Unassociated Document


    Exhibit
      10.1


    SECURITIES
      PURCHASE AGREEMENT

     

    This
      Securities Purchase Agreement (this “Agreement”)
      is
      dated as of May 31, 2007 between Technest Holdings, Inc., a Nevada corporation
      (the “Company”),
      and
      Shelter Island Opportunity Fund, LLC, or any Affiliate thereof designated by
      it
      (the “Purchaser”).

     

    WHEREAS,
      subject to the terms and conditions set forth in this Agreement and pursuant
      to
      Section 4(2) of the Securities Act of 1933, as amended (the “Securities
      Act”),
      and
      Rule 506 promulgated thereunder, the Company desires to issue and sell to the
      Purchaser, and the Purchaser desires to purchase from the Company, securities
      of
      the Company as more fully described in this Agreement.

     

    NOW,
      THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement,
      and for other good and valuable consideration the receipt and adequacy of which
      are hereby acknowledged, the Company and the Purchaser agree as
      follows:

     

    ARTICLE
      I.

    DEFINITIONS

     

    1.1    Definitions.
      In
      addition to the terms defined elsewhere in this Agreement: (a) capitalized
      terms
      that are not otherwise defined herein have the meanings given to such terms
      in
      the Debenture (as defined herein), and (b) the following terms have the meanings
      indicated in this Section 1.1:

     

    “Action”
shall
      have the meaning ascribed to such term in Section 3.1(j).

     

    “Advisor”
shall
      mean Ascendiant Securities, LLC.

     

    “Affiliate”
means
      any Person that, directly or indirectly through one or more intermediaries,
      controls or is controlled by or is under common control with a Person, as such
      terms are used in and construed under Rule 144 under the Securities
      Act. 

     

    “Business
      Day”
means
      any day except Saturday, Sunday, any day which shall be a federal legal holiday
      in the United States or any day on which banking institutions in the State
      of
      New York are authorized or required by law or other governmental action to
      close.

     

    “Change
      of Control Transaction”
shall
      have the meaning ascribed to such term in the Debenture.

     

    “Closing”
means
      the closing of the purchase and sale of the Debenture pursuant to Section
      2.1.

     

    “Closing
      Date”
means
      the Trading Day when all of the Transaction Documents have been executed and
      delivered by the applicable parties thereto, and all conditions precedent to
      (i)
      the Purchaser’s obligation to pay the Subscription Amount and (ii) the Company’s
      obligations to deliver the Debenture have been satisfied or waived.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

       

    

    “Commission”
means
      the Securities and Exchange Commission.

     

    “Common
      Stock”
means
      the common stock of the Company, par value $0.001 per share, and any other
      class
      of securities into which such securities may hereafter be reclassified or
      changed into.

     

    “Common
      Stock Equivalents”
means
      any securities of the Company or the Subsidiaries which would entitle the holder
      thereof to acquire at any time Common Stock, including, without limitation,
      any
      debt, preferred stock, rights, options, warrant or other instrument that is
      at
      any time convertible into or exercisable or exchangeable for, or otherwise
      entitles the holder thereof to receive, Common Stock.

     

    “Company
      Counsel”
means
      Foley Hoag LLP.

     

    “Debenture”
means
      the $1,650,000 Secured Original Issue Discount Debenture issued by the Company
      to the Purchaser, in the form of Exhibit
      A
      hereto.

     

    “Disclosure
      Schedules”
shall
      have the meaning ascribed to such term in Section 3.1.

     

    “EOIR”
means
      E-OIR Technologies, Inc., a Virginia corporation doing business as EOIR
      Technologies, Inc.

     

    “Exchange
      Act”
means
      the Securities Exchange Act of 1934, as amended, and the rules and regulations
      promulgated thereunder.

    


    “Exempt
      Issuance”
means
      the issuance of (a) shares of Common Stock or options to employees, officers
      or
      directors of the Company pursuant to the Company’s 2006 Stock Award Plan or any
      other stock or option plan duly adopted by a majority of the non-employee
      members of the Board of Directors of the Company or a majority of the members
      of
      a committee of non-employee directors established for such purpose, (b)
      securities upon the exercise or exchange of any securities exercisable or
      exchangeable for or convertible into shares of Common Stock issued and
      outstanding on the date of this Agreement, provided that such securities have
      not been amended since the date of this Agreement to increase the number of
      such
      securities or to decrease the exercise, exchange or conversion price of any
      such
      securities, and (c) securities issued pursuant to acquisitions or strategic
      transactions approved by a majority of the disinterested directors of the
      Company, provided any such issuance shall only be to a Person which is, itself
      or through its subsidiaries, an operating company in a business synergistic
      with
      the business of the Company and in which the Company receives benefits in
      addition to the investment of funds, but shall not include a transaction in
      which the Company is issuing securities primarily for the purpose of raising
      capital or to an entity whose primary business is investing in
      securities.

     

    
      
        
        

      

      
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    “FWS”
means
      Feldman Weinstein & Smith LLP, counsel to the Purchaser, with offices
      located at 420 Lexington Avenue, Suite 2620, New York, New York
      10170-0002.

     

    “GAAP”
shall
      have the meaning ascribed to such term in Section 3.1(h).

     

    “Genex”
shall
      mean Genex
      Technologies Incorporated, a Maryland corporation.

    


    “Guarantors”
shall
      mean each Subsidiary of the Company.

     

    “Guaranties”
shall
      mean the several Guaranties, each dated the date hereof, executed by each
      Guarantor to the Purchaser, in the form of Exhibit
      B
      attached
      hereto.

     

    “Intellectual
      Property Rights”
shall
      have the meaning ascribed to such term in Section 3.1(o).

     

    “License
      Agreement”
shall
      mean License Agreement, dated March 13, 2006, between the Company and
      Markland.

     

    “Liens”
means
      a
      lien, charge, security interest, encumbrance, right of first refusal, preemptive
      right or other restriction. 

     

    “Management
      Company”
shall
      mean Midway Management Partners, LLC, a Delaware limited liability
      company.

     

    “Markland”
shall
      mean Markland Technologies, Inc., a Florida corporation.

     

    “Material
      Adverse Effect”
shall
      have the meaning assigned to such term in Section 3.1(b).

     

    “Material
      Permits”
shall
      have the meaning ascribed to such term in Section 3.1(m).

     

    “Maximum
      Rate”
shall
      have the meaning ascribed to such term in Section 5.17.

     

    “Person”
means
      an individual or corporation, partnership, trust, incorporated or unincorporated
      association, joint venture, limited liability company, joint stock company,
      government (or an agency or subdivision thereof) or other entity of any
      kind.

     

    “Proceeding”
means
      an action, claim, suit, investigation or proceeding (including, without
      limitation, an investigation or partial proceeding, such as a deposition),
      whether commenced or threatened.

     

    “Required
      Approvals”
shall
      have the meaning ascribed to such term in Section 3.1(e).

     

    
      
        
        

      

      
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    “Rule
      144”
means
      Rule 144 promulgated by the Commission pursuant to the Securities Act, as such
      Rule may be amended from time to time, or any similar rule or regulation
      hereafter adopted by the Commission having substantially the same effect as
      such
      Rule.

     

    “SEC
      Reports”
shall
      have the meaning ascribed to such term in Section 3.1(h).

     

    “Securities
      Act”
means
      the Securities Act of 1933, as amended, and the rules and regulations
      promulgated hereunder. 

     

    “Security
      Agreements”
mean
      each of the Security Agreements, dated the date hereof, from (i) the Company
      to
      the Purchaser, in the form of Exhibit
      C-1
      and
Exhibit
      C-2
      attached
      hereto, (ii) Markland to the Purchaser, in the form of Exhibit
      C-3
      attached
      hereto and (iii) Genex to the Purchaser, in the form of Exhibit
      C-4
      attached
      hereto.

     

    “Subordination
      Agreement”
means
      the Subordination Agreement, dated the date hereof, among the Company, the
      Purchaser and Silicon Valley Bank, in the form of Exhibit
      D-1
      attached
      hereto.

     

    “Subordinated
      Debt Subordination Agreements”
mean
      each of the Subordination Agreements, dated the date hereof, among the Company,
      the Purchaser and each of the Persons to whom promissory notes were issued
      (and
      remain outstanding) pursuant to the Stock Purchase Agreement, dated June 29,
      2004, by and among Markland, EOIR and such Persons, in the form of Exhibit
      D-2
      attached
      hereto.

     

    “Subscription
      Amount”
      means
      $1,500,000, which is the amount
      to be
      paid for the Debenture purchased hereunder.

     

    “Subsidiary”
means
      any subsidiary of the Company as set forth on Schedule
      3.1(a).

     

    “Trading
      Day”
means
      a
      day on which the Trading Markets are open for business.

     

    “Trading
      Market”
means
      the following markets or exchanges: the Nasdaq Capital Market, the American
      Stock Exchange, the New York Stock Exchange. the Nasdaq National Market or
      the
      Over-the-Counter Bulletin Board.

