technest_10qsb-033108.htm

TECHNEST HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)

10QSB 1 technest_10qsb-033108.htm FORM 10-QSB technest_10qsb-033108.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

	(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2008

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

For the transition period from ______________ to ______________

Commission File Number 000-27023

TECHNEST HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Nevada	88-0357272
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

10411 Motor City Drive, Suite 650, Bethesda, Maryland 20817

(Address of principal executive offices and zip code)

(301) 767-2810

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of May 12, 2008, there were 20,505,335 shares of common stock, $0.001 par value, of the registrant issued and outstanding.

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

TECHNEST HOLDINGS, INC.

FORM 10-QSB

TABLE OF CONTENTS

MARCH 31, 2008

		Page

PART I. FINANCIAL INFORMATION:		3

Item 1. Financial Statements (Unaudited)		3

Condensed Consolidated Balance Sheet at March 31, 2008		3

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007		5

Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2008 and 2007		6

Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine Months Ended March 31, 2008		7

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2008 and 2007		9

Notes to Condensed Consolidated Financial Statements		11

Item 2. Management’s Discussion and Analysis or Plan of Operation		26

Item 3. Controls and Procedures		43

PART II. OTHER INFORMATION		44

Item 1. Legal Proceedings		44

Item 6. Exhibits		45

Signatures

STATEMENTS CONTAINED IN THIS FORM 10-QSB, WHICH ARE NOT HISTORICAL FACTS CONSTITUTE FORWARD-LOOKING STATEMENTS AND ARE MADE UNDER THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES. YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS "MAY", "WILL", "EXPECT", "ANTICIPATE", "BELIEVE", "ESTIMATE", "CONTINUE", AND SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT CONTAIN THESE WORDS CAREFULLY. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB ARE BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO IN PART I, ITEM 1, OF THIS QUARTERLY REPORT AND WITH THE INFORMATION CONTAINED IN ITEM 2 TOGETHER WITH MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION CONTAINED IN OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 2007, INCLUDING, BUT NOT LIMITED TO, THE SECTION THEREIN ENTITLED "RISK FACTORS."

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TECHNEST HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 2008

(Unaudited)

ASSETS

Current Assets
Cash and cash equivalents	$	486,250
Accounts receivable		563,482
Inventory		39,918
Restricted cash		236,226
Prepaid expenses and other current assets		128,937
Receivable from sale of EOIR		23,000,000
Total Current Assets		24,454,813

Property and Equipment – Net of accumulated depreciation $97,924		87,966

Other Assets
Deposits		28,525
Definitive-lived intangible assets – Net of accumulated amortization $1,014,814		716,296
Goodwill		4,876,038
Total Other Assets		5,620,859

Total Assets	$	30,163,638


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	225,973
Unearned revenue		11,493
Accrued expenses and other current liabilities		3,176,007
Deferred tax liability		300,000
Total Current Liabilities		3,713,473

Total Liabilities		3,713,473

TECHNEST HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEET

MARCH 31, 2008 (concluded)

(Unaudited)

Commitments and Contingencies
Stockholders’ Equity
Series A Convertible Preferred Stock - $.001 par value; 150 shares authorized;
64.325 shares issued and outstanding (preference in liquidation of
$64,325 at March 31, 2008)		-
Series C Convertible Preferred Stock - $.001 par value; 1,149,425 shares
authorized; 402,301 issued and outstanding (preference in liquidation
of $875,005 at March 31, 2008)		402
Common stock - par value $.001 per share; 500,000,000 shares authorized;
20,505,335 shares issued and outstanding		20,504
Additional paid-in capital		37,772,644
Accumulated deficit		(11,343,385	)
Total Stockholders’ Equity		26,450,165

Total Liabilities and Stockholders’ Equity	$	30,163,638

See notes to condensed consolidated financial statements.

	2008			2007

Revenues	$	569,332		$	974,041

Cost of Revenues		377,807			578,107

Gross Profit		191,525			395,934

Operating Expenses
Selling, general and administrative		828,800			1,048,208
Research and development		46,002			-
Amortization of intangible assets		81,185			81,186
Total Operating Expenses		955,987			1,129,394

Operating Loss		(764,462	)		(733,460	)

Other Income (Expenses), Net
Other income		5,723			10
Interest expense		-			(284,603	)
Total Other Income (Expenses), Net		5,723			(284,593	)

Net Loss from continuing operations		(758,739	)		(1,018,053	)

Discontinued Operations (Note 3)
Gain (loss) from operations of discontinued operations (including gain on disposal of $22,750,406 in the three months ended March 31, 2008)		21,078,927			97,959
Provision for income taxes		(300,000	)		--
Gain on discontinued operations		20,778,927			97,959

Net Income (Loss) Applicable to Common Shareholders	$	20,020,188		$	(920,094	)

Net Income (Loss) Per Common Share – basic and diluted
From continuing operations	$	(0.04	)	$	(0.06	)
From discontinued operations	$	1.02		$	0.01
Net Income (Loss) per share – basic and diluted	$	0.98		$	(0.05	)

Weighted Average Number of Common Shares Outstanding
Basic		20,467,427			16,815,136
Diluted		20,467,427			16,815,136

See notes to consolidated financial statements.

TECHNEST HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(Unaudited)

	2008			2007

Revenues	$	1,892,905		$	2,322,030

Cost of Revenues		1,107,041			1,499,559

Gross Profit		785,864			822,471

Operating Expenses
Selling, general and administrative		3,376,752			3,230,851
Research and development		46,002			-
Amortization of intangible assets		243,555			243,296
Total Operating Expenses		3,666,309			3,474,147

Operating Loss		(2,880,445	)		(2,651,676	)

Other (Expenses) Income, Net
Other income		5,875			3,109
Interest expense		(11,329	)		(1,531,430	)
Total Other Expenses, Net		(5,454	)		(1,528,321	)

Net Loss from continuing operations		(2,885,899	)		(4,179,997	)

Discontinued Operations (Note 3)
Gain (loss) from operations of discontinued operations (including gain on disposal of $14,801,367 in the nine months ended March 31, 2008)		11,867,149			(485,500	)
Provision for income taxes		(300,000	)		--
Gain (loss) on discontinued operations		11,567,149			(485,500	)

Net Income (Loss) Applicable to Common Shareholders	$	8,681,250		$	(4,665,497	)

Net Income (Loss) Per Common Share – basic and diluted
From continuing operations	$	(0.15	)	$	(0.25	)
From discontinued operations	$	0.60		$	(0.03	)
Net Income (Loss) per share - basic and diluted	$	0.45		$	(0.28	)

Weighted Average Number of Common Shares Outstanding
Basic		19,502,738			16,423,488
Diluted		19,502,738			16,423,488

See notes to consolidated financial statements.

