**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





FORM
      10-KSB







x
            **ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




For
                the Fiscal Year Ended: June 30,
                2005




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




For
                the transition period from _________ to
                _________.




**Commission
      File Number 000-28863**





**Markland
      Technologies, Inc.**


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




**Florida**
              (*State
                or other jurisdiction*
              *of
                incorporation or organization*)
              
              **88
                Royal Little Drive**
              **Providence,
                RI**
              (*Address
                of principal executive offices*)
              
              
              *(Mailing
                address)*
            **84-1334434**
              (*I.R.S.
                Employer*
              *Identification
                No.*)
              
              
              **02904**
              *(Zip
                Code)*





Issuer’s
      telephone number: (617) 973-5104




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




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





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


**Title
                of
                Class**


Common
        Stock, $0.0001 par value





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




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




State
      issuer’s revenues for its most recent fiscal year: $66,694,787




State
      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 a
      specified date within the past 60 days. (See definition of affiliate in Rule
      12b-2 of the Exchange Act.): $8,022,385 as of October 11, 2005




**APPLICABLE
      ONLY TO CORPORATE REGISTRANTS**




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of October 11, 2005: 327,444,291




Transitional
      Small Business Disclosure Format (check one):  Yes 
      o No  x


















**MARKLAND
      TECHNOLOGIES, INC.**




**FORM
      10-KSB**




**TABLE
      OF CONTENTS**




**PART
                    I**Item
                    1.
                Description
                    of Business
                1Item
                    2.
                Description
                    of Property
                17Item
                    3.
                Legal
                    Proceedings
                17Item
                    4.
                Submission
                    of Matters to a Vote of Security
                    Holders
                20**PART
                    II**Item
                    5.
                Market
                    for Common Equity and Related Stockholder
                    Matters
                20Item
                    6.
                Management's
                    Discussion and Analysis or Plan of
                    Operation
                21Item
                    7.
                Financial
                    Statements
                F-1Item
                    8.
                Changes
                    in and Disagreements with Accountants on Accounting
                    and Financial Disclosures
                46Item
                    8a.
                Controls
                    and Procedures
                46Item
                    8b.
                Other
                    Information
                46**PART
                    III**Item
                    9.
                Directors
                    and Executive Officers of the
                    Registrant
                46Item
                    10.
                Executive
                    Compensation
                48Item
                    11.
                Security
                    Ownership of Certain Beneficial Owners and
                    Management
                58Item
                    12.
                Certain
                    Relationships and Related
                    Transactions
                60Item
                    13.
                Exhibits
                68Item
                    14.
                Principal
                    Accountant Fees and Services
                81


*NOTE
      REGARDING FORWARD-LOOKING STATEMENTS*








*THIS
      ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS, WHICH INVOLVE
      RISKS AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVE, EXPECTATIONS AND
      INTENTIONS. YOU CAN IDENTIFY THESE STATEMENTS BY OUR USE OF WORDS SUCH AS
“MAY,”“EXPECT,”“BELIEVE,”“ANTICIPATE,”“INTEND,”“COULD,”“ESTIMATE,”“CONTINUE,”“PLANS,”
      OR THEIR NEGATIVES OR COGNATES. SOME OF THESE STATEMENTS INCLUDE DISCUSSIONS
      REGARDING OUR FUTURE BUSINESS STRATEGY AND OUR ABILITY TO GENERATE REVENUE,
      INCOME AND CASH FLOW. WE WISH TO CAUTION THE READER THAT ALL FORWARD-LOOKING
      STATEMENTS CONTAINED IN THIS FORM 10-KSB ARE ONLY ESTIMATES AND PREDICTIONS.
      OUR
      ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED AS A RESULT OF
      RISK FACING US OR ACTUAL EVENTS DIFFERING FROM THE ASSUMPTIONS UNDERLYING SUCH
      FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
      ON
      ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-KSB.
      WE WILL NOT UPDATE THESE FORWARD-LOOKING STATEMENTS UNLESS THE SECURITIES LAWS
      AND REGULATIONS REQUIRE US TO DO SO.*





*THE
      FOLLOWING INFORMATION REGARDING OUR SECURITIES HAS BEEN ADJUSTED TO REFLECT
      A
      1-FOR-40 REVERSE STOCK SPLIT EFFECTED ON JUNE 21, 2001 AND A 1-FOR-60 REVERSE
      STOCK SPLIT EFFECTED ON OCTOBER 27, 2003.*







*THE
      FOLLOWING INFORMATION REGARDING OUR SECURITIES HAS BEEN ADJUSTED TO REFLECT
      A
      1-FOR-40 REVERSE STOCK SPLIT EFFECTED ON JUNE 21, 2001 AND A 1-FOR-60 REVERSE
      STOCK SPLIT EFFECTED ON OCTOBER 27, 2003.*





This
      Annual Report on Form 10-KSB contains trademarks, service marks and
      registered marks of Markland Technologies, Inc. and its subsidiaries and other
      companies, as indicated. Unless otherwise provided in this Annual Report on
      Form 10-K, trademarks identified by ® and TM are registered trademarks or
      trademarks, respectively, of Markland Technologies, Inc. or its subsidiaries.
      All other trademarks are the properties of their respective owners. ****


ii








**PART
      I**




**ITEM
      1.****DESCRIPTION
      OF BUSINESS**




**Who
      We Are**




We
      are
      the successor to a variety of businesses dating back to 1995. Our business,
      as
      it exists today, consists of four business areas:




·
            remote
                sensor systems for military and intelligence
                applications;




·
            chemical
                detectors;




·
            border
                security; and




·
            imaging
                and surveillance.




We
      provide to the U.S. Department of Defense, or DOD, and to various other U.S.
      Intelligence agencies, or INTEL, remote sensing technology products, and
      services to protect our country's military personnel and infrastructure assets.
      We also provide to the Department of Homeland Security products, services and
      emerging technologies to protect our country's borders, infrastructure assets
      and personnel. Our mission is to build world-class integrated solutions for
      the
      Homeland Security, DOD and INTEL marketplaces via expansion of our existing
      contracts, development of our emerging technologies and acquisition of
      synergistic revenue producing assets.




Prior
      to
      our acquisition of EOIR on June 29, 2004, our primary sources of operating
      revenue were sales of our automatic chemical agent detection and alarm system,
      border security logistics products and services, and Small Business Investment
      Research funded research grants for the development of gas plasma antenna
      technology.




As
      a
      result of the acquisition of EOIR, our primary sources of operating revenues
      have been the sales of remote sensing technology products and services to the
      United States DOD and to various other INTEL. Our strategy is to grow through
      organic means via increased acceptance by our customers of our present products
      and services offerings and also via synergistic acquisitions of assets that
      provide products or services to Homeland Security, DOD, or INTEL.




**Recent
      Developments**




***October
      4, 2005 Agreement*** *.* On
      October 4, 2005, we entered into an agreement with our majority owned
      subsidiary, Technest Holdings, Inc., or Technest, and four institutional
      investors which are holders of our and Technest’s securities. A copy of this
      agreement is filed as an attachment to our current report on Form 8-K as Exhibit
      10.1. We refer to this agreement as the October 4 Agreement. The purpose of
      the
      October 4 Agreement was to amend the certain prior agreements involving our
      and
      Technest’s securities in light of the recent reorganization described in our
      current report on Form 8-K filed on August 18, 2005. The material terms of
      the
      October 4 Agreement include following:





·
            *Amendments
                to Series D Preferred Stock Restriction
                Agreement*





As
      part
      of the October 4 Agreement, we have agreed to amend the terms of the Series
      D
      Preferred Stock Restriction Agreement entered into on January 5, 2005 between
      us
      and James, LLC, our largest Series D preferred stock shareholder.





*Termination
      of Series D Preferred Stock Restriction Agreement.* We
      have
      agreed to amend the termination provisions of the Series D Preferred Stock
      Restriction Agreement. As amended, the agreement, other than provisions relating
      to a private equity credit agreement with Brittany Capital Management, Ltd.
      discussed below, will terminate upon the earlier to occur of (i) full payment
      by
      us, or full conversion by the holders, of all outstanding convertible promissory
      notes, as of October 4, 2005, held by DKR Soundshore Oasis Holding Fund, Ltd,
      DKR Soundshore Strategic Holding Fund, Ltd. and Harborview Capital, and their
      affiliates, or (ii) January 15, 2006. Prior to this amendment, the agreement
      terminated on such date as James LLC no longer held any shares of our Series
      D
      preferred stock.





1


As
        of
        October 4, 2005, we owed an aggregate of $1,276,125 pursuant to our convertible
        promissory notes held by DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
        Strategic Holding Fund, Ltd. and Harborview Capital, and their affiliates.
        Of
        the outstanding convertible notes held by the DKR entities, the principal
        amount
        of $973,750 is currently due on December 21, 2005 and the principal amount
        of
        $277,375 is currently due on January 20, 2006. The remaining principal amount
        of
        $25,000 under the convertible promissory note held by Harborview is due on
        November 9, 2005. Additional information concerning these promissory notes
        can
        be found in our current reports on Form 8-K filed on September 20, 2005,
        September 23, 2004 and November 15, 2004, which are incorporated herein by
        reference.


Upon
      of
      the termination of the Series D Preferred Stock Restriction Agreement, James
      LLC
      will no longer be subject to that agreement’s limitations on sales of both
      shares of Series D preferred stock and shares of our common stock issuable
      upon
      conversion of the Series D preferred stock





*Amendment
      of Provisions Relating to the Equity Line Registration* .
      We have
      agreed to amend the provisions of the Series D Preferred Stock Restriction
      Agreement relating to our commitment to enter into a private equity credit
      agreement with Brittany Capital Management, Ltd. As amended, we have committed
      to enter into a private equity credit agreement on usual and customary terms
      in
      the amount of $5,000,000 and we have agreed to use our best efforts to file
      a
      registration statement providing for the resale of shares of our common stock
      issued pursuant to such equity line, of at least $1,000,000 in value, as soon
      as
      practicable but no later than October 17, 2005. Prior to this amendment, the
      Series D Preferred Stock Restriction Agreement required us to enter into a
      private equity credit agreement for an amount of $10,000,000 and we were
      required to register for resale all of the shares of our common stock to be
      issued pursuant to such equity line.





In
      addition, we have agreed to pay liquidated damages in the amount of $50,000
      per
      month, or pro-rata portion thereof, should we fail to file and have declared
      effective a resale registration statement in connection with the equity line
      referred to above, by November 30, 2005.





If
      we
      complete a private equity credit agreement with Brittany Capital Management,
      Ltd., any proceeds we receive from the equity line will be subject to
      restrictions on use. Pursuant to a Securities Purchase Agreement, dated
      September 21, 2004, by and among us and DKR Soundshore Oasis Holding Fund,
      Ltd.
      and DKR Soundshore Strategic Holding Fund, Ltd., 75 percent of all proceeds
      received pursuant to a private equity line must first be used to satisfy our
      obligations under those certain convertible promissory notes held DKR Soundshore
      Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd. A
      copy
      of this Securities Purchase Agreement was filed as an attachment to our current
      report on Form 8-K filed on September 24, 2004.





*Payment
      of Liquidated Damages to Brittany Capital Management, Ltd.* Upon
      signing the October 4 Agreement, we issued to Brittany Capital Management,
      Ltd.
      3,750,000 shares of our common stock in satisfaction of liquidated damaged
      due in connection with the Series D Preferred Stock Restriction Agreement.
      The
      payment of shares was made in lieu of a cash payment for $150,000 due to
      Brittany Capital Management, Ltd. for failure to cause a registration statement
      to be declared effective by June 15, 2005, covering the resale of securities
      to
      be issued pursuant to a private equity agreement with Brittany Capital
      Management, Ltd. discussed above. This
      transaction 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 and Rule 506 of Regulation
      D
      promulgated thereunder, insofar as such securities were sold only to "accredited
      investors" within the meaning of Rule 501 of Regulation D. We have granted
      Brittany Capital Management, Ltd. the right to include these shares in the
      same
      resale registration statement, to be filed prior to October 17, 2005, covering
      the shares of common stock to be issued pursuant to a private equity line with
      Brittany Capital Management, Ltd. discussed above.





·
            *Exchange
                Agreements*





Concurrently
      with the execution of the October 4 Agreement, we entered into definitive
      exchange agreements with Southridge Partners, LP and Southshore Capital Fund,
      Ltd. p ursuant
      to which we exchanged an aggregate of 402,293 shares of Technest Series B
      preferred stock (convertible as of October 4, 2005 into 36,966,677 shares of
      Markland common stock) for 1,750 shares of our Series D preferred stock
      (convertible into 67,808,413 shares of Markland common stock as of October
      4,
      2005).





2


The
      following table illustrates
      the number of shares of Markland Series D preferred stock received by each
      of
      the investors in exchange for their holdings in Technest Series B preferred
      stock.





Investors
            Number
                of Shares of Technest Series B preferred stock held prior to the
                Exchange
            Number
                of Shares of Markland Common Stock issuable upon conversion of Technest
                Series  B preferred stock
            Number
                of Shares of Markland Series D preferred stock  received pursuant
                to
                the Exchange Agreement
            Number
                of Shares of Markland Common Stock issuable upon conversion of Markland
                Series  D preferred stockSouthshore
                Capital Fund, Ltd.
            57,466
            5,277,769
            250
            9,616,919Southridge
                Partners, LP
            344,827
            31,688,908
            1,500
            58,191,494





After
      giving effect to the exchanges described above, there are no longer any shares
      of Technest Series B preferred stock outstanding. This transaction 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 and Rule 506 of Regulation D promulgated thereunder,
      insofar as such securities were sold only to "accredited investors" within
      the
      meaning of Rule 501 of Regulation D.





As
      incentive to enter into the exchange agreements, we have granted Southshore
      Capital Fund, Ltd. and Southridge Partners, LP the right to include the shares
      of common stock underlying the conversion of our Series D preferred stock,
      issued pursuant to the exchange agreements, in the resale registration statement
      to be filed in connection with the private equity line with Brittany Capital
      Management, Ltd., discussed above.





·
            *Amendment
                to Registration Rights
                Agreement*





Also
      in connection with the execution of the exchange agreements, we agreed to issue
      to Southshore Capital Fund, Ltd. and Southridge Partners, LP shares of our
      common stock in lieu of any liquidated damages pursuant to a registration
      rights agreement, dated February 14, 2005, by and among Markland and the holders
      of the Technest Series B preferred stock. A copy of this registration rights
      agreement has been filed as an attachment to our current report on Form 8-K,
      filed on February 15, 2005, as Exhibit 4.1. The shares of our common stock to be issued to Southshore Capital Fund, Ltd. and
      Southridge Partners, LP shall be equal to four percent (4%) per month, or
      pro-rata portion thereof, of the stated value of the Technest Series B preferred
      stock exchanged by each investor, for the period beginning on June 29, 2005
      and
      continuing through the effective date of a resale registration statement
      covering the shares of common stock to be issued upon conversion of our Series
      D
      preferred stock issued in the exchange. Liquidated damages shall be payable
      at
      the beginning of each calendar month in the form of our restricted common stock
      valued at the lesser of $0.04 per share or the average closing bid price for
      our
      common stock for the five (5) trading days immediately preceding the due date.
      Southshore Capital Fund, Ltd. and Southridge Partners, LP shall have the right
      include such shares, issued in satisfaction of liquidated damages, in the resale
      registration statement to be filed pursuant to the private equity line with
      Brittany Capital Management, Ltd. The stated value of each share of Technest
      Series B preferred stock is $2.175. For illustrative purposes, assuming such
      registration statement is declared effective on November 30, 2005, the aggregate
      amount of liquidated damages that will be payable to Southshore Capital Fund,
      Ltd. and Southridge Partners, LP in connection with these exchange agreements
      would be approximately $175,000.





3


·
            *Markland
                Warrant*





Concurrently
      with the execution of the October 4 Agreement, we agreed to issue a warrant
      to
      purchase 750,000 shares of our common stock to Greenfield Capital Partners
      LLC.
      The warrants expire on February 10, 2010 and have an exercise price of $0.34
      per
      share and are substantially in the form attached to this current report on
      Form
      8-K as Exhibit 10.5. These warrants are exercisable immediately. This
      transaction 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 and Rule 506 of Regulation
      D
      promulgated thereunder, insofar as such securities were sold only to "accredited
      investors" within the meaning of Rule 501 of Regulation D.





***Agreement
      to Terminate Leases.*** On
      October 4, 2005, we entered into an agreement with Southridge Holdings LLC
      for
      the early termination of our leases for office space located at 90 Grove Street,
      Executive Pavilion, Ridgefield, Connecticut. One of the leases terminated was
      for space occupied by our majority owned subsidiary, Technest Holdings, Inc.
      As
      consideration for the termination of the lease obligations, we agreed to pay
      $75,000 in cash and issue to Southridge Holdings LLC 3,125,000 shares of our
      restricted common stock. These shares were issued in reliance on the exemption
      from registration provided by Rule 506 and Regulation D of the Securities Act
      of
      1933, as amended. We have agreed to register the shares to be issued to
      Southridge Holdings LLC in a resale registration statement to be filed with
      the
      SEC on or before October 17, 2005. In addition, if we fail to cause such
      registration statement to be declared effective by November 30, 2005, we shall
      pay Southridge Holdings LLC $2,500 per month, or pro-rata portion thereof,
      as
      liquidated damages. Liquidated damages shall be payable in shares of our common
      stock valued at the lesser of $0.04 or the average of the closing bid prices
      for
      our common stock for the five days immediately preceding the due date of the
      liquidated damages.




***Extension
      of Maturity Date of September 21, 2004 Notes*** *.* On
      September 20, 2005, we entered into an agreement with DKR Soundshore Oasis
      Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd., referred
      to
      herein as the DKR entities, the holders of our currently outstanding September
      21, 2004 Secured 8% Convertible Notes (the “Notes”), to extend the maturity date
      of the Notes for ninety (90) days. The Notes were due on September 21, 2005.
      The
      Notes are now due on December 20, 2005. As of September 20, 2005, the principal
      amount currently outstanding on the Notes was $2,523,750, which includes $58,750
      in satisfaction of liquidated damages for not having an effective registration
      statement per the September 21,  2004
      registration rights agreement.




As
      consideration for the extension of the maturity date of the Notes, we agreed
      to
      issue to the DKR entities secured convertible promissory notes identical in
      all
      respects to the Notes, but for the fact that the maturity date of such notes
      is
      January 20, 2006. The form of the Notes was filed as Exhibit 99.4 to our Current
      Report on Form 8-K on September 23, 2004 (File No. 000-28863) (the “8-K”). The
      original principal amount for the note to DKR Soundshore Oasis Holding Fund,
      Ltd. is $224,700 and the original principal amount for the note to DKR
      Soundshore Strategic Holding Fund, Ltd. is $52,675 (collectively, the “New
      Notes”). The New Notes have all the rights and preferences of the Notes as set
      forth in the Securities Purchase Agreement, dated September 21, 2004, between
      us
      and the DKR entities, which was filed as Exhibit 99.1 to the 8-K. We also agreed
      to prepare and file with the Securities and Exchange Commission a registration
      statement on Form SB-2 covering the resale of the shares of our common stock,
      $.0001 par value per share, issuable upon conversion of the New Notes (the
      “Underlying Stock”). The Underlying Stock is deemed Registrable Securities as
      defined in the Registration Rights Agreement, dated September 21, 2004, between
      us and the DKR entities, which was filed as Exhibit 99.3 to the 8-K, and
      afforded all the rights and obligations of Registrable Securities, provided,
      however, that the Filing Date (as defined in the aforementioned Registration
      Rights Agreement) of a registration statement covering the resale of the
      Underlying Stock shall be no later than October 17, 2005.




We
      also
      entered into a stock pledge agreement with the DKR entities pursuant to which
      we
      pledged 3,000,000 shares of Technest Holdings, Inc. common stock currently
      owned
      by us to secure our obligations under the New Notes.




***August
      19, 2005 Private Placement.*** On
      August 19, 2005, we entered into a definitive exchange agreement with the Deer
      Creek Fund LLC, (“Deer Creek”) pursuant to which we exchanged 114,943 shares of
      Technest Series B Preferred Stock (convertible into shares of Markland common
      stock for 500 shares of Markland Series D Preferred Stock (convertible into
      5,008,013 shares of Markland Common Stock as of August 19, 2005).




4




Concurrent
      with the exchange agreement, we entered into a registration rights agreement
      with Deer Creek in which we agree to submit a registration statement to the
      SEC
      covering the shares of Common Stock underlying the Series D on or before October
      17, 2005. This transaction 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 and Rule 506 of Regulation
      D
      promulgated thereunder, insofar as such securities were sold only to "accredited
      investors" within the meaning of Rule 501 of Regulation D.




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




***Stock
      Dividend of Technest Common Stock*** .
      In
      connection with the reorganization described above, our board of directors
      declared a dividend to the holders of record of our common stock as of May
      1,
      2006, of $10 million worth of shares of Technest common stock we currently
      own,
      up to a maximum of 2.5 million shares of Technest common stock. The dividend
      date is July 5, 2006. The actual number of shares of Technest common stock
      to be
      distributed will be calculated based on a per share price equal to the average
      closing price of the Technest common stock as reported by the National
      Association of Securities Dealers Automatic Quotations service for the ten
      trading days ending June 30, 2006; however, in no event shall the number of
      shares of the Technest common stock distributed exceed 2.5 million shares.
      To
      illustrate:




Average
                closing price of the Technest common stock as reported by the
                National Association of Securities Dealers Automatic Quotations
                service for the ten trading days ending June 30, 2006
            
            Number
                of shares of Technest common stock that will bedistributed to the
                holders of our common stock$2.00
                per share
            
            2,500,000
                shares$4.00
                per share
            
            2,500,000
                shares$10.00
                per share
            
            1,000,000
                shares$20.00
                per share
            
            500,000
                shares






Please
      note that the table provided above is not a prediction of the future price
      of
      Technest common stock. We will not deliver fractional shares of Technest common
      stock in connection with this dividend. Following this dividend, we will
      continue to own a majority of Technest on both primary and fully diluted
      (assuming the conversion of all of Technest's convertible securities and the
      exercise of all warrants to purchase Technest common stock) bases. Technest
      will
      file a registration statement registering these shares prior to the distribution
      date. This is not an offer to sell these shares, and these shares may not be
      offered or sold in any state or jurisdiction in which such offer or sale would
      be unlawful prior to the registration or qualification of such shares under
      the
      laws of such state or jurisdiction.




***Appointment
      of Gino Pereira as Director*** *.* On
      August 15, 2005, Gino M. Pereira, our Chief Financial Officer, was elected
      to
      our board of directors to fill the vacancy left by the resignation of Kenneth
      P.
      Ducey.




***June
      20, 2005 Private Placement*** **.** On June
      20, 2005, we entered into definitive agreements with the DKR entities, Verdi
      Consulting, Inc. and ipPartners, Inc. pursuant to which we exchanged 632,182
      shares of Technest Series B preferred stock (convertible into shares of our
      common stock) for 2,750 shares of our Series D preferred stock. As of October
      11, 2005, all of the 2,750 shares of our Series D preferred stock have been
      converted into an aggregate of 33,337,546 shares of our common stock.




5




This
      transaction 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 and Rule 506 of Regulation
      D
      promulgated thereunder, insofar as such securities were sold only to "accredited
      investors" within the meaning of Rule 501 of Regulation D.





**Business
      History**




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




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




·
            We
                formed a subsidiary corporation called Security Technology,
                Inc.




·
            Eurotech
                transferred particular rights to its acoustic core technology relating
                to
                illicit material detection to our
                subsidiary.




·
            Crypto.com
                Inc. (a subsidiary of Eurotech) and ipPartners transferred particular
                rights to their cryptology technologies to our
                subsidiary.




·
            90%
                of the shares of our common stock held by Market LLC and James LLC
                were
                retired.




·
            We
                issued 80% of our then issued and outstanding common stock to Eurotech
                and
                shares of common stock representing 10% of our then issued and outstanding
                shares of common stock to
                ipPartners.




·
            We
                issued $5,225,000 in stated value of our Series C 5% cumulative
                convertible preferred stock to Market LLC and James LLC in satisfaction
                of
                $5,225,000 of convertible notes held by Market LLC and James LLC
                and in
                exchange for their agreement to surrender 4,498,638 shares of our
                common
                stock.




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




In
      March
      2003, we entered into an agreement to acquire the intellectual property
      (including patents), equipment, and government contracts for some particular
      gas
      plasma antenna technology from ASI Technology Corporation. We closed this
      transaction in September 2003. We paid a purchase price of $150,000 in cash
      and
      283,333 shares of our common stock valued at $850,000. Please refer to the
      section entitled “Amortization of Intangible Assets” in the Management’s
      Discussion and Analysis regarding our gas plasma technology.




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




6




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




**Recent
      Acquisitions and Related Transactions**




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




**Acquisition
      Of Controlling Interest In Technest Holdings, Inc. And Related Agreements**




Technest
      is a company with a class of equity securities registered under Section 12(g)
      of
      the Exchange Act. In 2002 and 2003, Technest disposed of all of its operating
      businesses. Since then, Technest had no business operations and only minimal
      assets. Technest's common stock is quoted on the Over-the-Counter Bulletin
      Board
      market. We do not intend to take Technest private.




Our
      acquisition of Technest was effected pursuant to the terms of a Securities
      Purchase Agreement between us and Technest, dated February 14, 2005. In
      connection with this transaction, we also entered into an agreement with
      Technest pursuant to which Technest agreed to register for resale of the common
      stock issued to us, and Technest entered into agreements with its major
      shareholders pursuant to which they have agreed not to sell shares of Technest
      common stock owned by them prior to the transaction until the earlier of August
      15, 2005 or such time as there is an effective registration statement providing
      for the resale of those shares, which have since expired.




*Securities
      Purchase Agreement Between Markland And Technest* .
      In
      accordance with the terms of the Securities Purchase Agreement between us and
      Technest, on February 14, 2005, we acquired 412,650,577 shares of Technest's
      common stock in exchange for 10,168,764 shares of our common stock and our
      agreement to issue shares of our common stock upon conversion of Technest's
      Series B preferred stock. The Technest Series B preferred stock is convertible
      into our common stock upon the earlier to occur of (a) February 14, 2006 or
      (b)
      a date which is the first trading day after the date on which our common stock
      has a closing bid price of $2.50 or more for five consecutive trading days.
      The
      number of shares to be issued will be determined by dividing (a) the quotient
      obtained by dividing $5,000,000 by the lower of (i) $0.60 and (ii) the market
      price (as defined in the Merger Agreement) by (b) 1,149,425.




As
      a
      result of this transaction, in February 2005, we owned approximately 93% of
      Technest's common stock on a primary basis and 39% of Technest's stock on a
      fully diluted basis (assuming the conversion of all of Technest's convertible
      securities and the exercise of all warrants to purchase Technest's common
      stock). As of October 11, 2005, after our reorganization, we owned approximately
      98% of Technest common stock on a primary basis.




*Registration
      Obligation In Connection With The Acquisition Of Technest* .
      We also
      entered into a Registration Rights Agreement with Technest, dated February
      14,
      2005. Technest has agreed to use its best efforts to file a registration
      statement on Form SB-2 as soon as possible after it receives a request for
      registration from us (or the holder of a majority of the registrable securities
      if we transfer some or all of our Technest shares) and to cause the registration
      statement to be declared effective. Pursuant to this agreement, Technest also
      agreed to keep the registration statement effective until the earlier of (a)
      thirty-six (36) months following the date of the agreement or (b) such time
      as
      all transfer restrictions on our shares have been eliminated. Technest may
      suspend the effectiveness of the registration statement for a period of no
      more
      than fifteen (15) consecutive trading days, or an aggregate of thirty (30)
      trading days, each year. In addition, we have piggyback registration rights
      if,
      within two (2) years following the date of the agreement, Technest chooses
      to
      register any of its securities under the Securities Act on an underwritten
      basis.




*Lock-Up
      Agreement* .
      Prior
      to February 14, 2005, Technest was controlled by Garth LLC and Southshore
      Capital Management Fund Ltd. who, together, owned approximately 73% of the
      outstanding shares of Technest common stock. These two entities have executed
      and delivered lock-up agreements.




7




Under
      the
      terms of these agreements, such shareholders have agreed not to sell or dispose
      of their Technest common stock until the earlier of seven (7) months following
      February 14, 2005, or the date that the registration statement for the sale
      of
      such shares effective. In return, during the lock-up period, Technest agreed
      to
      maintain its reporting status with the Securities and Exchange Commission,
      to
      file all reports that are required to be filed, and to use its best efforts
      to
      ensure that the common stock is quoted for public trading. These stockholders
      were also granted piggyback registration rights to include their shares on
      the
      next registration statement Technest files. These agreements have since expired.




*Material
      Relationships* .
      Our
      Chairman and Chief Executive Officer, Robert Tarini, is also one of the
      investors in Technest's February 14, 2005 private placement and is currently
      the
      beneficial owner of Technest Series C preferred stock, convertible into 143,678
      shares of Technest common stock, and warrants exercisable for 9,995 shares
      of
      common stock . As of October 11, 2005, Mr. Tarini, when combined with our
      ownership in Technest, would beneficially own an aggregate of approximately
      98%
      of the outstanding Technest common stock. Our investment in Technest was
      negotiated by our senior management, including Mr. Tarini and was approved
      by a
      unanimous vote of the Board of Directors of Markland, including Dr. Mackin
      and
      Mr. Ducey, neither of whom has an interest in the transaction.




*Interlocking
      Management* .
      Robert
      Tarini, our Chief Executive Officer and Chairman of the Board, was appointed
      the
      Chief Executive Officer and a Director of Technest. Technest's only other
      director was Mark Allen, who served until March 30, 2005. In addition, Gino
      M.
      Pereira, our Chief Financial Officer, was appointed Chief Financial Officer
      of
      Technest and Joseph P. Mackin, our President, Chief Operating Officer and a
      Director of Markland, was appointed President and Director of
      Technest.




**Technest
      Financing of Genex Acquisition**





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





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





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





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




8





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





On
      June
      20, 2005, Markland entered into definitive agreements with DKR Soundshore Oasis
      Holding Fund, Ltd., DKR Soundshore Strategic Holding Fund, Ltd., Verdi
      Consulting, Inc., and ipPartners, Inc. pursuant to which Markland exchanged
      632,182 shares of Technest Series B preferred stock (convertible into shares
      of
      Markland common stock) for 2,750 shares of Markland Series D Preferred Stock
      (also convertible into shares of Markland common stock). On August 19, 2005,
      Markland entered into a definitive exchange agreement with the Deer Creek Fund
      LLC, pursuant to which Markland exchanged 114,943 shares of Technest Series
      B
      preferred stock for 500 shares of Markland Series D Preferred Stock. On October
      4, 2005, Markland entered into a definitive exchange agreement with Southshore
      Capital Fund, Ltd and Southridge Partners, LP, pursuant to which Markland
      exchanged 402,293 shares of Technest Series B preferred stock for 1,750 shares
      of Markland Series D Preferred Stock.





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





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





*Our
      Registration Obligations.* We
      entered into a Registration Rights Agreement, dated February 14, 2005, with
      the
      investors, pursuant to which we agreed to register 17,000,000 shares of Markland
      common stock issuable to the holders of the Series B preferred stock of
      Technest, and common stock issuable as liquidated damages for breach of some
      covenants contained in the agreement.





Under
      the
      terms of the Registration Rights Agreement, we have agreed to file a
      registration statement on Form SB-2 on or before seventy-five (75) days
      following the closing date of the transaction; and use our best efforts to
      cause
      the registration statement to be declared effective as promptly as possible
      thereafter but not later than one hundred thirty-five days following the closing
      date; and keep the registration statement effective until twenty-four (24)
      months following the date on the effective day of such registration statement.
      The offering will terminate once the registered shares have been sold or may
      be
      sold pursuant to Rule 144(k) of the Securities Act without volume
      restrictions.





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





If,
      during the effectiveness period, the number of shares of common stock issuable
      in lieu of the payment of partial liquidated damages exceeds the number of
      such
      shares then-registered in a registration statement, we will be required to
      file
      a new registration statement, as soon as reasonably practicable but no later
      than forty-five (45) days following the date on which we know or reasonably
      should have known that such registration statement is required.


9





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





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





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





**Acquisition
      of Genex Technologies, Inc.**





The
      acquisition of Genex Technologies, Inc. was effected pursuant to an Agreement
      and Plan of Merger, dated February 14, 2005, by and among Markland, Technest,
      Mtech Acquisition, Inc. ("MTECH") (a wholly-owned subsidiary of Technest),
      Genex
      and Jason Geng (the then sole stockholder of Genex). In connection with this
      merger, Markland and Technest entered into agreements providing for the
      registration of shares to be issued to Jason Geng, a lock-up agreement with
      Jason Geng and an employment agreement with Jason Geng.





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




Markland,
      Technest and MTECH, on one hand, and Jason Geng, on the other hand have agreed
      to indemnify each other for breaches of representations, warranties and failures
      to perform covenants. Indemnity is available pursuant to the indemnity escrow
      agreement for any claim by us or Technest above $100,000. Jason Geng's liability
      is limited to the amount in the indemnity escrow fund, set at closing as $2
      million of Markland common stock taken from the consideration paid to Jason
      Geng
      at closing. There are 2,905,361 shares of Markland common stock held in the
      indemnity escrow fund, which as of October 11, 2005, had a market value of
      approximately $71,132. Jason Geng has agreed to indemnify the Technest entities
      for all losses associated with disputes relating to the title of Genex shares,
      taxes, ERISA, environmental and intellectual property claims for amounts up
      to
      the full consideration for the merger. Jason Geng also agreed to pay Genex
      for
      any amount a governmental entity refuses to pay in relation to a regulatory
      audit currently being conducted.




10




*Our
      Registration Obligations* .
      We
      entered into a Registration Rights Agreement, dated February 14, 2005, with
      Jason Geng. We have agreed to file a registration statement for the shares
      of
      our common stock paid to Jason Geng on or before June 1, 2005, plus one day
      for
      each day when a registration statement is not effective and available for the
      resale of common stock issued to the investors in the Securities Purchase
      Agreement, dated September 21, 2004. We have agreed to use commercially
      reasonable efforts to cause the registration statement to be declared effective
      by August 1, 2005. Pursuant to the agreement, we must also use commercially
      reasonable efforts to keep the registration statement effective until the date
      on which Mr. Geng no longer owns any of the registrable securities, unless
      the
      shares of common stock have been sold or may be sold pursuant to Rule 144 of
      the
      Securities Act without volume restrictions. Following the acquisition of Genex,
      we and Technest have raised certain claims pursuant to the Merger Agreement.
      As
      a result, we do not intend to register 10,168,174 shares of our common stock
      issued to Mr. Geng.





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





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





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





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




11


**Our
        Business**
  Our
        business, as it exists today through our subsidiaries, consists of four business
        areas: remote sensor systems for military and intelligence applications;
        chemical detectors; border security systems; and imaging and
        surveillance.


**Remote
      Sensor Systems For Military And Intelligence Applications**




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




EOIR's
      most significant source of revenues is an Omnibus Contract with the United
      States Army Night Vision and Electronic Sensors Directorate. The Omnibus
      Contract has an extensive and varied scope that requires us to provide a very
      broad range of products and technical services. For those products and technical
      services that EOIR does not possess in-house, we subcontract to our team members
      and other subcontractors as necessary.




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




**Chemical
      Detectors**




In
      October 2003, our subsidiary, Security Technology, Inc., acquired all of the
      common stock of Science and Technology Research, Inc., a chemical detector
      manufacturer, as part of our ongoing business strategy of creating an integrated
      portfolio of homeland security solutions.




We
      have a
      contract with the U.S. Navy to be the sole producer of the U.S. Navy's shipboard
      Automatic Chemical Agent Detection and Alarm System used to detect all classic
      nerve and blister agents as well as other chemical warfare agent vapors. During
      fiscal year 2005, our subsidiary, STR, recognized approximately $538,910 of
      revenue from this contract. As of June 30, 2005, we had delivered all the units
      requested to date under this existing contract. At the option of the US Navy
      additional units may be purchased by the US Navy or other government agencies
      under this contract in the future.




We
      entered into an international distribution agreement with Tradeways, Ltd, to
      market and sell Markland's Shipboard ACADA chemical detection systems to foreign
      militaries to market our product in Argentina, Australia, Austria, Bahrain,
      Canada, Chile, Croatia, Denmark, Egypt, Estonia, Finland, Greece, Ireland,
      Israel, Italy, Japan, Jordan, Korea, Kuwait, Malaysia, The Netherlands, New
      Zealand, Norway, Oman, Pakistan, Portugal, Qatar, Saudi Arabia, Spain, Sweden,
      Taiwan, Turkey, and the United Arab Emirates. To date, we have not sold any
      products through this channel.




We
      are
      presently working on the design of a next generation "point" chemical detector
      product, which will also operate using Ion Mobility Spectrography ("IMS") cell
      technology and provide networked wireless communication capability.




On
      December 23, 2003, the U.S. Navy signed a ten-year non-exclusive license
      agreement with us to transfer particular chemical detection technology
      intellectual property rights to us. We believe the license will allow us to
      further expand the application for the "point" chemical detection technology
      and
      market the technology to non-defense customers such as foreign governments
      and
      commercial entities. We expect to continue to manufacture the Automatic Chemical
      Agent Detection and Alarm System for the U.S. Navy and simultaneously pursue
      opportunities with the Department of Homeland Security as well as foreign
      military sales. We are experiencing a decline in demand for our chemical
      detector unit from the U.S. Navy. We plan to compensate for this reduced demand
      by marketing this technology to new customers within the Homeland Security
      marketplace and by combining it with other technologies for sale to existing
      customers. In the interim, we are combining "stand off" chemical detection
      technologies from EOIR which are based on hyper spectral infra red technology
      with the "point" chemical detection technology of STR which is based on Ion
      Mobility Spectroscopy. This integrated and combined chemical detection
      capability we believe will accelerate penetration into new markets for the
      chemical detection products we now offer and help to increase revenues in the
      next fiscal year for chemical detection products. There can be no assurance
      that
      our revenues will increase as a result of these integrated and combined chemical
      capabilities.




12




**Border
      Security**




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




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




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




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




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




**Imaging
      and Surveillance**




*Intelligent
      Surveillance.* Our
      acquisition of a majority interest in Genex on February 14, 2005, a company
      which provides remote sensing technology products and services to the DOD,
      to
      various other United States Intelligence Agencies and the National Institute
      of
      Health, is a significant part of our ongoing business strategy of creating
      an
      integrated portfolio of solutions for the Homeland Security, DOD and INTEL
      marketplaces.




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




*Chemical
      and Explosive Detection* .
      Through
      our majority interest in Genex, we have also targeted sensing technologies
      that
      are relevant to both DOD and DHS missions: Chemical/Biological (Chem/Bio) and
      Improvised Explosive Devices (IED) detection sensors. The Chem/Bio and IED
      Division concentrates on the research and development of technologies that
      can
      reliably detect the presence of chemical, biological, and explosive devices
      or
      components from a stand-off distance. Under a Phase 2 Small Business Innovative
      Research grant from the U.S. Army, Genex is developing a new sensor that can
      remotely detect the presence of chemical and biological weapons.




13


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


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




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




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




The
      Commercial Division’s revenues since the date of acquisition to June 2005 were
      approximately $248,000. Current revenues for the Commercial Division derive
      primarily from our three-dimensional FaceCam product and associated software.
      This product is utilized by our customers to create personalized products for
      customers based on a three-dimensional image captured by our camera. The product
      is being marketed towards applications in digitized identification, such as
      employee ID and motor vehicle licenses, and in the medical market place. Efforts
      are underway to reduce product costs to encourage broader market adoption,
      to
      improve channels of distribution for this product, and to establish commercial
      agreements for mass-market deployment.




In
      addition, while not a current source of significant revenue, we are targeting
      manufacturers of products who would benefit strategically by adopting our
      technology to produce custom fitted products for their customers. We believe
      this strategy has the potential to generate significant revenue based on Genex’s
      ability to generate accurate three-dimensional measurement data. However, there
      can be no assurance that we will be able to generate significant revenue based
      on Genex’s ability to generate accurate three-dimensional measurement
      data.




**Competition**




The
      markets for our products and solutions are extremely competitive and are
      characterized by rapid technological change as a result of technical
      developments exploited by our competitors, changing technical needs of
      customers, and frequent introductions of new features. We expect competition
      to
      increase as other companies introduce products that are competitively priced,
      that may have increased performance or functionality, or that incorporate
      technological advances not yet developed or implemented by us. Some of our
      present and potential competitors may have financial, marketing, and research
      resources substantially greater than ours. In order to compete effectively
      in
      this environment, we must continually develop and market new and enhanced
      products at competitive prices, and have the resources to invest in significant
      research and development activities.




14




There
      is
      a risk that we may not be able to make the technological advances necessary
      to
      compete successfully. Existing and new competitors may enter or expand their
      efforts in our markets, or develop new products to compete against ours. Our
      competitors may develop new technologies or enhancements to existing products
      or
      introduce new products that will offer superior price or performance features.
      New products or technologies may render our products obsolete. Many of our
      primary competitors are well established companies that have substantially
      greater financial, managerial, technical, marketing, personnel and other
      resources than we do.




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




**Intellectual
      Property**




Our
      ability to compete effectively depends to a significant extent on our ability
      to
      protect our proprietary information. We rely primarily on patents and trade
      secret laws, confidentiality procedures and licensing arrangements to protect
      our intellectual property rights. We own multiple U.S. patents. We enter into
      confidentiality agreements with our consultants and key employees, and maintain
      controls over access to and distribution of our technology, software and other
      proprietary information. The steps we have taken to protect our technology
      may
      be inadequate to prevent others from using what we regard as our technology
      to
      compete with us.




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




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




EOIR
      provides engineers and scientists to perform research at Government research
      Laboratories. However, research performed in these Government laboratories
      is
      paid for with Government funds and is typically the property of the US
      Government. This intellectual property may be utilized via licensing agreements
      executed with the US Government, but there are no guarantees that the US
      Government will provide such licenses.




**Research
      And Development**




During
      the fiscal years ended June 30, 2004 and June 30, 2005, we spent $49,289 and
      $2,799,665 on research and development. During the fiscal year ended June 30,
      2005, we wrote off $2,075,000 of in-process research and development acquired
      on
      our acquisition of Technest and Genex.




Our
      research and development activities consist of projects funded entirely by
      us or
      with the assistance of SBIR grants, and SBIR projects are generally directed
      towards the discovery of specific information requested by the government
      research sponsor.




In
        addition, our subsidiary EOIR is permitted to charge and recover a percentage
        of
        its administrative budget on Internal Research and Development programs.
        These
        programs are generally short in duration and may yield new processes or
        techniques that will advance our technical knowledge on our government
        programs.
  15


We
      believe that focused investments in research and development are critical to
      our
      future growth and competitive position in the marketplace. Our research and
      development efforts are directed to timely development of new and enhanced
      products that are central to our business strategy. The industries in which
      we
      compete are subject to rapid technological developments, evolving industry
      standards, changes in customer requirements, and new product introductions
      and
      enhancements. As a result, our success depends in part upon our ability to
      enhance our existing products, develop and introduce new products that improve
      performance on a cost effective and timely basis. We may be unable to
      successfully develop products to address new customer requirements or
      technological changes, and any products we develop may not achieve market
      acceptance.




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




We
      offer
      substantially all of our entire range of our services and products to agencies
      of the U.S. Government. In both fiscal years 2005 and 2004, substantially all
      of
      our revenue came from U.S. Government prime or subcontracts.




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




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




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




**Government
      Regulation**




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




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




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




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




Some
      of
      our sales are direct commercial sales to foreign governments. These sales are
      subject to U.S. Government approval and licensing under the Arms Export Control
      Act. Legal restrictions on sales of sensitive U.S. technology also limit the
      extent to which we can sell our products to foreign governments or private
      parties. Currently we do not have any sales from overseas
      customers.




16


**Sales
        And Marketing**
 
 We
        currently divide the marketing efforts of our products and services into
        three
        areas: (1) directly to federal or local government agencies, (2) to large
        partners who may represent an opportunity for us as subcontractors, and (3)
        to
        commercial entities. These marketing duties are divided among upper
        management.
 
 **Manufacturing**
 
 Our
        primary manufacturing facilities are located in Fredericksburg, Virginia
        and
        Providence, Rhode Island. We also utilize our offices in Providence, Rhode
        Island as manufacturing prototype development facilities.
 
 **Employees**
 
 As
        of
        June 30, 2005, we employed approximately 196 full-time employees. We believe
        our
        future success will depend upon the continued service of our key technical
        and
        senior management personnel and upon our continued ability to attract and
        retain
        highly qualified technical and managerial personnel. None of our employees
        is
        represented by a labor union. We have never experienced a work stoppage and
        consider our relationship with our employees to be good.
 
 
 **ITEM
        2.****DESCRIPTION
        OF PROPERTY**
  We
        have a
        five year lease for our executive offices of approximately 1,500 square feet
        located in Ridgefield, Connecticut. The monthly rent for these offices is
        $6,000
        per month, which includes space leased to our majority owned subsidiary,
        Technest. As of October 4, 2005, we terminated this lease.
 
 We
        also
        maintain an administrative office in Providence, Rhode Island, which is utilized
        under a monthly sublease with Syqwest Inc., comprising approximately 4,000
        square feet.
 
 EOIR,
        a
        wholly owned subsidiary of Technest after the reorganization, holds a three-year
        lease for its executive and administrative offices of approximately 5,420
        square
        feet in Woodbridge, Virginia. The lease expires on September 30, 2008. EOIR
        leases approximately 10,000 square feet in Spotsylvania, Virginia, where
        it
        houses its software development unit. The lease expires on October 31, 2009.
        EOIR also holds a five-year lease for 6,951 square feet in Spotsylvania,
        Virginia. The lease expires on October 15, 2010.
 
 EOIR
        also
        has several offices located in Fredericksburg, Virginia. One office with
        approximately 4,722 square feet, with a one-year lease that expires on December
        31, 2005 or sooner at our option, one with 1,200 square feet, with a three-year
        lease, and one with 4,200 square feet, with a three-year lease that expires
        on
        June 30, 2007. Monthly lease amounts for these facilities total approximately
        $31,000. In addition, we have a one-year lease for executive offices in Boston,
        Massachusetts. The monthly rental amount for this facility is approximately
        $6,000.
 
 Genex
        Technologies, Inc., a wholly-owned subsidiary of Technest, leases offices
        with
        approximately 6,831 square feet in Kensington, Maryland, pursuant to a five-year
        lease which expires January 31, 2006. The office space lease provides for
        annual
        increases of 3% to the base rent and requires Genex to reimburse the landlord
        for its pro rata share of the increases in annual operating expenses and
        real
        estate taxes. Monthly lease amounts for this facility total approximately
        $10,100.
 
 We
        believe that our present facilities are adequate to meet our current needs.
        If
        new or additional space is required, we believe that adequate facilities
        are
        available at competitive prices. However, we may not be able to relocate
        to a
        new facility without severely disrupting the production of our
        goods.
   **ITEM
        3.****LEGAL
        PROCEEDINGS**
  **Markland
        Technologies, Inc.**
 
 On
        June
        28, 2004, Charles Wainer filed a civil suit against Markland in Florida state
        court alleging breach of a stock purchase agreement and breach of an employment
        agreement stemming from Wainer's sale of his business to a predecessor of
        Markland and his subsequent employment thereat. In the complaint, Wainer
        alleges
        Markland owes him $300,000 cash, some unspecified portion of $700,000 in
        stock,
        some unspecified portion of $86,000 cash for lease payments, and approximately
        $20,000 in back-pay.
  17
  On
        August
        11, 2004, Markland answered the complaint and denied any liability. In September
        2005 the trial of this matter was concluded. As a result, Markland anticipates
        that judgment will be entered against Markland and in favor of Mr. Wainer
        in an
        amount of approximately $482,000.
 
 On
        or
        about September 16, 2004, Joseph R. Moulton, Sr. initiated a lawsuit in the
        Circuit Court of Spotsylvania County, Virginia, against Markland, EOIR, and
        our
        Chief Executive Officer and Director, Robert Tarini. Mr. Moulton was the
        largest
        single shareholder of EOIR prior to its acquisition by Markland, owning
        approximately 67% of the EOIR capital stock. Mr. Moulton received approximately
        $5,863,000 in cash and a promissory note of EOIR in the approximate principal
        amount of $6,967,000 for his shares of EOIR at the closing of the acquisition
        of
        EOIR by Markland.
 
 In
        his
        complaint Mr. Moulton asserts, among other things, that Markland breached
        its
        obligations under the Stock Purchase Agreement, dated June 29, 2004, pursuant
        to
        which Markland acquired EOIR, by terminating Mr. Moulton's employment with
        EOIR
        and removing him from the EOIR board of directors.
 
 Mr.
        Moulton is seeking damages allegedly suffered by his loss of employment,
        extreme
        emotional distress, and costs incurred to enforce his contractual rights.
        In
        addition, he is seeking some other equitable relief including, the appointment
        of a receiver to oversee the management of EOIR until these promissory notes
        issued to former EOIR shareholders at the closing of the acquisition are
        paid in
        full and a declaratory judgment that Markland's actions constitute an event
        of
        default under these promissory notes allowing for the acceleration of all
        amounts (approximately $11,000,000) due thereunder. Markland is a guarantor
        of
        these notes.
 
 Markland
        believes that the allegations in this lawsuit are entirely without merit.
        Markland has filed an answer denying Mr. Moulton's allegations and opposing
        vigorously all equitable relief sought. Markland has also filed a counterclaim
        against Mr. Moulton seeking damages resulting from alleged misconduct and
        misrepresentations on the part of Mr. Moulton related to EOIR’s relationship
        with certain banks.
 
 On
        April
        4, 2005 a hearing was held in the Spotsylvania County Circuit Court on
        Markland's demurrer to certain claims brought by Mr. Moulton. As a result
        of
        that hearing, the claim by Mr. Moulton that his employment was terminated
        in
        violation of public policy was dismissed by the court , and the Court dismissed
        those aspects of Mr. Moulton's complaint suggesting that he was pursuing
        his
        claims on behalf of other, unnamed sellers of EOIR shares. Mr. Moulton was
        not
        given leave to amend or refile these claims. Also on April 4, 2005, trial
        was
        set to begin on January 17, 2006.
 
 On
        June
        16, 2005, we initiated a lawsuit against Kenneth P Ducey, Jr., a director
        and
        former president of Markland in the Superior Court for Danbury, Connecticut.
        In
        our complaint, we assert that while he was the president and chief financial
        officer of Markland, Mr. Ducey wrongfully expended funds belonging to Markland
        on personal expenses; that Mr. Ducey expended Company funds for expenses
        for
        which he had already been recompensed; and that Mr. Ducey wrongfully withheld
        stock certificates upon which Markland had exercised a contractual repurchase
        right. On June 30, 2005, we entered into a settlement agreement and general
        release (the "Settlement Agreement") with Kenneth P. Ducey, Jr., a director
        and
        former president of Markland. pursuant to which Markland paid $100,000 to
        Asset
        Growth Company, a company controlled by Mr. Ducey, and Mr. Ducey and Asset
        Growth agreed, in accordance with Markland's repurchase right, to remit
        6,555,088 shares of Markland common stock that had been previously issued
        to
        them as compensation. Under the Settlement Agreement, Mr. Ducey and Markland
        agreed to mutual general releases of all claims that the parties may have
        against each other. The Settlement Agreement also contains other customary
        provisions. A copy of the Settlement Agreement was filed as Exhibit 10.1
        to a
        Current Report on Form 8-K filed on June 30, 2005.
 