     

    “Transaction
      Documents”
means
      this Agreement, the Debenture, the Security Agreements, the Subordination
      Agreement, the Subordinated Debt Subordination Agreement, each Guaranty and
      any
      other documents or agreements executed in connection with the transactions
      contemplated hereunder.

     

    “Transaction
      End Date”
means
      June 5, 2007.

     

    
      
        
        

      

      
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     ARTICLE
      II.

    PURCHASE
      AND SALE

     

    2.1    Closing.
      On the
      Closing Date, upon the terms and subject to the conditions set forth herein,
      substantially concurrent with the execution and delivery of this Agreement
      by
      the parties hereto, the Company agrees to sell, and the Purchaser agrees to
      purchase, the Debenture. The Purchaser shall deliver to the Company via wire
      transfer or a certified check in immediately available funds equal to the
      Subscription Amount and the Company shall deliver to (A) the Purchaser, the
      Debenture and the other items set forth in Section 2.2 issuable at the Closing
      to the Purchaser, (B) the Management Company, the item set forth in Section
      2.2
      issuable at the Closing to the Management Company and (C) the Advisor, the
      item
      set forth in Section 2.2 issuable at the Closing to the Advisor. Upon
      satisfaction of the conditions and completion of the deliveries set forth in
      Sections 2.2 and 2.3, the Closing shall occur at the offices of FWS, or such
      other location as the parties shall mutually agree.

     

    2.2    Deliveries.

     

    (a)    On
      the
      Closing Date, the Company shall deliver or cause to be delivered to the
      Purchaser (or as otherwise specified) the following:

     

    (i)    this
      Agreement, duly executed by the Company;

     

    (ii)   a
      legal
      opinion of Company Counsel, in the form of Exhibit
      E
      attached
      hereto; 

     

    (iii)   the
      Debenture, duly executed by the Company;

     

    (iv)   resolutions
      duly adopted by the Board of Directors of the Company authorizing the
      transactions contemplated by the Transaction Documents; 

     

    (v)   the
      Security Agreements, duly executed by the Persons named therein; 

     

    (vi)         
      a
      Guaranty, duly executed by each Guarantor;

    


    (vii)         a
      true
      and complete copy of the License Agreement;

     

    (viii)       
      by
      wire
      transfer to the account as specified in writing by the Advisor, the amount
      of
      $56,250, representing
      payment to the Advisor of an advisory fee;

     

    (ix)   an
      engagement letter with the Advisor, duly executed by the Company and delivered
      to the Advisor;
      

     

    (x)    a
      collateral monitoring fee agreement, duly executed by the Company and delivered
      to the Management Company; 

     

    (xi)   the
      Subordination Agreement, duly executed by the Company and Silicon Valley Bank;
      and

    


    
      
        
        

      

      
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    (xii)   the
      Subordinated Debt Subordination Agreements, duly executed by the Company and
      the
      subordinated debt holder referred to therein or by Joseph P. Mackin as the
      representative of such subordinated debt holder, together with a letter from
      each such subordinated debt holder not executing a Subordinated Debt
      Subordination Agreement on its own behalf authorizing Joseph P. Mackin to act
      as
      their representative for such purpose.

    


    (b)    On
      the
      Closing Date, the Purchaser shall deliver or cause to be delivered to the
      Company the following: 

     

    (i)    this
      Agreement, duly executed by the Purchaser;

     

    (ii)   the
      Subscription Amount by wire transfer to the account as specified in writing
      by
      the Company; and

     

    (iii)   the
      Subordination Agreement, duly executed by the Purchaser. 

     

    2.3    Closing
      Conditions. 

     

    (a)    The
      obligations of the Company hereunder in connection with the Closing are subject
      to the following conditions being met:

     

    (i)   the
      accuracy in all material respects when made and on the Closing Date of the
      representations and warranties of the Purchaser contained herein;

     

    (ii)   all
      obligations, covenants and agreements of the Purchaser required to be performed
      at or prior to the Closing Date shall have been performed; and

     

    (iii)   the
      delivery by the Purchaser of the items set forth in Section 2.2(b) of this
      Agreement.

     

    (b)    The
      obligations of the Purchaser hereunder in connection with the Closing are
      subject to the following conditions being met:

     

    (i)    the
      accuracy in all material respects on the Closing Date of the representations
      and
      warranties of the Company contained in each Transaction Document;

     

    (ii)    all
      obligations, covenants and agreements of the Company required to be performed
      at
      or prior to the Closing Date shall have been performed; 

     

    (iii)    the
      delivery by the Company of the items set forth in Section 2.2(a) of this
      Agreement; 

     

    
      
        
        

      

      
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    (iv)    there
      shall have been no Material Adverse Effect with respect to the Company since
      the
      date hereof; and

     

    (v)    if
      the
      Common Stock is traded on a Trading Market at the date hereof, from the date
      hereof to the Closing Date, trading in the Common Stock shall not have been
      suspended, and, at any time prior to the Closing Date, trading in securities
      generally as reported by Bloomberg L.P. shall not have been suspended or
      limited, or minimum prices shall not have been established on securities whose
      trades are reported by such service, or on any Trading Market, nor shall a
      banking moratorium have been declared either by the United States or New York
      State authorities nor shall there have occurred any material outbreak or
      escalation of hostilities or other national or international calamity of such
      magnitude in its effect on, or any material adverse change in, any financial
      market which, in the case, in the reasonable judgment of the Purchaser, makes
      it
      impracticable or inadvisable to purchase the Debenture at the
      Closing.

     

    ARTICLE
      III.

    REPRESENTATIONS
      AND WARRANTIES

     

    3.1    Representations
      and Warranties of the Company.
      Except
      as set forth under the corresponding section of the disclosure schedules
      delivered to the Purchaser concurrently herewith (the “Disclosure
      Schedules”)
      (it
      being understood and agreed that disclosure made by the Company under any one
      section of the Disclosure Schedules shall also be applicable to any other
      section of the Disclosure Schedule for which the appropriateness of such
      disclosure is reasonably apparent), which Disclosure Schedules shall be deemed
      a
      part hereof and to qualify any representation or warranty otherwise made herein
      to the extent of such disclosure, the Company hereby make the representations
      and warranties set forth below to the Purchaser.

     

    (a)    Subsidiaries.
      All of
      the direct and indirect subsidiaries of the Company are set forth on
Schedule
      3.1(a).
      Except
      as set forth in Schedule
      3.1(a),
      the
      Company owns, directly or indirectly, all of the capital stock or other equity
      interests of the Subsidiaries free and clear of any Liens, and all the issued
      and outstanding shares of capital stock of the Subsidiaries are validly issued
      and are fully paid, non-assessable and free of preemptive and similar rights
      to
      subscribe for or purchase securities. 

     

    (b)    Organization
      and Qualification.
      The
      Company and each of the Subsidiaries is an entity duly incorporated or otherwise
      organized, validly existing and in good standing under the laws of the
      jurisdiction of its incorporation or organization (as applicable), with the
      requisite corporate power and authority to own and use its properties and assets
      and to carry on its business as currently conducted. None of the Company or
      any
      Subsidiary is in violation or default of any of the provisions of its respective
      certificate or articles of incorporation, bylaws or other organizational or
      charter documents. Each of the Company and the Subsidiaries is duly qualified
      to
      conduct business and is in good standing as a foreign corporation or other
      entity in the jurisdiction in which the nature of the business conducted or
      property owned by it makes such qualification necessary, except where the
      failure to be so qualified or in good standing, as the case may be, could not
      have or reasonably be expected to result in (i) a material adverse effect on
      the
      legality, validity or enforceability of any Transaction Document, (ii) a
      material adverse effect on the results of operations, assets, business,
      prospects or financial condition of the Company and the Subsidiaries, taken
      as a
      whole, or (iii) a material adverse effect on the Company’s ability to perform in
      any material respect on a timely basis its obligations under any Transaction
      Document (any of (i), (ii) or (iii), a “Material
      Adverse Effect”),
      and
      no Proceeding has been instituted in any such jurisdiction revoking, limiting
      or
      curtailing or seeking to revoke, limit or curtail such power and authority
      or
      qualification. 

