UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-K  xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended June 30, 2011 ̈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)88-0357272
(I.R.S. Employer Identification No.)10411 Motor City Drive, Suite 650, Bethesda, MD
(Address of principal executive offices)20817
(Zip Code)10411 Motor City Drive, Suite 650, Bethesda, MD
(Mailing Address)  Issuers Telephone Number: (301) 767-2810  Securities registered pursuant to Section 12(b) of the Act:  Title of ClassName of each exchange on which registeredNoneNot Applicable  Securities registered pursuant to Section 12(g) of the Exchange Act:  Common Stock, par value $0.001 per share (Title or Class)  Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   ̈ Yes   x No  Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   ̈ Yes   x No  Indicate by check mark whether the registrant  (1) has 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  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   ̈ Yes    ̈ No  Indicate by check mark if  disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.   ̈  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer ̈Smaller reporting companyx  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o Yes   x No  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 December 31, 2010 (See definition of affiliate in Rule 12b-2 of the Exchange Act.) was: $210,194.60  * 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:  120,279,296 shares as of October 12, 2011, all of one class of common stock, $0.001 par value.  DOCUMENTS INCORPORATED BY REFERENCE  Documents Incorporated by reference:  None        TECHNEST HOLDINGS, INC. FORM 10-K TABLE OF CONTENTS June 30, 2011  Part IItem 1.Business4Item 2.Property18Part IIItem 5.Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities19Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations20Item 8.Financial Statements42Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure61Item 9A.Controls and Procedures61Item 9B.Other Information62Part IIIItem 10.Directors, Executive Officers and Corporate Governance63Item 11.Executive Compensation66Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters72Item 13.Certain Relationships and Related Transactions and Director Independence.74Item 14.Principal Accounting Fees and Services75Part IVItem 15.Exhibits76Signatures80  2       NOTE REGARDING FORWARD-LOOKING STATEMENTS  This annual report on Form 10-K 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-K 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-K. 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-K, and unless the context otherwise requires Technest, "AccelPath, the Company, we, us and our refer to Technest Holdings, Inc. and its subsidiaries, AccelPath LLC, Technest, Inc. and Genex Technologies, Inc., taken as a whole.  All dollar amounts in this Annual Report are in U.S. dollars, unless otherwise stated.  3       PART I   Item 1. Description of Business  Overview  Technest Holdings, Inc. has two primary businesses: AccelPath, which is in the business of enabling pathology diagnostics and Technest, which is in the business of the design, research and development, integration, sales and support of three-dimensional imaging devices and systems.  Each of the AccelPath and Technest businesses are described below.  On March 4, 2011, Technest Holdings, Inc. acquired AccelPath and AccelPath became a wholly-owned subsidiary of Holdings.  The former members of AccelPath received an aggregate of 86,151,240 shares of Holdings common stock and, immediately after the transaction, owned 72.5% of Holdingss issued and outstanding common stock.  Immediately prior to the merger, Holdings had 32,678,056 shares of common stock outstanding.  Following the acquisition, AccelPath began operating as a wholly-owned subsidiary of Holdings.  Accounting principles generally accepted in the United States generally require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes.  The acquisition was accounted for as a reverse acquisition whereby AccelPath was deemed to be the accounting acquirer.  Accordingly, the results of operations of Technest Holdings, Inc. have been included in the consolidated financial statements since the date of the reverse acquisition.  The historical financial statements of AccelPath are presented as the historical financial statements of Holdings.  AccelPath Business  We are a technology solutions company that delivers services that play a key role in the delivery of information for diagnosis of diseases and other pathologic conditions with and through our associated pathologists and strategic alliances. The experienced pathologists and medical institutions with whom we partner to manage slide and information delivery prepare comprehensive diagnostic reports of a patients condition and consult with referring physicians to help determine the appropriate treatment. Such diagnostic reports often enable the early detection of disease, allowing referring physicians to make informed and timely treatment decisions that improve their patients health in a cost-effective manner. We seek out referring physicians and histology laboratories in need of pathology interpretations for our associated pathologists and manage slide delivery and develop services for managing the information.  We are focused on providing technology solutions for the anatomic pathology market. Our business model builds upon the expertise of experienced pathologists to provide seamless, reliable and comprehensive pathology and special test offerings to referring physicians using conventional and digital technologies.  The pathologists with whom we contract seek to establish long-standing relationships with the referring physicians as a result of focused delivery of our diagnostic services, personalized responses and frequent consultations, and flexible information technology, or IT, solutions that are customizable to the referring physicians or laboratories as well as the pathologists needs. Our IT and communications platform enables us to deliver diagnostic reports to referring physicians generally within 24 hours of slide receipt, helping to improve patient care. In addition, our IT platform enables us to closely track and monitor medical trends from referring physicians.  4      Below is a depiction of our current AccelPath business model:  [f10k002.gif]  Our AccelPath Competitive Strengths  We believe that we are distinguished by the following competitive strengths:  ·We focus our solutions on professional component services.  We are focused on the faster-growing non-hospital outpatient channel within the anatomic pathology market. The medical institutions we work with offer slide preparation services, and bill for and collect insurance reimbursements for slide preparation services performed in their own laboratories as well as the professional services rendered by their pathologists.·Locally-Focused Business Model with National Scale.  Our business model centers on achieving significant local market share, which yields operating efficiencies and national scale. The diagnostic services the pathologists provide are designed specifically to meet the needs of the local markets we serve. Our IT infrastructure enables us to more efficiently manage these operations, improve productivity of the pathologists and the referring physicians and deliver a more extensive menu of diagnostic services to local clients.·Work with Experienced, Specialized Pathologists Focused on Client Service.  We believe the pathologists who contract with us have or will build long-standing client relationships and provide high-quality service within their sub-specialties. The alignment of these pathologists specialties with those of the referring physicians is critical to our ability to attract new clients. Their clinical expertise and interactions with referring physicians on patient diagnoses enables them to establish effective consultative and long-term relationships with the referring physicians.·Professional Sales, Marketing and Client Relations Team.  We maintain a sales, marketing and client service team of 6 professionals who meet the needs of referring physicians and their patients. Our sales representatives are incentivized through compensation plans to not only secure new physician clients seeking professional pathology services from the pathologists who contract with us, but also to maintain and enhance relationships with existing physician clients. As a result, they have enabled us to expand our sales efforts to 15 states.  5       ·Proprietary IT Solutions.  Entry of and delivery of case and clinical information is essential to our business and a critical aspect of the differentiated service that we provide to our clients. We are developing scalable IT solutions that maximize the flexibility, ease-of-use and speed of delivery of our diagnostic reports, which has enabled us to meet the increasing physicians demand for our diagnostic services. We achieve this through the development of a proprietary suite of IT solutions that is compatible with electronic medical record, or EMR, systems. The software incorporates customized interface solutions, compliant web portal capacities, and proprietary solutions, all resulting in efficient and reliable onsite client connections.·Experienced Senior Leadership.   We believe that our management’s experience in health care companies helps us to drive operating performance and hire and retain other employees and form alliances with leading medical institutions.  Our Business Strategy  We intend to achieve growth by pursuing the following strategies:  ·Continue to Drive Market Penetration through Sales and Marketing.  We plan to drive organic growth through our professional sales and marketing organization. Our sales and marketing team provides us with broad coverage to augment and further penetrate existing relationships between referring physicians and our associated pathologists and to develop new referral relationships for our associated pathologists. We plan to strategically add sales professionals in markets that will most benefit from access to leading medical institutions for pathology professional services.·Leverage our IT Platform to Increase Operating Efficiencies.  We believe our IT platform will allow us to gain market share in various sub-specialties by improving productivity and reducing turnaround times. We intend to continue to develop our IT operations into a better-integrated diagnostic platform, which will improve national coordination of cases and provide real time visibility into key performance metrics. In addition, we plan to continue to introduce innovative IT solutions, interface capabilities and market-specific IT solutions that enhance our value proposition to referring physicians.·Expand Contracts with Laboratories and Hospitals in Target Markets.  We intend to continue to develop contracts with laboratories and hospitals in target markets as part of a broader strategy to strengthen and grow our presence in the outpatient business and expand our local market share.  Anatomic Pathology  Anatomic pathology typically requires a pathologist to make a specific diagnosis. Anatomic pathologists are medical doctors who specialize in the study of disease. Anatomic pathologists do not treat patients, but rather assist other physicians in determining the correct diagnosis of their patients ailments. A pathologists diagnosis represents a critical factor in determining a patients future care. In addition, anatomic pathologists may consult with attending physicians regarding treatment plans. In these capacities, the anatomic pathologist often serves as the physicians physician, thereby creating long-term relationships.  Anatomic pathologists perform their services in laboratories, including independent free-standing local laboratories, hospitals and hospital laboratories, regional and national laboratories, in ambulatory surgery centers and in a variety of other settings such as medical educational institutions. Referring physicians take specimens from patients, and those specimens are typically transported to an in-office or remote laboratory by courier or an overnight delivery service. Once received at the laboratory, a specimen is processed and mounted onto a slide by laboratory technologists for examination by a pathologist. Once the pathologist receives and examines a specimen, the pathologist typically records the results of testing performed in the form of a report to be transmitted to the referring physician. Since specimens are transportable and technology facilitates communication, samples can be diagnosed by a pathologist  6       from a remote location. Therefore, pathologists are generally not needed on-site to make a diagnosis. This flexibility facilitates better use of a pathologists time and allows a pathologist to service a wider geographic area.  An anatomic pathologist must have an understanding of a broad range of medicine. An anatomic pathologist may perform diagnostic testing services for a number of sub-specialty testing markets such as gastrointestinal pathology, dermatopathology, urologic pathology, womens health pathology, hematopathology or surgical pathology. While physical examination or radiology procedures may suggest a symptom for many diseases, a definitive diagnosis is generally established by the anatomic pathologist.  Sales and Marketing; Client Service  The selection of a pathologist or pathologists to perform diagnostic testing services is primarily made by an individual or group of referring physicians. We maintain a sales and marketing team to better meet the needs of the referring physicians that are the customers of our associated pathologists. We have designed our compensation structure to incentivize our sales representatives to not only secure new physician clients for our associated pathologists, but also to maintain and enhance relationships with existing physician clients of our associated pathologists. As a result, our sales and marketing team has enabled us to expand our geographic market presence to 15 states by leveraging the offering of diagnostic services provided by our associated pathologists across these states.  We currently focus our marketing and sales efforts primarily on clinical practices with in-office laboratories. The practices to which our marketing and sales efforts are directed include both non-hospital-based and hospital-based physicians. Our sales representatives concentrate on a geographic area based on the number of existing clients and client prospects, which we identify using several national physician databases that provide practice address information, patient demographic information and other data.  At the beginning of a new client relationship between a referring physician and one of our associated pathologists, one of our sales representatives will visit the prospective client and describe in detail the differentiated service offerings of our associated pathologists, focusing on the experience of our associated pathologists, our IT and technology capabilities, rapid turn-around times, comprehensive diagnostic reports, and client service. Our sales representatives will focus on the specialties offered by the pathologists, which will allow them not only to discuss our specialized diagnostic services, but also to describe diagnostic developments and new products and technologies in their practice areas.  Our dedicated case coordination team provides ongoing support to referring physicians and, in particular, the office staff of our referring physicians. Our client service team enables us to augment the relationships between the pathologists and their clients to maintain a more stable base of referrals. This team provides referring physicians with a personal, knowledgeable and consistent point of contact within our company. The case coordination team coordinates the provision of services, answers administrative and other questions, and resolves service issues. We believe these additional contacts greatly enhance the referring physicians satisfaction with our associated pathologists using our technology solutions and strengthen overall client relationships.  Once a relationship is established, our sales representatives and case coordination team will provide frequent follow-up sales and service calls to ensure we are continuing to meet the physicians needs and expectations and to explore other opportunities for the physician to use the diagnostic services offered by our associated pathologists. For example, once a relationship is established, our sales representatives and case coordination team will frequently contact the practice to monitor satisfaction. In addition, our sales representatives and case coordination team will frequently discuss with physicians ways to develop relationships and identify areas in which our service levels may be improved or expanded. We believe that the frequency of these calls will allow our sales representatives and case  7       coordination team to build and enhance strong relationships with referring physicians, helping us to better understand their needs and develop new service offerings.  Competition  The anatomic pathology market is highly competitive. Competition in our industry is based on several factors, including price, clinical expertise, quality of service, client relationships, breadth of testing menu, speed of turnaround of test results, reporting and IT systems, reputation in the medical community and ability to employ qualified personnel. Our competitors include local and regional pathology groups, national laboratories, hospital-based pathology groups and specialty physician groups.  ·Local and Regional Pathology Groups.  Local and regional pathology groups typically provide a relatively narrow menu of test services to community physicians and, in certain cases, to hospital-based pathologists.·National Laboratory Companies.  National laboratories typically offer a full suite of tests for a variety of medical professionals, including general practitioners, hospitals and pathologists. National laboratories have identified anatomic pathology as a focus area for future growth and will continue to be a competitive challenge going forward.·Hospital Pathologists.  Pathologists working in hospitals typically provide most of the diagnostic services required for hospital in-patients and, sometimes, hospital outpatients. Hospital pathologists act as medical directors for the hospitals clinical and histology laboratories. Typically, hospital pathologists provide these services to hospitals under exclusive and long-term contractual arrangements.  The anatomic pathology market remains highly fragmented, with the two largest clinical laboratory companies accounting for only 14 percent of annual revenues for the market in 2008. The remaining 72 percent of annual revenues for the market was comprised of over 13,000 pathologists and numerous specialized testing companies that offer a relatively narrow menu of diagnostic services. In 2008, approximately 70 percent of pathologists licensed in the U.S. were in private practices according to the Washington G-2 Report. There is an evolving trend among pathologists to form larger practices to provide a broader range of outpatient and inpatient services and enhance the utilization of the practices pathologists. We believe this trend can be attributed to several factors, including cost containment pressures by governmental and other third-party payors, increased competition, managed care and the increased costs and complexities associated with operating a medical practice. Moreover, given the current trends of increasing outpatient services, outsourcing and the consolidation of hospitals, pathologists are seeking to align themselves with larger practices that can assist providers in the evolving health care environment. Larger practices can offer pathologists certain advantages, such as obtaining and negotiating contracts with hospitals and other providers, managed care providers and national clinical laboratories; marketing and selling of professional services; providing continuing education and career advancement opportunities; making available a broad range of specialists with whom to consult; providing access to capital and business and management experience; establishing and implementing more efficient and cost effective billing and collection procedures; and expanding the practices geographic coverage area. Each of these factors supports the pathologists in the efficient management of the complex and time-consuming non-medical aspects of their practice. As a result, we believe that there are substantial consolidation opportunities in the anatomic pathology market as smaller pathology providers seek access to the resources of diagnostics companies with a more comprehensive selection of services for referring physicians.  Information Systems  We are focused on implementing IT systems that streamline internal operations and provide customized IT solutions to meet the needs of referring physicians and associated pathologists. We are developing AccelSlideTM, a customizable  8       solution to provide a gateway for entering and delivering clinical and patient information and reports and communicating with many of our referring physicians. Our IT solution provides an immediate impact to referring physicians and their offices. The most common connectivity tools include:  ·Electronic interfaces;·Referring physician EMR interfacing;·Secure internet report delivery (web portal); and·Patient data from clients’ office system requisitions.  Electronic interfaces provide a means through which referring physicians and we can share data efficiently and accurately. These customized interfaces can transfer patient information like demographics, requisitions and diagnostic results between our IT system and the IT systems of our referring physicians as well as those of the pathologists.  Two key elements that we believe differentiate our solution from our competitors electronic interfaces are the relative speed with which we can create and implement customized interfaces for clients and the low overall costs associated with doing so. Since AccelSlideTM is created to accommodate flexibility, customizations are easy to implement. This functional flexibility is achieved with relatively low cost to us as a result of our IT solution’s modular and adaptable design. We plan to expand the products we offer to include utilization and patient education reports as well as practice-specific solutions.  Most of our IT solutions will be implemented on a laboratory-by-laboratory basis in connection with our efforts to have a single system across all laboratories. We have developed, and will continue to develop our laboratory information system, or LIS, offering. We use an outsourced vendor to provide billing services.  A significant benefit for referring physicians is the storage of data in our central database and secure access to patient records anytime from any location.  We derive our revenues from or through contractual arrangements with medical institutions employing the associated pathologists we work with for case and IT management, and identification through our sales effort of potential referring physicians seeking pathology services. These interpretation centers pay us a fee for the non-medical services that we provide in connection with their work with the referring physicians.  Contracts and Relationships with Providers  We contract or will contract with hospitals, medical schools, pathology practices or individual pathologists on an independent contractor basis to provide these entities slide and information management services. These hospitals, medical schools, pathology practices or individual pathologists contract with referring physicians to provide them pathology services utilizing our case and information management services. We do not and will not exercise legal control over the pathologists, nor do we exercise control over, or otherwise influence, the medical judgment or professional decisions of any pathologist associated with us.  Our standard hospital contract agreement has a term of 5 years. The hospital, medical school, pathology practice or individual pathologist with whom we contract is responsible for billing patients, physicians and payors for services rendered by them for professional services, and in turn paying us a management fee. Our standard pathologists  9       contract contains restrictive covenants, including non-competition, non-solicitation and confidentiality covenants. We are paid a fee for our services irrespective of whether or not the hospital, medical school, pathology practice or individual pathologist with whom we contract is reimbursed for the services they render.  Our business is dependent on hospitals and pathology practices entering into long-term contracts with referring physicians to provide them with professional interpretation services. While there is one such contract in place, no assurance can be given that such arrangement will be able to continue successfully or that additional contracts can be entered into on terms similar to our current arrangement. In the event that a significant number of pathologists terminate their relationships with the hospital or practice or become unable or unwilling to continue their employment with the hospital or practice, our business could be materially harmed.  We are not licensed to practice medicine. The practice of medicine is conducted solely and independently by the licensed and qualified physicians at the hospitals, medical schools or pathology practices with whom we have a contract.  Compliance Infrastructure  Compliance with government rules and regulations is a significant concern throughout our industry, in part due to evolving interpretations of these rules and regulations. We seek to conduct our business in compliance with all statutes and regulations applicable to our operations. Our executive management team is responsible for the oversight and operation of our compliance efforts.  Government Regulation  The services that pathologists provide to referring physicians are heavily regulated by both federal and state governmental authorities. Failure to comply with the applicable regulations can subject the pathologists and referring physicians to significant civil and criminal penalties, loss of license, and consequently result in loss of revenue for us. The significant areas of regulation are set out below.  Clinical Laboratory Improvement Amendments of 1988 and State Regulation  As a diagnostic service provider, each of the referring physicians laboratory entities is required to hold certain federal, state and local licenses, certifications and permits to conduct our business. Under the Clinical Laboratory Improvement Amendments of 1988, or CLIA, each laboratory is required to hold a certificate applicable to the type of work performed at the laboratory and to comply with certain CLIA-imposed standards. CLIA regulates virtually all clinical and anatomic pathology laboratories by requiring they be certified by the federal government and comply with various operational, personnel, facilities administration, quality and proficiency requirements intended to ensure that their clinical laboratory testing services are accurate, reliable and timely. CLIA does not preempt state laws that are more stringent than federal law.  In addition to CLIA requirements, laboratories are subject to various state laws. CLIA provides that a state may adopt laboratory regulations that are more stringent than those under federal law. In some cases, the state programs actually substitute for the federal CLIA program. In other instances the states regulations may be in addition to the CLIA program. State laws may require that laboratory personnel meet certain qualifications, specify certain quality controls or prescribe record maintenance requirements.  10      Health Insurance Portability and Accountability Act  Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act, or HIPAA, the Department of Health and Human Services (HHS) has issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and protecting the privacy and security of protected health information, referred to as PHI, used or disclosed by healthcare providers and other covered entities. Four principal regulations with which we are currently required to comply have been issued in final form under HIPAA: privacy regulations; security regulations; standards for electronic transactions; and the national provider identifier, or NPI, regulations. We must also comply with regulations that require covered entities and business associates to provide notification after a breach of unsecured PHI.  