 Markland
        and Technest were notified on July 21, 2005 by counsel for Deer Creek LLC
        ("Deer
        Creek"), an investor in the February 15, 2005 transaction involving Technest,
        Markland and Genex, that Deer Creek filed an order to show cause requesting
        a
        temporary restraining order in the Superior Court for New York County, naming
        Technest and Markland as defendants. Deer Creek is seeking to enjoin Markland
        from issuing its common stock upon conversion of certain shares of Markland's
        Series D Preferred Stock issued pursuant to certain Exchange Agreements dated
        June 20, 2005. Technest and Markland retained the firm of Pryor, Cashman,
        Sherman & Flynn LLP, 410 Park Avenue, 10th Floor, New York, New York 10022
        to represent their interests in this matter. On July 25, 2005 Technest and
        Markland removed the matter to the United States District Court for the Southern
        District of New York. This matter was settled on August 19, 2005. Markland
        entered into an Exchange Agreement and a Registration Rights Agreement with
        Deer
        Creek on August 19, 2005. Such agreements were filed as exhibits to Markland’s
        Current Report on Form 8-K filed on August 25, 2005.
  18
  Markland
        and EOIR were notified on July 11, 2005 by counsel for Greg and Mary Williams,
        former shareholders and employees of EOIR and, in the case of Mr. Williams,
        a
        former director of Markland, that the Williamses filed a lawsuit in the
        Commonwealth of Virginia, naming EOIR and Markland as a defendant, regarding
        a
        number of contractual disputes involving the registration of shares of Markland
        common stock underlying certain options issued to the Williamses in connection
        with the acquisition of EOIR by Markland and severance payments called for
        pursuant to severance agreements by and among the Willliamses, EOIR and
        Markland. On August 3, 2005, EOIR and Markland filed an answer and a demurrer
        denying all liability.
 
 **Technest
        Holdings, Inc.**
 
 On
        or
        about July 23, 1998, H & H Acquisition Corporation, individually and
        purportedly on behalf of Technest Holdings, commenced an action in United
        States
        District Court, Southern District of New York entitled H & H Acquisition
        Corp., individually and on behalf of Technest Holdings, Inc. v. Financial
        Intranet Holdings, Inc. Technest Holdings, Inc., F/K /A Financial Intranet,
        Inc., Ben Stein, Interwest Transfer Co., Steven A. Sanders, Michael Sheppard,
        Maura Marx, Henry A. Schwartz, Leonard Gotshalk, Gotshalk Enterprises, Law
        Office of Steven A. Sanders, P.C. and Beckman, Millman & Sanders, LLP, 98
        Civ. 5269 The Judge is Judge Barbara S. Jones. The action’s principal basis
        appears to be plaintiff’s claim that Ben Stein wrongfully claims ownership of
        shares of common stock that Stein agreed to purchase from plaintiff. According
        to plaintiff, these shares belong to plaintiff. The plaintiff asserts sixteen
        causes of action. Only some make allegations against Technest Holdings, Inc.,
        Michael Sheppard and Maura Marx, former officers. The plaintiff alleges:
 
 ·
              that
                  Mr. Sheppard and Ms. Marx assisted defendants Stein and Financial
                  Intranet
                  Holdings (a company owned by Mr. Stein) in converting stock which
                  plaintiff allegedly owns. Plaintiff seeks damages allegedly sustained
                  because of the alleged conversion.
 
 ·
              that
                  Mr. Sheppard and Ms. Marx assisted in defrauding plaintiff with
                  respect to
                  the stock plaintiff claims. Plaintiff seeks damages allegedly sustained
                  because of the alleged fraud.
 
 ·
              in
                  a derivative claim, purportedly on behalf of Technest Holdings,
                  Inc: that
                  Mr. Sheppard and Ms. Marx permitted issuance of shares to defendant
                  Gotshalk without proper consideration and at a price lower than
                  that
                  offered to a company introduced by Plaintiff; that they refused
                  to allow
                  plaintiff to purchase additional shares; that Mr. Sheppard and
                  Ms. Marx
                  permitted Technest Holdings, Inc. to pay defendant Schwartz monies
                  which
                  should not have been paid, and authorized issuance of stock to
                  Schwartz
                  without proper authority; and that Mr. Sheppard and Ms. Marx caused
                  the
                  issuance of stock to themselves without proper authority. Plaintiff
                  seeks
                  damages allegedly sustained for these alleged wrongful acts.
 
 ·
              in
                  a derivative claim, purportedly on behalf of Technest Holdings,
                  Inc., that
                  actions taken at the December 1998 shareholders meeting were improper.
                  The
                  plaintiff seeks an order directing the rescission of actions by
                  the Court
                  or its designee.
 
 ·
              that
                  Technest Holdings, Inc. and its former transfer agent wrongfully
                  transferred shares belonging to plaintiff to a third party. The
                  transfer
                  agent has asserted a claim against us seeking indemnification for
                  any
                  liabilities incurred by the transfer agent in this action.
 
 Plaintiff
        also seeks an accounting from Mr. Sheppard, among other defendants, for damages
        Technest Holdings, Inc. allegedly suffered.
 
 Technest
        Holdings, Inc., Mr. Sheppard and Ms. Marx believe that the claims against
        Technest Holdings, Inc., Mr. Sheppard and Ms. Marx are without merit and
        are
        vigorously defending the action. Technest Holdings, Inc., Mr. Sheppard and
        Ms.
        Marx have filed responses to the claims against them. The responses deny
        all
        material allegations of the complaint and the claim asserted by the transfer
        agent, and asserts a variety of defenses. Technest cannot make any assurances
        about the litigation’s outcome. If the plaintiff prevails against us, Technest
        could be adversely affected.
 
 In
        September 2002, Technest was served with a Summary Judgment Motion regarding
        H
& H Acquisition Corp. and Technest answered the motion in November 2002. On
        January 3, 2005, the court denied the motion for summary judgment. Trial
        of this
        matter is scheduled to begin on January 4, 2006.
  In
        addition, we are subject to legal proceedings, claims, and litigation arising
        in
        the ordinary course of business. While the outcome of these matters is currently
        not determinable, we do not expect that the ultimate costs to resolve these
        matters will have a material adverse effect on our consolidated financial
        position, results of operations, or cash flows.
 
 19
  **ITEM
        4.****SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  No
        matters were submitted to a vote of our security holders during the fourth
        quarter of the fiscal year ended June 30, 2005.
  **PART
        II**
  **ITEM
        5.****MARKET
        FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
  **MARKET
        INFORMATION**
  Our
        common stock is quoted on the OTC Bulletin Board by The National Association
        of
        Securities Dealers, Inc. under the symbol "MRKL.OB." The following table
        provides, for the periods indicated, the high and low bid prices for our
        common
        stock as reported on the OTC Bulletin Board as set forth on Nasdaq.com. These
        over-the-counter market quotations reflect inter-dealer prices, without retail
        mark-up, mark-down or commission, and may not represent actual transactions.
        The
        prices reflect a 1-for-60 reverse stock split effective October 27, 2003.
        Prior
        to December 2003, our common stock was thinly traded.
 
 
 **Year
                  ended June 30, 2004**
              **High**
              **Low**First
                  quarter
              $9.00
              $2.40Second
                  quarter
              $5.70
              $1.90Third
                  quarter
              $2.70
              $0.69Fourth
                  quarter
              $4.40
              $0.59**Year
                  ended June 30, 2005**First
                  quarter
              $1.13
              $0.44Second
                  quarter
              $0.93
              $0.61Third
                  quarter
              $0.84
              $0.24Fourth
                  quarter
              $0.24
              $0.08
  There
        is
        no public trading market for our preferred stock.
 
 **HOLDERS**
  On
        October 11, 2005, we had approximately 829 holders of record of our common
        stock
        and four holders of record of our Series D Convertible Preferred Stock.
  **CASH
        DIVIDENDS**
  We
        have
        never declared or paid cash dividends on our common stock, and we do not
        plan to
        pay any cash dividends in the foreseeable future. We currently intend to
        retain
        any future earnings to finance our operations and future growth.
  **RESTRICTIONS
        ON MARKLAND'S ABILITY TO PAY DIVIDENDS ON COMMON STOCK**
  Pursuant
        to the Purchase Agreement between the Company and DKR Soundshore Oasis Holding
        Fund, Ltd, and DKR Soundshore Strategic Holding Fund, Ltd., dated September
        21,
        2004, we have covenanted that so long as any of the notes issued pursuant
        to
        such agreement are outstanding, we will not declare, pay or make any provision
        for any cash dividend or cash distribution with respect to our common stock
        or
        preferred stock, without first obtaining the approval of the investors party
        the
        agreement.
 
 20
 
 
 **SECURITIES
        AUTHORIZED FOR ISSUANCE UNDER MARKLAND'S EQUITY COMPENSATION
        PLANS**
  The
        following table sets forth certain information as of June 30, 2005, regarding
        securities authorized for issuance under our equity compensation plans,
        including individual compensation arrangements **.**
  **Plan
                  Category**
              **Number
                  of Securities to be Issued Upon Exercise of Outstanding Options,
                  Warrants
                  and Rights**
              **Weighted-Average
                  Exercise Price of Outstanding Options, Warrants and
                  Rights**
              **Number
                  of Securities Remaining Available for Future Issuance Under Equity
                  Compensation Plans**Equity
                  compensation plans approved by security holders
              0
              N/AEquity
                  compensation plans not approved by security holders
              14,220,893
                  (1)
              $0.23
              30,495,157
                  (1)**Total**
              14,220,893
                  (1)
              $0.23
              30,495,157
                  (1)
 (1)
              Markland
                  has two equity compensation plans - 2004 Stock Incentive Plan and
                  the 2005
                  Stock Award Plan. Each plan authorizes Markland to issue 25,000,000
                  shares
                  of common stock. The 2004 Plan permits the issuance of options,
                  stock
                  awards, performance share awards and stock appreciation rights.
                  The 2005
                  Plan only permits stock awards. Under the 2004 Plan, to date, we
                  have
                  outstanding options to purchase 14,220,893 shares, leaving 10,779,107
                  shares available for future issuance. Under the 2005 Plan, we have
                  granted
                  5,283,950 stock awards, leaving 19,716,050 shares available for
                  future
                  issuance.
  
 **ITEM
        6.****MANAGEMENT'S
        DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
  *The
        following discussion and analysis of our financial condition and results
        of
        operations for the period beginning June 30, 2004 and ending June 30, 2005
        should be read together with our financial statements and related notes included
        elsewhere in this report.*
 
 *When
        reviewing the discussion below, you should keep in mind the substantial risks
        and uncertainties that characterize our business. In particular, we encourage
        you to review the risks and uncertainties described under "Risk Factors "
        below.
        These risks and uncertainties could cause actual results to differ materially
        from those forecasted in forward-looking statements or implied by past results
        and trends. Forward-looking statements are statements that attempt to project
        or
        anticipate future developments in our business; we encourage you to review
        the
        examples of forward-looking statements under "Note Regarding Forward-Looking
        Statements." These statements, like all statements in this report, speak
        only as
        of the date of this report (unless another date is indicated) and we undertake
        no obligation to update or revise the statements in light of future
        developments.*
  **OVERVIEW**
  We
        are the
        successor to a variety of businesses dating back to 1995. Our business, as
        it
        exists today, consists of four business areas:
 
 ·
              remote
                  sensor systems for military and intelligence
                  applications;
 
 ·
              chemical
                  detectors;
 
 ·
              border
                  security; and
 
 ·
              imaging
                  and surveillance.
 
 21
  We
        provide to the U.S. Department of Defense, or DOD, and to various other U.S.
        Intelligence agencies, or INTEL, remote sensing technology products, and
        services to protect our country's military personnel and infrastructure assets.
        We also provide to the Department of Homeland Security products, services
        and
        emerging technologies to protect our country's borders, infrastructure assets
        and personnel. Our mission is to build world-class integrated solutions for
        the
        Homeland Security, DOD and INTEL marketplaces via expansion of our existing
        contracts, development of our emerging technologies and acquisition of
        synergistic revenue producing assets.
 
 Prior
        to
        the acquisition of EOIR, our primary sources of operating revenue were sales
        of
        our automatic chemical agent detection and alarm system, border security
        logistics products and services, and Small Business Investment Research funded
        research grants for the development of gas plasma antenna technology.
 
 As
        result
        of the acquisition of EOIR, our primary sources of operating revenues have
        been
        the sales of remote sensing technology products and services to the United
        States DOD and to various other INTEL. Our strategy is to grow through organic
        means via increased acceptance by our customers of our present products and
        services offerings and also via synergistic acquisitions of assets that provide
        products or services to Homeland Security, DOD, or INTEL.
  
 **COMPANY
        HISTORY**
 
 *EVENTS
        DURING FISCAL 2003* .
        In
        December 2002, we entered into a transaction with Eurotech Ltd., ipPartners,
        Inc., Market LLC, and James LLC. Pursuant to this transaction, the following
        took place:
  ·
              We
                  formed a subsidiary corporation called Security Technology,
                  Inc.
  ·
              Eurotech
                  transferred certain rights to its Acoustic Core Technology(TM)
                  to our
                  subsidiary.
  ·
              Crypto.com
                  Inc. (a subsidiary of Eurotech) and ipPartners, Inc. transferred
                  certain
                  rights to their cryptology technologies to our
                  subsidiary.
  ·
              90%
                  of the shares of our common stock held by Market LLC and James
                  LLC were
                  retired.
  ·
              We
                  issued shares of common stock representing 80% of our then issued
                  and
                  outstanding common stock to Eurotech, Ltd. And shares of common
                  stock
                  representing 10% of our then issued and outstanding shares of common
                  stock
                  to ipPartners, Inc.
  ·
              We
                  issued $5,225,000 in stated value of our Series C 5% Cumulative
                  Convertible Preferred Stock to Market LLC and James LLC in satisfaction
                  of
                  $5,225,000 of convertible notes held by Market LLC and James LLC
                  and in
                  exchange for their agreement to surrender 4,498,638 shares of our
                  common
                  stock.
  We
        are
        not a majority-owned subsidiary of Eurotech, Ltd. due to the issuances of
        additional common stock.
  In
        January of 2003, we acquired all of the common stock of Ergo Systems, Inc.
        ("Ergo"), a provider of security logistic support and related product
        development services. Ergo has a contract with the United States government
        to
        provide border security logistic support at five ports of entry. In
        consideration for this acquisition, we agreed to pay $400,000 in cash, payable
        at certain milestones related to our research efforts. During the year ended
        June 30, 2004, we recognized $955,736 from these services.
  In
        March
        of 2003, we entered into an agreement to acquire the intellectual property
        (including patents), equipment and government contracts relating to our gas
        plasma antenna technology from ASI Technology Corporation, but this transaction
        did not close until September 30, 2003. In consideration for this acquisition,
        we issued 283,333 shares of common stock valued at $850,000 and agreed to
        pay
        $150,000. During the year ended June 30, 2004, we recognized revenue of $261,479
        from SBIR research grants related to this technology. Please refer to the
        section entitled “Amortization of Intangible Assets” below regarding our gas
        plasma technology.
 
 22
 
 
 *EVENTS
        DURING FISCAL 2004* .
        In
        October of 2003, we acquired all of the common stock of Science and Technology
        Research Corporation, Inc. ("STR"). This company is the producer of the U.S.
        Navy's shipboard automatic chemical agent detection and alarm system. In
        consideration for this acquisition, we issued 1,539,779 shares of common
        stock
        valued at $5,100,000 and paid $900,000 in cash, and issued a promissory note
        for
        $375,000. During the year ended June 30, 2004, we recognized revenue of
        $4,796,715 from sales of our automatic chemical agent detection and alarm
        system
        to the U.S. Navy. We also entered into a consulting agreement with the former
        principal shareholder and employee.
  On
        June
        29, 2004, we acquired all of the outstanding stock of EOIR for $8,000,000
        in
        cash and $11,000,000 in principal amount of five year notes secured by the
        assets and stock of EOIR. EOIR is a provider of technology and services to
        the
        United States Army Night Vision and Electronic Sensors Directorate and has
        expertise in wide area remote sensing using both electro-optic and infrared
        technologies. Markland intends to continue to use the assets of EOIR for
        this
        purpose. We expect that EOIR will represent a majority of Markland's revenues
        going forward. We expect that these sensor science products will be our most
        significant revenue producing business.
 
 *EVENTS
        DURING FISCAL 2005* .
        On
        February 14, 2005, we acquired a controlling interest in Technest, a public
        company with no operations. In connection with this transaction, and, at
        the
        same time, Technest acquired all of the capital stock of Genex, a private
        company with expertise in imaging and surveillance whose primary customer
        is the
        U.S. Department of Defense. Technest financed the acquisition of Genex through
        the private placement of securities to sophisticated investors. We structured
        the acquisition of Genex in this manner to comply with covenants in our
        financing agreements and facilitate the financing of the
        acquisition.
  On
        June
        20, 2005, we entered into definitive agreements with DKR Soundshore Oasis
        Holding Fund, Ltd., DKR Soundshore Strategic Holding Fund, Ltd., Verdi
        Consulting, Inc., and ipPartners, Inc. pursuant to which we exchanged 632,182
        shares of Technest Series B Preferred Stock (convertible into shares of Markland
        common stock) for 2,750 shares of Markland Series D Preferred Stock. As of
        October 11, 2005, all of the 2,750 shares of our Series D preferred stock
        have
        been converted into an aggregate of 33,337,546 shares of our common stock.
        This
        transaction 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 and Rule 506 of Regulation
        D
        promulgated thereunder, insofar as such securities were sold only to "accredited
        investors" within the meaning of Rule 501 of Regulation D.
  *FINANCING
        ACTIVITIES* .
        We have
        financed our business activities through borrowings and private placements
        of
        our securities to institutional investors. We have engaged in the following
        financing activities:
  ·
              In
                  October 2003, we borrowed $1,400,000 from Bay View Capital, LLC.
                  This
                  borrowing was repaid in April 2004.
  ·
              At
                  various times between April 2003 and March 2004 we have raised
                  an
                  aggregate of approximately $3,832,000 through private placements
                  of our
                  Series D Preferred Stock to an institutional
                  investor.
  ·
              On
                  April 2, 2004, we sold 3,333,333 shares of common stock and warrants
                  to
                  purchase 3,333,333 shares of our common stock for gross proceeds
                  of
                  $2,000,000 to three investors in a private
                  placement.
  ·
              On
                  April 16, 2004, we sold 2,500,000 shares of our common stock and
                  warrants
                  to purchase 2,500,000 shares of our common stock for gross proceeds
                  of
                  $2,000,000 to ten investors in a private
                  placement.
  ·
              On
                  May 3, 2004, we sold 7,098,750 shares of our common stock and warrants
                  to
                  purchase 7,098,750 shares of ourcommon stock for gross proceeds of
                  $5,679,000 to 34 investors in a private
                  placement.
  ·
              As
                  of April 2004, all of our Series C Cumulative Convertible Preferred
                  Stock
                  has been converted into common stock and none remains
                  outstanding.
  ·
              On
                  June 30, 2004, we sold 3,500 shares of Series D Preferred Stock
                  to an
                  institutional investor for $2,000,000 in connection with the acquisition
                  of EOIR.
  23
  ·
              On
                  September 21, 2004, we sold secured convertible promissory notes
                  and
                  warrants to purchase shares of common stock to two institutional
                  investors
                  for approximately $4,000,000.
  ·
              On
                  February 14, 2005, Markland entered into definitive agreements
                  with
                  Technest, a public company with no revenue and minimal assets and
                  operations, Genex Technologies, Inc., and the certain investors,
                  which
                  resulted in Markland acquiring controlling interests in Technest
                  simultaneous with and conditioned upon the Technest acquisition
                  of Genex.
                  In accordance with the terms of the Markland Securities Purchase
                  Agreement
                  on February 14, 2005, Technest issued a controlling interest to
                  Markland
                  in exchange for 10,168,764 shares of Markland common stock and
                  Markland
                  agreed to issue additional shares of common stock upon conversion
                  of
                  Technest's Series B Preferred Stock. Immediately after the acquisition
                  by
                  Markland of a controlling interest in Technest, certain investors
                  paid
                  $5,000,000 in cash for shares of Technest Series B Preferred Stock,
                  shares
                  of Technest Series C Convertible Preferred Stock and five-year
                  warrants to
                  purchase Technest common stock. The acquisition of Genex was effected
                  pursuant to an Agreement and Plan of Merger dated February 14,
                  2005, by
                  and among Markland, Technest, Mtech Acquisition, Inc., a wholly-owned
                  subsidiary of Technest, Genex and Jason Geng, the sole stockholder
                  of
                  Genex. As a result of the merger, all of the outstanding shares
                  of the
                  capital stock of Genex were automatically converted into the right
                  to
                  receive in the aggregate (i) $3 million of cash; (ii) 10,168,764
                  shares of
                  Markland's common stock (the shares of Markland common stock issued
                  to
                  Technest); and (iii) if earned, contingent payments in the form
                  of
                  additional shares of Technest common stock. In addition, Dr. Geng
                  was to
                  receive a twelve month unsecured promissory note in the principal
                  amount
                  of $550,000 that pays interest at the rate of 6% per annum.Following the acquisition, it is Markland’s opinion that Dr. Geng omitted
                  material representations from the Merger Agreement and, as a result,
                  Markland has not and does not intend to issue the promissory note
                  or the
                  additional share consideration.
  
 **RESULTS
        OF OPERATIONS COMPARISON OF FISCAL 2005 AND FISCAL 2004**
 
 **REVENUE** :
  Revenue
        for the fiscal year ended June 30, 2005 was $66,694,787 compared to $6,013,930
        for the same period in 2004.
 
 For
        the
        fiscal year ended June 30, 2005, approximately 97% of our revenue was from
        EOIR,
        with 84% from our Omnibus Contract with the United States Army Night Vision
        and
        Electronic Sensors Directorate. Revenues from grants related to 3D imaging
        technology from our newly acquired Genex subsidiary and sales of ACADA products
        and border security products and services each represented approximately
        1.5% of
        our revenue.
  For
        the
        fiscal year ended June 30, 2004, approximately 80% or our revenue was from
        our
        chemical detection business, including sales of the ACADA product, approximately
        16% was from sales of our border security products and services, and
        approximately 4% was from SBIR grants for the development of our gas plasma
        antenna technology. Please refer to the section entitled “Amortization of
        Intangible Assets” below regarding our gas plasma technology. There was no
        revenue from EOIR in the year ended June 30, 2005 as EOIR was not acquired
        until
        June 29, 2005.
  **COST
        OF REVENUES:**
  Cost
        of
        revenues for the year ended June 30, 2005 was $52,846,275, compared to
        $4,674,593 for fiscal year 2004. Cost of revenues increased year to year
        as a
        result of the acquisition of EOIR which accounted for 99% of the cost of
        revenues.
  Gross
        profits for the year ended June 30, 2005 was $13,848,512 compared to $1,339,337
        for fiscal year 2004. Gross profits increased as a result of additional revenue
        from the acquisition of EOIR
  We
        had a
        gross profit margin of approximately 21% for the fiscal year ended June 30,
        2005, compared to 22% for the year ended June 30, 2004.
 
 24
  **SELLING,
        GENERAL AND ADMINISTRATIVE EXPENSES:**
  Selling,
        general and administrative expense for the year ended June 30, 2005 increased
        by
        $15,025,971 to $20,339,419, compared to selling, general and administrative
        expense for the year ended June 30, 2004 which was $5,313,448.
  Selling,
        general and administrative expense was primarily composed of payroll,
        consultants, legal and accounting fees, and vendors. The increase in selling,
        general and administrative expense was primarily due to increases in staff
        resulting from the acquisition of EOIR and increases due to related sales
        growth. Included in these expenses for the year ended June 30, 2005 is an
        accrual for $482,000 related to a legal dispute.
  **RESEARCH
        AND DEVELOPMENT:**
  During
        fiscal year 2005, we spent $2,799,665 on research and development. During
        the
        fiscal year 2004, $49,289 was spent on research and development activities.
        During the fiscal year ended June 30, 2005, we wrote off $2,075,000 of
        in-process research and development acquired in our acquisition of Technest
        and
        Genex.
  **AMORTIZATION
        OF INTANGIBLE ASSETS**
  During
        the years ended June 30, 2005 and 2004, Markland amortized $3,766,317 and
        $ 915,729 of intangible assets.
  The
        intangible asset entitled "Technology rights - Acoustic Core" which had a
        carrying value of $1,300,000 is not available for commercial sale as of June
        30,
        2005. We have determined that any future cash flow from this technology is
        unlikely and have recorded an impairment loss of $1,300,000 for the year
        ended
        June 30, 2005.
  The
        intangible assets acquired from ASI relating to gas plasma technology on
        September 30, 2003 totaled $1,000,000. These assets were being amortized
        over a
        three-year period commencing October 1, 2003. At June 30, 2005, it was
        determined that future cash flow from this asset was not likely and we recorded
        an impairment loss of $500,000. Amortization expense related to this contract
        for the years ended June 30, 2005 and 2004 was $250,000 in each
        year.
  The
        majority of the remaining amortization relates to the amortization of the
        EOIR
        intangible assets. Total amortization of these intangibles was approximately
        $1,306,000 in the year ended June 30, 2005.
  
 **COMPENSATORY
        ELEMENT OF STOCK ISSUANCES FOR SELLING, GENERAL AND ADMINISTRATIVE
        EXPENSES:**
  Compensatory
        element of stock issuances for selling, general and administrative expenses
        for
        the years ended June 30, 2005 and June 30, 2004 was $5,605,859 and $5,211,737,
        respectively.
  In
        fiscal
        year 2005, this amount consisted of amortization of compensatory stock issuances
        to executives and consultants over the life of their employment contracts,
        amortization of options issued in the acquisition of EOIR, charges at fair
        market value for compensatory stock issuances to employees and stock issued
        in
        settlement of legal disputes or breaches of contract.
  In
        fiscal
        year 2004, this amount consisted of charges for the issuance of 5,867,103
        shares
        of restricted stock at a valuation of 100% of market value of unrestricted
        stock
        at the time of issuance.
  We
        use
        our equity to compensate management and consultants who provide services
        to us.
        We expect to continue to do so in the future. For this reason we expect to
        continue to incur such charges.
 
 25
  **LOSS
        FROM OPERATIONS:**
  Loss
        from
        operations for the year ended June 30, 2005 was $18,662,748. Of this amount,
        $11,467,176 were non-cash charges relating to the compensatory element of
        stock
        issuances, amortization and write-down of intangible assets and the write-off
        acquired in-process research and development.
  Loss
        from
        operations for the year ended June 30, 2004 was $10,150,866. This loss resulted
        primarily from non-cash charges for the compensatory element of stock issuances
        of $5,211,737 and from selling, general and administrative expenses, which
        were
        offset by gross profit.
  **INTEREST
        EXPENSE:**
  Interest
        expense for the year ended June 30, 2005 increased substantially to $10,129,168
        compared to $360,347 for the year ended June 30, 2004. The non-cash element
        of
        these interest charges amounted to $9,187,227. Interest expense was from
        notes
        payable issued for bridge financing, and other financing costs. These charges
        represent the accretion of debt discount to the fair market value of the
        notes
        and amortization of deferred financing costs over the term of the convertible
        notes. We issued two convertible notes on September 21, 2004 and November
        9,
        2004. As this short-term financing had an original term of one year, these
        charges are accreted over a relatively short period of time resulting in
        substantial non-cash interest charges. We expect such charges to continue
        during
        the life of these notes. In connection with our acquisition of EOIR, EOIR
        issued, and we guaranteed, $11,000,000 in original principal amount of notes
        due
        to the former stockholders of EOIR. These notes bear interest at the rate
        of six
        (6%) percent per annum and must be repaid within the next five years. The
        face
        value of these notes is $9,387,750 at June 30, 2005.
  **MINORITY
        INTEREST IN NET LOSS OF SUBSIDIARY AND PREFERRED STOCK DIVIDENDS:**
  The
        minority interest in the net loss of Technest was $191,005 for the year ended
        June 30, 2005. Deemed preferred stock dividends for the year ended June 30,
        2005
        were $2,174,858. These deemed dividends resulted from the beneficial conversion
        features of Technest’s Series A and Series C stock issued to outside investors
        and as a result are entirely attributable to the minority interest in
        Technest.
  Preferred
        Stock dividends for the year ended June 30, 2005 were $340,000. This consisted
        of non cash deemed dividends related to a beneficial conversion feature
        resulting from the exchange of our Series D Preferred Stock for 632,182 shares
        of Technest Series B Preferred Stock.
  Preferred
        Stock dividends for the year ended June 30, 2004 were $4,584,248. This consisted
        of deemed dividends to the holder of our Series C Preferred Stock of $844,270,
        deemed dividends to the holder of our Series D Preferred Stock of $3,555,500,
        and actual dividends paid upon conversion to common stock to the holder of
        our
        Series C Preferred Stock of $184,478. Deemed dividends represent non-cash
        charges for $4,584,248.
  We
        expect
        to continue to finance our operations with additional debt and equity financing
        including, possibly, additional sales of our Series D Preferred Stock with
        beneficial conversion features. Such financing could result in additional
        charges for deemed preferred stock dividends.
  **NET
        LOSS APPLICABLE TO COMMON STOCKHOLDERS:**
  Net
        loss
        applicable to common stockholders for the year ended June 30, 2005 was
        $31,039,908 ($0.40 per share).
 
 Net
        loss
        applicable to common stockholders for the year ended June 30, 2004 was
        $15,095,461 ($1.39 per share).
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  During
        fiscal 2005, we used $2,135,917 of cash in operating activities. This negative
        cash flow was the result of a net loss of $30,699,908 for the year offset
        by
        non-cash charges of $23,228,601 and cash generated from working capital of
        $5,335,390. In addition, we used $2,892,523 of cash in investing activities.
        These investment activities primarily consisted of the acquisition of
        Technest/Genex. Cash flows from financing activities for the year ended June
        30,
        2004 provided $10,751,796 primarily through the issuance of convertible debt,
        preferred stock and the exercise of warrants to purchase common
        stock.
 
 26
 
 During
        fiscal 2004, we used $3,906,900 of cash in operating activities. This negative
        cash flow was the result of a loss of $10,511,213 offset by non-cash charges
        of
        $6,377,936 and working capital requirements of $226,377. In addition, we
        used
        $8,538,386 of cash in investing activities. These investment activities
        consisted of cash used primarily for the acquisition of EOIR. Cash provided
        by
        financing activities for the year ended June 30, 2004 approximated $13,540,909
        primarily through the issuance of common and preferred stock.
  We
        financed our operations and acquisition activities primarily through sales
        of
        common stock and preferred stock, exercise of warrants, as well as through
        margins from sales of our products and services. During fiscal 2005, we raised
        $5,516,250 from the exercise of warrants for common stock, and $3,512,423
        from
        sales of Preferred Stock. We also raised $4,541,342 from issuing secured
        convertible notes.
  During
        fiscal 2004, we raised $8,226,845 from sales of our common stock, and $5,401,970
        from sales of our Series D Preferred Stock.
  On
        June
        29, 2004, we acquired all of the outstanding stock of EOIR for $8,000,000
        in
        cash and $11,000,000 in principal amount of five year notes secured by the
        assets and stock of EOIR. These notes bear interest at the rate of six (6%)
        percent per annum and must be repaid within the next five years. The carrying
        value of these notes is $9,387,750 at June 30, 2005. On September 21, 2004,
        we
        sold secured convertible promissory notes and warrants for the aggregate
        consideration of $4,000,000 and in the aggregate principal amount of $5,200,000.
        These notes accrue interest at the rate of eight percent (8%) per annum and
        are
        due and payable within one year. The carrying value of this note is $3,016,343
        at June 30, 2005 and the discount to the principal amount will be accreted
        to
        interest expense over the remaining term of the loan. On November 9 2004,
        we
        sold secured convertible promissory notes and warrants for the aggregate
        consideration of $1,350,000 and in the aggregate principal amount of $1,755,000.
        These notes accrue interest at the rate of eight percent (8%) per annum and
        are
        due and payable within one year. The carrying value of this note is $474,042
        at
        June 30, 2005 and the discount to the principal amount will be accreted to
        interest expense over the remaining term of the loan. Between January 1,
        2005
        and February 10, 2005, additional warrants were exercised to purchase 7,225,000
        shares of the Company's common stock at $0.60 per share for proceeds of
        $4,335,000. On February 14, 2005, in connection with the Technest and Genex
        acquisitions, we raised $5,000,000 (gross) for shares of Technest Series
        B
        Preferred Stock, Technest Series C Convertible Preferred Stock and five-year
        warrants to purchase Technest common stock. After acquisition costs and fees,
        this financing provided us with an additional $448,247 in working
        capital.
  We
        believe that required investment capital will be available to us, but there
        can
        be no assurance that we will be able to raise funds on terms acceptable to
        us,
        or at all. We have the ability to adjust the level of research and development
        and selling and administrative expenses to some extent based on the availability
        of resources. However, reductions in expenditures could delay development
        and
        adversely affect our ability to generate future revenues.
  Any
        equity-based source of additional funds could be dilutive to existing equity
        holders and the dilution could be material. The lack of sufficient funds
        from
        operations or additional capital could force us to curtail or scale back
        operations and would therefore have an adverse effect on our business. Other
        than cash and cash equivalents, we have no unused sources of liquidity at
        this
        time. We expect to incur additional operating losses as a result of expenditures
        for research and development and marketing costs for our security products
        and
        technologies. The timing and amounts of these expenditures and the extent
        of our
        operating losses will depend on many factors, some of which are beyond our
        control. Accordingly, there can be no assurance that our current expectations
        regarding required financial resources will prove to be accurate. We anticipate
        that the commercialization of our technologies may require increased operating
        costs; however, we cannot currently estimate the amounts of these
        costs.
  **OFF-BALANCE
        SHEET ARRANGEMENTS**
 
 We
        have
        no significant off-balance sheet arrangements that have had or are reasonably
        likely to have a material effect on our financial condition, revenues or
        expenses, results of operations, liquidity, capital expenditures or capital
        resources.
  27
  **EFFECT
        OF INFLATION AND CHANGES IN PRICES**
  Management
        does not believe that inflation and changes in price will have a material
        effect
        on operations.
  **CRITICAL
        ACCOUNTING POLICIES**
  The
        preparation of Markland's financial statements and related disclosures in
        conformity with accounting principles generally accepted in the United States
        of
        America requires management to make estimates and assumptions that affect
        the
        reported amounts of assets and liabilities, and the disclosure of contingent
        assets and liabilities as of the date of the financial statements and the
        amounts of revenues and expenses recorded during the reporting periods. We
        base
        our estimates on historical experience, where applicable, and other assumptions
        that we believe are reasonable under the circumstances. Actual results may
        differ from our estimates under different assumptions or
        conditions.
  The
        sections below present information about the nature of and rationale for
        our
        critical accounting policies.
  **PRINCIPLES
        OF CONSOLIDATION**
  Our
        consolidated financial statements as of June 30, 2005 include the accounts
        of
        Markland, its wholly-owned subsidiaries, Security Technology, Inc., Ergo
        Systems, Inc., Science and Technology Research Corporation, Inc. and E-OIR
        Technologies, Inc. and its majority owned subsidiary, Technest Holdings,
        Inc.
        and its wholly-owned subsidiary, Genex Technologies, Inc. We have eliminated
        all
        significant inter-company balances and transactions.
  **CONCENTRATIONS**
  Statement
        of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of Information
        about Financial Instruments with Off-Balance-Sheet Risk and Financial
        Instruments with Concentrations of Credit Risk," requires that we disclose
        any
        significant off-balance-sheet and credit risk concentrations. We are subject
        to
        concentrations of credit risk because the majority of our revenues and accounts
        receivable are derived from the US Navy, Computer Science Corporation and
        the
        Department of Homeland Security, none of whom is required to provide collateral
        for amounts owed to us. We do not believe that we are subject to any unusual
        credit risks, other than the normal level of risk attendant to operating
        our
        business.
  As
        of
        June 30, 2005, we had cash balances in banks in excess of the maximum amount
        insured by the FDIC. In addition, we derive substantially all of our contract
        revenue from contracts with Federal government agencies. Consequently,
        substantially all of our accounts receivable are due from Federal government
        agencies either directly or through other government contractors.
  **RESEARCH
        AND DEVELOPMENT**
  We
        charge
        research and development costs to expense as incurred. We capitalize costs
        related to acquired technologies that have achieved technological feasibility
        and have alternative uses. We expense as research and development costs the
        technologies we acquire if they are in process at the date of acquisition
        or
        have no alternative uses.
  **IMPAIRMENT
        OF GOODWILL AND AMORTIZABLE INTANGIBLES**
  In
        accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we
        review
        goodwill and amortizable intangibles for impairment annually, or more frequently
        if an event occurs or circumstances change that would more likely than not
        reduce the fair value of our business enterprise below its carrying value.
        The
        impairment test requires us to estimate the fair value of our overall business
        enterprise down to the reporting unit level. We estimate fair value using
        either
        a discounted cash flows model, or an approach using market comparables, to
        determine fair value. Under the discounted cash flows method, we utilize
        estimated long-term revenue and cash flows forecasts developed as part of
        our
        planning process, together with an applicable discount rate, to determine
        fair
        value. Under the market approach, fair value is determined by comparing us
        to
        similar businesses (or guideline companies). Selection of guideline companies
        and market ratios require management's judgment. The use of different
        assumptions within our discounted cash flows model or within our market approach
        model when determining fair value could result in different valuations for
        goodwill.
 
 28
   **ESTIMATED
        USEFUL LIVES OF AMORTIZABLE INTANGIBLE ASSETS**
 
 We
        amortize our amortizable intangible assets over the shorter of the
        contractual/legal life or the estimated economic life. We are amortizing
        the
        intangible assets acquired as of a result of the Ergo and ASI acquisitions
        over
        a three-year life commencing with the date of acquisition. With respect to
        the
        Science & Technology Research, Inc. and EOIR Technologies, Inc.
        acquisitions, consistent with independent business valuations, we are amortizing
        the intangible assets over ten years and nine years respectively.
 
 The
        intangible assets acquired from ASI on September 30, 2003 totaled $1,000,000.
        These assets were being amortized over a three-year period commencing October
        1,
        2003. At June 30, 2005, it was determined that future cash flows from this
        asset
        were not likely and Markland recorded an impairment loss of $500,000.
        Amortization expense related to this contract for the years ended June 30,
        2005
        and 2004 were $250,000 in each year.
 
 The
        excess of the purchase price of STR over the fair value of assets acquired
        was
        $6,006,808. Of this amount, $4,038,864 was allocated to goodwill and $1,967,944
        to amortizable intangible assets. $416,000 was allocated to existing contracts
        with a twenty-six month estimated economic life and the remaining $1,551,944
        was
        allocated to customer relationships with an estimated economic useful life
        of
        ten years. Markland has recorded amortization expense of $155,194 and $532,396
        for years ended June 30, 2005 and 2004, respectively. Due to the early
        completion of its major contract with the US Navy, Markland accelerated the
        write down of the $416,000 which was allocated to existing
        contracts.
 
 The
        intangible assets entitled "Acoustic Core" which had a carrying value of
        $1,300,000 are not available for commercial sale as of June 30, 2005. Markland
        has determined that future cash flows from this technology are unlikely and
        has
        recorded an impairment loss of $1,300,000 for the year ended June 30,
        2005.
 
 Definite-lived
        intangible assets acquired from Genex represent costs of outside legal counsel
        related to obtaining new patents.  Patent costs are amortized over
        the
        legal life of the patents, generally twenty years, starting on the patent
        issue
        date.  The costs of unsuccessful and abandoned patent applications
        are
        expensed when abandoned.  The cost to maintain existing patents are
        expensed as incurred.  The nature of the technology underlying these
        patents relates to 3-D imaging, intelligent surveillance and 3-D facial
        recognition technologies.
 
 Markland
        also acquired Commercialized Technology relating to 3D facial recognition
        cameras and Contracts and Customer Relationships from the application of
        3D
        imaging technologies to breast cancer research for the National Institute
        of
        Health and disposable sensors and 3D face mapping for the Department of Defense.
        The amounts assigned to definite-lived intangible assets were determined
        based
        on an independent purchase price allocation analysis. These assets have an
        estimated useful life of five years.
  **IMPAIRMENT
        OF LONG-LIVED ASSETS**
 
 Pursuant
        to SFAS No. 144, we continually monitor events and changes in circumstances
        that
        could indicate carrying amounts of long-lived assets may not be recoverable.
        We
        recognize an impairment loss when the carrying value of an asset exceeds
        expected cash flows. Accordingly, when indicators or impairment of assets
        are
        present, we evaluate the carrying value of such assets in relation to the
        operating performance and future undiscounted cash flows of the underlying
        business. Our policy is to record an impairment loss when we determine that
        the
        carrying amount of the asset may not be recoverable. No impairment charges
        were
        recorded in the years ended June 30, 2005 and 2004.
  29
  **REVENUE
        RECOGNITION**
  We
        recognize revenue when the following criteria are met: (1) we have persuasive
        evidence of an arrangement, such as agreements, purchase orders or written
        requests, (2) we have completed delivery and no significant obligations remain,
        (3) our price to our customer is fixed or determinable, and (4) collection
        is
        probable. We recognize revenues at the time we perform services related to
        border security logistic support. With respect to our revenues from our chemical
        detectors, we recognize revenue under the units-of-delivery method. At the
        time
        the units are shipped to the warehouse of the United States Navy, Markland
        recognizes as revenues the contract price of each unit and recognizes the
        applicable cost of each unit shipped. As of June 30, 2004, we had completed
        delivery pursuant to all outstanding orders under this contract. Revenues
        from
        time and materials contracts are recognized as costs are incurred. Revenues
        from
        firm fixed price contracts are recognized on the percentage-of-completion
        method, either measured based on the proportion of costs recorded to date
        on the
        contract to total estimated contract costs or measured based on the proportion
        of labor hours expended to date on the contract to total estimated contract
        labor hours, as specified in the contract. Provisions for estimated losses
        on
        all contracts are made in the period in which such losses become known. Changes
        in job performance, job conditions, and estimated profitability, including
        those
        arising from contract penalty provisions, and final contract settlements
        may
        result in revision to cost and income and are recognized in the period in
        which
        the revisions are determined. Markland participates in teaming agreements
        where
        they are the primary contractor and they participate with other organizations
        to
        provide services to the Federal government. Markland has managerial and
        oversight responsibility for team members as well as the responsibility for
        the
        ultimate acceptability of performance under the contract. Markland includes
        as
        revenues the amounts that they bill under the teaming arrangements and include
        as direct costs amounts that are reimbursable or paid to team members
 
 **IMPACT
        OF RECENTLY ISSUED ACCOUNTING STANDARDS**
 
 In
        December 2004, the FASB issued SFAS No. 123(R) (revised 2004), Share-Based
        Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
        Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for
        Stock Issued to Employees, and Amends SFAS No. 95, Statement of Cash Flows.
        Generally, the approach in SFAS No. 123(R) is similar to the approach described
        in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments
        to
        employees, including grants of employee stock options, to be recognized in
        the
        income statement based on their fair values. Pro forma disclosure is not
        an
        alternative. SFAS No. 123(R) must be adopted no later than the first interim
        period for fiscal years beginning after December 15, 2005. We expect to adopt
        SFAS No. 123(R) on July 1, 2006.
 
 SFAS
        No.
        123(R) permits public companies to adopt its requirements using one of two
        methods: a “modified prospective” approach or a “modified retrospective”
        approach. Under the modified prospective approach, compensation cost is
        recognized beginning with the effective date based on the requirements of
        SFAS
        123(R) for all share-based payments granted after the effective date and
        the
        requirements of SFAS No. 123(R) for all awards granted to employees prior
        to the
        effective date of SFAS No. 123(R) that remain unvested on the effective date.
        The modified retrospective approach includes the requirements of the modified
        prospective approach but also permits entities to restate based on the amounts
        previously recognized under SFAS No. 123 for purposes of pro forma disclosures
        either for all prior periods presented or prior interim periods of the year
        of
        adoption. We are evaluating which method to adopt.
 
 As
        permitted by SFAS No. 123, we currently account for the share-based payments
        to
        employees using APB Opinion No. 25’s intrinsic value method and, as such,
        generally recognize no compensation cost for employee stock options. However,
        grants of stock to employees have always been recorded at fair value as required
        under existing accounting standards. We expect the adoption of SFAS No. 123(R)
        to have a material effect on its results of operations. Additionally, Our
        results of operations could be materially effected by share-based payments
        issued after the adoption of SFAS 123(R). The impact of the adoption of SFAS
        No.
        123(R) cannot be predicted at this time because it will depend on levels
        of
        share-based payments granted in the future. However, had we adopted SFAS
        No.
        123(R) in prior periods, the impact of that standard would have approximated
        the
        impact of SFAS No. 123 as described in Note 2 to our financial statements.
 
 SFAS
        No.
        123(R) also requires the benefits of tax deductions in excess of recognized
        compensation cost to be reported as a financing cash flow, rather than an
        operating cash flow under current accounting literature. Since we do not
        have
        the benefit of tax deductions in excess of recognized compensation cost,
        because
        of our net operating loss position, the change will have no immediate impact
        on
        our consolidated financial statements.
  30
  **RISK
        FACTORS**
  *Any
        investment in our common stock involves a high degree of risk. You should
        consider carefully the risks and uncertainties described below, and all other
        information contained in this report, before you decide whether to purchase
        our
        common stock.  The occurrence of any of the following risks could
        harm our
        business and may cause the trading price of our common stock to decline.
          As a result, you may lose part or all of your investment.*
 
 **RISKS
        RELATED TO MARKLAND’S OPERATING LOSSES**
 
 **Because
        we recently acquired EOIR Technologies, Inc., our most significant subsidiary,
        it is difficult to evaluate our business and future operating
        results.**
 
 We
        derive substantially all of our revenues from the operations of our subsidiary,
        EOIR. We acquired this company on June 30, 2004. Our limited operating history
        makes it difficult to evaluate our business and expected results.
 
 **We
        have a history of operating losses, and there is no assurance that we will
        achieve profitability in the future. If we do not achieve profitability,
        our
        financial condition and our stock price could suffer.**
 
 We
        have a history of operating losses.  We cannot predict when, or if,
        we will
        ever achieve profitability.  Our current business operations began
        in 2002
        and have resulted in losses in each fiscal year.  Our accumulated
        deficit
        as of June 30, 2005 was $48,240,148.  We will need to generate significant
        revenues to achieve profitability.  There can be no assurance that
        we will
        be able to do so.  Even if we do achieve profitability, we may not
        be able
        to sustain or increase profitability on a quarterly or annual basis in the
        future.  If we continue to experience operating losses, you may lose
        all or
        part of your investment.
 
 **If
        we cannot obtain additional capital required to fund our operations and finance
        our growth our business, operating results and financial condition may suffer
        and the price of our stock may decline.**
 
 The
        development of our technologies will require additional capital, and our
        business plan is to acquire additional revenue-producing assets. We incurred
        net
        losses applicable to our common stockholders of $30,471,059 and $15,095,461
        for
        the fiscal years ended June 30, 2005 and June 30, 2004, respectively.
        Additionally, net cash used in our operating activities for the year ended
        June
        30, 2005 was $2,135,917.  We may be unable to obtain additional funds
        in a
        timely manner or on acceptable terms, which would render us unable to fund
        our
        operations or expand our business. If we are unable to obtain capital when
        needed, we may have to restructure our business or delay or abandon our
        development and expansion plans. If this occurs, the price of our common
        stock
        may decline and you may lose part or all of your investment.
 
 Although
        we have been successful in the past in obtaining financing for working capital
        and acquisitions, we will have ongoing capital needs as we expand our business.
         If we raise additional funds through the sale of equity or convertible
        securities, your ownership percentage of our common stock will be reduced.
        In
        addition, these transactions may dilute the value of our common stock.  We
        may have to issue securities that have rights, preferences and privileges
        senior
        to our common stock.  The terms of any additional indebtedness may
        include
        restrictive financial and operating covenants that would limit our ability
        to
        compete and expand.
 
 **We
        have grown quickly; if we cannot effectively manage our growth, our business
        may
        suffer.**
 
 We
        have rapidly and significantly expanded operations through the acquisitions
        of
        Science Technology Research Corporation ("STR") in October 2003, EOIR in
        June
        2004 and Genex in February 2005.  This growth has placed, and is expected
        to continue to place, a strain on our personnel, management, financial and
        other
        resources.  Some of our officers have no prior senior management experience
        at public companies.  Our new employees include a number of key managerial,
        technical and operations personnel who have not yet been fully integrated
        into
        our operations.  To manage our growth effectively, we must, among
        other
        things:
 
 31
 
 ·
              upgrade
                  and expand our manufacturing facilities and capacity in a timely
                  manner;
 
 ·
              successfully
                  attract, train, motivate and manage a larger number of employees
                  for
                  manufacturing, sales and customer support
                  activities;
 
 ·
              control
                  higher inventory and working capital requirements;
                  and
 
 ·
              improve
                  the efficiencies within our operating, administrative, financial
                  and
                  accounting systems, procedures and
                  controls.
 
 To
        meet our growth objectives, among other things, we must attract and retain
        highly skilled technical, operational, managerial and sales and marketing
        personnel.  If we fail to attract and retain the necessary personnel,
        we
        may be unable to achieve our business objectives and may lose our competitive
        position, which could lead to a significant decline in net sales.  We
        face
        significant competition for these skilled professionals from other companies,
        research and academic institutions, government entities and other
        organizations.
 
 If
        we fail to manage our growth properly, we may incur unnecessary expenses
        and the
        efficiency of our operations may decline, adversely affecting our business
        and
        the price of our stock.
 
 **Future
        acquisitions of other companies, if any, may disrupt our business and additional
        expenses. As a result, our business could suffer.**
 
 We
        have completed the acquisitions of several companies including EOIR and Genex.
         We plan to review potential acquisition candidates, and our business
        and
        our strategy may include building our business through acquisitions. However,
        acceptable acquisition candidates may not be available in the future or may
        not
        be available on terms and conditions acceptable to us.
 
 Acquisitions
        involve numerous risks including among others, difficulties and expenses
        incurred in the consummation of acquisitions and assimilations of the
        operations, personnel, and services and products of the acquired companies.
        Additional risks associated with acquisitions include the difficulties of
        operating new businesses, the diversion of management's attention from other
        business concerns and the potential loss of key employees of the acquired
        company. If we do not successfully integrate the businesses we may acquire
        in
        the future, our business will suffer.
 
 **If
        we fail to realize some or all of the anticipated benefits from our acquisition
        of EOIR, our business will suffer.**
 
 Our
        combined company may fail to realize some or all of the anticipated benefits
        and
        synergies of the transaction as a result of, among other things, lower than
        expected order rates from customers of EOIR, unanticipated costs, deterioration
        in the U.S. economy and other factors. There can be no assurance that we
        will
        receive new orders under our existing contract with the United States Army
        Night
        Vision and Electronic Sensors Directorate.
 
 **Our
        current and future expected revenues are derived from a small number of
        customers within the U.S. government such that the loss of any one ultimate
        customer could materially reduce our revenues. As a result, our financial
        condition and our stock price would be adversely affected.**
 
 During
        the fiscal year ended June 30, 2005, we derived substantially all of our
        revenue
        from contracts with the U.S. Government, including the DOD, Homeland Security
        and various INTEL within the U.S. Government. We have a contract with the
        United
        States Army Night Vision and Electronic Sensors Directorate that may provide
        for
        revenues of up to approximately $406,000,000 depending upon the U.S. Army's
        needs of which our subsidiary, EOIR, recognized in excess of approximately
        $56.2
        million in revenues for the year ended June 30, 2005.  We expect this
        contract to account for a substantial majority of our revenues going forward.
 
 32
  The
        loss of this customer due to cutbacks, competition, or other reasons would
        materially reduce our revenue base. Annual or quarterly losses may occur
        if
        there are material gaps or delays in orders from one of our largest customers
        that are not replaced by other orders or other sources of income.
 
 **Many
        of our technologies are unproven and their success in the marketplace is
        unknown. If we do not successfully exploit these technologies, our business
        and
        our prospects would be adversely affected.**
 
 Although
        we currently sell automatic chemical detection and alarm systems, we do not
        know
        for how long the U.S. Navy will continue to buy this product, nor do we know
        if
        we will be able to sell this product or others like it to other customers.
        If we
        do not successfully exploit our technology, our financial condition, results
        of
        operations and business prospects would be adversely affected.
 
 The
        development of our technology is subject to factors beyond our control,
        including the production of components by our suppliers. We do not have long
        term supply agreements. As a result, products incorporating our technology
        may
        not be successfully and timely produced by our original equipment manufacturers
        due to the inherent risk of technology development, new product introduction,
        limitations on financing, competition, obsolescence, loss of key technical
        personnel or other factors. The development and introduction of our technologies
        could be subject to additional delays. For instance, unanticipated technical
        obstacles can arise at any time and result in lengthy and costly delays or
        a
        determination that further exploitation is unfeasible.
 
