to discontinued operations:Accounts
                payable
            
            $
            7,651,265Due
                to related party
            
            
            292,640Accrued
                expenses and other current liabilities
            
            
            2,989,037Current
                portion of long term debt
            
            
            9,486,315Total
                current liabilities
            
            
            20,419,257Total
                liabilities related to discontinued operations
            
            $
            20,419,257





All
      of
      the assets and liabilities of EOIR have been classified in the Balance Sheet
      as
      current since the proposed sale is expected to close and proceeds received
      within one year.


F-17


For
      the
      years ended June 30, 2007 and 2006, the operations of EOIR have been reported
      in
      discontinued operations in the Statements of Operations in accordance with
      SFAS
      No. 144, paragraph 42. Revenues and net loss from discontinued operations were
      as follows:





June
                30, 2007
            
            
            June
                30, 2006Revenues
                from discontinued operations
            
            $
            68,349,121
            
            
            $
            77,533,227Net
                (loss) from discontinued operations
            
            $
            (395,939
            )
            
            $
            (625,837
            )





After
      the
      closing of the EOIR sale, the Company does not expect any additional cash flows
      related to EOIR.  Certain general and administrative expenses of the
      Company that are clearly associated with EOIR totaling approximately $726,000
      and $300,000 in the years ended June 30, 2007 and 2006, respectively, have
      been
      included in the net loss from discontinued operations.





The
      following information relates to specific assets and liabilities included in
      the
      disposal group.





**Definite-lived
      Intangible Assets**





Definite-lived
      intangible assets consist of the following at June 30, 2006:




Amount
            
            
            Useful
                life (years)Customer
                relationships and contracts - EOIR- Sensor Technologies
            
            
            11,755,000
            
            
            
            9Customer
                relationships and contracts - EOIR- Chemical Detection
            
            
            1,551,944
            
            
            
            1013,306,944Accumulated
                amortization
            
            
            (4,300,312
            )Net
                definite-lived intangible asset
            
            $
            9,006,632







Patents
      are amortized over their estimated useful life but not to exceed the legal
      life
      of the patent. Customer relationships and contracts are amortized over the
      contractual term of the existing contracts plus anticipated contract renewals
      in
      accordance with EITF 02-17. In determining the estimate useful life of the
      customer relationships and contracts, the Company considered a number of factors
      including, its history with these customers which dates back to 1993, the
      remaining term of existing contracts, the status of outstanding bids submitted
      for additional contracts or contract extensions, the stage of development of
      the
      major tasks covered by existing contracts, the likelihood of receiving
      additional contracts or contract extensions and the term over which the Company
      could reasonably predict future revenues from existing customers.




Amortization
      expense, included in net loss from discontinued operations, was $1,261,305
      and
      $1,461,306 for the years ended June 30, 2007 and 2006,
      respectively.





In
      May
      2007, the Company ceased amortizing the definite-lived intangible assets and
      other long-lived assets.





**Long-Term
      Debt and Revolving Line of Credit**





It
      is a
      condition of the covenants of the EOIR Stock Purchase Agreement that the
      following loans be paid in full upon the sale of EOIR.  The following
      loans have therefore been included as current liabilities related to
      discontinued operations.   The related interest expense has been
      included in the net loss from discontinued operations.





Note
      payable – Shelter Island





On
      June
      1, 2007, Technest Holdings, Inc. (the “Company”) closed on a financing pursuant
      to a Securities Purchase Agreement dated May 31, 2007 with Shelter Island
      Opportunity Fund, LLP (“Shelter Island”). Pursuant to the Securities Purchase
      Agreement, the Company issued to Shelter Island a Secured Original Issue
      Discount Debenture bearing interest at the rate of 11.25% (or Prime plus 3%)
      with an aggregate principal amount of $1,650,000 (the “Debenture”) for a
      subscription amount of $1,500,000. The Debenture is due on May 31, 2010, unless
      otherwise accelerated by its terms.  The outstanding principal amount
      and all accrued interest thereon will be payable in 33 equal monthly
      installments commencing on August 31, 2007. On the maturity date of the
      Debenture, the Company also agreed to pay, as a termination fee (and not as
      a
      penalty), an amount equal to the product of (i) $45,000 and (ii) the number
      of
      months that have elapsed between May 31, 2007 and the date such payment is
      made
      by the Company to Shelter Island.


F-18


The
      Debenture is secured by (i) the assets of the Company, including its securities
      in its wholly-owned subsidiaries, (ii) all rights of Markland Technologies,
      Inc.
      (“Markland”) in and to the License Agreement dated March 31, 2006 between the
      Company and Markland, and (iii) the assets of the Company’s wholly-owned
      subsidiary, Genex Technologies Inc. (“Genex”).  Other than the
      security interest from Markland, Shelter Island’s security interests are
      subordinated to the interests of Silicon Valley Bank pursuant to a Subordination
      Agreement entered into between Shelter Island and Silicon Valley Bank. The
      Company’s wholly-owned subsidiaries, Genex and EOIR, guaranteed the
      Debenture.





At
      June
      30, 2007, the face value of the notes and unamortized discount was $1,650,000
      and $145,833, respectively. During the year ended June 30, 2007, the Company
      amortized $4,167 to non-cash interest expense. As the Securities Purchase
      Agreement was closed on June 1, 2007, there was no material interest expense
      for
      the year ended June 30, 2007.





Bank
      loan





On
      August
      10, 2006, Technest, EOIR and Genex closed on a financing (the “Financing”) under
      two Loan and Security Agreements with Silicon Valley Bank (the “Bank”). One
      Credit Agreement provides for a term loan facility under which the Company
      may
      borrow term loans with an initial minimum loan of $3,000,000 (the “Term Loan”).
      The other Credit Agreement provides for a one year revolving line of credit
      for
      up to $8,750,000 (the “Revolver”), provided that the Company’s borrowing under
      the Revolver is limited to 80% of Eligible Accounts Receivable, as defined.
      In
      addition, the maximum amount outstanding under both Credit Agreements at any
      time may not exceed $10,000,000. Both the Term Loan Facility and the Revolver
      are secured by all of the Company’s assets and the assets of its subsidiaries,
      including all intellectual property.  The Company also entered into a
      Registration Rights Agreement with the Bank pursuant to which we granted
“piggy-back” and S-3 registration rights for the shares of Technest common stock
      underlying the warrant. The Registration Rights Agreement does not include
      any
      liquidated damage provisions.





As
      consideration for the subordination of the security interest to the Bank and
      in
      connection with the closing of the Financing on August 10, 2006, the Company
      issued to the seven remaining EOIR subordinated note holders a total of 99,779
      shares of the Company’s common stock having a fair value of $344,238, of which
      our current Chief Executive Officer and one of the Company’s directors, Joseph
      P. Mackin, received 23,913 shares. The shares vest 18 months from the date
      of
      grant.  The value of these shares was recorded as deferred financing
      costs and is classified as assets related to discontinued operations due to
      the
      repayment of the financing upon the sale of EOIR.




Upon
      the
      date of closing under the Credit Agreements, the Company borrowed the entire
      $3,000,000 available under the Term Loan facility and borrowed approximately
      $4,445,000 under the Revolver. At June 30, 2007, the outstanding balance was
      $2,166,667 on the Term Loan and $4,562,809 on the Revolver.




Interest
      on all outstanding amounts under the Term Loan is payable monthly at a rate
      equal to the Bank’s prime rate plus 2.75%. Each loan under the Term Loan is
      repayable in 36 equal monthly principal installments (currently $83,333) plus
      accrued interest.




The
      Bank’s prime rate as of June 30, 2007 was 8.25%.  Interest expense on
      these loans for the years ended June 30, 2007 and 2006, was $614,505 and $5,527,
      respectively.





The
      Revolver bears interest at a rate equal to the Bank’s prime rate plus 0.50% per
      annum, but the Company must pay a minimum quarterly amount equal to the interest
      on an outstanding balance of $1,400,000. In addition, the Company pays a monthly
      collateral handling fee of 0.10% per month on financed receivables. Interest
      and
      handling fees are paid as invoices are collected.





As
      of
      June 30, 2007, the Company had the following covenants with the
      Bank.





1.
            Term
                Loan - Priced at Prime plus 3.50%; Beginning with month ending May
                31,
                2007 and thereafter pricing to be as
                follows:




Fixed
                Charge Coverage Ratio
            Pricing1.00x
                - 1.24x
            Prime
                plus 3.25%1.25x
                - 1.49x
            Prime
                plus 3.00%*>=
                1.50x
            Prime
                plus 2.75%


F-19





2.
            Revolver
                priced at Prime plus 1.00% and a collateral handling fee of 0.25%
                per
                month; reduces to the existing Interest Rate structure, per the first
                loan
                modification dated February 14, 2007, upon compliance with all financial
                covenants beginning May 31, 2007 and
                thereafter.