     

    
      
        
        

      

      
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    (c)    Authorization;
      Enforcement.
      Each of
      the Company and the Subsidiaries has the requisite corporate power and authority
      to enter into and to consummate the transactions contemplated by each of the
      Transaction Documents to which it is a party and otherwise to carry out its
      obligations hereunder and thereunder. The execution and delivery of the
      Transaction Documents by the Company and the Subsidiaries party to the
      Transaction Documents and the consummation by them of the transactions
      contemplated hereby and thereby have been duly authorized by all necessary
      action on the part of the Company and the Subsidiaries and no further action
      is
      required by the Company and the Subsidiaries, or their respective boards of
      directors or the Company’s stockholders, in connection therewith other than in
      connection with the Required Approvals. Each Transaction Document to which
      the
      Company and the Subsidiaries is a party has been (or upon delivery will have
      been) duly executed by them and, when delivered in accordance with the terms
      hereof and thereof, will constitute the valid and binding obligation of theirs
      enforceable against them in accordance with its terms except (i) as limited
      by
      general equitable principles and applicable bankruptcy, insolvency,
      reorganization, moratorium and other laws of general application affecting
      enforcement of creditors’ rights generally, (ii) as limited by laws relating to
      the availability of specific performance, injunctive relief or other equitable
      remedies and (iii) insofar as indemnification and contribution provisions may
      be
      limited by applicable law. The License Agreement constitutes the valid and
      binding obligation of the Company and, to the knowledge of the Company,
      constitutes the valid and binding obligation of Markland, enforceable against
      each in accordance with the terms thereof except (x) as limited by general
      equitable principles and applicable bankruptcy, insolvency, reorganization,
      moratorium and other laws of general application affecting enforcement of
      creditors’ rights generally, (y) as limited by laws relating to the availability
      of specific performance, injunctive relief or other equitable remedies and
      (z)
      insofar as indemnification and contribution provisions may be limited by
      applicable law.

     

    (d)    No
      Conflicts.
      Except
      as set forth on Schedule
      3.1(d),
      the
      execution, delivery and performance of the Transaction Documents by the Company
      and the Subsidiaries party to the Transaction Documents and the consummation
      by
      them of the transactions contemplated hereby and thereby do not and will not:
      (i) conflict with or violate any provision of the Company’s or any Subsidiary’s
      certificate or articles of incorporation, bylaws or other organizational or
      charter documents, or (ii) conflict with, or constitute a default (or an event
      that with notice or lapse of time or both would become a default) under, result
      in the creation of any Lien upon any of the properties or assets of the Company
      or any Subsidiary, or give to others any rights of termination, amendment,
      acceleration or cancellation (with or without notice, lapse of time or both)
      of,
      any agreement, credit facility, debt or other instrument (evidencing a Company
      or Subsidiary debt or otherwise) or other understanding to which the Company
      or
      any Subsidiary is a party or by which any property or asset of theirs is bound
      or affected, or (iii) subject to the Required Approvals, conflict with or result
      in a violation of any law, rule, regulation, order, judgment, injunction, decree
      or other restriction of any court or governmental authority to which the Company
      or a Subsidiary is subject (including federal and state securities laws and
      regulations), or by which any property or asset of theirs is bound or affected;
      except in the case of clauses (ii) and (iii), such as could not have or
      reasonably be expected to result in a Material Adverse Effect. 

     

    (e)    Filings,
      Consents and Approvals.
      Neither
      the Company nor any Subsidiary is required to obtain any consent, waiver,
      authorization or order of, give any notice to, or make any filing or
      registration with, any court or other federal, state, local or other
      governmental authority or other Person in connection with the execution,
      delivery, assumption and performance by them of the Transaction Documents to
      which any of them is a party, other than (i) such filings as are required to
      be
      made under applicable federal and state securities laws, (ii) filings required
      to perfect the security interest granted under the Security Agreements and
      (iii)
      consents and waivers required from Silicon Valley Bank (which are contained
      in
      the Subordination Agreement) (collectively,
      the “Required
      Approvals”).

     

    
      
        
        

      

      
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    (f)    Issuance
      of the Debenture.
      The
      Debenture is duly authorized and, when issued and paid for in accordance with
      the applicable Transaction Documents, will be duly and validly issued, fully
      paid and nonassessable, free and clear of all Liens imposed by the Company
      other
      than restrictions on transfer provided for in the Transaction Documents.


     

    (g)    Capitalization.
      Capitalization.
      The
      capitalization of the Company is as set forth on Schedule
      3.1(g),
      which
Schedule
      3.1(g)
      shall
      also include the number of shares of Common Stock owned beneficially, and of
      record, by Affiliates of the Company as of the date hereof. Except as set forth
      on Schedule
      3.1(g),
      the
      Company has not issued any capital stock since its most
      recently filed periodic report under the Exchange Act,
      other
      than pursuant to the exercise of employee stock options under the Company’s
      stock option plans, the issuance of shares of Common Stock to employees pursuant
      to the Company’s employee stock plans and pursuant to the conversion or exercise
      of Common Stock Equivalents outstanding as of the date of the most recently
      filed periodic report under the Exchange Act. No Person has any right of first
      refusal, preemptive right, right of participation, or any similar right to
      participate in the transactions contemplated by the Transaction Documents.
      All
      of the outstanding shares of capital stock of the Company are validly issued,
      fully paid and nonassessable, have been issued in compliance with all federal
      and state securities laws, and none of such outstanding shares was issued in
      violation of any preemptive rights or similar rights to subscribe for or
      purchase securities. 

     

    (h)    SEC
      Reports; Financial Statements.
      The
      Company has filed all reports, schedules, forms, statements and other documents
      required to be filed by it under the Securities Act and the Exchange Act,
      including pursuant to Section 13(a) or 15(d) thereof, for the two years
      preceding the date hereof (or such shorter period as the Company was required
      by
      law or regulation to file such material) (the foregoing materials, including
      the
      exhibits thereto and documents incorporated by reference therein, being
      collectively referred to herein as the “SEC
      Reports”)
      on a
      timely basis or has received a valid extension of such time of filing and has
      filed any such SEC Reports prior to the expiration of any such extension. As
      of
      their respective dates, the SEC Reports complied in all material respects with
      the requirements of the Securities Act and the Exchange Act and the rules and
      regulations of the Commission promulgated thereunder, as applicable, and none
      of
      the SEC Reports, when filed, contained any untrue statement of a material fact
      or omitted to state a material fact required to be stated therein or necessary
      in order to make the statements therein, in the light of the circumstances
      under
      which they were made, not misleading. The financial statements of the Company
      included in the SEC Reports comply
      in
      all material respects with applicable accounting requirements and the rules
      and
      regulations of the Commission with respect thereto as in effect at the time
      of
      filing. Such financial statements have been prepared in accordance with United
      States generally accepted accounting principles applied on a consistent basis
      during the periods involved (“GAAP”),
      except as may be otherwise specified in such financial statements or the notes
      thereto and except that unaudited financial statements may not contain all
      footnotes required by GAAP, and fairly present in all material respects the
      financial position of the Company and its consolidated subsidiaries as of and
      for the dates thereof and the results of operations and cash flows for the
      periods then ended, subject, in the case of unaudited statements, to normal,
      immaterial, year-end audit adjustments.

     

    
      
        
        

      

      
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    (i)    Material
      Changes.
      Since
      the date of the latest audited financial statements included within the SEC
      Reports, except as specifically disclosed in a subsequent SEC
      Report, (i)
      there
      has been no event, occurrence or development that has had or that could
      reasonably be expected to result in a Material Adverse Effect, (ii) the Company
      has not incurred any material liabilities (contingent or otherwise) other than
      (A) trade payables and accrued expenses incurred in the ordinary course of
      business consistent with past practice and (B) liabilities not required to
      be
      reflected in the Company’s financial statements pursuant to GAAP or disclosed in
      filings made with the Commission, (iii) the Company has not altered its method
      of accounting, (iv) the Company has not declared or made any dividend or
      distribution of cash or other property to its stockholders or purchased,
      redeemed or made any agreements to purchase or redeem any shares of its capital
      stock and (v) the Company has not issued any equity securities to any officer,
      director or Affiliate, except pursuant to existing Company stock plans. Except
      for the issuance of the Debenture contemplated by this Agreement, no event,
      liability or development has occurred or exists with respect to the Company
      or
      any Subsidiary or their respective business, properties, operations or financial
      condition, that would be required to be disclosed by the Company under
      applicable securities laws at the time this representation is made that has
      not
      been publicly disclosed at least one Trading Day prior to the date that this
      representation is made or that
      could reasonably be expected to result in a Material Adverse Effect.


     

    (j)    Litigation.
      There
      is no action, suit, inquiry, notice of violation, proceeding or investigation
      pending or, to the knowledge of the Company, threatened against or affecting
      Markland, the Company, any Subsidiary or any of their respective properties
      before or by any court, arbitrator, governmental or administrative agency or
      regulatory authority (federal, state, county, local or foreign) (collectively,
      an “Action”)
      which
      (i) adversely affects or challenges the legality, validity or enforceability
      of
      the License Agreement or any of the Transaction Documents or (ii) could, if
      there were an unfavorable decision, have or reasonably be expected to result
      in
      a Material Adverse Effect. There has not been, and to the knowledge of the
      Company, there is not pending or contemplated, any investigation by the
      Commission involving the Company or any current or former director or officer
      of
      the Company. The Commission has not issued any stop order or other order
      suspending the effectiveness of any registration statement filed by the Company
      under the Exchange Act or the Securities Act. 