 **Some
        of our competitors are much larger than we are, have better name recognition
        than we do and have far greater financial and other resources than we do.
        If we
        cannot effectively compete, our business may suffer and the price of our
        stock
        would decrease.**
 
 With
        the U.S. government's large appropriation of money for homeland security
        programs, many companies are competing for the same homeland security contracts
        and there can be no assurance that Markland will effectively compete with
        large
        companies who have more resources and funds than we do. Several companies
        have
        been working on issues relevant to the safety of the American people for
        the
        past several years. Because of the services and additional human and financial
        resources that these larger companies can provide, they may be more attractive
        to the U.S. government. Lockheed Martin and Northrop Grumman are providers
        of
        hardware engineering and systems engineering solutions. Computer Sciences
        Corporation and EDS provide computer and computer software solutions. Defense
        companies, such as General Dynamics, Boeing and Raytheon, are solutions
        providers that could easily expand their businesses into the homeland security
        business and are currently allocating resources to develop programs in this
        area.
 
 **Our
        success depends on the services of our chief executive officer and chief
        operating officer. The loss of key personnel or any inability to attract
        and
        retain additional personnel could affect our ability to successfully grow
        our
        business.**
 
 Our
        future success depends to a significant degree on the skills and efforts
        of
        Robert Tarini, our Chief Executive Officer and Dr. Joseph P. Mackin, our
        President and Chief Operating Officer. If we lost the services of Mr. Tarini
        or
        Dr. Mackin, our business and operating results could be adversely affected.
        On
        December 30, 2004, we entered into a five year employment agreements with
        Mr.
        Tarini and Dr. Mackin, which were subsequently amended. We describe the terms
        of
        these agreements in this report in the section entitled "Employment Agreements."
  We
        also depend on the ability of our other executive officers and members of
        senior
        management to work effectively as a team. The loss of one or more of our
        executive officers or senior management members could impair our ability
        to
        manage our business effectively and could harm our business, prospects,
        financial condition and results of operations.
  33
  **Our
        management will spend time on other activities with other entities. As a
        result,
        our business may suffer, adversely affecting the price of our common
        stock.**
  Robert
        Tarini, our Chief Executive Officer, also serves as an officer and director
        of
        other entities. These entities include Technest Holdings, Inc., Syqwest,
        Inc.,
        ipPartners, Inc., and Ocean Data Equipment Corporation. These entities may
        share
        similar investment objectives and policies. Dr. Mackin, our President and
        Chief
        Operating Officer, serves as President of Technest and Genex and the President
        and Chief Executive Officer of EOIR. Finally, Gino Pereira, our Chief Financial
        Officer is also the Chief Financial Officer of Technest and Genex. Mr. Tarini,
        Dr. Mackin and Mr. Pereira may disproportionately allocate their time and
        resources between these other entities and us. Neither our organizational
        documents nor our policies specify a minimum standard of time and attention
        that
        Mr. Tarini, Dr. Mackin and Mr. Pereira are required to devote to
        us.
 
 **Our
        largest customers are the DOD, Homeland Security, and various other INTEL
        whose
        operations are subject to unique political and budgetary constraints, involve
        competitive bidding, and our contacts with these customers may be subject
        to
        cancellation with or without penalty, which may produce volatility in our
        earnings and revenue.**
 
 Our
        largest customers are the DOD, Homeland Security, and various other INTEL.
        Due
        to political and budgetary processes and other scheduling delays that may
        frequently occur relating to the contract or bidding process, some government
        agency orders may be canceled or delayed, and the receipt of revenues or
        payments may be substantially delayed. This irregular and unpredictable revenue
        stream makes it difficult for our business to operate smoothly. Obtaining
        contracts from government agencies is challenging, and government contracts
        often include provisions that are not standard in private commercial
        transactions. For example, government contracts may:
 
 ·
              include
                  provisions that allow the government agency to terminate the contract
                  without penalty under some
                  circumstances;
 
 ·
              be
                  subject to purchasing decisions of agencies that are subject to
                  political
                  influence;
 
 ·
              contain
                  onerous procurement procedures; and
 
 ·
              be
                  subject to cancellation if government funding becomes
                  unavailable.
 
 In
        addition, federal government agencies routinely audit government contracts.
        These agencies review a contractor's performance on its contract, pricing
        practices, cost structure and compliance with applicable laws, regulations
        and
        standards. These audits may occur several years after completion of the audited
        work. An audit could result in a substantial adjustment to our revenues because
        we would not be reimbursed for any costs improperly allocated to a specific
        contract, and we would be forced to refund any improper costs already
        reimbursed. If a government audit uncovers improper or illegal activities,
        we
        may be subject to civil and criminal penalties and administrative sanctions,
        including termination of contracts forfeiture of profits, suspension of
        payments, fines and suspension or debarment from doing business with federal
        government agencies. In addition, our reputation could be harmed if allegations
        of impropriety were made against us.
 
 **Our
        business may suffer if we cannot protect our proprietary
        technology.**
 
 Our
        ability to compete depends significantly upon our patents, our trade secrets,
        our source code and our other proprietary technology.  Any misappropriation
        of our technology or the development of competing technology could seriously
        harm our competitive position, which could lead to a substantial reduction
        in
        net sales.
 
 The
        steps we have taken to protect our technology may be inadequate to prevent
        others from using what we regard as our technology to compete with us. Our
        patents could be challenged, invalidated or circumvented, in which case the
        rights we have under our patents could provide no competitive advantages.
        Existing trade secrets, copyright and trademark laws offer only limited
        protection. In addition, the laws of some foreign countries do not protect
        our
        proprietary technology to the same extent as the laws of the United States,
        which could increase the likelihood of misappropriation.  Furthermore,
        other companies could independently develop similar or superior technology
        without violating our intellectual property rights.
  34
  If
        we resort to legal proceedings to enforce our intellectual property rights,
        the
        proceedings could be burdensome, disruptive and expensive, distract the
        attention of management, and there can be no assurance that we would
        prevail.
  **Claims
        by others that we infringe their intellectual property rights could increase
        our
        expenses and delay the development of our business. As a result, our business
        and financial condition could be harmed.**
   Our
        industries are characterized by the existence of a large number of patents
        and
        frequent claims and related litigation regarding patent and other intellectual
        property rights. We cannot be certain that our products do not and will not
        infringe issued patents, patents that may be issued in the future, or other
        intellectual property rights of others.
  We
        do not conduct exhaustive patent searches to determine whether the technology
        used in our products infringes patents held by third parties. In addition,
        product development is inherently uncertain in a rapidly evolving technological
        environment in which there may be numerous patent applications pending, many
        of
        which are confidential when filed, with regard to similar
        technologies.
  We
        may face claims by third parties that our products or technology infringe
        their
        patents or other intellectual property rights. Any claim of infringement
        could
        cause us to incur substantial costs defending against the claim, even if
        the
        claim is invalid, and could distract the attention of our management. If
        any of
        our products are found to violate third-party proprietary rights, we may
        be
        required to pay substantial damages. In addition, we may be required to
        re-engineer our products or obtain licenses from third parties to continue
        to
        offer our products. Any efforts to re-engineer our products or obtain licenses
        on commercially reasonable terms may not be successful, which would prevent
        us
        from selling our products, and, in any case, could substantially increase
        our
        costs and have a material adverse effect on our business, financial condition
        and results of operations.
  **Fluctuations
        in our quarterly net sales and results of operations could depress the market
        price of our common stock.**
 
 Our
        future net sales and results of operations are likely to vary significantly
        from
        quarter to quarter due to a number of factors, many of which are outside
        our
        control. Accordingly, you should not rely on quarter-to-quarter comparisons
        of
        our results of operations as an indication of future performance. It is possible
        that our net sales or results of operations in a quarter will fall below
        the
        expectations of securities analysts or investors. If this occurs, the market
        price of our common stock could fall significantly. Our results of operations
        in
        any quarter can fluctuate for many reasons, including:
 
 ·
              Timing
                  of orders from our largest customers - the DOD, Homeland Security,
                  various
                  INTEL and the United States Night Vision and Electronic Sensors
                  Directorate;
 
 ·
              our
                  ability to manufacture, test and deliver products in a timely and
                  cost-effective manner;
 
 ·
              our
                  success in winning competitions for
                  orders;
 
 ·
              the
                  timing of new product introductions by us or our
                  competitors;
 
 ·
              the
                  mix of products we sell;
 
 ·
              competitive
                  pricing pressures; and
 
 ·
              general
                  economic climate.
 
 35
  A
        large portion of our expenses, including expenses for facilities, equipment,
        and
        personnel, are relatively fixed. Accordingly, if our net sales decline or
        do not
        grow as much as we anticipate, we might be unable to maintain or improve
        our
        operating margins. Any failure to achieve anticipated net sales could therefore
        significantly harm our operating results for a particular fiscal
        period.
 
 **RISKS
        RELATED TO THE DILUTIVE EFFECT OF OUR AGREEMENTS**
 **WITH
        INVESTORS AND OTHER ARRANGEMENTS**
 
 **You
        could suffer substantial dilution of your investment and our stock price
        could
        decline significantly if we issue substantial shares of our common stock
        (i)
        upon conversion of the outstanding Series D Preferred Stock, (ii) upon exercise
        of our warrants, (iii) upon conversion of our notes, (iv) pursuant to our
        employment agreements, consulting agreements and our equity compensation
        plans,
        (v) upon conversion of Series B Preferred Stock of
        Technest.**
 
 We
        are obligated to issue a substantial number of shares of common stock pursuant
        to the terms of the arrangements described above.  Should a significant
        number of these securities be issued, exercised or converted, the resulting
        increase in the amount of the common stock in the public market could have
        a
        substantial dilutive effect on our outstanding common stock. The conversion
        and
        exercise of a substantial amount of the aforementioned securities or the
        issuance of new shares of common stock may also adversely affect the terms
        under
        which we could obtain additional equity capital. The price, which we may
        receive
        for the shares of common stock, that are issuable upon conversion or exercise
        of
        such securities, may be less than the market price of the common stock at
        the
        time of such conversions or exercise.
 
 We
        cannot predict the actual number of shares of common stock that will be issued
        pursuant to these arrangements, in part, because the conversion price of
        some of
        these securities will fluctuate based on prevailing market conditions and
        we
        have not determined the total amount of advances we intend to draw.
         Nonetheless, we can estimate the number of shares of common stock
        that
        will be required to issue using the certain assumptions including (1) the
        recent
        price of our common stock of $0.0245 on October 11, 2005, (2) our recent
        average
        closing bid price of our common stock for the last five trading days ending
        October 11, 2005; (3) our recent closing bid price of our common stock for
        the
        last twenty trading days ending October 11, 2005, and (4) the number of shares
        outstanding as of October 11, 2005.
 
 ·
              As
                  of October 11, 2005, the outstanding Series D Preferred Stock would
                  convert into approximately 452,447,438 shares of our Common Stock,
                  our
                  secured convertible promissory notes would convert into approximately
                  24,587,303 shares of our common stock and we had warrants representing
                  the
                  right to purchase approximately 25,922,959 shares of our common
                  stock.
 
 ·
              In
                  addition, as provided in Section 2(b) of the Terms and Conditions
                  of the
                  September 21, 2004 and November 9, 2004 notes, interest payments
                  may be
                  made with shares in lieu of cash.  As of October 11, 2005,
                  we had
                  issued 3,269,166 shares of our common stock as payment of interest
                  accrued
                  on the notes.  As a result, existing investors will experience
                  significant dilution, and may experience further dilution if the
                  price of
                  our stock continues to decline.
 
 ·
              Our
                  2004 and 2005 equity compensation plans contemplate the issuance
                  of up to
                  50,000,000 shares of common stock to employees of the company.
                   As of
                  October 11, 2005, we have issued options exercisable into 14,220,893
                  shares of our common stock and 5,283,950 shares of our common stock
                  under
                  these plans.
 
 **Our
        stockholders will experience significant dilution upon the conversion of
        our
        Series D Preferred Stock because the Series D Preferred Stock converts at
        a
        discount to the market price of our common stock at the time of conversion.**
 
 36
  Shares
        of Series D preferred stock are convertible at the option of the stockholder
        at
        any time. The number of shares of our common stock into which each share
        of
        Series D preferred is convertible is determined by dividing $1,000 by the
        discounted bid price. The "discounted" bid price is the average closing bid
        price of our common stock during the five business days immediately preceding
        the conversion date multiplied by the applicable discount factor, as set
        forth
        below.
  **Average
                    Closing Bid Price (1)**
                **Discount
                    Factor**$15.00
                    or less
                80%more
                    than $15.00, but less than or equal to $30.00
                75%more
                    than $30.00, but less than or equal to $45.00
                70%more
                    than $45.00
                65%
  __________
 (1)  After
        an adjustment for a 1-for-60 reverse stock split effective October 27,
        2003.
 
 The
        Series D preferred stock can be converted only to the extent that the Series
        D
        stockholder and its affiliates will not, as a result of the conversion, hold
        in
        excess of 9.999% of the total outstanding shares of our common
        stock.
 
 There
        is an inverse relationship between our stock price and the number of shares
        issuable upon conversion or our Series D Preferred Stock. That is, as our
        stock
        price declines, we would be required to issue a greater number of shares
        upon
        conversion of the Series D Preferred Stock.  The conversion price
        is based
        on the then-existing market price.  This inverse relationship is
        demonstrated by the table set forth below, which shows the number
        of shares
        to be issued upon conversion of the Series D Preferred Stock at certain prices
        per share.
 
 **Average
                  Closing Price of Common Stock for Five Preceding Trading
                  Days**
              **Conversion
                  Price**
              **Shares
                  of Common Stock Issued upon Conversion of One Share of Series D
                  Preferred Stock**$0.04
              $0.032
              31,250$0.03
              $0.024
              41,667$0.02
              $0.016
              62,500$0.01
              $0.008
              125,000
  **Our
        stockholders will experience significant dilution upon the conversion of
        our 8%
        convertible notes issued on September 21, 2004 and November 9, 2004 because
        these notes convert at a discount to the market price of our common stock
        at the
        time of conversion.**
 
 All
        or any portion of the principal amount of the 8% convertible notes then
        outstanding together with any accrued and unpaid interest thereunder may
        be
        converted into shares of common stock at the conversion price, at the option
        of
        the holder of the notes, at any time and from time to time.  The number
        of
        shares issuable upon any conversion will be equal the outstanding principal
        amount of the note to be converted, divided by the conversion price on the
        conversion date, plus (if indicated in the applicable conversion notice)
        the
        amount of any accrued but unpaid interest on the note through the conversion
        date, divided by the conversion price on the conversion date.  As
        of March
        15, 2005, the conversion price of the notes has been adjusted to the lower
        of
        (i) $0.80 and (ii) a floating rate equal to 80% of average closing price
        per
        share of our common stock for the five trading days preceding conversion.
         Due to the conversion mechanics of the note, decreases in the conversion
        price result in an increase in the total number of shares issuable upon
        conversion.
 
 37
  The
        number of shares to be acquired by each of the holders of the notes upon
        conversion cannot exceed the number of shares that, when combined with all
        other
        shares of common stock and securities then owned by each holder and its
        affiliates, would result in any one of them owning more than 9.999% of our
        outstanding common stock at any point in time. The holders of the notes may
        not
        waive this limitation.
 
 There
        is an inverse relationship between our stock price and the number of shares
        issuable upon conversion or these convertible notes.  That is, as
        our stock
        price declines, we would be required to issue a greater number of shares
        upon
        conversion of these notes.  The conversion price is based on the
        then-existing market price.  This inverse relationship is demonstrated
        by
        the table set forth below, which shows the number of shares to be issued
        upon
        conversion of the notes at certain prices per share.
 
 **Average
                  Closing Price of Common Stock for Five Preceding Trading
                  Days**
              **Conversion
                  Price**
              **Shares
                  of Common Stock Issued per $1,000 Dollars of Note Principal
                  Converted**$0.04
              $0.032
              31,250$0.03
              $0.024
              41,667$0.02
              $0.016
              62,500$0.01
              $0.008
              125,000
 
 
 **OTHER
        RISKS RELATED TO OUR CAPITAL STRUCTURE, COMMON STOCK**
 
 **If
        we default on any of our outstanding notes, some or all of our assets could
        be
        liquidated, our operations will be disrupted and you may lose all or part
        of
        your investment.**
 
 All
        of our assets are subject to security agreements. Our obligations under notes
        issued to the former stockholders of EOIR, are secured by all the assets
        of EOIR
        and are guaranteed by Markland, and our obligations under the notes issued
        to
        the investors in our September 21, 2004 and November 9, 2004 private placements
        are secured by all of the assets of Markland and its subsidiaries - EOIR,
        Ergo
        Systems, Inc. ("Ergo") and STR. As a result, if we default under the terms
        of
        any of these notes, the holders of the notes could foreclose under the security
        interest and liquidate some or all of our assets.
 
 **Future
        sales by our stockholders may adversely affect our stock price and our ability
        to raise funds in new stock offerings.**
 
 Future
        sales of our common stock in the public market could lower the market price
        of
        our common stock. Such sales may also make it more difficult for us to sell
        equity securities or equity-related securities in the future at a time and
        price
        that our management deems acceptable or at all. Some of our shareholders
        hold
        securities issued and sold in private transactions in reliance upon exemptions
        from the registration requirements of the Securities Act.
 
 These
        securities may be resold in the public market only if the resale is registered
        or pursuant to an exemption from registration. As of October 11,
        2005:
 
 ·
              approximately
                  41,524,071 shares of our common stock are restricted securities;
                  and
 
 ·
              we
                  have four effective registration statements covering the resale
                  of up to
                  362,453,983 shares of our common stock.
  We
        do not know when these shares will be sold since sales will depend upon the
        market price for our common stock, the circumstances, needs and decisions
        of the
        selling stockholders, and other factors.
  38
 
 **The
        holders of our preferred stock have some rights and privileges that are senior
        to our common stockholders, and we may issue additional shares of preferred
        stock without stockholder approval that could adversely affect the price
        of our
        common stock.**
 
 Our
        board of directors has the authority to issue, without any further vote or
        action by you and the other common stockholders, a total of up to 5,000,000
        shares of preferred stock and to fix the rights, preferences, privileges,
        and
        restrictions, including voting rights, of the preferred stock, which typically
        are senior to the rights of the common stockholders. As of October 11, 2005,
        we
        have outstanding 30,000 shares of our Series A non-voting redeemable convertible
        preferred stock, 11,108 shares of our Series D convertible preferred stock
        and
        may, from time to time in the future, issue additional preferred stock for
        financing or other purposes with rights, preferences or privileges senior
        to the
        common stock. Your rights will be subject to, and may be adversely affected
        by,
        the rights of the holders of the preferred stock that have been issued or
        might
        be issued in the future. Preferred stock also could make it more difficult
        for a
        third party to acquire a majority of our outstanding voting stock. This could
        delay, defer or prevent a change in control.  Furthermore, holders
        of
        preferred stock may have other rights, including economic rights, senior
        to the
        holders of our common stock. As a result, the existence and issuance of
        preferred stock could have a material adverse effect on the market value
        of the
        common stock.
 
 **The
        issuance of preferred stock may entrench management or discourage a change
        of
        control.**
 
 Our
        Articles of Incorporation authorize the issuance of preferred stock that
        would
        have designations rights, and preferences determined from time to time by
        our
        Board of Directors. Accordingly, our Board of Directors is empowered, without
        stockholder approval, to issue preferred stock with dividends, liquidation,
        conversion, voting, or other rights that could adversely affect the voting
        power
        or other rights of the holders of our common stock.
 
 In
        the event of issuance, the preferred stock could be used, under some
        circumstances, as a method of discouraging, delaying or preventing a change
        in
        control of the company or, alternatively, granting the holders of preferred
        stock such rights as to entrench management. Current members of our management
        that are large stockholders and members of our Board may have interests that
        are
        different from other stockholders. Therefore, conflicting interests of some
        members of management and our stockholders may lead to stockholders desiring
        to
        replace these individuals. In the event this occurs and the holders of our
        common stock desired to remove current management, it is possible that our
        Board
        of Directors could issue preferred stock and grant the holders thereof such
        rights and preferences so as to discourage or frustrate attempts by the common
        stockholders to remove current management. In doing so, management would
        be able
        to severely limit the rights of common stockholders to elect the Board of
        Directors. In addition, by issuing preferred stock, management could prevent
        other shareholders from receiving a premium price for their shares as part
        of a
        tender offer.
  **We
        have never paid cash dividends on our capital stock, and we do not anticipate
        paying cash dividends in the foreseeable future.  Investors should
        not rely
        on an investment in our stock for the payment of cash
        dividends.**
 
 We
        have not paid cash dividends on any of our classes of capital stock to date,
        and
        we currently intend to retain our future earnings, if any, to fund the
        development and growth of our business. As a result, capital appreciation,
        if
        any, of our common stock will be your sole source of gain for the foreseeable
        future. Pursuant to the Purchase Agreement between Markland, DKR Soundshore
        Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd.,
        dated
        September 21, 2004, we have covenanted that so long as any of the notes issued
        pursuant to such agreement are outstanding, we will not declare, pay or make
        any
        provision for any cash dividend or cash distribution with respect to our
        common
        stock or preferred stock, without first obtaining the approval of the investors
        who are parties to the agreement.
  **Issuance
        of shares of common stock upon conversion of our Series D Preferred Stock
        and
        our September 21, 2004 and November 9, 2004 notes could have an adverse effect
        on our ability to make acquisitions with our common stock, thereby adversely
        affecting our business and future prospects.**
  39
  Our
        strategy is to grow through organic means by increasing acceptance by our
        customers of our present products and services offerings and also through
        acquisitions of assets that provide products or services to Homeland Security,
        DOD, or INTEL.   As we issue shares of common stock pursuant
        to our
        current obligations, we may not have sufficient shares of our common stock
        available to successfully attract and consummate future acquisitions.  It
        may be necessary for our stockholders to approve an increase of our authorized
        common stock in order to have sufficient authorized shares available to issue
        as
        consideration for acquisitions.  There can be no assurance that we
        will
        obtain shareholder approval to increase the number of authorized shares or
        that
        such approval will be timely.
  **The
        sale of material amounts of common stock could encourage short sales by third
        parties and further depress the price of our common stock.  As a result,
        you may lose all or part of your investment.**
  The
        significant downward pressure on our stock price caused by the sale of a
        significant number of registered shares could cause our stock price to decline,
        thus allowing short sellers of our stock an opportunity to take advantage
        of any
        decrease in the value of our stock. The presence of short sellers in our
        common
        stock may further depress the price of our common stock.
   **RISKS
        RELATING TO OUR INVESTMENT IN TECHNEST**
  **Technest's
        lack of operating history on which investors may evaluate its operations,
        prospects and ability to produce a return on investment makes an investment
        in
        Markland highly speculative.**
 
 Prior
        to February 14, 2005, Technest did not have any operations on which a potential
        investor may base an evaluation of its prospects and ability to operate Genex
        profitably. If Technest is unable to sustain profitable operations, Markland's
        return on its investment in Technest may suffer and the price of Markland's
        common stock may decline.
 
 **Robert
        Tarini is the Chief Executive Officer and Chairman of the Board of Directors
        of
        Technest and Markland.  In addition, Mr. Tarini, has an investment
        in
        Technest. Dr. Mackin and Mr. Pereira also serve as officers of Technest.
        Conflicts of interest could arise as a result of these overlapping positions.**
 
 Technest
        and Markland share similar investment objectives and policies. There may
        be
        instances where the business of these companies overlap or compete.  Mr.
        Tarini, Dr. Mackin and Mr. Pereira may disproportionately allocate time and
        resources between these other entities and us. Neither our organizational
        documents nor our policies specify a minimum standard of time and attention
        that
        these officers and directors, as applicable, are required to devote to us.
        However, we do not believe that having the same board of directors or doing
        business in the same markets will present a conflict of interest. There can
        be
        no assurances that there will be no conflicts of interest.  The board
        will
        endeavor to act in the best interests of each company.
 
 In
        addition, Mr. Tarini, through his wholly-owned company ipPartners, Inc.,
        is one
        of the investors that participated in the Genex Transactions. On February
        14,
        2005, ipPartners, Inc. received 143,678 shares of Technest Series B preferred
        stock, 143,678 shares of Technest Series C preferred stock convertible into
        143,678 shares of Technest common stock and warrants to purchase 143,678
        Technest common stock in exchange for $625,000.  On June 20, 2005,
        ipPartners, Inc. exchanged all of its Technest Series B preferred stock for
        625
        shares of Markland Series D preferred stock. On August 23, 2005, ipPartners
        converted its 625 shares of Markland Series D preferred stock into 6,510,417
        shares of Markland common stock. The resale of these shares of common stock
        were
        registered pursuant to a registration statement on Form SB-2 that was effective
        on August 10, 2005.
 
 **It
        may be difficult for us to resell shares of common stock of Technest if an
        active market for Technest common stock does not develop.**
 
 Due
        to the current price of Technest common stock, many brokerage firms may not
        be
        willing to effect transactions in its securities, particularly because
        low-priced securities are subject to SEC rules imposing additional sales
        requirements on broker-dealers who sell low-priced securities (generally
        defined
        as those having a per share below $5.00). These disclosure requirements may
        have
        the effect of reducing the trading activity in the secondary market for Technest
        common stock as it is subject to these penny stock rules. These factors severely
        limit the liquidity, if any, of Technest common stock, and will likely continue
        to have a material adverse effect on its market price and on our ability
        to
        raise additional capital through selling Technest common stock we
        hold.
  40
  The
        common stock of Technest is not actively traded on a securities exchange
        and
        will not be able to cause its securities to be listed because Technest does
        not
        meet the initial listing criteria for any registered securities exchange
        or the
        Nasdaq National Market System. The common stock of Technest is quoted on
        the
        less recognized OTC Bulletin Board. This factor may further impair our ability
        to sell our shares when we want and/or could depress the stock price of Technest
        common stock. As a result, we may find it difficult to dispose of, or to
        obtain
        accurate quotations of the price of, Technest common stock because smaller
        quantities of shares could be bought and sold, transactions could be delayed
        and
        security analyst and news coverage of our Technest may be limited. These
        factors
        could result in lower prices and larger spreads in the bid and ask prices
        for
        shares of Technest common stock.
 
 We
        cannot predict the extent to which investor interest in Technest common stock
        or
        a business combination, if any, will lead to an increase in its market price
        or
        the development of an active trading market or how liquid that market, if
        any,
        might become.
 
 **Markland
        may become an investment company if our controlling interest in Technest
        falls
        below 51%. If so, our compliance and registration costs will
        increase.**
 
 If
        Markland's ownership of Technest falls below 51%, Technest will no longer
        meet
        the definition of "majority-owned subsidiary" as contemplated by the Investment
        Company Act of 1940 (the "Investment Company Act") and Markland could be
        subject
        to regulation under the Investment Company Act. In such event, Markland may
        be
        required to register as an investment company, unless an exemption is available.
        We may incur significant registration and compliance costs and we may become
        subject to liability under the Investment Company Act, the Securities Act
        and
        the Exchange Act and rules and regulations adopted thereunder. Compliance
        with
        these rules could adversely affect Markland and Technest because it would
        require additional management and financial resources.  On October
        11,
        2005, Markland was the beneficial owner of 13,954,023 shares of Technest
        common
        stock (after giving effect to Technest's reverse stock split), which represented
        approximately 98% of the shares of Technest common stock on a primary
        basis.
 
 **RISKS
        RELATING TO INVESTING IN A CONTROLLED COMPANY**
 
 **Other
        business ventures of our Chief Executive Officer may present demands on his
        time
        or possible conflicts of interest which could materially and adversely affect
        our business.**
 
 Robert
        Tarini, our Chief Executive Officer and a Director of our company is involved
        in
        other business activities and may, in the future, become involved in additional
        business opportunities.  Mr. Tarini currently holds positions and
        is
        involved in the following activities.
 
 ·
              Mr.
                  Tarini is the founder and President of ipPartners, Inc., a firm
                  specializing in the design and manufacture of acoustic remote sensing
                  devices utilized in marine and land based applications. He is also
                  the
                  sole shareholder.
 
 ·
              Mr.
                  Tarini is the Chief Executive Officer, the Chief Operating Officer
                  and a
                  minority shareholder of Syqwest, Inc., a company that specializes
                  in the
                  development of acoustic remote sensing
                  devices.
 
 ·
              Since
                  1999, Mr. Tarini has served as the Chief Executive Officer of Ocean
                  Data
                  Equipment Corporation, where he has overseen the design and development
                  of
                  a complete line of scientific instruments targeted for geophysical
                  and
                  hydrographic research, and developed a remote sensing technique,
                  which is
                  currently being developed for application in detecting illicit
                  materials.
                  He is also a minority shareholder.
 
 ·
              On
                  February 14, 2005, Mr. Tarini was appointed Chief Executive Officer
                  and a
                  director of Technest.
 
 Mr.
        Tarini may face a potential conflict of interest in how he allocates his
        available time to each company. We have not formally adopted a plan to resolve
        any potential or actual conflicts of interest that exist or that may arise
        related to this matter. There can be no assurance that we will have a policy
        in
        place to address potential conflicts of interests.
 
 41
  **RISKS
        RELATED TO THE HOMELAND SECURITY AND DEFENSE INDUSTRIES**
 
 **The
        homeland security and defense industries are characterized by rapid
        technological change and evolving industry standards, and unless we keep
        pace
        with the changing technologies, we could lose customers and fail to win new
        customers.**
 
 Our
        future success will depend, in part, upon our ability to develop and introduce
        a
        variety of new products and services and enhancements to these new product
        and
        services in order to address the changing and sophisticated needs of the
        homeland security marketplace. Delays in introducing new products, services
        and
        enhancements, the failure to choose correctly among technical alternatives
        or
        the failure to offer innovative products and services at competitive prices
        may
        cause customers to forego purchases of our products and services and purchase
        those of our competitors. Frequently, technical development programs in the
        homeland security industry require assessments to be made of the future
        directions of technology and technology markets generally, which are inherently
        risky and difficult to predict.
 
 **We
        face intense competition, which could result in lower revenues and higher
        research and development expenditures and could adversely affect our results
        of
        operations.**
 
 Current
        political tensions throughout the world have heightened interest in the homeland
        security industry, and we expect competition in this field, which is already
        substantial, to intensify. If we do not develop new and enhanced products,
        or if
        we are not able to invest adequately in our research and development activities,
        our business, financial condition and results of operations could be negatively
        impacted. Many of our competitors have significantly more cash and resources
        than we have. Our competitors may introduce products that are competitively
        priced, have increased performance or functionality, or incorporate
        technological advances that we have not yet developed or implemented. To
        remain
        competitive, we must continue to develop, market and sell new and enhanced
        systems and products at competitive prices, which will require significant
        research and development expenditures.
 
 We cannot assure you that we will be able to compete successfully against
        current and future competitors.
  
 **RISKS
        RELATING TO NEW CORPORATE GOVERNANCE STANDARDS**
 
 **We
        are not subject to the same corporate governance standards as listed companies.
        This may affect market confidence and company performance. As a result, our
        business could be harmed and the price of our stock could
        decrease.**
 
 Registered
        exchanges and the Nasdaq National Market have adopted enhanced corporate
        governance requirements that apply to issuers that list their securities
        on
        those markets. These standards deal with the rights and responsibilities
        of a
        company's management, its board, shareholders and various stakeholders. How
        well
        companies are run may affect market confidence as well as company performance.
        Our common stock is quoted on the OTC Bulletin Board, which does not have
        comparable requirements. As a result, our business and the price of our stock
        may be adversely affected.
 
 For
        instance, we are not required to have any independent directors and we do
        not
        have independent directors. Therefore management has significant influence
        over
        decisions made by the Board on behalf of the stockholders.
 
 42
  In
        some circumstances, management may not have the same interests as the
        shareholders and conflicts of interest may arise. We do not have a policy
        to
        resolve conflicts of interest and we are not required to have one.
        Notwithstanding the exercise of their fiduciary duties as directors and
        executive officers and any other duties that they may have to us or our other
        stockholders in general, these persons may have interests different than
        yours.
 
 **Our
        administrative costs and expenses resulting from new regulations have increased,
        adversely affecting our financial condition and results of
        operations.**
 
 We
        face new corporate governance requirements under the Sarbanes-Oxley Act of
        2002
        and SEC rules adopted thereunder. These regulations increased our legal and
        financial compliance and made some activities more difficult, time-consuming
        and
        costly. Our expenses will continue to increase as we continue to implement
        these
        new regulations.
 
 **New
        corporate governance requirements have made it more difficult to attract
        qualified directors. As a result, our business may be harmed and the price
        of
        our stock may be adversely affected**
 
 New
        corporate governance requirements have increased the role and responsibilities
        of directors and executive officers of public companies. These new requirements
        will make it more difficult and more expensive for us to obtain director
        and
        officer liability insurance. We may be required to accept reduced coverage
        or
        incur significantly higher costs to obtain coverage. As a result, it may
        be more
        difficult for us to attract and retain qualified individuals to serve as
        members
        of our board of directors.
 
 **If
        we fail to maintain effective internal controls over financial reporting,
        the
        price of our common stock may be adversely affected.**
 
 We
        are required to establish and maintain appropriate internal controls over
        financial reporting. Our internal controls over financial reporting may have
        weaknesses and conditions that need to be addressed, the disclosure of which
        may
        have an adverse impact on the price of our common stock.
 
 Failure
        to establish those controls, or any failure of those controls once established,
        could adversely impact Markland's public disclosures regarding our business,
        financial condition or results of operations. In addition, management's
        assessment of internal controls over financial reporting may identify weaknesses
        and conditions that need to be addressed in our internal controls over financial
        reporting or other matters that may raise concerns for investors. Any actual
        or
        perceived weaknesses and conditions that need to be addressed, disclosure
        of
        management's assessment of our internal controls over financial reporting
        or
        disclosure of our independent registered public accounting firm's attestation
        to
        or report on management's assessment of our internal controls over financial
        reporting may have an adverse impact on the price of our common
        stock.
 
 **Standards
        for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain,
        and if we fail to comply in a timely manner, our business could be harmed
        and
        our stock price could decline.**
 
 Rules
        adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
        require annual assessment of our internal control over financial reporting,
        and
        attestation of this assessment by our independent registered public accountant.
        We expect that this requirement will first apply to our annual report for
        the
        fiscal year ending June 30, 2007. The standards that must be met for management
        to assess the effectiveness of the internal control over financial reporting
        are
        new and complex, and require significant documentation, testing and possible
        remediation to meet the detailed standards. We may encounter problems or
        delays
        in completing activities necessary to make an assessment of its internal
        control
        over financial reporting. In addition, we may encounter problems or delays
        in
        completing the implementation of any requested improvements and receiving
        an
        attestation of its assessment by our independent registered public accountants.
        If management cannot assess Markland's internal control over financial reporting
        as effective, or our independent registered public accounting firm is unable
        to
        issue an unqualified attestation report on such assessment, investor confidence
        and share value may be negatively impacted.
  43
  **RISKS
        RELATED TO INVESTING IN ILLIQUID AND LOW-PRICED SECURITIES**
 
 **Our
        common stock is deemed to be "penny stock," which may make it more difficult
        for
        investors to sell these shares due to suitability and disclosure
        requirements.**
 
 Due
        to the current price of our common stock ($0.0245 on October 11, 2005), many
        brokerage firms may not be willing to effect transactions in our securities,
        particularly because low-priced securities are subject to SEC rules (referred
        to
        as the "penny stock rules") imposing additional sales requirements on
        broker-dealers who sell low-priced securities (generally defined as those
        having
        a per share price below $5.00). These disclosure requirements may have the
        effect of reducing the trading activity in the secondary market for Markland
        common stock as it is subject to these penny stock rules. These rules severely
        limit the liquidity, if any, of our common stock, and will likely continue
        to
        have a material adverse effect on our market price and on our ability to
        raise
        additional capital through selling Markland common.
 
 The
        penny stock rules require a broker-dealer, prior to a transaction in a penny
        stock, to deliver a standardized risk disclosure document prepared by the
        Commission, that: (a) contains a description of the nature and level of risk
        in
        the market for penny stocks in both public offerings and secondary trading;
        (b)
        contains a description of the broker's or dealer's duties to the customer
        and of
        the rights and remedies available to the customer with respect to a violation
        to
        such duties or other requirements of Securities' laws; (c) contains a brief,
        clear, narrative description of a dealer market, including bid and ask prices
        for penny stocks and the significance of the spread between the bid and ask
        price; (d) contains a toll-free telephone number for inquiries on disciplinary
        actions; (e) defines significant terms in the disclosure document or in the
        conduct of trading in penny stocks; and (f) contains such other information
        and
        is in such form, including language, type, size and format, as the SEC may
        require by rule or regulation.
 
 In
        addition, the broker-dealer also must provide, prior to effecting any
        transaction in a penny stock, the customer with: (a) bid and ask quotations
        for
        the penny stock; (b) the compensation of the broker-dealer and its salesperson
        in the transaction; (c) the number of shares to which such bid and ask prices
        apply, or other comparable information relating to the depth and liquidity
        of
        the market for such stock; and (d) monthly account statements showing the
        market
        value of each penny stock held in the customer's account.
 
 Finally,
        the penny stock rules require that prior to a transaction in a penny stock
        not
        otherwise exempt from those rules, the broker-dealer must make a special
        written
        determination that the penny stock is a suitable investment for the purchaser
        and receive the purchaser's written acknowledgment of the receipt of a risk
        disclosure statement, a written agreement to transactions involving penny
        stocks, and a signed and dated copy of a written suitability
        statement.
 
 These
        requirements may reduce the potential market for our common stock by reducing
        the number of potential investors, brokers and traders. This may make it
        more
        difficult for investors in our common stock to sell shares to third parties
        or
        to otherwise dispose of them. This could cause our stock price to
        decline.
 
 We
        cannot predict the extent to which investor interest in Technest common stock
        or
        a business combination, if any, will lead to an increase in its market price
        or
        the development of an active trading market or how liquid that market, if
        any,
        might become.
 
 **It
        may be difficult for you to resell your shares if an active and liquid market
        for our common stock does not develop.**
 
 Our
        common stock is not actively traded on a securities exchange and we do not
        meet
        the initial listing criteria for any registered securities exchange or the
        Nasdaq National Market System. It is quoted on the less recognized OTC Bulletin
        Board. This factor may further impair your ability to sell your shares when
        you
        want and/or could depress our stock price. As a result, you may find it
        difficult to dispose of, or to obtain accurate quotations of the price of,
        our
        securities because smaller quantities of shares could be bought and sold,
        transactions could be delayed and security analyst and news coverage of our
        company may be limited. These factors could result in lower prices and larger
        spreads in the bid and ask prices for our shares.
 
 44
  Due
        to the current price of our common stock, many brokerage firms may not be
        willing to effect transactions in our securities, particularly because
        low-priced securities are subject to an SEC rule that imposes additional
        sales
        requirements on broker-dealers who sell low-priced securities (generally
        defined
        as those having a per share price below $5.00).
 
 These
        factors severely limit the liquidity of our common stock, and would likely
        have
        a material adverse effect on its market price and on our ability to raise
        additional capital. We cannot predict the extent to which investor interest
        in
        our stock, if any, will lead to an increase in its market price or the
        development of a more active trading market or how liquid that market might
        become.
 
 **The
        market price of our common stock may be volatile. As a result, you may not
        be
        able to sell our common stock in short time periods, or possibly at
        all.**
 
 Our
        stock price has been volatile. From July 1, 2003 to October 11, 2005, the
        trading price of our common stock ranged from a low price of $0.0245 per
        share
        to a high price of $9.00 per share. Many factors may cause the market price
        of
        our common stock to fluctuate, including:
 
 ·
              variations
                  in our quarterly results of
                  operations;
 
 ·
              the
                  introduction of new products by us or our
                  competitors;
 
 ·
              acquisitions
                  or strategic alliances involving us or our
                  competitors;
 
 ·
              future
                  sales of shares of common stock in the public market;
                  and
 
 ·
              market
                  conditions in our industries and the economy as a
                  whole.
  In
        addition, the stock market has recently experienced extreme price and volume
        fluctuations. These fluctuations are often unrelated to the operating
        performance of particular companies. These broad market fluctuations may
        adversely affect the market price of our common stock. When the market price
        of
        a company's stock drops significantly, stockholders often institute securities
        class action litigation against that company. Any litigation against us could
        cause us to incur substantial costs, divert the time and attention of our
        management and other resources or otherwise harm our business.
  45
  **ITEM
          7.****FINANCIAL
          STATEMENTS**
  **INDEX
          TO FINANCIAL STATEMENTS**
 Page**Report
                    Of Independent Registered Public Accounting Firm And Consolidated
                    Financial****Statements
                    For Markland Technologies, Inc. And Subsidiaries****For
                    The Years Ended June 30, 2005 and 2004**Report
                    of Independent Registered Public Accounting
                    Firm.
                F-2Consolidated
                    Balance Sheet at June 30,
                    2005
                F-3Consolidated
                    Statements of Loss for the Years
                    Ended June 30, 2005 and 2004
                F-4Consolidated
                    Statements of Stockholders' Equity
                    for the Years Ended June 30, 2005 and 2004
                F-5Consolidated
                    Statements of Cash Flows for the Years Ended
                    June 30, 2005 and 2004
                F-11Notes
                    to Consolidated Financial
                    Statements
                F-14
 
 
 F-1
 
 **REPORT
          OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
          FIRM**
 
 To
          the
          Board of Directors
 Markland
          Technologies, Inc. and Subsidiaries
 Providence,
          Rhode Island
 
 We
          have
          audited the consolidated balance sheet of Markland Technologies, Inc. and
          subsidiaries as of June 30, 2005, and the related consolidated statements
          of
          loss, stockholders' equity and cash flows for the years ended June 30,
          2005 and
          2004. 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 audit to obtain reasonable assurance about whether the
          financial
          statements are free of material misstatement. An audit includes examining,
          on a
          test basis, evidence supporting the amounts and disclosures in the financial
          statements. An audit also includes assessing the accounting principles
          used and
          significant estimates made by management, as well as evaluating the overall
          financial statement presentation. We believe that our audits provided a
          reasonable basis for our opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the financial position of Markland Technologies,
          Inc.
          and subsidiaries as of June 30, 2005 and the results of their operations
          and
          their cash flows for the years ended June 30, 2005 and 2004 in conformity
          with
          accounting principles generally accepted in the United States of
          America.
 
 
 /S/
          WOLF & COMPANY, P.C.
 
 
 Boston,
          Massachusetts
 October
          11, 2005
 
 F-2
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Balance Sheet**
 **At
          June 30, 2005**
 **Assets****Current
                    Assets:**Cash
                
                $
                6,824,444Accounts
                    receivable
                
                
                7,651,605Inventory
                    and work in process
                
                
                376,787Restricted
                    cash
                
                
                251,204Other
                    current assets
                
                
                316,938**Total
                    Current Assets**
                
                
                15,420,978**Property
                    and Equipment,**net
                
                
                908,294**Other
                    Assets**Deferred
                    financing costs, net
                
                
                169,204Amortizable
                    intangible assets, net
                
                
                13,405,341Goodwill
                
                
                14,035,551**Total
                    Other Assets**
                
                
                27,610,096**Total
                    Assets**
                
                $
                43,939,368**Liabilities
                    and Stockholders' Equity****Current
                    Liabilities:**Accounts
                    payable
                
                $
                10,822,385Accrued
                    expenses and other current liabilities
                
                
                3,018,806Customer
                    deposits
                
                
                1,530Convertible
                    secured notes -net of discount of $169,615
                
                
                3,490,375Current
                    portion of long-term debt
                
                
                709,943**Total
                    Current Liabilities**
                
                
                18,043,039**Non-Current
                    Liabilities:**Long-term
                    debt, less current portion and discount of $1,174,365
                
                
                7,633,879**Total
                    Liabilities**
                
                
                25,676,918**Minority
                    interest**
                
                
                5,156,158**Commitments
                    and Contingencies****Stockholders'
                    Equity:**Series
                    A redeemable convertible preferred stock - no par value;   
                    30,000 authorized, issued and outstanding; liquidation preference
                    of
                    $300,000
                
                
                300,000Series
                    C 5% cumulative convertible preferred stock - $.0001 par value;
                       8,000 authorized; none issued and
                    outstanding
                
                
                --Series
                    D convertible preferred stock - $.0001 par value; 40,000 authorized;
                  12,598 issued and outstanding; liquidation preference of
                    $9,848,000
                
                
                1Common
                    stock - $.0001 par value; 500,000,000 authorized;   
                    184,215,208 shares issued and outstanding
                
                
                18,421Additional
                    paid-in capital
                
                
                75,375,199Unearned
                    compensation
                
                
                (13,778,331
                )Accumulated
                    deficit
                
                
                (48,808,998
                )**Total
                    Stockholders' Equity**
                
                
                13,106,292**Total
                    Liabilities and Stockholders' Equity**
                
                $
                43,939,368
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  
 F-3
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Loss**
 **For
                    the Years Ended****June
                    30,****2005**
                
                **2004****Revenues**
                
                $
                66,694,787
                
                $
                6,013,930**Cost
                    of Revenues**
                
                
                52,846,275
                
                
                4,674,593Gross
                    Profit
                
                
                13,848,512
                
                
                1,339,337**Operating
                    Expenses:**Selling,
                    general and administrative
                
                
                20,339,419
                
                
                5,313,448Research
                    & development
                
                
                2,799,665
                
                
                49,289Amortization
                    of compensatory element of stock issuances for selling,   
                    general and administrative expenses
                
                
                5,605,859
                
                
                5,211,737Amortization
                    of intangible assets
                
                
                3,766,317
                
                
                915,729**Total
                    Operating Expenses**
                
                
                32,511,260
                
                
                11,490,203**Operating
                    Loss**
                
                
                (18,662,748
                )
                
                (10,150,866
                )**Other****(Expenses)
                    Income****,
                    Net:**Interest
                    expense
                
                
                (10,129,168
                )
                
                (360,347
                )Other
                    income
                
                
                75,861
                
                
                --**Total
                    Other (Expenses) Income, Net**
                
                
                (10,053,307
                )
                
                (360,347
                )**Net
                    Loss Before Minority Interest**
                
                
                (28,716,055
                )
                
                (10,511,213
                )**Minority
                    Interest**
                
                
                (1,983,853
                )
                
                --**Net
                    Loss After Minority Interest**
                
                
                (30,699,908
                )
                
                (10,511,213
                )**Deemed
                    Dividend to Preferred Stockholders**-
                    Series C
                
                
                --
                
                
                844,270**Deemed
                    Dividend to Preferred Stockholders**-
                    Series D
                
                
                340,000
                
                
                3,555,500**Preferred
                    Stock Dividend**-
                    Series C
                
                
                --
                
                
                184,478**Net
                    Loss Applicable to Common Stockholders**
                
                $
                (31,039,908
                )
                $
                (15,095,461
                )**Basic
                    and Diluted Loss per Common Share:**
                
                $
                (0.40
                )
                $
                (1.39
                )**Weighted
                    Average Number of Common Shares Outstanding**
                
                
                78,133,314
                
                
                10,872,049
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
   F-4
 
 **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Stockholders’
          Equity**
 **For
          The Years Ended June 30, 2005 and 2004**
  **Common
                    Stock**
                
                **Series
                    A Convertible**
                  **Preferred
                    Stock**
                
                **Series
                    C Convertible**
                  **Preferred
                    Stock****Shares
                    (1)**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**Balance
                    - July 1, 2003
                
                
                3,671,573
                
                
                367
                
                
                30,000
                
                
                300,000
                
                
                5,395
                
                
                1Issuance
                    of Series D convertible preferred    
                    stock
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Conversion
                    of Series C convertible preferred stock and accrued dividends
                    into common
                    stock
                
                
                5,156,412
                
                
                516
                
                
                —
                
                
                —
                
                
                (5,395
                )
                
                (1
                )Conversion
                    of promissory note intocommon
                        stock
                
                
                404,266
                
                
                40
                
                
                —
                
                
                —
                
                
                —
                
                
                —Conversion
                    of Series D convertible preferred stock into common stock
                
                
                604,839
                
                
                60
                
                
                —
                
                
                —
                
                
                —
                
                
                —Stock
                    issued in connection with settlement of liabilities to a related
                    party
                
                
                750,000
                
                
                75
                
                
                —
                
                
                —
                
                
                —
                
                
                —Stock
                    issued in connection with consulting and employment
                    agreements
                
                
                6,122,008
                
                
                612
                
                
                —
                
                
                —
                
                
                —
                
                
                —Common
                    stock issued in conjunctionwith
                    acquisition of ASI assets
                
                
                325,833
                
                
                33
                
                
                —
                
                
                —
                
                
                —
                
                
                —Common
                    stock issued in conjunctionwith
                    acquisition of Science andTechnology
                    Research Corporation, Inc.
                
                
                1,589,779
                
                
                154
                
                
                —
                
                
                —
                
                
                —
                
                
                —Amortization
                    of employment and consulting  
                     agreements
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Common
                    stock and warrant issuances - in private placements
                
                
                13,232,083
                
                
                1,323
                
                
                —
                
                
                —
                
                
                —
                
                
                —Intrinsic
                    value of options issued in connection with EOIR
                    acquisition
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Net
                    loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Balance
                    - June 30, 2004
                
                
                31,856,793
                
                
                3,180
                
                
                30,000
                
                
                300,000
                
                
                —
                
                
                —
 
 (1)
                Share
                    amounts have been restated to reflect the 1-60 reverse stock
                    split
                    effected on October 27, 2003.
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 F-5
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Stockholders’ Equity**
 **For
          The Years Ended June 30, 2005 and 2004**
  **Series
                    D Convertible**
                  **Preferred
                    Stock**
                
                **Unearned
                    Compensation****Shares**
                
                **Amount**
                
                **Amount**Balance
                    - July 1, 2003
                
                
                16,430
                
                
                2
                
                
                (4,381,379
                )Issuance
                    of Series D convertible preferred stock
                
                
                7,166
                
                
                —
                
                
                —Conversion
                    of Series C convertible preferred stock and accrued    
                    dividends into common stock
                
                
                —
                
                
                —
                
                
                —Conversion
                    of promissory note into common stock
                
                
                —
                
                
                —
                
                
                —Conversion
                    of Series D convertible preferred stock into common stock
                
                
                (810
                )
                
                —
                
                
                —Stock
                    issued in connection with settlement of liabilities to a related
                    party
                
                
                —
                
                
                —
                
                
                —Stock
                    issued in connection with consulting and employment
                    agreements
                
                
                —
                
                
                —
                
                
                (12,006,474
                )Common
                    stock issued in conjunction with acquisition of ASI assets
                
                
                —
                
                
                —
                
                
                —Common
                    stock issued in conjunction with acquisition of Science and Technology
                    Research Corporation, Inc.
                
                
                —
                
                
                —
                
                
                —Amortization
                    of employment and consulting agreements
                
                
                —
                
                
                —
                
                
                5,211,737Common
                    stock and warrant issuances - in private placements
                
                
                —
                
                
                —
                
                
                —Intrinsic
                    value of options issued in connection with EOIR
                    acquisition
                
                
                —
                
                
                —
                
                
                (4,000,000
                )Net
                    loss
                
                
                —
                
                
                —
                
                
                —Balance
                    - June 30, 2004
                
                
                22,786
                
                
                2
                
                
                (15,176,116
                )
 
 (1)
                Share
                    amounts have been restated to reflect the 1-60 reverse stock
                    split
                    effected on October 27, 2003.
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 F-6
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statement of Stockholders’ Equity**
 **For
          The Years Ended June 30, 2005 and 2004**
 
 **Additional**
                  **Paid-in
                    Capital**
                
                **Accumulated**
                  **Deficit**
                
                **Total**
                  **Stockholders’**
                  **Equity****Amount**
                
                **Amount**
                
                **Amount**Balance
                    - July 1, 2003
                
                
                13,900,104
                
                
                (9,772,735
                )
                
                46,360Issuance
                    of Series D convertible preferred stock
                
                
                5,401,970
                
                
                —
                
                
                5,401,970Conversion
                    of Series C convertible preferred stock and accrued    
                    dividends into common stock
                
                
                (515
                )
                
                —
                
                
                —Conversion
                    of promissory note into common stock
                
                
                518,419
                
                
                —
                
                
                518,459Conversion
                    of Series D convertible preferred stock into common stock
                
                
                (60
                )
                
                —
                
                
                —Stock
                    issued in connection with settlement of liabilities to a related
                    party
                
                
                449,925
                
                
                —
                
                
                450,000Stock
                    issued in connection with consulting employment agreements
                
                
                12,286,331
                
                
                —
                
                
                280,469Common
                    stock issued in conjunction with acquisition of ASI assets
                
                
                916,692
                
                
                —
                
                
                916,725Common
                    stock issued in conjunction with acquisition of Science and Technology
                    Research Corporation, Inc.
                