* If the Company achieves a three-month trailing FCCR of 1.25x or greater,
      for
      the period ending May 31, 2007, then pricing will be reduced to Prime +
      2.75%




Minimum
                Monthly EBITDA:
              · 
                One month ending
                February
                28, 2007 a minimum EBITDA of $1.00
              · 
                One month ending
                March 31,
                2007 a minimum EBITDA of $65,000
              · 
                One month ending
                April 30,
                2007 a minimum EBITDA of $150,000
              
              Fixed
                Charge Coverage Ratio:
              · 
                May 31, 2007 -
                1.00x
              · 
                June 30, 2007 -
                1.25x
              · 
                July 31, 2007 -
                1.25x
              · 
                August 31, 2007 and
                thereafter of - 1.50x




In
      the
      event of prepayment, the Company will pay to Bank a Prepayment Fee equal to:
      (i)
      three percent (3.0%) of the amount of any Term Advance prepaid during the first
      year of the Term Loan and (ii) two percent (2.0%) of the amount of any Term
      Advance prepaid for each year thereafter, prior to the Commitment Termination
      Date.





In
      September 2007, the Company extended the term of the Revolver to February 28,
      2008.





Markland
      has entered into an Unconditional Guaranty pursuant to which Markland agreed
      to
      guaranty up to $6,000,000 of the principal obligations plus interest thereon
      and
      related expenses under certain Credit Agreements and a Stock Pledge Agreement
      pursuant to which Markland pledged to the Bank 1,739,130 shares of Technest
      common stock currently owned by Markland, which had a market value of $6,000,000
      as of August 4, 2006. The Unconditional Guaranty and the Stock Pledge Agreement
      terminate August 3, 2008 if no event of default has occurred. In consideration
      for this Unconditional Guarantee and Stock Pledge Agreement, Technest paid
      Markland $580,372. This amount has been recorded as a debt issuance cost and
      will be amortized over the life of the Term Loan of 36 months. The Company
      incurred additional debt issuance costs of approximately $141,667.




A
      summary
      of the deferred financing costs as of June 30, 2007 is as follows:





Payment
                to Markland for Unconditional Guaranty
            
            $
            580,372Fair
                value of warrants granted to Silicon Valley Bank (see Note
                8)
            
            
            217,732Fair
                value of common stock issued to EOIR note holders in connection with
                subordination (see Note 7)
            
            
            344,238Other
                deferred financing costs paid
            
            
            492,953Gross
                deferred financing costs
            
            
            1,635,295Accumulated
                amortization
            
            
            (396,310
            )Net
                deferred financing costs
            
            $
            1,238,985





In
      the
      year ended June 30, 2007, amortization of deferred financing costs amounted
      to
      $412,935.





EOIR
      Seller Notes Payable





On
      June
      29, 2004, EOIR issued notes guaranteed by Markland in the face amount of
      $11,000,000 in connection with Markland’s acquisition of EOIR’s common stock.
      These notes accrue interest at 6% compounded monthly and are payable in
      quarterly installments over 60 months. The fair market value of these notes
      was
      $9,532,044 as determined by management based on a number of factors including
      an
      independent valuation. The discount of $1,467,956 is amortized to interest
      expense over the life of the note.


F-20


The
      Company used a portion of the proceeds of the Financing to pre-pay the
      outstanding principal of $4,952,526 of certain EOIR promissory notes issued
      in
      June 2004. After these payments, the remain outstanding notes had a total
      principal balance of $1,655,885. The security interest securing these remaining
      notes was subordinated to the Bank’s first priority security
      interest.





At
      June
      30, 2007, the face value of the EOIR Seller Notes and unamortized discount
      was
      $1,406,132 and $153,458, respectively. During the year ended June 30, 2007,
      the
      Company amortized $727,315 to non-cash interest expense. Interest expense
      related to the EOIR Seller Notes for the years ended June 30, 2007 and 2006,
      was
      $134,364 and $533,205, respectively.




**4. 
      ACQUISITION**




On
      August
      17, 2005, pursuant to a Stock Purchase Agreement with Markland Technologies,
      Inc., Technest purchased all of the outstanding stock of EOIR, formerly one
      of Markland’s wholly-owned subsidiaries. As consideration for the stock of EOIR,
      Technest issued 12 million shares of its common stock to Markland. Markland’s
      ownership of Technest increased, at the time of the transaction, 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 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 Technest
      did not need stockholder consent in order to complete this
      reorganization.  Since this is a transaction between entities under
      common control, in accordance with SFAS No. 141, “Business Combinations”,
      Appendix D, the Company recorded the net assets of EOIR at their carrying value
      on the date Technest came into Markland’s control group, February 14, 2005 and
      the Company restated its financial statements to include EOIR from this date.
      Markland acquired EOIR on June 29, 2004.  EOIR generated approximately 97%
      of Markland’s revenue for its fiscal year ended June 30, 2005.




**5. 
      DEFINITE-LIVED INTANGIBLE ASSETS**




Definite-lived
      intangible assets consist of the following at June 30, 2007:




Amount
              
              
              Useful
                  life (years)Patents
                  - commercialized technology
              
              $
              440,000
              
              
              
              5Patents
                  - other
              
              
              161,110
              
              
              
              15Customer
                  relationships and contracts
              
              
              1,130,000
              
              
              
              5Accumulated
                  amortization
              
              
              (771,259
              )Net
                  definite-lived intangible asset
              
              $
              959,851




Patents
      are amortized over their estimated useful life but not to exceed the legal
      life
      of the patent. Customer relationships and contracts are amortized over the
      contractual term of the existing contracts plus anticipated contract renewals
      in
      accordance with EITF 02-17. In determining the estimate useful life of the
      customer relationships and contracts, the Company considered a number of factors
      including, its history with these customers which dates back to 1993, the
      remaining term of existing contracts, the status of outstanding bids submitted
      for additional contracts or contract extensions, the stage of development of
      the
      major tasks covered by existing contracts, the likelihood of receiving
      additional contracts or contract extensions and the term over which the Company
      could reasonably predict future revenues from existing customers.




Amortization
      expense was $324,741 and $324,831 for the years ended June 30, 2007 and 2006,
      respectively. Future amortization expense related to the definite-lived
      intangible asset over the next five years is $324,741 for each of the years
      ended June 30, 2008 and 2009, $206,991 for the year ended June 30, 2010 and
      $10,741 for each of the years ended June 30, 2011 and 2012.




**6. 
      DERIVATIVE LIABILITY**




On
      February 14, 2005, in conjunction with the issuance of Technest’s Series B and C
      Convertible Preferred Stock, the Company issued warrants to purchase 1,149,425
      shares of common stock at $6.50 per share. The shares issuable upon exercise
      of
      these warrants are covered by a Registration Rights Agreement which requires
      the
      Company to pay certain liquidated damages in the event that the Company does
      not
      have an effective registration statement. Due to the significance of the
      liquidated damages potentially due under the Registration Rights Agreement,
      in
      accordance with EITF Issue No. 00-19, the Company must conclude that settling
      the warrants in unregistered shares was “uneconomic”. Since it is not within the
      Company’s control to settle the warrants in registered shares, the Company is
      required to assume that the warrants will be net-cash settled. As a result,
      under EITF No. 00-19, the warrants did not meet the definition of equity
      instruments.


F-21


Upon
      issuance, the relative fair value of the warrants, net of issuance costs,
      $1,059,000, was recorded as a derivative liability. The warrants were
      marked-to-market each period with changes in the fair value being charged
      (credited) to the statement of operations.  As a result, in the year
      ended June 30, 2006, changes in the fair value of the warrant liability recorded
      as derivative income in the consolidated statement of operations was
      $25,046,489.




On
      September 30, 2005, the Company amended the terms of the Registration Rights
      Agreement such that any liquidated damages would only be payable in common
      stock. As a result of this amendment, the Company was able to conclude that
      the
      settlement of the warrants in unregistered shares was no longer uneconomic.
      Therefore, on September 30, 2005, the fair value of the warrants on that date,
      $1,917,127, was reclassified from derivative liabilities to additional paid-in
      capital.




**7. 
      STOCKHOLDERS' EQUITY**




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 4,735.3
      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.




During
      the year ended June 30, 2006, 59.694 shares of Series A Preferred Stock were
      converted into 282,669 shares of the Company’s common stock.





At
      June
      30, 2007 and 2006, there were 64.631 shares of Series A Preferred Stock issued
      and outstanding.





Series
      B and C Convertible Preferred Stock




The
      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. 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 ranks pari passu with the Company's Series A and C
      Preferred Stock.




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 currently $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 ranks pari passu with the Company's Series A and B Preferred
      Stock.