The privacy regulations cover the use and disclosure of PHI by healthcare providers. They also set forth certain rights that an individual has with respect to his or her PHI maintained by a healthcare provider, including the right to access or amend certain records containing PHI or to request restrictions on the use or disclosure of PHI. The HIPAA privacy regulations, among other things, restrict our ability to use or disclose PHI in the form of patient-identifiable laboratory data without written patient authorization for purposes other than payment, treatment, or healthcare operations, except for disclosures for various public policy purposes and other permitted purposes outlined in the privacy regulations. The privacy regulations provide for significant fines and other penalties for wrongful use or disclosure of PHI. In addition, the American Recovery and Reinvestment Act of 2009, or ARRA, increases the civil monetary penalty amounts for violations of the HIPAA regulations. Although the HIPAA statute and regulations do not expressly provide for a private right of damages, laws in certain states provide for damages to private parties for the wrongful use or disclosure of confidential health information or other private personal information. Moreover, ARRA has created a new right of action for state attorneys general to sue on behalf of individuals who are harmed under the HIPAA regulations.  The security regulations establish requirements for safeguarding the confidentiality, integrity and availability of PHI, which is electronically transmitted or electronically stored. The security regulations provide for sanctions and penalties for violations. In addition, ARRA increases the civil monetary penalty amounts for violations of the HIPAA regulations and creates a new right of action for state attorneys general. The HIPAA privacy and security regulations establish a uniform federal minimum standard and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing PHI. As a result, we are required to comply with both HIPAA privacy and security regulations and varying state privacy and security laws. ARRA also applies the HIPAA privacy and security provisions and the civil and criminal penalties associated with violating these provisions to business associates in the same manner as they apply to covered entities.  In addition, HIPAA imposes standards for electronic transactions, which establish standards for common healthcare transactions. We utilize these standard transaction sets where required by HIPAA.  Finally, HIPAA also established a new NPI as the standard unique health identifier for healthcare providers to use in filing and processing healthcare claims and other transactions.  As part of the HIPAA requirements, certain specified coding sets are established that must be used for all billing transactions. Currently, all healthcare providers use a system of diagnosis coding referred to as the International Classification of Diseases, 9th edition, or ICD-9. However, HHS, which oversees HIPAA, has recently established a new requirement that will require all healthcare entities, including ours, to move to a new system of diagnosis codes, ICD-10, by October 1, 2013. ICD-10 utilizes more codes and is considered more complex than the current system. Because we must often rely on referring physicians to supply us with the appropriate diagnosis codes, the movement to the new system may increase billing difficulties if physicians or payors have difficulty in making the transition to the new codes.  11       In addition to PHI, the healthcare information of patients often includes social security numbers and other personal information that is not of an exclusively medical nature. The consumer protection laws of a majority of states now require organizations that maintain such personal information to notify each individual if their personal information is accessed by unauthorized persons or organizations so that the individuals can, among other things, take steps to protect themselves from identity theft. Penalties imposed by these state consumer protection laws vary from state to state but may include significant civil monetary penalties, private litigation and adverse publicity.  Insurance  We maintain liability insurance for our services. As a general matter, providers of diagnostic services may be subject to lawsuits alleging medical malpractice or other similar legal claims. Some of these suits may involve claims for substantial damages, and the results may be material to our results of operations and cash flows in the period in which the impact of such claims is determined or the claims are paid. We believe our insurance coverage is sufficient to protect us from material liability for such claims, and we believe that we will be able to obtain adequate insurance coverage in the future at acceptable costs. However, we must renew our insurance policies annually, and we may not be able to maintain adequate liability insurance in the future on acceptable terms or with adequate coverage against potential liabilities or at all.  Technest Business  Technest focuses on the design, research and development, integration, sales and support of three-dimensional imaging devices and systems primarily in the healthcare industries and intelligent surveillance devices and systems, and three-dimensional facial recognition in the security industries. Historically, the Companys largest customers have been the National Institutes of Health and the Department of Defense.  Our products leverage several core technology platforms, including:  ·3D Imaging Technology Platforms:o3D capture using patented Rainbow 3D technologyo3D processing, data manipulation, and advanced modelingo3D display in volumetric space  12       ·Intelligent Surveillance Technology Platforms:o360 degree video acquisition using mirror, lens, and array configurationso2D video detection, tracking, recognition and enhancement software·3D Facial Recognition Technology Platforms:o3D facial image acquisition and recognition algorithms and software  ·General Technology Platforms:oHigh-speed imaging processing hardware and embedded algorithms  Defense and Security - 3D-ID  Our major products consist of our 3D SketchArtist, 3D FaceCam, Portable MVR, OmniEyeTM Wellcam, and Small Tactical Ubiquitous Detection System (STUDS).  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.  The Company has developed a new pocket size, highly portable multi-sensor video recording device designed to be used in outdoor environments-The Portable MVR. It features A/V recording with advanced MPEG4 compression, photo snapshot with JPEG format and motion detection.  A 2.5 inch LCD makes recording and playback simple using on-screen intuitive menus and embedded software.  The MVR also features power saving, pre and post triggers, and an external video output connector so that the MVR can be placed in-line with an external monitor. Recordings can also be played back on a separate computer.  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.  STUDS are state-of-the-art, miniature, disposable, low-cost motion-tracking, positioning and imaging unattended ground 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.  Medical Devices  3D Digitizer Systems provide turnkey three-dimensional (3D) imaging solutions.  Technest Business Strategy  After the acquisition of AccelPath LLC, the Company is considering strategic alternatives to maximize the value of Technest and its intellectual property, including that developed by Technest, Inc.  The Company is actively pursuing  13       licensing opportunities for the further commercialization of these products and the related intellectual property.  Competition  The markets for our Technest products and solutions are extremely competitive and are characterized by rapid technological change as a result of technical developments exploited by our competitors, changing technical needs of customers, and frequent introductions of new features. We expect competition to increase as other companies introduce products that are competitively priced, that may have increased performance or functionality, or that incorporate technological advances not yet developed or implemented by us. Some of our present and potential competitors may have financial, marketing, and research resources substantially greater than ours. In order to compete effectively in this environment, we must continually develop and market new and enhanced products at competitive prices, and have the resources to invest in significant research and development activities. There is a risk that we may not be able to make the technological advances necessary to compete successfully. Existing and new competitors may enter or expand their efforts in our markets, or develop new products to compete against ours. Our competitors may develop new technologies or enhancements to existing products or introduce new products that will offer superior price or performance features. New products or technologies may render our products obsolete. Many of our primary competitors are well-established companies that have substantially greater financial, managerial, technical, marketing, personnel and other resources than we do.  We have particular proprietary technologies, some that have been developed and others that are in development. We will focus on our proprietary technologies, or leverage our management experience, in order to differentiate ourselves from these organizations. There are other technologies being presented to 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. As of June 2011, we own 23 U.S. patents and have 6 patents pending. 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.  14      Dependence on U.S. Government Contracts  Historically, our largest customers were agencies of the U.S. Government. Although we are continuously working to diversify our client base, we will continue to 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.  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.  Employees  As of October 12, 2011, we had 5 employees, 3 of which are full-time employees. We also have arrangements with 6 independent contractors performing sales, marketing and client service roles.  Although we have had some employee turnover, we consider our relationships with these individuals to be good.  15       Corporate History  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 (after giving effect to the Reverse Stock Split described below) shares of common stock issued and outstanding.  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.  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 remained 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 Technologies, Inc. (EOIR), formerly one of Marklands wholly-owned subsidiaries. As consideration for the stock of EOIR, we issued 12 million shares of our common stock to Markland, and, as a result, Marklands ownership of Technest increased 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.  Sale of EOIR Technologies, Inc.On September 10, 2007, Technest and EOIR, entered into a Stock Purchase Agreement (the EOIR SPA) with EOIR Holdings LLC, a Delaware limited liability company (LLC), pursuant to  16       which Technest agreed to sell EOIR to LLC.  LLC is an entity formed on August 9, 2007 by The White Oak Guggenheim Defense and Aerospace Funds for the purposes of facilitating this transaction.  The sale of EOIR to LLC was structured as a stock sale in which LLC acquired all of the outstanding stock of EOIR in exchange for approximately $34 million in cash, $11 million of which was paid at closing and $23 million of which is payable upon the successful re-award to EOIR of the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate (NVESD). This transaction closed on December 31, 2007. On August 4, 2008, EOIR was awarded the NVESD contract with a funding ceiling of $495 million. The Contingent Purchase Price of $23 million was due as of August 21, 2008 in accordance with the EOIR SPA. LLC alleged that the amount was not due because the award of the contract to EOIR did not meet the requirements for payment under the EOIR SPA.  However, following a seven-day Arbitration hearing that ended on June 30, 2009, the arbitration panel unanimously agreed with Technest and on August 21, 2009 ruled that LLC breached the EOIR SPA and must pay the remainder of the purchase price, including interest of $830,070, of  $23,778,403 plus interest from the date of the Award through date of payment at 3.25%.  LLC filed a petition to vacate the arbitration award in the U.S. District Court for the District of Columbia.  On September 21, 2009, Technest filed its opposition to LLC's motion to vacate the award and on October 5, 2009, Technest filed its opposition to LLC's superseding petition to vacate the arbitration award.  On October 26, 2009, Technest entered into a Settlement Agreement with LLC and EOIR, settling all claims related to the EOIR SPA (see Note 3 to the consolidated financial statements of Technest Holdings, Inc. for the years ended June 30, 2010 and 2009 for additional information).  Under the terms of the Settlement Agreement, LLC agreed to pay Technest $18,000,000 no later than December 25, 2009 and an additional $5,000,000 within sixty days of EOIR being awarded a contract under the Warrior Enabling Broad Sensor Services (WEBSS) Indefinite Delivery Indefinite Quantity (ID/IQ) contract or any contract generally recognized to be a successor contract to its current STES contract. The additional $5,000,000 is also payable to Technest in the event that EOIR is awarded task orders under its current STES contract totaling $495,000,000.  EOIR has guaranteed the performance of the obligations of LLC under the Settlement Agreement. The Settlement Agreement was entered into after a binding arbitration decision awarded Technest $23 million for breach of the Stock Purchase Agreement between the parties.  On December 24, 2009, LLC paid Technest $18,000,000 and subsequently, the actions pending between the parties were dismissed in accordance with the Settlement Agreement.  The Company paid out of the proceeds received $3,621,687 of previously recorded liabilities related to the sale of EOIR and related litigation and $13,134,741 as a return of capital dividend to our shareholders.  The release of the WEBSS contract has fallen slightly behind original expectations and the collection of the related receivable is now anticipated in the first quarter of calendar 2012.  Technest Inc. On October 1, 2008, the Company formed and acquired a 49% interest in Technest, Inc. in exchange for the transfer of certain contracts and employees. Technest, Inc. conducts research and development in the field of computer vision technology. Technest Holdings has the right of first refusal to commercialize products resulting from this research and development. The Companys former Chief Executive Officer beneficially owns 23% of Technest, Inc. and an employee of Technest, Inc. owns an additional 23%.  The remaining 5% interest is held by an unrelated third party. The Company has certain rights of first refusal and repurchase rights at fair market value, as defined in certain restricted stock agreements, with respect to the shares of Technest, Inc. that it does not own.  Acquisition of AccelPath LLC. On March 4, 2011, Technest acquired all of the outstanding membership interests of AccelPath, LLC, a Massachusetts limited liability company (AccelPath) pursuant to the terms of the Unit Purchase Agreement dated January 11, 2011 (the Purchase Agreement) among Technest, AccelPath, and all of the members of AccelPath (collectively, the Sellers), as amended by Amendment No. 1 to Unit Purchase Agreement dated March 4, 2011 (the Purchase Agreement Amendment).  In accordance with the terms of the Purchase Agreement (as amended by the Purchase Agreement Amendment), Technest acquired all of the outstanding membership interests of AccelPath from the Sellers, in consideration for 86,151,240 shares of Technests common stock in the aggregate (the  17       Transaction), which represented approximately 72.5% of Technests issued and outstanding common stock as of the date of the Transaction.  Following the issuance of the Bridge Financing Shares (as defined below) and assuming the conversion of those shares into shares of Technests common stock, the shares issued to the Sellers in connection with the closing of Transaction represented approximately 67.8% of Technests issued and outstanding voting securities.  AccelPath shall continue to operate as a wholly owned subsidiary of Technest.  Effective immediately prior to the closing of the Transaction, Gino M. Pereira resigned from his position as Technests President and Chief Executive Officer and his employment agreement dated January 14, 2008 was terminated.  In connection with and effective immediately prior to the closing of the Transaction, each of Gino M. Pereira, Robert A. Curtis, Laurence J. Ditkoff, David R. Gust and Stephen M. Hicks resigned from the Board of Directors of Technest.  Following the closing of the Transaction, Henry Sargent remained on the Board; and each of Shekhar G. Wadekar, Suren G. Dutia and F. Howard Schneider, Ph.D. were appointed to the Board of Directors of Technest to fill three of the vacancies caused by such resignations.  The Board currently consists of four directors, three of whom were appointed in connection with the Transaction.  Following the closing of the Transaction, Shekhar Wadekar became the President and Chief Executive Officer and a director of Technest.  Assuming the conversion of the Bridge Financing Shares into shares of Technests common stock, Shekhar Wadekar was deemed to beneficially own 20.46% of the shares of Technests common stock as of October 12, 2011.  Pursuant to the terms of the Purchase Agreement (as amended by the Purchase Agreement Amendment), the parties entered into certain other agreements at the closing of the Transaction, including a Lock-Up Agreement that prohibits the Sellers and certain of Technests existing stockholders from transferring shares of common stock held by them for a period of up to ten (10) months following the closing of the Transaction.  Bridge Financing.  On January 11, 2011, Technest entered into a Securities Purchase Agreement (the Bridge Financing Agreement) with Southridge Partners II, LP (Southridge) to issue 300 shares of its Series E 5% Convertible Preferred Stock (the Series E Preferred), with a stated value of $1,000 per share, to Southridge for a purchase price of $300,000 (the Bridge Financing).  The shares of Series E Preferred were issued in three tranches over a 90-day period beginning on the closing of the Transaction.  Prior to the closing of the Transaction, Southridge Partners, LP and its affiliates were the holders of a majority of Technests shares of common stock.  As set forth in the Series E 5% Convertible Preferred Stock Certificate of Designation filed with the Secretary of State of Nevada (the Certificate of Designation), the Series E Preferred is convertible into Technest common stock at the option of Southridge at any time.  The number of shares of Technest common stock into which each share of Series E Preferred is convertible is determined by dividing $1,000 (the stated value) by $0.044416985 per share.  The 300 shares of Series E Preferred issued to Southridge (the Bridge Financing Shares) are convertible into 6,754,173 shares of Technest common stock.  The Series E Preferred Dividend accrues quarterly in arrears, and shall be paid in cash when and if declared by the board or within 5 days of the conversion of Series E Preferred Stock into our common stock.   Item 2. Description of Property  Technest currently leases offices with approximately 6,848 square feet in Bethesda, Maryland, pursuant to a lease which expires December 31, 2011.  Monthly lease amounts for this facility total approximately $16,053. We are currently in the process of locating office space to meet our needs upon the expiration of our current lease.  18       PART II   Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities  Our common stock is listed on the OTCQB and trades under the symbol TCNH.PK.  The following table sets forth the range of the high and low bid quotations of our common stock for the past two years in the Over-the-Counter BB market and the Pink Sheets, as reported by the OTC Bulletin Board and in the Pink Sheets.  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 for the calendar years listed below:  Calendar YearHighLow2009First Quarter$0.30$0.05Second Quarter$0.20$0.10Third Quarter$0.40$0.15Fourth Quarter$0.62$0.252010First Quarter$0.51$0.06Second Quarter$0.14$0.05Third Quarter$0.10$0.05Fourth Quarter$0.10$0.052011First Quarter$0.12$0.05Second Quarter$0.10$0.06  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 June 30, 2011, there were approximately 332 record holders of our common stock and we had outstanding options to purchase 43,100,000 shares of common stock, none of which are exercisable as of the date of this prospectus.  As of June 30, 2011, 32,678,056 shares of our common stock are eligible for public sale under Rule 144 of the Securities Act of 1933, as amended.  Issuer Purchases of Equity Securities  We did not make any purchases of our common stock during the three months ended June 30, 2011, which is the fourth quarter of our fiscal year.  Dividend Policy  Following the settlement agreement with EOIR Holdings entered into in connection with the sale of EOIR  19       Technologies, Inc., on December 23, 2009, our board of directors declared a special return of capital cash distribution of $0.407 per share of common stock.  The cash dividend was paid on January 15, 2010 to shareholders of record as of January 4, 2010.  In addition, on January 3, 2011, our board of directors declared the distribution of contingent value rights.  On February 2, 2011 one contingent value right was distributed for each share of our common stock held by each common stockholder of record as of January 25, 2011.  Each contingent value right entitled the holder thereof to its pro rata portion of a payment to be received by Technest pursuant to the settlement agreement with EOIR Holdings, less certain expenses that will be deducted from such payment.  Following deduction of such expenses, Technest estimates that in the event that the payment from EOIR Holdings is received, the cash payment will be approximately $0.098 per contingent value right.  Other than the special return of capital cash distribution and the distribution of the contingent value right, we have not paid any cash dividends on our common stock in the past. We intend to retain and use any future earnings for the development and expansion of our business and do not anticipate paying any cash dividends on the common stock in the foreseeable future.  Subject to the rights of the holders of our Series E 5% Convertible Preferred Stock (Series E Preferred Stock) described below, the declaration of dividends will be at the discretion of our board of directors and will depend upon our earnings, financial position, general economic conditions and other pertinent factors.  In addition, holders of our Series E Preferred Stock are entitled to receive dividends at a rate per annum equal to $50.00 per share of Series E Preferred Stock (the Series E Preferred Dividend).  The Series E Preferred Dividend accrues quarterly in arrears, and shall be paid when and if declared by the board or within 5 days of the conversion of Series E Preferred Stock into our common stock.  So long as any shares of Series E Preferred Stock remain outstanding, we are not permitted to pay any dividends on our common stock without the written consent of the holders of at least 75% of the shares of Series E Preferred Stock then outstanding.   Item 7.  Managements Discussion and Analysis  The following discussion and analysis of our financial condition and results of operations for the years ending June 30, 2011 and 2010 should be read together with our financial statements and related notes included elsewhere in this annual report on Form 10-K.  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 in this annual report on Form 10-K. 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-K, speak only as of June 30, 2011 and we undertake no obligation to update or revise the statements in light of future developments.  Year ended June 30, 2011 compared with the year ended June 30, 2010  On March 4, 2011, Technest Holdings, Inc. acquired AccelPath and AccelPath became a wholly-owned subsidiary of Holdings. Accounting principles generally accepted in the United States generally require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial statement reporting purposes. The acquisition was accounted for as a reverse acquisition whereby AccelPath was deemed to be the accounting acquirer.  Accordingly, the results of operations of Technest Holdings, Inc. have been included in the consolidated financial statements since the date of the reverse acquisition.  The historical financial statements of AccelPath are presented as the historical financial statements of Holdings.  20      Revenues  The Company had $449,937 in revenues during the year ended June 30, 2011 compared with no revenue during the year ended June 30, 2010. Revenues for the year ended June 30, 2011 consisted of $296,330 in revenues generated by Technests Small Business Innovation Research grants in the field of 3-dimensional imaging after the reverse acquisition and $153,607 in revenues generated by AccelPaths medical diagnostic services.  AccelPath exited the development stage and began generating revenue in October 2010.  At June 30, 2011, the Companys backlog of funded contracts was approximately $370,000.  Gross profit  The gross profit for the year ended June 30, 2011 was $36,150 or 8% of revenues. There was no gross profit for the year ended June 30, 2010 as revenues commenced in October 2010.  Gross profit was negatively impacted by claims experience with third party payers.  Management has addressed this issue by billing hospitals directly and expects that gross profit will begin to improve.  Selling, general and administrative expenses  Selling, general and administrative expenses for the year ended June 30, 2011 were $1,764,082 compared to $325,235 for the year ended June 30, 2010.  During the year ended June 30, 2011, these expenses consisted primarily of compensation paid to managing members, professional fees related to the reverse acquisition, consulting fees and travel expenses incurred by AccelPath plus compensation, lease and insurance expense incurred by Technest.  In addition, stock-based compensation expense of $202,244 was recognized during the year ended June 30, 2011.  During the year ended June 30, 2010, these expenses consisted primarily of compensation paid to managing members, legal fees, consulting fees and travel expenses incurred by AccelPath.  Research and development expenses  During the year ended June 30, 2011, the Company incurred $15,360 in research and development expenses associated with the preliminary project stage costs for internal use software for our medical diagnostic services.   During the year ended June 30, 2010, there was no research and development expense.  Amortization of customer contracts  Amortization of intangible assets for the year ended June 30, 2011 was $58,332 compared to no amortization expense for the year ended June 30, 2010.  Amortization expense consists of four months of amortization of the definite-lived intangible assets recorded in the reverse acquisition.  Operating loss  The operating loss for the year ended June 30, 2011 was $1,801,624 compared with $325,235 for the year ended June 30, 2010.  The increased operating loss is primarily due to the increase in selling, general and administrative expenses described above.  Other income (expense)  Net other income (expense) was $(1,135,966) for the year ended June 30, 2011 and consisted primarily of the goodwill impairment loss of $1,161,215.  The impairment loss was recognized after management completed a discounted cash flow analysis of the reporting unit which concluded that there was no implied goodwill at June 30, 2011.  During the year ended June 30, 2011, the Company accreted $5,305 as interest income, subsequent to the reverse acquisition, related to the discount on the $5 million contingent receivable on the sale of EOIR.  During the year ended June 30, 2011, the Company paid $56 in interest on the note payable to a former managing member of AccelPath.  In addition, the Company recognized other income of $20,000 related to the licensing of certain intellectual property.  Net loss applicable to common shareholders  The net loss applicable to common shareholders for the year ended June 30, 2011 was $2,983,213 in comparison with a net loss of $325,235 applicable to common shareholders for the year ended June 30, 2010. Included in the net loss applicable to common shareholders for the year ended June 30, 2011 are non-cash deemed dividends of $37,709 related to Series E 5% Convertible Preferred Stock and accrued cash dividends payable of $3,511.  21      Liquidity and Capital Resources  Cash and Working Capital  On June 30, 2011, the Company had a working capital deficit of $682,682 due primarily to the operating loss incurred by AccelPath for the year ended June 30, 2011.  AccelPath exited the development stage in October 2010.  Our primary source of operating cash flows for the years ended June 30, 2011 and 2010 was from financing activities.  We received proceeds of $515,000 from the sale of common stock prior to the reverse acquisition and we received $300,000 from the sale of preferred stock during the year ended June 30, 2011.  We received proceeds of $335,000 from the sale of common stock during the year ended June 30, 2010.  We used cash of $869,824 and $279,378, respectively, to fund our operating activities during the years ended June 30, 2011 and 2010.  