     

    (k)    Labor
      Relations.
      No
      material labor dispute exists or, to the knowledge of the Company, is imminent
      with respect to any of the employees of the Company which could reasonably
      be
      expected to result in a Material Adverse Effect. 

     

    (l)    Compliance.
      Except
      as set forth on Schedule
      3.1(l),
      neither
      the Company nor any Subsidiary (i) is in default under or in violation of (and
      no event has occurred that has not been waived that, with notice or lapse of
      time or both, would result in a default by the Company or any Subsidiary under),
      nor has the Company or any Subsidiary received notice of a claim that it is
      in
      default under or that it is in violation of, the License Agreement, any
      indenture, loan or credit agreement or any other agreement or instrument to
      which it is a party or by which it or any of its properties is bound (whether
      or
      not such default or violation has been waived), (ii) is in violation of any
      order of any court, arbitrator or governmental body, or (iii) is or has been
      in
      violation of any statute, rule or regulation of any governmental authority,
      including without limitation all foreign, federal, state and local laws
      applicable to its business and all such laws that affect the environment, except
      in the case as could not have or reasonably be expected to result in a Material
      Adverse Effect. To the knowledge of Company, Markland has not breached any
      material provision of the License Agreement. The Company and the Subsidiaries
      are in compliance in all material respects with all applicable foreign, federal,
      state and local laws and regulations relating to the protection of human health
      and safety, the environment or hazardous or toxic substances or wastes,
      pollutants or contaminants.

     

    
      
        
        

      

      
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    (m)    Regulatory
      Permits.
      The
      Company and the Subsidiaries possess all certificates, authorizations and
      permits issued by the appropriate federal, state, local or foreign regulatory
      authorities necessary to conduct their respective businesses as described in
      the
      SEC Reports, except where the failure to possess such permits could not have
      or
      reasonably be expected to result in a Material Adverse Effect (“Material
      Permits”),
      and
      neither the Company nor any Subsidiary has received any notice of proceedings
      relating to the revocation or modification of any Material Permit.

     

    (n)    Title
      to Assets.
      The
      Company and the Subsidiaries have good and marketable title in all personal
      property owned by them that is material to their businesses, in each case free
      and clear of all Liens, except for Liens as do not materially affect the value
      of such property and do not materially interfere with the use made and proposed
      to be made of such property by the Company and the Subsidiaries and Liens for
      the payment of federal, state or other taxes, the payment of which is neither
      delinquent nor subject to penalties. Any facilities held under lease by the
      Company and the Subsidiaries are held by them under valid and enforceable leases
      with which the Company and the Subsidiaries are in compliance. Neither the
      Company nor any Subsidiary owns any real property.

     

    (o)    Patents
      and Trademarks.
      The
      Company and the Subsidiaries have, or have rights to use, all patents, patent
      applications, trademarks, trademark applications, service marks, trade names,
      trade secrets, inventions, copyrights, licenses and other intellectual property
      rights and similar rights necessary or material for use in connection with
      their
      respective businesses and which the failure to so have could have a Material
      Adverse Effect (collectively, the “Intellectual
      Property Rights”).
      Except as set forth on Schedule
      3.1(o),
      neither
      the Company nor any Subsidiary has received a notice (written or otherwise)
      that
      the Intellectual Property Rights used by them (including, without limitation,
      the patents, patent registrations and patent applications identified on Schedule
      B to the License Agreement) violates or infringes upon the rights of any Person.
      None of the Intellectual Property Rights (including, without limitation, the
      patents, patent registrations and patent applications identified on Schedule
      B
      to the License Agreement) has expired or been held invalid by a court or other
      tribunal of competent jurisdiction, and to the Company’s knowledge, there is no
      existing infringement by another Person of any of the Intellectual Property
      Rights. The patents listed on Schedule B to the License Agreement have been
      duly
      registered with the United States Patent Office on the dates set forth in
Schedule
      3.1(o),
      and the
      corresponding office of each applicable foreign jurisdiction. 

     

    (p)    Insurance.
      The
      Company and the Subsidiaries are insured by insurers of recognized financial
      responsibility against such losses and risks and in such amounts as are prudent
      and customary in the businesses in which the Company and the Subsidiaries are
      engaged, including, but not limited to, directors and officers insurance
      coverage at least equal to the Subscription Amount. Neither the Company nor
      any
      Subsidiary has any reason to believe that it will not be able to renew its
      existing insurance coverage as and when such coverage expires or to obtain
      similar coverage from similar insurers as may be necessary to continue its
      business without a significant increase in cost.

     

    
      
        
        

      

      
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    (q)    Transactions
      With Affiliates and Employees.
      Except
      as set forth in the SEC Reports, none of the officers or directors of the
      Company and, to the knowledge of the Company, none of the employees of the
      Company, is a party to any transaction with the Company or any Subsidiary (other
      than for services as employees, officers and directors), including any contract,
      agreement or other arrangement providing for the furnishing of services to
      or
      by, providing for rental of real or personal property to or from, or otherwise
      requiring payments to or from any officer, director or such employee or, to
      the
      knowledge of the Company, any entity in which any officer, director, or any
      such
      employee has a substantial interest or is an officer, director, trustee or
      partner, in the case in excess of $60,000 other than (i) for payment of (x)
      salary or consulting fees for services rendered or (y) severance pursuant to
      severance agreements, (ii) reimbursement for expenses incurred on behalf of
      the
      Company and (iii) for other employee benefits, including stock option agreements
      under any stock option plan of the Company.

     

    (r)    Sarbanes-Oxley;
      Internal Accounting Controls.
      The
      Company is in material compliance with all provisions of the Sarbanes-Oxley
      Act
      of 2002 which are applicable to it as of the Closing Date. The Company
      and the Subsidiaries maintain a system of internal accounting controls
      sufficient to provide reasonable assurance
      that (i) transactions are executed in accordance with management’s general or
      specific authorizations, (ii) transactions are recorded as necessary to permit
      preparation of financial statements in conformity
      with
      GAAP and to maintain asset accountability, (iii) access to assets is permitted
      only in accordance
      with management’s general or specific authorization, and (iv) the recorded
      accountability for assets is compared with the existing assets
      at
      reasonable intervals and appropriate action is taken with respect to any
      differences. The Company has established disclosure controls and procedures
      (as
      defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and
      designed such disclosure controls and procedures to ensure that information
      required to be disclosed by the Company in the reports it files or submits
      under
      the Exchange Act is recorded, processed, summarized and reported, within the
      time periods
      specified in the Commission’s
      rules and forms. The Company’s certifying
      officers have evaluated the effectiveness of the Company’s disclosure controls
      and procedures as of the end of the period covered by the Company’s most
      recently filed SEC Report (such date, the “Evaluation
      Date”).
      The
      Company presented in its most recently filed SEC Report the conclusions of
      the
      certifying officers about the effectiveness of the disclosure controls and
      procedures based on their evaluations as of the Evaluation Date. Since the
      Evaluation Date, there have been no changes in the Company’s internal control
      over financial reporting (as such term is defined in the Exchange Act) that
      has
      materially affected, or is reasonably likely to materially affect, the Company’s
      internal control over financial reporting.

     

    (s)    Certain
      Fees.
      No
      brokerage or finder’s fees or commissions are or will be payable by the Company
      to any broker, financial advisor or consultant, finder, placement agent,
      investment banker, bank or other Person with respect to the transactions
      contemplated by the Transaction Documents, other than to the Advisor as
      contemplated hereby and to Rodman & Renshaw LLC. The Purchaser shall have no
      obligation with respect to any fees or with respect to any claims made by or
      on
      behalf of other Persons for fees of a type contemplated in this Section that
      may
      be due in connection with the transactions contemplated by the Transaction
      Documents. 

     

    (t)    Private
      Placement.
      Assuming the accuracy of the Purchaser representations and warranties set forth
      in Section 3.2, no registration under the Securities Act is required for the
      offer and sale of the Debenture by the Company to the Purchaser as contemplated
      hereby. 

     

    
      
        
        

      

      
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    (u)    Investment
      Company.
      The
      Company is not, and is not an Affiliate of, and immediately after receipt of
      the
      Subscription Amount, will not be or be an Affiliate of, an “investment company”
within the meaning of the Investment Company Act of 1940, as amended. The
      Company shall conduct its businesses in a manner so that it will not become
      subject to the Investment Company Act of 1940, as amended.

     

    (v)    Listing
      and Maintenance Requirements.
      The
      Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange
      Act, and the Company has taken no action designed to, or which to its knowledge
      is likely to have the effect of, terminating the registration of the Common
      Stock under the Exchange Act nor has the Company received any notification
      that
      the Commission is contemplating terminating such registration. The Company
      has
      not, in the 12 mon0ths preceding the date hereof, received notice from any
      Trading Market on which the Common Stock is or has been listed or quoted to
      the
      effect that the Company is not in compliance with the listing or maintenance
      requirements of such Trading Market. The Company is, and has no reason to
      believe that it will not in the foreseeable future continue to be, in compliance
      with all such listing and maintenance requirements to which it is now
      subject.