TECHNEST HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT CHANGES IN OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2008

(Unaudited)

					Series A				Series C
					Convertible				Convertible
	Common stock				Preferred stock				Preferred stock
	Shares		Amount		Shares		Amount		Shares			Amount

Balance - July 1, 2007		16,878,451	$	16,877		64	$	-		632,185		$	632

Stock issued in connection with
termination of stockholder
and license agreement		3,000,000		3,000		-		-		-			-

Issuance and amortization of
stock-based compensation
related to restricted stock grants		397,000		397		-		-		-			-

Stock issued in connection with
conversion of Series C
Convertible Preferred Stock		229,884		230		-		-		(229,884	)		(230	)

Net Income		-		-		-		-		-			-
Balance - March 31, 2008		20,505,335	$	20,504		64	$	-		402,301		$	402

TECHNEST HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT CHANGES IN OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED MARCH 31, 2008 (concluded)

(Unaudited)

	Additional					Total
	Paid-In		Accumulated			Stockholders'
	Capital		Deficit			Equity
	Amount		Amount			Amount

Balance - July 1, 2007	$	36,115,030	$	(20,024,635	)	$	16,107,904

Stock issued in connection with
termination of stockholder
and license agreement		1,377,000		-			1,380,000

Issuance and amortization of
stock-based compensation
related to restricted stock grants		280,614		-			281,011

Stock issued in connection with
conversion of Series C
Convertible Preferred Stock		-		-			-

Net Income		-		8,681,250			8,681,250
Balance - March 31, 2008	$	37,772,644	$	(11,343,385	)	$	26,450,165

See notes to condensed consolidated financial statements.

TECHNEST HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)

	2008			2007

Cash Flows From Operating Activities:

Net income (loss)	$	8,681,250		$	(4,665,497	)

Adjustment to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization of property and equipment		33,197			319,868
Amortization of intangible assets		243,555			1,339,534
Non-cash interest expense		1,538,276			987,757
Stock-based compensation to employees and directors		281,011			962,503
Stock issued in connection with termination of stockholder
and license agreement		1,380,000			-
Stock issued in connection with settlement of liquidated damages		-			1,726,426
Fair value of warrants issued to a consultant		-			253,038
Gain on disposal of discontinued operations		(14,801,367	)		-
Deferred income tax expense		300,000			-
Changes in operating assets and liabilities:
Accounts receivable		8,816,402			(170,338	)
Unbilled receivables		1,515,558			907,770
Inventory and work in process		(28,665	)		12,785
Restricted cash		(236,226	)		-
Deposits and prepaid expenses and other current assets		63,963			10,836
Accounts payable		(8,045,789	)		(3,197,902	)
Unearned revenue		(255,816	)		-
Accrued expenses and other current liabilities		(293,451	)		(1,034,378	)
Due to related parties		(290,036	)		(232,485	)
Net Cash Used In Operating Activities		(1,098,138	)		(2,780,083	)

Cash Flows From Investing Activities:
Purchase of property and equipment		(39,848	)		(39,609	)
Proceeds from sale of discontinued operations, net of transaction costs		10,269,615			-
Net Cash Provided by (Used In) Investing Activities		10,229,767			(39,609	)

TECHNEST HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED MARCH 31, 2008 AND 2007 (concluded)

(Unaudited)

Cash Flows From Financing Activities:
Proceeds from term loan		-			3,000,000
(Repayment of) proceeds from revolving line of credit, net		(4,562,808	)		4,415,184
Payment of debt issuance costs		-			(141,667	)
Payment of loan guarantee fee to Markland		-			(580,372	)
Repayment of term loan		(2,166,667	)		(583,333	)
Repayment of notes payable		(3,056,131	)		(5,003,411	)
Net Cash (Used In) Provided by Financing Activities		(9,785,606	)		1,106,401

Net Decrease In Cash		(653,977	)		(1,713,291	)

Cash and Cash Equivalents - Beginning of Period		1,140,227			3,362,210

Cash and Cash Equivalents - End of Period	$	486,250		$	1,648,919

Supplemental Disclosures Of Cash Flow Information:
Cash paid during the periods for:
Interest	$	1,329,411		$	490,135
Taxes	$	-		$	-
Fair value of common stock and warrants issued as
deferred financing costs	$	-		$	561,970

See notes to condensed consolidated financial statements

TECHNEST HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2008 AND 2007

(Unaudited)

1. NATURE OF OPERATIONS

Business

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

Sale of EOIR Technologies, Inc.

On September 10, 2007, Technest and its wholly owned subsidiary, EOIR Technologies, Inc. (“EOIR”), entered into a Stock Purchase Agreement with EOIR Holdings LLC, a Delaware limited liability company ( “LLC”), pursuant to which Technest agreed to sell EOIR to LLC (see Note 3). LLC is an entity formed on August 9, 2007 by The White Oak Group, Inc., an Atlanta, Georgia based private investment firm, for the purposes of facilitating this transaction. The White Oak Group, Inc. is focused on investments in the aerospace and defense industry, with an emphasis on the following sectors: Homeland security (detection and deterrence); avionics and instrumentation; command and control; and communication networks and services.

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

On December 31, 2007, the Company divested the operations of its subsidiary, EOIR Technologies, Inc. In accordance with SFAS No. 144, the assets, liabilities and results of operations of this consolidated subsidiary have been classified as a discontinued operation for all periods presented in the accompanying consolidated financial statements (see Note 3).

The accompanying unaudited condensed consolidated financial statements of Technest have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, without being audited, pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary to make the financial statements not misleading have been included. Operating results for the nine months ended March 31, 2008 are not necessarily indicative of the result that may be expected for the year ending June 30, 2008. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and footnotes included in the Company's annual report on Form 10-KSB for the year ended June 30, 2007 filed with the Securities and Exchange Commission.

Reclassification

Certain amounts in the financial statements for the three months and nine months ended March 31, 2007 have been reclassified to conform with presentations for the three months and nine months ended March 31, 2008 (see Note 3).

Use of Estimates

The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates that are particularly susceptible to change are the revenue recognized under the percentage completion method on firm fixed price contracts, allowance for doubtful accounts, the estimated useful lives of property and equipment, carrying value of goodwill and long-lived assets, useful lives of intangible assets, the amount due to contracting government agencies as a result of their audits, the realizability of deferred tax assets including any limitations on the ability to utilize net operating losses and the fair value of derivative liability and equity instruments issued.

Concentrations and Risks

Technest, from time to time, has cash balances in banks in excess of the maximum amount insured by the FDIC.

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

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturities of ninety days or less to be cash equivalents. Cash equivalents consist of money market funds as of March 31, 2008.

Restricted cash represents amounts held in an escrow account related to the sale of EOIR and a certificate of deposit securing Company credit cards.

Accounts Receivable

Accounts receivable represent the amounts invoiced by the Company under contracts. An allowance for doubtful accounts is determined based on management's best estimate of probable losses inherent in the accounts receivable balance. Management assesses the allowance based on known trouble accounts, historical experience and other currently available evidence.

A significant portion of the Company's receivables are due from government contracts, either directly or as a subcontractor. The Company has not experienced any material losses in accounts receivable related to these contracts and has provided no allowance at March 31, 2008. If management determines amounts to be uncollectible, they will be charged to operations when that determination is made.

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

Property and Equipment

Property and equipment are valued at cost and are being depreciated over their useful lives using the straight-line method for financial reporting purposes. Routine maintenance and repairs are charged to expense as incurred. Expenditures which materially increase the value or extend useful lives are capitalized.