Technest
      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 (a) 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. On September 30, 2005, the Company amended the terms
      of
      this Registration Rights Agreement so that liquidated damages could only be
      paid
      for in the Company’s common stock at a rate of 4% of the initial subscription
      amount for any month (see Note 6).


F-22




In
      the
      year ended June 30, 2006, Markland entered into a definitive exchange agreement
      with the Deer Creek Fund LLC, pursuant to which Markland exchanged 2,250 shares
      of Markland Series D Preferred Stock for 517,243 shares of Technest Series
      B
      Convertible Preferred Stock. Subsequently, the Technest Series B Convertible
      Preferred Stock held by Markland was cancelled.





In
      the
      year ended June 30, 2006, 517,240 shares of Technest Series C Preferred
      Stock were converted to 517,240 shares of common stock.





At
      June
      30, 2007, the Company had -0- shares of Series B Preferred Stock and
      632,185 shares of Series C Preferred Stock issued and
      outstanding.





In
      conjunction with its Series B and C Convertible Preferred Stock financing,
      the
      Company has obligations under registration rights agreements. In the year ended
      June 30, 2006, the Company incurred liquidated damages of $2,329,466 which
      was
      charged to non-cash interest expense related to the Company's failure to have
      an
      effective registration statement. The Company settled $2,104,461 of this
      obligation through the issuance of 410,888 shares of Technest common stock
      and
      there is $195,000 included in accrued expenses and other current liabilities
      at
      June 30, 2006.




In
      the
      year ended June 30, 2007, the Company incurred liquidated damages related to
      these registration rights of $1,726,426 which was charged to non-cash interest
      expense and settled by the issuance of 850,761 shares of Technest common stock.
      On February 7, 2007, the required registration statement became effective and,
      as a result, the Company does not expect to incur any additional liquidated
      damages.





Common
      Stock Issuances




On
      August
      17, 2005, pursuant to a Stock Purchase Agreement with Markland Technologies,
      Inc., Technest purchased all of the outstanding stock of EOIR, formerly one
      of
      Markland’s wholly-owned subsidiaries. As consideration for the stock of EOIR,
      Technest issued 12 million shares of its common stock to Markland. Since this
      was a transaction between entities under common control, the Company has
      reported this stock issuance as though the transfer of EOIR occurred at the
      date
      Technest became part of Markland’s control group, February 14,
      2005.





During
      the year ended June 30, 2007, the Company issued the following amounts of common
      stock:




·
            850,761
                shares of Technest common stock with a fair value of $1,726,426 in
                settlement of liquidated damages for failure to have an effective
                registration statement which has been recorded as non-cash interest
                expense.




·
            99,779
                shares of Technest common stock with a fair value of $344,238 to
                certain
                employees of EOIR that hold the remaining outstanding seller notes
                in
                consideration for subordination of their security interest in the
                assets
                of the Company to Silicon Valley Bank in connection with the bank
                financing (see Note 3). This issuance includes 23,913 shares of common
                stock issued to the Company’s Chairman and Chief Executive Officer, Dr.
                Joseph Mackin.




·
            60,000
                shares of Technest common stock between Darlene Deptula-Hicks, Robert
                Doto
                and David Gust, our non-employee directors, as compensation for their
                election and service on the Company’s board of directors beginning in
                March 2006. These shares are subject to forfeiture in the event that
                the
                grantee is not providing services to Technest as a director on April
                1,
                2007. The fair value of these shares was $306,000 and was recognized
                as
                expense over the requisite service
                period.





F-23


On
      January 19, 2006, the Board of Directors of Technest adopted a resolution
      preventing the Company from designating, authorizing or issuing any series
      of
      preferred stock, or any other security, instrument or contract, convertible
      or
      exercisable, either directly or indirectly into shares of common stock, unless
      the maximum number of shares of common stock potentially issuable upon such
      conversion can be determined at the time of designation, authorization, or
      issuance.




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




Reserve
                for the exercise of warrants
            
            
            649,286Reserve
                for conversion of Series A Convertible Preferred Stock
            
            
            306,047Reserve
                for conversion of Series C Convertible Preferred Stock
            
            
            632,185Total
                common stock reserves
            
            
            1,587,518







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.




**8. 
      OPTIONS, WARRANTS AND STOCK-BASED COMPENSATION**




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 years ended June 30, 2007
      and 2006 and there are currently no options outstanding under the
      Plan.





Summary
      information with respect to warrants granted is as follows:




Number
                  of
                Shares
              
              
              Weighted
                  Average
                Exercise
                  PriceBalance,
                  July 1, 2005
              
              
              885,875
              
              
              $
              8.12Exercised
              
              
              (507,773
              )
              
              
              (6.50
              )Expired
              
              
              (3,816
              )
              
              
              3,259.17Balance,
                  June 30, 2006
              
              
              374,286
              
              
              
              6.50Issued
              
              
              275,000
              
              
              
              2.97Balance,
                  June 30, 2007
              
              
              649,286
              
              
              $
              5.00




The
      weighted average fair value per share of the warrants issued in the year ended
      June 30, 2007 is $1.83.


F-24


The
      following table summarizes the Company's warrants outstanding at June 30,
      2007:







Exercise
                price
            
            Number
            
            Expiration
                Date$6.50
            
            374,286
            
            02/14/2010$5.85
            
            75,000
            
            08/03/2013$1.89
            
            200,000
            
            07/17/2011649,286Weighted
                average remaining life
            3.4
                years





As
      of
      June 30, 2007 all warrants are exercisable.





As
      consideration for the Credit Agreements and in connection with the closing
      of
      the Financing (see Note 3), the Company issued Silicon Valley Bank a warrant
      to
      purchase 75,000 shares of Technest common stock at an exercise price of $5.85
      per share with a term of 7 years. The warrant expires August 3,
      2013.





On
      July
      17, 2006, the Company entered into an agreement with Crystal Research Associates
      to have an Executive Informational Overview independently written about the
      Company. As part of the consideration, the Company issued Crystal Research
      a
      fully vested warrant to purchase 200,000 shares of Technest common stock at
      an
      exercise price of 110% of the closing price of the Company’s stock on July 17,
      2006 or $1.89 with a term of 5 years. The fair value of this warrant was
      $253,038 and is included in selling, general and administrative expense and
      additional paid-in capital for the year ended June 30, 2007.





The
      fair
      value of these warrants was estimated using the Black-Scholes model and the
      assumptions described in Note 2.





Stock
      Award Plan





On
      March
      13, 2006, Technest adopted the Technest Holdings, Inc. 2006 Stock Award Plan,
      pursuant to which Technest may award up to 1,000,000 shares of its common stock
      to employees, officers, directors, consultants and advisors to Technest and
      its
      subsidiaries. The purpose of this plan is to secure for Technest and its
      shareholders the benefits arising from capital stock ownership by employees,
      officers and directors of, and consultants or advisors to, Technest and its
      subsidiaries who are expected to contribute to the Company’s future growth and
      success.





Technest
      has broad discretion in making grants under the Plan and may make grants subject
      to such terms and conditions as determined by the board of directors or the
      committee appointed by the board of directors to administer the Plan. Stock
      awards under the Plan will be subject to the terms and conditions, including
      any
      applicable purchase price and any provisions pursuant to which the stock may
      be
      forfeited, set forth in the document making the award. Pursuant to the
      Stockholder Agreement with Markland (see Note 10), (i) awards relating to no
      more than 500,000 shares may be granted in calendar year 2006 (the “2006
      Awards”), (ii) the 2006 Awards shall vest no earlier than twelve (12) months
      following the date of grant of such awards, and (iii) awards granted on or
      after
      January 1, 2007 shall vest no more frequently than in four equal quarterly
      installments.




Summary
      information with respect to the Plan is as follows:





Number
                of SharesIssued
            
            
            Granted
                but
              not
                issued
            
            
            TotalBalance,
                June 30, 2006
            
            
            --
            
            
            
            443,579
            
            
            
            443,579Issued
            
            
            159,779
            
            
            
            (159,779
            )
            
            
            --Granted
                but not issued
            
            
            --
            
            
            
            --
            
            
            
            --Forfeited
            
            
            --
            
            
            
            (25,000
            )
            
            
            (25,000
            )Balance,
                June 30, 2007
            
            
            159,779
            
            
            
            258,800
            
            
            
            418,579





F-25


A
      summary
      of the status of the Company’s nonvested shares as of June 30, 2007, and changes
      during the year then ended is presented below:





Nonvested
                Shares
            
            Shares
                (000)
            
            
            Weighted-Average
              Grant-Date
                Fair ValueNonvested
                at June 30, 2006
            
            
            426,779
            
            
            $
            4.71Granted
            
            
            --
            
            
            
            --Vested
            
            
            (140,666
            )
            
            $
            5.10Forfeited
            
            
            (25,000
            )
            
            $
            5.10Nonvested
                at June 30, 2007
            
            
            261,113
            
            
            $
            4.47





In
      the
      year ended June 30, 2006, in conjunction with employment agreements, five
      executives of Technest were granted 267,000 shares of the Company’s common
      stock. These shares are restricted and vest 33.33% on each of April 1, July
      1
      and October 1, 2007. The fair value of these shares, $1,361,700, is being
      recorded as stock-based compensation in selling, general and administrative
      expenses on a straight line basis over the vesting period.  During the
      year ended June 30, 2007, an employee ceased employment with the Company and
      forfeited 25,000 shares of restricted stock.  Stock-based compensation
      related to these restricted stock grants, net of forfeitures, amounts to
      $800,561 and $257,619 for the years ended June 30, 2007 and 2006,
      respectively.