     

    (w)    Disclosure.
      All
      written disclosure furnished by or on behalf of the Company to the Purchaser
      regarding the Company, its business and the transactions contemplated hereby,
      including the Disclosure Schedules to this Agreement, is true and correct and
      does not contain any untrue statement of a material fact or omit to state any
      material fact necessary in order to make the statements made therein, in light
      of the circumstances under which they were made, not misleading (it being
      recognized by the Purchaser that while the Company hereby represents that any
      projections and forecasts provided by the Company to it were prepared in good
      faith and based upon reasonable assumptions, such projections and forecasts
      are
      not factual and that actual results during any period covered thereby may differ
      from the projected and actual results). The Company acknowledges and agrees
      that
      the Purchaser has not made any representations or warranties with respect to
      the
      transactions contemplated hereby other than those specifically set forth in
      Section 3.2 hereof.

     

    (x)    Solvency.
      Based
      on the financial condition of the Company as of the Closing Date, the Company
      is
      solvent and has the necessary capital to pay its liabilities and obligations
      as
      they become due. 

     

    (y)    Tax
      Status.
      Except
      for matters that would not, individually or in the aggregate, have or reasonably
      be expected to result in a Material Adverse Effect, the Company and the
      Subsidiaries have filed all necessary federal, state and foreign income and
      franchise tax returns and has paid or accrued all taxes shown as due thereon,
      and the Company has no knowledge of a tax deficiency which has been asserted
      or
      threatened against the Company or any Subsidiary.

     

    (z)    No
      General Solicitation.
      Neither
      the Company nor any person acting on its behalf has offered or sold the
      Debenture by any form of general solicitation or general advertising. The
      Company has offered the Debenture for sale only to the Purchaser and certain
      other “accredited investors” within the meaning of Rule 501 under the Securities
      Act.

     

    
      
        
        

      

      
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    (aa)    Foreign
      Corrupt Practices.
      Neither
      the Company, nor to the knowledge of the Company, any agent or other person
      acting on its behalf, has (i) directly or indirectly, used any funds for
      unlawful contributions, gifts, entertainment or other unlawful expenses related
      to foreign or domestic political activity, (ii) made any unlawful payment to
      foreign or domestic government officials or employees or to any foreign or
      domestic political parties or campaigns from corporate funds, (iii) failed
      to
      disclose fully any contribution made by the Company (or made by any person
      acting on its behalf of which it aware) which is in violation of law, or (iv)
      violated in any material respect any provision of the Foreign Corrupt Practices
      Act of 1977, as amended.

     

    (bb)    Seniority.
      Except
      for the indebtedness of the Company to Silicon Valley Bank referred to in the
      Subordination Agreement, no indebtedness or other claim against the Company
      is
      senior to the Debenture in right of payment, whether with respect to interest
      or
      upon liquidation or dissolution, or otherwise.

     

    (cc)    Accountants.
      The
      Company’s accounting firm is set forth on Schedule
      3.1(cc)
      of the
      Disclosure Schedule. To the knowledge and belief of the Company, such accounting
      firm (i) is a registered public accounting firm as required by the Exchange
      Act
      and (ii) shall express its opinion with respect to the financial statements
      to
      be included in the Company’s Annual Report on Form 10-KSB for the year ending
      June 30, 2007.

     

    (dd)    No
      Disagreements with Accountants and Lawyers.
      There
      are no disagreements of any kind presently existing, or reasonably anticipated
      by the Company to arise, between the Company and the accountants and lawyers
      formerly or presently employed by the Company, and the Company is current with
      respect to any fees owed to its accountants and lawyers which could affect
      the
      Company’s ability to perform any of its obligations under any of the Transaction
      Documents.

     

    3.2    Representations
      and Warranties of the Purchaser.
      The
      Purchaser hereby represents and warrants as of the date hereof and as of the
      Closing Date to the Company as follows:

     

    (a)    Organization;
      Authority.
      The
      Purchaser is an entity duly organized, validly existing and in good standing
      under the laws of the jurisdiction of its organization with full right, power
      and authority to enter into and to consummate the transactions contemplated
      by
      the Transaction Documents and otherwise to carry out its obligations hereunder
      and thereunder. The execution and delivery of the Transaction Documents and
      performance by the Purchaser of the transactions contemplated by the Transaction
      Documents have been duly authorized by all necessary corporate or similar action
      on the part of the Purchaser. Each Transaction Document to which it is a party
      has been duly executed by the Purchaser, and when delivered by the Purchaser
      in
      accordance with the terms hereof, will constitute the valid and legally binding
      obligation of the Purchaser, enforceable against it in accordance with its
      terms, except (i) as limited by general equitable principles and applicable
      bankruptcy, insolvency, reorganization, moratorium and other laws of general
      application affecting enforcement of creditors’ rights generally, (ii) as
      limited by laws relating to the availability of specific performance, injunctive
      relief or other equitable remedies and (iii) insofar as indemnification and
      contribution provisions may be limited by applicable law.

     

    
      
        
        

      

      
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    (b)    Own
      Account.
      The
      Purchaser understands that the Debenture is a “restricted security” and has not
      been registered under the Securities Act or any applicable state securities
      law
      and is acquiring the Debenture as principal for its own account and not with
      a
      view to or for distributing or reselling the Debenture or any part thereof
      in
      violation of the Securities Act or any applicable state securities law, has
      no
      present intention of distributing the Debenture in violation of the Securities
      Act or any applicable state securities law and has no direct or indirect
      arrangement or understandings with any other persons to distribute or regarding
      the distribution of the Debenture (this representation and warranty not limiting
      the Purchaser’s right to sell the Debenture in compliance with applicable
      federal and state securities laws) in violation of the Securities Act or any
      applicable state securities law. The Purchaser is acquiring the Debenture
      hereunder in the ordinary course of its business.

     

    (c)    Purchaser
      Status.
      At the
      time the Purchaser was offered the Debenture, it was, and at the date hereof
      it
      is, either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2),
      (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified
      institutional buyer” as defined in Rule 144A(a) under the Securities Act. The
      Purchaser is not required to be registered as a broker-dealer under Section
      15
      of the Exchange Act.

     

    (d)    Experience
      of Such Purchaser.
      The
      Purchaser, either alone or together with its representatives, has such
      knowledge, sophistication and experience in business and financial matters
      so as
      to be capable of evaluating the merits and risks of the prospective investment
      in the Debenture, and has so evaluated the merits and risks of such investment.
      The Purchaser is able to bear the economic risk of an investment in the
      Debenture and, at the present time, is able to afford a complete loss of such
      investment.

     

    (e)    General
      Solicitation.
      The
      Purchaser is not purchasing the Debenture as a result of any advertisement,
      article, notice or other communication regarding the Debenture published in
      any
      newspaper, magazine or similar media or broadcast over television or radio
      or
      presented at any seminar or any other general solicitation or general
      advertisement.

     

    (f)    Short
      Sales and Confidentiality Prior To The Date Hereof.
      Other
      than consummating the transactions contemplated hereunder, the Purchaser has
      not
      directly or indirectly, nor has any Person acting on behalf of or pursuant
      to
      any understanding with the Purchaser, executed any purchases or sales, including
      short sales, of the securities of the Company during the period commencing
      from
      the time
      that the Purchaser first received a term sheet (written or oral) from the
      Company or any other Person representing the Company setting forth the material
      terms of the transactions contemplated hereunder until the date hereof
(“Discussion
      Time”).
      The
Purchaser
      has maintained the confidentiality of all disclosures made to it in connection
      with this transaction (including the existence and terms of this
      transaction).

     

    
      
        
        

      

      
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    ARTICLE
      IV.

    OTHER
      AGREEMENTS OF THE PARTIES

     

    4.1    Transfer
      Restrictions. 

     

    (a)    The
      Debenture may only be disposed of in compliance with state and federal
      securities laws. In connection with any transfer of Debenture other than
      pursuant to an effective registration statement or Rule 144, to the Company
      or
      to an Affiliate of the Purchaser or in connection with a pledge as contemplated
      in Section 4.1(b), the Company may require the transferor thereof to provide
      to
      the Company an opinion of counsel selected by the transferor and reasonably
      acceptable to the Company, the form and substance of which opinion shall be
      reasonably satisfactory to the Company, to the effect that such transfer does
      not require registration of the Debenture under the Securities Act. As a
      condition of transfer, any such transferee shall agree in writing to be bound
      by
      the terms of this Agreement and shall have the rights of the Purchaser under
      this Agreement and the other Transaction Documents.

     

    (b)    The
      Purchaser agrees to the imprinting, so long as is required by this Section
      4.1,
      of a legend on the Debenture in the following form:

     

    THIS
      DEBENTURE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION
      OR
      THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM
      REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
      ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
      EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN
      AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
      REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE
      SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR
      TO
      SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE
      COMPANY. THIS DEBENTURE MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN
      ACCOUNT OR OTHER LOAN SECURED BY THIS DEBENTURE.