Property and equipment are depreciated over the estimated useful lives of assets as follows:

Software	3 years
Computer equipment	3 years
Furniture and fixtures	5-7 years

Property and equipment consisted of the following at March 31, 2008:

Software	$	49,940
Computer equipment		24,665
Furniture and fixtures		111,285
		185,890
Less accumulated depreciation		(97,924	)
	$	87,966

Depreciation expense from continuing operations for the nine months ended March 31, 2008 and 2007 was $33,197 and $31,339 respectively.

Definite-lived Intangible Assets

With the acquisition of Genex, Technest acquired Commercialized Technology (patents) relating to 3D facial recognition cameras and Contracts and Customer Relationships from the application of 3D imaging technologies to breast cancer research for the National Institute of Health and disposable sensors and 3D face mapping for the Department of Defense. The amounts assigned to definite-lived intangible assets were determined by management based on a number of factors including an independent purchase price allocation analysis. These assets have an estimated useful life of five years.

Also included are certain costs of outside legal counsel related to obtaining new patents. Patent costs are amortized over the legal life of the patents, generally fifteen years, starting on the patent issue date. The costs of unsuccessful and abandoned patent applications are expensed when abandoned. The cost to maintain existing patents are expensed as incurred. The nature of the technology underlying these patents relates to 3-D imaging, intelligent surveillance and 3-D facial recognition technologies.

Fair Value of Financial Instruments

The financial statements include various estimated fair value information, as required by Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments." Financial instruments are initially recorded at historical cost. If subsequent circumstances indicate that a decline in the fair value of a financial asset is other than temporary, the financial asset is written down to its fair value.

Unless otherwise indicated, the fair values of financial instruments approximate their carrying amounts. By their nature, all financial instruments involve risk, including credit risk for non-performance by counterparties. The maximum potential loss may exceed any amounts recognized in the consolidated balance sheets.

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

Operating Segments

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

Revenue Recognition

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

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

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

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

Shipping Costs

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

Research and Development

The Company charges unfunded research and development costs to expense as incurred. Funded research and development is part of the Company’s revenue base and the associated costs are included in cost of revenues. The Company capitalizes costs related to acquired technologies that have achieved technological feasibility and have alternative uses. Acquired technologies which do not meet these criteria are expensed as in-process research and development costs.

Income Taxes

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

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. A deferred tax asset is recorded for net operating loss and tax credit carry forwards to the extent that their realization is more likely than not. The deferred tax benefit or expense for the period represents the change in the deferred tax asset or liability from the beginning to the end of the period.

Effective July 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109. The implementation of FIN 48 had no impact on the Company’s financial statements as the Company has no unrecognized tax benefits.

The Company is primarily subject to U.S. federal, and Maryland state income tax. Tax years subsequent to 2004 remain open to examination by U.S. federal and state tax authorities.

The Company’s policy is to recognize interest and penalties related to income tax matters in income tax expense. As of March 31, 2008, the Company had no accruals for interest or penalties related to income tax matters.

Income (Loss) Per Share

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

Common stock equivalents, consisting of Series A and C Convertible Preferred Stock and warrants were not included in the calculation of the diluted loss per share in the three months and nine months ended March 31, 2008 because their inclusion would have had the effect of decreasing the net loss from continuing operations per share otherwise computed.

Impairment of Intangible Assets

The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Goodwill is identified and recorded at the reporting unit level as required by paragraphs 30-31 of SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 prescribes a two-step process for impairment testing, at the reporting unit level, of goodwill, which is performed annually, as well as when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. The Company has determined that its reporting unit is its operating segment since this is the lowest level at which discrete financial information is available and regularly reviewed by management. The Company has elected to perform its annual analysis during the fourth quarter of each fiscal year. No impairment charges were recorded in the nine months ended March 31, 2008 and 2007.

Impairment of Long-Lived Assets

Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", the Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. Technest’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. No impairment charges were recorded in the nine months ended March 31, 2008 and 2007.

Derivative Instruments

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

Stock-Based Compensation

The Company applies the provisions of SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123, “Accounting for Stock Based Compensation”. Under SFAS No. 123(R), the Company recognizes compensation costs resulting from the issuance of stock-based awards to employees and directors as an expense in the statement of operations over the requisite service period based on the fair value for each stock award on the grant date.

Recent Accounting Pronouncements

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

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

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

In December 2007, the FASB issued FAS No. 141(R) “Applying the Acquisition Method”, which is effective for fiscal years beginning after December 15, 2008. This statement retains the fundamental requirements in FAS 141 that the acquisition method be used for all business combinations and for an acquirer to be identified for each business combination. FAS 141(R) broadens the scope of FAS 141 by requiring application of the purchase method of accounting to transactions in which one entity establishes control over another entity without necessarily transferring consideration, even if the acquirer has not acquired 100% of its target. Among other changes, FAS 141(R) applies the concept of fair value and “more likely than not” criteria to accounting for contingent consideration, and preacquisition contingencies. As a result of implementing the new standard, since transaction costs would not be an element of fair value of the target, they will not be considered part of the fair value of the acquirer’s interest and will be expensed as incurred. The Company does not expect that the impact of this standard will have a significant effect on its financial condition and results of operations.

3. DISCONTINUED OPERATIONS

In May 2007, the Company’s Board of Directors approved a plan to divest the operations of EOIR. On September 10, 2007, Technest and its wholly owned subsidiary, EOIR Technologies, Inc. entered into a Stock Purchase Agreement with EOIR Holdings LLC, a Delaware limited liability company, pursuant to which Technest agreed to sell EOIR to LLC. LLC is an entity formed on August 9, 2007 by The White Oak Group, Inc., an Atlanta, Georgia based private investment firm, for the purposes of facilitating this transaction. The White Oak Group, Inc. is focused on investments in the aerospace and defense industry, with an emphasis on the following sectors: Homeland security (detection and deterrence); avionics and instrumentation; command and control; and communication networks and services. The sale was completed on December 31, 2007.

The sale of EOIR to LLC was structured as a stock sale in which LLC acquired all of the outstanding stock of EOIR in exchange for approximately $34 million in cash, $11 million of which was paid at closing and $23 million of which will be paid upon the successful re-award to EOIR of the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate. On April 4, 2008, the U.S Army issued EOIR a Notice of Intent to Issue an Award with respect to this contract. Based on this information, the Company concluded that the outcome of the contingency was determinable beyond a reasonable doubt. As a result, the Company has recorded this $23 million contingent consideration as part of income from discontinued operations in the quarter ended March 31, 2008. The award is subject to all contract awardees meeting the small business criteria and size standard as determined by the Small Business Administration (“SBA”). EOIR has responded to its request for size standard information and anticipates receiving the contract award by the end of June 2008. The Company has also recorded a $300,000 deferred tax liability related to this gain, which offsets the gain from discontinued operations.

The major classes of assets and liabilities disposed of were:

Assets related to discontinued operations:
Cash	$	865,042
Accounts receivable		15,113,331
Unbilled receivable		4,110,027
Prepaid expenses and other current assets		337,516
Total current assets		20,425,916

Property and equipment, net		302,905
Deposits		47,603
Definitive lived intangible assets, net		9,006,632
Goodwill		9,159,513
Total non-current assets		18,516,653

Total assets related to discontinued operations	$	38,942,569

Liabilities related to discontinued operations:
Accounts payable	$	16,222,997
Unearned revenue		172,784
Accrued expenses and other current liabilities		4,987,678
Current portion of long term debt		5,969,513
Total current liabilities		27,352,972

Total liabilities related to discontinued operations	$	27,352,972

Included in the current portion of long term debt above is all debt required to be repaid at the closing of the sale of EOIR.