In
      the
      year ended June 30, 2006, the Company granted 100 shares of restricted common
      stock to each of its employees. As a result, the Company is obligated to issue
      16,800 shares of its common stock. These shares vest on May 7, 2007. The fair
      value of these shares, $85,680, was recorded as stock-based compensation in
      selling, general and administrative expenses on a straight line basis over
      the
      vesting period. In the years ended June 30, 2007 and 2006, the Company recorded
      stock-based compensation of $63,871 and $21,809, respectively, related to these
      restricted stock grants.




In
      the year ended June 30, 2007, 60,000 shares of common
      stock with a fair value of $306,000 were granted to the non-employee directors
      serving on the Company’s Board
      of
      Directors.




Total
      stock-based compensation related to shares that vested in the year ended June
      30, 2007 was $1,170,432.  As of June 30, 2007, there was unrecognized
      compensation costs related to nonvested restricted stock of $200,141 which
      will
      be recognized through October 2007.





As
      of
      June 30, 2007, the Company has 581,421 shares available for future grant under
      the Plan.




Markland
        Stock Options
  In
        the year ended June 30, 2006, the Company recorded
        stock-based compensation of $96,339 related to certain Markland options
        previously granted to employees of the Company.  At December 31, 2005, all
        these options were cancelled.







**9. 
      NET (LOSS) INCOME PER SHARE**




Securities
      that could potentially dilute basic earnings per share ("EPS") and that were
      not
      included in the computation of diluted EPS because to do so would have been
      anti-dilutive for the year ended June 30, 2007, consist of the
      following:




Shares
              PotentiallyIssuableSeries
                A Convertible Preferred Stock
            
            
            306,047Series
                C Convertible Preferred Stock
            
            
            632,185Warrants
            
            
            649,286Total
                as of June 30, 2007
            
            
            1,587,518




**10.
      COMMITMENTS AND CONTINGENCIES**




Facility
      Rental




Technest
      has a three-year lease for executive offices of approximately 2,000 square
      feet
      in Boston, Massachusetts, which expires December 31, 2009. The monthly rental
      amount for this facility is approximately $4,500. In May 2007 this facility
      was
      vacated and subleased.




Technest
      currently also leases offices with approximately 6,848 square feet in Bethesda,
      Maryland, pursuant to a five-year lease which expires March 31, 2011. Monthly
      lease amounts for this facility total approximately $14,263, increasing annually
      by 3%. Technest’s wholly owned subsidiary, Genex Technologies, Inc. had moved
      into this space on April 1, 2006. Genex had leased offices with approximately
      6,831 square feet in Kensington, Maryland, pursuant to a five-year lease which
      expired on January 31, 2006, which we had been extending on a monthly basis.
      Monthly lease amounts for this facility totaled approximately
      $10,100.


F-26


Rent
      expense for continuing operations in the years ended June 30, 2007 and 2006
      was
      $224,165 and $138,010, respectively.




The
      future minimum rental payments required under operating leases that have
      non-cancellable or original lease terms in excess of one year as of June 30,
      2007 as are follows:




June
                  30,2008
              
              $
              231,6612009
              
              
              236,9892010
              
              
              215,4502011
              
              
              144,4732012
              
              
              --Total
              
              $
              828,573


Government
      Contracts - Genex




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 over-billed to its
      customers.




In
      the
      quarter ended December 31, 2006, the Government completed its audit and
      concluded that $194,221 is due to be refunded to the Government. This amount
      was
      paid in May 2007.




The
      Company's billings related to certain U.S. Government contracts are based on
      provisional general and administrative and overhead rates which are subject
      to
      audit by the contracting government agency.


F-27


Lien
      on Assets





Silicon
      Valley Bank (see Note 3) has a primary lien on all the assets of Technest and
      its subsidiaries. The balance outstanding to Silicon Valley Bank as of June
      30,
      2007 was $6,729,476.




Employment
      Agreements with Joseph P. Mackin and Gino M. Pereira





On
      March
      13, 2006, Technest entered into employment agreements with its President and
      Chief Executive Officer, Dr. Joseph Mackin, and its Chief Financial Officer,
      Gino M. Pereira. The employment agreements provide for:




·
            a
                term of five years beginning on March 13,
                2006;




·
            a
                base salary of $350,000 per year; in Mr. Pereira’s case, his base salary
                is subject to pro rata adjustment based on the time he spends working
                on
                Technest. Mr. Pereira is required to devote not less than sixty percent
                of
                his working time to Technest;




·
            payment
                of all necessary and reasonable out-of-pocket expenses incurred by
                the
                executive in the performance of his duties under the
                agreement;




·
            $5,000
                per month for auto expense, business office expense and other personal
                expenses;




·
            eligibility
                to participate in bonus or incentive compensation plans that may
                be
                established by the board of directors from time to time applicable
                to the
                executive's services;




·
            eligibility
                to receive a bonus if Technest achieves revenue and profit milestones
                set
                by the board of directors; and




·
            eligibility
                to receive equity awards as determined by the board of directors
                or a
                committee of the board of directors composed in compliance with the
                corporate governance standards of any applicable listing exchange,
                with an
                initial award of 120,000 shares for Dr. Mackin and 72,000 shares
                for Mr.
                Pereira, which shall be issued on the first business day after Technest
                has filed a registration statement on Form S-8 registering the 2006
                Stock
                Award Plan and shall vest in three equal installments on April 1,
                2007,
                July 1, 2007 and October 1, 2007. At June 30, 2007, no shares had
                been
                issued to either Dr. Mackin or Mr.
                Pereira.




Both
      Dr.
      Mackin and Mr. Pereira will be eligible to receive a bonus of up to 300% of
      his
      annual base salary. If Technest meets the goals of the board of directors in
      annual gross profit, the executive shall be entitled to a bonus equal to fifty
      percent of his annual salary.  In the event that Technest exceeds the goals
      of the board of directors in annual gross profit, the executive shall be
      entitled to an additional amount equal to five percent of the gross profit
      in
      excess of the goals of the board of directors up to the maximum allowable cash
      bonus. At June 30, 2007, the Company has accrued bonuses of $173,000 related
      to
      Dr. Mackin and Mr. Pereira.




The
      employment agreements provide that in the event that the executive's employment
      with Technest is terminated by Technest without cause (as that term is defined
      in Section 8(b) of the agreement), or by the executive for "Good Reason" (as
      that term is defined in Section 8(c) of the agreement), Technest will continue
      to pay the executive’s cash salary and provide health insurance through the
      expiration of his agreement, and in Dr. Mackin’s case, Technest will cause its
      wholly owned subsidiary, EOIR Technologies, Inc., to prepay the outstanding
      principal on the promissory note issued to Dr. Mackin in connection with the
      acquisition of EOIR by Markland on June 30, 2004. As of June 30, 2007, the
      outstanding principal amount on Dr. Mackin’s note is $608,957. In the event that
      the executive’s employment with Technest is terminated for any other reason,
      there will be no continuation of cash salary payments or health insurance or
      acceleration of debt payment.




Stockholder
      Agreement with Markland Technologies, Inc.





On
      March
      13, 2006, Technest entered into a stockholder agreement (the “Stockholder
      Agreement”) with Markland in order to clarify and define terms relating to (i)
      the issuance of Technest’s securities, (ii) Technest’s corporate governance,
      (iii) the listing of Technest’s securities on The NASDAQ Capital Market, (iv)
      registration of shares of Technest’s common stock currently held by the
      Stockholder, (v) intellectual property rights and (v) the provision by the
      Stockholder of certain corporate services to Technest.