     

    The
      Company acknowledges and agrees that the Purchaser may from time to time pledge
      pursuant to a bona fide margin agreement with a registered broker-dealer or
      grant a security interest in some or all of the Debenture to a financial
      institution that is an “accredited investor” as defined in Rule 501(a) under the
      Securities Act and who agrees to be bound by the provisions of this Agreement
      and, if required under the terms of such arrangement, the Purchaser may transfer
      pledged or secured Debenture to the pledgees or secured parties. Such a pledge
      or transfer would not be subject to approval of the Company and no legal opinion
      of legal counsel of the pledgee, secured party or pledgor shall be required
      in
      connection therewith. Further, no notice shall be required of such pledge.
      At
      the Purchaser’s expense, the Company will execute and deliver such reasonable
      documentation as a pledgee or secured party of the Debenture may reasonably
      request in connection with a pledge or transfer of the Debenture.

     

    
      
        
        

      

      
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    4.2    Furnishing
      of Information.
      As long
      as the Purchaser owns the Debenture, the Company covenants to timely file (or
      obtain extensions in respect thereof and file within the applicable grace
      period) all reports required to be filed by the Company after the date hereof
      pursuant to the Exchange Act. As long as the Purchaser owns the Debenture,
      if
      the Company is not required to file reports pursuant to the Exchange Act, it
      will prepare and furnish to the Purchaser and make publicly available in
      accordance with Rule 144(c) such information as is required for the Purchaser
      to
      sell the Debenture under Rule 144. The Company further covenants that it will
      take such further action as any holder of the Debenture may reasonably request,
      to the extent required from time to time to enable such Person to sell the
      Debenture without registration under the Securities Act within the requirements
      of the exemption provided by Rule 144.

     

    4.3    Integration.
      The
      Company shall not sell, offer for sale or solicit offers to buy or otherwise
      negotiate in respect of any security (as defined in Section 2 of the Securities
      Act) that would be integrated with the offer or sale of the Debenture in a
      manner that would require the registration under the Securities Act of the
      sale
      of the Debenture to the Purchaser.

     

    4.4    Publicity.
      The
      Company and the Purchaser shall consult with the other prior to issuing press
      releases with respect to the transactions contemplated hereby, and neither
      the
      Company nor the Purchaser shall issue any such press release or otherwise make
      any such public statement without the prior consent of the Company, with respect
      to any press release of the Purchaser, or without the prior consent of the
      Purchaser, with respect to any press release of the Company, which consent
      shall
      not unreasonably be withheld or delayed, except if such disclosure is required
      by law, in which case the disclosing party shall promptly provide the other
      party with prior notice of such public statement or communication.

     

    4.5    Shareholder
      Rights Plan.
      No
      claim will be made or enforced by the Company or, with the consent of the
      Company, any other Person, that the Purchaser is an “Acquiring Person” under any
      control share acquisition, business combination, poison pill (including any
      distribution under a rights agreement) or similar anti-takeover plan or
      arrangement in effect or hereafter adopted by the Company, or that the Purchaser
      could be deemed to trigger the provisions of any such plan or arrangement,
      by
      virtue of receiving the Debenture.

     

    4.6    Post
      Closing Deliveries.
      Not
      later than the tenth day after the Closing Date, the Company shall deliver
      to
      the Purchaser an opinion of counsel to Markland with respect to the Security
      Agreements of Markland.

     

    4.7    Use
      of
      Proceeds.
      The
      Company shall use the net proceeds from the sale of the Debenture hereunder
      for
      working capital.

     

    4.8    Reimbursement.
      If the
      Purchaser becomes involved in any capacity in any Proceeding by or against
      any
      Person who is a stockholder of the Company (except as a result of sales,
      pledges, margin sales and similar transactions by the Purchaser to or with
      any
      other stockholder), solely as a result of the Purchaser’s acquisition of the
      Debenture under this Agreement, the Company agree to reimburse the Purchaser
      for
      its reasonable legal and other expenses (including the cost of any investigation
      preparation and travel in connection therewith) incurred in connection
      therewith, as such expenses are incurred. The reimbursement obligations of
      the
      Company under this paragraph shall be in addition to any liability which the
      Company may otherwise have, shall extend upon the same terms and conditions
      to
      any Affiliates of the Purchaser who are actually named in such action,
      proceeding or investigation, and partners, directors, agents, employees and
      controlling persons (if any), as the case may be, of the Purchaser and any
      such
      Affiliate, and shall be binding upon and inure to the benefit of any successors,
      assigns, heirs and personal representatives of the Company, the Purchaser and
      any such Affiliate and any such Person. The Company also agrees that neither
      the
      Purchaser nor any such Affiliates, partners, directors, agents, employees or
      controlling persons shall have any liability to the Company or any Person
      asserting claims on behalf of or in right of the Company solely as a result
      of
      acquiring the Debenture under this Agreement.

     

    
      
        
        

      

      
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    4.9    Indemnification
      of Purchaser.
      Subject
      to the provisions of this Section 4.9, the Company will indemnify and hold
      the
      Purchaser and its directors, officers, shareholders, members, partners,
      employees and agents (and any other Persons with a functionally equivalent
      role
      of a Person holding such titles notwithstanding a lack of such title or any
      other title), the Person who controls the Purchaser (within the meaning of
      Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
      directors, officers, shareholders, agents, members, partners or employees (and
      any other Persons with a functionally equivalent role of a Person holding such
      titles notwithstanding a lack of such title or any other title) of such
      controlling person (the, a “Purchaser
      Party”)
      harmless from any and all losses, liabilities, obligations, claims,
      contingencies, damages, costs and expenses, including all judgments, amounts
      paid in settlements, court costs and reasonable attorneys’ fees and costs of
      investigation that any such Purchaser Party may suffer or incur as a result
      of
      or relating to (a) any breach of any of the representations, warranties,
      covenants or agreements made by the Company in this Agreement or in the other
      Transaction Documents or (b) any action instituted against the Purchaser, or
      any
      of its Affiliates, by any stockholder of the Company, with respect to any of
      the
      transactions contemplated by the Transaction Documents (unless such action
      is
      based upon a breach of the Purchaser’s representations, warranties or covenants
      under the Transaction Documents or any agreements or understandings the
      Purchaser may have with any such stockholder or any violations by the Purchaser
      of state or federal securities laws or any conduct by the Purchaser which
      constitutes fraud, gross negligence, willful misconduct or malfeasance). If
      any
      action shall be brought against any Purchaser Party in respect of which
      indemnity may be sought pursuant to this Agreement, such Purchaser Party shall
      promptly notify the Company in writing, and the Company shall have the right
      to
      assume the defense thereof with counsel of its own choosing reasonably
      acceptable to the Purchaser Party. Any Purchaser Party shall have the right
      to
      employ separate counsel in any such action and participate in the defense
      thereof, but the fees and expenses of such counsel shall be at the expense
      of
      such Purchaser Party, except to the extent that (i) the employment thereof
      has
      been specifically authorized by the Company in writing, (ii) the Company has
      failed after a reasonable period of time to assume such defense and to employ
      counsel or (iii) in such action there is, in the reasonable opinion of such
      separate counsel, a material conflict on any material issue between the position
      of the Company and the position of such Purchaser Party, in which case the
      Company shall be responsible for the reasonable fees and expenses of no more
      than one such separate counsel. The Company will not be liable to any Purchaser
      Party under this Agreement (i) for any settlement by a Purchaser Party effected
      without the Company’s prior written consent, which shall not be unreasonably
      withheld or delayed; or (ii) to the extent, but only to the extent that a loss,
      claim, damage or liability is attributable to any Purchaser Party’s breach of
      any of the representations, warranties, covenants or agreements made by such
      Purchaser Party in this Agreement or in the other Transaction
      Documents.

     

    4.10          
      Participation
      in Future Financings.
      

     

    (a)    In
      connection with the issuance by the Company or any of its Subsidiaries of any
      promissory note, debenture or other debt security (a “Subsequent
      Financing”)
      at any
      time that any amount is owing to the Purchaser under the Debenture or any other
      Transaction Document, the Purchaser shall have the right to participate in
      up to
      an amount of the Subsequent Financing equal to 100% of the Subsequent Financing
      (the “Participation
      Maximum”)
      on the
      same terms, conditions and price provided for in the Subsequent Financing.
      

     

    (b)    At
      least
      ten Trading Days prior to the closing of any Subsequent Financing, the Company
      shall deliver to the Purchaser a written notice of its intention to effect
      such
      Subsequent Financing (“Pre-Notice”),
      which
      Pre-Notice shall ask the Purchaser if it wants to review the details of such
      financing (such additional notice, a “Subsequent
      Financing Notice”).
      Upon
      the request of the Purchaser, and only upon a request by the Purchaser, for
      a
      Subsequent Financing Notice, the Company shall promptly, but no later than
      one
      Trading Day after such request, deliver a Subsequent Financing Notice to the
      Purchaser. The Subsequent Financing Notice shall describe in reasonable detail
      the proposed terms of such Subsequent Financing, the amount of proceeds intended
      to be raised thereunder and the Person or Persons through or with whom such
      Subsequent Financing is proposed to be affected and shall include a term sheet
      or similar document relating thereto as an attachment, if such document is
      available. 