                
                5,166,346
                
                
                —
                
                
                5,166,500Amortization
                    of employment and consulting agreements
                
                
                —
                
                
                —
                
                
                5,211,737Common
                    stock and warrant issuances - in private placements
                
                
                8,225,506
                
                
                —
                
                
                8,226,829Intrinsic
                    value of options issued in connection with EOIR
                    acquisition
                
                
                4,000,000
                
                
                —
                
                
                —Net
                    loss
                
                
                —
                
                
                (10,511,213
                )
                
                (10,511,213
                )Balance
                    - June 30, 2004
                
                
                50,864,718
                
                
                (20,283,948
                )
                
                15,707,836
 
 (1)
                Share
                    amounts have been restated to reflect the 1-60 reverse stock
                    split
                    effected on October 27, 2003.
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  
 F-7
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Stockholders’ Equity**
 **For
          The Years Ended June 30, 2005 and 2004**
 
 **Series
                    A Convertible**
                
                **Series
                    C Convertible****Common
                    Stock**
                
                **Preferred
                    Stock**
                
                **Preferred
                    Stock****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**Balance
                    - July 1, 2004
                
                
                31,856,793
                
                $
                3,180
                
                
                30,000
                
                $
                300,000
                
                
                --
                
                $
                --Conversion
                      of Series D convertible preferred stock into common
                      stock
                
                
                73,810,693
                
                
                7,383
                
                
                --
                
                
                --
                
                
                --
                
                
                --Stock,
                      options and warrants issued in connection withconsulting
                      and employment agreements
                
                
                34,879,663
                
                
                3,489
                
                
                --
                
                
                --
                
                
                --
                
                
                --Amortization
                      of employment andconsulting  
                       agreements
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Cancellation
                    of warrant and employment     agreement
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                -
                
                
                -Stock
                      issued in connection with reset rights of private placement
                      investors
                
                
                833,333
                
                
                84
                
                
                --
                
                
                --
                
                
                --
                
                
                --Stock
                      issued in connection with conversionof promissory
                      notes
                
                
                20,469,871
                
                
                2,048
                
                
                --
                
                
                --
                
                
                --
                
                
                --Stock
                      issued in connection with interest onpromissory
                      notes
                
                
                2,623,467
                
                
                263
                
                
                --
                
                
                --
                
                
                --
                
                
                --Beneficial
                      conversion on stock issued in connection with stock issued
                      for interest on
                      promissory notes
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Stock
                    issued in connection with acquisitions
                
                
                10,394,860
                
                
                1,040
                
                
                --
                
                
                --
                
                
                --
                
                
                --Stock
                    issued in connection with legal settlement
                
                
                152,778
                
                
                15
                
                
                --
                
                
                --
                
                
                --
                
                
                --Stock
                    issued in connection with warrant conversions
                
                
                9,193,750
                
                
                919
                
                
                --
                
                
                --
                
                
                --
                
                
                --Fair
                    value of repriced warrants
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Fair
                      value of warrants and beneficialconversionfeature
                      on convertible promissory notes
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Exchange
                    of Series D convertible preferred stock forTechnest
                    Series B convertible preferred stock
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Net
                    loss after minority interest
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                --Balance
                    - June 30, 2005
                
                
                184,215,208
                
                $
                18,421
                
                
                30,000
                
                $
                300,000
                
                
                --
                
                $
                --
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 F-8
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Stockholders’ Equity**
 **For
          The Years Ended June 30, 2005 and 2004**
 
 **Series
                    D Convertible**
                
                **Unearned****Preferred
                    Stock**
                
                **Compensation****Shares**
                
                **Amount**
                
                **Amount**Balance
                    - July 1, 2004
                
                
                22,786
                
                $
                2
                
                $
                (15,176,116
                )Conversion
                      of Series D convertiblepreferred
                      stock into common stock
                
                
                (12,938
                )
                
                (1
                )
                
                --Stock,
                      options and warrants issued in connection withconsulting
                      and employment agreements
                
                
                --
                
                
                --
                
                
                (10,281,216
                )Amortization
                      of employment andconsulting
                      agreements
                
                
                --
                
                
                --
                
                
                5,084,587Cancellation
                    of warrant and employment agreement
                
                
                --
                
                
                --
                
                
                6,594,414Stock
                      issued in connection withreset
                      rights of private placement investors
                
                
                --
                
                
                --
                
                
                --Stock
                      issued in connection with conversionof
                      promissory notes
                
                
                --
                
                
                --
                
                
                --Stock
                      issued in connection with interest onpromissory
                      notes
                
                
                --
                
                
                --
                
                
                --Beneficial
                      conversion on stock issued in connectionwith
                      stock     issued for interest on promissory
                      notes
                
                
                --
                
                
                --
                
                
                --Stock
                    issued in connection with acquisitions
                
                
                --
                
                
                --
                
                
                --Stock
                    issued in connection with legal settlement
                
                
                --
                
                
                --
                
                
                --Stock
                    issued in connection with warrant conversions
                
                
                --
                
                
                --
                
                
                --Fair
                    value of repriced warrants
                
                
                --
                
                
                --
                
                
                --Fair
                      value of warrants and beneficialconversion
                      feature on     convertible promissory
                      notes
                
                
                --
                
                
                --
                
                
                --Exchange
                    of Series D convertible preferred stock forTechnest
                        Series B convertible preferred
                    stock
                
                
                2,750
                
                
                --
                
                
                --Net
                    loss after minority interest
                
                
                --
                
                
                --
                
                
                --12,598
                
                $
                1
                
                $
                (13,778,331
                )
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 F-9
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Stockholders’ Equity**
 **For
          The Years Ended June 30, 2005 and 2004**
 
 **Additional**
                
                
                
                **Total****Paid-in**
                
                **Accumulated**
                
                **Stockholders'****Capital**
                
                **Deficit**
                
                **Equity****Amount**
                
                **Amount**
                
                **Amount**Balance
                    - July 1, 2004
                
                $
                50,864,718
                
                $
                (20,283,948
                )
                $
                15,707,836Conversion
                      of Series D convertiblepreferred
                      stock into common stock
                
                
                (7,382
                )
                
                --
                
                
                --Stock,
                      options and warrants issued in connection withconsulting
                      and employment agreements
                
                
                10,914,499
                
                
                --
                
                
                636,772Amortization
                      of employment andconsulting
                      agreements
                
                
                --
                
                
                --
                
                
                5,084,587Cancellation
                    of warrant and employment agreement
                
                
                (6,594,414
                )
                
                --
                
                
                --Stock
                      issued in connection withreset
                      rights of private placement investors
                
                
                (84
                )
                
                --
                
                
                --Stock
                      issued in connection with conversionof
                      promissory notes
                
                
                3,292,952
                
                
                --
                
                
                3,295,000Stock
                      issued in connection with interest onpromissory
                      notes
                
                
                495,861
                
                
                --
                
                
                496,124Beneficial
                      conversion on stock issued in connectionwith
                          stock issued for interest on
                      promissory
                      notes
                
                
                87,973
                
                
                
                
                
                87,973Stock
                    issued in connection with acquisitions
                
                
                6,208,746
                
                
                --
                
                
                6,209,786Stock
                    issued in connection with legal settlement
                
                
                70,263
                
                
                --
                
                
                70,278Stock
                    issued in connection with warrant conversions
                
                
                5,515,331
                
                
                --
                
                
                5,516,250Fair
                    value of repriced warrants
                
                
                189,476
                
                
                --
                
                
                189,476Fair
                      value of warrants and beneficialconversion
                      feature on convertible
                    promissory notes
                
                
                6,172,150
                
                
                --
                
                
                6,172,150Exchange
                    of Series D convertible preferred stock forTechnest
                    Series B convertible preferred stock
                
                
                339,968
                
                
                --
                
                
                339,968Net
                    loss after minority interest
                
                
                (2,174,858
                )
                
                (28,525,050
                )
                
                (30,699,908
                )$
                75,375,199
                
                $
                (48,808,998
                )
                $
                13,106,292
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 F-10
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Cash Flows**
 **For
                    the Years Ended****June
                    30,****2005**
                
                **2004****Cash
                    Flows from Operating Activities:**Net
                    loss after minority interest
                
                $
                (30,699,908
                )
                $
                (10,511,213
                )Adjustment
                    to reconcile net loss after minority interest to net cash used
                    in
                    operating activities:Minority
                    interest in net loss of subsidiary and non-cash
                    deemed dividends
                
                
                1,983,853
                
                
                --Depreciation
                    and amortization of property and equipment
                
                
                327,273
                
                
                11,306Amortization
                    and write down of intangible assets
                
                
                3,766,317
                
                
                915,729Purchased
                    in-process research and development written off
                
                
                2,095,000
                
                
                --Loss
                    on disposal of equipment
                
                
                192,986
                
                
                --Non-cash
                    issuance of stock for legal settlement
                
                
                70,278
                
                
                --Non-cash
                    interest expense
                
                
                9,447,492
                
                
                239,164Amortization
                    and remeasurement of compensatory stock compensation
                
                
                5,605,859
                
                
                5,211,737Changes
                    in operating assets and liabilities:Accounts
                    receivable
                
                
                (2,130,781
                )
                
                350,760Inventory
                    and work in process
                
                
                (153,830
                )
                
                --Restricted
                    cash
                
                
                (251,204
                )
                
                --Other
                    current assets
                
                
                (6,465
                )
                
                137,362Accounts
                    payable
                
                
                7,006,426
                
                
                (444,295
                )Accrued
                    expenses and other current liabilities
                
                
                610,787
                
                
                182,550**Net
                    Cash Used In Operating Activities**
                
                
                (2,135,917
                )
                
                (3,906,900
                )**Cash
                    Flows from Investing Activities:**Proceeds
                    from sale of property and equipment
                
                
                28,607
                
                
                --Additional
                    transaction costs relating to purchase of EOIR
                
                
                (69,111
                )
                
                --Cash
                    used for acquisitions, net of cash acquired
                
                
                (2,515,516
                )
                
                (8,536,533
                )Purchases
                    of property and equipment
                
                
                (336,503
                )
                
                (1,853
                )**Net
                    Cash Used In Investing Activities**
                
                
                (2,892,523
                )
                
                (8,538,386
                )**Cash
                    Flows from Financing Activities:**Proceeds
                    from sale of preferred stock
                
                
                --
                
                
                5,401,970Proceeds
                    from the sale of Technest preferred stock and warrants
                
                
                3,512,423Proceeds
                    from exercise of warrants
                
                
                5,516,250
                
                
                --Proceeds
                    from convertible secured notes (net)
                
                
                4,541,342
                
                
                --Principal
                    payments relating to premium financing agreement
                
                
                --
                
                
                (12,906
                )Proceeds
                    from notes payable
                
                
                --
                
                
                1,400,000Repayments
                    of notes payable
                
                
                (2,218,219
                )
                
                (1,475,000
                )Repayments
                    of credit line
                
                
                (600,000
                )
                
                --Proceeds
                    from sale of common stock in private placement
                
                
                --
                
                
                8,226,845**Net
                    Cash Provided By Financing Activities**
                
                
                10,751,796
                
                
                13,540,909**Net
                    Increase In Cash**
                
                
                5,723,356
                
                
                1,095,623**Cash
                    - Beginning of Year**
                
                
                1,101,088
                
                
                5,465**Cash
                    - End of Year**
                
                $
                6,824,444
                
                $
                1,101,088
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
  
 F-11
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Cash Flows**
 **(Continued)**
 
 **For
                    the Years Ended****June
                    30,****2005**
                
                **2004****Supplemental
                    Disclosures Of Cash Flow Information:**Cash
                    paid during the years for:Interest
                
                $
                885,789
                
                $
                100,769Taxes
                
                $
                500
                
                $
                --Non-cash
                    investing and financing activities:Conversion
                    of notes payable and accrued interest into preferred stock
                
                $
                --
                
                $
                518,459Acquisition
                    of ASI by issuance of common stock
                
                $
                --
                
                $
                916,725Acquisition
                    of STR by issuance of common stock
                
                $
                --
                
                $
                5,166,500Conversion
                    of accounts payable into Common Stock
                
                $
                --
                
                $
                450,000Deemed
                    dividend preferred stock - beneficial conversion Feature - Series
                    C
                
                $
                --
                
                $
                844,270Deemed
                    dividend preferred stock - beneficial conversion Feature - Series
                    D
                
                $
                --
                
                $
                3,555,500Accrued
                    Dividends on preferred stock
                
                $
                --
                
                $
                184,478Stock
                    issued in conjunction with acquisitions of Technest and
                    EOIR
                
                $
                6,209,786
                
                $
                --Fair
                    value of warrants and beneficial conversion feature of convertible
                    promissory notes
                
                $
                6,172,150
                
                $
                --Stock
                    issued upon conversion of promissory notes
                
                $
                3,295,000
                
                $
                --Exchange
                    of Series D preferred stock for Technest Series B preferred
                    stock
                
                $
                339,968
                
                $
                --
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 F-12
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **Consolidated
          Statements of Cash Flows**
 **Years
          Ended June 30, 2005 and 2004**
 **(Concluded)**
 
 During
          years ended June 30, 2005 and 2004, the Company acquired the assets and
          assumed
          the liabilities of various entities. The transactions had the following
          non-cash
          impact on the balance sheet:
 
 **2005**
                
                **2004**Accounts
                    receivable
                
                $
                166,557
                
                $
                5,390,805Inventory
                    and work in process
                
                
                222,957
                
                
                --Equipment
                
                
                44,000
                
                
                1,083,467Other
                    current assets
                
                
                25,403
                
                
                317,851Intangibles
                
                
                6,715,676
                
                
                25,029,277In-process
                    research and development
                
                
                2,095,000
                
                
                --Accounts
                    payable
                
                
                (544,291
                )
                
                (3,678,360
                )Accrued
                    liabilities
                
                
                --
                
                
                (1,860,156
                )Notes
                    payable to sellers
                
                
                --
                
                
                (10,339,351
                )Line
                    of credit
                
                
                --
                
                
                (600,000
                )Transaction
                    costs
                
                
                --
                
                
                (857,000
                )Equity
                
                
                (6,209,786
                )
                
                (5,950,000
                )Net
                    Cash Used for Acquisitions, net of cash acquired of $784,484
                    and
                    $538,467
                
                $
                2,515,516
                
                $
                8,536,533
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 F-13
 
 **MARKLAND
          TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL
          STATEMENTS**
 **YEARS
          ENDED JUNE 30, 2005 AND 2004**
 
 **1.**
                **NATURE
                    OF OPERATIONS**
  BUSINESS
          HISTORY AND OPERATIONS
 
 Markland
          Technologies, Inc. ("Markland" or the “Company”), previously known as Quest Net
          Corporation, was incorporated in Colorado in November 1995, under the name
          "A.P.
          Sales Inc." In December 1998, A.P. Sales Inc. dissolved as a Colorado
          corporation, redomiciled in Florida and changed its name to Quest Net
          Corporation.
 
 In
          January 2003, Markland purchased the common stock of Ergo Systems, Inc.
          ("Ergo"). In September 2003, Markland purchased certain technology from
          ASI
          Technology Corporation ("ASI"). In October 2003, Markland purchased the
          common
          stock of Science and Technology Research Corporation, Inc. ("STR").
 
 We
          acquired from ASI antenna technology assets and a sub-license for plasma
          sterilization and decontamination. The assets at time of purchase included
          three
          ongoing funded SBIR government contracts and nine issued and pending U.S.
          patents related to gas plasma antenna technology with demonstrated applications
          in the fields of ballistic missile defense, phased array radar, and forward
          deployed decontamination.
 
 STR
          provides a full range of electrical and mechanical engineering support
          as well
          as fabrication and assembly of electrical and mechanical systems. STR is
          a
          producer of the United States Navy's Shipboard Automatic Chemical Agent
          Detection and Alarm System (ACADA). The Navy deploys the "man-portable"
          point
          detection system to detect all classic nerve and blister agents as well
          as other
          chemical warfare agent (CWA) vapors.
 
 In
          June
          2004, Markland acquired 100% of E-OIR Technologies, Inc.'s ("EOIR") outstanding
          common stock in conjunction with a Stock Purchase Agreement dated June
          29, 2004.
          EOIR provides research and engineering services to Defense and Intelligence
          Community customers. EOIR's technical services include design and fabrication
          of
          sensor systems for military and intelligence community applications. These
          efforts involve systems, engineering, system integration, prototyping,
          field
          collections as well as data analysis and processing. Substantially all
          of EOIR's
          revenues are derived from Government contracts.
  On
          February 14, 2005, Markland entered into definitive agreements with Technest
          Holdings, Inc. (“Technest”), a public company with no revenue and minimal assets
          and operations, Genex Technologies, Inc. ("Genex"), and certain investors,
          which
          resulted in Markland acquiring controlling interests in Technest simultaneous
          with and conditioned upon the Technest acquisition of Genex.  Genex
          operates in four business areas: intelligent surveillance, chemical and
          explosives detection, research and development and commercial products.
          Founded
          in 1995, Genex has an established history in video surveillance sensor
          science.
          Its Surveillance Group provides innovative sensor and algorithm solutions
          that
          are small, tactical, low power and low cost solutions. Its surveillance
          technologies combine powerful algorithms, such as object tracking and image
          enhancement, with revolutionary wide-area, 360-degree sensors. These solutions
          operate in visible, near-infrared, infrared, and acoustic wavelengths.
          Within
          its biometrics technologies the 3D Facial Recognition Group develops tools
          for
          enhancing facial recognition. Genex offers products which include; (i)
          design
          and fabrication of customized remote sensor systems and platforms for Department
          of Defense ("DOD"), INTEL and Homeland Security applications; (ii) design
          and
          fabrication of three-dimensional facial recognition products tools for
          law
          enforcement; and (iii) design and fabrication of non-invasive three-dimensional
          medical imaging tools. These efforts involve systems engineering, system
          integration, prototyping, manufacturing and field data collections as well
          as
          data analysis and processing.
  These
          transactions are in support of Markland's objective to provide end-to-end
          solutions to the Department of Homeland Security ("DHS") and DOD. Markland's
          principal end customer is the United States Government. Markland operates
          in one
          principal business segment of providing primarily Government Agencies with
          products to protect the United States' borders, military personnel and
          infrastructure assets. All of the Markland's operating units have similar
          products and services, production processes, customers and regulatory
          environment. During 2005, Markland’s most significant source of revenues is an
          Omnibus Contract with the United States Army Night Vision and Electronic
          Sensors
          Directorate granted to EOIR which has a total potential value of approximately
          $406 million over its five year period of performance. Approximately 84%
          of EOIR
          revenues for the year ended June 30, 2005, were derived from this contract.
          During 2004, sales of remote sensing products, border security products
          and
          services and SBIR funded research grants comprised 80%, 16% and 4% of our
          revenue, respectively.
  F-14
 **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Subsequent
          to June 30, 2005, Markland
          sold all of the outstanding stock of EOIR to its majority-owned subsidiary,
          Technest Holdings, Inc. pursuant to a Stock Purchase Agreement with Technest
          (see Note 17).
 
 Markland
          is subject to risks common to companies in the Homeland Defense Technology
          industry, including, but not limited to, development by its competitors
          of new
          technological innovations, dependence on key personnel, protection of
          proprietary technology and loss of significant customers. Since the United
          States Government represents substantially all of Markland's current revenue,
          the loss of this customer would have a material adverse effect on Markland's
          future operations.
 
 **2**
                **SUMMARY
                    OF SIGNIFICANT ACCOUNTING
                    POLICIES**
  Principles
          of Consolidation
 
 The
          consolidated financial statements for the years ended June 30, 2005 and
          2004
          include the accounts of Markland and its wholly-owned subsidiaries, Security
          Technology, Inc. ("STI"), Ergo Systems, Inc. ("Ergo"), Science and Technology
          Research Corporation, Inc. ("STR") and E-OIR Technologies, Inc. ("EOIR"),
          and
          its majority owned subsidiaries Technest Holdings, Inc (“Technest”) and
          Technest’s wholly-owned subsidiary, Genex Technologies, Inc. (“Genex”). The
          minority interest represents outsiders’ interest in preferred stock of Technest.
          All significant inter-company balances and transactions have been eliminated
          in
          consolidation.
  Use
          of
          Estimates in Preparation of Financial Statements
 
 The
          preparation of the accompanying consolidated financial statements in conformity
          with accounting principles generally accepted in the United States of America
          requires management to make certain estimates and assumptions that affect
          the
          reported amounts of assets and liabilities and disclosures of contingent
          assets
          and liabilities at the date of the financial statements and the reported
          amounts
          of revenue and expenses during the reporting period. Actual results could
          differ
          from those estimates. Significant estimates that are particularly susceptible
          to
          change are the determination of the fair value of assets acquired and
          liabilities assumed in business combinations, impairment of identified
          intangible assets, goodwill and long-lived assets, the fair value of equity
          instruments issued, valuation reserves on deferred tax assets, the amount
          due to
          contracting government agencies as a result of their audits and revenue
          and
          costs recognized on long-term, fixed-price contracts.
  Concentrations
 
 Markland
          has cash balances in banks in excess of the maximum amount insured by the
          FDIC
          as of June 30, 2005.
 
 Substantially
          all revenue is generated from contracts with Federal government agencies.
          Consequently, substantially all accounts receivable are due from Federal
          government agencies either directly or through other government
          contractors.
 
 Restricted
          Cash
 
 Restricted
          cash represents a one year certificate of deposit, maturing January 2006,
          collateralizing a letter of credit in the amount of $250,000 issued in
          favor of
          a bank in conjunction with the Company’s corporate credit cards.
 
 Accounts
          Receivable
 
 Accounts
          receivable represent the amount invoiced for product shipped and amounts
          invoiced by the Company under contracts. An allowance for doubtful accounts
          is
          determined based on management's best estimate of probable losses inherent
          in
          the accounts receivable balance. Management assesses the allowance based
          on
          known trouble accounts, historical experience and other currently available
          evidence. If management determines amounts to be uncollectible, they will
          be
          charged to operations when that determination is made. The Company has
          not
          experienced any material losses in accounts receivable and has provided
          no
          allowance at June 30, 2005 and 2004. If management determines amounts to
          be
          uncollectible, they will be charged to operations when that determination
          is
          made.
  F-15
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Inventory
          and Work in Process
 
 Inventories
          are stated at the lower of cost or market.  Cost is determined by
          the
          first-in, first-out method and market represents the lower of replacement
          costs
          or estimated net realizable value. Work in process represents allowable
          costs
          incurred but not billed related to contracts.
 
 Property
          and Equipment
 
 Property
          and equipment are valued at cost and are being depreciated over their useful
          lives using the straight-line method for financial reporting. Routine
          maintenance and repairs are charged to expense as incurred. Expenditures
          which
          materially increase the value or extend useful lives are
          capitalized.
 
 Property
          and equipment are depreciated over the estimated useful lives of assets
          as
          follows:
 Software
                
                
                3
                    yearsComputers
                    and equipment
                
                
                3
                    yearsVehicles
                
                
                5
                    yearsLeasehold
                    improvements
                
                
                Shorter
                    of useful life or lease termFurniture
                    and fixtures
                
                
                5-7
                    years
 
 Property
          and equipment, net consisted of the following at June 30,
          2005:
 
 Software
                
                $
                152,544Computers
                    and equipment
                
                
                566,606Vehicles
                
                
                55,268Leasehold
                  improvements
                
                
                220,550Furniture
                    and fixtures
                
                
                237,177$
                1,232,145Less
                    accumulated depreciation and amortization
                
                
                (323,851
                )$
                908,294
 
 Depreciation
          expense for the years ended June 30, 2005 and 2004 was $327,273 and $11,306,
          respectively.
 
 Income
          Taxes
 
 The
          Company accounts for income taxes using the asset and liability method.
          Deferred
          tax assets and liabilities are recognized for the future tax consequences
          attributable to differences between the financial statement carrying amounts
          of
          existing assets and liabilities and their respective tax bases, and operating
          loss and tax credit carry forwards. Deferred tax assets and liabilities
          are
          measured using enacted tax rates expected to apply to taxable income in
          the
          years in which
 these
          temporary differences are expected to be recovered or settled. A deferred
          tax
          asset is recorded for net operating loss and tax credit carry forwards
          to the
          extent that their realization is more likely than not. The deferred tax
          benefit
          or expense for the period represents the change in the deferred tax asset
          or
          liability from the beginning to the end of the period.
  F-16
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Revenue
          Recognition
 
 We
          recognize revenue when the following criteria are met: (1) we have persuasive
          evidence of an arrangement, such as contracts, purchase orders or written
          requests; (2) we have completed delivery and no significant obligations
          remain,
          (3) our price to our customer is fixed or determinable, and (4) collection
          is
          probable. We recognize revenues at the time we perform services related
          to
          border security logistic support. With respect to our revenues from our
          chemical
          detectors, we recognize revenue under the units-of-delivery method. At
          the time
          the units are shipped to the United States Navy, the Company recognizes
          as
          revenues the contract price of each unit and recognizes the applicable
          cost of
          each unit shipped. As of June 30, 2005, the Company had completed delivery
          of
          all outstanding orders under the contract.
 
 Revenues
          from time and materials contracts are recognized as costs are incurred
          and
          billed. Allowable costs incurred but not billed as of a period end are
          recorded
          as work in process.
 
 Revenues
          from firm fixed price contracts are recognized on the percentage-of-completion
          method, either measured based on the proportion of costs recorded to date
          on the
          contract to total estimated contract costs or measured based on the proportion
          of labor hours expended to date on the contract to total estimated contract
          labor hours, as specified in the contract.
 
 Provisions
          for estimated losses on all contracts are made in the period in which such
          losses become known. Changes in job performance, job conditions, and estimated
          profitability, including those arising from contract penalty provisions,
          and
          final contract settlements may result in revision to cost and income and
          are
          recognized in the period in which the revisions are determined.
 
 EOIR
          participates in teaming agreements where they are the primary contractor
          and
          they participate with other organizations to provide services to the Federal
          government. EOIR has managerial and oversight responsibility for team members
          as
          well as the responsibility for the ultimate acceptability of performance
          under
          the contract. EOIR includes as revenues the amounts that they bill under
          the
          teaming arrangements and include as direct costs amounts that are reimbursable
          or paid to team members.
 
 Fair
          Value of Financial Instruments
 
 The
          financial statements include various estimated fair value information at
          June
          30, 2005, as required by Statement of Financial Accounting Standards No.
          107,
          "Disclosures about Fair Value of Financial Instruments." Financial instruments
          are initially recorded at historical cost. If subsequent circumstances
          indicate
          that a decline in the fair value of a financial asset is other than temporary,
          the financial asset is written down to its fair value.
 
 Unless
          otherwise indicated, the fair values of financial instruments approximate
          their
          carrying amounts. By their nature, all financial instruments involve risk,
          including credit risk for non-performance by counterparties. The maximum
          potential loss may exceed any amounts recognized in the consolidated balance
          sheets.
 
 The
          fair
          value of cash, accounts receivable, bank line of credit and long-term debt
          approximate their recorded amounts because of their relative market and
          settlement terms. The fair value of the notes payable issued to the former
          owners of EOIR (see Note 3) have been recorded at their fair value, as
          determined by an independent valuation, which is less than the face value
          due to
          a below market interest rate. The convertible secured notes have been recorded
          at relative fair value which is less than face value as a result of the
          relative
          fair value of warrants issued in conjunction with the notes and the related
          beneficial conversion feature.
 
 Shipping
          Costs
 
 Delivery
          and shipping costs are included in cost of revenue in the accompanying
          consolidated statements of loss.
 
 Research
          and Development
  Research
          and development costs are charged to expense as incurred. Markland capitalizes
          costs related to acquired technologies that have achieved technological
          feasibility and have alternative uses. Acquired technologies which do not
          meet
          these criteria are expensed as in-process research and development costs.
          For
          the year ended June 30, 2005, the Company expensed $2,095,000 of acquired
          in-process research and development related to the acquisition of Genex
          (see
          Note 3).
  F-17
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Loss
          Per Share
 
 Basic
          and
          diluted net loss per common share has been computed based on the weighted
          average number of shares of common stock outstanding during the periods
          presented.
 
 Common
          stock equivalents, consisting of convertible debt, Series A and D Convertible
          preferred stock, Technest’s Series B preferred stock, options and warrants were
          not included in the calculation of the diluted loss per share because their
          inclusion would have had the effect of decreasing the loss per share otherwise
          computed.
 
 Impairment
          of Intangible Assets
 
 The
          Company records as goodwill the excess of purchase price over the fair
          value of
          the identifiable net assets acquired. Statements of Financial Accounting
          Standards (SFAS ) No. 142, "Goodwill and Other Intangible Assets", prescribes
          a
          two-step process for impairment testing of goodwill, which is performed
          annually, as well as when an event triggering impairment may have occurred.
          The
          first step tests for impairment, while the second step, if necessary, measures
          the impairment. The Company has elected to perform its annual analysis
          during
          the fourth quarter of each fiscal year. No impairment charges were recorded
          in
          the years ended June 30, 2005 and 2004.
  Impairment
          of Long-Lived Assets
 
 Pursuant
          to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived
          Assets", Markland continually monitors events and changes in circumstances
          that
          could indicate carrying amounts of long-lived assets may not be recoverable.
          An
          impairment loss is recognized when expected cash flows are less than the
          asset's
          carrying value. Accordingly, when indicators or impairment are present,
          Markland
          evaluates the carrying value of such assets in relation to the operating
          performance and future undiscounted cash flows of the underlying assets.
          Markland's policy is to record an impairment loss when it is determined
          that the
          carrying amount of the asset may not be recoverable. In the year ended
          June 30,
          2005, the Company determined that its “Acoustic Core” technology and its
          intangible assets related to the ASI acquisition were impaired and recorded
          an
          impairment charge of $1,800,000 (see Note 4) which is included in Amortization
          of Intangibles in the consolidated statement of loss. No impairment charges
          were
          recorded in the year ended June 30, 2004.
 
 Stock-Based
          Compensation
 
 At
          June
          30, 2005, as permitted under SFAS No. 148, "Accounting for Stock-Based
          Compensation - Transition and Disclosure", which amended SFAS No. 123,
          "Accounting for Stock-Based Compensation", Markland has elected to continue
          to
          follow the intrinsic value method in accounting for its stock-based employee
          compensation arrangements as defined by Accounting Principles Board Opinion
          ("APB") No. 25, "Accounting for Stock Issued to Employees", and related
          interpretation including Financial Accounting Standards Board ("FASB")
          Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
          Compensation", an interpretation of APB No. 25. Had the Company followed
          the
          fair value method in accounting for its stock-based employee compensation
          it
          would have had the following effect on the net loss for the years ended
          June 30:
 Year
                    endedJune
                    30,2005
                
                2004Net
                    loss as reported
                
                $
                (30,699,908
                )
                $
                (10,511,213
                )Add:
                    stock-based employee compensation under intrinsic value method
                    included in
                    net loss
                
                
                1,322,411
                
                
                --Deduct:
                    stock-based employee compensation under fair value method
                
                
                (2,452,537
                )
                
                --Pro
                    forma net loss
                
                
                (31,830,034
                )
                
                (10,511,213
                )Less:
                    dividends to preferred stockholders
                
                
                340,000
                
                
                (4,584,248
                )Pro
                    forma net loss to applicable to common stockholders
                
                $
                (32,170,034
                )
                $
                (15,095,461
                )Basic
                    and diluted loss per share - as reported
                
                $
                (0.40
                )
                $
                (1.39
                )Basic
                    and diluted loss per share - pro forma
                
                $
                (0.41
                )
                $
                (1.39
                )
  
 F-18
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 
 Impact
          of Recently Issued Accounting Standards
 
 In
          December 2004, the FASB issued SFAS No. 123(R) (revised 2004), Share-Based
          Payment, which is a revision of SFAS No. 123, Accounting for Stock-Based
          Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting
          for
          Stock Issued to Employees, and Amends SFAS No. 95, Statement of Cash Flows.
          Generally, the approach in SFAS No. 123(R) is similar to the approach described
          in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments
          to
          employees, including grants of employee stock options, to be recognized
          in the
          income statement based on their fair values. Pro forma disclosure is not
          an
          alternative. SFAS No. 123(R) must be adopted no later than the first interim
          period for fiscal years beginning after December 15, 2005. The Company
          expects
          to adopt SFAS No. 123(R) on July 1, 2006.
 
 SFAS
          No.
          123(R) permits public companies to adopt its requirements using one of
          two
          methods: a “modified prospective” approach or a “modified retrospective”
          approach. Under the modified prospective approach, compensation cost is
          recognized beginning with the effective date based on the requirements
          of SFAS
          123(R) for all share-based payments granted after the effective date and
          the
          requirements of SFAS No. 123(R) for all awards granted to employees prior
          to the
          effective date of SFAS No. 123(R) that remain unvested on the effective
          date.
          The modified retrospective approach includes the requirements of the modified
          prospective approach but also permits entities to restate based on the
          amounts
          previously recognized under SFAS No. 123 for purposes of pro forma disclosures
          either for all prior periods presented or prior interim periods of the
          year of
          adoption. The Company is evaluating which method to adopt.
 
 As
          permitted by SFAS No. 123, the Company currently accounts for the share-based
          payments to employees using APB Opinion No. 25’s intrinsic value method and, as
          such, generally recognize no compensation cost for employee stock options.
          However, grants of stock to employees have always been recorded at fair
          value as
          required under existing accounting standards. The Company expects the adoption
          of SFAS No. 123(R) to have a material effect on its results of operations.
          Additionally, the Company’s results of operations could be materially effected
          by share-based payments issued after the adoption of SFAS 123(R). The impact
          of
          the adoption of SFAS No. 123(R) cannot be predicted at this time because
          it will
          depend on levels of share-based payments granted in the future. However,
          had the
          Company adopted SFAS No. 123(R) in prior periods, the impact of that standard
          would have approximated the impact of SFAS No. 123 as described in Note
          2 to the
          financial statements.
 
 SFAS
          No.
          123(R) also requires the benefits of tax deductions in excess of recognized
          compensation cost to be reported as a financing cash flow, rather than
          an
          operating cash flow under current accounting literature. Since the Company
          does
          not have the benefit of tax deductions in excess of recognized compensation
          cost, because of net operating loss position, the change will have no immediate
          impact on the consolidated financial statements.
 
 **3.**
                **ACQUISITIONS**
 
 Purchase
          of Science and Technology Research, Inc.
 
 In
          October 2003, Markland completed the acquisition of 100% of the common
          stock of
          Science and Technology Research, Inc., a Maryland corporation ("STR"),
          by its
          subsidiary, Security Technology, Inc., a Delaware Corporation ("STI"),
          through a
          merger of STI with newly formed STR Acquisition Corporation, a Maryland
          Corporation. STR is a producer of the U.S. Navy's Shipboard Automatic Chemical
          Agent Detection and Alarm System (ACADA). The Navy deploys the "man-portable"
          point detection system to detect all classic nerve and blister agents as
          well as
          other chemical warfare agent (CWA) vapors.
 
 The
          purchase price for the STR aggregated $6,475,000 and consisted of $900,000
          in
          cash, which was paid in October 2003, 1,539,779 shares of common stock
          valued at
          $5,100,000, a promissory note of $375,000 and acquisition costs of $100,000.
          The
          promissory note required no interest and, under amended terms, was due
          in full
          on October 15, 2004. Holders of the shares of common stock were granted
          piggy-back registration rights. The shares were registered in June 2004.
          The
          promissory note is collateralized by all of the assets of STR and 40% of
          the
          common stock of STR held by Markland. In June 2004, the Company made the
          first
          principal payment in the amount of $75,000. The remaining promissory note,
          as
          amended, is payable as follows:
 July
                    15, 2004
                
                $
                75,000August
                    15, 2004
                
                
                75,000September
                    15, 2004
                
                
                75,000October
                    15, 2004
                
                
                75,000$
                300,000
 
 
 F-19
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 On
          March
          15, 2004, Markland agreed to pay $40,000 of cash and issue an additional
          50,000
          shares of common stock valued at $66,500 in exchange for the agreement
          to extend
          the due date of the promissory note to October 15, 2004. These amounts
          were
          charged to interest expense in the statement of loss for the year ended
          June 30,
          2004.
 
 A
          summary
          of the allocation, as determined by an independent valuation, of the aggregate
          consideration for the acquisition to the fair value of the assets acquired
          and
          liabilities assumed is as follows:
 
 Fair
          value of net assets acquired:
 Fair
                    value of assets acquired -Current
                    assets, including cash of $115,830
                
                $
                783,657Property
                    and equipment
                
                
                53,467Fair
                    value of liabilities assumed -Accounts
                    payable and accrued expenses
                
                
                (368,932
                )Fair
                    value of identifiable net tangible assets acquired
                
                
                468,192Existing
                    contracts
                
                
                416,000Customer
                    relationships
                
                
                1,551,944Goodwill
                
                
                4,038,864Total
                    Purchase Price
                
                $
                6,475,000
 
 Markland
          also entered into a consulting agreement with the principal shareholder
          and
          employee of STR (see Note 12).
 
 Markland
          funded the cash portion of the acquisition from a loan provided by Bay
          View
          Capital, LLC, ("Bay View"). Robert Tarini, Markland's Chairman is affiliated
          with Bay View. The entire amount of the loan provided by Bay View was $1,400,000
          (see Note 7).
 
 The
          results of operations of STR have been included in Markland's consolidated
          statements of operations commencing October 1, 2003.
 
 Purchase
          of E-OIR Technologies, Inc.
 
 On
          June
          29, 2004, Markland acquired all of the outstanding stock of E-OIR Technologies,
          Inc. ("EOIR") for $8,000,000 in cash and $11,000,000 in principal amount
          of five
          year notes secured by the assets and stock of EOIR. EOIR is a provider
          of
          technology and services to the US Army Night Vision Laboratories and has
          expertise in wide area remote sensing using both electro-optic and infrared
          technologies. The acquisition was consummated in furtherance of Markland's
          stated strategy of making synergistic acquisitions in order to provide
          products
          and services to Homeland Defense, the Department of Defense and U.S.
          Intelligence Agencies.
 
 In
          connection with this acquisition, Markland has also adopted a Stock Incentive
          Plan (see Note 9).
 
 A
          summary
          of the allocation, as determined by an independent valuation, of the aggregate
          consideration for the merger to the fair value of the assets acquired and
          liabilities assumed is as follows:
 
 Cash
                  
                  $
                  8,000,000Promissory
                      note (net of $1,467,956 below market interest rate discount)
                  
                  
                  9,532,044Transaction
                      costs
                  
                  
                  969,639Total
                      Purchase Price
                  
                  $
                  18,501,683
  F-20
  **MARKLAND
              TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL
              STATEMENTS**
 **YEARS
              ENDED JUNE 30, 2005 AND 2004**
  Fair
                      value of net assets acquired:Fair
                      value of assets acquired -Current
                      assets, including cash of $332,637
                  
                  $
                  6,073,467Property
                      and equipment
                  
                  
                  1,030,000Fair
                      value of liabilities assumed:Accounts
                      payable & accrued expenses
                  
                  
                  (4,445,125
                  )Bank
                      loans and overdrafts
                  
                  
                  (1,032,308
                  )Fair
                      value of identifiable net tangible assets acquired
                  
                  
                  1,626,034Customer
                      relationships
                  
                  
                  11,755,000Goodwill
                  
                  
                  5,120,649Total
                      Purchase Price
                  
                  $
                  18,501,683
 
 The
          goodwill in this transaction, as determined by the independent valuation,
          arose
          as a result of anticipated synergies, cost savings and other items not
          related
          to tangible net assets or identifiable intangible assets.
  As
          a
          result of the transaction being structured as a stock acquisition, Markland
          does
          not expect the goodwill to be deductible for tax purposes.
  In
          connection with the EOIR acquisition, Markland also raised gross proceeds
          of
          $2,000,000 through a private placement of an additional 3,500 shares of
          its
          Series D Preferred Stock to a single institutional investor (see Note
          9).
  Between
          March 31, 2004 and June 30, 2004 Markland completed three private placements,
          issuing a total of 13,232,083 shares of common stock plus additional warrants
          for total proceeds of $9,679,000 ($8,226,845 net of issuance costs). Cash
          raised
          in these financings were used, in part, to fund the acquisition of
          EOIR.
  Subsequent
          to June 30, 2005, Markland
          sold all of the outstanding stock of EOIR to its majority-owned subsidiary,
          Technest Holdings, Inc. pursuant to a Stock Purchase Agreement with Technest
          (see Note 17).
  F-21
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Purchase
          of Technest Holdings, Inc. and Genex Technologies, Inc.
 
 On
          February 14, 2005, Markland entered into definitive agreements with Technest
          Holdings, Inc., a Nevada corporation ("Technest"), a public company with
          no
          revenue and minimal assets and operations, Genex Technologies, Inc. ("Genex"),
          and certain investors, which resulted in Markland acquiring controlling
          interests in Technest simultaneous with and conditioned upon the Technest
          acquisition of Genex.
 
 In
          accordance with a Securities Purchase Agreement between Technest and Markland,
          Technest issued 412,650,577 (1,954,023 post reverse split) shares of its
          common
          stock to Markland in exchange for 10,168,764 shares of Markland’s common stock
          (“the Markland Investment”). On February 14, 2005, the common stock received
          from Technest represents a 93% interest in Technest’s common stock on a primary
          basis. Consequently, Technest became a majority owned subsidiary of Markland
          on
          February 14, 2005. The Securities Purchase Agreement contains provisions
          for
          Markland to deliver additional shares of its common stock to Technest in
          conjunction with the conversion of the Technest Series B Convertible Preferred
          Stock (see below).
 
 Immediately
          after the acquisition by Markland of a controlling interest in Technest,
          certain
          investors paid $5,000,000 in cash for shares of Technest Series B Preferred
          Stock, Technest Series C Convertible Preferred Stock and five-year warrants
          to
          purchase Technest common stock (see Note 9).
 
 The
          acquisition of Genex was effected pursuant to an Agreement and Plan of
          Merger
          dated February 14, 2005, by and among Markland, Technest, MTECH Acquisition,
          Inc. ("MTECH"), a wholly-owned subsidiary of Technest, Genex and Jason
          Geng
          (“Dr. Geng”), the sole stockholder of Genex. As a result of the merger, all of
          the outstanding shares of the capital stock of Genex were automatically
          converted into the right to receive in the aggregate (i) $3 million of
          cash;
          (ii) 10,168,764 shares of Markland's common stock valued at $6,101,259
          (the
          shares of Markland common stock issued to Technest); and (iii) if earned,
          contingent payments in the form of additional shares of Technest common
          stock. A
          brokerage fee in connection with this acquisition of $300,000 was also
          paid. In
          addition, Dr. Geng was to receive a twelve month unsecured promissory note
          in
          the principal amount of $550,000 that paid interest at the rate of 6% per
          annum.
          Dr. Geng's share consideration was to be adjusted to reflect changes in
          the
          closing bid price of Markland common stock in the 10 trading days following
          February 14, 2005, subject to limitations set forth in the Merger Agreement.
          Following the acquisition, it is Technest’s opinion that Dr. Geng omitted
          material representations from the Merger Agreement and, as a result, Technest
          has not issued and does not intend to issue the promissory note, the additional
          shares of Markland common stock or the contingent consideration of Technest
          common stock, if any.
 
 A
          summary
          of the allocation, as determined by an independent purchase price allocation
          analysis, of the aggregate consideration for the merger to the fair value
          of the
          assets acquired and liabilities assumed is as follows :
  Cash
                    and brokerage fee
                
                $
                3,300,000Shares
                    of Markland Technologies, Inc. common stock
                
                
                6,101,259Total
                    Purchase Price
                
                $
                9,401,259Fair
                    value of net assets acquired:Fair
                    value of assets acquired -Current
                    assets, including cash of $784,484
                
                $
                1,199,401Property
                    and equipment
                
                
                44,000Fair
                    value of liabilities assumed -Accounts
                    payable & accrued expenses
                
                
                (544,291
                )Fair
                    value of identifiable net tangible assets acquired
                
                
                699,110Intangible
                    assets - intellectual property
                
                
                161,111In-process
                    research and development
                
                
                2,095,000Commercialized
                    patents
                
                
                440,000Contracts
                    and customer relationships
                
                
                1,130,000Goodwill
                
                
                4,876,038Total
                    Purchase Price
                
                $
                9,401,259
   F-22
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 As
          a
          result of the transaction being structured as a stock acquisition, Markland
          does
          not expect any goodwill resulting from the transaction to be deductible
          for tax
          purposes.
 
 Genex
          is
          a supplier of advanced imaging, surveillance and security sensor technologies.
 
 Unaudited
          Condensed Pro Forma Information
 
 Unaudited
          condensed pro forma information for Markland's acquisition of EOIR , STR
          ,
          Technest and Genex assuming they were acquired on July 1, 2003 is as
          follows:
 
 2005
                
                2004Revenues
                
                $
                69,923,000
                
                $
                65,134,000Loss
                    from operations
                
                $
                (18,867,000
                )
                $
                (7,059,000
                )Net
                    loss applicable to common stockholders
                
                $
                (31,266,000
                )
                $
                (12,780,000
                )Net
                    loss applicable to common stockholders per common share
                
                $
                (0.41
                )
                $
                (0.60
                )
 
 Push
          Down Accounting
 
 Based
          on
          the substantial change in ownership and control of Technest, as well as
          the fact
          that the investors in the Technest financing represent a collaborative
          group
          brought together to promote the acquisition of Genex, the push down basis
          of
          accounting has been applied to the acquisition of Technest by Markland.
          In
          accordance with the push down basis of accounting, Technest recorded Genex’s net
          assets, which are included in our consolidated financial statements, at
          their
          estimated fair values as of the date of acquisition which resulted in the
          basis
          of the net assets acquired being adjusted as disclosed above. Technest’s
          accumulated deficit was reset to zero as of the acquisition date. The purchase
          price was allocated to the estimated fair value of Genex’s assets and
          liabilities based on an independent purchase price allocation analysis.
  **4.**
                **AMORTIZATION
                    OF INTANGIBLE ASSETS**
  Amortizable
          intangible assets consist of the following at June 30, 2005:
 Amortizable
                    intangibles - EOIR
                
                $
                11,755,000Amortizable
                    intangibles - Ergo
                
                
                400,000Amortizable
                    intangibles - STR
                
                
                1,551,944Amortizable
                    intangibles - Technest
                
                
                1,731,111Total
                    amortizable intangibles
                
                $
                15,438,055Accumulated
                    amortization
                
                
                (2,032,714
                )Net
                    amortizable intangibles
                
                $
                13,405,341
  
 F-23
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 The
          purchase price of $400,000 related to the January 2003 acquisition of Ergo
          was
          allocated entirely to a contract with the United States Government. The
          contract
          is being amortized over a three-year period commencing with the date of
          the
          acquisition, January 14, 2003. Amortization expense related to the contract
          for
          the years ended June 30, 2005 and 2004 was $133,333 and $133,332,
          respectively.
  The
          intangible assets acquired from ASI on September 30, 2003 totaled $1,000,000.
          These assets were being amortized over a three-year period commencing October
          1,
          2003. At June 30, 2005 it was determined that future cash flows from this
          asset
          were not likely and the company recorded an impairment loss of $500,000.
          Amortization expense related to this contract for the years ended June
          30, 2005
          and 2004 was $250,000 in each year.
  The
          excess of the purchase price of STR over the fair value of assets acquired
          was
          $6,006,808. Of this amount, $4,038,864 was allocated to goodwill and $1,967,944
          to amortizable intangible assets. And, of that amount, $416,000 was allocated
          to
          existing contracts with a twenty-six month estimated economic life and
          the
          remaining $1,551,944 was allocated to customer relationships with an estimated
          economic useful life of ten years. Markland has recorded amortization expense
          of
          $155,195 and $532,396 for years ended June 30, 2005 and 2004 respectively.
          In
          the year ended June 30, 2004, due to the early completion of its major
          contract
          with the US Navy, the Company fully amortized the $416,000 which was allocated
          to existing contracts.
  The
          excess of the purchase price of EOIR on June 29, 2004 over the fair value
          of
          assets acquired is $16,875,649. Of this amount, $5,120,649 was allocated
          to
          goodwill and $11,755,000 to amortizable intangible assets comprising contracts
          and customer relationships. This asset has an estimated useful life of
          nine
          years. Markland has recorded amortization expense for years ended June
          30, 2005
          and 2004 of $1,306,111 and $0, respectively.
 
 The
          excess of the purchase price of Technest and Genex over the fair value
          of net
          tangible assets acquired is $8,702,149. Of this amount, $4,876,038 was
          allocated
          to goodwill, $2,095,000 to in-process research and development and $1,731,111
          to
          amortizable intangible assets comprised of contracts and customer relationships
          and commercialized patents. The company has recorded amortization expense
          of
          $121,678 for the year ended June 30, 2005.
 
 The
          intangible assets entitled "Acoustic Core" which had a carrying value of
          $1,300,000 are not available for commercial sale as of June 30, 2005. The
          Company has determined that any future cash flows from this technology
          are
          unlikely and has recorded an impairment loss of $1,300,000 for the year
          ended
          June 30, 2005.
 
 Future
          amortization expense related to the above-acquired intangible assets over
          the
          next five years is as follows:
 
 Years
                    EndingJune
                    30,
                
                Amount2006
                
                $
                1,854,5452007
                
                
                1,787,8802008
                
                
                1,787,8802009
                
                
                1,787,8802010
                
                
                1,670,130$
                8,888,315
 
 
 **5.**
                **GOODWILL**
 
 On
          the
          date EOIR was acquired by Markland, EOIR had a payable of $724,459 to the
          former
          stockholders related to possible taxes due in conjunction with the final
          pre-acquisition tax return. In the quarter ended December 31, 2004, this
          accrual
          was determined to no longer be required and no distributions are due to
          the
          former stockholders. This reduction in payables was considered an adjustment
          in
          the fair value of EOIR's net assets acquired and, accordingly, was recorded
          as a
          reduction in Goodwill of $724,459. In addition, actual transaction costs
          exceeded the original estimate by $177,639. These additional transaction
          costs,
          including the fair value of stock issued of $108,528, were recorded as
          an
          increase in Goodwill of $177,639 in the year ended June 30, 2005.
  F-24
 
 **6.**
                **LINES
                    OF CREDIT**
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Secured
          Convertible Revolving Credit Notes
 
 On
          December 10, 2002, Markland entered into a Restated and Amended Secured
          Convertible Revolving Credit Note Agreement for $500,000.
  Interest
          under this note accrued at the interest rate of 6% per annum.
  The
          note
          was convertible at any time, in whole or in part, into shares of the Company's
          common stock. The total number of shares of common stock issuable upon
          conversion will be determined by dividing the principal amount of this
          note
          being converted by 80% of the closing bid price of the common stock based
          on the
          average of the five trading days immediately preceding the date of conversion.
          The value of the beneficial conversion feature of $125,000 was being amortized
          as interest expense over the term of the debt.
  The
          principal on the note and accrued interest totaling $518,459 was converted
          into
          404,266 shares of Markland's common stock on April 12, 2004. All unamortized
          discount related to the beneficial conversion feature was charged to interest
          expense at that time. Amortization of the beneficial conversion feature
          for the
          year ended June 30, 2004 was $60,126.
  Bank
          Line of Credit
  EOIR
          established a $500,000 line of credit with Virginia Community Bank in October
          1999. It is secured by current accounts receivable with variable interest
          at the
          prime lending rate (4% at June 30, 2004) plus 1%. The line of credit was
          extended in 2004 and increased to $600,000. The credit line was fully paid
          and
          expired in April, 2005.
  **7.**
                **LONG-TERM
                    DEBT**
  Note
          Payable - AI
 
 In
          December 2003, Markland signed a note to finance an insurance premium.
          The
          unpaid balance of this note on June 30, 2004 was $4,098.
  Note
          Payable - Bay View Capital
 
 On
          September 4, 2003, Markland signed a term sheet with Bay View Capital,
          LLC, a
          related party, and received in October, 2003 a $1,400,000 bridge-financing
          loan
          of which Markland immediately repaid $211,000. The proceeds from this loan
          were
          used by Markland to fund the acquisition of STR (see Note 3). The loan
          agreement
          provides for Markland to make 24 monthly payments of principal and
          interest.
 