F-28


Pursuant
      to the terms of the Stockholder Agreement, Technest is required to:





·
            refrain
                from issuing any shares of our common stock or securities convertible
                into
                our common stock without the consent of Markland for a period of
                twenty-six months, other than 1,000,000 shares to be issued under
                our 2006
                Stock Award Plan and certain permissible
                offerings;





·
            Maintain
                a board of directors consisting of five directors, not less than
                three of
                whom shall be “independent” directors as defined by the National
                Association of Securities Dealers;





·
            Comply
                with the corporate governance requirement set forth in the National
                Association of Securities Dealers’ Marketplace
                Rules;





·
            Submit
                an application for inclusion on The NASDAQ Capital Market and take
                all
                such actions as may be necessary to cause the application to be accepted;
                and





·
            Make
                twelve monthly payments, beginning in April 2006, in the amount of
                $83,333
                to Markland for certain services and other
                considerations.





Technest
      also granted Markland certain registration rights pursuant to which Technest
      is
      obligated to use its best efforts to register all or a portion of those shares
      of its common stock held by Markland, or any parties to whom Markland may
      transfer those shares, with the Securities and Exchange Commission for public
      resale. Such registrations are to be carried out from time to time, at our
      expense, upon the written request of Markland, with certain limitations. There
      are no liquidated damages provisions associated with these registration
      rights.





Pursuant
      to the terms of the Stockholder Agreement, Markland has agreed:





·
            For
                a period of twelve months from the date of the agreement, not to
                vote the
                shares held by it to increase the size of Technest’s board of directors or
                to remove any of the directors currently in
                office;





·
            To
                consent to Technest’s participation in up to two offerings of common stock
                in the next twelve months, provided that we do not offer shares of
                common
                stock in such an offering at a price of less than $5.85, and that
                Markland, and its assigns, be permitted to participate as a selling
                shareholder in any such offering.




License
      Agreement with Markland Technologies, Inc.





On
      March
      13, 2006, Technest entered into a license agreement with Markland (the “License
      Agreement”). Pursuant to the License Agreement, Technest granted Markland an
      exclusive, world-wide license to make, use and sell products and services based
      on its intellectual property, to parties other than federal, state or local
      government agencies involved in intelligence, military, law enforcement or
      homeland defense functions. The license granted by the License Agreement shall
      be in effect until all of its current patents or patent applications have
      expired or until such time as the License Agreement is terminated pursuant
      to
      its terms.





Pursuant
      to the terms of the License Agreement, Markland is required to pay us a royalty
      of twenty-five percent of the net gross profits, as defined in the License
      Agreement, they realize on any sale of any product or service utilizing the
      licensed intellectual property.





Additionally,
      if at the end of three years from the date of execution of the License
      Agreement, Markland has not realized enough net gross profits to generate an
      aggregate $300,000 of royalties, or $150,000 in royalties on an annual basis
      thereafter, the license shall become non-exclusive.





As
      a
      condition of the License Agreement, we are required to take all steps reasonably
      necessary to maintain our current patents and prosecute our current
      patent applications.





The
      License Agreement provides that Markland may cancel the agreement at any time
      upon 180 days notice. Technest may cancel the License Agreement if Markland
      fails to make a required royalty payment and does not cure such failure within
      thirty days of receiving notice of the failure or Markland violates the
      licensing terms of the License Agreement.


F-29


In
      conjunction with the License Agreement, Technest transferred inventory with
      a
      cost of $105,218 from Genex to Markland related to Genex’s commercial
      products.





On
      August
      31, 2007, certain provisions of the Stockholder Agreement and the entire License
      Agreement were terminated (see Note 15).





**11. 
      INCOME TAXES**




There
      was
      no provision for federal income taxes for the years ended June 30, 2007 and
      June
      30, 2006 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.




At
      June
      30, 2007, the Company had net operating loss carryforwards for federal income
      tax purposes of approximately $12,000,000, including those related to EOIR,
      which will expire in various amounts through 2026.




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




2007
              
              
              2006Tax
                  provision (benefit) at statutory rate
              
              $
              (1,695,000
              )
              
              $
              6,886,000Permanent
                  differences due to :Derivative
                  (income) loss
              
              
              --
              
              
              
              (8,516,000
              )Losses
                  providing no tax benefit
              
              
              1,695,000
              
              
              
              1,597,000Other
              
              
              --
              
              
              
              33,000$
              --
              
              
              $
              --




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, 2007 and June 30,
      2006
      are as follows:




2007
            
            
            2006Net
                operating loss carryforward
            
            $
            4,420,000
            
            
            $
            4,200,000Stock-based
                compensation
            
            
            535,000
            
            
            
            --Non-deductible
                EOIR intangibles
            
            
            (464,000
            )
            
            
            (702,000
            )Property
                and equipment
            
            
            117,000
            
            
            
            46,000Valuation
                allowance
            
            
            (4,608,000
            )
            
            
            (3,544,000
            )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. In the years ended June 30, 2007 and 2006, the
      valuation allowance increased by $1,064,000 and $44,000 respectively.  If
      the proposed sale of EOIR closes, the Company will not recognize the net
      operating losses or deferred tax assets related to EOIR.





**12. 
      RELATED PARTY TRANSACTIONS**




During
      the year ended June 30, 2007, Markland invoiced EOIR $1,497,436 for
      administrative support services, engineering services and product manufacturing
      rendered by Markland. During the year ended June 30, 2007, EOIR paid Markland
      $1,385,792 in conjunction with the intercompany transactions described above.
      During the year ended June 30, 2006 the Company recorded as selling, general
      and
      administrative expense a management fee of $1,000,000 to Markland for
      administrative support services, engineering services and services rendered
      by
      executive officers of Markland who also functioned as executive officers of
      the
      Company (see Note 10). During the year ended June 30, 2006, EOIR made payments
      to Markland of approximately $2,350,000 in conjunction with the intercompany
      transactions described above.


F-30


At
      June
      30, 2007, Technest has an amount due from Markland of
      $2,604.  Included in the liabilities related to discontinued
      operations is $292,640 due to Markland.




As
      consideration for the subordination of the security interest to the Bank and
      in
      connection with the closing of the Financing on August 10, 2006, the Company
      issued to the seven remaining EOIR subordinated note holders a total of 99,779
      shares of the Company’s common stock having a fair value of $344,238, of which
      our current Chief Executive Officer and one of the Company’s directors, Joseph
      P. Mackin, received 23,913 shares. These were recorded as deferred financing
      costs and are classified as assets related to discontinued operations due to
      the
      repayment of the financing upon the sale of EOIR (see Note 3).




Markland
      has entered into an Unconditional Guaranty pursuant to which Markland agreed
      to
      guaranty up to $6,000,000 of the principal obligations plus interest thereon
      and
      related expenses under the Credit Agreements and a Stock Pledge Agreement
      pursuant to which Markland pledged to the Bank 1,739,130 shares of Technest
      common stock currently owned by Markland, which had a market value of $6,000,000
      as of August 4, 2006. The Guaranty and the Stock Pledge Agreement terminate
      August 3, 2008 if no event of default has occurred. In consideration for this
      guarantee and stock pledge, Technest paid Markland $580,372. This was recorded
      as a deferred financing cost and is classified as assets related to discontinued
      operations due to the repayment of the Financing upon the sale of EOIR (see
      Note
      3 and 15).





**13.
       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.




Technest
      has adopted a 401(k) plan for the benefit of employees. Essentially all Technest
      employees are eligible to participate. The Company also contributes to the
      plan
      under a safe harbor plan requiring a 3% contribution for all eligible
      participants. In addition, the Company may contribute a 3% elective match.
      The
      Company contributes 6%, excluding bonuses on an annual basis, to those who
      have
      been employed by Technest for more than one year and remain employed on the
      last
      day of the fiscal year.




Contributions
      and other costs of these plans in the year ended June 30, 2007 and 2006 were
      $113,840 and $61,051, respectively.





**14. 
      LITIGATION**





*Technest
      Holdings, Inc.*





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 plaintiffs are purporting to act on behalf of Technest in the
      context of a shareholder’s derivative suit. The action’s principal basis appears
      to be a claim that Ben Stein, a former director and Secretary of Technest,
      wrongfully claims ownership of shares of common stock that Stein agreed to
      purchase from H&H. According to H&H, these shares belong to them.
      H&H asserts sixteen causes of action. Only some make allegations against
      Technest Holdings, Inc., Michael Sheppard and Maura Marx, former officers of
      Technest.


F-31


Technest,
      Mr. Sheppard and Ms. Marx believe that the claims against Technest, Mr. Sheppard
      and Ms. Marx are without merit and are vigorously defending the action.
      Technest, 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.





In
      June
      2006, the court directed the parties to address the court’s continuing subject
      matter jurisdiction over Technest in the H&H matter. Technest has responded
      to the court’s direction and believes that as a result of intervening corporate
      actions, the injunctive relief sought by the plaintiff which gives rise the
      court’s subject matter jurisdiction in this case has been rendered moot, thereby
      depriving the court of continuing subject matter jurisdiction. Technest believes
      that the case as currently styled is fundamentally a dispute between H&H
      Acquisition Corp. and Ben Stein.