Our primary uses of operating cash were for compensation payments to managing members of AccelPath, professional fees related to the reverse acquisition, consulting fees and travel expenses.  Sources of Liquidity  During the year ended June 30, 2011, we satisfied our operating cash requirements primarily from the sale of common stock and Series E 5% Convertible Preferred Stock.  We have also increased our accounts payable for expenses incurred in connection with the reverse acquisition.  On March 7, 2011, Technest entered into an Equity Purchase Agreement with Southridge Partners II, LP.  Pursuant to the Equity Purchase Agreement, Southridge shall commit to purchase up to $5,000,000 of Technest common stock over the course of 24 months commencing on the effective date of Technests registration statement pursuant to the registration rights agreement.  We filed the registration statement on August 10, 2011.  The purchase price of the common stock to be sold pursuant to the Equity Purchase Agreement will be 95% of the average of the lowest three closing bid prices, consecutive or inconsecutive, during the five trading day period commencing on the date a put notice requesting that Southridge purchase shares of common stock under the Equity Purchase Agreement is delivered.  The Company expects to be successful in its efforts to have the registration statement declared effective so that Southridge will purchase our common stock, and then management believes that the Company will have sufficient sources of liquidity to satisfy its obligations for at least the next 12 months.  Alternatively, if the Company is not successful, its expansion plans and software development efforts would need to be curtailed.  Commitments and Contingencies  Facilities  Technest currently leases offices with approximately 6,848 square feet in Bethesda, Maryland, pursuant to a lease which expires on December 31, 2011. Monthly lease amounts for this facility total approximately $16,053.  Operating Lease  AccelPath currently leases certain equipment under a non-cancelable operating lease.  The lease requires monthly rental payments of $3,698 and expires in May 2015.  Future minimum lease payments remaining at June 30, 2011 for the years ending June 30, 2012, 2013, 2014 and 2015 are $44,376, $44,376, $44,376 and $36,980, respectively.  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, 2011, Technest had warrants outstanding for the purchase of 275,000 shares of common stock.  Technest does not expect any material cash proceeds upon exercise of these warrants.  As of June 30, 2011, Technest had stock options outstanding for the purchase of 43,100,000 shares of common stock. In addition, on March 7, 2011, Technest entered into an Equity Purchase Agreement with Southridge Partners II, LP.  Pursuant to the Equity Purchase Agreement, Southridge shall commit to purchase up to $5,000,000 of Technest common stock over the course of 24 months commencing on the effective date of Technests registration statement pursuant to the registration rights agreement.  Effect of inflation and changes in prices  Management does not believe that inflation and changes in price has had or will have a material effect on operations.  Critical Accounting Policies and Estimates  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  22       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 Operations  As a result of the reverse acquisition, the accompanying consolidated financial statements include the operations of AccelPath (the accounting acquirer) and its affiliate. AccelPath provided management services to a professional limited liability company (PLLC) in states where laws prohibit business corporations from providing pathology interpretations through the direct employment of pathologists.  AccelPath had a long term professional service and administrative support agreements with such PLLC. A nominee shareholder owns all the equity of the PLLC.  AccelPath follows accounting guidance concerning certain matters related to physician practice management entities (PPMs) with contractual management arrangements. The accounting guidance provides a listing of criteria which, when applied to the contractual arrangements between PPMs and the medical practice company, indicate whether or not they should be consolidated. In accordance with the criteria outlined, AccelPath includes the accounts and the operations of the PLLCs.  The accompanying consolidated financial statements also includes the operations of its wholly-owned subsidiary, Genex Technologies, Inc. and its 49% owned subsidiary Technest, Inc. (see Note 5) since the date of the reverse acquisition March 4, 2011 through June 30, 2011.  Technest, Inc. conducts research and development in the field of computer vision technology and the Company has the right of first refusal to commercialize products resulting from this research and development.  The Companys former Chief Executive Officer beneficially owns 23% of Technest, Inc., an employee owns 23% and an unrelated third party owns 5%.  Technest, Inc. is considered a variable interest entity (VIE) for which the Company is the primary beneficiary.  The Company follows ASU No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, (ASU 2009-17) which amended the consolidation guidance applicable to variable interest entities and required additional disclosures concerning an enterprises continuing involvement with variable interest entities.  The Company consolidates all entities in which the Company holds a controlling financial interest. For voting interest entities, the Company is considered to hold a controlling financial interest when the Company is able to exercise control over the investees operating and financial decisions. For variable interest entities (VIEs), the Company is considered to hold a controlling financial interest when it is determined to be the primary beneficiary. For VIEs, a primary beneficiary is a party that has both: (1) the power to direct the activities of a VIE that most significantly impact that entity's economic performance, and (2) the obligation to absorb losses, or the right to receive benefits, from the VIE that could potentially be significant to the VIE. The determination of whether an entity is a VIE is based on the amount and characteristics of the entity's equity.  All significant inter-company balances and transactions have been eliminated in consolidation.  Included in the assets acquired by AccelPath in the reverse acquisition were assets and liabilities related to Holdings discontinued operations. In May 2007, the Board of Directors of Holdings at that time approved a plan to divest the operations of EOIR Technologies, Inc. (EOIR). On September 10, 2007, Technest and its wholly owned subsidiary, EOIR entered into a Stock Purchase Agreement (SPA) with EOIR Holdings LLC (LLC), a Delaware limited liability company, pursuant to which Technest agreed to sell EOIR to LLC.  The sale of EOIR to LLC was structured as a stock sale in which LLC acquired all of the outstanding stock of EOIR in exchange for approximately $34 million in cash, $11 million of which was paid at closing and $23 million of which was payable upon the successful re-award to EOIR of the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate (NVESD). This transaction closed on December 31, 2007. On August 4, 2008, EOIR was one of three companies awarded the U.S. Army's NVESD contract with a funding ceiling of $495 million. The Contingent Purchase Price of $23 million was due as of August 21, 2008 in accordance with the SPA.  On August 26, 2008, LLC notified Holdings that, in their opinion, the conditions set forth in the Stock Purchase Agreement triggering payment of the Contingent Purchase Price had not been satisfied.  On August 21, 2009, an American Arbitration Association Panel of three arbitrators awarded Holdings $23,778,403 following a seven-day hearing that ended on June 30, 2009.  The $23,778,403 included $830,070 of interest through the date of the Award and is also subject to additional interest due Holdings at 3.25% from the date of the Award through date of payment.  On October 26, 2009, Holdings entered into a Settlement Agreement with LLC and EOIR settling all claims related to the Stock Purchase Agreement (see Note 1).  The assets and liabilities related to the sale of EOIR and related legal and other costs incurred to collect the contingent consideration were acquired by AccelPath in the reverse acquisition and are presented as a discontinued operation in the  23       consolidated financial statements.  The accretion of the discount is recorded in income from continuing operations as the interest income represents the consequences of management's subsequent decision to hold the related asset.  Concentrations  Substantially all of Technest Inc.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.  During the year ended June 30, 2011, all of AccelPaths revenues were generated from one laboratory and one hospital.  Risks associated to companies in the homeland defense technology industry and the anatomic pathology market, include, but are not limited to, the development by its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology and loss of significant customers.  From time to time we have cash balances in banks in excess of the maximum amount insured by the FDIC.  Impairment of Goodwill  Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in business combinations. Accounting guidance requires us to test goodwill for impairment at least annually at the reporting unit level in lieu of being amortized and requires a two-step impairment test for goodwill and intangible assets with indefinite lives. The first step is to compare the carrying amount of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then the second step is required to be completed, which involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill.  To estimate the fair value of its reporting unit containing the goodwill, the Company utilizes a discounted cash flow model on the Technest operating segment. In estimating fair value, management relies on and considers a number of factors, including but not limited to, future revenue growth by product/service line, operating profit margins and overhead expenses. Subsequent to the acquisition we reassessed the potential for new contracts and due to employee turnover and other factors we expect limited future revenues beyond the current backlog.  The Company considered the fair value of the Technest reporting unit and concluded that its goodwill balance of approximately $1.2 million at June 30, 2011 was impaired.  Therefore, the Company recognized an impairment loss of approximately $1.2 million in the fourth quarter of the year ended June 30, 2011.  Estimated Useful Lives of Amortizable Intangible Assets  In the reverse acquisition, the Company acquired Technest, Inc.s existing customer contracts with the National Institute of Health and the Department of Defense. The amounts assigned to these definite-lived intangible assets were determined based on a discounted cash flow of existing backlog and a projection of existing customer revenue.  These assets are being amortized over the contractual terms of the existing contracts plus anticipated contract renewals.  Impairment of Long-Lived Assets  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.  Revenue Recognition  Revenues from medical diagnostic services are recognized upon completion of the services and the billing to customers.  Billings for services expected to be reimbursed by third party payers are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers and are based on our assessment of collection. Billings for services directly to hospitals are fixed in advance and are considered collectible by us.  24       Revenues from time and materials contracts are recognized as costs are incurred and billed. 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. Revenues from firm fixed price contracts with payments tied to milestones are recognized when all milestone requirements have been achieved and all other revenue recognition criteria have been met.   Costs incurred on firm fixed price contracts with milestone payments are recorded as work in process until all milestone requirements have been achieved.  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 December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29) to address diversity in practice in interpreting the pro forma revenue and earnings disclosure requirements for business combinations. This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the current year business combination(s) had occurred as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  Early adoption is permitted.  In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04).  The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the assets highest and best use.  The guidance also requires, for public companies, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed.  The amendments in this Update are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not expect this pronouncement to have a material effect on its consolidated financial statements.  In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income.  This ASU amends the disclosure requirements for the presentation of comprehensive income.  The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders deficit. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with retrospective application required.  Early application is permitted. There will be no impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.  In September 2011, the FASB issued ASU 2011-08, Intangibles  Goodwill and Other (Topic 350), Testing Goodwill for Impairment.  This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill.  Under the new guidance,  an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount.  If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary.  The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption will be permitted.  25       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  Risks Related to our AccelPath Business  We have a limited operating history in our services business, which may make it difficult to accurately evaluate our business and prospects.  We commenced providing our services in October 2010.  As a result, we have a limited operating history upon which to accurately predict our potential revenue. Our revenues and income potential and our ability to expand our business into new markets for pathology services is still unproven. As a result of these factors, the future revenues and income potential of our business are uncertain. Any evaluation of our business and our prospects must be considered in light of these factors and the risks and uncertainties often encountered by companies in our stage of development. Our profitability may be adversely affected as we expand our infrastructure or if we incur increased selling expenses or other general and administrative expenses. Some of these risks and uncertainties include our ability to:  ·execute our business model;·create brand recognition;·respond effectively to competition;·manage growth in our operations;·respond to changes in applicable government regulations and legislation;·access additional capital when required; and·attract and retain key personnel.  If we cannot complete additional financing, our operating results and financial condition may suffer and the price of our stock may decline.  The development of our technologies will require additional capital.  Although we believe with the availability of the proceeds from the Equity Purchase Agreement and the Bridge Financing, we will have sufficient sources of liquidity to satisfy our obligations for at least the next 12 months, we may be unable to complete the financing or 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  26       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, 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.  The market in which we participate is competitive and we expect competition to increase in the future, which will make it more difficult for us to sell our services and may result in pricing pressure, reduced revenue and reduced market share.  The market for anatomic pathology services is competitive and rapidly changing, barriers to entry are relatively low, and with the introduction of new technologies and market entrants, we expect competition to intensify in the future. If we fail to compete effectively, our operating results will be harmed.  In addition, if one or more of our competitors were to merge or partner with another of our competitors, or if companies larger than we are enter the market through internal expansion or acquisition of one of our competitors, the change in the competitive landscape could adversely affect our ability to compete effectively. These competitors could have established customer relationships and greater financial, technical, sales, marketing and other resources than we do, and could be able to respond more quickly to new or emerging technologies or devote greater resources to the development, promotion and sale of their services. This competition could harm our ability to provide our services, which may lead to lower prices, reduced revenue and, ultimately, reduced market share.  If our arrangements with our associated pathologists or interpretation centers are found to violate state laws prohibiting the corporate practice of medicine or fee splitting, our business, financial condition and our ability to operate in those states could be adversely impacted.  The laws of many states, including states in which referring physicians and the pathologists at the interpretation centers with whom we contract are located, prohibit us from exercising control over the medical judgments or decisions of physicians and from engaging in certain financial arrangements, such as splitting professional fees with physicians. These laws and their interpretations vary from state to state and are enforced by state courts and regulatory authorities, each with broad discretion. We enter into independent contractor relationships with our interpretation centers and pathology departments of hospitals, pursuant to which their pathologists render professional medical services. We structure our relationships with these centers in a manner that we believe is in compliance with prohibitions against the corporate practice of medicine and fee splitting. However, state regulatory authorities or other parties could assert that we are engaged in the corporate practice of medicine. If such a claim were successfully asserted, we could be subject to civil and criminal penalties and could be required to restructure or terminate the applicable contractual arrangements. A determination that these arrangements violate state statutes, or our inability to successfully restructure our relationships with our associated pathologists to comply with these statutes, could eliminate referring physicians located in certain states from the market for our services, which would have a materially adverse effect on our business, financial condition and operations.  We may become subject to medical liability claims, which could cause us to incur significant expenses and may require us to pay significant damages if not covered by insurance.  Our business entails the risk of medical liability claims against our associated pathologists and us. Successful medical liability claims could result in substantial damage awards, which could exceed the limits of our insurance coverage. In addition, medical liability insurance is expensive and insurance premiums may increase significantly in the future, particularly as we expand our services to include primary reads. As a result, adequate medical liability insurance may not be available to our associated pathologists or us in the future at acceptable costs or at all.  27       Any claims made against us that are not fully covered by insurance could be costly to defend against, result in substantial damage awards against us and divert the attention of our management and our associated pathologists from our operations, which could adversely affect our operations and financial performance. In addition, any claims might adversely affect our business or reputation.  Changes in the regulatory environment may constrain or require us to restructure our operations, which may harm our revenue and operating results.  Healthcare laws and regulations change frequently and may change significantly in the future. We monitor legal and regulatory developments and modify our operations from time to time as the regulatory environment changes.  However, we may not be able to adapt our operations to address every new regulation, and new regulations may adversely affect our business. In addition, although we believe that we are operating in compliance with applicable foreign, federal and state laws, neither our current nor anticipated business operations have been scrutinized or assessed by judicial or regulatory agencies. We cannot assure you that a review of our business by courts or regulatory authorities would not result in a determination that adversely affects our operations or that the healthcare regulatory environment will not change in a way that restricts our operations.  Non-governmental third-party payors have taken steps to control the utilization and reimbursement of diagnostic services.  Efforts are being made by non-governmental third-party payors, including health plans, to reduce utilization of diagnostic testing services and reimbursement for diagnostic services. For instance, third-party payors often use the payment amounts under the Medicare fee schedules as a reference in negotiating their payment amounts. As a result, a reduction in volumes and reimbursement rates could result in a reduction in the fees we receive from our associated pathologists. Changes in test coverage policies of and reimbursement from other third-party payors may also occur independently from changes in Medicare. Such reimbursement and coverage changes in the past have resulted in reduced prices, added costs and reduced accession volume and have added more complex and new regulatory and administrative requirements.  The health care industry has also experienced a trend of consolidation among health insurance plans, resulting in fewer, larger health plans with significant bargaining power to negotiate fee arrangements with health care providers like our associated pathologists. In addition, some health plans have limited the preferred provider organization or point-of-service laboratory network to only a single national laboratory and its associated physicians to obtain improved fee-for-service pricing. The increased consolidation among health plans also has increased the potential adverse impact of ceasing to be a contracted provider with any such insurer.  We expect that efforts to reduce reimbursements, impose more stringent cost controls and reduce utilization of diagnostic testing services will continue. These efforts may have a material adverse effect on the fees we negotiate with our interpretation centers and our results of operations.  Failure to adequately safeguard data, including patient data that is subject to regulations related to patient privacy, could adversely impact our business.  The success of our business depends on our ability to obtain, process, analyze, maintain and manage data, including sensitive information such as patient data. If we do not adequately safeguard that information and it were to become available to persons or entities that should not have access to it, our business could be impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. Although we have implemented security measures, our infrastructure is vulnerable to computer viruses, break-ins and similar disruptive problems caused by our clients or  28       others that could result in interruption, delay or cessation of service. Break-ins, whether electronic or physical, could potentially jeopardize the security of confidential client and supplier information stored physically at our locations or electronically in our computer systems. Such an event could damage our reputation, cause us to lose existing clients and deter potential clients. It could also expose us to liability to parties whose security or privacy has been infringed, to regulatory actions by the Centers for Medicare & Medicaid Services, or CMS, part of the United States Department of Health and Human Services, or HHS, or by the Office of Civil Rights, also part of HHS, and to civil or criminal sanctions. The occurrence of any of the foregoing events could adversely impact our business.  The American Recovery and Reinvestment Act of 2009 imposed additional obligations on health care entities with respect to data privacy and security, including new notifications in case of a breach of privacy and security standards. We are unable to predict the extent to which these new obligations may prove technically difficult, time-consuming or expensive to implement.  We are an early-stage company that is in the process of building relationships with associated pathologists and referring physicians, and our business may be harmed by the loss of any one associated pathologist or customer of an associated pathologist.  We are an early-stage company that is in the process of building relationships with associated pathologists and referring physicians.  We currently service a limited number of referring physicians through agreements with a limited number of associated pathologists, therefore the loss of any one customer of an associated pathologist may have a significant impact on our business, financial condition, results of operations and cash flows.  No assurance can be given that we will continue to maintain our competitive position with our associated pathologists or their referring physicians.  The loss of, or a significant curtailment of purchases by, one or more customers of an associated pathologist could cause our net sales to decline significantly, which would harm our business, financial condition, results of operations and cash flows.  Similarly, delays in payments by our associated pathologists could have a significant impact on our cash flows.  In addition, as a result of our dependence on a limited number of associated pathologists and referring physicians, we have significant concentrations of accounts receivable.  These significant and concentrated receivables expose us to additional risks, including the risk of default by any of the associated pathologists representing a significant portion of our total receivables.  If we were required to take additional accounts receivable reserves, our business, financial condition and results of operations could be materially adversely affected.  Failure to effectively continue or manage our strategic and organic growth could cause our growth rate to decline.  To continue growth, we will need to continue to identify appropriate providers, such as laboratories, for which our associated pathologists can provide professional pathology services. Consolidation and competition within our industry, among other factors, may make it difficult or impossible to identify such providers on timely basis, or at all. In particular, the competition to acquire independent private labs and pathology groups has increased. In addition to historical competitors such as national lab companies, regional hospital centers and specialty lab companies, a number of private equity firms have recently made initial investments in the pathology and laboratory industry and may become potential competitors to our efforts to secure new customers for our associated pathologists. Our inability to continue our strategic growth would cause our growth rate to decline and could have a material adverse effect on our business.  We also seek to continue our organic growth through the expansion of our sales force, and the targeting of international customers for pathology services. Because of limitations in available capital and competition within our industry, among other factors, we may not be able to implement any or all of these organic growth strategies on a  29       reasonable schedule, or at all. Our failure to continue our organic growth would cause our growth rate to decline and could have a material adverse effect on our business.  To manage our growth, we must continue to implement and improve our operational and financial systems and to expand, train, manage and motivate our employees. We may not be able to effectively manage the expansion of our operations, and our systems, procedures or controls may not be adequate to support our operations. Our management may not be able to rapidly scale the infrastructure necessary to exploit the market opportunity for our services. Our inability to manage growth could have a material adverse effect on our business.  Our growth could strain our personnel, management and infrastructure resources, which may harm our business.  We are currently experiencing a period of rapid growth in our operations, which has placed, and will continue to place, a significant strain on our management, administrative, operational and financial infrastructure. We also anticipate that further growth will be required to address increases in the scope of our operations and size of our customer base. Our success will depend in part upon the ability of our current senior management team to manage this growth effectively.  