     

    
      
        
        

      

      
        18

        
          

        

      

      
        
        

      

       

    

    (c)    If
      the
      Purchaser desires to participate in such Subsequent Financing, it must provide
      written notice to the Company by not later than 5:30 p.m. (New York City time)
      on the fifth Trading Day after it has received the Pre-Notice that the Purchaser
      is willing to participate in the Subsequent Financing, the amount of the
      Purchaser’s participation, and that the Purchaser has such funds ready, willing,
      and available for investment on the terms set forth in the Subsequent Financing
      Notice. If the Company receives no notice from the Purchaser as of such fifth
      Trading Day, the Purchaser shall be deemed to have notified the Company that
      it
      does not elect to participate. 

     

    (d)    If
      by
      5:30 p.m. (New York City time) on the fifth Trading Day after the Purchaser
      has
      received the Pre-Notice, notification by the Purchaser of its willingness to
      participate in the Subsequent Financing (or to cause its designees to
      participate) is, in the aggregate, less than the total amount of the Subsequent
      Financing, then the Company may effect the remaining portion of such Subsequent
      Financing on the terms and with the Persons set forth in the Subsequent
      Financing Notice. 

     

    (e)    The
      Company must provide the Purchaser with a second Subsequent Financing Notice,
      and the Purchaser will again have the right of participation set forth above
      in
      this Section 4.10, if the Subsequent Financing subject to the initial Subsequent
      Financing Notice is not consummated for any reason on the terms set forth in
      such Subsequent Financing Notice within 60 Trading Days after the date of the
      initial Subsequent Financing Notice. 

     

    (f)    Notwithstanding
      the foregoing, this Section 4.10 shall not apply in respect of (i) an Exempt
      Issuance or (ii) an underwritten public offering of securities of the
      Company.

     

    4.11    Form
      D; Blue Sky Filings.
      The
      Company agrees to timely file a Form D with respect to the Debenture as required
      under Regulation D and to provide a copy thereof, promptly upon request of
      the
      Purchaser. The Company shall take such action as it shall reasonably determine
      is necessary in order to obtain an exemption for, or to qualify the Debenture
      for, sale to the Purchaser at the Closing under applicable securities or “Blue
      Sky” laws of the states of the United States, and shall provide evidence of such
      actions promptly upon request of the Purchaser.

     

    4.12    Certain
      Notices.
      Within
      two Trading Days after the Company enters into any binding agreement that could
      reasonably be expected to result in a Change of Control Transaction, the Company
      shall notify the Purchaser thereof and shall furnish the Purchaser with a copy
      of any writing evidencing such agreement. The Company shall further notify
      the
      Purchaser promptly of all events relating to any such Change of Control
      Transaction, including, without limitation, the consummation thereof. The
      failure of the Company to provide any such notice or any defect therein shall
      not have any effect on the Company’s obligation to pre-pay the Debenture when
      required by the holder thereof in accordance with the terms
      thereof.

     

    ARTICLE
      V.

    MISCELLANEOUS

     

    5.1    Termination.
      This
      Agreement may be terminated by the Purchaser if the Closing has not been
      consummated on or before the Transaction End Date; provided,
      however,
      that no
      such termination will affect the right of any party to sue for any breach by
      the
      other party (or parties).

     

    5.2    Fees
      and Expenses.
      At the
      Closing, the Company shall pay FWS the legal fees and expenses incurred by
      the
      Purchaser in connection with the Transaction Documents in an amount not to
      exceed $35,000. Except as expressly set forth in the Transaction Documents
      to
      the contrary, each party shall pay the fees and expenses of its advisers,
      counsel, accountants and other experts, if any, and all other expenses incurred
      by such party incident to the negotiation, preparation, execution, delivery
      and
      performance of this Agreement and the other Transaction Documents. The Company
      shall pay all transfer agent fees, stamp taxes and other taxes and duties
      required to be paid in connection with the delivery of the Debenture to the
      Purchaser.

     

    
      
        
        

      

      
        19

        
          

        

      

      
        
        

      

       

    

    5.3    Entire
      Agreement.
      This
      Agreement and the other Transaction Documents, together with the exhibits and
      schedules thereto, contain the entire understanding of the parties with respect
      to the subject matter hereof and supersede all prior agreements and
      understandings, oral or written, with respect to such matters, which the parties
      acknowledge have been merged into such documents, exhibits and
      schedules.

     

    5.4    Notices.
      Any and
      all notices or other communications or deliveries required or permitted to
      be
      provided hereunder shall be in writing and shall be deemed given and effective
      on the earliest of (a) the date of transmission, if such notice or communication
      is delivered via facsimile at the facsimile number set forth on the signature
      pages attached hereto prior to 5:30 p.m. (New York City time) on a Trading
      Day,
      (b) the next Trading Day after the date of transmission, if such notice or
      communication is delivered via facsimile at the facsimile number set forth
      on
      the signature pages attached hereto on a day that is not a Trading Day or later
      than 5:30 p.m. (New York City time) on any Trading Day, (c) the 2nd
      Trading
      Day following the date of mailing, if sent by U.S. nationally recognized
      overnight courier service, or (d) upon actual receipt by the party to whom
      such
      notice is required to be given. The address for such notices and communications
      shall be as set forth on the signature pages attached hereto.

     

    5.5    Amendments;
      Waivers.
      No
      provision of this Agreement may be waived, modified, supplemented or amended
      except in a written instrument signed, in the case of an amendment, by the
      Company and the Purchaser or, in the case of a waiver, by the party against
      whom
      enforcement of any such waived provision is sought. No waiver of any default
      with respect to any provision, condition or requirement of this Agreement shall
      be deemed to be a continuing waiver in the future or a waiver of any subsequent
      default or a waiver of any other provision, condition or requirement hereof,
      nor
      shall any delay or omission of any party to exercise any right hereunder in
      any
      manner impair the exercise of any such right.

     

    5.6    Headings.
      The
      headings herein are for convenience only, do not constitute a part of this
      Agreement and shall not be deemed to limit or affect any of the provisions
      hereof.

     

    5.7    Successors
      and Assigns.
      This
      Agreement shall be binding upon and inure to the benefit of the parties and
      their successors and permitted assigns. The Company may not assign this
      Agreement or any rights or obligations hereunder without the prior written
      consent of the Purchaser. The Purchaser may assign any or all of its rights
      under this Agreement to any Person to whom the Purchaser assigns or transfers
      any of its Debenture, provided such transferee agrees in writing to be bound,
      with respect to the transferred Debenture, by the provisions of the Transaction
      Documents that apply to the “Purchaser” and Purchaser shall notify the Company
      of any such assignment.

     

    5.8    No
      Third-Party Beneficiaries.
      This
      Agreement is intended for the benefit of the parties hereto and their respective
      successors and permitted assigns and is not for the benefit of, nor may any
      provision hereof be enforced by, any other Person, except as otherwise set
      forth
      in Sections 4.8 and 4.9.

     

    
      
        
        

      

      
        20

        
          

        

      

      
        
        

      

       

    

    5.9    Governing
      Law.
      All
      questions concerning the construction, validity, enforcement and interpretation
      of the Transaction Documents shall be governed by and construed and enforced
      in
      accordance with the internal laws of the State of New York, without regard
      to
      the principles of conflicts of law thereof. Each party agrees that all legal
      proceedings concerning the interpretations, enforcement and defense of the
      transactions contemplated by this Agreement and any other Transaction Documents
      (whether brought against a party hereto or its respective affiliates, directors,
      officers, shareholders, employees or agents) shall be commenced exclusively
      in
      the state and federal courts sitting in the City of New York. Each party hereby
      irrevocably submits to the exclusive jurisdiction of the state and federal
      courts sitting in the City of New York, borough of Manhattan for the
      adjudication of any dispute hereunder or in connection herewith or with any
      transaction contemplated hereby or discussed herein (including with respect
      to
      the enforcement of any of the Transaction Documents), and hereby irrevocably
      waives, and agrees not to assert in any suit, action or proceeding, any claim
      that it is not personally subject to the jurisdiction of any such court, that
      such suit, action or proceeding is improper or is an inconvenient venue for
      such
      proceeding. Each party hereby irrevocably waives personal service of process
      and
      consents to process being served in any such suit, action or proceeding by
      mailing a copy thereof via registered or certified mail or overnight delivery
      (with evidence of delivery) to such party at the address in effect for notices
      to it under this Agreement and agrees that such service shall constitute good
      and sufficient service of process and notice thereof. Nothing contained herein
      shall be deemed to limit in any way any right to serve process in any other
      manner permitted by law. The parties hereby waive all rights to a trial by
      jury.
      If any party shall commence an action or proceeding to enforce any provisions
      of
      the Transaction Documents, then the prevailing party in such action or
      proceeding shall be reimbursed by the other party for its reasonable attorneys’
fees and other costs and expenses incurred with the investigation, preparation
      and prosecution of such action or proceeding.