As
      of
      September 21, 2007, Technest has not been notified of a trial date for this
      matter.





On
      or
      about May 30, 2006, Deer Creek Fund LLC filed a claim for Interference with
      Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing
      against Technest, seeking unspecified monetary damages.  Deer Creek alleges
      misconduct on the part of Technest related to a proposed sale by Deer Creek
      of
      157,163 shares of Technest common stock at $7.00 per share and the applicability
      of certain selling restrictions under a registration rights agreement entered
      into between the parties. Technest believes that the allegations in this
      lawsuit are entirely without merit. Technest has been aggressively defending
      this action, and has filed an answer denying Deer Creek’s allegations and
      vigorously opposes all relief sought.  A trial date for this claim had
      been set for July 10, 2007, which had to be unexpectedly
      rescheduled.  Technest has not been notified of a new trial
      date.





*EOIR
      Technologies, Inc.*





Markland
      and EOIR were notified on July 11, 2005 by counsel for Greg and Mary Williams,
      former shareholders and employees of EOIR and, in the case of Mr. Williams,
      a
      former director of Markland, that the Williams’ filed a lawsuit in the
      Commonwealth of Virginia, naming EOIR and Markland as defendants, seeking
      damages in the amount of $3,000,000 regarding a number of contractual disputes
      involving the registration of shares of Markland common stock underlying certain
      options issued to the Williams’ in connection with the acquisition of EOIR by
      Markland and severance payments pursuant to severance agreements by and among
      the Williams’, EOIR and Markland. On August 3, 2005, EOIR and Markland filed an
      answer and a demurrer denying all liability. On November 4, 2005, the Court
      heard the demurrer filed by EOIR Technologies, Inc. and Markland Technologies,
      Inc. and denied it. On April 6, 2006, a hearing was held in the Circuit Court
      for the City of Fredericksburg, Virginia on the Williams’ motion for summary
      judgment. On May 4, 2006, the court granted the Williams’ motion for summary
      judgment with regard to liability on Count I of the Williams’ claim regarding
      severance payment and Count III of their claim regarding Markland’s failure to
      register shares of Markland’s common stock underlying their options. We have,
      and continue to assert that Count III of the Williams’ complaint does not allege
      wrongdoing by EOIR and thus, we believe that we have no liability on that claim.
      Count II of the claim, which seeks a declaration that the promissory notes
      issued to Mr. and Mrs. Williams in connection with the acquisition of EOIR
      by
      Markland on June 29, 2004 are in default and an acceleration of the payments
      due
      under those notes, was not addressed by the court’s order.





On
      July
      27, 2006, we entered into an agreement with the Williams pursuant to which
      we
      paid them $246,525 in satisfaction of their claims for severance under Count
      I
      and agreed to pay the outstanding balance of their promissory notes, along
      with
      all accrued but unpaid interest, in satisfaction of Count II which was paid
      on
      August 10, 2006. The Williams continue to assert claims against us for
      attorney’s fees and costs on all three counts of their complaint. Count III was
      not addressed by this agreement.





On
      September 1, 2006, we entered into an agreement with Markland pursuant to which
      we agreed to indemnify Markland against any judgment for damages or attorney’s
      fees ordered by the Court pursuant to Counts I or II and Markland agreed to
      indemnify us against any judgment for damages or attorney’s fees ordered by the
      Court pursuant to Count III.





On
      March
      21, 2007, EOIR and the Williams entered into a settlement agreement pursuant
      to
      which EOIR agreed to pay to the Williams $100,000 in 10 monthly installments
      of
      $10,000 each beginning on April 1, 2007 in exchange for the Williams to dismiss,
      with prejudice, their request for attorney’s fees against EOIR on Counts I and
      II of their motion for judgment and Count III as it pertained to
      EOIR.  The remaining balance of $60,000 is included in liabilities
      related to discontinued operations at June 30, 2007.


F-32


**15**. 
      **SUBSEQUENT EVENTS**




**Proposed
      Sale of EOIR Technologies, Inc.**





On
      September 10, 2007, Technest and its wholly owned subsidiary, E-OIR
      Technologies, Inc. (“EOIR”), entered into a Stock Purchase Agreement with EOIR
      Holdings LLC, a Delaware limited liability company ( “LLC”), pursuant to which
      Technest will sell EOIR to LLC.  LLC is an entity formed on August 9,
      2007 by The White Oak Group, Inc., an Atlanta, Georgia based private investment
      firm, for the purposes of facilitating this transaction.  The White
      Oak Group, Inc. is a private investment firm focused on investments in the
      aerospace and defense industry, with an emphasis on the following sectors:
      Homeland security (detection and deterrence); avionics and instrumentation;
      command and control; and communication networks and services.





The
      sale
      of EOIR to LLC will be structured as a stock sale in which LLC will acquire
      all
      of the outstanding stock of EOIR in exchange for approximately $34 million
      in
      cash, $11 million of which will be paid at closing and $23 million of which
      will
      be paid upon the successful re-award to EOIR of the contract with the U.S.
      Army's Night Vision and Electronics Sensors Directorate. As a condition of the
      sale,
      the proceeds will be used to extinguish debt from Silicon Valley Bank, Shelter
      Island and the former EOIR note holders. As of June 30, 2007, the face value
      of
      these loans was $9,785,616.





*Summary
      of the Transaction*





Pursuant
      to the terms of the Stock Purchase Agreement, at the closing, LLC will acquire
      all of the outstanding common stock of EOIR from Technest and LLC will pay
      Technest $11 million in cash.  The initial cash payment due at closing
      will be subject to adjustment (up or down) depending on EOIR’s net working
      capital on the closing date.  In addition to the initial cash payment,
      LLC has agreed to pay Technest an additional contingent payment of $23 million
      if, on or prior to December 31, 2009, EOIR is awarded the follow-on of EOIR’s
      current contract with the U.S. Army's Night Vision and Electronics Sensors
      Directorate.





Technest
      and LLC have agreed to deposit $200,000 of the initial purchase price payment
      and $2.3 million of the contingent purchase price payment (if any) in an escrow
      account to secure indemnification obligations of Technest under the Stock
      Purchase Agreement.





The
      transaction has been approved unanimously by the board of directors of Technest
      and EOIR. The board of directors of Technest was advised by Rodman &
Renshaw, LLC who acted as a financial advisor to Technest and provided a
      fairness opinion to the Technest board as to the fairness of the consideration
      to be received by Technest.





*Conditions
      to Completion of the Transaction*





Technest
      and LLC will complete the transaction when all of the conditions to closing
      are
      satisfied or waived, including among other things, approval of the transaction
      by the stockholders of Technest.  In addition, as a condition to
      closing, LLC, which is in the process of applying for a small business
      investment company license under the Small Business Investment Company Act
      of
      1958, must obtain the approval of the transaction as a “pre-license investment”
from the Small Business Administration.





In
      connection with the Stock Purchase
      Agreement, certain stockholders of Technest representing approximately 42%
      of
      Technest’s outstanding Common Stock, entered into Voting Agreements, pursuant to
      which such stockholders agreed to vote their Technest shares in favor of the
      proposed transaction.





**Termination
      of Certain Sections
      of Stockholder Agreement and of License Agreement.**





On
      August 31, 2007, Technest Holdings,
      Inc. entered into a Release Agreement with Southridge Partners, LP, a Delaware
      limited partnership (“Southridge”), a current stockholder of the Company,
      pursuant to which the parties agreed, among other things, to the
      following:





·
            Technest
                and Markland Technologies, Inc. (“Markland”) were parties to a Stockholder
                Agreement, dated March 13, 2006 (the “Stockholder Agreement”), and a
                License Agreement dated March 13, 2006 (the “License
                Agreement”).  Pursuant to an Assignment and Assumption Agreement
                dated as of August 30, 2007 between Markland and Southridge, Markland
                assigned all of its rights in the Stockholder Agreement and the License
                Agreement to Southridge. As part of the Release Agreement, Southridge
                and
                Technest agreed to (a) terminate the obligations set forth in Section
                1 of
                the Stockholder Agreement that restrict the ability of Technest to
                issue
                equity securities, convertible debt or derivative securities, (b)
                terminate the obligations set forth in Section 5 of the Stockholder
                Agreement relating to a right of co-sale and (c) terminate the License
                Agreement in its entirety.  All rights, title and interest in
                the intellectual property that was subject to the License Agreement
                reverts back to Technest and its
                subsidiaries.


F-33


·
            *Voting
                Agreement.* Southridge agreed that it will vote all shares of Technest
                Common Stock owned by it and to cause its Affiliates that own shares
                of
                Technest Common Stock or Technest Preferred Stock to vote all of
                their
                shares, in favor of certain transactions entered into by September
                10,
                2007 that are approved and recommended by a majority of the directors
                of
                Technest under certain conditions.