 Principal
          is calculated on a monthly basis using a "Cash Flow Recapture Mechanism"
          as
          defined in the agreement. Interest is payable monthly in arrears at a rate
          of
          12% per annum payable. The note requires monthly payments in the amount
          equal to
          twenty five percent of the gross revenue of STR for the immediately preceding
          calendar month. The remaining principal balance together with any unpaid
          interest is due on October 27, 2005. The note was secured by a security
          interest
          in substantially all assets of Markland. The balance of the note, plus
          accrued
          interest, was paid in full in April 2004. Interest expense related to this
          note
          was $100,769 for the year ended June 30, 2004.
  F-25
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Note
          Payable - STR Acquisition
  On
          October 1, 2003, Markland issued a note to
          George
          Yang in
          the
          amount of $375,000 in connection with the acquisition of STR (see Note
          3). This
          note was paid in full by December 31, 2004.
  On
          March
          15, 2004, Markland agreed to issue to George Yang $40,000 of cash and an
          additional 50,000 shares of common stock valued at $66,500 in exchange
          for his
          agreement to extend the note to October 15, 2004. These amounts were charged
          to
          interest expense in the statement of loss for the year ended June 30, 2004.
          Accounts payable at June 30, 2005, include $40,000 related to this
          agreement.
  Notes
          Payable - EOIR Acquisition
 
 On
          June
          29, 2004, EOIR issued notes guaranteed by Markland in the face amount of
          $11,000,000 in connection with the acquisition of EOIR's common stock.
          These
          notes accrue interest at 6% compounded monthly and are payable in quarterly
          installments over 60 months. The fair market value of these notes is $9,532,044
          as determined by an independent valuation. The discount of $1,467,956 will
          be
          amortized to interest expense over the life of the note. During the years
          ended
          June 30, 2005 and 2004, $293,591 and $0, respectively, were amortized to
          interest expense. The carrying value and unamortized discount at June 30,
          2005
          was $8,213,385 and $1,174,365, respectively.
  Other
          Long-Term Bank Debt
  Markland's
          long-term bank debt consists of the following as of June 30,
          2005:
 First
                    Market Bank, secured by research equipment, dated October, 2002
                    with
                    monthly payments of $3,715 including interest of LIBOR plus 2.75%
                    (6.27%
                    at June 30, 2005)
                
                
                39,438First
                    Market Bank, dated July, 2002 with monthly payments of $15,278
                    plus
                    interest of LIBOR plus 2.75%, (6.27% at June 30, 2005)
                
                
                56,027First
                    Market Bank, secured by leasehold improvements, dated March 19,
                    2003 with
                    monthly payments of $3,514 including interest of 5.05%
                
                
                22,128American
                    Honda Finance, secured by vehicle, dated March 24, 2003 with
                    monthly
                    payments of $406 including interest of 4.70%
                
                
                12,844$
                130,437
 
 Future
          debt maturities for all notes payable and long-term debt are as follows
          for the
          years ending:
 
 June
                    302006
                
                $
                709,9432007
                
                
                2,204,6002008
                
                
                2,203,6442009
                
                
                2,200,0002010
                
                
                2,200,000Total
                
                
                9,518,187Less:
                    debt discount
                
                
                (1,174,365
                )$
                8,343,822
   F-26
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Convertible
          Notes and Warrant Purchase Agreements - September 21, 2004
 
 On
          September 21, 2004, Markland Technologies, Inc. entered into a Purchase
          Agreement with DKR Soundshore Oasis Holding Fund, Ltd. and DKR Soundshore
          Strategic Holding Fund, Ltd. (together the "Investors") pursuant to which
          the
          Company sold warrants to purchase shares of common stock (the "Warrants")
          and
          secured convertible promissory notes (the "Convertible Notes") for the
          aggregate
          consideration of $4,000,000. The Convertible Notes are initially convertible
          into $5,200,000 of common stock at a price of $0.80 per share, subject
          to
          certain adjustments as defined in the Purchase Agreement. The Warrants
          entitle
          the Investors to purchase an aggregate of 6,500,000 shares of our Common
          Stock
          at an initial conversion price of $.80 at any time and from time to time
          through
          September 21, 2009.
 
 The
          Purchase Agreement contains standard representations, covenants and events
          of
          default. Occurrence of an event of default allows the Investors to accelerate
          the payment of the Convertible Notes and/or exercise other legal remedies,
          including foreclosing on collateral.
 
 The
          Convertible Notes are in the aggregate principal amount of five million
          two
          hundred thousand dollars ($5,200,000) and accrue interest daily at the
          rate of
          eight percent (8%) per year on the then outstanding and unconverted principal
          balance of the Convertible Notes. Under the terms of the Convertible Notes,
          $4,000,000 of the outstanding principal and interest is required to be
          prepaid
          by March 15, 2005. In the event the Investors do not receive such prepayment
          amount by March 15, 2005, then the Conversion Price shall automatically
          become
          the Adjusted Conversion Price which is the lower of $0.80 a share or 80%
          of the
          average of the Closing Prices during the five (5) Trading Days prior to
          the
          applicable Conversion Date. This shall not be an event of default. The
          Company
          did not make such prepayment by March 15, 2005. The remaining outstanding
          balance is due by September 21, 2005. At anytime, and at the option of
          the
          Investors, the outstanding principal and accrued interest of the Convertible
          Notes may be converted into shares of Markland's common stock at the lower
          of
          $0.80 per share or 80% of the average of the closing prices during the
          five
          trading days prior to the applicable conversion date.
 
 Subsequent
          to June 30, 2005, the due date of these Convertible Notes was extended
          to
          December 20, 2005 (see Note 17).
 
 The
          Company has granted a security interest in and a lien on substantially
          all of
          its assets to the Investors pursuant to the terms of a Security Agreement,
          dated
          September 21, 2004.
 
 As
          part
          of this financing, James LLC, the largest holder of Series D Preferred
          Stock,
          agreed not to sell any of its holdings of Series D Preferred Stock until
          the
          earlier to occur of: (1) notice from the Company and the investors that
          the
          transactions contemplated in the Purchase Agreement had been terminated,
          or (2)
          March 15, 2005. However, pursuant to the terms of the lock-up agreement,
          James,
          LLC may still convert their Series D shares and sell the underlying shares
          of
          common stock in accordance with Rule 144 of the Securities Act of 1933,
          as
          amended. In exchange, Markland agreed that under certain conditions, if
          they did
          not redeem the Series D stock by January 15, 2005, they would issue to
          James LLC
          a warrant to purchase 1,088,160 shares of our common stock at $.80 per
          share.
          The Series D stock was not redeemed by January 15, 2005 and the warrant
          was
          subsequently issued.
 
 Subject
          to conditions set forth in this financing, the Company may require the
          Investors
          to purchase $1,000,000 of Additional Notes on the Additional Closing
          Date.
  F-27
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 In
          conjunction with this financing, the Company issued 833,333 shares of common
          stock to investors that participated in the Company's April 2, 2004 private
          placement in exchange for their waiver and release of certain
          rights.
 
 On
          September 21, 2004, Markland estimated the fair value of the Warrants and
          allocated the gross proceeds of $4,000,000 on a relative fair value basis
          between the Convertible Notes and the Warrants. Based on this analysis,
          Markland
          estimated that the relative fair value of the Warrants and Convertible
          Notes
          were approximately $1,659,000 and $2,341,000, respectively. Based on the
          initial
          conversion price of $0.80 per share, Markland estimated that the Convertible
          Notes could convert into 6,500,000 shares of common stock and the effective
          conversion price was approximately $0.36 per share. Accordingly, Markland
          determined that there was a beneficial conversion feature of approximately
          $3,054,000. Since the beneficial conversion feature exceeded the carrying
          value
          of the Convertible Notes, the recognition of the beneficial conversion
          feature
          was limited to $2,341,000. As a result, the Convertible Notes were recorded
          net
          of the fair value of the Warrants and beneficial conversion feature at
          $0 and
          will be accreted to $5,200,000, the face value of the Convertible Notes,
          over
          the term of those notes. Non-cash interest expense related to the accretion
          of
          this discount was $5,066,343 for the year ended June 30, 2005. The carrying
          value and unamortized discount at June 30, 2005 was $3,016,343 and $133,657
          respectively.
 
 In
          conjunction with the issuance of these Convertible Notes and Warrants,
          Markland
          incurred cash financing costs of $766,628. These costs have been recorded
          in
          Other Assets as deferred financing costs and are being amortized to interest
          expense over the term of the Convertible Notes. Non-cash interest expense
          related to the amortization of deferred financing costs was $712,220 in
          the year
          ended June 30, 2005.
 
 Warrants
          to purchase 1,500,000 shares of common stock at an initial exercise price
          of
          $1.50 and three year term were issued as finders fees. The fair value of
          these
          warrants have been calculated at $887,374 and have been recorded as additional
          deferred financing costs and are being amortized to interest expense over
          the
          term of the Convertible Notes. Non-cash interest expense related to the
          amortization of these deferred financing costs was $859,271 in the year
          ended
          June 30, 2005.
 
 See
          Note
          10 for information regarding the December 28, 2004 reduction in the exercise
          price of the Warrants and related replacement warrants issued.
 
 During
          the year ended June 30, 2005, notes with a face value of $2,050,000 were
          converted into 13,789,614 shares of the Company’s common stock.
 
 Convertible
          Notes and Warrant Purchase Agreements - November 9, 2004
 
 On
          November 9, 2004, the Company entered into a Securities Purchase Agreement
          (the
          "Securities Purchase Agreement") with Harborview Master Fund, LP and Southridge
          Partners, LP (the "November Investors") pursuant to which the Company sold
          warrants to purchase shares of common stock (the "November Warrants") and
          secured convertible promissory notes (the "November Convertible Notes")
          for the
          aggregate consideration of $1,350,000. The November Convertible Notes are
          initially convertible into $1,755,000 of common stock at a price of $0.80
          per
          share, subject to certain adjustments as defined in the Purchase Agreement.
 
 The
          November Warrants entitle the November Investors to purchase an aggregate
          of
          2,531,250 shares of our common stock, at any time and from time to time,
          through
          November 9, 2009 at an initial exercise price of $1.50 per share. The November
          Convertible Notes are in the aggregate principal amount of $1,755,000 and
          accrue
          interest daily at the rate of eight percent (8%) per year on the then
          outstanding and unconverted principal balance of the notes. Under the terms
          of
          the November Convertible Notes $1,000,000 of the outstanding principal
          and
          interest is required to be prepaid by March 15, 2005. In the event the
          November
          Investors do not receive such prepayment amount by the prepayment date
          then the
          conversion price shall automatically become the adjusted conversion price
          which
          is the lower of $0.80 per share or 80% of the average of the closing prices
          during the five trading days prior to the applicable conversion date. This
          shall
          not be an event of default. The Company did not make such prepayment by
          March
          31, 2005. The remaining outstanding balance is due by September 21, 2005.
          The
          notes will mature on November 9, 2005. At any time, and at the option of
          the
          November Investors, the outstanding principal and accrued interest of the
          notes
          may be converted into shares of our common stock at the lower of $0.80
          per share
          or 80% of the average of the closing prices during the five trading days
          prior
          to the applicable conversion date.
  F-28
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 
 On
          November 9, 2004, Markland estimated the fair value of the November Warrants
          and
          allocated the gross proceeds of $1,350,000 on a relative fair value basis
          between the November Convertible Notes and the November Warrants. Based
          on this
          analysis, Markland estimated that the relative fair value of the November
          Warrants and November Convertible Notes were approximately $571,513 and
          $778,487, respectively. Based on the initial conversion price of $0.80
          per
          share, Markland estimated that the November Convertible Notes could convert
          into
          2,193,750 shares of common stock and the effective conversion price was
          approximately $0.36 per share. Accordingly, Markland determined that there
          was a
          beneficial conversion feature of approximately $713,263. As a result, the
          November Convertible Notes were recorded net of the fair value of the November
          Warrants and beneficial conversion feature at $65,224 and will be accreted
          to
          $1,755,000, the face value of the November Convertible Notes, over the
          term of
          those notes. Non-cash interest expense related to the accretion of this
          discount
          was $1,653,818 for the year ended June 30, 2005. The carrying value and
          unamortized discount at June 30, 2005 was $534,538 and $101,182, respectively.
 
 In
          conjunction with the issuance of these November Convertible Notes and November
          Warrants, Markland incurred financing costs of $175,530. These costs have
          been
          recorded in Other Assets as deferred financing costs and are being amortized
          to
          interest expense over the term of the November Convertible Notes. Non-cash
          interest expense related to the amortization of deferred financing costs
          was
          $112,050 in the year ended June 30, 2005.
 
 The
          other
          terms of these notes and warrants are substantially the same as the Convertible
          Notes and Warrants Purchase agreement dated September 21, 2004 described
          above.
 
 See
          Note
          9 for information regarding the December 28, 2004, reduction in the exercise
          price of the November Warrants and related replacement warrants
          issued.
 
 In
          the
          year ended June 30, 2005, notes with a face value of $1,245,000 were converted
          into 6,680,137 shares of the Company’s common stock.
 
 Accrued
          interest of $372,102 related to both the September 21, 2004 and November
          9, 2004
          convertible notes was paid through the issuance of 2,623,467 shares of
          common
          stock. As a result of the common stock being issued at a discount, the
          Company
          recognized an additional beneficial conversion feature of $41,141.
 
 **8.**
                **EQUITY
                    LINE**
 
 On
          September 10, 2003, Markland entered into a Private Equity Credit Agreement
          with
          Brittany Capital Management, Ltd. ("Brittany"). Markland agreed to issue
          and
          sell to Brittany up to $10,000,000 worth of its common stock over the next
          three
          years. Prior to any sales, Markland is required to file a registration
          statement
          with the Securities and Exchange Commission, relating to the shares to
          be
          issued, and to have such registration statement declared effective.
 
 For
          all
          periods presented, Markland has determined that the fair value of this
          Put was
          not material.
 
 The
          Equity Line expired on September 10, 2004 and the Company is no longer
          entitled
          to require Brittany to purchase shares of Common Stock pursuant to it.
 
 Subsequent
          to June 30, 2005, the Company committed to enter into a new private equity
          credit agreement with Brittany (see Note 17).
 
 **9.**
                **STOCKHOLDERS'
                    EQUITY**
  Preferred
          Stock
  The
          Company is authorized to issue 5,000,000 shares of preferred stock which
          may be
          issued in series with such designations, preferences, stated values, rights,
          qualifications, or limitations as determined by the Board of
          Directors.
  F-29
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
  Series
          A Redeemable Convertible Preferred Stock
  On
          June
          30, 2003, Markland issued 30,000 shares of our Series A Non-Voting Redeemable
          Convertible Preferred Stock in satisfaction of our remaining obligations
          under a
          promissory note. The Series A Preferred Stock has no par value, is non-voting
          and has a stated value of $10 per share. The Preferred Stock is convertible
          at
          any time at the option of the Company, and cannot be converted by the holder.
          This stock is convertible at the rate of three shares of Series A Preferred
          Stock for each share of common stock. This conversion rate may be adjusted
          at
          any time by the Company as a result of either the sale of the Company or
          as a
          result of a stock split or stock dividend that is issued by the Company
          while
          these shares remain outstanding.
  The
          Company shall have the right, but not the obligation to, at any time after
          the
          issuance of these shares to redeem all or any portion of the outstanding
          shares
          of Series A Preferred Stock from the holder in cash at the stated value
          of $10
          per share by sending notice to the holder. The Series A Preferred Stock
          has a
          liquidation preference of $10 per share. This stock does not accrue
          dividends.
  Series
          B Convertible Preferred Stock
  On
          September 4, 2003, Markland's board of directors approved a resolution
          to cancel
          its Series B convertible preferred stock.
  Series
          C 5% Cumulative Convertible Preferred Stock
  On
          December 9, 2002, the Company entered into an Exchange Agreement, among
          the
          Company and Market LLC and James LLC who agreed to exchange their convertible
          notes payable in the amount of $3,812,000 and $1,413,000, respectively
          ($5,225,000 in value), inclusive of accrued interest for 5,225 shares ($1,000
          stated value per share) of the Company's newly issued Series C Preferred
          Stock.
          The Series C Preferred Stock is non-voting and has a liquidation preference
          of
          $1,000 per share.
  The
          holders of the Series C Preferred Stock are entitled to receive dividends
          on
          each share of preferred stock, which shall accrue on a daily basis at the
          rate
          of 5% per annum on the sum of the liquidation preference plus all accumulated
          and unpaid dividends thereon. These dividends shall accrue whether or not
          they
          have been declared or there are legally available funds with which to pay
          them,
          and at the option of the holders are payable either in cash or in unrestricted
          common stock.
  The
          Series C Preferred Stock is redeemable at any time by Markland, and cannot
          be
          converted by the holders without written permission for a period of 6 months
          following the issuance of the shares and then only 10% may be converted
          per
          month thereafter. The Series C Preferred Stock is convertible at the option
          of
          the holder at a conversion price ranging from 65% to 80% of the common
          stock's
          market price at the time of the conversion.
  Deemed
          dividends related to this beneficial conversion feature were $0 and $884,270
          for
          the years ended June 30, 2005 and 2004, respectively.
  During
          the years ended June 30, 2005 and 2004, the Company accreted dividends
          of $0 and
          $184,478, respectively.
  During
          the year ended June 30, 2004, all outstanding Series C Preferred Stock
          and
          dividends of $337,194 were converted into 6,029,844 shares of common
          stock.
  F-30
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
  Series
          D Convertible Preferred Stock
  Shares
          of
          the Series D Convertible Preferred Stock have a liquidation preference
          of $1,000
          per share, are non-voting, do not accrue dividends, are redeemable by Markland
          anytime and are convertible into shares of Markland's common stock at a
          conversion price ranging from 65% to 80% of the common stock's market price
          at
          the time of the conversion.
  The
          Series D preferred stock is convertible at the option of the stockholder
          at any
          time. The number of shares of our common stock into which each share of
          Series D
          preferred is convertible is determined by dividing $1,000 by the discounted
          bid
          price. The "discounted" bid price is the average closing bid
 price
          of
          our common stock during the five business days immediately preceding the
          conversion date multiplied by the applicable discount factor, as set forth
          below.
 
 
 AVERAGE
                    CLOSING BID PRICE (1)
                
                DISCOUNT
                    FACTOR$15.00
                    or less
                
                
                80%more
                    than $15.00, but less than or equal to $30.00
                
                
                75%more
                    than $30.00, but less than or equal to $45.00
                
                
                70%more
                    than $45.00
                
                
                65%
 
 (1)
                After
                    an adjustment for a 1-for-60 reverse stock split effective October
                    27,
                    2003.
 
 The
          Series D preferred stock can be converted only to the extent that the Series
          D
          stockholder will not, as a result of the conversion, hold in excess of
          9.999% of
          the total outstanding shares of our common stock.
  During
          the year ended June 30, 2004, Markland sold to a third party 7,166 shares
          of
          Series D Preferred Stock for gross proceeds of $5,402,000. Markland has
          determined that as of the date of issuance there was a beneficial conversion
          feature in the aggregate amount of $3,555,500 for the year ended June 30,
          2004.
          During the year ended June 30, 2005 Markland also issued 2,750 shares of
          Series
          D convertible stock, pursuant to an exchange agreement with Technest Holdings,
          Inc., in exchange for 632,182 shares of Technest Series B preferred stock.
          The
          Company recorded the Series D Preferred Stock at $339,968 which was the
          carrying
          value of the Technest Series B preferred stock and was previously included
          in
          Minority Interest (see below). The Company has determined that as of the
          date of
          issuance there was a beneficial conversion feature in the aggregate amount
          of
          $340,000 for the year ended June 30, 2005. The accretion of the beneficial
          conversion features on the Series D Preferred Stock has been recorded as
          a
          deemed dividend. The deemed dividends increases the loss applicable to
          common
          shareholders in the calculation of basic and diluted net loss per common
          share.
 
 During
          the year ended June 30, 2005, 12,938 shares of Series D were converted
          into
          73,810,693 common shares of the Company.
 
 At
          June
          30, 2005 there were 12,598 shares of Series D outstanding.
  Reverse
          Stock Split
  On
          September 4, 2003, Markland's board of directors approved a resolution
          to effect
          a one-for-sixty reverse stock split. This action was subsequently approved
          by
          shareholder action which was approved by written consent of the Markland
          shareholders who held at least a majority of the voting power of the common
          stock, at least 67% of the voting power of the Series C Cumulative Convertible
          Preferred Stock, and at least 67% of the voting power of the Series D Cumulative
          Convertible Preferred Stock. As a result, each sixty shares of common stock
          was
          converted automatically into one share of common stock. To avoid the issuance
          of
          fractional shares of common stock, each fractional share resulting
          from the reverse split was rounded up to a whole share. The reverse stock
          split
          did not reduce the 500,000,000 shares of common stock that Markland is
          authorized to issue. The resolution, which impacts shareholders of record
          as of
          September 5, 2003 became effective on October 27, 2003. All share amounts
          and
          per share data have been restated to reflect this reverse stock
          split.
  F-31
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Common
          Stock Issuances
  During
          the year ended June 30, 2004, Markland issued the following shares of common
          stock.
 
 On
          July
          3, 2003, Markland entered into a consulting agreement for program management
          and
          project engineering services for Ergo Systems related border security
          activities. In conjunction with this agreement, Markland
          issued 25,000 fully vested shares of common stock valued at $102,000. This
          amount was charged to operations in the year ended June 30, 2004.
 
 On
          July
          24, 2003, Markland entered into an Agreement with Syqwest, Inc., a Rhode
          Island
          corporation, and related party, Under this Agreement, Syqwest agreed to
          receive
          750,000 shares of Markland's restricted common stock as full consideration
          for
          $450,000 of unpaid services, which were performed by Syqwest in connection
          with
          the research efforts as it relates to the Vehicle Stopping Technology.
          Pursuant
          to the Agreement, Markland has the right at any time by written notice
          to
          repurchase from Syqwest these 750,000 shares of restricted common stock
          at a
          purchase price of $0.60 per share. Based on this redemption right and the
          restriction on the sale of such securities, Markland has valued these shares
          at
          the redemption price of $450,000.
  During
          the year ended June 30, 2004, Markland issued to a consultant, 13,790 shares
          of
          common stock valued at $44,486. These fully vested shares were issued for
          enhanced media and corporate communications programs. This amount was charged
          to
          operations in the year ended June 30, 2004.
  In
          November 2003, Markland entered into a one year agreement with a consultant
          to
          perform certain services with regard to investor relations for Markland.
          In
          consideration for these services, Markland agreed to issue a cumulative
          total of
          90,908 shares of its common stock in quarterly installments of 22,727 shares.
          Since these shares are earned over the term of the agreement and are subject
          to
          forfeiture, the Company has accounted for these under variable accounting.
          Accordingly, the Company records at fair value the unearned shares each
          period
          through the term of the agreement. As of June 30, 2004, the Company has
          recognized unearned compensation, additional paid in capital and stock
          compensation of $91,005, $273,012 and $182,011, respectively. In the quarter
          ended September 30, 2004, the Company issued these consultants 160,000
          shares of
          common stock valued at $106,000 in order to settle and terminate the contract.
          All remaining unearned compensation was charged to expense in the year
          ended
          June 30, 2005.
  In
          November 2003, Markland entered into an agreement with a consultant to
          prepare
          an equity research report. In consideration for these services, Markland
          issued
          a total of 37,099 shares valued at $105,732. This amount was charged to
          operations in the year ended June 30, 2004.
  During
          the year ended June 30, 2004, Markland awarded three non-officer employees
          of
          Markland a total of 19,445 shares valued at $48,036.
  During
          March of 2004, Markland issued 42,500 shares of common stock valued at
          $66,725
          to ASI as a penalty for not having an effective registration statement
          for the
          shares issued to ASI. This amount was charged to interest expense in the
          year
          ended June 30, 2004.
  F-32
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 On
          March
          15, 2004, in conjunction with the acquisition of STR, Markland agreed to
          issue
          to George Yang 50,000 shares of common stock valued at $66,500 in exchange
          for
          his agreement to amend a note payable. This amount was charged to interest
          expense in the year ended June 30, 2004.
  On
          February 12, 2004, Markland entered into a one year agreement for investment
          banking services. This agreement calls for quarterly payments of $25,000
          payable
          in stock. As of June 30, 2004, the Company has
 recognized
          unearned compensation, additional paid in capital and stock compensation
          of
          $50,000, $100,000 and $50,000, respectively. All remaining unearned compensation
          was charged to expense in the year ended June 30, 2005.
  Pursuant
          to a private placement transaction completed on April 2, 2004, Markland
          issued
          the following:
 ·
                  3,333,333
                      shares of Markland common stock at $0.60 per
                      share;
 
 ·
                  300,000
                      shares of Markland common stock in order to get the investors'
                      consent to
                      the private placement on April 16, 2004 (see
                      below)
 ·
                    warrants
                        to purchase 3,333,333 shares of Markland common stock at
                        $1.00 per share
                        with a three year term;
 
 ·
                  warrants
                      to purchase 333,333 shares of Markland common stock at $1.40
                      per share
                      with a three year term that were issued as finders'
                      fees;
 
 ·
                  warrants
                      to purchase 50,000 shares of Markland common stock at $1.00
                      per share with
                      a three year term that were issued in order to get the investors'
                      consent
                      to the private placement on April 16, 2004 (see
                      below).
  Markland
          agreed to register for resale 150% of the 3,333,333 shares of its common
          stock
          in this offering and 110% of the 3,333,333 shares of its common stock that
          are
          issuable to certain stockholders upon exercise of the warrants to cover
          the
          shares of its common stock, if any, issuable to certain selling stockholders
          as
          liquidated damages for breach of certain covenants contained in or as a
          result
          of adjustments contemplated by certain provisions of the Securities Purchase
          Agreement dated as of April 2, 2004 or the Registration Rights Agreement
          dated
          as of April 2, 2004. Markland also agreed to register 110%
          of
          the 383,333 shares of its common stock that are issuable to certain stockholders
          upon exercise of the warrants issued as finders' fee and in order to obtain
          the
          investors' consent.
  Pursuant
          to a private placement transaction completed on April 16, 2004, Markland
          issued
          the following:
 ·
                  2,500,000
                      shares of Markland common stock;
 
 ·
                  warrants
                      to purchase 3,333,333 shares of Markland common stock at $1.50
                      per share
                      with a three year term;
 
 ·
                  warrants
                      to purchase 25,000 shares of Markland common stock at $2.00
                      per shares
                      with a three year term that were issued as finders'
                      fees.
  F-33
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Markland
          agreed to register for sale 150% of the 2,500,000 shares of its common
          stock
          sold to certain selling stockholders pursuant to the Securities Purchase
          Agreement dated April 16, 2004 and 110% of the 3,333,333 shares of its
          common
          stock that are issuable to certain stockholders upon exercise of the warrants sold
          in
          this private placement, to cover the shares of its common stock, if any,
          issuable to certain selling stockholders as liquidated damages for breach
          of
          certain covenants contained in or as a result of adjustments contemplated
          by
          certain provisions of the Securities Purchase Agreement dated as of April
          16, 2004
          or
          the Registration Rights Agreement dated as of April 2, 2004.
  Pursuant
          to a private placement transaction completed on May 3, 2004, Markland issued
          the
          following:
  ·
                  7,098,750
                      shares of its common stock;
 
 ·
                  warrants
                      to purchase 7,098,750 shares of its common stock at $1.50 per
                      shares with
                      a three year term;
 
 ·
                  warrants
                      to purchase 529,800 shares of its common stock at $1.50 per
                      share with a
                      three year term that were issued as finders'
                      fees.
  In
          conjunction with these three private placements, Markland received gross
          proceeds of $9,679,000 and net proceeds of $8,226,845 (after deducting
          finders'
          fees and transaction costs).
  Markland
          has entered into compensation agreements with certain officers and a consultant
          (see Note 12) which provide for, among other things, certain performance-based
          stock grants. Due to the indeterminate number of shares to be issued under
          these
          agreements, Markland accounts for these stock compensation plans under
          variable
          accounting. Accordingly, for the year ended June 30, 2005, Markland recognized
          unearned compensation, additional paid in capital and stock compensation
          expense
          of $5,196,630, $10,277,728 and $5,084,587, respectively. For the year ended
          June
          30, 2004, the Company recognized unearned compensation, additional paid
          in
          capital and stock compensation expense of $11,035,110, $15,414,419 and
          $4,379,309, respectively. In connection with these agreements, Markland
          issued
          30,506,253 and 5,830,713 shares of common stock during the years ended
          June 30,
          2005 and 2004, respectively.
  During
          the year ended June 30, 2005, Markland also issued the following:
  ·
                  4,373,410
                      shares of its common stock to other employees and consultants
                      as
                      compensation.
 
 ·
                  73,810,693
                      shares of its common stock on conversion of 12,938 Series D
                      shares.
 
 ·
                  833,333
                      shares of its common stock in connection with satisfying a
                      negotiated
                      settlement agreement with an existing investor and a result
                      of the
                      Convertible Note and Warrant Purchase Agreement entered into
                      on September
                      21, 2004 (see Note 7).
 
 ·
                  9,193,750
                      shares of its common stock in connection with the exercise
                      of warrants for
                      gross proceeds of $5,516,250.
 
 ·
                  152,778
                      shares with a fair value of $70,278 of its common stock issued
                      as
                      settlement in connection with litigation.
 
 ·
                  20,469,871
                      shares of its common stock on conversion of secured convertible
                      notes.
 
 ·
                  2,623,467
                      shares of its common stock in satisfaction of accrued interest
                      on
                      convertible notes
 
 ·
                  10,394,860
                      shares of its common stock in connection with the acquisition
                      of Technest,
                      Genex and EOIR.
  Markland
          has established the following reserves for the future issuance of common
          stock
          as follows:
 Reserve
                    for the exercise of warrants
                
                
                29,000,000Reserve
                    for stock option plan
                
                
                25,000,000Reserve
                    for conversion of Series A Preferred Stock
                
                
                10,000Reserve
                    for conversion of Series D Preferred Stock
                
                
                197,000,000Reserve
                    for conversion of Technest Series B preferred stock
                
                
                20,000,000Reserve
                    for conversion of secured promissory notes
                
                
                36,500,000Total
                    reserves
                
                
                307,510,000
   F-34
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
   The
          Company is also obligated to issue certain shares under employment and
          consulting agreements (see Note 12).
 
 Technest
          Series B Convertible Preferred Stock
 
 In
          conjunction with Markland’s acquisition of Technest and Technest’s acquisition
          of Genex (see Note 3), Technest issued, among other securities, 1,149,425
          shares
          of Series B Convertible Preferred Stock (“Series B Preferred Stock”). The Series
          B Preferred Stock will be convertible into Markland common stock upon the
          earlier to occur of (a) February 14, 2006 or (b) a date which is the first
          trading day after the date on which Markland common stock has a closing
          bid
          price of $2.50 or more for five consecutive trading days. The number of
          shares
          to be issued will be determined by dividing the quotient of (a) $5,000,000
          divided by the lower of (i) $0.60 and (ii) the market price (as defined
          in the
          Merger Agreement) by (b) 1,149,425. Technest has determined that there
          was a
          beneficial conversion feature limited to the allocated proceeds, in the
          amount
          of approximately $2,050,000 related to the issuance of the Series B Preferred
          Stock. This beneficial conversion feature will be recorded by the Company
          as a
          deemed dividend to the minority interest holders in the period in which
          the
          Series B Preferred Stock becomes convertible. On June 24, 2005, Markland
          exchanged 2,750 shares of the Company’s Series D preferred shares for 632,182
          shares of Technest Series B Preferred Stock. Subsequent to year end, the
          Technest Series B Preferred Stock held by Markland was cancelled. In connection
          with this exchange, the Company recognized a beneficial conversion feature
          of
          $340,000 on the Series D preferred stock (see above).
 
 Subsequent
          to June 30, 2005, the remaining Technest Series B Preferred Stock was exchanged
          for Markland Series D preferred stock (see Note 17).
 
 Minority
          Interest
 
 As
          of
          June 30, 2005, the minority interest in Technest is comprised of the
          following:
 Outside
                    investment in Technest common and preferred stock
                
                
                
                
                $
                3,172,305Deemed
                    dividends related to beneficial conversion features of
                        Technest preferred stock
                
                
                2,174,858Minority
                    interest in net loss of Technest (7%)
                
                
                (191,005
                )
                
                1,983,853Minority
                    interest
                
                
                
                
                $
                5,156,158
 
 **10.**
                  **OPTIONS
                      AND WARRANTS**
 
 Options
  In
          conjunction with the Company's acquisition of EOIR (see Note 3), the Company
          adopted the 2004 Stock Incentive Plan ("the Plan"). The Plan authorizes
          the
          Company to issue up to 25,000,000 of common shares in the form of options,
          stock
          awards, performance share awards or stock appreciation rights.
 
 The
          Company also adopted the 2005 Stock Award Plan, which authorizes the Company
          to
          issue up to 25,000,000 shares of common stock in the form of stock
          awards.
  On
          June
          29, 2004, the Company issued options to eleven former minority owners of
          EOIR
          who have continued employment with the Company. These options have a ten
          year
          term and vest ratably over a five year period. Ten of these employees received
          options to purchase 9,345,737 shares of common stock at a price of $.3775.
          On
          the date of grant, the intrinsic value of these options, $3,528,016, was
          recorded as unearned stock-based compensation and additional paid in capital.
          This intrinsic value will be amortized to stock compensation over the five
          year
          vesting period.
  F-35
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 One
          employee received five options, each of which allows for the purchase of
          a
          number of shares equal to .11799575 times a fraction of $1,600,000 divided
          by
          the fair value of the stock on the vesting date. One of these options vests
          each
          year for the next five years. The exercise price of these options will
          be
          one-half the fair value of the stock on the vesting date. The intrinsic
          value of
          these options based on the fair value of the stock on June 30, 2005 is
          $471,983.
          This intrinsic value has been recorded as unearned stock-based compensation
          and
          additional paid in capital. Due to the variable nature of the exercise
          price and
          number of shares to be issued under these options, the intrinsic value
          will be
          remeasured each period until the terms are fixed. The intrinsic value of
          each
          option will be amortized over the vesting periods. As of June 30, 2005,
          the
          maximum number of shares issuable under these options is 7,866,383.
  During
          the three months ended December 31, 2004, 3,009,574 options were cancelled
          due
          to the departure of four employees. In conjunction with the departure of
          two of
          these employees, the Company modified the options so that the employees
          were
          immediately vested in 40% of the options held. Without modification, these
          options would have been cancelled upon termination. As a result of this
          modification, the Company remeasured the intrinsic value on the remeasurement
          date and determined that there was no incremental value. Therefore, the
          Company
          fully amortized the remaining unearned portion of the vested options upon
          modification. The cancellation of the remaining unvested options resulted
          in a
          reduction in unearned compensation and additional paid-in capital of $1,136,099.
 
 In
          conjunction with an employment agreement with Dr. Mackin (see Note 12),
          the
          Company accelerated the vesting of Dr. Mackin’s options to purchase 1,250,286
          shares of the Company’s common stock at a price of $.3775 per share. As a result
          of this modification, the Company remeasured the intrinsic value of the
          modified
          options and determined that there was no additional intrinsic value. The
          Company
          fully amortized the unearned compensation related to these options.
 
 For
          the
          year ended June 30, 2005, the Company recorded $1,322,411 in amortization
          relating to the Plan options.
 
 On
          May
          18, 2005, the Company entered into a Restricted Stock Grant Agreement with
          Dr.
          Mackin, pursuant to which Dr. Mackin exchanged vested options to purchase
          1,250,286 shares of the Company’s common stock at a price of $.3775 per share
          for 1,250,286 shares of Common Stock.  Subject to the terms of the
          Restricted Stock Grant Agreement, the shares of Common Stock issued to
          Dr.
          Mackin are subject to forfeiture in the event that Dr. Mackin’s tenure with the
          Company is terminated before a registration statement covering the shares
          has
          been declared effective by the Securities and Exchange Commission. In addition,
          four other employees also exchanged options to purchase 231,750 shares
          of common
          stock at $.3775 per share for 231,750 shares of the Company’s common stock. The
          Company charged to operations $166,613 relating to these exchanges of equity
          instruments.
 
 Markland
          has also agreed to grant options to purchase an additional 5,000,000 shares
          of
          common stock to employees of EOIR in the future. Markland expects that
          these
          options will vest over five years after the date of grant and will have
          an
          exercise price equal to the fair market value of the common stock on the
          date of
          grant.
  In
          connection with the acquisition of Genex (see Note 3), Markland agreed
          to
          replace options to purchase 312,000 shares of Genex common stock with fully
          vested options for the purchase of the same number of shares of Markland
          common
          stock with an exercise price equal to the fair value of Markland’s common stock
          on the closing date of the Genex acquisition ($0.60).
 
 There
          were no options issued in the year ended June 30, 2005 and 3,344,293 were
          vested
          at June 30, 2005.
  F-36
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 SFAS
          No.
          123 requires the measurement of the fair value of stock options, to be
          included
          in the statement of loss or disclosed in the notes to financial statements
          (see
          Note 2). The Company has determined that it will continue to account
          for stock-based compensation for employees under Accounting Principles
          Board
          Opinion No. 25, Accounting for Stock Issued to Employees, and has elected
          the
          disclosure-only alternative under SFAS Nos. 123 and 148 using the Black-Scholes
          option pricing model prescribed by SFAS No. 123. The assumptions used and
          weighted average information for the years ended June 30, 2005 and 2004
          is as
          follows:
 
 2005
                
                2004Risk-free
                    interest rate
                
                
                3.53
                %
                
                3.05
                %Expected
                    dividend yield -
                
                
                --
                
                
                --Expected
                    lives
                
                
                9
                    years
                
                
                3
                    yearsExpected
                    volatility
                
                
                69
                %
                
                149.4
                %Weighted
                    average fair value per share of options granted
                
                $
                0.12
                
                $
                0.71
 
 Warrants
 Private
          Placement Warrants
 
 In
          connection with private placements of common stock in April and May 2004,
          the
          Company issued warrants to purchase a total of 13,870,216 shares of common
          stock
          at exercise prices between $1.00 and $1.50. Included in these are warrants
          to
          purchase 12,932,083 shares of common stock issued to investors in the private
          placements. The value of these warrants was recorded as additional paid
          in
          capital. The Company has estimated the fair value of these warrants on
          the grant
          date as $19,391,359. The remaining warrants to purchase a total of 938,133
          shares of common stock were issued as finders' fees. Since these warrants
          are
          considered stock issuance costs, there is no net impact on equity. The
          Company
          has estimated the fair value of these warrants on the grant date as
          $1,116,945.
  Trilogy
          Warrants
 
 On
          December 7, 2004, we entered into an Agreement with Trilogy Capital Partners,
          Inc. ("Trilogy"). Pursuant to that agreement, for a period of twelve months,
          Trilogy will provide publicity and marketing services for us. In addition,
          Trilogy will perform the functions of an in-house Investor Relations Officer
          for
          us. In return we are required to pay Trilogy a fee of $10,000 per month
          for
          twelve months. In addition, pursuant to this agreement, we issued to Trilogy
          warrants to purchase four million (4,000,000) shares of our common stock,
          par
          value $0.0001 per share, with an exercise price of $0.60 per share and
          three
          month vesting. We also issued warrants to purchase 400,000 shares of our
          common
          stock on substantially the same terms to an individual for the introduction
          to
          Trilogy. The fair value of these warrants was calculated at $2,391,592,
          was
          recorded as unearned compensation and additional paid-in capital and was
          to be
          expensed over the twelve months service period from December 7, 2004. In
          February 2005, we terminated our relationship with Trilogy and Trilogy
          agreed to
          cancel and return the outstanding warrants. The unamortized unearned
          compensation balance of $2,253,616 was reversed. Prior to cancellation,
          the
          Company recorded amortization of unearned compensation in Selling, General
          and
          Administrative expense of $137,976 related to this agreement.
 
 DKR
          Warrants
 
 On
          December 28, 2004, we entered into agreements with DKR Soundshore Oasis
          Holding
          Fund Ltd. and DKR Soundshore Strategic Holding Fund Ltd. (collectively
          "DKR") to
          amend terms of warrants issued to DKR on September 21, 2004 (the "DKR
          Warrants"), for the purchase of up to 6,500,000 shares of our common stock,
          $0.0001 par value per share issued in connection with our September 21,
          2004
          private placement (see Note 7). Specifically, subject to the terms and
          conditions contained in the DKR Amendment, the parties have agreed:
 
 ·
                To
                    amend the DKR Warrants so that DKR may exercise all or any portion
                    of the
                    Warrants for an exercise price of $0.60 per share of the Common
                    Stock,
                    from December 28, 2004 until February 28, 2005 (the "DKR Exercise
                    Period"). At the end of the DKR Exercise Period, the amendment
                    shall
                    expire and the exercise terms of the DKR Warrants existing prior
                    to
                    December 28, 2004, shall be effective.
 
 ·
                That
                    DKR shall exercise a minimum of $600,000 in exercise price of
                    the DKR
                    Warrants, as amended, on or before the close of business on December
                    31,
                    2004.
 
 ·
                That
                    the number of shares of Common Stock subject to the DKR Warrants
                    shall not
                    be adjusted as a result of the temporary reduction in exercise
                    price.
 
 ·
                At
                    the end of the DKR Exercise Period, we will issue to DKR warrants
                    to
                    purchase a number of shares of Common Stock equal to the number
                    of shares
                    purchased by DKR during the DKR Exercise Period at an exercise
                    price of
                    $1.50 per share (the "New DKR Warrants").
   F-37
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 On
          February 7, 2005, the Company entered into agreements with DKR to reduce
          the
          exercise price of the New DKR Warrants issuable to DKR pursuant to the
          DKR
          Amendment dated December 28, 2004 (see above). Specifically, subject to
          the
          terms and conditions in the Agreements, the parties have agreed:
 
 ·
                That
                    DKR shall purchase no less than an aggregate of 1,500,000 shares
                    of Common
                    Stock by exercising Common Stock Purchase Warrant, as amended,
                    no later
                    than February 7, 2005.
 
 ·
                That
                    the exercise price of the Replacement Warrants issued to DKR
                    pursuant to
                    the Amendments shall be reduced from $1.50 per share to $0.50
                    per share.
 
 ·
                That
                    DKR waives any default or potential default that the Amendments
                    may
                    otherwise have caused under those certain Secured 8% Convertible
                    Notes
                    made by the Company and payable to DKR executed in connection
                    with the
                    September 21, 2004, private placement, and any other defaults
                    under the
                    other transaction contracts and agreements between DKR and the
                    Company
                    that may arise out of the Amendments.
 
 The
          parties have further agreed that DKR shall have piggy-back registration
          rights
          with regard to the shares of Common Stock underlying the Replacement Warrants.
 
 As
          a
          result of these modifications, Markland remeasured the fair value of the
          DKR
          Warrants. Since the beneficial conversion feature originally measured (see
          Note
          6) exceeded the proceeds allocated to the convertible notes, no additional
          beneficial conversion feature was recorded as a result of this modification.
 
 During
          the year ended June 30, 2005, DKR exercised warrants to purchase 5,500,000
          shares of the Company's common stock at $0.60 per share for proceeds of
          $3,300,000.
 
 Greenfield
          Capital Warrants
 
 On
          December 29, 2004, we entered into an agreement with Greenfield Capital
          Partners
          LLC ("Greenfield") to amend the terms of a warrant issued to Greenfield
          (the
          "Greenfield Warrants") on September 22, 2004 for the purchase of up to
          750,000
          shares of Common Stock as compensation for consulting services performed
          by
          Greenfield in connection with our September 21, 2004 private placement.
          Specifically, subject to the terms and conditions contained in the Greenfield
          Amendment, the parties have agreed:
 
 ·
                To
                    amend the Greenfield Warrants so that Greenfield may exercise
                    all or any
                    portion of the Greenfield Warrant for an exercise price of $0.60
                    per share
                    of Common Stock, from December 29, 2004 until January 31, 2005
                    (the
                    "Greenfield Exercise Period").
 
 ·
                That
                    Greenfield shall exercise a minimum of 400,000 of the Greenfield
                    Warrants,
                    as amended, on or before December 31, 2004, and 350,000 of the
                    Greenfield
                    Warrants, as amended, on or before the close of business on January
                    31,
                    2005.
 
 ·
                That
                    the number of shares of Common Stock subject to the Greenfield
                    Warrant
                    shall not be adjusted as a result of the temporary reduction
                    in exercise
                    price.
 
 ·
                That
                    section 2(b) of the Greenfield Warrant shall be amended so as
                    to prohibit
                    the exercise of the Greenfield Warrants to the extent that such
                    issuance
                    would result in Greenfield beneficially owning more than 9.99%
                    of the
                    outstanding shares of Common Stock.
 
 As
          a
          result of this modification of terms, Markland remeasured the fair value
          of the
          Greenfield Warrants. Markland determined there was no material incremental
          value
          as a result of this remeasurement.
 
 During
          the year ended June 30, 2005, Greenfield exercised warrants to purchase
          750,000
          shares of the Company's common stock at $0.60 per share for proceeds of
          $450,000.
  F-38
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Southridge
          Partners LP Warrant
 
 On
          December 29, 2004, we entered into an agreement with Southridge Partners
          LP
          ("Southridge") to amend the terms of a warrant issued to Southridge on
          November
          9, 2004 (the "Southridge Warrant") for the purchase of up to 568,750 shares
          of
          Common Stock in connection with our November 9, 2004, private placement.
          Specifically, subject to the terms and conditions contained in the Southridge
          Amendment, the parties have agreed:
 
 ·
                To
                    amend the Southridge Warrant so that Southridge may exercise
                    all or any
                    portion of the Southridge Warrant for an exercise price of $0.60
                    per share
                    of Common Stock, from December 29, 2004 until December 31, 2004
                    (the
                    "Southridge Exercise Period").
 
 ·
                That
                    Southridge shall exercise all of the of the Southridge Warrant,
                    as
                    amended, on or before the close of business, New York City time,
                    on
                    December 31, 2004.
 
 ·
                That
                    the number of shares of Common Stock subject to the Southridge
                    Warrant
                    shall not be adjusted as a result of the temporary reduction
                    in exercise
                    price.
 
 ·
                That
                    section 11(a) of the Southridge Warrant shall be deleted in its
                    entirety
                    so as to eliminate restrictions on the ability of Southridge
                    to exercise
                    the Southridge Warrants based on the number of shares of Common
                    Stock
                    beneficially owned by Southridge.
 
 As
          a
          result of this modification of terms, Markland remeasured the fair value
          of the
          Southridge Warrants. Markland determined there was no material incremental
          value
          as a result of this remeasurement. Since the beneficial conversion feature
          originally measured (see Note 7) exceeded the proceeds allocated to the
          convertible notes, no additional beneficial conversion feature was recorded
          as a
          result of this modification.
 
 On
          December 30, 2004, Southridge exercised warrants to purchase 568,750 shares
          of
          the Company's common stock at $0.60 per share for proceeds of $341,250.
 
 Stefansky
          and Rosenblum Warrants
 
 On
          January 4, 2005, we entered into agreements with David Stefansky and Richard
          Rosenblum to amend the terms of warrants issued (the "Stefansky and Rosenblum
          Warrants") on September 21, 2004 in connection with our private placement
          on
          that date for the purchase of up to 375,000 shares of our common stock.
          Specifically, subject to the terms and conditions contained in the Stefansky
          and
          Rosenblum Amendment, the parties have agreed:
 
 ·
                To
                    amend the Stefansky and Rosenblum Warrants so that Stefansky
                    and Rosenblum
                    may exercise all or any portion of the Stefansky and Rosenblum
                    Warrants
                    for an exercise price of $0.60 per share of common stock, from
                    January 4,
                    2005, until January 7, 2005.
 
 ·
                That
                    Stefansky and Rosenblum shall exercise all of the Stefansky and
                    Rosenblum
                    Warrants, as amended, on or before the close of business on January
                    7,
                    2005.
 
 ·
                That
                    the number of shares of common stock subject to the Stefansky
                    and
                    Rosenblum Warrants shall not be adjusted as a result of the temporary
                    reduction in exercise price.
 
 As
          a
          result of this modification of terms, Markland remeasured the fair value
          of the
          Stefansky and Rosenblum Warrants. Markland determined there was no material
          incremental value as a result of this remeasurement.
 
 On
          January 5, 2005, warrants for 750,000 shares of common stock were exercised
          for
          proceeds of $450,000.
  F-39
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Harborview
          Warrants
  On
          January 4, 2005, we entered into an agreement (the "Harborview Amendment")
          with
          Harborview Master Fund LP ("Harborview") to amend the terms of a warrant
          issued
          to Harborview on November 9, 2004 (the "Harborview Warrant") for the purchase
          of
          up to 1,625,000 shares of Common Stock in connection with our November
          9, 2004,
          private placement. Specifically, subject to the terms and conditions contained
          in the Harborview Amendment, the parties have agreed:
   ·
                To
                    amend the Harborview Warrant so that Harborview may exercise
                    all or any
                    portion of the Harborview Warrant for an exercise price of $0.60
                    per share
                    of Common Stock, from January 4, 2005 until February 28, 2005,
                    after which
                    time the exercise price will return to its original level.
  ·
                That
                    Harborview shall exercise the Harborview Warrant to purchase
                    not less than
                    250,000 share of Common Stock on or before the close of business,
                    New York
                    City time, on January 7, 2005.
  ·
                That
                    the number of shares of Common Stock subject to the Harborview
                    Warrant
                    shall not be adjusted as a result of the temporary reduction
                    in exercise
                    price.
  During
          the year ended June 30,, 2005, warrants for 1,625,000 shares of common
          stock
          were exercised for proceeds of $975,000.
  James
          LLC Warrants
 
 As
          set
          forth in the Lock-Up agreement with the Series D Holder dated September
          21,
          2004,the Company issued warrants to purchase one million eighty-eight thousand
          one hundred sixty (1,088,160) shares of Common Stock, at an exercise price
          of
          $0.60 per share on January 5,2005.
 
 Replacement
          Warrants
 
 Based
          on
          the warrant exercises done in connection with the amendments described
          above, on
          February 7, 2005, the Company issued warrants to purchase 568,750 shares
          of
          common stock to Southridge Partners LP, warrants to purchase 1,625,000
          shares of
          common stock to Harborview Master Fund LP, warrants to purchase 375,000
          shares
          of common stock to Richard Rosenblum, and warrants to purchase 375,000
          shares of
          common stock to David Stefansky (collectively, the "Warrants"). The Warrants
          entitle the holders thereof to purchase an aggregate 2,943,750 shares of
          common
          stock at an exercise price of $0.60 per share at any time and from time
          to time
          through, February 7, 2010.
 
 On
          March
          10, 2005, the Company issued warrants to purchase 5,500,000 of common stock
          to
          DKR. The warrants entitle the holders thereof to purchase shares of common
          stock
          at an exercise price of $0.50 per share at any time and from time to time
          through March 10, 2010.
 