The gain of disposal of EOIR was determined as follows:

Gross proceeds from sale	$	34,069,947
Transaction costs		(800,332	)
Net proceeds received at closing		33,269,615
Working capital adjustment due to White Oaks		(909,137	)
Technest investment in EOIR		(17,559,111	)
Gain on disposal of EOIR	$	14,801,367

The Stock Purchase Agreement calls for an adjustment to the purchase price based on the final working capital in EOIR on the date of sale. At December 31, 2007, the Company paid The White Oak Group $50,000 and has estimated that it owes an additional $859,137 related to this adjustment. The Company also recorded certain severance payments triggered by the $23,000,000 of contingent consideration on the sale of EOIR of approximately $1,572,000 These amounts are included in accrued expenses and other current liabilities at March 31, 2008.

For the three months and nine months ended March 31, 2008 and 2007, the operations of EOIR have been reported in discontinued operations in the Statements of Operations in accordance with SFAS No. 144, paragraph 42. Revenues and net loss from discontinued operations were as follows:

	Three Months Ended
	March 31,			March 31,
	2008			2007

Revenues from discontinued operations	$	--		$	16,971,026

Net (loss) income from discontinued operations	$	(1,671,479	)	$	97,959

	Nine Months Ended
	March 31,		March 31,
	2008		2007

Revenues from discontinued operations	$	46,099,851	$	51,343,547

Net loss from discontinued operations	$	(2,934,218)	$	(485,500	)

Certain general and administrative and interest expenses of the Company that are clearly associated with EOIR totaling approximately $5,746,501 and $243,976 in the nine months ended March 31, 2008 and 2007, respectively, have been included in the net gain from discontinued operations.

4. DEFINITE-LIVED INTANGIBLE ASSETS

Definite-lived intangible assets consist of the following at March 31, 2008:

	Amount			Useful l life (years)
Patents - commercialized technology	$	440,000			5
Patents - other		161,110			15
Customer relationships and contracts		1,130,000			5
Accumulated amortization		(1,014,814	)
Net definite-lived intangible asset	$	716,296

Patents are amortized over their estimated useful life but not to exceed the legal life of the patent. Customer relationships and contracts are amortized over the contractual term of the existing contracts plus anticipated contract renewals in accordance with EITF 02-17. In determining the estimated useful life of the customer relationships and contracts, the Company considered a number of factors including, its history with these customers which dates back to 1993, the remaining term of existing contracts, the status of outstanding bids submitted for additional contracts or contract extensions, the stage of development of the major tasks covered by existing contracts, the likelihood of receiving additional contracts or contract extensions and the term over which the Company could reasonably predict future revenues from existing customers. Amortization expense was $243,555 for each of the nine months ended March 31, 2008 and 2007.

5. STOCKHOLDERS' EQUITY

Series A Convertible Preferred Stock

On February 8, 2005, the Company's Board of Directors designated 150 shares of preferred stock as Series A Convertible Preferred Stock (“Series A Preferred Stock”). The Series A Preferred Stock is non-interest bearing, is not entitled to receive dividends and is not redeemable. The Series A Preferred Stock has a liquidation preference of $1,000 per share. The holders of Series A Preferred Stock have no voting rights except that they will be entitled to vote as a separate class on any amendment to the terms or authorized number of shares of Series A Preferred Stock, the issuance of any equity security ranking senior to the Series A Preferred Stock and the redemption of or the payment of a dividend in respect of any junior security. At any time, holders of Series A Preferred Stock may elect to convert their Series A Preferred Stock into common stock. Each share of Series A Preferred Stock is currently convertible into 4,735.3 shares of common stock provided that, following such conversion, the total number of shares of common stock then beneficially owned by such holder and its affiliates and any other persons whose beneficial ownership of Common Stock would be aggregated with the holder's for purposes of Section 13(d) of the Exchange Act, does not exceed 4.999% of the total number of issued and outstanding shares of common stock. The Series A Preferred Stock ranks pari passu with the Company's Series B and C Preferred Stock.

At March 31, 2008 there were 64.325 shares of Series A Preferred Stock issued and outstanding.

Series B and C Convertible Preferred Stock

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

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

Technest entered into a Registration Rights Agreement dated February 14, 2005. Pursuant to this agreement, Technest agreed to file a registration statement covering the resale of (a) all of the common stock issuable upon conversion of the Series C preferred stock, (b) all of the common stock issuable upon exercise of the common stock purchase warrants, and (c) common stock which may become issuable to selling stockholders as liquidated damages for breach of covenants contained in or as a result of adjustments contemplated by the securities purchase agreement and the registration rights agreement. Technest agreed to use its best efforts to cause the registration statement to be declared effective as promptly as possible thereafter. On December 31, 2005, the Company amended the terms of this Registration Rights Agreement so that liquidated damages could only be paid for in the Company’s common stock at a rate of 4% of the initial subscription amount for any month. On February 7, 2007, the required registration statement became effective and, as a result, the Company does not expect to incur any additional liquidated damages.

At March 31, 2008, the Company had -0- shares of Series B Preferred Stock and 402,301 shares of Series C Preferred Stock issued and outstanding.

In the year ended June 30, 2007, the Company incurred liquidated damages related to these registration rights of $1,726,426 which was charged to non-cash interest expense and settled by the issuance of 850,761 shares of Technest common stock.

Common Stock Issuances

During the nine months ended March 31, 2008, the Company issued the following amounts of common stock:

202,000 shares of Technest common stock to four executives of the Company pursuant to employment agreements and performance bonuses.

3,000,000 shares of Technest common stock to Southridge Partners, LP with a value of $1,380,000 in connection with the Termination of Certain Sections of Stockholder Agreement and of License Agreement which has been included in selling, general and administrative expenses from continuing operations.

155,000 shares of Technest common stock to three employees of the Company pursuant to performance bonuses.

218,390 shares of Technest common stock to DKR Soundshore Oasis Holding Fund Ltd upon conversion of 218,390 Series C Preferred Stock

11,494 shares of Technest common stock to DKR Soundshore Strategic Holding Fund Ltd upon conversion of 11,494 Series C Preferred Stock

40,000 shares of Technest common stock between David Gust and Robert Curtis, our non-employee directors, as compensation for their election and service on the Company’s board of directors.

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

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

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

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

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

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

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

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

Reserve for the exercise of warrants			649,286
Reserve for conversion of Series A Convertible Preferred Stock			306,047
Reserve for conversion of Series C Convertible Preferred Stock			402,301
Total common stock reserves			1,357,634

6. OPTIONS, WARRANTS AND STOCK-BASED COMPENSATION

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

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

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

No options were granted pursuant to the Plan during the periods ended March 31, 2008 and 2007 and there are currently no options outstanding under the Plan.

Summary information with respect to warrants granted is as follows:

	Number of Shares		Weighted Average Exercise Price
Balance, July 1, 2007		649,286	$	5.00
Issued		-		-
Expired		-		-
Balance, March 31, 2008		649,286	$	5.00

The following table summarizes the Company's warrants outstanding at March 31, 2008:

Exercise price		Number		Expiration Date
$	6.50		374,286	02/14/2010
$	5.85		75,000	08/03/2013
$	1.89		200,000	07/17/2011
			649,286
Weighted average remaining life					2.7 years

As of March 31, 2008 all warrants are exercisable.