To effectively manage our anticipated growth, we will need to continue to improve our operational, financial and management processes and controls. If we fail to successfully manage our growth, our business and operating results will be harmed.  Failure to adequately scale our infrastructure to meet demand for our diagnostic services or to support our growth could create capacity constraints and divert resources, resulting in a material adverse effect on our business.  Increases in demand for diagnostic services, including unforeseen or significant increases in demand due to accession volume, could strain the capacity of our personnel and infrastructure. Any strain on our personnel or infrastructure could lead to inaccurate test results, unacceptable turn-around times or client service failures. Furthermore, although we are not currently subject to these capacity constraints, if demand increases for diagnostic services, we may not be able to scale our personnel or infrastructure accordingly. Any failure to handle increases in demand, including increases due to accession volumes, could lead to the loss of established clients and have a material adverse effect on our business.  We intend to expand by contracting with interpretation centers in additional geographic markets. In addition to development costs, this will require us to spend considerable time and money to expand our infrastructure and to hire and retain skilled laboratory and IT staff, experienced sales representatives, case coordination associates and other personnel for additional laboratories. We may also need federal, state and local certifications, as well as supporting operational, logistical and administrative infrastructure. Even after new centers are operational, it may take time for us to derive the same economies of scale we currently have. Moreover, we may suffer reduced economies of scale in our existing center as we seek to balance the amount of work allocated to each center. An expansion of our systems could divert resources, including the focus of our management, away from our current business.  Our growth strategy depends on the ability of the interpretation centers with whom we contract to recruit and retain qualified pathologists and other skilled personnel. If they are unable to do so, our future growth would be limited and our business and operating results would be harmed.  Our success is dependent upon the continuing ability of the interpretation centers with whom we contract to recruit and retain qualified pathologists at their facilities. An inability to recruit and retain pathologists and pathology  30       departments in medical institutions would have a material adverse effect on our ability to grow and would adversely affect our results of operations. They face competition for pathologists from other healthcare providers, including pathology groups, research and academic institutions, government entities and other organizations.  We must also identify, recruit and retain skilled executive, technical, administrative, sales, marketing and operations personnel. Competition for highly qualified and experienced personnel is intense due to the limited number of people available with the necessary skills. Failure to attract and retain the necessary personnel would inhibit our growth and harm our business.  Interruptions or delays in our information systems or in network or related services provided by third-party suppliers could impair the delivery of our services and harm our business.  Our operations depend on the uninterrupted performance of our information systems, which are substantially dependent on systems provided by third parties over which we have little control. Failure to maintain reliable information systems, or disruptions in our information systems could cause disruptions and delays in our business operations which could have a material adverse effect on our business, financial condition and results of operations.  We rely on broadband connections provided by third party suppliers to route digital images from laboratories within the United States to our associated pathologists at the interpretation centers with whom we contract. Any interruption in the availability of the network connections between the hospitals and our interpretation centers would reduce our revenue and profits. Frequent or persistent interruptions in our services could cause permanent harm to our reputation and brand and could cause current or potential referring physicians to believe that our systems are unreliable, leading them to switch to our competitors. Because referring physicians may use our services for critical healthcare services, any system failures could result in damage to the referring physicians businesses and reputation. These referring physicians could seek significant compensation from us for their losses, and our agreements with our customers do not limit the amount of compensation that they may receive. Any claim for compensation, even if unsuccessful, would likely be time-consuming and costly for us to resolve.  Although our systems have been designed around industry-standard architectures to reduce downtime in the event of outages or catastrophic occurrences and have multiple backups, they remain vulnerable to damage or interruption from earthquakes, floods, fires, power loss, telecommunication failures, terrorist attacks, computer viruses, break-ins, sabotage, and acts of vandalism. Despite any precautions that we may take, the occurrence of a natural disaster or other unanticipated problems at our interpretation centers or in the networks that connect our interpretation centers with laboratories could result in lengthy interruptions in our services. We do not carry business interruption insurance to protect us against losses that may result from interruptions in our service as a result of system failures.  Hospital privileging requirements or physician licensure laws may limit our market, and the loss of hospital privileges or state medical licenses held by our associated pathologists could have a material adverse affect on our business, financial condition and results of operations.  Each of our associated pathologists must be granted privileges to practice at each hospital from which the pathologist receives images and must hold a license in good standing to practice medicine in the state in which the hospital or laboratory is located. The requirements for obtaining and maintaining hospital privileges and state medical licenses vary significantly among hospitals and states. If a hospital or state restricts or impedes the ability of physicians located outside of the state to obtain privileges or a license to practice medicine at that hospital or in that state, the market for our services could be reduced. In addition, any loss of existing privileges or medical licenses held by our associated pathologists could impair our ability to serve our existing referring physicians and have a material adverse affect on our business, financial condition and results of operations.  31       Changes in the healthcare industry or litigation reform could reduce the number of diagnostic procedures ordered by physicians, which could result in a decline in the demand for our services, pricing pressure and decreased revenue.  Changes in the healthcare industry directed at controlling healthcare costs and perceived over-utilization of diagnostic pathology procedures could reduce the volume of biopsy procedures performed. For example, in an effort to contain increasing costs, some managed care organizations and private insurers are instituting pre-authorization policies, which require physicians to pre-clear orders for diagnostic biopsy procedures before those procedures can be performed. If pre-clearance protocols are broadly instituted throughout the healthcare industry, the volume of biopsy procedures could decrease, resulting in pricing pressure and declining demand for our services. Some payors have hinted at reducing the number of units of service that would be reimbursed in a connection with a single case.  In addition, it is often alleged that many physicians order diagnostic procedures even when the procedures may have limited clinical utility in large part to establish a record for defense in the event of a medical liability claim. Changes in perceived malpractice risk could reduce the number of biopsy procedures ordered for this purpose and therefore reduce the total number of biopsy procedures performed each year, which could harm our operating results.  We may not have adequate intellectual property rights in our brand, which could limit our ability to enforce such rights.  Our success depends in part upon our ability to market our services under the AccelPath brand and we have not secured registrations of this or other marks. Other businesses may have prior rights in the brand names that we market under or in similar names, which could limit or prevent our ability to use these marks, or to prevent others from using similar marks. If we are unable to prevent others from using our brand names, or if others prohibit us from using them, our revenue could be adversely affected. Even if we are able to protect our intellectual property rights in such brands, we could incur significant costs in doing so.  Any failure to protect our intellectual property rights in our workflow technology could impair its value and our competitive advantage.  We rely heavily on our workflow technology to distribute pathology slide images and information to the appropriately licensed and privileged associated pathologist best able to provide the necessary clinical insight in the least amount of turnaround time and reports to referring physicians. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology, and our business may be harmed. We currently do not hold any patents with respect to our technology, and we have not filed any applications for patents. Although we intend to file applications for patents covering our workflow technology, we may be unable to obtain patent protection for this technology. In addition, any patents we may obtain may be challenged by third parties. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property.  We may in the future become subject to intellectual property rights claims, which could harm our business and operating results.  The information technology industry is characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. If a third party asserts that our technology violates that third-partys proprietary rights, or if a court holds that our technology violates such rights, we may be required to re-engineer our technology, obtain licenses from third parties to continue using our technology without substantial re-engineering or remove the infringing functionality or feature. In addition, we may incur substantial costs defending against any such claim. We may also become subject to damage awards, which could cause us to incur additional losses and hurt our financial position.  32       Monitoring potential infringement of and defending or asserting our intellectual property rights may entail significant expense. We may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any litigation, whether or not it is resolved in our favor, could result in significant expense to us and divert the efforts of our technical and management personnel.  Failure to attract and retain experienced and qualified personnel could adversely affect our business.  Our success depends on our ability to attract, retain and motivate experienced IT staff, experienced sales representatives and other personnel and also on our ability to contract with affiliated pathologists and interpretation centers.  Competition for these employees and pathologists is strong, and if we are not able to attract and retain qualified personnel or contract with qualified pathologists and interpretation centers it would have a material adverse effect on our business.  Our sales representatives have developed and maintain close relationships with a number of health care professionals, and our specialized approach to marketing our services positions our sales representatives to have a deep knowledge of the needs of the referring physicians they serve. Given the nature of the relationships we seek to develop with referring physicians, losses of sales representatives may cause us to lose clients.  We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.  Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Shekhar Wadekar, our Chief Executive Officer. The loss of Mr. Wadekar or other key personnel could have a material adverse effect on our business, financial condition, results of operations and the trading price of our common stock. In addition, the search for replacements could be time consuming and could distract our management team from the day-to-day operations of our business.  We may be unable to enforce non-compete agreements with our associated interpretation centers.  Our independent contractor agreements with our associated pathologists typically provide that the pathologists may not compete with us for a period of time, typically one year, after the agreements terminate. These covenants not to compete are enforceable to varying degrees from jurisdiction to jurisdiction. In most jurisdictions, a covenant not to compete will be enforced only to the extent that it is necessary to protect the legitimate business interest of the party seeking enforcement, that it does not unreasonably restrain the party against whom enforcement is sought and that it is not contrary to the public interest. This determination is made based upon all the facts and circumstances of the specific case at the time enforcement is sought. It is unclear whether our interests will be viewed by courts as the type of protected business interest that would permit us to enforce a non-competition covenant against the pathologists. Since our success depends in substantial part on our ability to preserve the business of our associated pathologists, a determination that these provisions are not enforceable could have a material adverse effect on us.  Enforcement of state and federal anti-kickback laws may adversely affect our business, financial condition or operations.  Various federal and state laws govern financial arrangements among healthcare providers. The federal anti-kickback law prohibits the knowing and willful offer, payment, solicitation or receipt of any form of remuneration in return for, or with the purpose to induce, the referral of Medicare, Medicaid, or other federal healthcare program patients, or in return for, or with the purpose to induce, the purchase, lease or order of items or services that are covered by Medicare, Medicaid, or other federal healthcare programs. Similarly, many state laws prohibit the solicitation, payment or receipt of remuneration in return for, or to induce the referral of patients in private as well as government  33       programs. Violation of these anti-kickback laws may result in substantial civil or criminal penalties for individuals or entities and/or exclusion from participating in federal or state healthcare programs. We believe that we are operating in compliance with applicable law and believe that our arrangements with our affiliated pathologists and referring physicians would not be found to violate the anti-kickback laws. However, these laws could be interpreted in a manner inconsistent with our operations.  Because referring physicians submit claims to the Medicare program based on the services provided by our affiliated pathologists, it is possible that a lawsuit could be brought against us, our affiliated pathologists or the referring physicians under the federal False Claims Act, and the outcome of any such lawsuit could have a material adverse effect on our business, financial condition and operations.  The Federal False Claims Act provides, in part, that the federal government may bring a lawsuit against any person whom it believes has knowingly presented, or caused to be presented, a false or fraudulent request for payment from the federal government, or who has made a false statement or used a false record to get a claim approved. The government has taken the position that claims presented in violation of the federal anti-kickback law may be considered a violation of the Federal False Claims Act. The Federal False Claims Act further provides that a lawsuit brought under that act may be initiated in the name of the United States by an individual who was the original source of the allegations, known as the relator. Actions brought under the Federal False Claims Act are sealed by the court at the time of filing. The only parties privy to the information contained in the complaint are the relator, the federal government and the court. Therefore, it is possible that lawsuits have been filed against us that we are unaware of or which we have been ordered by the court not to discuss until the court lifts the seal from the case. Penalties include fines ranging from $5,500 to $11,000 for each false claim, plus three times the amount of damages that the federal government sustained because of the act of that person. We believe that we are operating in compliance with the Medicare rules and regulations, and thus, the Federal False Claims Act. However, if we were found to have violated certain rules and regulations and, as a result, submitted or caused the submission of allegedly false claims, any sanctions imposed under the Federal False Claims Act could result in substantial fines and penalties or exclusion from participation in federal and state healthcare programs which could have a material adverse effect on our business and financial condition.  Risks Related to our Technest Business and Contracting with the United States Government  Although we are currently actively pursuing licensing opportunities for the commercialization of our Technest products and intellectual property as well as products developed by Technest, Inc., if we are not able to enter into such licensing arrangements, our financial condition could suffer.  After the acquisition of AccelPath LLC, the Company is considering strategic alternatives to maximize the value of the Technest products and intellectual property, including those developed by Technest, Inc.  The Company is actively pursuing licensing opportunities for the further commercialization of these products and the related intellectual property. If the Company is not successful in these efforts, the financial condition of the Company could suffer.  Our current revenues from Technest operations are derived from a small number of contracts within the U.S. government set aside for small businesses.  Substantially all of our revenue from our Technest operation is derived from Small Business Innovation Research contracts with the U.S. Governmentsuch that the loss of any one contract could materially reduce our revenues. As a result, our financial condition and our stock price would be adversely affected.  In order to receive these Small Business Innovation Research contracts, we must satisfy certain eligibility criteria  34       established by the Small Business Administration. If we do not satisfy these criteria, we would not be eligible for these contracts and thus, our primary source of revenue would no longer be available to us.  As a result, our financial condition would be adversely affected.  Our business could be adversely affected by changes in budgetary priorities of the Government.  Because Technest derives a substantial majority of our revenue from contracts with the Government, we believe that the success and development of our business will continue to depend on our successful participation in Government contract programs. Changes in Government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, or a shift of expenditures away from programs that we 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 our actual results to differ materially from those anticipated. Among the factors that could seriously affect our 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.  Our contracts and administrative processes and systems are subject to audits and cost adjustments by the Government, which could reduce our revenue, disrupt our business or otherwise adversely affect our 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 our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. They also review our compliance with regulations and policies and the adequacy of our internal control systems and policies, including our 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, we may be subjected to increased government oversight and approval that could delay or otherwise adversely affect our 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, we 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, we could suffer serious reputational harm if allegations of impropriety were made against us. Each of these results could cause actual results to differ materially from those anticipated.  Unfavorable government audit results could force us to adjust previously reported operating results and could subject us to a variety of penalties and sanctions.  The federal government audits and reviews our performance on awards, pricing practices, cost structure, and compliance with applicable laws, regulations, and standards. Like most large government vendors, our 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  35       we have acquired or may acquire or subcontractors we have hired or may hire, could result in a substantial adjustment in our operating results for the applicable period. For example, any costs which were originally reimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be refunded and our operating margins may be reduced. To date, we have not experienced any significant adverse consequences as a result of government audits.  If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with U.S. Government agencies.  Failure to attract and retain experienced and qualified personnel could adversely affect our business.  Within the last year, we have had significant employee turnover.  Our success depends on our ability to attract, retain and motivate experienced personnel in the field of three-dimensional imaging. Competition for these employees is strong, and if we are not able to attract and retain qualified personnel, it would have a material adverse effect on our business.  Risks Related To Controlled Companies  Technests controlling stockholder has significant influence over the Company.  As of October 12, 2011, Shekhar Wadekar, the Companys Chief Executive Officer owns 21.61% of the outstanding Common Stock, which becomes 20.46% upon the conversion of the Series E 5% Convertible Preferred Stock. Assuming the conversion of the Series E 5% Convertible Preferred Stock, Stephen Hicks, through the shares beneficially owned by Southridge Partners II, LP, Aberdeen Avenue LLC, Southridge Capital Management LLC, Southshore Capital Fund Ltd., Garth LLC and Trillium Partners, LP, along with those shares directly owned by Mr. Hicks, is deemed to beneficially own 9.2% of the shares of Technests common stock as of October 12, 2011.  Mr. Hicks disclaims beneficial ownership of such shares other than those issued to Mr. Hicks as a director of Technest.  As a result, Messrs. Wadekar and Hicks possess significant influence over our affairs.  Their stock ownership and relationships with members of Technests board of directors may have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of Technest, which in turn could materially and adversely affect the market price of Technests common stock.  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 a controlling interest in 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.  36       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.  Risks related to our Common Stock  Any additional funding we arrange through the sale of our common stock will result in dilution to existing security holders.  We will have to raise additional capital in order for our business plan to succeed. Wherever possible, our board of directors will attempt to use non-cash consideration to satisfy obligations. Therefore, our most likely source of additional capital will be through the sale of additional shares of our common stock. Our board of directors has authority, without action or vote of the shareholders, to issue all or part of the authorized 495,000,000 shares.  In addition, we may attempt to raise capital by selling shares of our common stock, possibly at a discount to market. Such issuances will cause our security holders interests in our Company to be diluted, which may negatively affect the value of their shares.  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 OTCQB.  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.  The market price of our common stock may be volatile. As a result, you may not be able to sell our common stock in short time periods, or possibly at all.  Our stock price has been volatile.  From July 2007 to August 2011, the trading price of our common stock ranged from a low price of $0.05 per share to a high price of $0.64 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  37       harm our business.  Future sales of common stock by shareholders, or the perception that such sales may occur, may depress the price of our common stock.  The sale or availability for sale of substantial amounts of our shares in the public market, including shares eligible for resale upon expiration of a lock-up agreement, shares issuable upon conversion of outstanding preferred stock or exercise of common stock options, or the perception that such sales could occur, could adversely affect the market price of our common stock and also could impair our ability to raise capital through future offerings of our shares. In connection with the acquisition of AccelPath, LLC, the sellers of the membership interests and certain of our existing stockholders entered into a lock-up agreement which prohibits the transferring of shares of common stock held by them until January 4, 2012, the 10-month anniversary of the closing of the AccelPath transaction.  As of June 30, 2011, we had 120,279,296 outstanding shares of common stock, and the following additional shares were reserved for issuance: 43,100,000 shares upon exercise of outstanding options and 6,754,173 shares upon conversion of preferred stock.  Any decline in the price of our common stock may encourage short sales, which could place further downward pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.  Any trading market that may develop may be restricted by virtue of state securities Blue Sky laws, making it difficult or impossible for our security holders to sell shares of its common stock in those states.  There is a limited public market for our shares of common stock, and there can be no assurance that any public market will develop in the foreseeable future.  Transfer of our common stock may also be restricted under the securities regulations and laws promulgated by various states and foreign jurisdictions, commonly referred to as Blue Sky laws, which prohibit trading absent compliance with individual state laws. Absent compliance with such individual state laws, our common stock may not be traded in such jurisdictions.  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;  38       (e)defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and(f)contains such other information and is in such form, including language, type, size and format, as the SEC may require by rule or regulation.  In addition, the broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with:  (a)bid and ask quotations for the penny stock;(b)the compensation of the broker-dealer and its salesperson in the transaction;(c)the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and(d)monthly account statements showing the market value of each penny stock held in the customers account.  Also, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchasers written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.  We cannot predict the extent to which investor interest in our stock or a business combination, if any, will lead to an increase in our market price or the development of an active trading market or how liquid that market, if any, might become.  We do not expect to pay dividends to holders of our common stock in the foreseeable future. As a result, holders of our common stock must rely on stock appreciation for any return on their investment.  Other than the special return of capital cash distribution made in connection with the settlement agreement with EOIR Holdings, Inc., we have not declared any dividends since our inception, and we do not plan to declare any dividends in the foreseeable future. If we were to become profitable, it would be expected that all of such earnings would be retained to support our business. Accordingly, holders of our common stock will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock.  Risks Related To Market Conditions  We have filed a registration statement registering an aggregate of 18,300,000 shares of common stock to be issued under the Equity Purchase Agreement. The sale of such shares could depress the market price of our common stock.  