·
            *Board
                Representation.*The Board of Directors of Technest agreed to increase
                the size of the board from five to six and fix the number of directors
                of
                Technest at six and to elect two reasonably qualified individuals
                representing Southridge to fill the newly created directorships in
                accordance with Technest’s Bylaws.





·
            *Other
                Terms.*Until March 31, 2008 or upon the satisfaction of
                certain conditions, whichever is earlier, Technest agreed that it
                would
                refrain from (a) issuing any shares of its Common Stock or securities
                convertible into its Common Stock, other than (i) shares to be issued
                in
                certain permissible offerings; (ii) certain shares already awarded
                under
                Technest’s 2006 Stock Award Plan, and (iii) 250,000 shares to be issued
                under the 2006 Stock Award Plan; (b) entering into any transaction
                with
                its officers, directors, stockholders or any of their Affiliates,
                except
                for transactions that are in the ordinary course of Technest’s business,
                upon fair and reasonable terms that are no less favorable to Technest
                than
                would be obtained in an arm’s length transaction with a non-Affiliated
                person or entity.





·
            *Consideration.*  As
                consideration for the Release Agreement, Technest agreed to issue
                Southridge 3,000,000 shares of Technest Common Stock, $0.001 par
                value per
                share, with a value of $1,380,000.





**Other
      Matters**





On
      August
      15, 2007, the Company issued 152,000 shares of its Common Stock to three
      executives of Technest pursuant to employment agreements.





On
      August
      9, 2007, Darlene Deptula-Hicks resigned as a director of Technest Holdings,
      Inc.
      for personal reasons.  Ms. Deptula-Hicks served as the chairman of the
      Company’s audit committee.  Until such time as another independent
      director, who also qualifies as a financial expert, is elected to Board of
      Directors, the audit committee has been disbanded.




On September 12, 2007, the Silicon Valley Bank Revolver
      was
      extended until February 3, 2008.





F-34


**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.




**Changes
      in Internal Controls Over Financial Reporting**




There
      was
      no change in our internal control over financial reporting during the quarter
      ended June 30, 2007 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.





**PART
      III**




**Item
      9. Directors and Executive Officers of the Registrant;
      Compliance with Section 16(a) of the Exchange Act.**




The
      information called for by this item is incorporated by reference to our Proxy
      Statement for the 2007 annual meeting of stockholders.




**Item
      10. Executive Compensation.**




The
      information called for by this item is incorporated by reference to our Proxy
      Statement for the 2007 annual meeting of stockholders.




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




The
      information called for by this item is incorporated by reference to our Proxy
      Statement for the 2007 annual meeting of stockholders.




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




The
      information called for by this item is incorporated by reference to our Proxy
      Statement for the 2007annual meeting of stockholders.


-33-





**Item
      13. Exhibits.**





Exhibit
                No.
            Description
            Filed
                with this
              10-KSB
            Incorporated
              by
                reference
              From
            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 LLC, 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
            3.13.4
            Amended
                and Restated By-Laws dated May 21, 2001.
            
            DEF
                14A
            June
                14, 2001
            B3.5
            Bylaw
                Amendments
            
            8-K
            December
                20, 2006
            3.14.1
            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 LLC for Markland
                Common
                Stock, dated February 14, 2005
            
            8-K
            February
                15, 2005
            4.1


-34-





4.4
            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 LLC 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
            4.44.7
            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
            Amendment
                No. 1 to the Registration Rights Agreement dated October 3, 2005
                among
                Technest Holdings, Inc., Verdi Consulting, Inc., ipPartners, Inc.,
                Southridge Partners LP and Southshore Capital Fund, Ltd., amending
                the
                Registration Rights Agreement dated February 14, 2005 among these
                parties.
            
            8-K
            October
                7, 2005
            4.24.12
            Amendment
                No. 2 to Registration Rights Agreement dated February 27, 2006 among
                Technest Holdings, Inc., Verdi Consulting, Inc., ipPartners, Inc.,
                Southridge Partners LP and Southshore Capital Fund, Ltd., amending
                the
                Registration Rights Agreement dated February 14, 2005 among these
                parties.
            
            8-K
            March
                2, 2006
            4.24.13
            Technest
                Common Stock Warrant issued to Silicon Valley Bank dated August 4,
                2006.
            
            8-K
            August
                14, 2006
            4.1


-35-





4.14
            Registration
                Rights Agreement between Technest Holdings, Inc. and Silicon Valley
                Bank
                dated August 4, 2006.
            
            8-K
            August
                14, 2006
            4.24.15
            Technest
                Common Stock Warrant issued to Crystal Research Associates LLC dated
                July
                17, 2006
            
            10-KSB
            October
                13, 2006
            4.15





4.16
            Registration
                Rights Agreement between Technest Holdings, Inc. and Crystal Research
                Associates LLC dated July 17, 2006.
            
            10-KSB
            October
                13, 2006
            4.164.17
            $1,650,000
                Secured Original Issue Discount Debenture dated May 31, 2007.
            
            8-K
            June
                5, 2007
            4.110.1
            Securities
                Purchase Agreement between the registrant and Verdi Consulting dated
                February 8, 2005.
            
            8-K
            February
                14, 2005
            10.110.2
            Form
                of 8% Promissory Note between the registrant and Garth LLC.
            
            8-K
            February
                14, 2005
            10.210.3
            Exchange
                Agreement between the registrant and Garth LLC dated February 8,
                2005.
            
            8-K
            February
                14, 2005
            10.310.4
            Securities
                Purchase Agreement between the registrant and Garth LLC dated February
                8,
                2005.
            
            8-K
            February
                14, 2005
            10.410.5
            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
            10.110.6*
            Form
                of Option to be granted under the 2004 Markland Stock Incentive
                Plan
            
            8-K
            February
                15, 2005
            10.610.7
            Stock
                Purchase Agreement between Markland Technologies, Inc. and Technest
                Holdings, Inc. dated August 17, 2005
            
            8-K
            August
                18, 2005
            10.110.8
            Night
                Vision Electronic Sensors Directorate (NVESD) Omnibus Contract between
                E-OIR Technologies, Inc. and****United States Army
                Night Vision and Electronic Sensors Directorate.
            
            10-QSB
            November
                21, 2005
            10.210.9
            Stock
                Purchase Agreement by and between Markland and EOIR, dated June 30,
                2004.
            
            10-QSB
            November
                21, 2005
            10.310.10
            Form
                of Promissory Note made by EOIR Technologies, Inc. and dated June
                29,
                2004.
            
            10-QSB
            November
                21, 2005
            10.4


-36-





10.11
            Security
                Agreement by and between EOIR and sellers of EOIR stock, dated
                June 30, 2004.
            
            10-QSB
            November
                21, 2005
            10.510.12
            Pledge
                and Security Agreement, by and between Markland, EOIR and the Sellers
                thereon, dated June 29, 2004.
            
            10-QSB
            November
                21, 2005
            10.610.13
            Lease
                Agreement between Branch Banking and Trust Company of Virginia
                and
              E-OIR
                Technologies, dated May 31, 2002.
            
            10-QSB
            February
                21, 2006
            10.110.14
            First
                Amendment to Lease by and between Branch Banking and Trust Company
                of
                Virginia and E-OIR Technologies, Inc. dated October 1, 2005.
            
            10-QSB
            February
                21, 2006
            10.210.15
            Jackson
                Square Office Park Deed of Lease by and between LJ Holding, L.C.
                and E-OIR
                Technologies, Inc., dated September 22, 2004.
            
            10-QSB
            February
                21, 2006
            10.310.16
            Deed
                of Commercial Office Lease Agreement between BDC Spotsylvania LLC
                and
                E-OIR Technologies, Inc., dated May 16, 2005.
            
            10-QSB
            February
                21, 2006
            10.410.17
            First
                Amendment to Deed of Commercial Office Lease Agreement between BDC
                Spotsylvania LLC and E-OIR Technologies, Inc. dated September 29,
                2005.
            
            10-QSB
            February
                21, 2006
            10.510.18
            Lease
                between Paul J Kingston, Trustee of M.P.A. Realty Trust, and Technest
                Holdings, Inc., dated December 31, 2005.
            
            10-QSB
            February
                21, 2006
            10.610.19
            Office
                Lease Agreement between Motor City Drive, LLC and Genex Technologies,
                Inc., dated December 20, 2005.
            
            10-QSB
            February
                21, 2006
            10.710.20
            Stockholders’
                Agreement between Markland Technologies, Inc. and Technest Holdings,
                Inc.
                dated March 13, 2006.
            
            8-K
            March
                17, 2006
            10.110.21
            License
                Agreement between Markland Technologies, Inc. and Technest Holdings,
                Inc.
                dated March 13, 2006.
            