Stock Award Plan

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

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

Total stock-based compensation related to shares that vested in the nine months ended March 31, 2008 was $281,011.

As of March 31, 2008, the Company had 306,421 shares available for future grant under the Plan.

7. NET INCOME (LOSS) PER SHARE

Securities that could potentially dilute basic earnings per share ("EPS") and that were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the three months and nine months ended March 31, 2008, consist of the following:

	Shares Potentially
	Issuable
Series A Convertible Preferred Stock		306,047
Series C Convertible Preferred Stock		402,301
Warrants		649,286
Total as of March 31, 2008		1,357,634

8. COMMITMENTS AND CONTINGENCIES

Facility Rental

Technest has a three-year lease for executive offices of approximately 2,000 square feet in Boston, Massachusetts, which expires December 31, 2008. The monthly rental amount for this facility is approximately $4,500. In May 2007 this facility was vacated and subleased.

Technest currently also leases offices with approximately 6,848 square feet in Bethesda, Maryland, pursuant to a five-year lease which expires March 31, 2011. Monthly lease amounts for this facility total approximately $15,131, increasing annually by 3%.

Rent expense for continuing operations in the three months ended March 31, 2008 and 2007 was $44,512 and $43,215, respectively.

Employment Agreements

The Company is obligated under employment agreements with certain members of senior management.

Audit Committee

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

9. INCOME TAXES

There was no provision for federal or state income taxes related to continuing operations for the three and nine months ended March 31, 2008 and 2007 due to the Company's operating losses and a full valuation reserve on deferred tax assets.

The Company's deferred tax assets consist primarily of the tax effects of its net operating loss carry forwards. The use of the federal net operating loss carry forwards may be limited in future years as a result of ownership changes in the Company's common stock, as defined by Section 382 of the Internal Revenue Code. The Company is in the process of completing a full Section 382 analysis of these changes.

As of result of the sale of EOIR, the Company estimates that it will recognize a taxable gain of approximately $13,300,000. The Company expects that it will have sufficient net operating losses available to offset this gain. As a result, the valuation allowance on deferred tax assets was reduced by approximately $4,000,000 in the three months ended March 31, 2008. The Company expects to owe Alternative Minimum Tax as a result of this transaction of approximately $300,000 which will become due in the tax year in which the EOIR sale proceeds are received. At March 31, 2008, this amount has been recorded as a deferred tax liability and included in the net gain from discontinued operations.

Other than as described above, the Company has provided a full valuation reserve against the deferred tax asset because of the Company's loss history and significant uncertainty surrounding the Company's ability to utilize its net operating loss and tax credit carryforward.

10. RELATED PARTY TRANSACTIONS

During the nine months ended March 31, 2008, Markland invoiced, and EOIR paid, $264,306 in conjunction with the supply of products pursuant to a sub-contract agreement.

During the nine months ended March 31, 2008, Technest paid Southridge Partners LP, $250,000 in satisfaction of a payable assigned from Markland Technologies in June 2007.

11. EMPLOYEE BENEFIT PLANS

Technest has adopted a 401(k) plan for the benefit of employees. Essentially all Technest employees are eligible to participate. The Company also contributes to the plan under a safe harbor plan requiring a 3% contribution for all eligible participants. In addition, the Company may contribute a 3% elective match. The Company contributes 6%, excluding bonuses on an annual basis, to all eligible employees.

Contributions and other costs of this plan in the three months ended March 31, 2008 and 2007 were $28,763 and $28,469, respectively.

12. LITIGATION

Technest Holdings, Inc.

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

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

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

As of May 12, 2008, Technest has not been notified of a trial date for this matter.

On or about May 30, 2006, Deer Creek Fund LLC filed a claim for Interference with Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing against Technest, seeking unspecified monetary damages. Deer Creek alleges misconduct on the part of Technest related to a proposed sale by Deer Creek of 157,163 shares of Technest common stock at $7.00 per share and the applicability of certain selling restrictions under a registration rights agreement entered into between the parties. Technest believes that the allegations in this lawsuit are entirely without merit. Technest has been aggressively defending this action, and has filed an answer denying Deer Creek’s allegations and vigorously opposes all relief sought. The trial for this claim took place on April 8, 2008. A decision has not been rendered as of May 12, 2008.

13. SUBSEQUENT EVENT

On April 4, 2008, the U. S. Army issued EOIR a Notice of Intent to Issue an Award notifying EOIR that the Government intends to award the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate to EOIR along with three other companies. The award is subject to all contract awardees meeting the small business criteria and size standard as determined by the Small Business Administration (“SBA”). EOIR has responded to its request for size standard information and anticipates receiving the contract award by the end of June 2008. Based on this information, the Company concluded that receipt of the award, and accordingly, payment of the contingent consideration, is determinable beyond a reasonable doubt. The SBA final determination on small business eligibility of all four awardees is expected by the end of June, 2008.

Item 2. Management’s Discussion and Analysis or Plan of Operation

The following discussion and analysis of our financial condition and results of operations for our financial quarter ending March 31, 2008 should be read together with our financial statements and related notes included elsewhere in this report.

FORWARD LOOKING STATEMENTS

The information in this discussion contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including but not limited, to statements regarding Technest Holdings, Inc.’s capital needs, business strategy and expectations. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially. In evaluating these statements, you should consider various factors, including the risks outlined in the Risk Factors section below, and, from time to time, in other reports we file with the Securities and Exchange Commission (the “SEC”). These factors may cause our actual results to differ materially from any forward-looking statement. Readers are cautioned not to place undue reliance on any forward looking statements contained in this report. We will not update these forward looking statements unless the securities laws and regulations require us to do so.

OVERVIEW

General

On February 14, 2005, Technest became a majority owned subsidiary of Markland Technologies, Inc., a homeland defense, armed services and intelligence contractor. Markland is a public company with a class of equity securities registered pursuant to Section 12(g) of the Exchange Act. Technest issued to Markland 1,954,023 shares of its common stock in exchange for 10,168,764 shares of Markland common stock which were used as partial consideration for the concurrent acquisition of Genex Technologies, Inc.

Prior to our acquisition of Genex, we were a public “shell” company with no operations, nominal assets, accrued liabilities totaling $184,468 and 139,620 (post-split) shares of common stock issued and outstanding. From May 2002 through our acquisition of Genex, we had no operations.

On August 17, 2005, pursuant to a Stock Purchase Agreement with Markland Technologies, Inc., we purchased all of the outstanding stock of EOIR Technologies, Inc., formerly one of Markland’s wholly-owned subsidiaries. As consideration for the stock of EOIR, we issued 12 million shares of our common stock to Markland.

On November 1, 2006, pursuant to the Asset Contribution Agreement between Technest and Genex, which was attached to the quarterly report for the period ended December 31, 2006 as Exhibit 10.2, Genex transferred certain of its assets and liabilities to Technest in order to preserve the continued eligibility for certain contracts under Small Business Innovation Research programs. The transfer primarily involved all of Genex’s government contracts which have since been novated to Technest and the associated intellectual property. As our financial results are reported on a consolidated basis, this transfer did not impact our financial statements.