We have filed a registration statement registering an aggregate of 18,300,000 shares of common stock for issuance pursuant to the Equity Purchase Agreement. The 18,300,000 shares of our common stock will represent approximately 13.2% of our shares outstanding immediately after our exercise of the put right. Our common stock is thinly traded. The sale of these shares into the public market by Southridge may result in a greater number of shares being available for trading than the market can absorb and therefore, could depress the market price of our common stock.  The sale of material amounts of common stock could encourage short sales by third parties and further depress  39       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.  The Company may not have access to the full amount available under the Equity Purchase Agreement.  We have not drawn down funds and have not issued shares of our common stock under the Equity Purchase Agreement with Southridge. Our ability to draw down funds and sell shares under the Equity Purchase Agreement requires that the recently filed registration statement be declared effective by the SEC, and that the registration statement continue to be effective. In addition, such registration statement registers 18,300,000 total shares of our common stock issuable under the Equity Purchase Agreement, and our ability to access the Equity Purchase Agreement to sell any remaining shares issuable under the Equity Purchase Agreement is subject to our ability to prepare and file one or more additional registration statements registering the resale of these shares, which we may not file until the later of 60 days after Southridge and its affiliates have resold substantially all of the common stock registered for resale under the recently filed registration statement, or six months after the effective date of such registration statement.  These subsequent registration statements may be subject to review and comment by the Staff of the SEC, and will require the consent of our independent registered public accounting firm.  Therefore, the timing of effectiveness of these subsequent registration statements cannot be assured.  The effectiveness of these subsequent registration statements is a condition precedent to our ability to sell the shares of common stock subject to these subsequent registration statements to Southridge under the Equity Purchase Agreement.  Even if we are successful in causing one or more registration statements registering the resale of some or all of the shares issuable under the Equity Purchase Agreement to be declared effective by the SEC in a timely manner, we will not be able to sell shares under the Equity Purchase Agreement unless certain other conditions are met.Accordingly, because our ability to draw down amounts under the Equity Purchase Agreement is subject to a number of conditions, there is no guarantee that we will be able to draw down any portion or all of the $5 million available to us under the Equity Purchase Agreement.  Because Southridge will be paying less than the then-prevailing market price for our common stock, your ownership interest may be diluted and the value of our common stock may decline by exercising the put right pursuant to the Equity Purchase Agreement.  The common stock to be issued to Southridge pursuant to the Equity Purchase Agreement will be purchased at an 5% discount to the average of the lowest closing price of the common stock of any three trading days, consecutive or inconsecutive, during the five consecutive trading days immediately following the date of our notice to Southridge of our election to put shares pursuant to the Equity Purchase Agreement. Because the put price is lower than the prevailing market price of our common stock, to the extent that the put right is exercised, your ownership interest may be diluted.  Southridge has a financial incentive to sell our common stock immediately upon receiving the shares to realize the profit equal to the difference between the discounted price and the market price. If Southridge sells the shares, the price of our common stock could decrease. If our stock price decreases, Southridge may have a further incentive to sell the shares of our common stock that it holds. These sales may have a further impact on our stock price.  The Equity Purchase Agreements pricing structure may result in dilution to our stockholders.  Pursuant to the Equity Purchase Agreement, Southridge committed to purchase, subject to certain conditions, up to the $5 million of our common stock over a two-year period. If we sell shares to Southridge under the Equity Purchase  40       Agreement, or issue shares in lieu of any blackout payment (as described below), it will have a dilutive effect on the holdings of our current stockholders, and may result in downward pressure on the price of our common stock. If we draw down amounts under the Equity Purchase Agreement, we will issue shares to Southridge at a discount of 5% from the average price of our common stock. If we draw down amounts under the Equity Purchase Agreement when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Issuances in the face of a declining share price will have an even greater dilutive effect than if our share price were stable or increasing, and may further decrease our share price. In addition, we are entitled in certain circumstances to deliver a blackout notice to Southridge to suspend the use of the registration statements that we have filed or may in the future file with the SEC registering for resale the shares of common stock to be issued under the Equity Purchase Agreement. If we deliver a blackout notice in the fifteen trading days following a settlement of a draw down, then we must issue Southridge additional shares of our common stock.  Certain provisions of our articles of incorporation could discourage potential acquisition proposals or change in control.  Our board of directors, without further stockholder approval, may issue preferred stock that would contain provisions that could have the effect of delaying or preventing a change in control or which may prevent or frustrate any attempt by stockholders to replace or remove the current management. The issuance of additional shares of preferred stock could also adversely affect the voting power of the holders of our common stock, including the loss of voting control to others.  We have identified weaknesses in our internal controls.  Our management has concluded that our internal control over financial reporting was not effective as of June 30, 2011, as a result of several material weaknesses in our internal control over financial reporting. Descriptions of the material weaknesses are included in Item 9A, "Control and Procedures", in this annual report on Form 10-K.  As a result of these material weaknesses, we performed additional procedures to obtain reasonable assurance regarding the reliability of our financial statements.   Material weaknesses could result in a misstatement of accounts and disclosures, which would result in a misstatement of annual or interim financial statements that would not be prevented or detected. Errors in our financial statements could require a restatement or prevent us from timely filing our periodic reports with the Securities and Exchange Commission. Additionally, ineffective internal control over financial reporting could cause investors to lose confidence in our reported financial information.  Our inability to remediate all weaknesses or any additional material weaknesses that may be identified in the future could, among other things, cause us to fail to timely file our periodic reports with the SEC and require us to incur additional costs and divert management resources. Additionally, the effectiveness of our or any system of disclosure controls and procedures is subject to inherent limitations, and therefore we cannot be certain that our internal control over financial reporting or our disclosure controls and procedures will prevent or detect future errors or fraud in connection with our financial statements.  41        Item 8.  Financial Statements  TECHNEST HOLDINGS, INC. CONSOLIDATED FINANCIAL STATEMENTS  INDEX  Page NumberTechnest Holdings, Inc. and SubsidiariesYears ended June 30, 2011 and 2010Report of Independent Registered Public Accounting Firm43Consolidated Balance Sheets44Consolidated Statements of Operations45Consolidated Statements of Changes in Stockholders Deficit46Consolidated Statements of Cash Flows47Notes to Consolidated Financial Statements48  42       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 sheets of Technest Holdings, Inc. and subsidiaries as of June 30, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years then ended. 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, 2011 and 2010, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.  The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations, has negative cash flows from operations, a stockholders deficit and a working capital deficit. This raises substantial doubt about the Companys ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  /s/ Wolf & Company, P.C.  Boston, Massachusetts October 13, 2011  43       TECHNEST HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS JUNE 30, 2011 AND 2010  20112010ASSETSCurrent AssetsCash and cash equivalents ($23,184)$50,598$59,597Accounts receivable, net of allowances of $9,000 at June 30, 2011 ($155,376)219,494Prepaid expenses and other current assets ($16,053)28,337Assets related to discontinued operations5,000,000Total Current Assets5,298,42959,597Property and Equipment  Net of accumulated depreciation of $1,24922,299Other AssetsDeposits46,52518,000Deferred financing costs36,000Customer contracts, net of accumulated amortization of $58,332291,668Total Other Assets374,19318,000Total Assets$5,694,921$77,597LIABILITIES AND STOCKHOLDERS DEFICITCurrent LiabilitiesAccounts payable ($185,644)$1,094,666$15,834Accrued expenses and other current liabilities ($65,958)185,75815,000Accrued compensation45,00055,000Accrued income taxes369,816Notes payable46,250Contingent value rights payable3,194,247Liabilities related to discontinued operations1,045,374Total Current Liabilities5,981,11185,834Total Liabilities5,981,11185,834Commitments and ContingenciesStockholders DeficitPreferred stock  Series E 5% Convertible; stated value $1,000 per share; 300 shares issued and outstanding at June 30, 2011 (preference in liquidation at June 30, 2011 of $303,511)300,000Common stock - par value $.001 per share; 495,000,000 shares authorized; 120,279,296 and 79,485,767 shares issued and outstanding at June 30, 2011 and 2010, respectively120,27979,486Additional paid-in capital2,917,952407,414Accumulated deficit(3,437,130)(495,137)Total stockholders deficit of Technest Holdings, Inc.(98,899)(8,237)Non-controlling interest(187,291)Total Stockholders Deficit(286,190)(8,237)Total Liabilities and Stockholders Deficit$5,694,921$77,597  Asset and liability amounts in parentheses represent the portion of the June 30, 2011 balance attributable to Technest, Inc. which is a variable interest entity (Note 5).  See report of independent registered public accounting firm and notes to consolidated financial statements.  44       TECHNEST HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2011 AND 2010  20112010Revenues$449,937$Cost of Revenues413,787Gross Profit36,150Operating ExpensesSelling, general and administrative1,764,082325,235Research and development15,360Amortization of customer contracts58,332Total Operating Expenses1,837,774325,235Operating Loss(1,801,624)(325,235)Other Income (Expense), NetInterest income5,305Goodwill impairment loss(1,161,215)Interest expense(56)Other income20,000Total Other Income (Expense), Net(1,135,966)Loss before Income Taxes(2,937,590)(325,235)Income tax benefitNet Loss(2,937,590)(325,235)Net Loss Attributable to Non-Controlling Interest(4,403)Net Loss Attributable to Technest Holdings, Inc.(2,941,993)(325,235)Deemed and Cash Dividends to Preferred Stockholders - Series E(41,220)Net Loss Applicable to Common Shareholders$(2,983,213)$(325,235)Net Loss Per Share - Basic and Diluted$(0.030)$(0.004)Weighted Average Number of Common Shares OutstandingBasic and diluted98,559,09573,824,680  See report of independent registered public accounting firm and notes to consolidated financial statements.  45       TECHNEST HOLDINGS, INC. CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED JUNE 30, 2011 AND 2010  TotalAdditionalNon-Stockholders'PreferredCommon StockPaid-InAccumulatedControllingEquityStockSharesAmountCapitalDeficitInterest(Deficit)Balance, June 30, 2009$66,988,005$66,988$84,912$(169,902)$$(18,002)Issuance of common stock12,497,76212,498322,502335,000Net loss(325,235)(325,235)Balance, June 30, 201079,485,76779,486407,414(495,137)(8,237)Issuance of common stock17,163,59317,163497,837515,000Repurchase of common stock(10,498,120)(10,498)(63,502)(74,000)Issuance of common stock in reverse acquisition32,678,05632,6781,792,920(191,694)1,633,904Issuance of common stock under the Employment Settlement Agreement1,000,0001,00049,00050,000Issuance of common stock under the Equity Purchase Agreement450,00045035,55036,000Issuance of 300 shares of  Preferred Stock  Series E300,000300,000Cash dividends accrued on Preferred Stock  Series E(3,511)(3,511)Stock-based compensation202,244202,244Net loss(2,941,993)4,403(2,937,590)Balance, June 30, 2011$300,000120,279,296$120,279$2,917,952$(3,437,130)$(187,291)$(286,190)  See report of independent registered public accounting firm and notes to consolidated financial statements.  46       TECHNEST HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2011 AND 2010  20112010Cash Flows From Operating Activities:Net loss$(2,937,590)$(325,235)Adjustment to reconcile net loss to net cash used in operating activities:Depreciation and amortization of property and equipment1,249Amortization of customer contracts58,332Goodwill impairment loss1,161,215Stock-based compensation202,244Fair value of common stock issued under Employment Settlement Agreement50,000Non-cash interest income related to discount accretion(5,305)Changes in operating assets and liabilities:Accounts receivable(187,187)Inventory and work in process19,388Restricted cash15,000Deposits, prepaid expenses and other assets(4,913)(18,000)Accounts payable742,36528,857Accrued expenses and other current liabilities25,378Accrued compensation(10,000)35,000Net Cash Used In Operating Activities(869,824)(279,378)Cash Flows From Investing Activities:Purchase of equipment(19,841)Cash acquired in reverse acquisition93,416Net Cash Provided by Investing Activities73,575Cash Flows From Financing Activities:Principal paid on notes payable(27,750)Proceeds from issuance of common stock515,000335,000Proceeds from issuance of Preferred Stock  Series E300,000Net Cash Provided by Financing Activities787,250335,000Net (Decrease) Increase in Cash and Cash Equivalents(8,999)55,622Cash and Cash Equivalents - Beginning of Year59,5973,975Cash and Cash Equivalents - End of Year$50,598$59,597  20112010Supplemental Disclosures Of Cash Flow Information:Interest paid$56$Income taxes paid$$Non-Cash Investing and Financing Activities:Note payable issued by AccelPath, LLC for repurchase of common stock$74,000$Fair value of common stock issued under Equity Purchase Agreement recorded as deferred financing costs$36,000$Dividend accrued on Preferred Stock-Series E$3,511$  See Note 1  Reverse Acquisition.  See report of independent registered public accounting firm and notes to consolidated financial statements.  47       TECHNEST HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2011 AND 2010  1.  NATURE OF OPERATIONS AND BASIS OF PRESENTATION  Business  Technest Holdings, Inc. (Holdings or the Company) includes its wholly-owned subsidiary AccelPath, LLC (AccelPath) and Holdings wholly-owned subsidiary Genex Technologies, Inc. and its 49% owned subsidiary Technest, Inc. (Technest) (see Basis of Presentation below). Holdings has two primary businesses: AccelPath, which is in the business of enabling pathology diagnostics and Technest, which is in the business of the design, research and development, integration, sales and support of three-dimensional imaging devices and systems.  Reverse Acquisition  On March 4, 2011, Technest Holdings, Inc. acquired AccelPath and AccelPath became a wholly-owned subsidiary of Holdings.  The former members of AccelPath received an aggregate of 86,151,240 shares of Holdings common stock and, immediately after the transaction, owned 72.5% of Holdingss issued and outstanding common stock.  Immediately prior to the merger, Holdings had 32,678,056 shares of common stock outstanding.  Following the acquisition, AccelPath began operating as a wholly-owned subsidiary of Holdings.  Accounting principles generally accepted in the United States generally require that a company whose security holders retain the majority voting interest in the combined business be treated as the acquirer for financial reporting purposes.  The acquisition was accounted for as a reverse acquisition whereby AccelPath was deemed to be the accounting acquirer.  Accordingly, the results of operations of Technest Holdings, Inc. have been included in the consolidated financial statements since the date of the reverse acquisition.  The historical financial statements of AccelPath are presented as the historical financial statements of Holdings.  As the accounting acquirer, AccelPath acquired tangible assets consisting of cash of $93,416, accounts receivable of $32,307, inventory of $19,388, assets related to discontinued operations of $5,000,000, property and equipment of $3,707, and prepaid expenses and other assets of $61,644 and identifiable intangible assets of $350,000 related to existing customer contracts.  AccelPath assumed accounts payable of $336,467, accrued expenses of $141,870, accrued income taxes of $369,816, contingent value rights payable of $3,194,247 and liabilities related to discontinued operations of $1,045,374.  The fair value of Holdings net assets acquired on the date of the acquisition, based on managements analysis of the fair value of Holdings stock transferred, was $1,633,904. AccelPath recorded goodwill of $1,161,215 for the excess of purchase price over the net assets acquired.  Unaudited pro forma operating results, assuming the reverse acquisition had been made as of July 1, 2009, are as follows:  Years Ended June 30,20112010Revenues$1,862,667$2,699,532Net loss applicable to common shareholders$(3,103,629)$(1,508,762)Net loss per share  basic and diluted$(0.026)$(0.015)  All share and per share amounts presented in these consolidated financial statements have been retroactively restated to reflect the 33.327365 exchange ratio of AccelPath member interests to Holdings common shares in the merger.  Basis of Presentation  As a result of the reverse acquisition, the accompanying consolidated financial statements include the operations of AccelPath (the accounting acquirer) and its affiliate. AccelPath provided management services to a professional limited liability company (PLLC) in states where laws prohibit business corporations from providing pathology interpretations through the direct employment of pathologists.  AccelPath had a long term professional service and administrative support agreements with such PLLC. A nominee shareholder owns all the equity of the PLLC.  AccelPath follows accounting guidance concerning certain matters related to physician practice management entities (PPMs) with contractual management arrangements. The accounting guidance provides a listing of criteria which, when applied to the contractual arrangements between PPMs and the medical practice company, indicate whether or not they should be consolidated. In accordance with the criteria outlined, AccelPath includes the accounts and the operations of the PLLCs.  See report of independent registered public accounting firm.  48       The accompanying consolidated financial statements also includes the operations of its wholly-owned subsidiary, Genex Technologies, Inc. and its 49% owned subsidiary Technest, Inc. (see Note 5) since the date of the reverse acquisition March 4, 2011 through June 30, 2011.  Technest, Inc. conducts research and development in the field of computer vision technology and the Company has the right of first refusal to commercialize products resulting from this research and development.  The Companys former Chief Executive Officer beneficially owns 23% of Technest, Inc., an employee owns 23% and an unrelated third party owns 5%.  Technest, Inc. is considered a variable interest entity (VIE) for which the Company is the primary beneficiary.  The Company follows ASU No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, (ASU 2009-17) which amended the consolidation guidance applicable to variable interest entities and required additional disclosures concerning an enterprises continuing involvement with variable interest entities.  The Company consolidates all entities in which the Company holds a controlling financial interest. For voting interest entities, the Company is considered to hold a controlling financial interest when the Company is able to exercise control over the investees operating and financial decisions. For variable interest entities (VIEs), the Company is considered to hold a controlling financial interest when it is determined to be the primary beneficiary. For VIEs, a primary beneficiary is a party that has both: (1) the power to direct the activities of a VIE that most significantly impact that entity's economic performance, and (2) the obligation to absorb losses, or the right to receive benefits, from the VIE that could potentially be significant to the VIE. The determination of whether an entity is a VIE is based on the amount and characteristics of the entity's equity.  All significant inter-company balances and transactions have been eliminated in consolidation.  Settlement Agreement Related to the Sale of EOIR Technologies, Inc.  On October 26, 2009, Holdings entered into a Settlement Agreement with EOIR Holdings, LLC (LLC) and EOIR Technologies, Inc. (EOIR), settling all claims related to the Stock Purchase Agreement (see Note 4).  Under the terms of the Settlement Agreement, LLC agreed to pay Holdings $18,000,000 no later than December 25, 2009 and an additional $5,000,000 within sixty days of EOIR being awarded a contract under the Warrior Enabling Broad Sensor Services (WEBSS) Indefinite Delivery Indefinite Quantity (ID/IQ) contract or any contract generally recognized to be a successor contract to its current STES contract. The additional $5,000,000 is also payable to Holdings in the event that EOIR is awarded task orders under its current STES contract totaling $495,000,000.  EOIR has guaranteed the performance of the obligations of LLC under the Settlement Agreement. The Settlement Agreement was entered into after a binding arbitration decision awarded Holdings $23 million for breach of the Stock Purchase Agreement between the parties.  On December 24, 2009, LLC paid Holdings $18,000,000 and subsequently, the actions pending between the parties were dismissed in accordance with the Settlement Agreement.  The Company paid out of the proceeds received $3,621,687 of previously recorded liabilities related to the sale of EOIR and related litigation and $13,134,741 as a return of capital dividend to our shareholders. The Company recorded a $154,000 discount on the $5 million contingent receivable. The release of the WEBSS contract has fallen behind original expectations and the collection of the related receivable is now anticipated in the first calendar quarter of 2012. The financial statements for the year ended June 30, 2011 include interest income of $5,305 related to this discount.  Holdings believes that the collectability of the contingent receivable, which was acquired by AccelPath in the reverse acquisition, is determinable beyond a reasonable doubt and as such does not believe any reserves are warranted at June 30, 2011.  2.  GOING CONCERN UNCERTAINTY AND MANAGEMENTS PLAN  The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate the continuation of the Company as a going concern. The Company has incurred net losses of $2,983,213 and $325,235 for the years ended June 30, 2011 and 2010, respectively, and has experienced an operating cash flow deficit in both 2011 and 2010. Further, the Company has a working capital deficit of $682,682 and a stockholders deficit of $98,899 at June 30, 2011. Management is anticipating sales growth through an expanded customer base and is also actively seeking financing through new and existing investors to fund operations. There is no assurance that the Company can reverse its net losses, or that the Company will be able to raise capital. These factors raise substantial doubt about the Companys ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of the above uncertainty.  See report of independent registered public accounting firm.  49      3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  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.  Concentrations and Risks  Holdings, from time to time, has cash balances in excess of the maximum amount insured by the FDIC.  Substantially all of Technest Inc.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.  During the year ended June 30, 2011, all of AccelPaths revenues were generated from one laboratory and one hospital.  Risks associated to companies in the homeland defense technology industry and the anatomic pathology market, include, but are not limited to, the 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. The Company had no cash equivalents as of June 30, 2011 and 2010.  Accounts Receivable  At June 30, 2011, accounts receivable includes $155,376 invoiced by Technest under government contracts and $73,118 invoiced by AccelPath for services rendered.  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 troubled accounts, historical experience and other currently available evidence.  A significant portion of Technest Inc.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 for contract receivables at June 30, 2011. Billings for AccelPaths services reimbursed by third-party payers are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers.  If management determines amounts to be uncollectible, they will be charged to the allowance when that determination is made.  Unbilled receivables, if any, represent amounts earned related to allowable costs incurred under contracts but not billed.  During the year ended June 30, 2011, AccelPath charged allowances for differences between amounts billed and estimated receipts totaling $329,000 against revenues and during the fourth quarter AccelPath charged off $320,000 of unpaid accounts receivable against the allowance based on adjustments and updated claims experience with third-party payers.  Inventory and Work in Process  Inventories, if any, 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 time and material contracts.  Costs incurred on firm fixed price contracts with milestone payments are recorded as work in process until all milestone requirements have been achieved.  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.  The Company accounts for internally developed software by capitalizing development costs incurred during the application development stage until the software is ready for its intended use.  Capitalized internal use software development costs are amortized on a straight line basis over the estimated useful life of the software, beginning on the date the software is completed and available for use.  Development costs of minor upgrades and enhancements are expensed as incurred.  Net capitalized development costs are reviewed for impairment annually by management.  See report of independent registered public accounting firm.  50       Property and equipment are depreciated over the estimated useful lives of assets as follows:


| |                        |         | 
| | ---------------------- | ------- | 
| | Software               | 5 years | 
| | Computer equipment     | 3 years | 
| | Furniture and fixtures | 5 years | 
| | Laboratory equipment   | 5 years | 