 The
          majority of these replacement warrants were related to the private placements
          of
          convertible promissory notes for which full beneficial conversion features
          were
          recognized. Therefore, no additional value was assigned to them. However,
          the
          warrants issued to Stefansky and Rosenblum were originally recorded as
          deferred
          financing costs. Therefore, the value of the replacement warrants issued
          to
          Stefansky and Rosenblum, $189,476, was charged to non-cash interest expense
          in
          the year ended June 30, 2005
 
 On
          March
          29, 2005, we entered into agreements with DKR Soundshore Oasis Holding
          Fund Ltd.
          and DKR Soundshore Strategic Holding Fund Ltd. (collectively the "DKR
          Investors"); and Southridge Partners LP, Harborview Master Fund LP, Richard
          Rosenblum and David Stefansky (collectively the "Remaining Investors")
          to amend
          the exercise price of warrants to purchase an aggregate 8,443,750 shares
          of our
          common stock, $.0001 par value per share issued to the Remaining Investors
          on
          February 7, 2005 and to the DKR Investors on March 10, 2005 (the "Warrants").
          According to the terms of the agreements, the exercise price of the Warrants
          will be amended to $.34 per share. All remaining terms and conditions of
          the
          Warrants remain unchanged. Markland determined there was no material incremental
          value as a result of this remeasurement.
  F-40
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
   At
            June
            30, 2005, the Company had the following outstanding warrants:
  Number
                    ofShares
                
                Exercise
                
                Date
                    ofExercisable
                
                Price
                
                ExpirationIssued
                    in conjunction with April 2, 2004 private placement
                
                
                3,333,333
                
                $
                1.25
                
                
                April
                    2, 2007333,333
                
                $
                1.40
                
                
                April
                    2, 2007Issued
                    in conjunction with April 16, 2004 private placement
                
                
                2,500,000
                
                $
                1.50
                
                
                April
                    16,200725,000
                
                $
                2.00
                
                
                April
                    16,2007Issued
                    in conjunction with May 3, 2004 private placement
                
                
                7,098,750
                
                $
                1.50
                
                
                May
                    3, 2007529,800
                
                $
                1.50
                
                
                May
                    3, 2007Issued
                    in conjunction with September 21, 2004 convertible note
                
                
                1,000,000
                
                $
                0.60
                
                
                September
                    21, 2009Issued
                    in conjunction with November 9, 2004 convertible note
                
                
                337,500
                
                $
                1.50
                
                
                November
                    9, 2007Issued
                    in conjunction with December 7, 2004 consulting agreement
                
                
                400,000
                
                $
                0.60
                
                
                November
                    30, 2007Issued
                    in conjunction with September 21, 2004 lock up agreement
                
                
                1,088,160
                
                $
                0.60
                
                
                January
                    5, 2009Issued
                    in conjunction with March 29, 2005 agreement
                
                
                8,443,750
                
                $
                0.60
                
                
                March
                    8, 2010Total
                
                
                25,089,626
 
 Weighted
                    average exercise price
                
                $
                1.00Weighted
                    average remaining life
                
                
                
                
                
                3.00
                    years
  All
          warrant agreements contain anti-dilution provisions which, upon exercise,
          may
          cause the exercise price and number of shares of common stock issued to
          differ
          from those listed above.
  **11.**
                **NET
                    LOSS PER SHARE**
  Securities
          that could potentially dilute basic earnings per share ("EPS") in the future,
          and that were not included in the computation of diluted EPS because to do
          so
          would have been anti-dilutive for the periods presented, consists of the following:
  Shares
                    PotentiallyIssuableSeries
                    A Redeemable Convertible Preferred Stock
                
                
                10,000Series
                    D Convertible Preferred Stock (convertible at 80% of market
                    value)
                
                
                197,000,000Technest
                    Series B preferred stock
                
                
                20,000,000Stock
                    options
                
                
                13,300,000Warrants
                
                
                29,000,000Convertible
                    Notes
                
                
                36,500,000Total
                    as of June 30, 2005
                
                
                295,810,000
 
 **12.**
                **COMMITMENTS
                    AND CONTINGENCIES**
  Compensation
          Agreements
  Effective
          January 2003, Markland entered into a one-year compensation agreement with
          the
          former chief executive officer and three three-year agreements with an
          officer,
          the president and chief financial officer, and two consultants to Markland,
          Robert Tarini and Verdi Consulting, which provided for aggregate remuneration
          of
          $47,500 per month.
  F-41
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 One
          of
          these agreements provided for the issuance of 1.67% of Markland's outstanding
          common stock in three installments, 50% of the shares were issued on or
          about
          March 21, 2003, 25% of the shares on or about July 1, 2003 and 25% of the
          shares
          on or about October 1, 2003. A final issuance occurred as of December 31,
          2003,
          so that the total amount of shares issued up to December 31, 2003 will
          equal
          1.67% of the outstanding common stock as of December 31, 2003.
 
 In
          addition, these three agreements provide in total for the issuance of 5.01%
          of
          the Company's outstanding common stock in four installments on a fully
          diluted
          basis based upon certain performance criteria being met. Upon contract
          signing,
          the Company issued a number of shares of Common Stock then equivalent to
          0.5% of
          the total number of shares of Common Stock then outstanding, inclusive
          of such
          Employee's/Consultant's Shares; on or about July 1, 2003, Company will
          issue to
          these Employee/Consultants a number of shares of Common Stock then equivalent
          to
          0.5% of the total number of shares of Common Stock then outstanding, inclusive
          of such Employee's/Consultant's Shares if the Second Quarter gross revenue
          target has been met; and on or about October 1, 2003 Company will issue
          to these
          Employee/Consultants a number of shares of Common Stock then equivalent
          to 0.67%
          of the total number of shares of Common Stock then outstanding, inclusive
          of
          such Employee's/Consultant's Shares, minus the aggregate number of Shares
          issued
          to these parties in the first two installments if the Third Quarter gross
          revenue target has been met. If necessary, an additional issuance will
          occur in
          January 2004, so that the total amount of shares issued will equal 5.01%
          of the
          outstanding common stock calculated on a fully-diluted basis assuming the
          conversion of all convertible securities as of December 31, 2003.
 
 All
          of
          the shares issuable under these four agreements were earned as of January
          1,
          2004. Accordingly, a total of 1,410,719 shares were issued, of which 119,360
          were issued during the year ended June 30, 2003 and 1,291,359 were issued
          during
          the year ended June 30, 2004.
 
 On
          May
          12, 2004, Markland entered into five-year compensation agreements with
          two
          executives, the chairman and chief executive officer and the president
          and chief
          financial officer, and a consultant, Verdi Consulting. These agreements,
          which
          are effective on January 1, 2004, provide for the following remuneration:
 
 Base
          annual remuneration of $300,000 each (an aggregate of $900,000) payable
          over the
          five-year period ending January 2, 2009;
 
 Discretionary
          bonuses over the term of the agreement of up to 300% of the base remuneration;
          and
 
 Conditional
          stock grants over the period commencing April 1, 2004 through January 2,
          2008,
          based on defined performance criteria. The stock grants, if all earned,
          entitle
          each of the three parties to receive up to 7.5% of Markland's common stock
          on a
          fully diluted basis. These grants are earned according to the following
          schedule:
 Grant
                    1
                
                
                2.5%
                
                
                April
                    1, 2004Grant
                    2
                
                
                1.0%
                
                
                July
                    1, 2004Grant
                    3
                
                
                1.0%
                
                
                October
                    1, 2004Grant
                    4
                
                
                1.0%
                
                
                January
                    2, 2005Grant
                    5
                
                
                1.0%
                
                
                January
                    2, 2006Grant
                    6
                
                
                0.5%
                
                
                January
                    2, 2007Grant
                    7
                
                
                0.5%
                
                
                January
                    2, 2008
 The
          number of shares of common stock to be granted on each grant date is equal
          to
          the product of (a) the number of fully diluted shares outstanding at the
          grant
          date and (b) the stock percentage associated with that grant date.
  F-42
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 In
          the
          event of a change in control of Markland during the period covered by the
          agreement, each executive/consultant will automatically be granted all
          remaining
          stock grants and will be due cash and expense compensation for the shorter
          of
          (i) three years from the date of the change in control, or (ii) until the
          end of
          the term of the agreement. A change in control is defined by the agreements
          as a
          change in the majority ownership of the equity of Markland, or the resignation
          or termination of the majority of the board of directors within a two month
          period, or the replacement of the CEO or the President of Markland.
 
 In
          June
          2004, these agreements were modified to remove the anti-dilution provision.
          During the six months ended December 31, 2004, a total of 6,637,145 shares
          of
          common stock were issued under these new agreements.
 
 In
          December 2004 these agreements were modified to provide a mechanism whereby
          the
          Company may acquire all or a portion of the Common Stock granted to each
          executive/consultant for a nominal sum in the event that their relationship
          with
          the Company terminates prior to the registration of those shares. As part
          of
          this modification, the stock grants were accelerated so that Grants 5 and
          6 were
          earned on January 2, 2005 and Grants 7 and 8 will be earned on July 1,
          2005.
 
 On
          December 7, 2004, we appointed Gino Pereira as our Chief Financial Officer.
          The
          employment agreement for Mr. Pereira provides for a term of five years,
          beginning December 1, 2004. Mr. Pereira's salary is set at $225,000, with
          a
          provision that such salary shall be increased to $300,000 at such time
          when Mr.
          Pereira's duties with the Company preclude him from performing work for
          other
          clients. The employment agreement provides for a grant of 3,000,000 shares
          of
          the Company's Common Stock to Mr. Pereira on the date of signing. These
          shares
          are unregistered shares and were granted in reliance on Section 4(2) of
          the
          Securities Act of 1933. The employment agreement provides for payment to
          Mr.
          Pereira upon a change in control resulting in the voluntary or involuntary
          termination of a majority of the board of directors, the chief executive
          officer
          or the president of an amount equal to the lesser of three times his then
          current salary or the salary owed through the end of the employment agreement
 
 The
          employment agreement provides a mechanism whereby the Company may acquire
          all or
          a portion of the Common Stock granted to Mr. Pereira for a nominal sum
          in the
          event that his engagement with the Company is terminated prior to the
          registration of those shares. Since August of 2004, Mr. Pereira had been
          acting
          as a paid consultant to us in matters involving finances. As of November
          18,
          2004, Mr. Pereira had received $62,497 for his consulting services.
 
 On
          December 7, 2004, we appointed Dr. Joseph P. Mackin as our chief operating
          officer. Dr. Mackin was a selling shareholder of EOIR when we purchased
          it on
          June 30, 2004. As part of that transaction, Dr. Mackin received $97,712.15
          in
          cash and a promissory note for $662,288.00. The employment agreement for
          Dr.
          Mackin provides for a term of five years, beginning January 3, 2005. Dr.
          Mackin's salary is set at $300,000. The employment agreement accelerated
          the
          vesting date for options previously granted to Dr. Mackin and provides
          for
          periodic grants of the Company's Common Stock to Dr. Mackin, with a total
          grant
          of 6,750,000 shares. Dr. Mackin received initial grants totaling 4,500,000
          in
          the year ended June 30, 2005. On May 18, 2005, the Company entered into
          a
          Restricted Stock Grant Agreement with Dr. Mackin, pursuant to which Dr.
          Mackin
          exchanged vested options to purchase 1,250,286 shares of the Company’s common
          stock at a price of $.3775 per share for 1,250,286 shares of Common Stock.
           Subject to the terms of the Restricted Stock Grant Agreement, the
          shares
          of Common Stock issued to Dr. Mackin are subject to forfeiture in the event
          that
          Dr. Mackin’s tenure with the Company is terminated before a registration
          statement covering the shares has been declared effective by the Securities
          and
          Exchange Commission. These shares are unregistered shares and were granted
          in
          reliance on Section 4(2) of the Securities Act of 1933. The employment
          agreement
          provides for an acceleration of stock grants and payment to Dr. Mackin
          upon a
          change in control resulting in the voluntary or involuntary termination
          of a
          majority of the board of directors or the chief executive officer of an
          amount
          equal to the lesser of three times his then current salary or the salary
          owed
          through the end of the employment agreement. The employment agreement provides
          a
          mechanism whereby the Company may acquire all or a portion of the Common
          Stock
          granted to Dr. Mackin for a nominal sum in the event that his engagement
          with
          the Company is terminated prior to the registration of those shares.
 
 In
          the
          year ended June 30, 2005, Markland recorded unearned compensation, additional
          paid-in capital and stock compensation of $5,196,630, $10,277,728 and
          $5,084,587, respectively, related to these agreements. For the year ended
          June
          30, 2004, the Company recognized unearned compensation, additional paid
          in
          capital and stock compensation expense of $11,035,110, $15,414,419 and
          $4,379,309, respectively.
  F-43
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 In
          the
          year ended June 30, 2005, Markland paid cash bonuses totaling $1,975,000
          to
          executives and consultants related to these agreements.
 
 In
          connection with the STR acquisition, Markland entered into a one year consulting
          agreement, as amended on March 17, 2004, with the former President and
          principal
          of STR ("Consultant"). In consideration for the consulting services to
          be
          rendered by Consultant, Markland shall pay to Consultant the sum of $285,000
          (the "fee"). The fee shall be payable as follows: $25,000 is payable on
          July 15,
          2004, a second payment in the amount of $35,000, is payable on August 15,
          2004,
          a third payment in the amount of $60,000 is payable on September 15, 2004,
          a
          fourth payment in the amount of $60,000 is payable on October 15, 2004,
          a fifth
          payment in the amount of $60,000 is payable on November 15, 2004 and the
          sixth
          and final payment in the amount of $45,000 is payable on December 15, 2004.
          As
          of June 30, 2005, Markland has accrued $225,625 related to this agreement.
 
 Termination
          of engagement of Ken Ducey, Jr., as president of Markland
 
 On
          March
          23, 2005 we removed Ken Ducey, Jr. as our president, and terminated his
          engagement as a director or officer from our wholly owned subsidiaries
          Ergosystems, Inc., a Virginia corporation, Science and Technology Research,
          Inc., a Maryland corporation and Security Technology, Inc., a Delaware
          corporation.
 
 On
          April
          15, 2005 in connection with the termination of Mr. Ducey, and in accord
          with
          section 4(j) of the employment agreement by and between the Company and
          Mr.
          Ducey and dated December 30, 2004, we exercised our right to repurchase
          1,525,010 shares of our common stock, par value $.0001 per share (the “Common
          Stock”), issued to Mr. Ducey pursuant to employment agreements at a price of
          $.01 per share.
 
 Mr.
          Ducey
          resigned as a director of the Company on June 30, 2005.
  Termination
          of Asset Growth Company as Strategic Operations Contractor
  On
          March
          23, 2005, pursuant to our Strategic Operations Contractor Agreement with
          them,
          we terminated our agreement with Asset Growth Company. Mr. Ducey is a director
          and majority shareholder of Asset Growth Company
  Also
          on
          April 15, 2005 in connection with the termination of our former consultant
          Asset
          Growth Company., and in accord with section 4(i) of the strategic operations
          contractor agreement by and between the Company and Asset Growth Company
          and
          dated December 30, 2004, we exercised our right to repurchase 5,030,078
          shares
          of our common stock, par value $.0001 per share (the “Common Stock”), issued to
          Asset Growth Company pursuant to strategic operations contractor agreement
          at a
          price of $.01 per share. All amounts paid to Asset Growth Company may be
          considered to have been paid to Mr. Ducey as he is a director and the
          controlling shareholder of Asset Growth Company.
  As
          the
          result of exercising these repurchase rights, the unamortized unearned
          compensation balance accruing to Ken Ducey and Asset Growth Company of
          $4,340,798 was reversed.
  Facility
          Rental
 
 STR
          leases its location in Fredericksburg, Virginia, on a month-to-month basis
          without a formal agreement. Rent expense relating to this location was
          $6,937
          per month. This location was vacated on December 31, 2004.
 
 We
          have a
          five year lease for our executive offices of approximately 1,500 square
          feet
          located in Ridgefield, Connecticut and a month-to-month lease for a
          manufacturing facility of approximately 5,000 square feet located in
          Fredericksburg, Virginia. We also have an administrative office in Providence,
          Rhode Island which is utilized under a monthly sublease comprising approximately
          4,000 square feet.
 
 EOIR,
          our
          wholly owned subsidiary, holds a four-year lease for its executive and
          administrative offices of approximately 5,420 square feet in Woodbridge,
          Virginia. The lease, which has an option to renew for an additional three-year
          term, expires on September 30, 2005. EOIR also leases approximately 5,000
          square
          feet in Spotsylvania, Virginia, where it houses its software development
          unit.
          This lease is currently on a month-to-month basis.
  F-44
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 We
          also
          have several offices located in Fredericksburg, Virginia. One office with
          approximately 4,722 square feet., with a one year lease, one with 1,200
          square
          feet with a 5 year lease, one with 10,000 square feet, with a five year
          lease,
          and one with 4,200 square feet, with a five year lease. Monthly lease amounts
          for these facilities total approximately $31,000.
 
 Genex
          leases office space under the terms of a non-cancelable operating lease
          that
          expires in January 2006. The office space lease provides for annual increases
          of
          3% to the base rent and requires the Company to reimburse the landlord
          for its
          pro rata share of the increases in annual operating expenses and real estate
          taxes. Monthly lease amounts for this facility total approximately
          $10,100.
 
 In
          addition, we have a one year lease for an executive office located in Boston,
          Massachusetts. The monthly lease amount for this facility is approximately
          $6,000.
 
 Total
          rent expense for the years ended June 30, 2005 and 2004 were $566,941 and
          $92,066 respectively.
 
 Income
          Taxes
 
 The
          Company is currently delinquent on its corporate state income tax filings.
          The
          Company expects that its net operating loss carryforwards will be sufficient
          to
          offset any taxable income. As a result, no provision for income taxes or
          any
          related penalties or interest has been recorded for the years ended June
          30,
          2005 and 2004.
 
 Government
          Contracts
 
 The
          Company's billings related to certain U.S. Government contracts are based
          on
          provisional general & administrative and overhead rates which are subject to
          audit by the contracting government agency. During an audit conducted in November 2004 covering the fiscal
          year 2002,
          the Defense Contract Audit Agency (“DCAA”) discovered significant deficiencies
          in Genex’s accounting system that resulted in misclassified and unallowable
          costs. As a result of this audit, Genex could be prevented from completing
          certain previous contracts awarded by the Department of Defense and may
          be
          required to refund amounts overbilled to its customers.  The
          Company has accrued $ 68,017 for overpayments for 2002 and has extended
          the
          analysis of misclassified and unallowed costs to June 30, 2005. At
          June
          30, 2005, the company has determined that $102,228 is repayable to the
          government. This amount is included in accrued expenses at June 30,
          2005.
 
 **13.**
                **INCOME
                    TAXES**
 
 There
          was
          no provision for federal or state income taxes for the years ended June
          30, 2005
          and 2004, due to the Company's operating losses and a full valuation reserve.
  The
          Company's deferred tax asset before valuation allowance is approximately
          $14,982,000 and at June 30, 2005 consisted primarily of net operating loss
          carry
          forwards. The change in the valuation allowance for the year ended June
          30, 2005
          was approximately $5,588,000. The Company's net operating loss carry forwards
          of
          approximately $33,000,000 will expire in varying amounts through 2025.
          The use
          of the federal net operating loss carry forwards may be limited in future
          years
          as a result of ownership changes in the Company's common stock, as defined
          by
          section 382 of the Internal Revenue Code. The Company has not completed
          an
          analysis of these changes.
  The
          Company has provided a full valuation reserve against the deferred tax
          asset
          because of the Company's loss history and significant uncertainty surrounding
          the Company's ability to utilize its net operating loss and tax credit
          carryforward.
  2005
                
                2004Expected tax expense (benefit)
                
                
                (35%)
                
                
                (35%)Increase (decrease) related to:Permanent
                    differences
                
                
                14%
                
                
                0%Increase in valuation allowance on deferred
                    tax
                    asset
                
                
                21%
                
                
                35%0%
                
                
                0%
 
 F-45
 **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
  **14.**
                **RELATED
                    PARTY TRANSACTIONS**
 
 Robert
          Tarini, our chief executive officer is also chief executive officer of
          Syquest,
          Inc. Syquest performs software and engineering development for the Company
          and
          provides approximately 4000 sq ft of office space to the Company in Providence,
          RI. During the year ended June 30, 2004, $1,244,327 was paid to Syquest
          for
          these services and there was a payable due to Syquest of $40,607 at June
          30,
          2004.
  On
          July
          24, 2003, we entered into an agreement with Syqwest, Inc., in which we
          issued
          750,000 shares of our common stock in exchange for the forgiveness of $450,000
          for unpaid services performed by Syqwest in connection with research conducted
          in relation to our vehicle stopping technology. We have the right at any
          time by
          written notice to repurchase these shares from Syqwest at a price equal
          to $.60
          per share. During the year ended June 30, 2005 Syquest provided $557,234
          in
          engineering and software services and charged $72,000 for rent. At June
          30,
          2005, there was no outstanding payable to Syquest.
 
 ipPartners,
          Inc. a corporation majority owned and controlled by Mr. Tarini, Markland's
          Chief
          Executive Officer and Chairman, participated in 12.5% of the February 14,
          2005
          investor financing related
          to the acquisition of Genex by Technest. .
          This
          financing was negotiated on behalf of Markland by senior management of
          Markland,
          including Mr. Tarini. The Markland Investment was approved by a unanimous
          vote
          of the Board of Directors of Markland including, Mr. Mackin and Mr. Ducey,
          neither of whom has an interest in the transaction.
 
 During
          the year ended June 30, 2005, Technest billed $504,196 to EOIR for services
          performed on a sub-contract of EOIR. EOIR also provides administrative
          and
          accounting services to Technest. For the period ended June 30, 2005, the
          charge
          for these administrative and accounting services amounted to $326,241 which
          is
          based on actual time incurred by EOIR personnel on behalf of Technest and
          Genex.
          Technest also made cash advances to Markland in the amount of $273,885.
          The net
          amount due to Technest is $117,615. All intercompany transactions have
          been
          eliminated in consolidation.
 
 The
          Company believes that all transactions described above were made on terms
          no
          less favorable to it than those obtainable from unaffiliated third parties.
          All
          future transactions, if any, with its executive officers, directors and
          affiliates will be on terms no less favorable to it than those that will
          be
          obtainable from unrelated third parties at the time such transactions are
          made.
 
 **15.**
                **LITIGATION**
 
 Charles
          Wainer
  On
          June
          28, 2004, Charles Wainer filed a civil suit against Markland in Florida
          state
          court alleging breach of a stock purchase agreement and breach of an employment
          agreement stemming from Wainer's sale of his business to a predecessor
          of
          Markland and his subsequent employment thereat. In the complaint, Wainer
          alleges
          Markland owes him $300,000 cash, some unspecified portion of $700,000 in
          stock,
          some unspecified portion of $86,000 cash for lease payments, and approximately
          $20,000 in back-pay. On August 11, 2004, Markland answered the complaint
          and
          denied any liability. In September 2005 the trial of this matter was concluded.
          As a result, Markland anticipates that judgment will be entered against
          Markland
          and in favor of Mr. Wainer in an amount of approximately $482,000. At June
          30,
          2005, the Company has charged to Selling, General and Administrative expense
          $482,000 related to this matter.
  Joseph
          R. Moulton
 
 On
          or
          about September 16, 2004, Joseph R. Moulton, Sr. initiated a lawsuit in
          the
          Circuit Court of Spotsylvania County, Virginia, against the Company, EOIR,
          our
          wholly owned subsidiary, and our Chief Executive Officer and Director,
          Robert
          Tarini. Mr. Moulton was the largest single shareholder of EOIR prior to
          its
          acquisition by the Company, owning approximately 67% of the EOIR capital
          stock.
          Mr. Moulton received approximately $5,863,000 in cash and a promissory
          note of
          EOIR in the approximate principal amount of $6,967,000 for his shares of
          EOIR at
          the closing of the acquisition of EOIR by the Company. In his complaint
          Mr.
          Moulton asserts, among other things, that the Company breached its obligations
          under the Stock Purchase Agreement, dated June 29, 2004, pursuant to which
          the
          Company acquired EOIR, by terminating Mr. Moulton's employment with EOIR
          and
          removing him from the EOIR board of directors. Mr. Moulton is seeking damages
          allegedly suffered by his loss of employment, extreme emotional distress,
          and
          costs incurred to enforce his contractual rights. In addition, he is seeking
          certain other equitable relief including, the appointment of a receiver
          to
          oversee the management of EOIR until these promissory notes issued to former
          EOIR shareholders at the closing of the acquisition are paid in full and
          a
          declaratory judgment that the Company's actions constitute an event of
          default
          under these promissory notes allowing for the acceleration of all amounts
          (approximately $11,000,000) due thereunder. The Company is a guarantor
          of these
          notes. The Company believes that the allegations in this lawsuit are entirely
          without merit and expects to file an answer denying Mr. Moulton's allegations
          and opposing vigorously all equitable relief sought. The Company is considering
          bringing various claims against Mr. Moulton either by counterclaim or in
          a
          separate action.
  F-46
 **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 H
          & H Acquisition Corp.
 
 On
          July
          23, 1998, H & H Acquisition Corp., individually and purportedly on behalf of
          Technest Holdings, commenced an action in federal court in the Southern
          District
          of New York against the Company, the founder and certain officers, among
          others.
          The complaint is an action to recover shares of common stock of the Company
          and
          unspecified damages. Management believes that the claims against the Company
          and
          certain officers are without merit and is vigorously defending the action.
          The
          Company cannot make any assurances about the litigation's outcome. However,
          the
          Company could be adversely affected if the plaintiff prevails.
 
 In
          September 2002 the Company was served with a Summary Judgment Motion regarding
          H
& H Acquisition Corp. and the Company answered the motion in November 2002.
          On January 3, 2005, the court denied the motion for summary judgment. Trial
          of
          this matter is scheduled to begin in January 2006.
  Other
  On
          November 22, 2002, a default Judgment in the sum of $30,106 including interest
          and related costs was entered against Technest regarding Bowne of Dallas.
          This
          amount is included in accounts payable as of June 30, 2005.
  On
          December 7, 2004, the Company issued 152,778 shares of its Common Stock
          valued
          at $70,278 in settlement of a civil suit filed against Quest Net, Inc.,
          a
          predecessor company to Markland, for the non-payment of a promissory note
          valued
          at $66,671.
 
 In
          addition, we are subject to legal proceedings, claims, and litigation arising
          in
          the ordinary course of business. While the outcome of these matters is
          currently
          not determinable, we do not expect that the ultimate costs to resolve these
          matters will have a material adverse effect on our consolidated financial
          position, results of operations, or cash flows
  **16.**
                  **EMPLOYEE
                      BENEFIT PLANS**
        
 **17.**
                **SUBSEQUENT
                    EVENTS**
 
 Subsequent
          stock issuances
 
 Subsequent
          to June 30, 2005, convertible promissory notes with a face value of $3,145,000
          were converted into 87,795,999 shares of our common stock.
 
 Subsequent
          to June 30, 2005, 3,830 shares of Series D Convertible Preferred Stock
          were
          converted into 45,840,657 shares of our common stock.
  F-47
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Reorganization
          and Stock Dividend
 
 On
          August
          17, 2005, Markland sold all of the outstanding stock of EOIR to its
          majority-owned subsidiary, Technest Holdings, Inc. pursuant to a Stock
          Purchase
          Agreement with Technest.  As consideration for the stock of EOIR,
          Technest
          issued 12 million shares of its common stock to Markland, and, as a result,
          Marklnd’s ownership of Technest increased from 85% immediately prior to the
          transaction to approximately 98% on a primary basis and from 39% to
          approximately 82% on a fully diluted basis (assuming the conversion of
          all of
          Technest’s convertible securities and the exercise of all warrants to purchase
          Technest common stock).  This reorganization did not result in a
          change of
          control of EOIR and as a result, no pro forma financial information is
          considered necessary.  We did not need stockholder consent in order
          to
          complete this reorganization. In connection with this reorganization, the
          Board
          declared a stock dividend of $10 million worth of its Technest common stock
          to
          Markland common stockholders up to a maximum of 2.5 million shares of Technest
          common stock.  The record date for the dividend is May 1, 2006 and
          the
          dividend date is July 5, 2006.  The actual number of shares of Technest
          common stock to be distributed will be calculated based on a per share
          price
          equal to the average closing price of the Technest Stock as reported by
          the
          National Association of Securities Dealers Automatic Quotations service
          for the
          ten trading days ending June 30, 2006; however, in no event shall the number
          of
          shares of the Technest common stock distributed exceed 2.5 million.
 
 Appointment
          of Director
 
 On
          August
          15, 2005, Gino M. Pereira, our Chief Financial Officer, was elected to
          our board
          of directors to fill the vacancy left by the resignation of Kenneth P.
          Ducey.
          Mr. Pereira is party to an employment agreement with the Company dated
          January
          2, 2005
 
 Unregistered
          Sale of Equity Securities
 
 On
          August
          19, 2005, we entered into a definitive exchange agreement with the Deer
          Creek
          Fund LLC, (“Deer Creek”) pursuant to which we exchanged 114,943 shares of
          Technest Series B Preferred Stock (potentially convertible into 3,799,409
          shares
          of Markland common stock based on the closing price of Markland’s common stock
          as of August 19, 2005) for 500 shares of Markland Series D Preferred Stock
          (convertible into 5,008,013 shares of Markland Common Stock as of August
          19,
          2005).  Concurrent with the exchange agreement, we entered into
          a
          registration rights agreement with Deer Creek in which we agree to submit
          a
          registration statement to the SEC covering the shares of Common Stock underlying
          the Series D on or before October 17, 2005.   In connection
          with this
          agreement, the Company will record a deemed dividend to preferred stockholders
          related to the additional common stock into which the Series D Preferred
          Stock
          converts over those into which the Technest Series B Preferred Stock
          converted.
 
 Extension
          of Convertible Notes
 
 On
          September 20, 2005, Markland Technologies, Inc. entered into an agreement
          with
          DKR Soundshore Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding
          Fund, Ltd. (the “DKR entities”), the holders of Markland’s currently outstanding
          September 21, 2004 Secured 8% Convertible Notes (the “Notes”), to extend the
          maturity date of the Notes for ninety (90) days.  The Notes were
          due on
          September 21, 2005.  The Notes are now due on December 20, 2005.
           As
          of September 20, 2005, the principal amount currently outstanding on these
          Notes
          is $2,523,750.
  As
          consideration for the extension of the maturity date of the Notes, Markland
          agreed to issue to the DKR entities for no additional consideration secured
          convertible promissory notes identical in all respects to the Notes, but
          for the
          fact that the maturity date of such notes is January 20, 2006.  The
          original principal amount for the note to DKR Soundshore Oasis Holding
          Fund,
          Ltd. is $224,700 and the original principal amount for the note to DKR
          Soundshore Strategic Holding Fund, Ltd. is $52,675 (collectively, the “New
          Notes”).  The New Notes have all the rights and preferences of the Notes
          as
          set forth in the Securities Purchase Agreement, dated September 21, 2004,
          between Markland and the investors signatory thereto.  Markland
          also agreed
          to prepare and file with the Securities and Exchange Commission a registration
          statement on Form SB-2 covering the resale of the shares of Markland common
          stock, $.0001 par value per share, issuable upon conversion of the New
          Notes
          (the “Underlying Stock”).  The Underlying Stock is deemed Registrable
          Securities as defined in the Registration Rights Agreement, dated September
          21,
          2004, between Markland and the investors signatory thereto, and afforded
          all the
          rights and obligations of Registrable Securities, provided, however, that
          the
          Filing Date (as defined in the aforementioned Registration Rights Agreement)
          of
          the registration statement on Form SB-2 covering the resale of the Underlying
          Stock shall be no later than October 17, 2005.
  F-48
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 Markland
          also entered into a stock pledge agreement (the “Pledge Agreement”) with the DKR
          entities pursuant to which Markland pledged 3,000,000 shares of Technest
          Holdings, Inc. Common Stock currently owned by Markland to secure Markland’s
          obligations under the New Notes.
 
 October
          4, 2005 Agreement *.*
  On
          October 4, 2005, we entered into an agreement with our majority owned
          subsidiary, Technest Holdings, Inc., or Technest, and four institutional
          investors which are holders of our and Technest’s securities. A copy of this
          agreement is filed as an attachment to our current report on Form 8-K as
          Exhibit
          10.1. We refer to this agreement as the October 4 Agreement. The purpose
          of the
          October 4 Agreement was to amend the certain prior agreements involving
          our and
          Technest’s securities in light of the recent reorganization described in our
          current report on Form 8-K filed on August 18, 2005. The material terms
          of the
          October 4 Agreement include following:
 
 · **
                *Amendments
                    to Series D Preferred Stock Restriction
                    Agreement*
 
 As
          part
          of the October 4 Agreement, we have agreed to amend the terms of the Series
          D
          Preferred Stock Restriction Agreement entered into on January 5, 2005 between
          us
          and James, LLC, our largest Series D preferred stock shareholder.
 
 *Termination
          of Series D Preferred Stock Restriction Agreement.* We
          have
          agreed to amend the termination provisions of the Series D Preferred Stock
          Restriction Agreement. As amended, the agreement, other than provisions
          relating
          to a private equity credit agreement with Brittany Capital Management,
          Ltd.
          discussed below, will terminate upon the earlier to occur of (i) full payment
          by
          us, or full conversion by the holders, of all outstanding convertible promissory
          notes, as of October 4, 2005, held by DKR Soundshore Oasis Holding Fund,
          Ltd,
          DKR Soundshore Strategic Holding Fund, Ltd. and Harborview Capital, and
          their
          affiliates, or (ii) January 15, 2006. Prior to this amendment, the agreement
          terminated on such date as James LLC no longer held any shares of our Series
          D
          preferred stock.
 
 As
          of
          October 4, 2005, we owed an aggregate of $1,276,125 pursuant to our convertible
          promissory notes held by DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
          Strategic Holding Fund, Ltd. and Harborview Capital, and their affiliates.
          Of
          the outstanding convertible notes held by the DKR entities, the principal
          amount
          of $973,750 is currently due on December 21, 2005 and the principal amount
          of
          $277,375 is currently due on January 20, 2006. The remaining principal
          amount of
          $25,000 under the convertible promissory note held by Harborview is due
          on
          November 9, 2005. Additional information concerning these promissory notes
          can
          be found in our current reports on Form 8-K filed on September 20, 2005,
          September 23, 2004 and November 15, 2004, which are incorporated herein
          by
          reference.
 
 Upon
          of
          the termination of the Series D Preferred Stock Restriction Agreement,
          James LLC
          will no longer be subject to that agreement’s limitations on sales of both
          shares of Series D preferred stock and shares of our common stock issuable
          upon
          conversion of the Series D preferred stock
 
 *Amendment
          of Provisions Relating to the Equity Line Registration* .
          We have
          agreed to amend the provisions of the Series D Preferred Stock Restriction
          Agreement relating to our commitment to enter into a private equity credit
          agreement with Brittany Capital Management, Ltd. As amended, we have committed
          to enter into a private equity credit agreement on usual and customary
          terms in
          the amount of $5,000,000 and we have agreed to use our best efforts to
          file a
          registration statement providing for the resale of shares of our common
          stock
          issued pursuant to such equity line, of at least $1,000,000 in value, as
          soon as
          practicable but no later than October 17, 2005. Prior to this amendment,
          the
          Series D Preferred Stock Restriction Agreement required us to enter into
          a
          private equity credit agreement for an amount of $10,000,000 and we were
          required to register for resale all of the shares of our common stock to
          be
          issued pursuant to such equity line.
 
 In
          addition, we have agreed to pay liquidated damages in the amount of $50,000
          per
          month, or pro-rata portion thereof, should we fail to file and have declared
          effective a resale registration statement in connection with the equity
          line
          referred to above, by November 30, 2005.
  F-49
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 If
          we
          complete a private equity credit agreement with Brittany Capital Management,
          Ltd., any proceeds we receive from the equity line will be subject to
          restrictions on use. Pursuant to a Securities Purchase Agreement, dated
          September 21, 2004, by and among us and DKR Soundshore Oasis Holding Fund,
          Ltd.
          and DKR Soundshore Strategic Holding Fund, Ltd., 75 percent of all proceeds
          received pursuant to a private equity line must first be used to satisfy
          our
          obligations under those certain convertible promissory notes held DKR Soundshore
          Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holding Fund, Ltd.
          A copy
          of this Securities Purchase Agreement was filed as an attachment to our
          current
          report on Form 8-K filed on September 24, 2004.
 
 *Payment
          of Liquidated Damages to Brittany Capital Management, Ltd.* Upon
          signing the October 4 Agreement, we issued to Brittany Capital Management,
          Ltd.
          3,750,000 shares of our common stock in satisfaction of liquidated
          damaged
          due in connection with the Series D Preferred Stock Restriction Agreement.
          The
          payment of shares was made in lieu of a cash payment for $150,000 due to
          Brittany Capital Management, Ltd. for failure to cause a registration statement
          to be declared effective by June 15, 2005, covering the resale of securities
          to
          be issued pursuant to a private equity agreement with Brittany Capital
          Management, Ltd. discussed above. This
          transaction 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 and Rule 506 of Regulation
          D
          promulgated thereunder, insofar as such securities were sold only to "accredited
          investors" within the meaning of Rule 501 of Regulation D. We have granted
          Brittany Capital Management, Ltd. the right to include these shares in
          the same
          resale registration statement, to be filed prior to October 17, 2005, covering
          the shares of common stock to be issued pursuant to a private equity line
          with
          Brittany Capital Management, Ltd. discussed above.
 
 · **
                *Exchange
                    Agreements*
 
 Concurrently
          with the execution of the October 4 Agreement, we entered into definitive
          exchange agreements with Southridge Partners, LP and Southshore Capital
          Fund,
          Ltd. p ursuant
          to which we exchanged an aggregate of 402,293 shares of Technest Series
          B
          preferred stock (convertible as of October 4, 2005 into 36,966,677 shares
          of
          Markland common stock) for 1,750 shares of our Series D preferred stock
          (convertible into 67,808,413 shares of Markland common stock as of October
          4,
          2005).
 
 The
          following table illustrates the number of shares of Markland Series D preferred
          stock received by each of the investors in exchange for their holdings
          in
          Technest Series B preferred stock.
 
 Investors
                
                Number
                    of Shares of Technest Series B preferred stock held prior to
                    the Exchange
                
                Number
                    of Shares of Markland Common Stock issuable upon conversion of
                    Technest
                    Series  B preferred stock
                
                Number
                    of Shares of Markland Series D preferred stock  received
                    pursuant to
                    the Exchange Agreement
                
                Number
                    of Shares of Markland Common Stock issuable upon conversion of
                    Markland
                    Series  D preferred stockSouthshore
                    Capital Fund, Ltd.
                
                
                57,466
                
                
                5,277,769
                
                
                250
                
                
                9,616,919Southridge
                    Partners, LP
                
                
                344,827
                
                
                31,688,908
                
                
                1,500
                
                
                58,191,494
 
 After
          giving effect to the exchanges described above, there are no longer any
          shares
          of Technest Series B preferred stock outstanding. This transaction 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 and Rule 506 of Regulation D promulgated thereunder,
          insofar as such securities were sold only to "accredited investors" within
          the
          meaning of Rule 501 of Regulation D.
  F-50
  **MARKLAND
            TECHNOLOGIES, INC. AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL
            STATEMENTS**
 **YEARS
            ENDED JUNE 30, 2005 AND 2004**
 As
          incentive to enter into the exchange agreements, we have granted Southshore
          Capital Fund, Ltd. and Southridge Partners, LP the right to include the
          shares
          of common stock underlying the conversion of our Series D preferred stock,
          issued pursuant to the exchange agreements, in the resale registration
          statement
          to be filed in connection with the private equity line with Brittany Capital
          Management, Ltd., discussed above.
 
 ·**
                *Amendment
                    to Registration Rights
                    Agreement*
 
 Also
          in
          connection with the execution of the exchange agreements, we agreed to
          issue to
          Southshore Capital Fund, Ltd. and Southridge Partners, LP shares of our
          common
          stock in lieu of any liquidated damages pursuant to a registration
          rights
          agreement, dated February 14, 2005, by and among Markland and the holders
          of the
          Technest Series B preferred stock. A copy of this registration rights agreement
          has been filed as an attachment to our current report on Form 8-K, filed
          on
          February 15, 2005, as Exhibit 4.1. The shares
          of our common stock to be issued to Southshore Capital Fund, Ltd. and Southridge
          Partners, LP shall be equal to four percent (4%) per month, or pro-rata
          portion
          thereof, of the stated value of the Technest Series B preferred stock exchanged
          by each investor, for the period beginning on June 29, 2005 and continuing
          through the effective date of a resale registration statement covering
          the
          shares of common stock to be issued upon conversion of our Series D preferred
          stock issued in the exchange. Liquidated damages shall be payable at the
          beginning of each calendar month in the form of our restricted common stock
          valued at the lesser of $0.04 per share or the average closing bid price
          for our
          common stock for the five (5) trading days immediately preceding the due
          date.
          Southshore Capital Fund, Ltd. and Southridge Partners, LP shall have the
          right
          include such shares, issued in satisfaction of liquidated damages, in the
          resale
          registration statement to be filed pursuant to the private equity line
          with
          Brittany Capital Management, Ltd. The stated value of each share of Technest
          Series B preferred stock is $2.175. For illustrative purposes, assuming
          such
          registration statement is declared effective on November 30, 2005, the
          aggregate
          amount of liquidated damages that will be payable to Southshore Capital
          Fund,
          Ltd. and Southridge Partners, LP in connection with these exchange agreements
          would be approximately $175,000.
 
 · **
                *Markland
                    Warrant*
 
 Concurrently
          with the execution of the October 4 Agreement, we agreed to issue a warrant
          to
          purchase 750,000 shares of our common stock to Greenfield Capital Partners
          LLC.
          The warrants expire on February 10, 2010 and have an exercise price of
          $0.34 per
          share and are substantially in the form attached to this current report
          on Form
          8-K as Exhibit 10.5. These warrants are exercisable immediately. This
          transaction 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 and Rule 506 of Regulation
          D
          promulgated thereunder, insofar as such securities were sold only to "accredited
          investors" within the meaning of Rule 501 of Regulation D.
  Termination
          of Ridgefield leases
 
 On
          October 4, 2005, we entered into an agreement with Southridge Holdings
          LLC for
          the early termination of our leases for office space located at 90 Grove
          Street,
          Executive Pavilion, Ridgefield, Connecticut. One of the leases terminated
          was
          for space occupied by our majority owned subsidiary, Technest Holdings,
          Inc. As
          consideration for the termination of the lease obligations, we agreed to
          pay
          $75,000 in cash and issue to Southridge Holdings LLC 3,125,000 shares of
          our
          restricted common stock. We have agreed to register the shares to be issued
          to
          Southridge Holdings LLC in a resale registration statement to be filed
          with the
          SEC on or before October 17, 2005. In addition, if we fail to cause such
          registration statement to be declared effective by November 30, 2005, we
          shall
          pay Southridge Holdings LLC $2,500 per month, or pro-rata portion thereof,
          as
          liquidated damages. Liquidated damages shall be payable in shares of our
          common
          stock valued at the lesser of $0.04 or the average of the closing bid prices
          for
          our common stock for the five days immediately preceding the due date of
          the
          liquidated damages.
   F-51
 ITEM
          8.CHANGES
          IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
 **AND
        FINANCIAL DISCLOSURE**
 None.
 
 **ITEM
        8A.** **CONTROLS
        AND PROCEDURES**
 
 Based
        on
        our management's evaluation (with the participation of our principal executive
        officer and principal financial officer), as of the end of the period covered
        by
        this report, our principal executive officer and principal financial officer
        have concluded that our disclosure controls and procedures (as defined in
        Rules
        13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
        (the "Exchange Act")) are effective to ensure that information required to
        be
        disclosed by us in reports that we file or submit under the Exchange Act
        is
        recorded, processed, summarized and reported within the time periods specified
        in Securities and Exchange Commission rules and forms.
  The
          limited size of our internal financial and controls staff did not permit
          a
          significant amount of time or expense on monitoring and oversight of our
          general
          administrative and financial functions. In the course of management's ongoing
          evaluation of our controls and procedures, management has concluded that,
          due to
          the limited amount of resources available for general administrative and
          financial matters, Markland: (i) had less than the desirable number of
          people
          performing a majority of the financial duties, (ii) lacked the desired
          internal
          financial and controls staff resources for a comprehensive internal audit
          function, and (iii) in some cases had not been able to promptly accumulate
          and
          process all of our data and reports on a timely basis. Management believes
          that
          at this time, in light of existing newly instituted staff and controls,
          the
          risks associated with a lack of segregation of duties and limited staff
          have
          been largely mitigated. However, management will periodically reevaluate
          the
          situation, and as necessary, will put in place additional internal staff
          and
          controls to prevent a lack of discipline around policies and procedures
          in our
          administrative and financial matters.
 
 In
        August
        2005, management hired a controller to increase our capabilities in the finance,
        accounting and internal control functions. The addition of another accounting
        professional will expand the numbers of members of our staff with knowledge
        of
        accounting issues and technical accounting literature and interpretive material.
        We will continue to review whether we need additional accounting personnel.
 
 Other
        than as stated above, there is no change in our internal control over financial
        reporting during our fourth fiscal quarter that has materially affected,
        or is
        reasonably likely to materially affect, our internal control over financial
        reporting. It should be noted that any system of controls, however well designed
        and operated, can provide only reasonable, and not absolute, assurance that
        the
        objectives of the system are met. In addition, the design of any control
        system
        is based in part upon certain assumptions about the likelihood of future
        events.
        Because of these and other inherent limitations of control systems, there
        can be
        no assurance that any design will succeed in achieving its stated goals under
        all potential future conditions, regardless of how remote.
 
 **ITEM
        8B.****OTHER
        INFORMATION**
  None.
 
 **PART
        III**
  **ITEM
        9.****DIRECTORS,
        EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
        16(A)
        OF THE EXCHANGE ACT**
 
 Each
        director serves as director until his successor is duly elected and qualified.
        Our executive officers are elected by, and serve at the discretion of, our
        board
        of directors. There are no family relationships between our executive officers
        and directors. Our executive officers and directors are as follows:
 
 **Name**
              **Age**
              **Position**
              **Year
                  Began**Robert
                  Tarini
              46
              Chief
                  Executive Officer, Chairman
                of
                  the Board of Directors
              2002Joseph
                  P. Mackin
              55
              President,
                  Chief Operating Officer and Director
              2004Gino
                  M. Pereira
              47
              Chief
                  Financial Officer and Director
              2004
 
 Each
        director serves for a term beginning on the date they are first elected or
        appointed and continuing until the next succeeding annual meeting of
        stockholders.
  46
  ROBERT
        TARINI has served as our Chief Executive Officer since November 14, 2003
        and as
        our chairman of the board of directors since December 9, 2002. In addition,
        since February 14, 2005, Mr. Tarini has served as the Chief Executive Officer
        and chairman of the board of directors of our majority owned subsidiary,
        Technest. In April 2003, Mr. Tarini founded Syqwest Inc., a firm which
        specializes in the design and manufacture of acoustic remote sensing devices
        utilized in marine and land based applications. In April 2001, Mr. Tarini
        founded Trylon Metrics Corp., a developer of acoustic remote sensing technology,
        and acted as President of Trylon from April 2001 to present. In May 2001,
        Mr.
        Tarini founded ipPartners Inc. and has served as its President to present.
        ipPartners Inc. specializes in the development of acoustic remote sensing
        devices. Since 1999, Mr. Tarini has served as the chief executive officer
        of
        Ocean Data Equipment Corporation, where he oversaw the design and development
        of
        a complete line of scientific instruments targeted for geophysical and
        hydrographic research, and developed a remote sensing technique, which is
        currently being applied to detecting illicit materials. From June 1982 to
        July
        1990, Mr. Tarini worked at Raytheon, where he designed active sonar and sonar
        trainers for US and foreign customers which were installed onto every 688
        class
        attack submarine and every SQQ-89 surface ship combat system, in total, over
        100
        seafaring vessels.
 
 DR.
        JOSEPH P. MACKIN has been a member of our board of directors since July 13,
        2004 and
        has served as our Chief Operating Officer since December 7, 2004. On March
        23,
        2005, he was appointed President of Markland .
        Dr.
        Mackin has been with EOIR for four years and is currently the President and
        CEO
        of EOIR. In addition, Dr. Mackin has been the President and a member of the
        board of directors of our majority owned subsidiary, Technest, since April
        1,
        2005. Dr. Mackin is responsible for strategic technology development and
        Homeland Security initiatives as well as a key participant in corporate
        day-to-day operations at EOIR. He has served on numerous government panels
        and
        committees, and has had an extensive career in the military in weapons systems
        development and acquisition. Prior to joining EOIR, Dr. Mackin was an Assistant
        Sensor Systems Group Leader at MIT Lincoln Laboratories where, among other
        things, he served as the system integration lead for the Smart Sensor Web
        program. Dr. Mackin holds a PhD in Physics from the Massachusetts Institute
        of
        Technology and a BS in Engineering from the United States Military Academy
        at
        West Point. He is a graduate of the Defense Systems Management College, and
        hold
        a DoD level 3 certification (the highest) in both R&D and Project
        Management. He is a retired Colonel in the United States Army.
 
 GINO
        M.
        PEREIRA has served as Markland's Chief Financial Officer since December 7,
        2004
        and as a director of Markland since August 15, 2005. Since February 14, 2005,
        Mr. Pereira has also served as the Chief Financial Officer of our majority
        owned
        subsidiary, Technest. Mr. Pereira currently serves on the Board of Directors
        of
        Teletrak Environmental Systems. From 1991 through 2000, Mr. Pereira was employed
        by CDC Technologies, Inc., located in Oxford, Connecticut. From 1991 through
        1998, Mr. Pereira was CDC Technologies' Executive Vice-President and Chief
        Financial Officer. In 1999, Mr. Pereira assumed the role of Chief Operating
        Officer of CDC Technologies. Mr. Pereira remained in that role through 2000.
        In
        January 2001, Mr. Pereira assumed the position of Chief Operating Officer
        of CDC
        Acquisition Corporation, a subsidiary company of Drew Scientific Group plc.
        Mr.
        Pereira remained in that position until November 2001, when he became a
        principal at Interim Management Solutions in Oxford, Connecticut. During
        his
        tenure at Interim Management Solutions, Mr. Pereira has acted as an interim
        or
        part-time Chief Financial Officer or Chief Operations Officer for numerous
        small
        and emerging companies. In January 2003, Mr. Pereira also became a Managing
        Director of Kiwi Securities, Inc., an independently owned investment banking
        firm, a post he held until December 7, 2004. Mr. Pereira is a Fellow of the
        Chartered Association of Certified Accountants (UK).
 
 WE
        DO NOT
        HAVE AN AUDIT COMMITTEE
 
 We
        are
        not a "listed issuer" within the meaning of Rule 10A-3 under the Exchange
        Act of
        1934, as amended. As a result, we are not required to have an audit committee.
        However, our board of directors may consider appointing such a committee
        in the
        future.
 
 WE
        DO NOT
        HAVE AN AUDIT COMMITTEE FINANCIAL EXPERT
  The
        Securities and Exchange Commission ("SEC") has adopted rules to implement
        certain requirements of the Sarbanes-Oxley Act of 2002 pertaining to audit
        committees of listed companies. One of the rules adopted by the SEC requires
        a
        company to disclose whether it has an "Audit Committee Financial Expert"
        serving
        on its audit committee.
 
 We
        are
        not required to have an audit committee. As a result, we do not have an Audit
        Committee Financial Expert, as defined by Item 401(e)(2) of Regulation S-B,
        serving as a director of the Company.
 
 47
  THERE
        HAVE BEEN NO CHANGES TO THE PROCEDURES FOR SECURITY HOLDERS NOMINATIONS TO
        THE
        BOARD OF DIRECTORS
 
 We
        do not
        have in place a process by which our stockholders may recommend nominees
        to our
        board of directors. However, our board would consider any candidate proposed
        by
        a stockholder in accordance with the by-laws, certificate of incorporation
        and
        the laws of the State of Florida.
 
 We
        do not
        pay fees to any third party to assist in the process of identifying or
        evaluating director candidates.
 
 SECTION
        16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
 Pursuant
        to Section 16(a) of the Securities Exchange Act of 1934, as amended, our
        officers and directors, and holders of more than 10% of the our common stock
        (collectively, the "Reporting Persons") must file with the Securities and
        Exchange Commission initial reports of ownership and reports of changes in
        ownership of our common stock.
 