     

    5.10   Survival.
      The
      representations, warranties, covenants and other agreements contained herein
      shall survive the Closing and the delivery and/or exercise of the Debenture,
      as
      applicable for the applicable statue of limitations.

     

    5.11   Execution.
      This
      Agreement may be executed in two or more counterparts, all of which when taken
      together shall be considered one and the same agreement and shall become
      effective when counterparts have been signed by the party and delivered to
      the
      other parties, it being understood that all parties need not sign the same
      counterpart. In the event that any signature is delivered by facsimile
      transmission or by e-mail delivery of a “.PDF” format data file, such signature
      shall create a valid and binding obligation of the party executing (or on whose
      behalf such signature is executed) with the same force and effect as if such
      facsimile or “.PDF” signature page were an original thereof.

     

    5.12   Severability.
      If any
      term, provision, covenant or restriction of this Agreement is held by a court
      of
      competent jurisdiction to be invalid, illegal, void or unenforceable, the
      remainder of the terms, provisions, covenants and restrictions set forth herein
      shall remain in full force and effect and shall in no way be affected, impaired
      or invalidated, and the parties hereto shall use their commercially reasonable
      efforts to find and employ an alternative means to achieve the same or
      substantially the same result as that contemplated by such term, provision,
      covenant or restriction. It is hereby stipulated and declared to be the
      intention of the parties that they would have executed the remaining terms,
      provisions, covenants and restrictions without including any of such that may
      be
      hereafter declared invalid, illegal, void or unenforceable.

     

    
      
        
        

      

      
        21

        
          

        

      

      
        
        

      

       

    

    5.13   Rescission
      and Withdrawal Right.
      Notwithstanding anything to the contrary contained in (and without limiting
      any
      similar provisions of) any of the other Transaction Documents, whenever the
      Purchaser exercises a right, election, demand or option under a Transaction
      Document and the Company does not timely perform its related obligations within
      the periods therein provided, then the Purchaser may rescind or withdraw, in
      its
      sole discretion from time to time upon written notice to the Company, any
      relevant notice, demand or election in whole or in part without prejudice to
      its
      future actions and rights.

     

    5.14   Replacement
      of Debenture.
      If any
      certificate or instrument evidencing the Debenture is mutilated, lost, stolen
      or
      destroyed, the Company shall issue or cause to be issued in exchange and
      substitution for and upon cancellation thereof (in the case of mutilation),
      or
      in lieu of and substitution therefor, a new certificate or instrument, but
      only
      upon receipt of evidence reasonably satisfactory to the Company of such loss,
      theft or destruction. The applicant for a new certificate or instrument under
      such circumstances shall also pay any reasonable third-party costs (including
      customary indemnity) associated with the issuance of such replacement
      Debenture.

     

    5.15   Remedies.
      In
      addition to being entitled to exercise all rights provided herein or granted
      by
      law, including recovery of damages, the Purchaser and the Company will be
      entitled to specific performance under the Transaction Documents. The parties
      agree that monetary damages may not be adequate compensation for any loss
      incurred by reason of any breach of obligations contained in the Transaction
      Documents and hereby agree to waive and not to assert in any action for specific
      performance of any such obligation the defense that a remedy at law would be
      adequate. 

     

    5.16   Payment
      Set Aside.
      To the
      extent that the Company makes a payment or payments to the Purchaser pursuant
      to
      any Transaction Document or the Purchaser enforces or exercises its rights
      thereunder, and such payment or payments or the proceeds of such enforcement
      or
      exercise or any part thereof are subsequently invalidated, declared to be
      fraudulent or preferential, set aside, recovered from, disgorged by or are
      required to be refunded, repaid or otherwise restored to the Company, a trustee,
      receiver or any other person under any law (including, without limitation,
      any
      bankruptcy law, state or federal law, common law or equitable cause of action),
      then to the extent of any such restoration the obligation or part thereof
      originally intended to be satisfied shall be revived and continued in full
      force
      and effect as if such payment had not been made or such enforcement or setoff
      had not occurred.

     

    5.17   Usury.
      To the
      extent it may lawfully do so, the Company hereby agrees not to insist upon
      or
      plead or in any manner whatsoever claim, and will resist any and all efforts
      to
      be compelled to take the benefit or advantage of, usury laws wherever enacted,
      now or at any time hereafter in force, in connection with any claim, action
      or
      proceeding that may be brought by the Purchaser in order to enforce any right
      or
      remedy under any Transaction Document. Notwithstanding any provision to the
      contrary contained in any Transaction Document, it is expressly agreed and
      provided that the total liability of the Company under the Transaction Documents
      for payments in the nature of interest shall not exceed the maximum lawful
      rate
      authorized under applicable law (the “Maximum
      Rate”),
      and,
      without limiting the foregoing, in no event shall any rate of interest or
      default interest, or both of them, when aggregated with any other sums in the
      nature of interest that the Company may be obligated to pay under the
      Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum
      contract rate of interest allowed by law and applicable to the Transaction
      Documents is increased or decreased by statute or any official governmental
      action subsequent to the date hereof, the new maximum contract rate of interest
      allowed by law will be the Maximum Rate applicable to the Transaction Documents
      from the effective date forward, unless such application is precluded by
      applicable law. If under any circumstances whatsoever, interest in excess of
      the
      Maximum Rate is paid by the Company to the Purchaser with respect to
      indebtedness evidenced by the Transaction Documents, such excess shall be
      applied by the Purchaser to the unpaid principal balance of any such
      indebtedness or be refunded to the Company, the manner of handling such excess
      to be at the Purchaser’s election.

     

    
      
        
        

      

      
        22

        
          

        

      

      
        
        

      

       

    

    5.18   Liquidated
      Damages.
      The
      Company’s obligations to pay any partial liquidated damages or other amounts
      owing under the Transaction Documents is a continuing obligation of theirs
      and
      shall not terminate until all unpaid partial liquidated damages and other
      amounts have been paid notwithstanding the fact that the instrument or security
      pursuant to which such partial liquidated damages or other amounts are due
      and
      payable shall have been canceled.

     

    5.19   Construction.
      The
      parties agree that each of them and/or their respective counsel has reviewed
      and
      had an opportunity to revise the Transaction Documents and, therefore, the
      normal rule of construction to the effect that any ambiguities are to be
      resolved against the drafting party shall not be employed in the interpretation
      of the Transaction Documents or any amendments hereto.

     

    (Signature
      Pages Follow)

     

    
      
        
        

      

      
        23

        
          

        

      

      
        
        

      

    


    IN
      WITNESS WHEREOF, the parties hereto have caused this Securities Purchase
      Agreement to be duly executed by their respective authorized signatories as
      of
      the date first indicated above.

     

    
      	
              TECHNEST
                HOLDINGS, INC.

               

            	
              Address
                for Notice:

            
	
              By:           
                /s/ Gino M.
                Pereira                                                
                

              Name:
                Gino M. Pereira

              Title:
                Chief Financial Officer

            	
              10411
                Motor City Drive, Suite 650

              Bethesda,
                Maryland 20817

            
	 	 
	 	 


    

    With
      a
      copy to (which shall not constitute notice):

    Foley
      Hoag LLP

    1000
      Winter Street, Suite 4000

    Waltham,
      Massachusetts 02451

    Telecopy:
      617 753 1405

    Attention:
      David Broadwin, Esq.

    


    [REMAINDER
      OF PAGE INTENTIONALLY LEFT BLANK

    SIGNATURE
      PAGE FOR PURCHASER FOLLOWS]

     

    
      
        
        

      

      
        24

        
          

        

      

      
        
        

      

    

     

    IN
      WITNESS WHEREOF, the undersigned have caused this Debenture Purchase Agreement
      to be duly executed by their respective authorized signatories as of the date
      first indicated above.

     

    
      	
              SHELTER
                ISLAND OPPORTUNITY FUND, LLC

              By:
                Shelter Island GP, LLC, its Manager

               

            	
              Address
                for Notice:

            
	
              By:         
                /s/ Randall P.
                Stern                                                              
                

                   
                Name: Randall P. Stern

                   
                Title: President

               

            	
              One
                East 52nd
                Street, New York, NY 10022

            
	
              With
                a copy to (which shall not constitute notice):

              Feldman
                Weinstein & Smith LLP

              420
                Lexington Avenue

              New
                York, New York 10170-0002

              Telecopy:
                212 997 4242

              Attention:
                Saul H. Finkelstein, Esq.

               

            	 


    

    
 

     

    25