Property and equipment consisted of the following at June 30, 2011 and 2010:  20112010Software$13,650$Computer equipment3,466Furniture and fixtures239Laboratory equipment6,19323,548Less accumulated depreciation(1,249)$22,299$  Depreciation and amortization expense for the years ended June 30, 2011 and 2010 was $1,249 and $0, respectively.  Customer Contracts  In the reverse acquisition, the Company acquired Technest, Inc.s existing customer contracts with the National Institute of Health and the Department of Defense. The amounts assigned to these definite-lived intangible assets were determined by management based on a discounted cash flow of existing backlog and a projection of existing customer revenue.  At June 30, 2011, the customer contracts have a cost basis of $350,000 and accumulated amortization of $58,332.  The customer contracts are being amortized over an estimated life of two years.  Amortization expense was $58,332 for the year ended June 30, 2011.  Amortization expense for the years ending June 30, 2012 and 2013 is expected to be $175,000 and $116,668, respectively.  These contracts do not contain extension or renewal terms.  Fair Value of Financial Instruments  The financial statements include various estimated fair value information.  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 fair value of cash, accounts receivable, accounts payable, notes payable, discontinued operating assets and liabilities and the contingent value rights payable approximate their recorded amounts because of their relatively short settlement terms.  Operating Segments  The Company operates in two operating segments which are consistent with its internal organization. The major segments are medical diagnostic services, and government contracting in the business of research and development, design and fabrication of 3D imaging and of intelligent surveillance products.  Revenue Recognition  Revenues from medical diagnostic services are recognized upon completion of the services and the billing to customers.  Billings for services expected to be reimbursed by third party payers are recorded as revenues net of allowances for differences between amounts billed and the estimated receipts from such payers and are based on managements assessment of collection. Billings for services directly to hospitals are fixed in advance and are considered collectible by management.  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, if any, 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. Revenues from firm fixed price contracts with payments tied to milestones are recognized when all milestone requirements have been achieved  See report of independent registered public accounting firm.  51       and all other revenue recognition criteria have been met.   Costs incurred on firm fixed price contracts with milestone payments are recorded as work in process until all milestone requirements have been achieved.  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.  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  The Company allocates current and deferred taxes to its subsidiaries as if each were a separate tax payer.  The Company has no unrecognized tax benefits or uncertainties requiring additional disclosures.  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.  When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained.  The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions.  Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.  The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.  The Company is primarily subject to U.S. federal income tax, and Maryland and Massachusetts state income taxes.  The Companys policy is to recognize interest and penalties related to income tax matters in income tax expense.  Loss Per Share  Basic and diluted net loss per common share available to common shareholders has been computed based on the weighted average number of shares of common stock outstanding during the periods presented. Basic and diluted net loss per common share is computed by dividing net loss by the weighted-average common shares outstanding during the year.  Common stock equivalents, consisting of Series E 5% Convertible Preferred Stock, stock options and warrants were not included in the calculation of the diluted loss per share for the years ended June 30, 2011 and 2010 because their inclusion would have had the effect of decreasing the net loss per share otherwise computed (see Note 11).  Goodwill and Impairment  Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired in business combinations.  Goodwill will not be amortized but will be tested at least annually for impairment.   The purchase price allocation is preliminary and is subject to change as the contingent value rights payable are subject to adjustment for certain future events as defined in the contingent value rights agreement.  The Company is required to test goodwill for impairment at least annually at the reporting unit level in lieu of being amortized. A two-step impairment test for goodwill and intangible assets with indefinite lives is required. The first step is to compare the carrying amount of the reporting unit's net assets to the fair value of the reporting unit. If the fair value exceeds the carrying value, no further work is required and no impairment loss is recognized. If the carrying amount exceeds the fair value, then the second  See report of independent registered public accounting firm.  52       step is required to be completed, which involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss occurs if the amount of the recorded goodwill exceeds the implied goodwill.  To estimate the fair value of its reporting unit containing the goodwill, the Company utilized a discounted cash flow model on the Technest operating segment.  In estimating fair value, management relies on and considers a number of factors, including but not limited to, future revenue growth by product/service line, operating profit margins and overhead expenses. Subsequent to the acquisition management reassessed the potential for new contracts and due to employee turnover and other factors they expect limited future revenues beyond the current backlog.  The Company considered the fair value of the Technest reporting unit and concluded that its goodwill balance of approximately $1.2 million at June 30, 2011 was impaired.  Therefore, the Company recognized an impairment loss of approximately $1.2 million in the fourth quarter of the year ended June 30, 2011.  Impairment of Long-Lived Assets  The Company amortizes intangible assets over the shorter of the contractual/legal life or the estimated economic life.  The Company 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, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. The Companys policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. The Company tested its long-lived assets for impairment and no impairment charges were recorded in the years ended June 30, 2011 and 2010.  Stock-Based Compensation  The Company 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 requisite service period based on the fair value for each stock award on the grant date.  Recent Accounting Pronouncements  In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (ASU 2010-29) to address diversity in practice in interpreting the pro forma revenue and earnings disclosure requirements for business combinations. This ASU specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the current year business combination(s) had occurred as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010.  Early adoption is permitted.  In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU 2011-04).  The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the assets highest and best use.  The guidance also requires, for public companies, disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed.  The amendments in this Update are to be applied prospectively.  For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company does not expect this pronouncement to have a material effect on its consolidated financial statements.  In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income.  This ASU amends the disclosure requirements for the presentation of comprehensive income.  The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholders deficit. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, ending after December 15, 2011, with retrospective application required.  Early application is permitted. There will be no impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.  In September 2011, the FASB issued ASU 2011-08, Intangibles  Goodwill and Other (Topic 350), Testing Goodwill for Impairment.  This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill.  Under the new guidance,  an entity will have the option of first assessing qualitative factors (events and circumstances) to  See report of independent registered public accounting firm.  53       determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount.  If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary.  The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption will be permitted.  4.  DISCONTINUED OPERATIONS  Included in the assets acquired by AccelPath in the reverse acquisition were assets and liabilities related to Holdings discontinued operations. In May 2007, the Board of Directors of Holdings at that time approved a plan to divest the operations of EOIR Technologies, Inc. (EOIR). On September 10, 2007, Technest and its wholly owned subsidiary, EOIR entered into a Stock Purchase Agreement (SPA) with EOIR Holdings LLC (LLC), a Delaware limited liability company, pursuant to which Technest agreed to sell EOIR to LLC.  The sale of EOIR to LLC was structured as a stock sale in which LLC acquired all of the outstanding stock of EOIR in exchange for approximately $34 million in cash, $11 million of which was paid at closing and $23 million of which was payable upon the successful re-award to EOIR of the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate (NVESD). This transaction closed on December 31, 2007. On August 4, 2008, EOIR was one of three companies awarded the U.S. Army's NVESD contract with a funding ceiling of $495 million. The Contingent Purchase Price of $23 million was due as of August 21, 2008 in accordance with the SPA.  On August 26, 2008, LLC notified Holdings that, in their opinion, the conditions set forth in the Stock Purchase Agreement triggering payment of the Contingent Purchase Price had not been satisfied.  On August 21, 2009, an American Arbitration Association Panel of three arbitrators awarded Holdings $23,778,403 following a seven-day hearing that ended on June 30, 2009.  The $23,778,403 included $830,070 of interest through the date of the Award and is also subject to additional interest due Holdings at 3.25% from the date of the Award through date of payment.  On October 26, 2009, Holdings entered into a Settlement Agreement with LLC and EOIR settling all claims related to the Stock Purchase Agreement (see Note 1).  The assets and liabilities related to the sale of EOIR and related legal and other costs incurred to collect the contingent consideration were acquired by AccelPath in the reverse acquisition and are presented as a discontinued operation in the consolidated financial statements.  The accretion of the discount is recorded in income from continuing operations as the interest income represents the consequences of management's subsequent decision to hold the related asset.  There was no loss from discontinued operations for the years ended June 30, 2011 and 2010.  5.  TECHNEST, INC.  Holdings owns a 49% interest in Technest, Inc., a company that conducts research and development in the field of computer vision technology. Holdings has the right of first refusal to commercialize products resulting from this research and development. Holdings former Chief Executive Officer beneficially owns 23% of Technest, Inc., a current employee of Technest owns 23% and an unrelated third party owns 5%. Holdings has certain rights of first refusal and repurchase rights at fair market value, as defined in certain restricted stock agreements, with respect to the shares of Technest, Inc. that it does not own.  Holdings allocates certain general and administrative and overhead expenses to Technest, Inc.  Since the reverse acquisition by AccelPath on March 4, 2011 through the year ended June 30, 2011 Holdings did not allocate any expenses to Technest, Inc.  Technest, Inc. is considered a variable interest entity (VIE) for which the Company is the primary beneficiary.  6.  CONTINGENT VALUE RIGHTS PAYABLE  On January 13, 2011, Holdings entered into a Contingent Value Rights Agreement (the CVR Agreement) pursuant to which Holdings common stockholders of record as of January 25, 2011 received one contingent value right (a CVR) for each share of Holdings common stock held by them.  Each CVR shall entitle the holder thereof to its pro rata portion of a payment to be received by Holdings pursuant to a Settlement Agreement and Mutual Release with EOIR Holdings LLC and EOIR Technologies, Inc. (the Settlement Agreement), less certain expenses (subject to adjustments for future events)  that will be deducted from such payment.  At June 30, 2011, management estimates that the cash payment will be $3,194,247 or approximately $0.098 per CVR.  7.  PREFERRED STOCK  Bridge Financing  On January 11, 2011, Holdings entered into a Securities Purchase Agreement with Southridge Partners II, LP (Southridge) to issue 300 shares of its Series E 5% Convertible Preferred Stock, with a stated value of $1,000 per share, to Southridge for a purchase price of $300,000.  The shares of Series E 5% Convertible Preferred Stock were issued in three tranches over a 90-day  See report of independent registered public accounting firm.  54       period beginning on the closing of the reverse acquisition.  Upon any liquidation or dissolution of Holdings, the holders of the Series E 5% Convertible Preferred Stock are entitled to receive the stated value of $1,000 per share plus all accrued unpaid dividends per share.  The number of shares of Holdings common stock into which each share of Series E Preferred is convertible is determined by dividing $1,000 (the stated value) by $0.044416985 per share.  The 300 shares of Series E Preferred issued to Southridge are convertible into 6,754,173 shares of Holdings common stock.  Prior to the closing of the reverse acquisition, Southridge Partners, LP and its affiliates were the holders of a majority of Holdings shares of common stock.  The Series E Preferred accrues cash dividends at 5% per annum and is convertible to common stock at any time.  On March 4, 2011, Southridge purchased $150,000 of Series E Preferred, on April 18, 2011, Southridge purchased $75,000 of Series E Preferred, and on June 2, 2011 Southridge purchased $75,000 of Series E Preferred for cash.  The Company determined that there was a beneficial conversion feature of $37,709 for the issuance of the 300 shares of Series E Preferred Stock.  The beneficial conversion feature was calculated based on the effective conversion price per share compared to the fair value per share of common stock on the commitment date.  This resulted in a deemed dividend in the amount of $37,709 for the year ended June 30, 2011.  The Company also accrued cash dividends payable of $3,511 for the year ended June 30, 2011.  8.  COMMON STOCK ISSUANCES AND REPURCHASES  Prior to the reverse acquisition, during the year ended June 30, 2010, AccelPath issued 12,497,762 shares of $0.001 par value common stock for total proceeds of $335,000 and during the year ended June 30, 2011, AccelPath issued 17,163,593 shares of $0.001 par value common stock for total proceeds of $515,000.  On March 4, 2011, AccelPath entered into a resignation and repurchase agreement with one of its Managing Members.  The Managing Member resigned on March 4, 2011 and AccelPath agreed to repurchase 10,498,120 shares of $0.001 par value common stock for $74,000.  To complete the repurchase, AccelPath issued a $74,000 note payable due in eight monthly installments of $9,269 including interest at 0.54% per annum.  In addition, AccelPath entered into a consulting agreement with the Managing Member requiring payments of $750 per month for a period of eight months in consideration for continuing services.  Interest expense for the year ended June 30, 2011 was $56. Consulting expense for the year ended June 30, 2011 was $2,250.  On March 4, 2011, in connection with the reverse acquisition, 32,678,056 shares of common stock were recorded in the financial statements of AccelPath, the accounting acquirer (See Note 1  Reverse Acquisition).  On March 7, 2011, Holdings issued 450,000 shares of common stock to Southridge in connection with the Equity Purchase Agreement.  Under the Equity Purchase Agreement, Southridge shall commit to purchase up to $5,000,000 of Holdings common stock over the twenty-four month period commencing on the effective date of Holdings registration statement pursuant to the registration rights agreement.  The purchase price of the common stock will be 95% of the average of the lowest three closing bid prices during the five day trading period. The fair value of the common stock issued of $36,000 was recorded as a deferred financing cost. The Company did not record any amortization during the year ended June 30, 2011.  In conjunction with the Equity Purchase Agreement, the Company entered into a Registration Rights Agreement with Southridge.  The Registration Rights Agreement does not include any obligations of the Company to transfer consideration to Southridge.  On March 14, 2011, Holdings issued 1,000,000 shares of common stock to its former President and CEO under the January 11, 2011 Employment Settlement Agreement.  The Company recorded compensation expense of $50,000 for the year ended June 30, 2011 based on the fair value of the common stock issued.  9.  OPTIONS, WARRANTS AND STOCK-BASED COMPENSATION  2011 Equity Incentive Plan  On March 4, 2011, the Board of Directors adopted the Technest Holdings, Inc. 2011 Equity Incentive Plan and reserved 50,000,000 shares of common stock for issuance to employees, directors and consultants, subject to stockholder approval by March 4, 2012.  The plan also provides for automatic annual increases, subject to Board approval, on January 1st of each year (commencing on January 1, 2012 and ending on January 1, 2021), in the aggregate number of shares reserved equal to the lesser of (a) five percent of the total number of shares outstanding on December 31st of the preceding year or (b) 3,000,000 shares.  Under the plan, the Board may grant stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards.  Valuation and amortization method. The fair value of each stock award is estimated on the grant date using the Black-Scholes option-pricing model.  The estimated fair value of employee stock options is amortized to expense using the straight-line method over the vesting period.  See report of independent registered public accounting firm.  55       Volatility. The Company estimates volatility based on the Companys historical volatility and considered the historical volatility of a peer group.  Risk-free interest rate. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant commensurate with the expected term assumption.  Expected term. The expected term of stock options granted is based on an estimate of when options will be exercised in the future.  The Company applied the simplified method of estimating the expected term of the options, as described in the SECs Staff Accounting Bulletins 107 and 110, as the Company has had a significant change in its business operations as result of the reverse acquisition and the historical experience is not indicative of the expected behavior in the future.  The expected term, calculated under the simplified method, is applied to groups of stock options that have similar contractual terms.  Using this method, the expected term is determined using the average of the vesting period and the contractual life of the stock options granted.  Forfeitures.   Stock-based compensation expense is recorded only for those awards that are expected to vest.  FASB ASC Topic 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The term forfeitures is distinct from cancellations or expirations and represents only the unvested portion of the surrendered option.  An annual forfeiture rate of 0% was applied to all unvested options as of June 30, 2011 which was managements best estimate.  This analysis will be re-evaluated semi-annually and the forfeiture rate will be adjusted as necessary.  Ultimately, the actual expense recognized over the vesting period will be for only those shares that vest.  The following weighted average assumptions were used for grants during the year ended June 30, 2011:  2011Risk-free interest rate1.76% - 2.28%Expected dividend yieldExpected term6 yearsForfeiture rate0%Expected volatility128.99% - 136.20%  A summary of option activity under the Companys stock plans as of June 30, 2011 and changes during the year then ended is presented below:  OptionsSharesWeighted-
Average
Exercise
PriceWeighted-
Average
Remaining
Contractual
TermAggregate
Intrinsic
ValueOutstanding at July1, 2010$Granted43,100,000$0.065Exercised$Forfeited or expired$Outstanding at June 30, 201143,100,000$0.0659.78 years$Exercisable at June 30, 2011$$  On April 6, 2011, the Board of Directors granted stock options to purchase 42,350,000 shares of common stock at an exercise price of $0.065 per share.  On May 13, 2011, the Board of Directors granted stock options to purchase 750,000 shares of common stock at an exercise price of $0.06 per share.  The weighted average fair value of the options granted was estimated at $0.057 per share.  These options vest over three years and have a term of 10 years.  Stock-based compensation expense for the year ended June 30, 2011 was $202,244.  At June 30, 2011, unrecognized total compensation cost related to nonvested awards of $2,238,058 is expected to be recognized over a weighted average period of 2.75 years. At June 30, 2011 there were 6,900,000 shares reserved for future grants.  Warrants  See report of independent registered public accounting firm.  56       The outstanding Technest Holdings, Inc. warrants remain in place subsequent to the reverse acquisition. No warrants were issued, exercised or expired in the year ended June 30, 2011.  During the year ended June 30, 2010, no warrants were issued or exercised but 374,286 warrants expired without being exercised.  The Company has reserved 275,000 shares of common stock for the exercise of outstanding warrants.  The following table summarizes the warrants outstanding at June 30, 2011:  Exercise priceNumberExpiration Date$5.8575,00008/03/2013$1.89200,00007/17/2011275,000  The weighted average remaining life of the warrants is 0.6 years.  At June 30, 2011 all warrants are exercisable and there is no aggregate intrinsic value for the warrants outstanding.  Stock Award Plan  The Technest Holdings, Inc. 2006 Stock Award Plan, pursuant to which Holdings may award up to 2,000,000 shares of its common stock to employees, officers, directors, consultants and advisors, remain in place subsequent to the reverse acquisition.  Holdings has broad discretion in making grants under the Stock Award Plan and may make grants subject to such terms and conditions as determined by the Board of Directors or the committee appointed by the board of directors to administer the Plan. Stock awards under the Plan will be subject to the terms and conditions, including any applicable purchase price and any provisions pursuant to which the stock may be forfeited, set forth in the document making the award.  The following is a summary of the activity under the Stock Award Plan:  SharesWeighted-
Average
Grant-Date
Fair ValueNonvested at June 30, 2009--Granted1,160,5000.15Vested(1,160,500)0.15Forfeited--Nonvested at June 30, 2010--$--  Of the shares granted and vested in 2010, 651,230 shares with a grant date fair value of $0.15 per share were issued to Company directors in satisfaction of services performed and expensed in 2009. Total stock-based compensation related to shares that vested in the years ended June 30, 2010 was $0.  As of June 30, 2011 and 2010, there was no unrecognized compensation cost related to non-vested restricted stock.  As of June 30, 2011 and 2010, the Company has 111,845 shares available for future grant under the Plan.  10.  NET LOSS 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 years ended June 30, 2011 and 2010 consist of the following:  Shares Potentially Issuable20112010Series E 5% Convertible Preferred Stock6,754,173--Stock Options43,100,000--Warrants275,000275,000Total50,129,173275,000  11.  COMMITMENTS AND CONTINGENCIES  Facility Rental  Holdings currently leases offices with approximately 6,848 square feet in Bethesda, Maryland, pursuant to a lease which currently expires on December 31, 2011 and requires the payment of a refundable security deposit of $28,525 which is included in deposits on the Companys consolidated balance sheet. Monthly lease amounts for this facility total approximately $16,053. Rent expense  See report of independent registered public accounting firm.  57       included in the accompanying financial statements since the assumption of the lease by AccelPath in the reverse acquisition was $64,212. The future minimum rental payments required under this operating lease through expiration is $96,315.  Operating Lease  In May 2010, AccelPath entered into a non-cancelable operating lease for certain equipment.  The lease requires monthly rental payments of $3,698 and expires in May 2015.  The lease terms required payment of a refundable security deposit of $18,000 which is included in deposits on the Companys consolidated balance sheet.  Future minimum lease payments remaining at June 30, 2011 for the years ending June 30, 2012, 2013, 2014 and 2015 are $44,376, $44,376, $44,376 and $36,980, respectively.  Rent expense for the years ended June 30, 2011 and 2010 was $44,487 and $7,396, respectively.  Government Contracts  Holdings 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.  Provisional rates are based on the annual budget submitted to and approved by the government.  Employment Agreements  At June 30, 2011, the Company was not obligated under any employment agreements.  12.  INCOME TAXES  There was no provision for federal or state income taxes for the year ended June 30, 2011 due to the Companys operating losses and a full valuation reserve on deferred tax assets.  In addition, AccelPath (the accounting acquirer) was treated as a partnership for federal and state income taxes from inception until the reverse acquisition was completed.  A partnerships income or loss is allocated directly to the partners for income tax purposes.  Accordingly, there was no provision for federal and state income taxes for the year ended June 30, 2010.  The income tax benefit differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the year ended June 30, 2011 due to the following:  2011Computed expected tax benefit(35%)Increase (decrease) in income taxes resulting from:State taxes, net of federal benefit(3%)Tax reporting differences due to the reverse acquisition8%Goodwill impairment and other permanent differences15%Increase in the valuation reserve15%0%  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, 2011 are as follows:  2011Deferred tax assets:Net operating loss carryforward$3,993,000Stock-based compensation174,000Intangibles385,000Miscellaneous accruals140,000Property and equipment7,000Valuation allowance(3,941,000)Deferred tax assets758,000Deferred tax liabilities:Accrued interest(356,000)Deferred gain on sale of EOIR(402,000)Deferred tax liabilities(758,000)Net deferred tax asset (liability)$---  See report of independent registered public accounting firm.  58       At June 30, 2011, the Company had a valuation allowance of $3,941,000.  The Company has recorded a valuation allowance against deferred tax assets as management has determined certain net operating loss carryforwards will not be available due to Internal Revenue Code Section 382 ownership changes and the utilization of other net operating loss carryforwards is uncertain.  The Company carried forward the deferred tax assets, liabilities and valuation reserve of Holdings after the reverse acquisition because for tax purposes Holdings acquired AccelPath as a subsidiary.  Accordingly, in the year ended June 30, 2011, the valuation allowance increased by $441,000 from the amount previously reflected in the Companys June 30, 2010 financial statements.  The increase in the valuation allowance in the year ended June 30, 2011was due to the Companys net operating loss.  At June 30, 2011, the Company has net operating loss carryforwards not subject to IRC Section 382 limitations of approximately $4,200,000 which begin to expire in 2024.  During the year ended June 30, 2011 the Company did not recognize any interest and penalties. Tax years subsequent to 2004 are subject to examination by federal and state authorities.  13.  EMPLOYEE BENEFIT PLAN  Holdings has adopted a 401(k) plan for the benefit of employees. Essentially all Holdings 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.  Contributions and other costs of the plan included in the accompanying financial statements for the year ended June 30, 2011were $7,768.  14.  RELATED PARTY TRANSACTIONS  Compensation  Beginning in December 2008, AccelPath made monthly payments of $10,000 each to two Managing Members as compensation for services performed.  During the year ended June 30, 2010, these two Managing Members agreed to forego $90,000 of monthly payments.  Beginning in February 2010, AccelPath began to pay an additional Member a $10,000 monthly payment for services provided (pro-rated for February).  On March 4, 2011, one of the Managing Members resigned (see Note 9) and is no longer receiving this monthly payment. The two remaining members continued to receive this compensation. No written agreements are currently in place related to these payments.  AccelPath recognized $330,000 and $195,417 of expense for these monthly payments during the years ended June 30, 2011 and 2010, respectively.  At June 30, 2011, $45,000 of unpaid monthly payments are recorded as accrued compensation.  AccelPath Revenue  During the year ended June 30, 2011, approximately $110,000 of AccelPath revenue transactions were initiated by one laboratory.  Certain of the owners of the laboratory were minority owners of AccelPath prior to the reverse acquisition and are now minority shareholders of Holdings.  15.  OPERATING SEGMENTS  The Company operates in two operating segments which are consistent with its internal organization. The major segments are medical diagnostic services and government contracting.  Where applicable, Unallocated represents items necessary to reconcile to the consolidated financial statements, which generally include corporate activity at the parent level and eliminations.  The Company evaluates performance of individual operating segments based on operating income (loss). On a consolidated basis, this amount represents total net loss as shown in the consolidated statement of operations. Reconciling items represent executive compensation costs that are not allocated to the operating segments.  Such costs have not been allocated from the parent to the subsidiaries.  See report of independent registered public accounting firm.  59       Fiscal Year Ended June 30, 2011Medical