 Based
        solely on a review of the Forms 3, 4 and 5, and amendment thereto and written
        representations provided to us, we believe that during the fiscal year ended
        June 30, 2005, the following Reporting Persons either filed or will file
        late
        reports:
 
 o  Robert
        Tarini, our Chief Executive Officer and Director reported transactions on
        Forms
        4 filed on October 29, 2004, February 23, 2005, February 25, 2005, June 15,
        2005
        and June 30, 2005 that we believe should have been reported earlier on Forms
        4.
        We are not aware of any outstanding report required to be filed by Mr.
        Tarini.
 
 o  Joseph
        Mackin, our President, Chief Operating Officer and Director, filed an initial
        report under Section 16(a) on October 12, 2004 that we believe should have
        been
        earlier filed. This delayed report did not involve any transaction in our
        common
        stock. Dr. Mackin reported transactions on a Form 4 filed on June 2, 2005
        that
        we believe should have been reported earlier on a Form 4. We are not aware
        of
        any outstanding report required to be filed by Dr. Mackin.
 
 o  Gino
        Pereira,
        our Chief Financial Officer and Director, filed an initial report under Section
        16(a) of the Securities Exchange Act of 1934 on January 5, 2005 that we believe
        should have been earlier reported on Form 3. This delayed report does not
        involve any transaction in our common stock but rather is related to his
        election as our Chief Financial Officer. Mr. Pereira reported transactions
        on a
        Form 4 filed on May 31, 2005 that we believe should have been reported earlier
        on a Form 4. We are not aware of any outstanding report required to be filed
        by
        Mr. Pereira.
  CODE
        OF
        ETHICS
 
 Our
        board
        of directors has not adopted a code of ethics that applies to our principal
        executive officer, principal financial officer, principal accounting officer,
        or
        controller, or other persons performing similar functions.
 
 In
        the
        near future, our board of directors expects to (i) assess ethics and compliance
        risks within the organization, and (ii) evaluate our corporate cultural,
        our
        internal reporting mechanisms in light of Sarbanes-Oxley, and the time and
        financial resources necessary to put in place an ethics compliance
        program.
 
 If
        we
        decide to adopt a code of ethics, we intend to satisfy the disclosure
        obligations set for in SEC Release No.33-8180 and in the Form 8-K.
 
 **ITEM
        10.****COMPENSATION
        OF DIRECTORS AND EXECUTIVE OFFICERS**
 
 DIRECTOR
        COMPENSATION
 
 We
        do
        not, as a standard practice, compensate our directors for their service.
        However, all of our current directors also serve us as either officers or
        consultants, and we compensate them for their service in such
        capacities.
 
 48
  EXECUTIVE
        OFFICER COMPENSATION
 
 SUMMARY
        COMPENSATION TABLE
 
 The
        following table provides summary information concerning the compensation
        earned
        by our chief executive officer and our other executive officers for services
        rendered for the fiscal years ended June 30, 2003, June 30, 2004 and June
        30,
        2005.
 
 
 **Long-Term
                  Compensation****Annual
                  Compensation**
              **Awards****Name
                  and Principal Position**
              **Fiscal
                  Year**
              **Salary
                  ($)**
              **Bonus
                  ($)**
              **Other
                  Annual Compensation**
                **($)**
              **Restricted
                  Stock Award(s)**
                **($)**
              **Securities
                  Underlying Options (#)**Robert
                  Tarini (1)
                Chief
                  Executive Officer and
                Chairman
                  of the Board of Directors
              2005
                2004
                2003
              $
                  300,000
                $
                  210,000
                $
                  120,000
              $
                  600,000
                $
                  150,000
              $ 60,000
              $4,123,470
                  (2)
                $3,033,130Joseph
                  P. Mackin (3)
                President,
                  Markland
                Executive
                  Vice President, EOIR
              2005
                2004
                2003
              $
                  282,916
                $
                  190,000
              $
                  437,000
              $
                  24,000
              $1,930,034
                  (4)Gino
                  M. Pereira (5)
                Chief
                  Financial Officer
              2005
              $
                  175,000
              $
                  275,000
              $
                  20,000
              $2,220,000
                  (6)Kenneth
                  P. Ducey, Jr. (7)
                President
                  and Chief Financial Officer
              2005
                2004
                2003
              $
                  217,500
                $
                  240,000
                $
                  180,000
              $
                  450,000
                
                $
                  130,000
              $45,000
              $3,659,503
                  (8)Gregory
                  A. Williams (9)
                Vice
                  President, EOIR
              2005
                2004
                2003
              $
                  165,225
                $
                  135,000
              
              
              
              1,250,286
 ________________________
 (1)
              Mr.
                  Tarini assumed the rule of Chief Executive Officer upon in November
                  2003.
 (2)
              Consists
                  of 8,946,230 shares of common stock valued at an average price
                  of $0.46
                  per share based on the closing market price as of the date of grant.
                  These
                  shares were not registered on the date of
                  grant.
 (3)
              On
                  March 23, 2005, we appointed Dr. Mackin as President of
                  Markland.
 (4)
                Consists
                    of 5,750,286 shares of common stock valued at an average price
                    of $0.34
                    per share based on the closing price as of the date of grant.
                    These shares
                    were not registered on the date of
                    grant.
 (5)
                On December 7, 2004, we appointed Gino Pereira
                  as our
                  Chief Financial Officer. From August 2004 to December 7, 2004,
                  Mr. Pereira
                  had been acting as a paid consultant to us in matters involving
                  finances.
                  As of November 18, 2004, Mr. Pereira had received $62,497 for his
                  consulting services.
 (6)
                Consists of 3,000,000 shares of common stock
                  valued at an
                  average price of $0.74 per share based on the closing market price
                  as of
                  the date of grant.
 (7)
                On December 7, 2004, Kenneth P. Ducey, Jr. resigned
                  as
                  the Chief Financial Officer of Markland. On March 23, 2005, we
                  removed Mr.
                  Ducey as President of Markland, and terminated his engagement as
                  director
                  and officer of our wholly owned subsidiaries - Ergo, STR, and STI.
                  We also
                  exercised our option to repurchase 6,555,088 shares of common stock
                  at
                  $0.01 per share.
 (8)
                Consists of 5,079,839 shares of common stock
                  valued at an
                  average price of $0.60 per share based on the closing market price
                  as of
                  the date of grant.
  49
  (9)
              On
                  November 1, 2004, Gregory A. Williams notified our Board of Directors
                  of
                  his resignation from the Board and his positions as Director, Executive
                  Vice President, Chief Financial Officer, and Chief Operating Officer
                  of
                  our then wholly owned subsidiary, EOIR Technologies, Inc. Mr. Williams
                  was
                  a shareholder of EOIR prior to the acquisition of EOIR on June
                  29, 2004.
                  To our knowledge, Mr. Williams' resignation was not in connection
                  with any
                  disagreement concerning matters relating to the Company's operations,
                  policies or practices. On November 1, 2004, we entered into an
                  agreement
                  with Mr. Williams and EOIR detailing the terms and conditions of
                  Mr.
                  Williams' resignation, including, among other things, (a) payment
                  to Mr.
                  Williams of twelve months of severance and all accrued and unused
                  vacation
                  time, (b) continuation of benefits until the earlier of December
                  31, 2005
                  or when Mr. Williams finds new employment, (c) acceleration of
                  vesting of
                  40% of the non-statutory stock options held by Mr. Williams; and
                  (d)
                  reaffirmation by Mr. Williams of his confidentiality and non-competition
                  obligations and an agreement not to compete with or solicit employees
                  from
                  EOIR for a period of twelve (12)
                  months.
  
 EMPLOYMENT
        AGREEMENTS
  **Employment
        Agreement With Robert Tarini**
  On
        December 30, 2004, we entered into an employment agreement with Mr. Tarini.
        This
        agreement supplants a previous employment agreement with Mr. Tarini dated
        May
        12, 2004, which was terminated. Mr. Tarini's employment agreement provides
        for:
  ·
              Mr.
                  Tarini to commence his service as our chairman of the board of
                  directors
                  and chief executive officer a term of five years beginning on January
                  2,
                  2004;
  ·
              a
                  base salary of $25,000.00 per month (total of $300,000.00 per
                  year);
  ·
              payment
                  of all necessary and reasonable out-of-pocket expenses incurred
                  by the
                  employee in the performance of his duties under this
                  agreement;
  ·
              up
                  to $5,000 monthly for auto expense, business office expense and
                  medical
                  and life insurance expenses;
  ·
              eligibility
                  to participate in bonus or incentive compensation plans that may
                  be
                  established by the board of directors from time to time applicable
                  to Mr.
                  Tarini's services;
  ·
              eligibility
                  to receive a bonus if we achieve revenue and revenue and profit
                  milestones
                  set by the board of directors; and
  ·
              conditional
                  stock awards granted at different periods, earned based upon a
                  performance
                  criteria achieved by Markland and set by the board of
                  directors.
  This
        employment agreement provides for periodic grants of our common stock to
        Mr.
        Tarini. Each individual grant is conditioned upon Markland achieving performance
        objectives, based on a plan to be ratified by our board of directors during
        regularly scheduled meetings for each of the applicable years. The number
        of
        shares of common stock to be granted on each grant date is equal to the product
        of (a) the number of fully diluted shares outstanding at the grant date and
        (b)
        the stock percentage associated with that grant date.
  **Grant**
                **Stock
                    Percentage**
                **Date
                    For Grant**Grant
                    One
                2.5%
                April
                    1, 2004Grant
                    Two
                1.0%
                July
                    1, 2004Grant
                    Three
                1.0%
                October
                    1, 2004Grant
                    Four
                2.0%
                January
                    3, 2005Grant
                    Five
                1.0%
                July
                    1, 2005
  As
        reported in our current report on Form 8-K filed on January 7, 2005, the
        first
        grant, made on January 3, 2005, was for 2,867,458 shares. The resale of these
        shares was subsequently registered with the SEC.
  50
  Shares
        issued to Mr. Tarini are non transferable and subject to forfeiture. If Markland
        files a registration statement following the date of the final grant, Mr.
        Tarini
        has the right to participate in such registration statement. The agreement
        also
        provides for preemptive rights in connection with potentially dilutive events
        for a period of five years from the effective date of the agreement.
  Mr.
        Tarini will be eligible to receive a bonus of up to 300% of his annual base
        salary. For any quarter of the Company's operations, Mr. Tarini will be eligible
        for a portion of his bonus if Markland achieves revenue and profit milestones
        set forth by the board of directors in its periodic meetings. For the first
        year
        of the agreement, the revenue milestone was $1 million in each quarter and
        $6
        million for calendar year 2004. On February 23, 2005, Mr. Tarini received
        a cash
        bonus in the amount of $350,000.
  The
        employment agreement provides that in the event that Mr. Tarini's engagement
        with us is terminated by us without cause (as that term is defined in Section
        8
        of the agreement), or by Mr. Tarini for "Good Reason" (as that term is defined
        in Section 8(f) of the agreement) we will continue to pay Mr. Tarini's cash
        salary and provide health insurance through the earlier of (a) three months
        from
        the date of termination or (b) until Mr. Tarini finds other full time
        employment. In the event that Mr. Tarini's employment with us is terminated
        for
        any other reason, there will be no continuation of cash salary payments or
        health insurance.
  The
        employment agreement contains a change in control provision that provides
        that,
        upon a change in control resulting in a change in the majority ownership
        of us,
        resignation or termination of a majority of the current board of directors
        within a two month period, or replacement of the chief executive officer
        or
        president, all pending stock grants will immediately be granted and an amount
        equal to the lesser of three times his then current cash salary or the cash
        salary owed through the end of the employment agreement will be placed in
        an
        escrow account.
  The
        employment agreement provides that in the event that Mr. Tarini ceases to
        be
        employed by Markland, for any reason or no reason, with or without cause,
        we
        may, at our own discretion, acquire all or a portion of the common stock
        granted
        to Mr. Tarini, at a price of $0.01 per share. Provided that such repurchase
        options may only be exercised for those shares that have not been registered
        with the SEC, or sold pursuant to Rule 144.
  **Recent
        Amendment to Mr. Tarini’s Employment Agreement.** On May
        17, 2005, we entered into an amendment (the “Tarini Amendment”) to Mr. Tarini’s
        employment agreement dated December 30, 2004 (the “Tarini Agreement”), to
        accelerate the final stock grant due to Mr. Tarini.
  ·
              Specifically,
                  pursuant to the terms of the Tarini Agreement, we were required
                  to issue
                  to Mr. Tarini a number of shares of its common stock equal to 1.0%
                  of our
                  fully diluted outstanding shares of common stock.
  ·
              Pursuant
                  to the terms of the Tarini Amendment, this award was accelerated
                  to become
                  due on May 16, 2005. As a result, on May 18, 2005 the Company issued
                  3,866,391 shares of Common Stock to Mr. Tarini. The issuance of
                  these
                  securities was exempt from registration under Section 4(2) of the
                  Securities Act of 1933, as amended, as a sale not involving a public
                  offering.
  The
        Tarini Agreement was filed as Exhibit 99.4 to the Company’s current report on
        Form 8-k filed with the SEC on January 7, 2005, and is incorporated herein
        by
        reference. The form of the Tarini Amendment was filed as an Exhibit to our
        quarterly report on Form 10-QSB for the quarter ended March 31, 2005, and
        is
        incorporated herein by reference.
  **Employment
        Agreement With Joseph P. Mackin**
  On
        December 30, 2004, we entered into an employment agreement with Dr. Mackin.
        Dr.
        Mackin's employment agreement provides for:
  ·
              Dr.
                  Mackin to commence his service for Markland as our chief operating
                  officer;
  ·
              a
                  term of five years beginning on December 15,
                  2004;
  ·
              a
                  base salary of $25,000.00 per month (total of $300,000.00 per
                  year);
  ·
              payment
                  of all necessary and reasonable out-of-pocket expenses incurred
                  by the
                  employee in the performance of his duties under this
                  agreement;
  51
  ·
              up
                  to $4,000 monthly for auto expense, business office expense and
                  medical,
                  life insurance and other personal
                  expenses;
  ·
              eligibility
                  to participate in bonus or incentive compensation plans that may
                  be
                  established by the board of directors from time to time applicable
                  to Dr.
                  Mackin's services;
  ·
              eligibility
                  to receive a bonus if we achieve revenue and revenue and profit
                  milestones
                  set by the board of directors; and
  ·
              conditional
                  stock awards granted at different periods, earned based upon a
                  performance
                  criteria achieved by the Company and set by the board of
                  directors.
  The
        employment agreement accelerated the vesting date for options previously
        granted
        to Dr. Mackin in connection with the acquisition of EOIR by Markland. These
        options have an exercise price equal to $0.3775 per share of common
        stock.
  The
        employment agreement provides for periodic grants of our common stock to
        Dr.
        Mackin. Each individual grant is conditioned upon Markland achieving performance
        objectives, based on a plan to be ratified by the board of directors during
        regularly scheduled meetings for each of the applicable years.
  **Grant**
                **Number
                    of Shares**
                **Grant
                    Date**Grant
                    One
                2,000,000
                January
                    3, 2005Grant
                    Two
                2,500,000
                May
                    16, 2005Grant
                    Three
                750,000
                January
                    3, 2007Grant
                    Four
                750,000
                January
                    3, 2008Grant
                    Five
                750,000
                January
                    3, 2009
  As
        reported in our current report on Form 8-K filed on January 7, 2005, the
        first
        grant, made on January 3, 2005, was for 2,000,000 shares. The resale of these
        shares was subsequently registered with the SEC.
  Shares
        issued to Dr. Mackin are non transferable and subject to forfeiture. If Markland
        files a registration statement following the date of the final grant, Dr.
        Mackin
        has the right to participate in such registration statement. The agreement
        also
        provides for preemptive rights in connection with potentially dilutive events
        for a period of five years from the effective date of the
        agreement.
  Dr.
        Mackin will be eligible to receive a bonus of up to 300% of his annual base
        salary. For any quarter of the Company's operations, Dr. Mackin will be eligible
        for a portion of his bonus if the Company achieves revenue and profit milestones
        set forth by the board of directors in its periodic meetings. On February
        23,
        2005, Joseph P. Mackin received a cash bonus equal to $350,000.
   The
        employment agreement provides that in the event that Dr. Mackin's engagement
        with us is terminated by us without cause (as that term is defined in Section
        8
        of the agreement), or by Dr. Mackin for "Good Reason" (as that term is defined
        in Section 8(f) of the agreement) Dr. Mackin's options will immediately vest
        and
        we will continue to pay Dr. Mackin's cash salary and provide health insurance
        through the earlier of (a) expiration of this employment agreement or (b)
        until
        Dr. Mackin finds equivalent full time employment. In the event that Dr. Mackin's
        employment with us is terminated for any other reason, there will be no
        continuation of cash salary payments or health insurance.
  The
        employment agreement contains a change in control provision that provides
        that,
        upon a change in control resulting in the a change in the majority ownership
        of
        Markland, resignation or termination of a majority of the current board of
        directors within a two month period, or replacement of the chief executive
        officer, all pending stock options will immediately vest and an amount equal
        to
        the lesser of three times his then current cash salary or the cash salary
        owed
        through the end of the employment agreement will be placed in an escrow account
        for distribution to Dr. Mackin.
  52
  The
        employment agreement provides that in the event that Dr. Mackin ceases to
        be
        employed by Markland, for any reason or no reason, with or without cause,
        we
        may, at our own discretion, acquire all or a portion of the common stock
        granted
        to Dr. Mackin, at a price of $0.01 per share; provided that such repurchase
        options may only be exercised for those shares that have not been registered
        with the SEC, or sold pursuant to Rule 144.
  **Recent
        Amendment to Dr. Mackin’s Employment Agreement.** On
        May
        17, 2005, we entered into an amendment (the “Mackin Amendment”) to the
        employment agreement dated December 30, 2004 to accelerate certain stock
        grants
        due to Dr. Mackin under the Mackin Agreement as well as to reflect the March
        23,
        2005 appointment of Dr. Mackin as president of Markland. Specifically, subject
        to the terms of the Mackin Amendment, Dr. Mackin shall be entitled periodic
        grants, on the dates and in the amounts listed below, of the Company’s common
        stock. Each individual grant is conditioned upon Markland achieving performance
        objectives, based on a plan to be ratified by the board of directors during
        regularly scheduled meetings for each of the applicable years.
  As
        a
        result, on May 18, 2005, the Company issued 2,500,000 shares of common stock
        to
        Dr. Mackin. The issuance of these securities was exempt from registration
        under
        Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving
        a public offering.
  The
        Mackin Agreement was filed as Exhibit 99.6 to the Company’s current report on
        Form 8-K filed with the SEC on January 7, 2005 and is incorporated herein
        by
        reference. The form of the Mackin Amendment is filed as Exhibit 10.84 to
        our
        quarterly report on Form 10-QSB for the quarter ended March 31, 2005, and
        is
        incorporated herein by reference.
  **Restricted
        Stock Grant Agreement with Dr. Mackin.** On
        May
        18, 2005, the Company entered into a Restricted Stock Grant Agreement with
        Joseph Mackin, our president and chief operating officer, pursuant to which
        Dr.
        Mackin forfeited options to purchase 1,250,286 shares of the Company’s common
        stock at a price of $.3775 per share. In return, we granted Dr. Mackin 1,250,286
        shares of common stock. Subject to the terms of the Restricted Stock Grant
        Agreement, the shares of common stock issued to Dr. Mackin are subject to
        forfeiture in the event that Dr. Mackin’s tenure with Markland is terminated
        before a registration statement covering the shares has been declared effective
        by the SEC. The issuance of these securities was exempt from registration
        under
        Section 4(2) of the Securities Act of 1933, as amended, as a sale not involving
        a public offering.
  The
        form
        of the stock option granted to Dr. Mackin on June 30, 2004 was filed as Exhibit
        2.7 to the Company’s current report on Form 8-K filed with the SEC on June 30,
        2004 and is incorporated herein by reference. The form of the Restricted
        Stock
        Grant Agreement with Dr. Mackin was filed as Exhibit 10.86 to our quarterly
        report on Form 10-QSB for the quarter ended March 31, 2005, and is incorporated
        herein by reference.
  **Employment
        Agreement With Gino M. Pereira**
  On
        December 7, 2004 we entered into an employment agreement with Gino Pereira.
        Mr.
        Pereira's employment agreement provides for:
  ·
              Mr.
                  Pereira to commence his service for the Company as our Chief Financial
                  Officer;
  ·
              a
                  term of five years beginning on December 1,
                  2004;
  ·
              a
                  base salary of $18,750.00 per month (total of $225,000.00 per year)
                  until
                  January 15, 2005 when it was increased to a base salary of $25,000.00
                  per
                  month (total of $300,000.00 per
                  year);
  ·
              payment
                  of all necessary and reasonable out-of-pocket expenses incurred
                  by the
                  employee in the performance of his duties under this
                  agreement;
  ·
              up
                  to $2,000 monthly, increased to $4,000 monthly on January 15, 2005,
                  for
                  auto expense, business office expense and medical and life insurance
                  expenses;
  ·
              eligibility
                  to participate in bonus or incentive compensation plans that may
                  be
                  established by the Board from time to time applicable to Mr. Pereira’s
                  services;
  53
  ·
              eligibility
                  to receive a bonus if we achieve revenue and revenue and profit
                  milestones
                  set by the Board; and
  ·
              conditional
                  stock awards granted at different periods, earned based upon a
                  performance
                  criteria achieved by the Company and set by the
                  Board.
  The
        employment agreement provides for a grant of 3,000,000 shares of our common
        stock to Mr. Pereira on the date of signing. The employment agreement provides
        for additional periodic grants of our common stock to Mr. Pereira. Each
        individual grant is conditioned upon the Company achieving performance
        objectives, based on a plan to be ratified by the Board during regularly
        scheduled meetings for
        each
        of the applicableyears.
  Shares
        issued to Mr. Pereira are non transferable and subject to forfeiture. If
        the
        Company files a registration statement following the date of the final grant,
        Mr. Pereira has the right to participate in such registration statement.
        The
        agreement also provides for preemptive rights in connection with potentially
        dilutive events for a period of five years from the effective date of the
        agreement.
  Mr.
        Pereira will be eligible to receive a bonus of up to 300% of his annual base
        salary. For any quarter of the Company's operations, Mr. Pereira will be
        eligible for a portion of his bonus if the Company achieves revenue and profit
        milestones set forth by the Board in its periodic meetings. On February 23,
        2005, Mr. Pereira received a cash bonus equal to $200,000.
  As
        reported on our current report on Form 8-K, filed on January 7, 2005, we
        granted
        3,000,000 to Mr. Pereira on December 30, 2004. These shares have not been
        registered with the SEC and were granted in reliance on Section 4(2) of the
        Securities Act.
  The
        employment agreement provides that in the event that Mr. Pereira's engagement
        with us is terminated by us without cause (as that term is defined in Section
        8
        of the agreement), or by Mr. Pereira for "Good Reason" (as that term is defined
        in Section 8(f) of the agreement), we will continue to pay Mr. Pereira's
        cash
        salary and provide health insurance through the earlier of (a) expiration
        of
        this employment agreement or (b) until Mr. Pereira finds equivalent full
        time
        employment. In the event that Mr. Pereira's employment with us is terminated
        for
        any other reason, there will be no continuation of cash salary payments or
        health insurance.
  The
        employment agreement contains a change in control provision that provides
        that,
        upon a change in control resulting in the a change in the majority ownership
        of
        the Company, resignation or termination of a majority of the current board
        of
        directors within a two month period, or replacement of the Chief Executive
        Officer, all pending stock grants will immediately be granted and an amount
        equal to the lesser of three times his then current cash salary or the cash
        salary owed through the end of the employment agreement will be placed in
        an
        escrow account for distribution to Mr. Pereira.
   The
        employment agreement provides that in the event that Mr. Pereira ceases to
        be
        employed by the Company, for any reason or no reason, with or without cause,
        we
        may, at our own discretion, acquire all or a portion of the common stock
        granted
        to Mr. Pereira, at a price of $0.01 per share. Provided that such repurchase
        options may only be exercised for those shares that have not been registered
        with the SEC, or sold pursuant to Rule 144.
  **Prior
        Employment Agreements Supplanted by an Employment Agreements Executed On
        December 30, 2004**
  *The
        agreements summarized below have been supplanted by the agreements we entered
        into on December 30, 2004. Nevertheless, we provide a description of these
        agreements because they are reflected in the "Summary Compensation
        Table"*
  Robert
        Tarini. On May
        12, 2004, the Company entered into a five-year compensation agreements with
        Robert Tarini, our Chairman and Chief Executive Officer. This agreements
        was
        terminated and replaced with the current employment agreement described above.
  54
  This
        agreement, as amended on June 14, 2004, provided for the following remuneration
        to Robert Tarini):
  ·
              Base
                  annual remuneration of $300,000 payable over the five-year period
                  ending
                  January 2, 2009;
  ·
              Discretionary
                  bonuses over the term of the agreement of up to 300% of the base
                  remuneration;
  ·
              Conditional
                  stock grants over the period commencing April 1, 2004 through January
                  2,
                  2008, based on performance criteria. The stock grants, if all earned,
                  entitle Mr. Tarini to receive up to 7.5% of the Company's common
                  stock on
                  a fully diluted basis. These grants are earned according to the
                  following
                  schedule:
  **Grant**
                **Stock
                    Percentage**
                **Date
                    for Grant**Grant
                    One
                2.5%
                May
                    12, 2004Grant
                    Two
                1.0%
                July
                    1, 2004Grant
                    Three
                1.0%
                October
                    1, 2004Grant
                    Four
                1.0%
                January
                    2, 2005Grant
                    Five
                1.0%
                January
                    2, 2006Grant
                    Six
                0.5%
                January
                    2, 2007Grant
                    Seven
                0.5%
                January
                    2, 2008
 The
        number of shares of common stock to be granted on each grant date is equal
        to
        the product of (a) the number of fully diluted shares outstanding at the
        grant
        date and (b) the stock percentage associated with that grant date;
  ·
              In
                  the event of a change in control of the Company during the period
                  covered
                  by the agreement, each executive/consultant will automatically
                  be granted
                  all remaining stock grants and will be due cash and expense compensation
                  for the shorter of (i) three years from the date of the change
                  in control,
                  or (ii) until the end of the term of the agreement. A change in
                  control is
                  defined by the agreements as a change in the majority ownership
                  of the
                  equity of the company, the resignation or termination of the majority
                  of
                  the board of directors within a two month period, or the replacement
                  of
                  the CEO or the President of the Company;
                  and
  ·
              Expense
                  allowance for all reasonable and necessary expenses of $5,000 per
                  month.
  The
        new
        agreements supersede our prior employment or consulting arrangements with
        Messrs. Tarini and Ducey, the terms of which are summarized below:
  Pursuant
        to our consulting agreement with Mr. Tarini, he served as our chairman and
        chief
        executive officer for an initial term of three years at a base consulting
        fee of
        $10,000 per month. We also agreed to reimburse Mr. Tarini for all reasonable
        and
        necessary out-of-pocket expenses related to the performance of his duties
        under
        this agreement. We issued 430,474 shares of our common stock in connection
        with
        the execution of the agreement and satisfaction of stated performance criteria.
        Mr. Tarini was eligible to receive a performance-based bonus of up to four
        times
        his annual base salary upon the conclusion of the term of the agreement.
        He was
        also eligible to participate in any bonus or incentive compensation program
        established by our board of directors.
  In
        the
        event that we terminated Mr. Tarini's engagement without cause, or he terminated
        his engagement for "good reason" (defined in the agreement as, among other
        things, the assignment of duties inconsistent with Mr. Tarini's position
        or any
        material breach by us of the consulting agreement), we would have been obligated
        to continue payments until the earlier of (a) three months from the date
        of
        termination or (b) the date on which Mr. Tarini obtained a full-time engagement
        elsewhere. This agreement also subjected Mr. Tarini to some restrictive
        covenants, including an obligation to maintain confidential
        information.
  Under
        our
        employment agreement with Mr. Ducey, he served as our president and chief
        financial officer for an initial term of three years at an annual base salary
        of
        $185,000. The agreement also provided for up to $1,200 a month for his expenses,
        including his automobile, health insurance and reasonable expenses associated
        with setting up and maintaining a home office. The remaining terms of his
        agreement, including provisions for grants of common stock, bonuses and
        severance pay, were substantially the same as those of Mr. Tarini's
        agreement.
  55
  ***Employment
        Agreement of Mr. Ken Ducey, our former CEO and President - Consulting Agreement
        with Asset Growth Company, a company controlled by Mr.
        Ducey***
  On
        December 30, 2004, we entered into an employment agreement with Mr. Ducey.
        On
        March 23, 2005, we removed Mr. Ducey from his position as President of our
        company and as officer and director of our subsidiaries.
  This
        agreement supplanted a previous employment agreement with Mr. Ducey dated
        May
        12, 2004. Mr. Ducey's employment agreement provided for:
  ·
              Mr.
                  Ducey to commence his service for the Company as our
                  President;
  ·
              a
                  term of five years beginning on January 2,
                  2004;
  ·
              a
                  base salary of $15,000.00 per month (total of $180,000.00 per
                  year);
  ·
              payment
                  of all necessary and reasonable out-of-pocket expenses incurred
                  by the
                  employee in the performance of his duties under this agreement
                  including
                  initiation fees for membership in a local
                  club;
  ·
              up
                  to $5,000 monthly for auto expense, business office expense and
                  medical
                  and life insurance expenses;
  ·
              eligibility
                  to participate in bonus or incentive compensation plans that may
                  be
                  established by the Board from time to time applicable to Mr. Ducey's
                  services;
  ·
              eligibility
                  to receive a bonus if we achieve revenue and revenue and profit
                  milestones
                  set by the Board; and
  ·
              conditional
                  stock awards granted at different periods, earned based upon a
                  performance
                  criteria achieved by the Company and set by the
                  Board.
  The
        employment agreement provided for periodic grants of our common stock to
        Mr.
        Ducey. Each individual grant was conditioned upon Markland achieving performance
        objectives, based on a plan to be ratified by our Board during regularly
        scheduled meetings for each of the applicable years. The number of shares
        of
        common stock to be granted on each grant date was equal to the product of
        (a)
        the number of fully diluted shares outstanding at the grant date and (b)
        the
        stock percentage associated with that grant date.
  **Grant**
                **Stock
                    Percentage**
                **Date
                    for Grant**Grant
                    One
                0.5%
                April
                    1, 2004Grant
                    Two
                0.25%
                July
                    1, 2004Grant
                    Three
                0.25%
                October
                    1, 2004Grant
                    Four
                0.50%
                January
                    3, 2005Grant
                    Five
                0.50%
                January
                    3, 2006
   As
        reported in our current report on Form 8-K filed on January 7, 2005, the
        first
        grant, made on January 3, 2005, was for 716,864 shares. These shares have
        not
        been registered with the SEC and were granted in reliance on Section 4(2)
        of the
        Securities Act.
  Shares
        issued to Mr. Ducey were non transferable and subject to forfeiture. The
        agreement also provided for preemptive rights in connection with potentially
        dilutive events for a period of five years from the effective date of the
        agreement.
  56
  Mr.
        Ducey
        was also eligible to receive a bonus of up to 300% of his annual base salary.
        For any quarter of Markland’s operations, Mr. Ducey was be eligible for a
        portion of his bonus if we achieved revenue and profit milestones set forth
        by
        the Board in its periodic meetings. For the first year of the agreement,
        the
        revenue milestone was $1 million in each quarter and $6 million for calendar
        year 2004. On February 23, 2005, Ken Ducey received a cash bonus equal to
        $200,000 received through Asset Growth.
  The
        employment agreement provided that in the event that Mr. Ducey's engagement
        with
        us was terminated by us without cause (as that term is defined in Section
        8 of
        the agreement), or by Mr. Ducey for "Good Reason" (as that term is defined
        in
        Section 8(f) of the agreement) we will continue to pay Mr. Ducey's cash salary
        and provide health insurance through the earlier of (a) three months from
        the
        date of termination or (b) until Mr. Ducey finds other full time employment.
        In
        the event that Mr. Ducey's employment with us is terminated for any other
        reason, there will be no continuation of cash salary payments or health
        insurance.
  The
        employment agreement contains a change in control provision that provided
        that,
        upon a change in the majority ownership of the Company, resignation or
        termination of a majority of the current board of directors within a two
        month
        period, or replacement of the Chief Executive Officer, all pending stock
        grants
        would immediately be granted and an amount equal to the lesser of three times
        his then current cash salary or the cash salary owed through the end of the
        employment agreement was going to be placed in an escrow account.
  The
        employment agreement also provided that in the event that Mr. Ducey ceases
        to be
        employed by the Company, for any reason or no reason, with or without cause,
        we
        could, at our own discretion, acquire all or a portion of the common stock
        granted to Mr. Ducey, at a price of $0.01 per share. On April 15, 2005, we
        exercised our right to repurchase 6,555,088 shares held by Mr. Ducey and
        Asset
        Growth at a price of $0.01 per share.
  **Strategic
        Operations Contractor Agreement With Asset Growth Company, Inc.** We
        also
        entered into a Strategic Operations Contractor Agreement with Asset Growth
        Company, Inc., on December 30, 2004. to provide consulting services to our
        company. On March 23, 2005, pursuant to our Strategic Operations Contractor
        Agreement with them, we notified Asset Growth of our intent to terminate
        its
        services as a consultant within the following thirty (30) days. We terminated
        our relationship with Asset Growth on April 1, 2005.
  Ken
        Ducey
        is a director, officer and controlling shareholder of Asset Growth. As a
        result,
        Mr. Ducey may be deemed to have received 100% of the payments and benefits
        contemplated in this agreement.
  The
        Strategic Operations Contractor Agreement provided for a term of engagement
        of
        five years beginning on January 2, 2004, to perform duties related to business
        development and administrative services. Asset Growth's agreement provides
        for:
  ·
              Asset
                  Growth to provide (i) advice on proper deal structures for Company
                  business development activities and (ii) administrative services
                  and
                  support for Company executive staff and
                  customers;
  ·
              a
                  term of five years beginning on January 2,
                  2004;
  ·
              a
                  base payment of $10,000.00 per month (total of $120,000.00 per
                  year);
  ·
              payment
                  of all necessary and reasonable out-of-pocket expenses incurred
                  by Asset
                  Growth in the performance of its duties under this
                  agreement;
  ·
              up
                  to $5,000 monthly for expenses;
  ·
              eligibility
                  to participate in bonus or incentive compensation plans that may
                  be
                  established by the Board from time to time applicable to Asset
                  Growth's
                  services;
  ·
              eligibility
                  to receive a bonus payment if we achieve revenue and revenue and
                  profit
                  milestones set by the Board; and
  ·
              conditional
                  stock awards granted at different periods, earned based upon a
                  performance
                  criteria achieved by the Company and set by the
                  Board.
  57
  The
        agreement provided for periodic grants of our common stock to Asset Growth.
        Each
        individual grant was conditioned upon the Company achieving performance
        objectives, based on a plan to be ratified by our Board during regularly
        scheduled meetings for each of the applicable years. The number of shares
        of
        common stock to be granted on each grant date was equal to the product of
        (a)
        the number of fully diluted shares outstanding at the grant date and (b)
        the
        stock percentage associated with that grant date.
  **Grant**
                **Stock
                    Percentage**
                **Date
                    for Grant**Grant
                    One
                2.0%
                April
                    1, 2004Grant
                    Two
                0.75%
                July
                    1, 2004Grant
                    Three
                0.75%
                October
                    1, 2004Grant
                    Four
                1.5%
                January
                    3, 2005Grant
                    Five
                0.5%
                July
                    1, 2005
  As reported in our current report on Form 8-K filed on January 7, 2005, the
        first grant, made on January 3, 2005, was for 2,150,593 shares. These shares
        have not been registered with the SEC and were granted in reliance on Section
        4(2) of the Securities Act.
  Shares
        issued to Asset Growth were non transferable and subject to
        forfeiture.
  Asset
        Growth was be eligible to receive a bonus of up to 300% of its annual base
        payment. For any quarter of the Company's operations, Asset Growth was eligible
        for a portion of its bonus if we achieved revenue and profit milestones set
        forth by our Board in its periodic meetings. For the first year of the
        agreement, the revenue milestone was $1 million in each quarter and $6 million
        for calendar year 2004. On February 23, 2005, Ken Ducey, through Asset Growth
        received a cash bonus equal to $200,000.
  The
        agreement provided that in the event that Asset Growth's engagement with
        us was
        terminated by us without cause (as that term is defined in Section 8 of the
        agreement), or by Asset Growth for "Good Reason" (as that term is defined
        in
        Section 8(f) of the agreement) we were going to continue to pay Asset Growth
        cash payments and provide health insurance through the earlier of (a) three
        months from the date of termination or (b) until Asset Growth finds other
        full
        time engagement. In the event that Asset Growth's agreement with us was
        terminated for any other reason, there was no continuation of cash salary
        payments or health insurance.
  The
        agreement contained a change in control provision that provided that, upon
        a
        change in the majority ownership of the Company, resignation or termination
        of a
        majority of the current board of directors within a two month period, or
        replacement of the Chief Executive Officer or President, all pending stock
        grants would immediately be granted and an amount equal to the lesser of
        three
        times the then current per year cash payment or the cash payments owed through
        the end of the agreement would be placed in an escrow account.
  The
        agreement provided that in the event that Asset Growth ceased to be engaged
        by
        the Company, for any reason or no reason, with or without cause, we could,
        at
        our own discretion, acquire all or a portion of the common stock granted
        to
        Asset Growth, at a price of $0.01 per share. On April 15, 2005, we exercised
        our
        right to repurchase 6,555,088 shares held by Mr. Ducey and Asset Growth at
        a
        price of $0.01 per share.
   **ITEM
        11.****SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**
 
 At
        the
        close of business on October 11, 2005, there were issued and outstanding
        327,444,291 shares of our common stock. The following table provides information
        regarding beneficial ownership of our common stock as of October 11, 2005
        by:
  58
  ·
              each
                  person known by us to be the beneficial owner of more than five
                  percent of
                  our common stock;
 
 ·
              each
                  of our directors;
 
 ·
              each
                  executive officer named in the summary compensation table (including
                  two
                  former executive officers); and
 
 ·
              all
                  of our current directors and executive officers as a
                  group.
 
 The
        persons named in this table have sole voting and investment power with respect
        to the shares listed, except as otherwise indicated. The inclusion of shares
        listed as beneficially owned does not constitute an admission of beneficial
        ownership. Shares included in the "Right to Acquire" column consist of shares
        that may be purchased through the exercise of options that vest within 60
        days
        of October 11, 2005. Unless otherwise noted below, the address of the beneficial
        owners shall be Markland’s address at 88 Royal Little Drive, Providence, Rhode
        Island 02904.


**Shares
                    Beneficially Owned****Name
                    and Address of Beneficial Owner**
                **Outstanding**
                **Right
                    to Acquire**
                **Total**
                **Percent**James
                    LLC
                  c/o
                    Southridge Capital Mgmt
                  90
                    Grove Street, Suite 206
                  Ridgefield,
                    Connecticut 06877
                4,128,468
                31,791,520(1)
                35,919,988
                9.999%Deer
                    Creek Fund LLC
                  100
                    Jericho Quandrangle Suite 335
                  Jericho,
                    NY 11753
                -
                20,532,194(1)
                20,532,194
                5.9%Southridge
                    Partners LP
                  c/o
                    Southridge Capital Mgmt
                  90
                    Grove Street, Suite 206
                  Ridgefield,
                    Connecticut 06877
                3,225,000(2)
                32,795,362(1)
                36,020,362
                9.999%Robert
                    Tarini, Chairman of the Board and Chief Executive Officer
                -
                -
                -
                -Joseph
                    P. Mackin, Chief Operating Officer, President and Director
                -
                -
                -
                -Gino
                    M. Pereira, Chief Financial Officer and Director
                -
                -
                -
                -Kenneth
                    P. Ducey, Jr.(3)
                  54
                    Danbury Road #207
                  Ridgefield,
                    Connecticut 06877
                -
                -
                -
                -Gregory
                    A. Williams(4)
                  5
                    English Hills Drive
                  Fredericksburg,
                    Virginia 22406
                -
                -
                -
                -All
                    current directors and executive officers as a group (3
                    persons)
                -
                -
                -
                -
   59
 ______________________
 (1)
        Represents shares of common stock issuable upon conversion of Markland’s Series
        D convertible preferred stock. For purposes of this calculation, we assumed
        a
        conversion price of $0.024352 per share as of October 11, 2005.
 (2)
        Includes shares of common stock held by Southridge Holdings, LLC and Greenfield
        Capital Partners, LLC. The shareholder has represented to us that in accordance
        with Rule 13d-3 under the Securities Exchange Act of 1934, as amended, the
        total
        number of shares of common stock beneficially owned by Southridge Holdings,
        LLC
        and Greenfield Capital Partners, LLC should be aggregated with Southridge
        Partners, LP for purposes of calculating beneficial ownership.
 (3)
        Mr.
        Ducey resigned as our chief financial officer on December 15, 2004. On March
        23,
        2005 the Company removed Mr. Ducey as its president. On June 30, 2005 Mr.
        Ducey
        resigned as a member of the Company’s board of directors.
 (4)
        On
        November 1, 2004 Mr. Williams resigned as a member of our board of
        directors.
  
 **ITEM
        12.****CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS**
  **Transactions
        Involving Our Officers And Directors**
  **2003**
 
 During
        January 2003, we completed our acquisition of Ergo Systems, Inc. from Ocean
        Data
        Equipment Corporation, now called SyQwest, Inc. Robert Tarini, our Chief
        Executive Officer, is also the Chief Executive Officer of SyQwest, Inc. Ergo's
        main asset is an annually renewable U.S. Government General Services
        Administration contract to provide logistic support and product development
        for
        five U.S. ports of entry. In exchange for Ergo we agreed to pay SyQwest $400,000
        in cash, due in installments that are triggered with the completion of research
        milestones.
 
 On
        March
        27, 2003, we entered into an exchange agreement with Eurotech whereby Eurotech
        exchanged 1,666,666 shares of our common stock for 16,000 shares of our Series
        D
        cumulative convertible preferred stock. Our Series D cumulative convertible
        preferred stock has a stated value of $1,000 per share and has a beneficial
        conversion feature where each share is immediately convertible into common
        stock
        at a discount to market prices. During the past six months we have also issued
        shares of our Series D cumulative convertible preferred stock to James LLC.
        James LLC has invested a total of $3,832,000 in our Series D cumulative
        convertible preferred stock. As of February 17, 2005, the Series D cumulative
        convertible preferred stock held by James LLC was convertible into 30,279,088
        shares of our common stock.
 
 On
        July
        24, 2003, we entered into an agreement with SyQwest, Inc., in which we issued
        750,000 shares of our common stock in exchange for the forgiveness of $450,000
        for unpaid services performed by SyQwest in connection with research
        conducted in relation to our vehicle stopping technology. Robert Tarini,
        our
        Chief Executive Officer, is also the Chief Executive Officer of SyQwest.
        We have
        the right at any time by written notice to repurchase these shares from SyQwest
        at a price equal to $.01 per share.
 
 On
        September 30, 2003, we acquired one hundred percent (100%) of the outstanding
        stock of Science and Technology Research, Inc., which produces our U.S. Navy
        shipboard automatic chemical agent detection and alarm system product. We
        paid
        the stockholder of Science and Technology Research a total of $6,475,000
        consisting of $900,000 in cash, common stock valued at $5,100,000, a promissory
        note of $375,000, and acquisition costs of $100,000. To finance this acquisition
        we executed a two year, twelve percent (12%), secured Promissory Note with
        Bay
        View Capital, LLC for $1,400,000. Bay View Capital, LLC is controlled by
        Robert
        Tarini, our Chief Executive Officer, and Chad A. Verdi, whom we have engaged
        as
        a consultant. The outstanding balance and accrued interest of this note were
        repaid in full in April 2004.
 
 During
        the six months ended December 31, 2004, SyQwest provided $213,980 in engineering
        and software services and charged $36,000 for rent.
  60
  **2004**
  On
        June
        29, 2004, we acquired all of the outstanding stock of EOIR for $8 million
        in
        cash and $11 million in principal amount of five year notes issued to the
        former
        shareholders of EOIR, including one of our current directors, Joseph P. Mackin.
        Dr. Mackin had no affiliation with us prior to the transaction. In connection
        with his continued employment at EOIR, and as a condition of the acquisition,
        we
        granted him options to purchase 1,250,286 shares of our common stock at an
        exercise price of $0.3775 per share. The options were to vest in five equal
        annual installments. On May 18, 2005, the Company entered into a Restricted
        Stock Grant Agreement with Joseph Mackin, our president and chief operating
        officer, pursuant to which Dr. Mackin forfeited these options. In return,
        we
        granted Dr. Mackin 1,250,286 shares of common stock. Subject to the terms
        of the
        Restricted Stock Grant Agreement, the shares of common stock issued to Dr.
        Mackin are subject to forfeiture in the event that Dr. Mackin’s tenure with
        Markland is terminated before a registration statement covering the shares
        has
        been declared effective by the SEC. The issuance of these securities was
        exempt
        from registration under Section 4(2) of the Securities Act of 1933, as amended,
        as a sale not involving a public offering.
  Also
        in
        connection with this acquisition, we issued to James LLC 3,500 shares of
        Series
        D preferred stock in exchange for $2,000,000 cash. The Series D preferred
        stock
        is convertible at the option of the stockholder at any time. The number of
        shares of our common stock into which each share of Series D preferred is
        convertible is determined by dividing $1,000 by the discounted bid price.
        The
        "discounted" bid price is the average closing bid price of our common stock
        during the five business days immediately preceding the conversion date
        multiplied by the applicable discount factor, as set forth below.
  **Average
                      Closing Bid Price (1)**
                  **Discount
                      Factor**$15.00
                      or less
                  80%more
                      than $15.00, but less than or equal to $30.00
                  75%more
                      than $30.00, but less than or equal to $45.00
                  70%more
                      than $45.00
                  65%
 __________
 (1)  After
          an adjustment for a 1-for-60 reverse stock split effective October 27,
          2003.
 The
          Series D preferred stock can be converted only to the extent that the Series
          D
          stockholder will not, as a result of the conversion, hold in excess of
          9.999% of
          the total outstanding shares of our common stock. During the six months
          ended
          December 31, 2004, James LLC converted 7,331 shares of Series D preferred
          stock
          into 15,868,206 shares of the Company's common stock.
  On
        September 21, 2004, we sold secured convertible promissory notes and common
        stock purchase warrants to two institutional investors. As a condition to
        this
        sale, the investors required our Chief Executive Officer, Robert Tarini,
        and our
        Chief Financial Officer, Kenneth Ducey, Jr., to enter into a lock-up agreement
        pursuant to which Mr. Tarini and Mr. Ducey agreed not to sell any shares
        of our
        common stock until 60 days after the effective date of a registration statement
        covering the resale of the underlying shares of common stock of those securities
        sold in the September 21, 2004 private placement.
  As
        part
        of our private placement of secured convertible promissory notes and common
        stock purchase warrants completed on September 21, 2004, James LLC, the largest
        holder of our Series D preferred stock, agreed not to sell any of its holdings
        of Series D preferred stock until the earlier to occur of: (1) notice from
        the
        us and the investors that the transactions contemplated had been completed
        had
        been terminated, or (2) March 15, 2005. However, pursuant to the terms of
        the
        lock-up agreement, James LLC may still convert their Series D shares and
        sell
        the underlying shares of common stock in accordance with the volume limitations
        of Rule 144 of the Securities Act. In exchange, we agreed that subject to
        some
        conditions, if we did not redeem the Series D stock by January 15, 2005,
        we
        would issue to James LLC a warrant to purchase 1,088,160 shares of our common
        stock at $0.80.
  61
  This
        agreement was subsequently replaced by a preferred stock restriction agreement
        entered into on January 5, 2005 and described in detail below. In connection
        with the execution of the preferred stock restriction agreement, on January
        5,
        2005 we issued warrants to purchase one million eighty-eight thousand one
        hundred sixty (1,088,160) shares of common stock to James LLC at an exercise
        price of $0.60 per share. James LLC is entitled to have the shares subject
        to
        these warrants included in the first registration statement filed by us with
        the
        SEC following the equity line registration statement. These warrants are
        unregistered securities and are being issued in reliance on Section 4(2)
        of the
        Securities Act.
  On
        July
        28, 2004, we issued 1,006,902 shares of our common stock to Robert Tarini,
        301,370 shares of our common stock to Kenneth P. Ducey, Jr. and 705,532 shares
        of our common stock to Asset Growth Company, an entity wholly owned and
        controlled by Kenneth P. Ducey, Jr. in connection with their employment and
        consulting agreements. The issuance of these securities was exempt from
        registration under Section 4(2) of the Securities Act, as a sale not involving
        a
        public offering.
  On
        October 4, 2004, we issued 1,205,479 shares of our common stock to Robert
        Tarini, 301,370 shares of common stock to Kenneth Ducey, Jr. and 904,110
        shares
        of common stock to Asset Growth Company, a company wholly owned and controlled
        by Kenneth P. Ducey, Jr. in connection with employment and consulting
        agreements. The issuance of these securities was exempt from registration
        under
        Section 4(2) of the Securities Act, as a sale not involving a public
        offering.
  On
        May
        12, 2004, we entered into five-year employment agreements with our Chief
        Executive Officer and Chairman of our Board of Directors, Robert Tarini,
        and our
        Chief Financial Officer and Director, Kenneth P. Ducey, Jr. The agreements
        provide for salary and bonus compensation, as well as performance based equity
        grants. The terms of the agreements are set forth in detail in this report
        in
        the section entitled Compensation of Directors and Executive Officers under
        heading "Employment Agreements." We have also executed amendments to these
        agreements with each of Mr. Tarini and Mr. Ducey which provided for a higher
        initial grant of shares in exchange for the omission of antidilution protection
        in the agreements, a concession granted prior to execution of the
        agreements.
  From
        August to December 7, 2004, Mr. Pereira, who became our Chief Financial Officer
        on December 7, 2004, provided consulting services to Markland in connection
        with
        the preparation of financial statements and other related services. For these
        services, he received $62,497.
  On
        December 30, 2004, we entered into new employment and consulting agreements
        with
        Mr. Tarini, our Chief Executive Officer, Mr. Gino Pereira, our Chief Financial
        Officer, Mr. Kenneth P. Ducey, Jr., our President, Dr. Joseph P. Mackin our
        Chief Operating Officer, and Asset Growth Company, Inc., a company controlled
        by
        Mr. Ken Ducey, our President. The terms of the agreements are set forth in
        detail in this report in the section entitled “Employment
        Agreements."
  During
        the fiscal year ended June 30, 2004, $1,244,327 was paid to SyQwest for services
        and there was a payable due to SyQwest of $40,607 at June 30, 2004
   **2005**
  On
        January 3, 2005, we granted shares of common stock to the following parties.
        These shares have not be registered with the SEC and the offer and sale of
        these
        securities was made in reliance on Section 4(2) of the Securities
        Act.
  Purchasers
                Number
                    of shares issuedRobert
                    Tarini
                2,867,458Gino
                    Pereira
                3,000,000Kenneth
                    P. Ducey
                716,864Joseph
                    P. Mackin
                2,000,000Asset
                    Growth Company (1)
                2,150,593
 ____________
 (1)
        Kenneth P. Ducey is a director, officer and controlling shareholder of Asset
        Growth.
  62
  On
        February 14, 2005, Technest Holdings Inc. completed a financing. This financing
        is described in the Business section of this report. Mr. Robert Tarini was
        an
        investor in this private placement through ipPartners Inc., a company owned
        by
        Mr. Tarini. ipPartners Inc. invested $625,000 in this offering and received
        143,678 shares of Technest Series B preferred stock, 143,678 shares of Technest
        Series C preferred stock, and warrants to purchase 30,341,920 shares of Technest
        common stock. The Technest Series B preferred stock is convertible into shares
        of our common stock. We have agreed to register the resale of these shares
        of
        our common stock. On June 20, 2005, ipPartners, Inc. exchanged all of its
        Technest Series B Preferred Stock for Markland Series D preferred stock.
  In
        connection with our acquisition of control of Technest Holdings, Inc. Robert
        Tarini, our Chief Executive Officer and Chairman of the Board, was appointed
        the
        Chief Executive Officer and a Director of Technest. Technest's only other
        director is Mark Allen. On March 30, 2005, Mark Allen resigned as director
        of
        Technest. In addition, Gino M. Pereira, our Chief Financial Officer, was
        appointed Chief Financial Officer of Technest and Joseph P. Mackin, our Chief
        Operating Officer and a Director of Markland, was appointed President of
        Technest. Each of these individuals may participate in Technest's 1998, 2000
        and
        2001 stock option plans.
  Currently,
        Robert Tarini, our Chief Executive Officer is also Chief Executive Officer
        of
        Syquest, Inc. Syquest performs software and engineering development for the
        Markland Group and provides approximately 4000 sq ft of office space to the
        Company in Providence, RI. During the year ended June 30, 2005, Syquest provided
        $557,234 in engineering and software services and charged $72,000 for rent.
  On
        February 23, 2005, we paid cash bonuses in the amount of $600,000 to Verdi
        Consulting, Inc., $350,000 each to Robert Tarini and Joseph P. Mackin; and
        $200,000 each to Gino Pereira and Asset Growth. Payments made to Asset Growth
        should be considered as being made to Ken Ducey, as Mr. Ducey is the controlling
        shareholder and a director of Asset Growth Company.
  On
        April
        15, 2005, in connection with the termination of Mr. Ducey, and in accord
        with
        Section 4(j) of the employment agreement by and between the Company and Mr.
        Ducey dated December 30, 2004, we exercised our right to repurchase 1,525,010
        shares of our common stock issued to Mr. Ducey pursuant to employment agreements
        at a price of $.01 per share.
  On
        May
        18, 2005, we issued 3,866,391 shares of common stock to Robert Tarini, 1,933,195
        shares of common stock to Verdi Consulting, and 3,750,286 shares of common
        stock
        to Joseph Mackin in connection with employment agreements, consulting agreements
        and restricted stock grant agreement. Please refer to the section entitled
        “Employment Agreements.”
  On
        June
        20, 2005, we entered into definitive agreements with DKR Soundshore Oasis
        Holding Fund, Ltd., DKR Soundshore Strategic Holding Fund, Ltd., Verdi
        Consulting, Inc., and ipPartners, Inc. pursuant to which we exchanged 632,182
        shares of Technest Series B Technest Preferred Stock (convertible shares
        of
        Markland common stock) for 2,750 shares of Markland Series D Preferred Stock.
        As
        of October 11, 2005, all of the 2,750 shares of our Series D preferred stock
        have been converted into an aggregate of 33,337,546 shares of our common
        stock.
        ipPartners, Inc., a company controlled and wholly-owned by Mr. Tarini, exchanged
        143,678 shares of Technest Series B Preferred Stock (convertible into shares
        of
        Markland common stock) into 635 shares of Markland Series D Preferred Stock
        (convertible into shares of Markland common stock). On
        August 23, 2005, ipPartners converted its 625 shares of Markland Series D
        preferred stock into 6,510,417 shares of Markland common stock. This
        transaction 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 and Rule 506 of Regulation
        D
        promulgated thereunder, insofar as such securities were sold only to "accredited
        investors" within the meaning of Rule 501 of Regulation D. The resale of
        the
        shares of common stock underlying the Markland Series D Preferred Stock were
        registered pursuant to a registration statement on Form SB-2 that went effective
        on August 10, 2005.
  On
        June
        30, 2005, Mr. Ducey resigned as a Director of Markland. Please refer to the
        "Legal Proceedings" section regarding our Settlement Agreement with Mr. Ducey.
  63
  On
        August 19, 2005, we entered into a definitive exchange agreement with the
        Deer
        Creek Fund LLC, (“Deer Creek”) pursuant to which we exchanged 114,943 shares of
        Technest Series B Preferred Stock (convertible into shares of Markland common
        stock for 500 shares of Markland Series D Preferred Stock (convertible into
        5,008,013 shares of Markland Common Stock as of August 19, 2005).
         Concurrent with the exchange agreement, we entered into a registration
        rights agreement with Deer Creek in which we agree to submit a registration
        statement to the SEC covering the shares of Common Stock underlying the Series
        D
        on or before October 17, 2005. This transaction 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 and Rule 506 of Regulation D promulgated thereunder, insofar as such
        securities were sold only to "accredited investors" within the meaning of
        Rule
        501 of Regulation D.
 