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

In accordance with Statement of Financial Accounting Standard No. 144 (“SFAS 144”), EOIR is presented as a discontinued operation in the consolidated financial statements.

Technest Business

As a result of the sale of EOIR, the remaining business of Technest Holdings, Inc. is the design, research and development, integration, sales and support of three-dimensional imaging devices and systems primarily in the healthcare industries and intelligent surveillance devices and systems, and three-dimensional facial recognition in the security industries. Historically, the Company’s largest customers have been the National Institutes of Health and the Department of Defense.

Our products leverage several core technology platforms, including:

·	3D Imaging Technology Platforms:
	-3D capture using patented Rainbow 3D technology
	-3D processing, data manipulation, and advanced modeling
	-3D display in volumetric space

·	Intelligent Surveillance Technology Platforms:
	-360-degree video acquisition using mirror, lens, and array configurations
	-2D video detection, tracking, recognition and enhancement software

·	3D Facial Recognition Technology Platforms:
	-3D facial image acquisition and recognition algorithms and software

·	General Technology Platforms:
	-High-speed imaging processing hardware and embedded algorithms

Medical Devices Division

3D Digitizer Systems provide turnkey three-dimensional (3D) imaging solutions.

The EARCAD (Ear Impression) system has been customized for applications in the custom hearing aid and ear mold markets. The EARCAD system automates the process of converting a physical ear impression into a 3D model for streamlined production and quality control. Initial applications are for manufacturers looking to streamline their operations and enables audiology practices to improve turnaround times and accuracy. Approximately 2.5 million hearing aids were sold in the United States in 2007 and the retail market world wide was over $6 billion. Market penetration still has considerable potential growth as 17.6% of the US population, or 56 million people, are over the age of 60 with increasing life expectancy. EARCAD will provide audiologists and manufacturers with a total value added solution from its range of impression and non impression scanners and associated software. In particular the non impression scanner is well suited to the new “behind the ear” fit models which are approaching 50% of all hearing aids sold. The first of these systems was sold in April 2008 to a major international hearing aid manufacturer following a successful debut at the annual American Audiology conference.

The AFOCAD is being developed as a Rapid Design and Fabrication Product/ Service Platform for Custom-Fabricated, Patient Specific, Ankle-Foot Orthoses (AFOs) in collaboration with Northeastern University and Spaulding Rehabilitation hospital in Boston, Massachusetts. The current market size for AFO’s is approximately $1 billion. Many stroke and diabetic patients will require an AFO as a result of their condition. The AFOCAD system is projected to be available before the end of the current calendar year.

The Dental Digitizer™ is being developed for applications in the dental industry. The system automates the process of creating 3D models from dental molds and impressions in a rapid and accurate process. This system offers significant benefits in cost, quality, and turnaround times for dental labs, dentists, and orthodontists in the creation of dental crowns, bridges, aligners, braces, and other dental solutions. In addition the Company is developing a hand held intra oral scanner for taking digital impressions.

Defense and Security Division - 3D-ID

Our major products, developed and in development, include our OmniEye™ Wellcam, OmniEye™ Cerberus, Smart Optical Sensor (SOS), Smart Suite™, OmniEye Viewer, Small Tactical Ubiquitous Detection System (STUDS), 3D SketchArtist, and 3D FaceCam.

OmniEye™ Wellcam is an ultra light, portable 360 degree field of view camera which can be used in field applications, such as detection of underground weapon caches and search and rescue beneath building rubble, due to its durability. OmniEye™ Cerberus is a re-configurable multi-sensor system that is designed for long distance infrared and visible light detection. OmniEye™ Cerberus delivers this flexibility while still maintaining seamless panoramic coverage up to 360 degrees.

SOS high speed image processing platform powers our Smart Suite™ algorithms, enhancing both new and existing sensor systems with capabilities including: reliable target detection, motion tracking, and object classification and recognition. Smart Suite™ algorithms are a portfolio of advanced video analysis and augmentation modules. The SOS is a powerful system that allows multiple cameras to be deployed easily in a distributed, scaleable network that provides autonomous surveillance.

OmniEye Viewer is a software platform for a wide range of security and surveillance camera products. A flexible user interface allows the user to remotely control OmniEye remote sensors and choose the best view desired for their specific application. User's can choose from 360-degree "fish-eye" and/or panoramic views, multi-sensor stitched views, or perspective Pan-Tilt-Zoom views to move left-right, up-down to "see as a person would see". Trip wires and regions of interest can also be set to customize alarm scenarios to the application.

STUDS are state-of-the-art, miniature, disposable, low-cost motion-tracking, positioning and imaging unattended ground sensors that permit long-range surveillance at high resolution. The system also includes rapidly deployable wireless networking and GPS mapping for integration with legacy sensors, among other advantages.

3D SketchArtist is a three-dimensional composite sketch tool that uses our patented three-dimensional morphing technology. The tool allows you to transform ordinary two-dimensional sketches into rapidly evolving mock-ups that can be modified via facial features, poses, expressions, and lighting in seconds.

3D FaceCam changes the way we capture photographs. The 3D FaceCam uses three sensors to create precise, complete 3D face images at light speed. By capturing the very highly detailed geometric and texture information on a face, the 3D FaceCam overcomes a photo’s traditional limitations of pose, lighting, and expression. Capture speed is less than half a second, enabling rapid processing of large numbers of people. 3D FaceCam is also highly accurate, making 3D FaceCam ideal for facial recognition. In April 2008, the Company sold its first outdoor facial recognition system to the US Army for evaluation.

Technest Business Strategy

Our goal is to establish the Company as a leading innovator in the 3-D imaging products and solutions arena. The broad strategies that we have in place to achieve this goal are outlined below:

	·	Focus on commercialization of pipeline products;

	·	Utilize relationships with current and new industry partners to bring technology to market;

	·	Develop recurring revenue models where possible;

	·	Continue to explore the cutting edge of 3-D and 360° imaging through continued research and development;

	·	Continue to develop a robust intellectual property portfolio; and

Seek strategic acquisitions

RESULTS OF OPERATIONS

Recent Developments

Sale of EOIR Technologies, Inc.

In May 2007, the Board of Directors adopted a plan to sell this wholly owned subsidiary of Technest Holdings, Inc. On September 10, 2007, Technest and EOIR Technologies, Inc. entered into a Stock Purchase Agreement with EOIR Holdings LLC, a Delaware limited liability company, pursuant to which Technest will sell EOIR to LLC. LLC is an entity formed on August 9, 2007 by The White Oak Group, Inc., an Atlanta, Georgia based private investment firm, for the purposes of facilitating this transaction.

The sale of EOIR to LLC was completed on December 31, 2007 and was structured as a stock sale in which LLC acquired all of the outstanding stock of EOIR in exchange for approximately $34 million in cash, $11 million of which was paid at closing and $23 million of which will be paid upon the successful re-award to EOIR of the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate. In April, 2008, the US Army informed EOIR that it intends to award the NVESD contract to EOIR, amongst others, subject to verification of its small business status. A majority of the contingent payment of $23 million, net of expenses and accruals, will be distributed to shareholders in the form of a cash dividend when it is received.