DiagnosticsGovernment
ContractingUnallocatedTotalNet revenue$153,607$296,330$-$449,937Operating loss(1,294,720)(254,660)(252,244)(1,801,624)Interest income and other income-25,305-25,305Interest expense56--56Depreciation and amortization82658,755-59,581Expenditure for long-lived assets, including intangibles19,841--19,841Impairment of goodwill-1,161,215-1,161,215Total Assets at June 30, 2011136,517522,4045,036,0005,694,921  Fiscal Year Ended June 30, 2010Medical
DiagnosticsGovernment
ContractingUnallocatedTotalNet revenue$-$-$-$-Operating loss(325,235)--(325,235)Interest income and other income----Interest expense----Depreciation and amortization----Expenditure for long-lived assets, including intangibles----Impairment of goodwill----Total Assets at June 30, 201077,597--77,597  16.  SUBSEQUENT EVENTS  On August 12, 2011 the Board of Directors granted stock options to purchase 120,000 shares of common stock at an exercise price of $0.050. These options vest over one year and have a contractual term of 10 years.  See report of independent registered public accounting firm.  60        Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  None.   Item 9A. Controls and Procedures  Disclosure Controls and Procedures  We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure.  Our management, with the participation of our Chief Executive Officer (CEO) and our Principal Financial Officer (PFO), evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of June 30, 2011, the end of our fiscal year. In designing and evaluating disclosure controls and procedures, we and our management recognize that any disclosure controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objective. As of June 30, 2011, based on the evaluation of these disclosure controls and procedures, and in light of the material weaknesses found in our internal controls, the CEO and PFO concluded that our disclosure controls and procedures were not effective.  In light of the conclusion that our internal controls over financial reporting were ineffective as of June 30, 2011, we have applied procedures and processes as necessary to ensure the reliability of our financial reporting in regards to this annual report. Accordingly, management believes, based on its knowledge, that: (i) this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report; and (ii) the financial statements, and other financial information included in this annual report, fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this annual report.  Managements Report on Internal Control over Financial Reporting  Our management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. Under the supervision of our CEO and PFO, the Company conducted an evaluation of the effectiveness of our internal control over financial reporting as of June 30, 2011 using the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over financial reporting as of June 30, 2011, we determined that control deficiencies existed that constituted material weaknesses, as described below:  1)lack of documented policies and procedures;2)inadequate resources dedicated to the financial reporting function; and3)ineffective separation of duties due to limited staff.  Subject to the Companys ability to obtain financing and hire additional employees, the Company expects to be able to design and implement effective internal controls in the future that address these material weaknesses.  Accordingly, we concluded that these control deficiencies resulted in a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis by the Company's internal controls.  As a result of the material weaknesses described above, our CEO and PFO have concluded that the Company did not maintain effective internal control over financial reporting as of June 30, 2011 based on criteria established in Internal ControlIntegrated Framework issued by COSO.  61       Attestation Report of the Registered Public Accounting Firm  This annual report does not include an attestation report of our registered public accounting firm, Wolf & Company, P.C., regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.  Changes in Internal Controls  There were no changes in our internal controls over financial reporting during the fourth quarter of fiscal 2011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Limitations on the Effectiveness of Controls  Our management, including our CEO and PFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.   ITEM 9B. Other Information.  None.  62       PART III   ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE  Our current directors and executive officers are:  NameAgePositionYear BeganShekhar G. Wadekar52Chief Executive Officer, President, Director2011Bruce C. Warwick55Principal Financial Officer2011Suren G. Dutia68Director2011Henry Sargent43Director2008F. Howard Schneider, Ph.D.72Director2011 _______________________  Technests executive officers are appointed by, and serve at the discretion of, the Board. There are no family relationships among our officers or directors.  Shekhar G. Wadekar, Ph.D., M.B.A. has served as our President and Chief Executive Officer and as a director since March 4, 2011.  In addition, Mr. Wadekar founded and has served as a Manager of AccelPath, a wholly-owned subsidiary of the Company since October, 2008.  From July 2005 to February 1, 2010, Mr. Wadekar served as Executive Vice President, Secretary and Treasurer of Phoenix India Acquisition Corp., a company formed to serve as a vehicle for the acquisition of an operating business through mergers, capital stock exchanges, asset acquisitions or other similar business combinations.  From December 2006, he served as the President, Secretary and Director of Yantrik Technology Inc., a company involved in the reselling of engineering services.  From November 2003 to April 2009, Mr. Wadekar served as President and Chief Executive Officer of Traxyz Medical, Inc., a development stage medical device company, subsequent to which he has served as Manager of Traxyz LLC, a company that holds the intellectual property of Traxyz Medical, Inc.  From February 2002 to September 2003, Mr. Wadekar served as President and Chief Operating Officer of MadMax Optics, a scientific software company.  From August 1994 until joining MadMax Optics, Mr. Wadekar served as research analyst on Wall Street following the semiconductor industry.  From April 1999 to February 2002, he served as Director in Equity Research at Royal Bank of Canada Capital Markets. Prior thereto, he was employed by Raymond James and Associates and Sanford C. Bernstein and Co., Inc.  From August 1989 to December 1993, Mr. Wadekar was employed at IBM working on optical communications and was also Technical Coordinator of the IBM/Siemens/Toshiba joint development program in semiconductor memory.  He holds a Ph.D. in electrical engineering from the University of Delaware, an M.B.A. from the Stern School of Business at New York University and a B.Tech. in metallurgical engineering from the Indian Institute of Technology, Bombay.  Mr. Wadekars extensive senior management experience in a broad range of industries makes him a highly qualified member of the Board.  Bruce C. Warwick, CPA has served as our principal financial officer since March 4, 2011, and provides services to Technest on a part-time basis.  Mr. Warwick currently provides accounting, finance and contract administration services to AccelPath on a part-time basis.  Mr. Warwick has served as Controller of Mayflower Communications Company, Inc., a provider of advanced radio navigation, digital anti-jam, and wireless communication technologies since December 2007 and as Treasurer since March 2008.  Mr. Warwick previously served as Controller for MicroFinancial Incorporated, a publicly traded leasing company from October 2005 to September 2007.  He also served as an officer of both Able Laboratories, Inc. and RxBazaar, Inc. from May 2000 to August 2005.  Able was a publicly traded manufacturer of generic drugs and RxBazaar was a publicly held distributor of pharmaceutical and medical products. From 1988 until 2000, Mr. Warwick was employed at Wolf & Company, P.C., a large regional public accounting and business consulting firm, most recently as a principal.  Mr. Warwick is a graduate of Bentley  63       College with a Bachelor of Science in Accounting and a Master of Science in Taxation.  He is licensed as a Certified Public Accountant in Massachusetts and is a member of the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants  Suren G. Dutiahas served as a director since March 4, 2011.  From March 2006, to May 2010, Mr. Dutia served as Chief Executive Officer of TiE Global, a non-profit network of entrepreneurs and professionals with a focus on fostering entrepreneurship globally.  From January 1989 to December 1999, Mr. Dutia was President and Chief Executive Officer of Xscribe Corporation, a publicly-traded manufacturer of computer-aided transcription products.  From April, 1981 to December, 1988, Mr. Dutia was a senior executive responsible for overseeing number of subsidiaries of Boston-based Dynatech Corporation. Mr. Dutia holds B.S. and M.S. degrees in Chemical Engineering and a B.A. in Political Science from Washington University in St. Louis, and holds an M.B.A. from the University of Dallas in Irving, Texas.  Mr. Dutias senior management experience in publicly traded and privately held companies and his experience as a passionate advocate of entrepreneurship makes him a highly qualified member of the Board.  Henry Sargent, JD, CFA has served as a director since March 11, 2008. Mr. Sargent serves as General Counsel and Chief Operating Officer of Southridge LLC. His responsibilities include investment selection, deal structuring, workouts, and reorganization. Prior to joining Southridge in 1998, Mr. Sargent spent several years at a New York-based corporate and securities law firm, specializing in private placements, venture capital financing, and corporate reorganizations. He received a JD from Fordham University School of Law, New York, New York. Mr. Sargent is a member of the New York Bar Association, the CFA Institute, and the New York Society of Security Analysts.  F. Howard Schneider, Ph.D. has served as a director since March 4, 2011.  Dr. Schneider is currently a part time pharmacology consultant.  From January 2004 to July 2006, Dr. Schneider served as Vice President, Special Projects of Able Laboratories, Inc., a publicly traded manufacturer of generic drugs, prior to which he served as a consultant to Able Laboratories, Inc. from August 2002 to January 2004.  He also served on the board of directors Able Laboratories from September 1989 to February 2004.  From November 1997 to July 2003, Dr. Schneider was Vice President of Development and a director of CereMedix, Inc., a company developing treatments for neurological diseases.  From June 1991 to November 1997, he was Senior Vice President of Technology of Able Laboratories, Inc.  Dr. Schneider also serves on the board of PKC Pharmaceuticals, a privately-held company that manufactures and sells biological research chemicals.  Dr. Schneider earned a M.S. degree in chemistry from Arizona State University and in 1966 a Ph.D. in pharmacology from Yale University School of Medicine.  Dr. Schneiders management experience and experience in the healthcare industry makes him a highly qualified member of the Board.  On July 18, 2005, Able Laboratories, Inc. filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of New Jersey.  Each of Dr. Schneider and Mr. Warwick was an officer of Able Laboratories, Inc. at the time such petition was filed.  Board of Directors  Members of our board of directors are elected for one-year terms serving until the next annual stockholders meeting or until their death, resignation, retirement, removal, disqualification, or until a successor has been elected and qualified. All officers are appointed annually by our board of directors and serve at the pleasure of our board of directors. Currently, our directors receive no cash compensation for their service on our board of directors.  Committees of the Board of Directors  In March 2006, the Board created three standing committees: Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee.  Since the resignation of Mr. Robert Doto and Ms. Darlene Deptula-Hicks, Technest has had vacancies on the Compensation Committee and the Nominating and Corporate Governance Committee.  Currently, the full Board is serving the functions of the Compensation Committee and the  64       Nominating and Corporate Governance Committee.  The Nominating and Corporate Governance Committee does not operate under a charter and does not have a policy with regard to the consideration of any director candidates recommended by security holders.  The Board has determined that it is appropriate to not have such a policy given Technests size and stockholder base.  The Compensation Committee does not operate under a charter and the full Board, serving the function of the Compensation Committee, has collective responsibility for determining and approving the compensation of Technests executive officers.  The Audit Committee does not operate under a charter and upon Ms. Depula-Hicks resignation on August 9, 2007, Technest no longer had an audit committee financial expert. Until such time as another independent director, who also qualifies as an audit committee financial expert, is elected to the Board, the Audit Committee has been disbanded and the full Board serves the functions of the Audit Committee.  Given the Companys current board size, the limited number of independent directors and the Companys resources, the Board has determined that it is best for the full Board to collectively address matters regarding compensation, nominations, corporate governance and audit.  Code of Ethics  The board of directors has adopted a code of ethics applicable to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer. A copy of the Code of Ethics may be obtained free of charge by mailing a request to the Companys offices in Bethesda, Maryland to the attention of the corporate secretary.  Section 16(a) Beneficial Ownership Reporting Compliance  Our executive officers and directors and persons who own beneficially more than ten percent of our equity securities are required under Section 16(a) of the Securities Exchange Act of 1934 to file reports of ownership and changes in their ownership of our securities with the Securities and Exchange Commission.  They must also furnish copies of these reports to us.  Based solely on a review of the copies of reports furnished to us and written representations that no other reports were required, we believe that for fiscal year 2011, our executive officers, directors and 10% beneficial owners complied with all applicable Section 16(a) filing requirements, except that Messrs. Dutia, Schneider, Wadekar and Warwick filed late Form 4s on June 21, 2011 which were due on April 12, 2011 for the granting of options to purchase shares of Common Stock by the Company.  65        ITEM 11.  EXECUTIVE COMPENSATION  Executive Officer Compensation Summary Compensation:The following table sets forth certain compensation information for our chief executive officer and our other most highly compensated executive officer (other than our chief executive officer) who served as an executive officer during the year ended June 30, 2011 and whose annual compensation exceeded $100,000 for that year.  Summary Compensation Table  Name and Principal
PositionFiscal
YearSalary
($)Bonus
($)Stock
Awards
($)Option
Awards
($)All Other
compensation
($)Total
($)Shekhar Wadekar (1)Chief Executive Officer2011$40,000(2)$―$―$88,825(3)$―$128,825Bruce Warwick (1)Principal Financial Officer2011$19,848(4)$―$―$9,869(5)$―$29,717Gino M. Pereira (1)Former Chief Executive Officer and President2011$201,930(6)$―$50,000(7)$―$4,663(8)$256,5932010$325,000(9)$―$―$―$662,425(10)$987,425Nitin V. Kotak (1)Former Chief Financial Officer2011$159,407$―$―$―$5,469(8)$164,8762010$220,000$―$―$―$15,420(8)$235,420 _____________________________ (1)Mr. Pereira resigned effective immediately prior to the closing of the acquisition of AccelPath LLC, which closed on March 4, 2011. Mr. Kotak resigned effective as of February 21, 2011. On March 4, 2011, Mr. Wadekar was appointed President and Chief Executive Officer of Technest and Mr. Warwick was appointed Principal Financial Officer.(2)Mr. Wadekar is paid at an annual rate of $120,000. The amount in the table represents four months of his annual salary.(3)On April 6, 2011, Mr. Wadekar was granted an option to purchase 18,000,000 shares of Technest Common Stock at an exercise price of $0.0650 that vests 5,940,000 shares on April 6, 2012, 5,940,000 shares on April 6, 2013 and 6,120,000 on April 6, 2014.  The dollar amount set forth in the table represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FASB ASC Topic 718.(4)Mr. Warwick has been working for the Company on a part-time basis.(5)On April 6, 2011, Mr. Warwick was granted an option to purchase 2,000,000 shares of Technest Common Stock at an exercise price of $0.0650 that vests 660,000 shares on April 6, 2012, 660,000 shares on April 6, 2013 and 680,000 shares on April 6, 2014.  The dollar amount set forth in the table represents the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with FASB ASC Topic 718.(6)This amount includes $25,000 which was earned by Mr. Pereira during the fiscal year but will be paid to him upon Technests receipt of the EOIR Payment.(7)Mr. Pereira was issued 1,000,000 shares of Technest Common Stock in connection with him entering into his Employment Settlement Agreement. The dollar amount set forth in the table represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718.(8)Consists of Technests matching and safe harbor contributions under its 401(k) plan.(9)From July 1, 2009 to December 31, 2009, Mr. Pereira was paid at an annual rate of $350,000. Beginning on January 1, 2010, Mr. Pereira agreed to reduce his salary to an annual rate of $300,000.(10)Consists of (i) $615,000 paid to Mr. Pereira in accordance with his March 13, 2006 employment agreement which payment was triggered by the sale of EOIR Technologies, Inc., (ii) $30,000 earned by Mr. Pereira from July 1, 2009 through December 31, 2009 as the executives fixed amount per month for auto expense, business office expense and other personal expenses pursuant to Mr. Pereiras employment agreement (as of January 1, 2010, the executive agreed to  no longer receive this payment), and (iii) $17,425 as Technests matching and safe harbor contributions under its 401(k) plan.  66       Outstanding Equity Awards at Fiscal Year-End  OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-ENDOPTION AWARDSSTOCK AWARDSName
(a)Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
(b)Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
(c)Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
(d)Option
Exercise
Price
($)
(e)Option
Expiration
Date
(f)Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
(#)
(g)Market
Value
of
Shares
or
Units
of
Stock
That
Have
Not
Vested
($)
(h)Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
(i)Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not Vested
(#)
(j)Shekhar Wadekar18,000,000(1)$0.0654/5/2021Bruce Warwick2,000,000(2)$0.0654/5/2021  (1)On April 6, 2011, Mr. Wadekar was granted an option to purchase 18,000,000 shares of Technest Common Stock at an exercise price of $0.0650 that vest 5,940,000 shares on April 6, 2012, 5,940,000 shares on April 6, 2013 and 6,120,000 on April 6, 2014 based on continued employment.(2)On April 6, 2011, Mr. Warwick was granted an option to purchase 2,000,000 shares of Technest Common Stock at an exercise price of $0.0650 that vests 660,000 shares on April 6, 2012, 660,000 shares on April 6, 2013 and 680,000 shares on April 6, 2014 based on continued employment.  Agreements with Gino M. Pereira  In accordance with the terms of the Employment Settlement Agreement and Release (the Employment Settlement Agreement) dated January 11, 2011, with Gino M. Pereira, the former President and Chief Executive Officer of Technest, Mr. Pereiras Employment Agreement dated January 14, 2008 was terminated on March 4, 2011.  Under the Employment Settlement Agreement, Mr. Pereira was entitled to receive his current salary and benefits through January 31, 2011 and was issued 1,000,000 shares of Technests Common Stock following the closing of the acquisition of AccelPath, LLC.  In consideration for such payments, Mr. Pereira resigned as President and Chief Executive Officer and a director of Technest and released Technest from any and all claims which he may have had against Technest.  Pursuant to Mr. Pereiras January 14, 2008 employment agreement, he was entitled to a base salary of $350,000 per year which on January 1, 2010, was reduced to $300,000 per year and $5,000 per month for auto expense, business office expense and other personal expenses, which he stop receiving after January 1, 2010.  He was also eligible to receive a performance based bonus and a performance based stock award. The employment agreement also provided that in the event that Mr. Pereira's engagement with Technest was terminated by Technest without cause (as that term is defined in Section 8(b) of the agreement), or by Mr. Pereira for Good Reason (as that term is defined in Section 8(c) of the agreement), Technest would continue to pay Mr. Pereira's Annual Salary and provide health insurance for a period of one year from the date of termination plus certain bonuses as calculated in Section 8(f) of the agreement. In the event that Mr. Pereira was terminated by Technest as a result of a Change of Control (as defined in the agreement) or Mr. Pereira terminated his employment for Good Reason as a result of a Change of Control, he would be entitled to  67       two times the Annual Salary, plus certain bonuses as calculated in Section 8(g) of the agreement. In the event that Mr. Pereira's employment with Technest was terminated for any other reason, there would be no continuation of cash salary payments or health insurance.  The foregoing summary of the Employment Settlement Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Employment Settlement Agreement, a copy of which is filed as Exhibit 10.3 to Technests Current Report on Form 8-K filed with the S.E.C on March 10, 2011 and is incorporated herein by reference.  Mr. Pereiras employment agreement is filed as Exhibit 10.1 to Technests Current Report on Form 8-K filed on January 18, 2008 and is incorporated herein by reference.  Employment Agreement with Nitin V. Kotak  Mr. Nitin V. Kotak, our former Chief Financial Officer, resigned effective as of February 21, 2011 to pursue another opportunity. Below are the terms of his employment agreement, which was entered into January 14, 2008:  ·a term of five years beginning on January 14, 2008;·An initial base salary of $220,000 per year (the Annual Salary);·payment of all necessary and reasonable out-of-pocket expenses incurred by Mr. Kotak in the performance of his duties under the agreement;·eligibility to receive cash bonuses as determined by the board of directors; and·eligibility to receive equity awards under Technests 2006 Stock Award Plan as determined by the board of directors, with an initial award of 50,000 shares of Common Stock which vested on January 14, 2009.  The employment agreement provides that in the event that Mr. Kotak's engagement with Technest is terminated by Technest without cause (as that term is defined in Section 8(b) of the agreement), or by Mr. Kotak for Good Reason (as that term is defined in Section 8(c) of the agreement), Technest will continue to pay Mr. Kotak's Annual Salary and provide health insurance for a period of one year from the date of termination. In the event that Mr. Kotak is terminated as a result of a Change of Control (as defined in the agreement), he would be entitled to his Annual Salary. In the event that Mr. Kotak's employment with Technest is terminated for any other reason, there will be no continuation of cash salary payments or health insurance.  The above description summarizes the material terms of Mr. Kotaks employment agreement, which is filed as Exhibit 10.2 to our Current Report on Form 8-K filed on January 18, 2008 and is incorporated by reference herein. For further information on Mr. Kotaks employment agreement, please refer to Exhibit 10.2.  68       Director Compensation  Summary Compensation:The following table sets forth the compensation of our directors for the year ended June 30, 2011.  Name and Principal
PositionDirector
Fees
($)Option Awards
($)All other
compensation
($)Total
($)Robert A. Curtis (1)(2)$―$―$―$―Laurence Ditkoff (1)(2)――――Suren G. Dutia (1)―71,060(3)―71,060David R. Gust (1)(2)――――Stephen Hicks (1)(2)――――Henry Sargent (1)(2)――――F. Howard Schneider (1)―71,060(3)―71,060 _____________________________  (1)In connection with and effective immediately prior to the closing of the acquisition of AccelPath LLC, which occurred on March 4, 2011, each of Gino M. Pereira, Robert A. Curtis, Laurence Ditkoff, David R. Gust and Stephen Hicks resigned from the Board of Directors of Technest.  Following the closing of the acquisition of AccelPath, LLC, Henry Sargent remained on the Board; and each of Shekhar G. Wadekar, Suren G. Dutia and F. Howard Schneider, Ph.D. were appointed to the Board of Directors of Technest to fill three of the vacancies caused by such resignations.  Following the closing, the Board consists of four directors, three of whom were appointed in connection with the acquisition.(2)Each of Robert A. Curtis, Laurence Ditkoff, David R. Gust, Stephen Hicks and Henry Sargent waived their fees for the fiscal year ended June 30, 2011 and no payments are due to them.(3)On April 6, 2011, Suren Dutia and Howard Schneider each received an option to purchase 1,200,000 shares of Technest Common Stock with an exercise price of $0.065 that vest on 396,000 on April 6, 2012 and 396,000 on April 6, 2013 and 408,000 on April 6, 2014 based on their continued service to the Company. The amount represented in the table represents the aggregate grant date fair value computed in accordance with FASB ASC Topic 718. They received no other compensation for their services.  Directors who are also our employees receive no additional compensation for serving as directors.  69       Equity Compensation Plan Information  The following table provides information about the securities authorized for issuance under the Company's equity compensation plans as of June 30, 2011:  Plan categoryNumber of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rightsWeighted
average exercise
price of
outstanding
options,
warrants and
rightsNumber of
securities
remaining
available for