 On
        October 4, 2005, we entered into an agreement with our majority owned
        subsidiary, Technest, and James LLC, Southridge Partners, LP, Southshore
        Capital
        Fund, Ltd. and Greenfield Capital Partners LLC, who are holders of our and
        Technest’s securities. The purpose of the October 4 Agreement was to amend the
        certain prior agreements involving our and Technest’s securities in light of the
        recent reorganization described in our current report on Form 8-K filed on
        August 18, 2005. For a discussion of the material terms of the October 4
        Agreement, please refer to the section entitled “Recent Developments” in the
        Business section of this report.
  **Transactions
        Involving James LLC**
  On
        January 5, 2005, we entered into a preferred stock restriction agreement
        with
        James LLC (the sole holder of our Series D preferred stock), to restrict
        the
        sale of shares of our Series D cumulative convertible preferred stock and
        shares
        of our common stock, par value $0.0001 per share issuable upon conversion
        of the
        series D preferred stock. Specifically, subject to the terms and conditions
        contained in the agreement, the parties have agreed that the James LLC will
        not
        transfer or dispose of any of the subject securities prior to March 15, 2005.
        Beginning on March 15, 2005, the James LLC may sell shares of our common
        stock
        received pursuant to conversions of Series D preferred stock in broker's
        transactions subject to Rule 144 promulgated under the Securities Act. However,
        beginning on June 15, 2005, the James LLC's sales of such conversion shares
        shall be limited to not more than $600,000 per calendar month. Beginning
        on
        September 13, 2005, the monthly limit on sales of shares shall be increased
        to
        $750,000 per calendar month.
  The
        preferred stock restriction agreement calls for us to enter into a private
        equity credit agreement with an investor Brittany Capital Management, Ltd.,
        for
        an equity line of credit in the amount of $10,000,000. We are required, within
        twenty-one (21) days of the execution of the private equity credit agreement,
        to
        file a registration statement with the Securities and Exchange Commission
        providing for the resale by the investor of the shares of common stock sold
        to
        the investor pursuant to the Equity Line. In the event that the equity line
        registration statement has not been declared effective by the SEC prior to
        June
        15, 2005, we shall pay a cash penalty of $50,000 per month to James
        LLC.
  In
        connection with the execution of the preferred stock restriction agreement,
        on
        January 5, 2005 we issued warrants to purchase one million eighty-eight thousand
        one hundred sixty (1,088,160) shares of common stock to James LLC at an exercise
        price of $0.60 per share. James LLC is entitled to have the shares subject
        to
        these warrants included in the first registration statement filed by us with
        the
        SEC following the equity line registration statement. These warrants are
        unregistered securities and are being issued in reliance on Section 4(2)
        of the
        Securities Act.
  Please
        refer to the section entitled “Recent Developments” in the Business section of
        this report for a discussion of our October 4, 2005 Agreement involving James
        LLC.
  **Transactions
        With Jason Geng**
  As
        a
        result of our acquisition of Technest and Technest's acquisition of Genex
        Technologies, Inc., at that time, Jason Geng became the beneficial owner
        of
        approximately 11% of shares of Markland common stock, on a primary basis.
        In
        connection with the acquisition of Genex, we entered into the following
        additional arrangements with Mr. Geng.
  64
  The
        Merger provided for Mr. Geng to receive a six-month unsecured promissory
        note in
        the principal amount of $550,000 that pays interest at the rate of 6% per
        annum.
        Jason Geng's share consideration would be adjusted to reflect changes in
        the
        closing bid price of Markland common stock in the 10 trading days following
        February 14, 2005, subject to limitations set forth in the Merger Agreement.
        Following the acquisition of Genex, we and Technest have raised certain claims
        pursuant to the Merger Agreement. As a result, we have not and do not intend
        to
        issue the promissory note to Mr. Geng.
  If,
        following completion of the acquisition of Genex, Genex meets specified revenue
        goals at the end of each of the first three years following February 14,
        2005,
        the Merger Agreement provides that Technest will pay to Mr. Geng contingent
        consideration of additional shares of Technest common stock equal to the
        fair
        market value of 30% of the difference in Genex's gross revenue during the
        year
        proceeding the payment and its gross revenue in 2004.
  In
        the
        event that the Intraoral Technologies (as such term is defined in the Merger
        Agreement) owned by Genex prior to February 14, 2005 are commercialized,
        the
        Merger Agreement provides that Jason Geng shall be entitled to fifty percent
        (50%) of all profits generated from the Intraoral Technologies for a period
        of
        five years following February 14, 2005. Notwithstanding the foregoing, any
        revenue resulting from the Intraoral Technologies shall be excluded from
        the
        calculation of the earn out described in the foregoing paragraph.
  The
        Merger Agreement provides that Markland, Technest and MTECH, on one hand,
        and
        Jason Geng, on the other hand have agreed to indemnify each other for breaches
        of representations, warranties and failures to perform covenants. Indemnity
        is
        available pursuant to the indemnity escrow agreement for any claim by Markland
        or Technest above $100,000. Jason Geng's liability is limited to the amount
        in
        the indemnity escrow fund, set at closing as $2 million of Markland common
        stock
        taken from the consideration paid to Jason Geng also on closing.
  We
        entered into a Registration Rights Agreement with Jason Geng, the sole
        stockholder of Genex, on February 14, 2005, pursuant to which we agreed to
        file
        a registration statement for the shares of Markland common stock paid to
        Jason
        Geng on or before June 1, 2005, plus one day for each day when a registration
        statement is not effective and available for the resale of common stock issued
        to the investors in the Investors Securities Purchase Agreement, dated September
        21, 2004. Following the acquisition of Genex, we and Technest have raised
        certain claims pursuant to the Merger Agreement. As a result, we do not intend
        to register the 10,168,174 shares of our common stock issued to Mr.
        Geng.
  Technest
        and Markland entered into a lock-up agreement with Jason Geng pursuant to
        which
        Jason Geng has agreed (a) not to sell or dispose of any of the Markland common
        stock issued to Jason Geng under the Merger Agreement through July 31, 2005
        without the prior written consent of Markland, provided that Jason Geng may
        sell
        or transfer such shares to Markland, Technest or his immediate family members
        as
        a bona fide gift, (b) beginning on August 1, 2005, not to sell more than
        ten
        percent (10%) of the aggregate Markland common stock in any given thirty
        (30)
        day period, and (c) not to sell more than twenty-five percent (25%) of the
        aggregate Technest common stock that may be issued to him, in any given thirty
        (30) day period.
  In
        connection with this acquisition, Genex entered into an employment agreement
        with Jason Geng. The agreement contemplated the employment of Jason Geng
        by
        Genex for a period of three years as its Executive Vice President and Chief
        Scientist with a salary of $300,000 per year and eligibility to participate
        in
        any bonus or incentive compensation plans established by the Board of Directors
        of Genex, Markland or Technest. The employment agreement provided that Jason
        Geng's salary payments and health insurance benefits would continue until
        the
        earlier of (a) the date that Jason Geng has obtained other full-time engagement
        or (b) twelve (12) months from the date of termination of employment with
        Genex,
        in the event that Genex terminates his engagement without cause (as defined
        in
        the agreement) prior to the termination of the agreement or in the event
        that
        Jason Geng terminates his engagement for good reason (as defined in the
        agreement). The agreement also provided for a continuation, for the lesser
        of
        six months or through the end of the term of the agreement, of Jason Geng's
        salary in the event that he became permanently disabled during the term of
        the
        agreement. On March 18, 2005, as a result of claims made by Technest arising
        from the purchase of Genex, Mr. Geng’s employment with Genex was
        terminated.
  On
        February 14, 2005, Robert Tarini, our Chief Executive Officer and Chairman
        of
        the Board, was appointed the Chief Executive Officer and a Director of Technest.
        Technest's only other director is Mark Allen. In addition, Gino M. Pereira,
        our
        Chief Financial Officer, was appointed Chief Financial Officer of Technest
        and
        Dr. Joseph P. Mackin, our Chief Operating Officer and a Director of Markland,
        was appointed President of Technest. Each of these individuals may participate
        in Technest's 1998, 2000 and 2001 stock option plans.
  65
  **Transactions
        with Verdi Consulting, Inc.**
  According
        to Amendment No. 1 to the Schedule 13D filed on March 4, 2005, Verdi Consulting,
        Inc. was the beneficial owner of 1.62% of our common stock issued and
        outstanding. Following the June 20, 2005 private placement, Mr. Verdi became
        the
        beneficial owner of 9.31% of outstanding shares of our common stock.
  *Agreement
        With Verdi Consulting, Inc.*
  On
        January 3, 2005, we also entered in to a Consultant Agreement with Verdi
        Consulting, Inc. Chad A. Verdi, one of our stockholders, is the sole shareholder
        of Verdi. This agreement supplants a previous agreement with Verdi dated
        May 12,
        2004, amended in June 2004. This new agreement provides for:
  ·
              Verdi
                  Consulting to commence service for the Company as a development
                  and
                  financing consultant;
 ·
              a
                  term of five years beginning on January 2,
                  2004;
 ·
              a
                  base salary of $25,000.00 per month (total of $300,000.00 per
                  year);
 ·
              payment
                  of all necessary and reasonable out-of-pocket expenses incurred
                  by Verdi
                  Consulting in the performance of its duties under this
                  agreement;
 ·
              up
                  to $5,000 monthly for auto expense, business office expense and
                  medical
                  and life insurance expenses;
 ·
              eligibility
                  to participate in bonus or incentive compensation plans that may
                  be
                  established by the Board from time to time applicable to Verdi
                  Consulting
                  's services;
 ·
              eligibility
                  to receive a bonus if we achieve revenue and revenue and profit
                  milestones
                  set by the Board; and
 ·
              conditional
                  stock awards granted at different periods, earned based upon a
                  performance
                  criteria achieved by our Company and set by the
                  Board.
  The
        employment agreement provides for periodic grants of our common stock to
        Verdi
        Consulting. Each individual grant is conditioned upon our Company achieving
        performance objectives, based on a plan to be ratified by the Board during
        regularly scheduled meetings for each of the applicable years. The number
        of
        shares of common stock to be granted on each grant date is equal to the product
        of (a) the number of fully diluted shares outstanding at the grant date and
        (b)
        the stock percentage associated with that grant date.
  **Grant**
                **Stock
                    Percentage**
                **Date
                    For Grant**Grant
                    One
                2.5%
                April
                    1, 2004Grant
                    Two
                1.0%
                July
                    1, 2004Grant
                    Three
                1.0%
                October
                    1, 2004Grant
                    Four
                2.5%
                January
                    3, 2005Grant
                    Five
                0.5%
                July
                    1, 2005
 
 As
        reported in our current report on Form 8-K filed on January 7, 2005, the
        first
        grant, made on January 3, 2005, was for 3,584,322 shares. These shares have
        not
        been registered with the SEC and were granted in reliance on Section 4(2)
        of the
        Securities Act. As a result of this grant. Verdi Consulting became the
        beneficial owner of 4,210,328 shares of our common stock of our outstanding
        common stock (in excess of 5% of our common stock).
  Shares
        issued to Verdi Consulting are non transferable and subject to forfeiture.
        If
        the Company files a registration statement following the date of the final
        grant, Verdi has the right to participate in such registration statement.
        The
        agreement also provides for preemptive rights in connection with potentially
        dilutive events for a period of five years from the effective date of the
        agreement.
  Verdi
        Consulting will be eligible to receive a bonus of up to 300% of his annual
        base
        salary. For any quarter of the Company's operations, Verdi Consulting will
        be
        eligible for a portion of his bonus if our Company achieves revenue and profit
        milestones set forth by the Board in its periodic meetings. For the first
        year
        of the agreement, the revenue milestone was $1 million in each quarter and
        $6
        million for calendar year 2004. On February 23, 2005, Verdi Consulting, Inc.
        received a cash bonus equal to $600,000.
  66
  The
        employment agreement provides that in the event that Verdi Consulting' s
        engagement with us is terminated by us without cause (as that term is defined
        in
        Section 8 of the agreement), or by Verdi Consulting for "Good Reason" (as
        that
        term is defined in Section 8(f) of the agreement) we will continue to pay
        Verdi
        Consulting's cash payment and provide health insurance through the earlier
        of
        (a) three months from the date of termination or (b) until Verdi Consulting
        finds another full time engagement. In the event that Verdi Consulting' s
        employment with us is terminated for any other reason, there will be no
        continuation of cash salary payments or health insurance.
  The
        agreement contains a change in control provision that provides for an
        acceleration of stock grants and cash payments to Verdi Consulting upon a
        change
        in control resulting in the a change in the majority ownership of the Company,
        resignation or termination of a majority of the current board of directors
        within a two month period, or replacement of the Chief Executive Officer
        or
        President. In the event of such a change in control, all pending stock grants
        will immediately be granted and an amount equal to the lesser of three times
        his
        then current cash salary or the cash salary owed through the end of the
        employment agreement will be placed in an escrow account for distribution
        to
        Verdi.
  This
        agreement supersedes the prior agreement we had with Verdi Consulting, Inc.,
        which was executed in May 2004 and amended on June 2004.
  Grants
        of
        our common stock made in connection with the 2004 consulting agreement to
        date
        include 1,525,258 issued on May 12, 2004, 1,006,902 shares issued on July
        28,
        2004, and 1,205,479 shares issued on October 4, 2004. The issuance of these
        securities was exempt from registration under Section 4(2) of the Securities
        Act, as a sale not involving a public offering.
  *Recent
        Amendment to our consulting Agreement with Verdi Consulting* .
        On May
        17, 2005, the Company entered into an amendment (the “Verdi Amendment”) to the
        consulting agreement dated January 3, 2005 between the Company and Verdi
        Consulting, Inc. (the “Verdi Agreement”), to accelerate the final stock grant
        due to Verdi Consulting, Inc., under the Verdi Agreement. Specifically, pursuant
        to the terms of the Verdi Agreement, the Company was required to issue to
        Verdi
        Consulting, Inc. a number of shares of its Common Stock equal to 0.5% of
        the
        Company’s fully diluted outstanding Common Stock. Pursuant to the terms of the
        Amendment, this award was accelerated to become due on May 16, 2005.
  As
        a
        result, on May 18, 2005, the Company issued 1,933,195 shares of Common Stock
        to
        Verdi Consulting, Inc. The issuance of these securities was exempt from
        registration under Section 4(2) of the Securities Act of 1933, as amended,
        as a
        sale not involving a public offering.
  
 67


**ITEM
          13. EXHIBITS**
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**2.1
              Stock
                  Purchase Agreement by and between Markland and EOIR, dated June
                  30, 2004
              
              8-K
              June
                  30, 2004
              2.12.2
              Forms
                  of Promissory Note
              
              8-K
              June
                  30, 2004
              2.22.3
              Security
                  Agreement by and between EOIR and sellers of EOIR stock, dated
                  June 30,
                  2004
              
              8-K
              June
                  30, 2004
              2.32.4
              2004
                  Stock Option Plan, adopted June 30, 2004
              
              8-K
              June
                  30, 2004
              2.42.5
              Preferred
                  Securities Purchase Agreement
              
              8-K
              June
                  30, 2004
              2.52.6
              Pledge
                  and Security Agreement
              
              8-K
              June
                  30, 2004
              2.62.7
              Forms
                  of Stock Option
              
              8-K
              June
                  30, 2004
              2.73.1
              Articles
                  of Incorporation of Quest Net Corp., filed with the Florida Secretary
                  of
                  State on December 28, 1998
              
              8-K
              March
                  20, 2000
              1.33.2
              Articles
                  of Merger filed with the Florida Secretary of State on March 15,
                  2000
              
              8-K
              March
                  20, 2000
              1.23.3
              Articles
                  of Amendment to the Articles of Incorporation of Quest Net Corp.,
                  filed
                  with the Florida Secretary of State on April 4, 2001
              
              8-K
              April
                  10, 2001
              3.13.4
              Articles
                  of Amendment to the Articles of Incorporation of Quest Net Corp.,
                  filed
                  with the Florida Secretary of State on June 21, 2001
              
              8-K
              April
                  10, 2001
              3.33.5
              Articles
                  of Amendment to the Articles of Incorporation of Markland Technologies,
                  Inc. filed with the Florida Secretary of State on December 21,
                  2001
              
              SB-2
              May
                  11, 2004
              3.53.6
              Articles
                  of Amendment to the Articles of Incorporation of Markland Technologies,
                  Inc. filed with the Florida Secretary of State on September 16,
                  2003
              
              10-KSB
              October
                  14, 2003
              3.6
 
 68
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**3.7
              Certificate
                  of Designations of Rights and Preferences of the Series A Non-Voting
                  Convertible Preferred Stock
              
              10-KSB
              October
                  14, 2003
              3.73.8
              Certificate
                  of Designations of Rights and Preferences of the Series C Cumulative
                  Convertible Preferred Stock
              
              8-K
              December
                  20, 2002
              3.53.9
              Certificate
                  of Designations of Rights and Preferences of the Series D Cumulative
                  Convertible Preferred Stock
              
              10-KSB
              October
                  14, 2003
              3.53.10
              Amended
                  and Restated By-Laws
              
              8-K
              March
                  20, 2000
              1.44.1
              Form
                  of common stock certificate of Markland Technologies, Inc.
              
              10-QSB
              February
                  14, 2003
              4.14.2
              Registration
                  Rights Agreement between Markland Technologies, Inc., Montana View
                  Corporation, Elite Properties, Ltd., Sparrow Ventures, Inc., dated
                  April
                  2, 2004
              
              SB-2
              May
                  11, 2004
              4.24.3
              Form
                  of Common Stock Purchase Warrant dated April 2, 2004
              
              SB-2
              May
                  11, 2004
              4.34.4
              Form
                  of Common Stock Purchase Warrant dated April 16, 2004
              
              SB-2
              May
                  11, 2004
              4.44.5
              Form
                  of Common Stock Purchase Warrant dated May 3, 2004
              
              SB-2
              May
                  11, 2004
              4.54.6
              Registration
                  Rights Agreement, dated March 19, 2003, by and between ASI
                  Technology
                  Corporation and Markland Technologies, Inc.
              
              10-KSB
              October
                  14, 2003
              10.104.7
              Registration
                  Rights Agreement by and between Markland Technologies, Inc. and
                  Brittany
                  Capital Management limited, dated September 10, 2003
              
              10-KSB
              October
                  14, 2003
              10.174.8
              Consulting
                  Agreement by and between ECON Investor Relations, Inc., dated January
                  18,
                  2003
              
              SB-2
              May
                  11, 2004
              4.104.9
              Registration
                  Rights Agreement by and between Markland Technologies, Inc. and
                  the
                  investors named therein, dated September 21, 2004
              
              8-K
              September
                  23, 2004
              99.3
 
 69
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**4.10
              Form
                  of Common Stock Purchase Warrant issued by Markland Technologies,
                  Inc. on
                  September 21, 2004
              
              8-K
              September
                  23, 2004
              99.54.11
              Lock-up
                  Agreement by and among Markland Technologies, Inc., Robert Tarini,
                  and
                  Kenneth Ducey, Jr.
              
              8-K
              September
                  23, 2004
              99.74.12
              Lock-up
                  Agreement by and between Markland Technologies, Inc. and James,
                  LLC
              
              8-K
              September
                  23, 2004
              99.64.13
              Waiver
                  Agreement by and among Markland Technologies, Inc. and the parties
                  named
                  therein, dated September 21, 2004
              
              8-K
              September
                  23, 2004
              99.84.14
              Amendment
                  to Warrant No. CS-85, by and between Markland Technologies, Inc.
                  and DKR
                  Soundshore Oasis Holding Fund, Ltd., dated December 28,
                  2004
              
              8-K
              December
                  30, 2004
              99.14.15
              Amendment
                  to Warrant No. CS-85, by and between Markland Technologies, Inc.
                  and DKR
                  Soundshore Strategic Holding Fund, Ltd., dated December 28,
                  2004
              
              8-K
              December
                  30, 2004
              99.24.16
              Form
                  of Warrant issued in connection with warrant amendments dated February
                  7,
                  2005
              
              8-K
              December
                  30, 2004
              99.34.17
              Amendment
                  to Warrant No. CS-83, by and between Markland Technologies, Inc.
                  and
                  Greenfield Capital Partners, LLC dated December 29, 2004
              
              8-K
              December
                  30, 2004
              99.44.18
              Amendment
                  to Warrant No. CS-89, by and between Markland Technologies, Inc.
                  and
                  Southridge Partners LP, dated December 29, 2004
              
              8-K
              December
                  30, 2004
              99.54.19
              Amendment
                  to Warrant No. CS-86, by and between Markland Technologies, Inc.
                  and David
                  Stefansky, dated January 4, 2005
              
              8-K
              January
                  7, 2005
              99.14.20
              Amendment
                  to Warrant No. CS-87, by and between Markland Technologies, Inc.
                  and
                  Richard Rosenblum, dated January 4, 2005
              
              8-K
              January
                  7, 2005
              99.2
 
 70
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**4.21
              Amendment
                  to Warrant No. CS-88, by and between Markland Technologies, Inc.
                  and
                  Harborview Master Fund LP, dated January 4, 2005
              
              8-K
              January
                  7, 2005
              99.34.22
              Preferred
                  Stock Restriction Agreement by and between Markland Technologies,
                  Inc. and
                  James LLC, dated January 5, 2005
              
              8-K
              January
                  11, 2005
              99.14.23
              Form
                  of Common Stock Purchase Warrant issued to James LLC
              
              8-K
              January
                  11, 2005
              99.34.24
              Preferred
                  Stock Restriction Agreement Amendment by and between Markland
                  Technologies, Inc. and James LLC, dated January 5, 2005
              
              8-K
              January
                  12, 2005
              99.14.25
              Registration
                  Rights Agreement by and among Markland Technologies, Inc. and Southridge
                  Partners, LP, Southshore Capital Fund Limited, ipPartners, Inc.,
                  Verdi
                  Consulting Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
                  Strategic Holding Fund, Ltd. and Deer Creek Fund, LP for Markland
                  Common
                  Stock, dated February 14, 2005
              
              8-K
              February
                  15, 2005
              4.14.26
              Registration
                  Rights Agreement between Technest Holdings, Inc. and Markland
                  Technologies, Inc., dated February 14, 2005
              
              8-K
              February
                  15, 2005
              4.24.27
              Registration
                  Rights Agreement by and among Technest Holdings, Inc., and Southridge
                  Partners, LP, Southshore Capital Fund Limited, ipPartners, Inc.,
                  Verdi
                  Consulting Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR Soundshore
                  Strategic Holding Fund, Ltd. and Deer Creek Fund, LP for Technest
                  Series C
                  Preferred Stock and Warrants for Technest Common Stock, dated February
                  14,
                  2005
              
              8-K
              February
                  15, 2005
              4.34.28
              Registration
                  Rights Agreement between Technest Holdings, Inc. and Jason Geng,
                  dated
                  February 14, 2005
              
              8-K
              February
                  15, 2005
              4.44.29
              Registration
                  Rights Agreement between Markland Technologies, Inc. and Jason
                  Geng, dated
                  February 14, 2005
              
              8-K
              February
                  15, 2005
              4.5
 
 71
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**4.30
              Form
                  of Technest Common Stock Purchase Warrant issued on February 14,
                  2005
              
              8-K
              February
                  15, 2005
              4.64.31
              Technest
                  Series B Convertible Preferred Stock Certificate of Designations
                  filed
                  with the Secretary of State of Nevada on February 14, 2005
              
              8-K
              February
                  15, 2005
              4.74.32
              Technest
                  Series C Convertible Preferred Stock Certificate of Designations
                  filed
                  with the Secretary of State of Nevada on February 14, 2005
              
              8-K
              February
                  15, 2005
              4.84.33
              Promissory
                  Note made by Genex Technologies, Inc. and issued in favor of Jason
                  Geng on
                  February 14, 2005
              
              8-K
              February
                  15, 2005
              4.94.34
              Warrant
                  issued to Michael Rosenblum on December 7, 2005
              
              SB-2(3)
              March
                  17, 2005
              4.404.35
              Warrant
                  issued to DKR Soundshore Oasis Holding Fund, Ltd. on March 10,
                  2005
              
              SB-2(3)
              March
                  17, 2005
              4.424.36
              Warrant
                  issued to DKR Soundshore Strategic Holding Fund, Ltd. on
                  March 10, 2005
              
              SB-2(3)
              March
                  17, 2005
              4.434.37
              Warrant
                  issued to Southridge Partners, LP on February 7, 2005
              
              SB-2(3)
              March
                  17, 2005
              4.444.38
              Warrant
                  issued to Harborview Master Fund, LP on February 7, 2005
              
              SB-2(3)
              March
                  17, 2005
              4.454.39
              Warrant
                  issued to David Stefansky on February 7, 2005
              
              SB-2(3)
              March
                  17, 2005
              4.464.40
              Warrant
                  issued to Richard Rosenblum on February 7, 2005
              
              SB-2(3)
              March
                  17, 2005
              4.474.41
              Form
                  of Letter Agreement lowering exercise price of Warrants issued
                  on
                  February 7, 2005 and March 10, 2005
              
              SB-2(3)/1A
              April
                  8, 2005
              4.484.42
              Notices
                  to investors in September 21, 2004 and November 9, 2004 regarding
                  interest
                  payments effected with shares in lieu of cash
              
              SB-2(3)/1A
              April
                  8, 2005
              4.49
 
 72
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.1
              Securities
                  Purchase Agreement, between Markland Technologies, Inc., Montana
                  View
                  Corporation, Elite Properties, Ltd., and Sparrow Ventures, Inc.,
                  dated
                  April 2, 2004
              
              SB-2
              May
                  11, 2004
              10.110.2
              Securities
                  Purchase Agreement by and among Markland Technologies, Inc. and
                  the
                  Investors named therein, dated April 16, 2004
              
              SB-2
              May
                  11, 2004
              10.210.3
              Securities
                  Purchase Agreement by and between Markland Technologies, Inc. and
                  the
                  Investors named therein, dated May 3, 2004
              
              SB-2
              May
                  11, 2004
              10.310.4
              Loan
                  Agreement by and between Security Technology, Inc. and Bay View
                  Capital
                  LLC, dated September 30, 2003
              
              8-K
              November
                  12, 2003
              10.210.5
              Promissory
                  Note by and among Markland Technologies, Inc., Security Technology,
                  Inc.,
                  and Bay View Capital LLC, dated September 30, 2003
              
              8-K
              November
                  12, 2003
              10.510.6
              Security
                  Agreement by and between Security Technology, Inc. and Bay View
                  Capital
                  LLC, dated September 30, 2003
              
              SB-2
              May
                  11, 2004
              10.1110.7
              Security
                  Agreement by and between Markland Technologies, Inc. and Bay View
                  Capital
                  LLC
              
              SB-2
              May
                  11, 2004
              10.1210.8
              Sublicense
                  Agreement by and between Markland Technologies, Inc. and ASI Technology
                  Corporation, dated March 19, 2004
              
              SB-2
              May
                  11, 2004
              10.1310.9
              ASI
                  Technology Corporation SBIR Phase II Proposal, dated October 8,
                  2001
              
              SB-2/1A
              June
                  16, 2004
              10.1410.10
              ASI
                  Technology Corporation Contract with Air Force Office of Scientific
                  Research,
                dated
                  August 1, 2002
              
              SB-2/1A
              June
                  16, 2004
              10.1510.11
              ASI
                  Technology Corporation Contract with Naval Surface Warfare Center,
                  dated
                  January 31, 2003
              
              SB-2/1A
              June
                  16, 2004
              10.16
 
 73
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.12
              Restated
                  and Amended Convertible Revolving Credit Note Agreement, dated
                  December
                  10, 2002, by and between Markland Technologies, Inc. and Market
                  LLC
              
              10-QSB
              February
                  14, 2003
              10.210.13
              Letter
                  from Sherb & Co., LLP to the Commission, dated March 12, 2003,
                  concerning change in certifying accountant
              
              8-K
              March
                  17, 2003
              16.110.14
              Technology
                  Purchase Agreement between Markland Technologies, Inc. and ASI
                  Technology
                  Corporation, dated March 19, 2003
              
              8-K
              April
                  4, 2003
              10.110.15
              Nonexclusive
                  License Agreement by and Science & Technology Research , Inc. and the
                  Secretary of the Day, dated 11/4/03
              
              SB-2
              May
                  11, 2004
              10.3110.16
              International
                  Distribution Agreement between Markland Technologies, Inc. and
                  Tradeways
              
              SB-2
              May
                  11, 2004
              10.3210.17
              Science
                  & Technology Research contract Naval Surface Warfare Center, dated
                  January 31, 2003
              
              SB-2
              May
                  11, 2004
              10.3310.18
              Subcontract
                  Agreement by and between ERCO Systems, Inc. and Computer Sciences
                  Corporation ,dated December 8, 2003
              
              SB-2
              May
                  11, 2004
              10.3410.19
              Lease
                  for Property located at 112 Juliad Court in Fredericksburg, Virginia,
                  dated October 11, 2000, by and between Science and Technology,
                  Inc. and
                  112 Juliad Court LLC
              
              SB-2/1A
              June
                  16, 2004
              10.3510.20
              Co-Operative
                  Research and Development Agreement between Markland Technologies,
                  Inc. and
                  the U.S. Air Force
              
              SB-2/1A
              June
                  16, 2004
              10.3510.21
              Employment
                  Agreement by and between Markland Technologies, Inc. and Robert
                  Tarini,
                  dated May 12, 2004 *
              
              10-QSB
              May
                  24, 2004
              10.3210.22
              Employment
                  Agreement by and between Markland Technologies, Inc. and Kenneth
                  Ducey,
                  Jr., dated January 2, 2004 *
              
              10-QSB
              May
                  24, 2004
              10.33
 
 74
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.23
              Strategic
                  Operations Contractor Agreement by and between Markland Technologies,
                  Inc.
                  and Asset Growth Company, dated May 12, 2004 *
              
              10-QSB
              May
                  24, 2004
              10.3410.24
              Consulting
                  Agreement by and between Markland Technologies, Inc. and Chad A.
                  Verdi,
                  dated May 12, 2004 *
              
              10-QSB
              May
                  24, 2004
              10.3510.25
              Amendment
                  to Employment Agreement between Markland Technologies Inc. and
                  Robert
                  Tarini dated June 14, 2004 *
              
              SB-2/1A
              June
                  16, 2004
              10.4110.26
              Amendment
                  to the Employment Agreement between Markland Technologies Inc.
                  and
                Kenneth
                  P. Ducey, dated June 14, 2004 *
              
              SB-2/1A
              June
                  16, 2004
              10.4210.27
              Amendment
                  to the Consulting Agreement between Markland Technologies Inc.
                  and
                Verdi
                  Consulting, dated June 14, 2004 *
              
              SB-2/1A
              June
                  16, 2004
              10.4310.28
              Amendment
                  to the Strategic Operations Contractor Agreement by and between
                  Markland
                  Technologies, Inc. and Asset Growth Company, dated June 16, 2004
                  *
              
              SB-2/1A(2)
              June
                  16, 2004
              10.4410.29
              Purchase
                  Agreement between Markland Technologies, Inc. and the investors
                  named
                  therein, dated September 21, 2004
              
              8-K
              September
                  23, 2004
              99.110.30
              Security
                  Agreement between Markland Technologies, Inc. and the investors
                  named
                  therein, dated September 21, 2004
              
              8-K
              September
                  23, 2004
              99.210.31
              Form
                  of Secured Convertible Promissory Note issued by Markland Technologies,
                  Inc., on September 21, 2004
              
              8-K
              September
                  23, 2004
              99.410.32
              Night
                  Vision Electronic Sensors Directorate (NVESD) Omnibus Contract
                  between
                  E-OIR Measurement Inc., a subsidiary of EOIR and****United
                  States Army Night Vision and Electronic Sensors
                  Directorate
              
              10-KSB
              October
                  13, 2004
              10.4810.33
              Securities
                  Purchase Agreement by and among Markland Technologies, Inc. Harborview
                  Master Fund L.P. and Southridge Partners LP dated November 9,
                  2004
              
              SB-2(1)
              November
                  10, 2004
              10.5010.34
              Form
                  of Convertible Note made by Markland Technologies, Inc. and issued
                  to
                  Harborview Master Fund L.P. and Southridge Partners LP on November
                  9, 2004
              
              SB-2(1)
              November
                  10, 2004
              10.5110.35
              Form
                  of Warrant issued by Markland Technologies, Inc. to Harborview
                  Master Fund
                  L.P. and Southridge Partners LP, on November 9, 2004
              
              SB-2(1)
              November
                  10, 2004
              10.5210.36
              Subordination
                  Agreement by and among DKR Soundshore Oasis Holding Fund, LLC,
                  DKR
                  Soundshore Strategic Holding Fund, LLC, Harborview Master Fund
                  L.P.,
                  Southridge Partners LP, and Markland Technologies, Inc., dated
                  November 9,
                  2004
              
              SB-2(1)
              November
                  10, 2004
              10.5310.37
              Conditional
                  Waiver and Consent by and among DKR Soundshore Oasis Holding Fund,
                  LLC,
                  DKR Soundshore Strategic Holding Fund, LLC, Harborview Master Fund
                  L.P.,
                  Southridge Partners LP, and Markland Technologies, Inc., dated
                  November 9,
                  2004
              
              SB-2(1)
              November
                  10, 2004
              10.5410.38
              Stock
                  Purchase Agreement by and between Markland and EOIR, dated June
                  30,
                  2004
              
              8-K
              June
                  30, 2004
              2.110.39
              Form
                  of Promissory Note made by EOIR Technologies, Inc. and dated June
                  29,
                  2004
              
              8-K
              June
                  30, 2004
              2.210.40
              Security
                  Agreement by and between EOIR and sellers of EOIR stock, dated
                  June 30, 2004
              
              8-K
              June
                  30, 2004
              2.310.41
              The
                  Markland Technologies, Inc. 2004 Stock Option Plan *
              
              8-K
              June
                  30, 2004
              2.410.42
              Preferred
                  Securities Purchase Agreement by and between Markland Technologies,
                  Inc.
                  and James LLC
              
              8-K
              June
                  30, 2004
              2.510.43
              Pledge
                  and Security Agreement, by and between Markland, EOIR and the Sellers
                  thereon, dated June 29,2004
              
              8-K
              June
                  30, 2004
              2.610.44
              Forms
                  of Nonqualified Stock Option issued by Markland Technologies, Inc.
                  on June
                  29, 2004 *
              
              8-K
              June
                  30, 2004
              2.7
 
 75
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.45
              Agreement
                  and General Release, dated November 1, 2004, by and between Markland
                  Technologies, Inc. and Gregory A. Williams
              
              10-QSB
              November
                  15, 2004
              10.6110.46
              Engagement
                  Letter with Trilogy Capital Partners, Inc., dated December 7,
                  2004
              
              8-K
              December
                  9, 2004
              99.110.47
              Form
                  of Warrant issued to trilogy Capital Partners, Inc., and the unaffiliated
                  consultant, dated December 7, 2004
              
              8-K
              December
                  9, 2004
              99.210.48
              Waiver
                  by and among Markland Technologies, Inc., DKR Soundshore Oasis
                  Holding
                  Fund Ltd., DKR Soundshore Strategic Holding Fund Ltd., Harborview
                  Master
                  Fund L.P. and Southridge Partners LP
              
              8-K
              December
                  13, 2004
              99.110.49
              Letter
                  Agreement by and among Markland Technologies, Inc., DKR Soundshore
                  Oasis
                  Holding Fund Ltd., and DKR Soundshore Strategic Holding Fund
                  Ltd.
              
              8-K
              December
                  13, 2004
              99.210.50
              Employment
                  Agreement by and between Markland Technologies, Inc. and Robert
                  Tarini,
                  dated January 2, 2005 *
              
              8-K
              January
                  7, 2005
              99.410.51
              Employment
                  Agreement by and between Markland Technologies, Inc. and Kenneth
                  Ducey,
                  Jr., dated January 2, 2005 *
              
              8-K
              January
                  7, 2005
              99.510.52
              Employment
                  Agreement by and between Markland Technologies, Inc. and Dr. Joseph
                  P.
                  Mackin, dated January 2, 2005 *
              
              8-K
              January
                  7, 2005
              99.610.53
              Employment
                  Agreement by and between Markland Technologies, Inc. and Gino M.
                  Pereira,
                  dated January 2, 2005 *
              
              8-K
              January
                  7, 2005
              99.710.54
              Strategic
                  Operations Contractor Agreement by and between Markland Technologies,
                  Inc.
                  and Asset Growth Company, dated January 2, 2005
              
              8-K
              January
                  7, 2005
              99.810.55
              Consultant
                  Agreement by and between Markland Technologies, Inc. and Verdi
                  Consulting,
                  Inc., dated January 2, 2005
              
              8-K
              January
                  7, 2005
              99.9
 
 76
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.56
              Finder
                  Agreement by and between Technest Holdings, Inc. and Greenfield
                  Capital
                  dated February 14, 2005
              
              SB-2(2)
              February
                  28, 2005
              10.6410.57
              Escrow
                  Agreement by and among Markland Technologies, Inc., Technest Holdings,
                  Inc., Genex Technologies, Inc., Jason Geng, and Wilmington Trust
                  Company,
                  dated February 14, 2005
              
              8-K
              February
                  15, 2005
              10.110.58
              Lock-Up
                  Agreement by and among Markland Technologies, Inc., Technest Holdings,
                  Inc. and Jason Geng, dated February 14, 2005
              
              8-K
              February
                  15, 2005
              10.210.59
              Employment
                  Agreement by and between Genex Technologies, Inc. and Jason Geng
                  dated
                  February 14, 2005
              
              8-K
              February
                  15, 2005
              10.310.60
              Lock-up
                  Agreement by and among Technest Holdings, Inc., Garth LLC and Southshore
                  Capital Fund Ltd., dated February 14, 2005
              
              8-K
              February
                  15, 2005
              10.410.61
              Form
                  of Option to be granted under the 2004 Markland Stock Incentive
                  Plan
                  *
              
              8-K
              February
                  15, 2005
              10.610.62
              Agreement
                  by and between Genex Technologies, Inc. and Ocean Tomo
              
              8-K
              February
                  15, 2005
              10.710.63
              Securities
                  Purchase Agreement by and among Technest Holdings, Inc., and Southridge
                  Partners, LP, Southshore Capital Fund Limited, ipPartners, Inc.,
                  Verdi
                  Consulting, Inc., DKR Soundshore Oasis Holding Fund, Ltd., DKR
                  Soundshore
                  Strategic Holding Fund, Ltd and Deer Creek Fund, LP, dated February
                  14,
                  2005
              
              8-K
              February
                  15, 2005
              2.110.64
              Preferred
                  Stock Restriction Agreement between Markland Technologies, Inc.
                  and James
                  LLC
              
              8-K
              January
                  11, 2005
              99.110.65
              Amendment
                  to the Preferred Stock Restriction Agreement between Markland
                  Technologies, Inc. and James LLC
              
              8-K
              January
                  12, 2005
              99.210.66
              Securities
                  Purchase Agreement between Markland Technologies, Inc. and Technest
                  Holdings, Inc., dated February 14, 2005
              
              8-K
              February
                  15, 2005
              2.2
 
 77
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.67
              Agreement
                  and Plan of Merger by and between Technest Holdings, Inc., MTECH
                  Acquisition, Inc., Genex Technologies, Inc. and Jason Geng, dated
                  February
                  14, 2005
              
              8-K
              February
                  15, 2005
              2.310.68
              Articles
                  of Merger merging MTECH Acquisition, Inc. with and into Genex
                  Technologies, Inc., filed with the Secretary of the State of Maryland
                  on
                  February 14,  2005
              
              10-QSB/A
              February
                  18, 2005
              99.210.69
              Certificate
                  of Merger merging MTECH Acquisition, Inc. with and into Genex
                  Technologies, Inc., filed with the Secretary of the State of Delaware
                  on
                  February 14, 2005
              
              10-QSB/A
              February
                  18, 2005
              99.110.70
              2005
                  Markland Technologies, Inc. Stock Award Plan *
              
              8-K
              April
                  22, 2005
              2.110.71
              Form
                  of Markland Technologies, Inc. Stock Award Agreement *
              
              8-K
              April
                  22, 2005
              2.210.72
              Employment
                  Agreement Amendment between Markland Technologies, Inc. and Robert
                  Tarini
                  dated May 17, 2005 *
              
              10-QSB
              May
                  23, 2005
              10.8310.73
              Employment
                  Agreement Amendment between Markland Technologies, Inc. and Joseph
                  Mackin
                  dated May 17, 2005 *
              
              10-QSB
              May
                  23, 2005
              10.8410.74
              Consultant
                  Agreement Amendment between Markland Technologies, Inc. and Verdi
                  Consulting, Inc. dated May 17, 2005
              
              10-QSB
              May
                  23, 2005
              10.8510.75
              Restricted
                  Stock Grant Agreement between Markland Technologies, Inc. and Joseph
                  Mackin dated May 18, 2005 *
              
              10-QSB
              May
                  23, 2005
              10.8610.76
              Exchange
                  Agreement dated June 20, 2005 by and between Markland Technologies,
                  Inc.
                  and DKR Soundshore Oasis Holding Fund, Ltd.
              
              SB-2(4)
              June
                  22, 2005
              10.8410.77
              Exchange
                  Agreement dated June 20, 2005 by and between Markland Technologies,
                  Inc.
                  and DKR Soundshore Strategic Holding Fund, Ltd.
              
              SB-2(4)
              June
                  22, 2005
              10.85
 
 78
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.78
              Exchange
                  Agreement dated June 20, 2005 by and between Markland Technologies,
                  Inc.
                  and ipPartners, Inc.
              
              SB-2(4)
              June
                  22, 2005
              10.8610.79
              Exchange
                  Agreement dated June 20, 2005 by and between Markland Technologies,
                  Inc.
                  and Verdi Consulting, Inc.
              
              SB-2(4)
              June
                  22, 2005
              10.8710.80
              Letter
                  from Marcum & Kliegman regarding the change in certifying
                  accountants
              
              8-K/A
              July
                  15, 2004
              16.110.81
              Stock
                  Purchase Agreement between Technest Holdings, Inc. and Markland
                  Technologies, Inc. dated August 17, 2005
              
              8-K
              August
                  18, 2005
              10.110.82
              Exchange
                  Agreement dated August 19, 2005 by and between Markland Technologies,
                  Inc.
                  and Deer Creek Fund LLC
              
              8-K
              August
                  25, 2005
              10.110.83
              Registration
                  Rights Agreement dated August 25, 2005 between Markland Technologies,
                  Inc.
                  and Deer Creek Fund LLC
              
              8-K
              August
                  25, 2005
              10.210.84
              Agreement
                  between Markland Technologies, Inc. and DKR Soundshore Oasis Holding
                  Fund,
                  Ltd. dated September 20, 2005
              
              8-K
              September
                  20, 2005
              10.110.85
              Agreement
                  between Markland Technologies, Inc. and DKR Soundshore Strategic
                  Holding
                  Fund, Ltd. dated September 20, 2005
              
              8-K
              September
                  20, 2005
              10.210.86
              Stock
                  Pledge Agreement by and among Markland Technologies, Inc., DKR
                  Soundshore
                  Oasis Holding Fund, Ltd. and DKR Soundshore Strategic Holdings
                  Fund, Ltd.
                  dated September 20, 2005
              
              8-K
              September
                  20, 2005
              10.310.87
              Agreement
                  relating to Certain Securities Issued by Markland Technologies,
                  Inc. and
                  Technest Holdings, Inc. dated October 4, 2005 by and among James
                  LLC,
                  Southridge Partners, LP, Southshore Capital Fund, Ltd., Greenfield
                  Capital
                  Partners LLC, Markland Technologies, Inc. and Technest Holdings,
                  Inc.
              
              8-K
              October
                  7, 2005
              10.1
 
 79
 
 
 **Exhibit
                  No.**
              **Description**
              **Filed
                  with this Form 10-KSB**
              **Incorporated
                  by Reference****Form**
              **Filing
                  Date**
              **Exhibit
                  No.**10.88
              Agreement
                  to Terminate Leases dated October 4, 2005 by and among Markland
                  Technologies, Inc., Technest Holdings, Inc. and Southridge Holdings
                  LLC.
              
              8-K
              October
                  7, 2005
              10.210.89
              Form
                  of Exchange Agreement dated October 4, 2005 between Markland Technologies,
                  Inc. and Southridge Partners, LP.
              
              8-K
              October
                  7, 2005
              10.310.90
              Form
                  of Exchange Agreement dated October 4, 2005 between Markland Technologies,
                  Inc. and Southshore Capital Fund, Ltd.
              
              8-K
              October
                  7, 2005
              10.410.91
              Form
                  of Warrant Issued to Greenfield Capital Partners LLC.
              
              8-K
              October
                  7, 2005
              10.521.1
              List
                  of Subsidiaries
              X23.1
              Consent
                  of Wolf & Company, PC
              X31.1
              Certification
                  by CFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule
                  15d-14(a)
              X31.2
              Certification
                  by CFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule
                  15d-14(a)
              X32.1
              Certification
                  by CEO and CFO of Periodic Report Pursuant to 18 U.S.C. Section
                  1350
              X
  *
        Indicates a management contract or compensatory plan or arrangement required
        to
        be filed as an exhibit to this Form 10-KSB/A.
 
 Notes:
 (1)
        SEC
        File # 333-120390
 (2)
        SEC
        File # 333-115395
 (3)
        SEC
        File # 333-123400
 (4)
        SEC
        File # 333-126051
 
 80
 
 **ITEM
        14.****PRINCIPAL
        ACCOUNTANT FEES AND SERVICES**
 
 Aggregate
        fees for professional services rendered for the Company by Marcum
        and
        Kliegman LLP for the year ended June 30, 2004 and Wolf & Company, P.C.
        for the year ended June 30, 2005, were:
 
 2004
              
              
              
              2005Audit
              
              $
              210,000
              
              
              
              $
              228,200Audit
                  Related
              
              
              172,000
              
              
              
              
              128,200Tax
              
              
              0
              
              
              
              
              58,750All
                  Other
              
              
              0
              
              
              
              
              0Total
              
              $
              382,000
              
              
              
              $
              415,150
 The Audit fees for the years ended June 30, 2004, and 2005, were for
        professional services rendered for the audits of the consolidated financial
        statements of the Company and quarterly reviews.
 
 The
        Audit
        Related fees for the years ended June 30, 2004, and 2005, were for professional
        services rendered in connection with consents and assistance with review
        of
        registration statements filed with the SEC, for consultations concerning
        financial accounting and reporting standards, and audits of entities acquired
        in
        purchase business combinations.
  The
        Tax fees for the year ended June 30, 2005 were for
        professional services rendered in the preparation of federal corporate tax
        returns.
  The
        fee information above excludes fees paid by
        Markland's majority-owned subsidiary, Technest Holdings, Inc., which were
        disclosed in its 10-KSB filed September 28, 2005.
 
 The
        percentage of hours expended on Wolf & Company, PC's engagement to audit our
        financial statements that was performed by other than Wolf & Company, PC's
        full-time permanent employees did not exceed 50%.
 
 **POLICY
        ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT** **SERVICES
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 At
        present, it is the practice of our board of directors to approve each engagement
        for audit or non-audit services before we engage our independent registered
        public accounting firm to provide those services. Our board of directors
        has
        established pre-approval policies and procedures in accordance with SEC
        regulations, describing the specific audit, audit-related, tax and all other
        services that have been pre-approved by the board of directors. The term
        of any
        general pre-approval is 12 months from the date of pre-approval, unless our
        board of directors specifically provides for a different period. Our board
        will
        annually review the pre-approval policies and procedures and the services
        that
        may be provided by our independent registered public accounting firm, and
        will
        revise the list of pre-approved services from time to time based on subsequent
        determinations.
 
 None
        of
        the services provided by our independent registered public accounting firm
        for
        fiscal 2005 was obtained in reliance on the waiver of the pre-approval
        requirement afforded in SEC regulations.
 
 
 81
 
 **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.
  
 **MARKLAND
        TECHNOLOGIES, INC.**
 
 
 By: Robert
        Tarini
 Robert
        Tarini
 Title:
        Chief Executive Officer
 
 Date:  October
        11,
        2005
 
 
  In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 By: /s/ Robert
        Tarini
 Robert
        Tarini
 Title:
        Chief Executive Officer and Chairman of
 the
        Board
        of Directors
 
 Date:  October
        11,
        2005
 
 By: /s/
        Joseph P.
        Mackin
 Name:
        Joseph P. Mackin
 Title:
        Chief Operating Officer, President and Director
 
 Date:  October
        11,
        2005
 
 
  By: /s/
        Gino M.
        Pereira
 Name:
        Gino M. Pereira
 Title:
        Chief Financial Officer and Director
 
 Date:  October
        11,
        2005
 
  82