            8-K
            March
                17, 2006
            10.210.22*
            Employment
                Agreement between Joseph P. Mackin and Technest Holdings, Inc. dated
                March
                13, 2006.
            
            8-K
            March
                17, 2006
            10.310.23*
            Employment
                Agreement between Gino M. Pereira and Technest Holdings, Inc. dated
                March
                13, 2006.
            
            8-K
            March
                17, 2006
            10.4


-37-





10.24*
            Form
                of Restricted Stock Agreement between Joseph P. Mackin and Technest
                Holdings, Inc.
            
            8-K
            March
                17, 2006
            10.510.25*
            Form
                of Restricted Stock Agreement between Gino M. Pereira and Technest
                Holdings, Inc.
            
            8-K
            March
                17, 2006
            10.610.26*
            Release
                and Indemnification Agreement between Robert Tarini and Technest
                Holdings,
                Inc. dated March 13, 2006.
            
            8-K
            March
                17, 2006
            10.710.27*
            Technest
                Holdings, Inc. 2006 Stock Award Plan.
            
            8-K
            March
                17, 2006
            10.810.28
            Loan
                and Security Agreement for Term Loan among Silicon Valley Bank, Technest
                Holdings, Inc., E-OIR Technologies, Inc. and Genex Technologies,
                Inc.
                dated August 4, 2006.
            
            8-K
            August
                14, 2006
            10.110.29
            Loan
                and Security Agreement for Working Capital Line of Credit among Silicon
                Valley Bank, Technest Holdings, Inc., E-OIR Technologies, Inc. and
                Genex
                Technologies, Inc. dated August 4, 2006.
            
            8-K
            August
                14, 2006
            10.210.30
            Intellectual
                Property Security Agreement among Silicon Valley Bank, Technest Holdings,
                Inc., E-OIR Technologies, Inc. and Genex Technologies, Inc. dated
                August
                4, 2006.
            
            8-K
            August
                14, 2006
            10.3





10.31
            Unconditional
                Guaranty by Markland Technologies, Inc. dated August 4, 2006.
            
            8-K
            August
                14, 2006
            10.410.32
            Stock
                Pledge Agreement between Markland Technologies, Inc. and Silicon
                Valley
                Bank dated August 4, 2006.
            
            8-K
            August
                14, 2006
            10.510.33*
            Agreement
                relating to Certain Promissory Notes between Technest Holdings, Inc.
                and
                Joseph P. Mackin dated August 4, 2006.
            
            8-K
            August
                14, 2006
            10.610.34*
            First
                Allonge to Promissory Note of Joseph P. Mackin dated August 4,
                2006.
            
            8-K
            August
                14, 2006
            10.710.35*
            Restricted
                Stock Grant Agreement between Technest Holdings, Inc. and Joseph
                P. Mackin
                dated August 4, 2006.
            
            8-K
            August
                14, 2006
            10.810.36
            Indemnification
                Agreement between Technest Holdings, Inc. and Markland Technologies,
                Inc.
                dated September 1, 2006.
            
            10-KSB
            October
                13, 2006
            10.3610.37
            Office
                Lease Agreement Amendment No. 1 by and among Genex Technologies,
                Incorporated, Technest Holdings, Inc. and Motor City Drive, LLC dated
                as
                of November 1, 2006.
            
            10-QSB
            February
                14, 2007
            10.1


-38-





10.38
            Asset
                Contribution Agreement between Technest Holdings, Inc. and Genex
                Technologies Incorporated dated November 1, 2006.
            
            10-QSB
            February
                14, 2007
            10.210.39
            First
                Loan Modification Agreement, dated February 14, 2007, to the Loan
                and
                Security Agreement for Term Loan among Silicon Valley Bank, Technest
                Holdings, Inc., E-OIR Technologies, Inc. and Genex Technologies,
                Inc.
                dated August 4, 2006.
            
            10-QSB
            May
                11, 2007
            10.310.40
            First
                Loan Modification Agreement, dated February 14, 2007, to the Loan
                and
                Security Agreement for Working Capital Line of Credit among Silicon
                Valley
                Bank, Technest Holdings, Inc., E-OIR Technologies, Inc. and Genex
                Technologies, Inc. dated August 4, 2006.
            
            10-QSB
            May
                11, 2007
            10.410.41
            Second
                Loan Modification Agreement, dated April 3, 2007, to the Loan and
                Security
                Agreement for Term Loan among Silicon Valley Bank, Technest Holdings,
                Inc., E-OIR Technologies, Inc. and Genex Technologies, Inc. dated
                August
                4, 2006.
            
            10-QSB
            May
                11, 2007
            10.510.42
            Second
                Loan Modification Agreement, dated April 3, 2007, to the Loan and
                Security
                Agreement for Working Capital Line of Credit among Silicon Valley
                Bank,
                Technest Holdings, Inc., E-OIR Technologies, Inc. and Genex Technologies,
                Inc. dated August 4, 2006.
            
            10-QSB
            May
                11, 2007
            10.610.43
            Securities
                Purchase Agreement dated May 31, 2007 between Technest Holdings,
                Inc. and
                Shelter Island Opportunity Fund, LLC.
            
            8-K
            June
                5, 2007
            10.110.44
            Security
                Agreement dated May 31, 2007 between Technest Holdings, Inc. and
                Shelter
                Island Opportunity Fund, LLC.
            
            8-K
            June
                5, 2007
            10.210.45
            Security
                Agreement dated May 31, 2007 between Technest Holdings, Inc. and
                Shelter
                Island Opportunity Fund, LLC.
            
            8-K
            June
                5, 2007
            10.310.46
            Security
                Agreement dated May 31, 2007 between Markland Technologies, Inc.
                and
                Shelter Island Opportunity Fund, LLC.
            
            8-K
            June
                5, 2007
            10.410.47
            Security
                Agreement dated May 31, 2007 between Genex Technologies Incorporated
                and
                Shelter Island Opportunity Fund, LLC.
            
            8-K
            June
                5, 2007
            10.510.48
            Guaranty
                by E-OIR Technologies, Inc. dated May 31, 2007.
            
            8-K
            June
                5, 2007
            10.6


-39-





10.49
            Guaranty
                by Genex Technologies Incorporated dated May 31, 2007.
            
            8-K
            June
                5, 2007
            10.710.50
            Agreement
                relating to Certain Promissory Notes among Technest Holdings, Inc.,
                E-OIR
                Technologies, Inc. and Joseph P. Mackin dated May 31,
                2007.
            
            8-K
            June
                5, 2007
            10.810.51
            Release
                Agreement dated August 31, 2007 between Technest Holdings, Inc. and
                Southridge Partners, LP
            
            8-K
            September
                7, 2007
            10.110.52
            Stock
                Purchase Agreement dated September 10, 2007 between Technest Holdings,
                Inc., EOIR Holdings, LLC and E-OIR Technologies, Inc.
            
            8-K
            September
                13, 2007
            10.110.53
            Form
                of Voting Agreement with a list of signatories.
            
            8-K
            September
                13, 2007
            10.210.54
            Third
                Loan Modification Agreement, dated September 12, 2007, to the Loan
                and
                Security Agreement for Working Capital Line of Credit among Silicon
                Valley
                Bank, Technest Holdings, Inc., E-OIR Technologies, Inc. and Genex
                Technologies, Inc. dated August 4, 2006.
            x16.1
            Letter
                from Sherb & Co.
            
            8-K/A
            August
                25, 2005
            16.121.1
            List
                of the Subsidiaries of Technest Holdings, Inc.
            x23.1
            Consent
                of Wolf & Company, PC
            x31.1
            Certification
                by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule
                15d-14(a).
            x31.2
            Certification
                by CFO 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


*
      Indicates a management contract or compensatory plan.








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




The
      information called for by this item is incorporated by reference to our Proxy
      Statement for the 2007annual meeting of stockholders.


-40-





**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 on October 1, 2007.





TECHNEST
                HOLDINGS, INC.
              
              By:  /s/ Joseph P.
                Mackin
              Joseph P. Mackin
              Chief Executive
                Officer






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.





**Signature**
            
            **Title**
            
            **Date**/s/
                Joseph P. Mackin
            
            Chief
                Executive Officer, President and
            
            October
                1, 2007Joseph
                P. Mackin
            
            Chairman
                of the Board of Directors/s/
                Gino Miguel Pereira
            
            Chief
                Financial Officer, Principal
            
            October
                  1, 2007Gino
                Miguel Pereira
            
            Accounting
                Officer and Director/s/
                David R. Gust
            
            Director
            
            October
                  1, 2007David
                R. Gust/s/
                Robert Doto
            
            Director
            
            October
                  1, 2007Robert
                Doto






-41-