In accordance with SFAS 144, we have classified EOIR’s results of operations as discontinued operations for all periods presented in the accompanying consolidated financial statements.

Three and nine months ended March 31, 2008 compared with the three and nine months ended March 31, 2007

Revenues

Technest had $569,332 in revenues from continuing operations during the three months ended March 31, 2008 compared with $974,041 during the three months ended March 31, 2007.

Technest had $1,892,905 in revenues from continuing operations during the nine months ended March 31, 2008 compared with $2,322,030 during the nine months ended March 31, 2007. These revenues were largely generated by Small Business Innovative Research grants (SBIR’s) in the field of 3-dimensional imaging. We use the revenue from these grants to develop future potential products for our business. By their nature these revenues are not consistent from quarter to quarter.

Gross profit

The gross profit from continuing operations for the three months ended March 31, 2008 was $191,525 or 34 % of revenues. The gross profit for the three months ended three months ended March 31, 2007 was $395,934 or 41% of revenues.

The gross profit from continuing operations for the nine months ended March 31, 2008 was $785,864 or 42% of revenues. The gross profit for the nine months ended March 31, 2007 was $822,471 or 35% of revenues. Technest expects to expand its revenue base to include commercial product revenues and, accordingly, gross profit on future revenues may differ.

Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended March 31, 2008 were $828,800 including payroll related expenses of approximately $363,340, non recurring legal expenses of $76,639, non cash amortization of stock-based compensation to employees amounting to $16,703 and accrual of approximately $136,467 for a claim made by the Defense Contract Management Agency for reimbursement of overpayments made to the Company in fiscal year 2004.

Selling, general and administrative expenses for the three months ended March 31, 2007 were $1,048,208, and consisted primarily of non cash amortization of stock-based compensation amounting to $250,923 and a management fee of $250,000 paid to Markland Technologies, Inc.

Certain general and administrative expenses of the Company that are clearly associated with EOIR have been reduced from the net gain from discontinued operations. Such amounts totaled $1,671,479, including certain severance payments triggered by the contingent sale consideration on the sale of EOIR, in the three months ended March 31, 2008.

Selling, general and administrative expenses for the nine months ended March 31, 2008 were $3,376,752 including payroll related expenses of approximately $798,836, non cash amortization of stock-based compensation to directors, officers and employees amounting to $236,212 and $1,380,000 related to the fair value of stock issued in connection with the termination of certain sections of a stockholder agreement dated March 13, 2007 and of a licensing agreement dated March 13, 2007.

Selling, general and administrative expenses for the nine months ended March 31, 2007 were $3,230,851, and consisted primarily of non cash amortization of stock-based compensation amounting to $962,503.

Certain general and administrative expenses of the Company that are clearly associated with EOIR totaling approximately $5,746,501 and $243,976 in the nine months ended March 31, 2008 and 2007, respectively, have been included in the net gain(loss) from discontinued operations.

Amortization of intangible assets

Amortization of intangible assets for the three months and nine months ended March 31, 2008 was $81,185 and $243,555, respectively. Amortization of intangible assets for the three months and nine months ended March 31, 2007 was $81,186 and $243,296, respectively. Amortization expense relates to the definite-lived intangible assets acquired in conjunction with Genex Technologies.

Operating loss

The operating loss for the three months ended March 31, 2008 was $764,462. The operating loss for the three months ended March 31, 2007 was $733,460.

The operating loss from continuing operations for the nine months ended March 31, 2008 was $2,880,445. The operating loss from continuing operations for the nine months ended March 31, 2007 was $2,651,676.

Other income (expenses)

In the three months ended March 31, 2008, Technest had no charges for interest expense

In the three months ended March 31, 2007, Technest charged to interest expense $284,603 which primarily arose from interest paid in common stock related to liquidated damages incurred for failure to have an effective registration statement. Interest expense attributable to loans that were required to be paid off at the closing of the sale of EOIR have been included in the loss on discontinued operations.

In the nine months ended March 31, 2008, Technest charged to interest expense $11,329. Interest expense attributable to loans that were paid off at the closing of the sale of EOIR have been included in the loss on discontinued operations.

In the nine months ended March 31, 2007, Technest charged to interest expense $1,531,430 which primarily arose from interest paid in common stock related to liquidated damages incurred for failure to have an effective registration statement. Interest expense attributable to loans that were required to be paid off at the closing of the sale of EOIR have been included in the loss on discontinued operations.

Discontinued Operations

The net gain from discontinued operations was $11,567,149 in the nine months ended March 31, 2008 compared with a net loss of ($485,500) for the nine months ended March 31, 2007. The net gain (loss) for the nine months ended March 31, 2008 and 2007 included costs of $5,746,501 and $243,976 respectively for costs incurred by Technest that are clearly associated with the discontinued operations.

The gain from discontinued operations the nine months ended March 31, 2008 includes a gain on disposal of $14,801,367 on the sale of EOIR. On April 4, 2008 the Department of the Army issued EOIR a Notice of Intent to Issue an Award notifying EOIR that the Government intended to award the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate to EOIR amongst other companies. The award is subject to EOIR meeting the small business criteria and size standard as determined by the Small Business Administration (“SBA”). EOIR has responded to the request for size standard information. Based on this information, the Company concluded that the payment of the contingent consideration is now assured beyond a reasonable doubt.

The SBA is currently evaluating the small business eligibility of all four potential awardees and has notified EOIR that the award will likely take place in June 2008.

Net Income (Loss) applicable to common shareholders

The net income attributable to common shareholders for the three months and nine months ended March 31, 2008 was $20,020,188 and $8,681,250 respectively.

The net loss applicable to common stockholders for the three months and nine months ended March 31, 2007 was ($920,094) and ($4,665,497), respectively.

Liquidity and Capital Resources

Cash and Working Capital

On March 31, 2008, Technest had a positive working capital balance of $20,471,340. Net cash used in operating activities for the nine months ended March 31, 2008 was $1,098,138.

Cash Used in Investing Activities

In the nine months ended March 31, 2008, Technest used cash of $39,848 for the acquisition of property and equipment. In the nine months ended March 31, 2008, the Company received proceeds from the sale of EOIR, net of transaction costs, of $10,269,615.

Cash Used in Financing Activities

In the nine months ended March 31, 2008, $9,785,606 was used for loan repayments, primarily related to the EOIR seller notes, the Shelter Island note, the Silicon Valley Bank Term note and the Silicon Valley Bank revolving line of credit. These amounts were required to be repaid at the closing of the EOIR sale and the facilities are no longer available to the Company.

Sources of Liquidity

During the nine months ended March 31, 2008, we satisfied our operating and investing cash requirements primarily from financing activities and cash reserves. We do not currently have any borrowing facilities available to us. As discussed elsewhere, EOIR was sold with about $11 million being received in cash by the Company on closing. A further $23 million is payable to the Company contingent on the re-award of the NVESD contract. The Company expects to receive these proceeds during calendar 2008. The Company is also expanding its efforts in commercial sales and believes that these activities will contribute positively in fiscal 2008. As a result of the forgoing, management believes that Technest has sufficient sources of liquidity to satisfy its obligations for at least the next 12 months.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders. As of March 31, 2008, Technest had warrants outstanding for the purchase of 649,286 shares of common stock. However, due to the net share settlement provisions of these warrants, Technest does not expect any material cash proceeds upon exercise.