future issuance(a)(b)(c)Equity compensation plans approved by security holders (1)0$00Equity compensation plans not approved by security holders (2)43,100,000$.0657,011,845(2)Total43,100,000$$.0657,011,845(2)  (1)2001 Stock Option Plan. This plan terminated by its own terms in June 2011.(2)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.  On September 21, 2009, the Board of Directors of Technest increased the number of shares issuable under the plan from 1,000,000 shares to 2,000,000 shares.  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 a 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.  As of June 30, 2011, the Company had 111,845 shares available for issuance under the plan.On March 4, 2011, the Board approved the Technest Holdings, Inc. 2011 Equity Incentive Plan pursuant to which Technest may grant stock awards covering an aggregate of 50,000,000 shares of its Common Stock. As of October 12, 2011, the Board of Directors has granted stock options to purchase a total of 43, 220,000 shares of common stock, 42,350,000 of which had an exercise price of $0.065 per share, 750,000 of which had an exercise price of $0.06 and 120,000 of which had an exercise price of $0.05 per share.  The options vest over three years and have a term of 10 years.  70       Adoption of Technest Holdings, Inc. 2011 Equity Incentive Plan  On March 4, 2011, the Board approved the Technest Holdings, Inc. 2011 Equity Incentive Plan (the 2011 Plan).  The purpose of the 2011 Plan is to secure and retain the services of employees, officers, directors and consultants of Technest and its affiliates and to provide a means by which such eligible individuals may be given an opportunity to benefit from increases in the value of Technests common stock through the granting of stock awards, thereby aligning the long-term compensation and interests of those individuals with Technests stockholders.  The 2011 Plan provides for the granting of incentive stock options, nonstatutory stock options, restricted stock awards, stock appreciation rights, and other forms of equity compensation.  The 2011 Plan also provides for the granting of performance stock awards so that the Board (or a committee to which authority has been delegated) may use performance criteria in establishing specific targets to be attained as a condition to the grant or vesting of one or more awards under the 2011 Plan.  The 2011 Plan provides for the grant of stock awards to employees, directors and consultants of Technest and its affiliates covering an aggregate of 50,000,000 shares of its common stock, subject to adjustments in the event of certain changes to Technests capitalization.  The number of shares of common stock available for issuance under the 2011 Plan shall automatically increase on January 1st of each year for a period of 9 years commencing on January 1, 2012 in an amount equal to the lesser of 5% of the total number of shares of common stock outstanding on December 31st of the preceding calendar year, or 3,000,000 shares.  The common stock subject to the 2011 Plan may be unissued shares or reacquired shares, including shares purchased on the open market.  If a stock award granted under the 2011 Plan expires or otherwise terminates for any reason without being exercised in full, or a stock award is forfeited to or repurchased by Technest, the shares of common stock expired, terminated, forfeited or repurchased again become available for subsequent issuance under the 2011 Plan.  The Board has broad discretion in making grants under the 2011 Plan and may make grants subject to such terms and conditions as determined by the Board or a duly appointed committee thereof.  Grants under the 2011 Plan will be subject to the terms and conditions set forth in the document making the award, including, without limitation any applicable purchase price and provisions pursuant to which the grant may be forfeited.  The Board or a duly appointed committee thereof may suspend or terminate the 2011 Plan at any time.  The 2011 Plan is scheduled to terminate on the day before the tenth (10th) anniversary of the earlier of (i) the date the 2011 Plan is adopted by the Board, or March 4, 2011, or (ii) the date the 2011 Plan is approved by the stockholders of Technest.  No rights may be granted under the 2011 Plan while the 2011 Plan is suspended or after it is terminated.  The Board or a duly appointed committee thereof may amend or modify the 2011 Plan at any time, subject to any required stockholder approval.  71        ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  The following table sets forth information known to Technest with respect to the beneficial ownership of Technest common stock as of October 12, 2011, unless otherwise noted, by:  · each stockholder known to Technest to own beneficially more than 5% of Technest’s common stock;  · each of Technest’s directors;  · each of Technest’s executive officers; and  · all of Technest’s current directors and executive officers as a group.  Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or dispositive power with respect to securities.  Shares relating to options or warrants currently exercisable, or exercisable within 60 days of October 12, 2011, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Percentage of ownership is based on 120,279,296 shares of common stock outstanding on October 12, 2011.  Except as indicated by footnote, and subject to the community property laws where applicable, the persons or entities named in the tables have sole voting and dispositive power with respect to all shares shown as beneficially owned by them. Except as otherwise noted in the tables below, the address of each person or entity listed in the table is c/o Technest Holdings, Inc. 10411 Motor City Drive, Suite 650, Bethesda, MD 20817.  Number of Shares of Common Stock
Beneficially OwnedBeneficial Owner of 5% or moreSharesPercentHarold Lance Evans10,498,1208.73%304 Ѕ East 38th Street (Gar)New York NY 10016Stephen Hicks11,692,602(1)9.2%(1)c/o Southridge Partners90 Grove StreetRidgefield, CT 06877Southridge Partners II, LP7,204,173(2)5.67%(2)90 Grove StreetRidgefield, CT 06877Directors and Executive OfficersShekhar G. Wadekar, Chief Executive Officer, President and Director25,995,344(3)21.61%Bruce Warwick, Principal Financial Officer0(4)*Suren G. Dutia, Director4,999,105(5)4.16%(5)Henry Sargent, Director1,385,532(6)1.15%(6)F. Howard Schneider, Ph.D., Director0(5)*Directors and Executive Officers as a Group (5 Persons)32,379,981(7)27%(7)Former Executive OfficersGino M. Pereira, Former Chief Executive Officer (8)1,447,0001.20%Nitin V. Kotak, Former Chief Financial Officer (9)50,000*  72       *Less than 1%  (1) Includes (i) the shares beneficially owned by Southridge Partners II, LP; (ii) 508,993 shares owned by Southridge Partners, LP LLC over which Stephen Hicks has voting and investment control and disclaims beneficial ownership thereof, (iii) 9,192 shares owned by Southridge Capital Management LLC over which Stephen Hicks has voting and investment control and disclaims beneficial ownership thereof; (iv) 398,681shares beneficially owned by Aberdeen Avenue LLC; (v) 243,017 shares of Technests common stock owned directly by Mr. Hicks; (vi) as reported in Schedule 13D/A filed in October 2009, 111.81 shares of Series G Preferred Stock issued by Markland Technologies Inc., convertible subject to certain restrictions into an additional 37,049 shares of Technests common stock owned by Southshore Capital Fund Ltd over which each of David Sims and Stephen Hicks has voting and investment control and each disclaims beneficial ownership of such shares; (vii) 1,912,339 shares beneficially owned by Millennium Trust Company FBO Stephen Hicks, IRA over which Mr. Hicks is the beneficial ownerand  (viii) 1,379,158 shares of Common Stock owned by Trillium Partners, LP for which Mr. Hicks is the President of the general partner.  (2) Includes (i) 450,000 shares of our common stock and (ii) 300 shares of our Series E 5% Convertible Preferred Stock that are convertible into 6,754,173 shares of our common stock at the option of the holder thereof.  Stephen Hicks has voting and investment control over the securities held by Southridge Partners II, LP and disclaims beneficial ownership of such shares.  (3) On April 6, 2011, Mr. Wadekar was granted an option to purchase 18,000,000 shares of Technests common stock at a purchase price of $0.065 per share, of which 5,940,000 vests on April 6, 2012, 5,940,000 vests on April 6, 2013 and 6,120,000 vests on April 6, 2014. This option is not reflected in the above table.  (4) On April 6, 2011, Mr. Warwick was granted an option to purchase 2,000,000 shares of Technests common stock at a purchase price of $0.065 per share, of which 660,000 vest on April 6, 2012, 660,000 vest on April 6, 2013 and 680,000 vest on April 6, 2014. This option is not reflected in the above table.  (5) On April 6, 2011, Messrs. Dutia and Schneider were each granted an option to purchase 1,200,000 shares of Technests common stock at a purchase price of $0.065 per share, of which 396,000 on April 6, 2012 and 396,000 on April 6, 2013 and 408,000 on April 6, 2014. These options are not reflected in the above table.  (6) Includes 1,142,515 shares of Common Stock owned by Mountain West Partners LLC, for which Mr. Sargent is the managing member.  (7) Includes shares held by Messrs. Wadekar, Warwick, Dutia, Sargent and Schneider.  Excludes options to purchase  73       an aggregate of 22,400,000 shares of Technets common stock, which are not exercisable within 60 days of the date of this report.  (8) Mr. Pereira resigned effective immediately prior to the closing of the acquisition of AccelPath, LLC, which closed on March 4, 2011.  (9) Mr. Kotak resigned effective as of February 21, 2011 to pursue another opportunity.   ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  Conversion of Series A Convertible Preferred Stock and Series C Convertible Preferred Stock  On December 14, 2009, in accordance with the Series A Certificate of Designation, as amended, Garth LLC, the only holder of Technest Series A Convertible Preferred Stock, converted all of its shares of Technest Series A Convertible Preferred Stock into 304,578 shares of Technests common stock.  After this conversion, there are no longer any shares of Technest Series A Convertible Preferred Stock outstanding.  The issuance of the shares of Common Stock in this transaction was exempt from registration under the Securities Act of 1933, as amended (the Securities Act), pursuant to Section 3(a)(9) of the Securities Act.  On December 14, 2009, in accordance with the Series C Certificate of Designation, as amended, Southridge Partners LP and Southshore Capital Fund Ltd., the only holders of Technest Series C Convertible Preferred Stock, converted all of their shares of Technest Series C Convertible Preferred Stock into 344,827 shares of Technests common stock and 57,467 shares of Technests common stock, respectively. After these conversions, there are no longer any shares of Technest Series C Convertible Preferred Stock outstanding.  The issuance of the shares of Common Stock in these transactions was exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act.  Conversion of Series D 5% Convertible Preferred Stock  On December 8, 2009, in accordance with the Series D 5% Convertible Preferred Stock (Series D) Certificate of Designation, Southridge Partners LP and Southridge Capital Management LLC, the only holders of Series D, converted all of their shares of Series D into Technests common stock.  Upon conversion of the Series D, Southridge Partners LP acquired 6,859,306 shares of Technests common stock, which included 359,306 shares of Common Stock in payment of the accrued cumulative dividend of 5% per annum.  Upon conversion of the Series D, Southridge Capital Management LLC acquired 3,274,639 shares of Technests common stock, which included 74,639 shares in payment of the accrued cumulative dividend of 5% per annum. After these conversions, there are no longer any shares of Technest Series D outstanding. The issuance of the shares of Common Stock in these transactions was exempt from registration under the Securities Act pursuant to Section 3(a)(9) of the Securities Act.  Bridge Financing  On January 11, 2011, Technest entered into a Securities Purchase Agreement (the Bridge Financing Agreement) with Southridge Partners II, LP (Southridge) to issue 300 shares of its Series E 5% Convertible Preferred Stock (the Series E Preferred), with a stated value of $1,000 per share, to Southridge for a purchase price of $300,000 (the Bridge Financing).  The shares of Series E Preferred were issued in three tranches over a 90-day period beginning on the closing of the Transaction.  Prior to the closing of the Transaction, Southridge Partners, LP and its affiliates were the holders of a majority of Technests shares of common stock.  As set forth in the Series E 5% Convertible Preferred Stock Certificate of Designation filed with the Secretary of State of Nevada (the Certificate of Designation), the Series E Preferred is convertible into Technest common stock at the option of Southridge at any time.  The number of shares of Technest common stock into which each share of Series E  74       Preferred is convertible is determined by dividing $1,000 (the stated value) by $0.044416985 per share.  The 300 shares of Series E Preferred issued to Southridge (the Bridge Financing Shares) are convertible into 6,754,173 shares of Technest common stock.  The Series E Preferred dividend accrues quarterly in arrears, and shall be paid in cash when and if declared by the board or within 5 days of the conversion of Series E Preferred Stock into our common stock.  Any future transactions or loans between us and our officers, directors, principal stockholders or affiliates will be on terms no less favorable to us than could be obtained from an unaffiliated third party, and will be approved by a majority of disinterested directors.  Director Independence  For the fiscal year ended June 30, 2011, the Board determined that two of the six directors- Robert A. Curtis and David R. Gust, were independent directors as defined by NASDAQ Rule 5605(a)(2) governing the independence of directors.  After the acquisition of AccelPath, LLC on March 4, 2011, each of Mr. Dutia and Mr. Schneider are deemed independent directors as defined by NASDAQ Rule 5605(a)(2).  Mr. Wadekar and Mr. Sargent are not deemed to be independent directors under such standard.   ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES  Fees and Services  Audit Fees.The aggregate audit fees billed for professional services rendered by the independent registered public accounting firm for the audit of our financial statements as of and for the years ended June 30, 2011 and 2010, the reviews of our quarterly financial statements for the respective years, our filings with the Securities and Exchange Commission and other audit fees were $91,200 and $90,000, respectively.  Audit Related Fees.The aggregate audit related fees billed for professional services by the independent registered public accounting firm as of and for the years ended June 30, 2011 and June 30, 2010 were $12,930 and  $0, respectively.  Tax Fees.The aggregate tax fees billed for professional services by the independent registered public accounting firm as of and for the years ended June 30, 2011 and 2010 were $0 and $25,400, respectively.  The tax fees for both periods include fees for the preparation of federal and state income tax returns.  All Other Fees.No other fees were billed by or paid to the independent registered public accounting firm during the years ended June 30, 2011 or 2010.  Other than the services discussed above, Wolf & Company, P.C. has not rendered any non-audit related services for the period ended June 30, 2011.  At this time, we do not have a stand-alone Audit Committee. Until an independent director who also qualifies as an audit committee financial expert is elected to the Board of Directors, the full Board of Directors is serving the function of the Audit Committee.  For the year ended June 30, 2011, the full Board of Directors, functioning as the Audit Committee, approved the audit or non-audit services before the accounting firm was engaged to perform any such services.  Management must obtain the specific prior approval of the Board of Directors for each engagement of the independent registered public accounting firm to perform any audit-related or other non-audit services.  The Board of Directors does not delegate its responsibility to approve services performed by the independent registered public accounting firm to any member of management.  75        Item 15.  Exhibits.  All references to registrants Forms 8-K, 10-K and 10-Q include reference to File No. 000-27023.  Exhibit No.DescriptionFiled
with this
10-KIncorporated
by reference
FromFiling DateExhibit
No.2.1Stock Purchase Agreement dated September 10, 2007 between Technest Holdings, Inc., EOIR Holdings, LLC and E-OIR Technologies, Inc.8-KSeptember 13, 20072.12.2Form of Voting Agreement with a list of signatories8-KSeptember 13, 20072.22.3First Amendment to Stock Purchase Agreement dated December 31, 2007 among Technest Holdings, Inc., EOIR Holdings, LLC and EOIR Technologies, Inc.8-KJanuary 4, 20082.32.4Unit Purchase Agreement, dated as of January 11, 2011, by and among Technest Holdings, Inc., AccelPath, LLC and the members of AccelPath, LLC8-KJanuary 14, 20112.12.5Amendment No. 1 to Unit Purchase Agreement, dated as of March 4, 2011, by and among Technest Holdings, Inc. and AccelPath, LLC8-KMarch 10, 20112.013.1Restated 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, 200110-KSBApril 16, 20013.23.2Certificate of Amendment to Articles of Incorporation8-KAugust 9, 20013.13.3Amended and Restated By-Laws dated May 21, 2001DEF 14AJune 14, 2001B3.4Bylaw Amendments8-KDecember 20, 20063.13.5By-law Amendments8-KOctober 4, 20073.14.1Form of Common Stock CertificateSB-2February 26, 19994.14.2Technest Common Stock Warrant issued to Silicon Valley Bank dated August 4, 20068-KAugust 14, 20064.14.3Registration Rights Agreement between Technest Holdings, Inc. and Silicon Valley Bank dated August 4, 20068-KAugust 14, 20064.24.4Series E 5% Convertible Preferred Stock Certificate of Designation to be filed with the Secretary of State of Nevada8-KJanuary 14, 20114.110.1Office Lease Agreement between Motor City Drive, LLC and Genex Technologies, Inc., dated December 20, 200510-QSBFebruary 21, 200610.710.2*Technest Holdings, Inc. 2006 Stock Award Plan8-KMarch 17, 200610.8  76       10.3Indemnification Agreement between Technest Holdings, Inc. and Markland Technologies, Inc. dated September 1, 200610-KSBOctober 13, 200610.3610.4Office Lease Agreement Amendment No. 1 by and among Genex Technologies, Incorporated, Technest Holdings, Inc. and Motor City Drive, LLC dated as of November 1, 200610-QSBFebruary 14, 200710.110.5Asset Contribution Agreement between Technest Holdings, Inc. and Genex Technologies Incorporated dated November 1, 200610-QSBFebruary 14, 200710.210.6Release Agreement dated August 31, 2007 between Technest Holdings, Inc. and Southridge Partners, LP8-KSeptember 7, 200710.110.7Form of Non-competition Agreement entered into between EOIR Technologies, Inc. and Technest Holdings, Inc. and Genex Technologies, Inc.Definitive Information Statement on Schedule 14CDecember 7, 2007Annex D10.8Form of Release entered into by Technest Holdings, Inc. and Genex Technologies, Inc. and acknowledged by EOIR Holdings LLCDefinitive Information Statement on Schedule 14CDecember 7, 2007Annex C10.9*Employment Agreement between Gino M. Pereira and Technest Holdings, Inc. dated January 14, 20088-KJanuary 18, 200810.110.10*Employment Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 14, 20088-KJanuary 18, 200810.210.11*Restricted Stock Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 15, 20088-KJanuary 18, 200810.310.12*Restricted Stock Agreement between David R. Gust and Technest Holdings, Inc. dated January 15, 20088-KJanuary 18, 200810.510.13*Restricted Stock Agreement between Dr. Robert A. Curtis and Technest Holdings, Inc. dated January 15, 20088-KJanuary 18, 200810.610.14*Severance Agreement between Joseph P. Mackin and Technest Holdings, Inc. dated December 31, 200710-QSBFebruary 19, 200810.810.15*Agreement between Gino M. Pereira and Technest Holdings, Inc. dated December 31, 200710-QSBFebruary 19, 200810.910.16Asset Contribution Agreement between Technest Holdings, Inc. and Technest, Inc. dated September 17, 2008, effective as of October 1, 200810-KSBOctober 2, 200810.4810.17Securities Purchase Agreement dated October 31, 2008 between Technest Holdings, Inc. and Southridge Partners, LP8-KNovember 5, 200810.1  77       10.18Securities Purchase Agreement dated May 20, 2009 between Technest Holdings, Inc. and Southridge Capital Management LLC8-KMay 27,200910.110.19Securities Purchase Agreement dated June 11, 2009 between Technest Holdings, Inc. and Southridge Capital Management LLC8-KJune 16, 200910.110.20Securities Purchase Agreement dated July 17, 2009 between Technest Holdings, Inc. and Southridge Capital Management LLC8-KJuly 22, 200910.110.21Form of Non-Employee Director Restricted Stock Grant Agreement entered into by each non-employee director and Technest Holdings, Inc. dated September 21, 200910-KOctober 19, 200910.2210.22Settlement Agreement among Technest Holdings, Inc., EOIR Holdings, LLC and EOIR Technologies, Inc. dated October 26, 20098-KOctober 29, 200910.110.23*Technest Holdings, Inc. 2006 Stock Award Plan, As amended  September 21, 200910-QNovember 16, 200910.210.24Form of Non-Employee Director Restricted Stock Grant Agreement entered into by each non-employee director and Technest Holdings, Inc. dated December 20098-KDecember 14, 200910.110.25Form of Non-Employee Director Restricted Stock Grant Agreement entered into by each non-employee director and Technest Holdings, Inc. dated May 201010-QMay 14, 201010.110.26Securities Purchase Agreement, dated as of January 11, 2011, by and between Technest and Southridge Partners II, LP8-KJanuary 14, 201110.110.27Contingent Value Rights Agreement, dated as of January 13, 2011, by and between Technest Holdings, Inc. and Mellon Investor Services LLC8-KJanuary 14, 201110.210.28Amendment to Motor City Lease dated February 8, 2011 between Technest Holdings, Inc. and Motor City Drive, LLC10-QFebruary 17, 201110.310.29Equity Purchase Agreement, dated as of March 7, 2011, by and between Technest Holdings, Inc. and Southridge Partners II, LP8-KMarch 10, 201110.110.30Registration Rights Agreement, dated as of March 7, 2011, by and between Technest Holdings, Inc. and Southridge Partners II, LP8-KMarch 10, 201110.210.31Employment Settlement Agreement and Release, dated as of January 11, 2011, by and between Technest Holdings, Inc. and Gino M. Pereira8-KMarch 10, 201110.310.32Form of Lock-Up Agreement8-KMarch 10, 201110.4  78       10.33Technest Holdings, Inc. 2011 Equity Incentive Plan8-KMarch 10, 201110.510.34Form of Option Grant Notice under the Technest Holdings, Inc. 2011 Equity Incentive Plan8-KMarch 10, 201110.610.35Form of Option Agreement under the Technest Holdings, Inc. 2011 Equity Incentive Plan8-KMarch 10, 201110.721.1List of the Subsidiaries of Technest Holdings, Inc.X23.1Consent of Wolf & Company, PCX31.1Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X31.2Certification by PFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X32.1Certification by CEO and PFO of Periodic Report Pursuant to 18 U.S.C. Section 1350X * Indicates a management contract or compensatory plan.  79        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 13, 2011.  TECHNEST HOLDINGS, INC.By:/s/ Shekhar G. WadekarShekhar G. Wadekar,Chief Executive Officer, Principal Executive OfficerBy:/s/ Bruce C. WarwickBruce C. WarwickPrincipal Accounting 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.  SignatureTitleDate/s/ Shekhar G. WadekarPresident, Chief Executive Officer and DirectorOctober 13, 2011Shekhar G. Wadekar/s/ Bruce C. WarwickPrincipal Financial OfficerOctober 13, 2011Bruce C. Warwick/s/ Suren G. DutiaDirectorOctober 13, 2011Suren G. Dutia/s/ Henry SargentDirectorOctober 13, 2011Henry Sargent/s/ F. Howard SchneiderDirectorOctober 13, 2011F. Howard Schneider  80      Exhibit Index  All references to registrants Forms 8-K, 10-K and 10-Q include reference to File No. 000-27023.  Exhibit No.DescriptionFiled
with this
10-KIncorporated
by reference
FromFiling DateExhibit
No.2.1Stock Purchase Agreement dated September 10, 2007 between Technest Holdings, Inc., EOIR Holdings, LLC and E-OIR Technologies, Inc.8-KSeptember 13, 20072.12.2Form of Voting Agreement with a list of signatories8-KSeptember 13, 20072.22.3First Amendment to Stock Purchase Agreement dated December 31, 2007 among Technest Holdings, Inc., EOIR Holdings, LLC and EOIR Technologies, Inc.8-KJanuary 4, 20082.32.4Unit Purchase Agreement, dated as of January 11, 2011, by and among Technest Holdings, Inc., AccelPath, LLC and the members of AccelPath, LLC8-KJanuary 14, 20112.12.5Amendment No. 1 to Unit Purchase Agreement, dated as of March 4, 2011, by and among Technest Holdings, Inc. and AccelPath, LLC8-KMarch 10, 20112.013.1Restated 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, 200110-KSBApril 16, 20013.23.2Certificate of Amendment to Articles of Incorporation8-KAugust 9, 20013.13.3Amended and Restated By-Laws dated May 21, 2001DEF 14AJune 14, 2001B3.4Bylaw Amendments8-KDecember 20, 20063.13.5By-law Amendments8-KOctober 4, 20073.14.1Form of Common Stock CertificateSB-2February 26, 19994.14.2Technest Common Stock Warrant issued to Silicon Valley Bank dated August 4, 20068-KAugust 14, 20064.14.3Registration Rights Agreement between Technest Holdings, Inc. and Silicon Valley Bank dated August 4, 20068-KAugust 14, 20064.24.4Series E 5% Convertible Preferred Stock Certificate of Designation to be filed with the Secretary of State of Nevada8-KJanuary 14, 20114.110.1Office Lease Agreement between Motor City Drive, LLC and Genex Technologies, Inc., dated December 20, 200510-QSBFebruary 21, 200610.710.2*Technest Holdings, Inc. 2006 Stock Award Plan8-KMarch 17, 200610.8  81       10.3Indemnification Agreement between Technest Holdings, Inc. and Markland Technologies, Inc. dated September 1, 200610-KSBOctober 13, 200610.3610.4Office Lease Agreement Amendment No. 1 by and among Genex Technologies, Incorporated, Technest Holdings, Inc. and Motor City Drive, LLC dated as of November 1, 200610-QSBFebruary 14, 200710.110.5Asset Contribution Agreement between Technest Holdings, Inc. and Genex Technologies Incorporated dated November 1, 200610-QSBFebruary 14, 200710.210.6Release Agreement dated August 31, 2007 between Technest Holdings, Inc. and Southridge Partners, LP8-KSeptember 7, 200710.110.7Form of Non-competition Agreement entered into between EOIR Technologies, Inc. and Technest Holdings, Inc. and Genex Technologies, Inc.Definitive Information Statement on Schedule 14CDecember 7, 2007Annex D10.8Form of Release entered into by Technest Holdings, Inc. and Genex Technologies, Inc. and acknowledged by EOIR Holdings LLCDefinitive Information Statement on Schedule 14CDecember 7, 2007Annex C10.9*Employment Agreement between Gino M. Pereira and Technest Holdings, Inc. dated January 14, 20088-KJanuary 18, 200810.110.10*Employment Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 14, 20088-KJanuary 18, 200810.210.11*Restricted Stock Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 15, 20088-KJanuary 18, 200810.310.12*Restricted Stock Agreement between David R. Gust and Technest Holdings, Inc. dated January 15, 20088-KJanuary 18, 200810.510.13*Restricted Stock Agreement between Dr. Robert A. Curtis and Technest Holdings, Inc. dated January 15, 20088-KJanuary 18, 200810.610.14*Severance Agreement between Joseph P. Mackin and Technest Holdings, Inc. dated December 31, 200710-QSBFebruary 19, 200810.810.15*Agreement between Gino M. Pereira and Technest Holdings, Inc. dated December 31, 200710-QSBFebruary 19, 200810.910.16Asset Contribution Agreement between Technest Holdings, Inc. and Technest, Inc. dated September 17, 2008, effective as of October 1, 200810-KSBOctober 2, 200810.4810.17Securities Purchase Agreement dated October 31, 2008 between Technest Holdings, Inc. and Southridge Partners, LP8-KNovember 5, 200810.1  82       10.18Securities Purchase Agreement dated May 20, 2009 between Technest Holdings, Inc. and Southridge Capital Management LLC8-KMay 27,200910.110.19Securities Purchase Agreement dated June 11, 2009 between Technest Holdings, Inc. and Southridge Capital Management LLC8-KJune 16, 200910.110.20Securities Purchase Agreement dated July 17, 2009 between Technest Holdings, Inc. and Southridge Capital Management LLC8-KJuly 22, 200910.110.21Form of Non-Employee Director Restricted Stock Grant Agreement entered into by each non-employee director and Technest Holdings, Inc. dated September 21, 200910-KOctober 19, 200910.2210.22Settlement Agreement among Technest Holdings, Inc., EOIR Holdings, LLC and EOIR Technologies, Inc. dated October 26, 20098-KOctober 29, 200910.110.23*Technest Holdings, Inc. 2006 Stock Award Plan, As amended  September 21, 200910-QNovember 16, 200910.210.24Form of Non-Employee Director Restricted Stock Grant Agreement entered into by each non-employee director and Technest Holdings, Inc. dated December 20098-KDecember 14, 200910.110.25Form of Non-Employee Director Restricted Stock Grant Agreement entered into by each non-employee director and Technest Holdings, Inc. dated May 201010-QMay 14, 201010.110.26Securities Purchase Agreement, dated as of January 11, 2011, by and between Technest and Southridge Partners II, LP8-KJanuary 14, 201110.110.27Contingent Value Rights Agreement, dated as of January 13, 2011, by and between Technest Holdings, Inc. and Mellon Investor Services LLC8-KJanuary 14, 201110.210.28Amendment to Motor City Lease dated February 8, 2011 between Technest Holdings, Inc. and Motor City Drive, LLC10-QFebruary 17, 201110.310.29Equity Purchase Agreement, dated as of March 7, 2011, by and between Technest Holdings, Inc. and Southridge Partners II, LP8-KMarch 10, 201110.110.30Registration Rights Agreement, dated as of March 7, 2011, by and between Technest Holdings, Inc. and Southridge Partners II, LP8-KMarch 10, 201110.210.31Employment Settlement Agreement and Release, dated as of January 11, 2011, by and between Technest Holdings, Inc. and Gino M. Pereira8-KMarch 10, 201110.310.32Form of Lock-Up Agreement8-KMarch 10, 201110.4  83       10.33Technest Holdings, Inc. 2011 Equity Incentive Plan8-KMarch 10, 201110.510.34Form of Option Grant Notice under the Technest Holdings, Inc. 2011 Equity Incentive Plan8-KMarch 10, 201110.610.35Form of Option Agreement under the Technest Holdings, Inc. 2011 Equity Incentive Plan8-KMarch 10, 201110.721.1List of the Subsidiaries of Technest Holdings, Inc.X23.1Consent of Wolf & Company, PCX31.1Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X31.2Certification by PFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).X32.1Certification by CEO and PFO of Periodic Report Pursuant to 18 U.S.C. Section 1350X * Indicates a management contract or compensatory plan.  84