Effect of inflation and changes in prices

Management does not believe that inflation and changes in price will have a material effect on operations.

Critical Accounting Policies

The preparation of Technest's financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and the amounts of revenues and expenses recorded during the reporting periods. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

The sections below present information about the nature of and rationale for our critical accounting policies.

Principles of Consolidation

Our consolidated financial statements as of March 31, 2008 include the accounts of Technest, and our wholly-owned subsidiary- Genex Technologies, Inc. We have eliminated all significant inter-company balances and transactions.

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

Concentrations

Statement of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," requires that we disclose any significant off-balance-sheet and credit risk concentrations. We are subject to concentrations of credit risk because the majority of our revenues and accounts receivable are derived from the U.S. government, including the Department of Defense, who is not required to provide collateral for amounts owed to us. We do not believe that we are subject to any unusual credit risks, other than the normal level of risk attendant to operating our business.

From time to time we have cash balances in banks in excess of the maximum amount insured by the FDIC. In addition, we derive substantially all of our contract revenue from contracts with Federal government agencies. Consequently, substantially all of our accounts receivable are due from Federal government agencies either directly or through other government contractors.

Research and Development

We charge research and development costs to expense as incurred. Funded research and development is part of our revenue base and the associated costs are included in cost of revenues. We capitalize costs related to acquired technologies that have achieved technological feasibility and have alternative uses. We expense as research and development costs the technologies we acquire if they are in process at the date of acquisition or have no alternative uses.

No new technologies were acquired during the three months ended March 31, 2008 and as such there are no capitalized or expensed in-process research and development costs during this period relating thereto.

Impairment of Goodwill and Amortizable Intangibles

In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we review goodwill and amortizable intangibles for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of our business enterprise below its carrying value. The impairment test requires us to estimate the fair value of our overall business enterprise down to the reporting unit level. We identify and record our intangible assets at the reporting unit level and also conduct our impairment tests at the reporting unit level as required by paragraphs 30-31 of SFAS No. 142, “Goodwill and Other Intangible Assets”.

We estimate fair value using either a discounted cash flows model, or an approach using market comparables, to determine fair value. Under the discounted cash flows method, we utilize estimated long-term revenue and cash flows forecasts developed as part of our planning process, together with an applicable discount rate, to determine fair value. Under the market approach, fair value is determined by comparing us to similar businesses (or guideline companies). Selection of guideline companies and market ratios require management's judgment. The use of different assumptions within our discounted cash flows model or within our market approach model when determining fair value could result in different valuations for goodwill.

Estimated Useful Lives of Amortizable Intangible Assets

We amortize our amortizable intangible assets over the shorter of the contractual/legal life or the estimated economic life.

Definite-lived intangible assets acquired from Genex represent costs of outside legal counsel related to obtaining new patents. Patent costs are amortized over the legal life of the patents, generally fifteen years, starting on the patent issue date. The costs of unsuccessful and abandoned patent applications are expensed when abandoned. The cost to maintain existing patents are expensed as incurred. The nature of the technology underlying these patents relates to 3D imaging, intelligent surveillance and 3D facial recognition technologies.

Technest also acquired commercialized technology relating to 3D facial recognition cameras and contracts and customer relationships from the application of 3D imaging technologies to breast cancer research for the National Institute of Health and disposable sensors and 3D face mapping for the Department of Defense. The amounts assigned to definite-lived intangible assets were determined by management based on a number of factors including an independent purchase price allocation analysis. These assets have an estimated useful life of five years.

Contracts and Customer relationships acquired as a result of business combinations have been valued by management considering various factors including independent appraisals done by valuation and financial advisory firms in accordance with SFAS No. 141, “Business Combinations”, SFAS No. 142, “Goodwill and Other Intangible Assets”, FASB Concepts Statement Number 7 and EITF Issue No. 02-17, “Recognition of Customer Relationship Assets Acquired in a Business Combination”. These assets are being amortized over the contractual terms of the existing contracts plus anticipated contract renewals in accordance with EITF Issue No. 02-17.

Impairment of Long-Lived Assets

Pursuant to SFAS No. 144, we continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. We recognize an impairment loss when the carrying value of an asset exceeds expected cash flows. Accordingly, when indicators or impairment of assets are present, we evaluate the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying business. Our policy is to record an impairment loss when we determine that the carrying amount of the asset may not be recoverable. No impairment charges were recorded in the nine months ended March 31, 2008 and 2007.

Revenue Recognition

We recognize revenue when the following criteria are met: (1) we have persuasive evidence of an arrangement, such as agreements, purchase orders or written requests, (2) we have completed delivery and no significant obligations remain, (3) our price to our customer is fixed or determinable, and (4) collection is probable.

Revenues from time and materials contracts are recognized as costs are incurred. Revenues from firm fixed price contracts are recognized on the percentage-of-completion method, either measured based on the proportion of costs recorded to date on the contract to total estimated contract costs or measured based on the proportion of labor hours expended to date on the contract to total estimated contract labor hours, as specified in the contract. During the nine months ended March 31, 2008, approximately 27% of Technest’s revenue has come from firm fixed price contracts.

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

Impact of Recently Issued Accounting Standards

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

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

RISK FACTORS

Any investment in our common stock involves a high degree of risk. You should consider carefully the risks described below and elsewhere in this report and the information under “Note Regarding Forward-Looking Statements,” before you decide to buy our common stock. If any of the following risks, or other risks not presently known to us or that we currently believe are not material, develop into an actual event, then our business, financial condition and results of operations could be adversely affected. In that case, the trading price of our common stock could decline due to any of these risks and uncertainties, and you may lose part or all of your investment.

Risks Related To Our Business, Results Of Operations And Financial Condition

We have a limited operating history. As a result, it may be difficult to evaluate our prospects for profitable operations.

Technest has a limited operating history on which a potential investor may base an evaluation of us, our prospects and our ability to operate profitably. If Technest is unable to sustain profitable operations, investors may lose their entire investment in Technest.

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

Technest has had net operating losses each year since its inception. As of March 31, 2008, our accumulated deficit was approximately $11 million. If Technest continues to suffer losses as it has in the past, investors may not receive any return on their investment and may lose their entire investment.

If we cannot obtain additional capital required to fund our operations and finance the growth our business, operating results and financial condition may suffer and the price of our stock may decline.

The development of our technologies will require additional capital, and our business plan is to acquire additional revenue-producing assets. Although we believe that we have sufficient sources of liquidity to satisfy our obligations for at least the next 12 months, we may be unable to obtain additional funds, if needed, in a timely manner or on acceptable terms, which may render us unable to fund our operations or expand our business. If we are unable to obtain capital when needed, we may have to restructure our business or delay or abandon our development and expansion plans. If this occurs, the price of our common stock may decline and you may lose part or all of your investment.

We will have ongoing capital needs as we expand our business. If we raise additional funds through the sale of equity or convertible securities, your ownership percentage of our common stock will be reduced. In addition, these transactions may dilute the value of our common stock. We may have to issue securities that have rights, preferences and privileges senior to our common stock. The terms of any additional indebtedness may include restrictive financial and operating covenants that would limit our ability to compete and expand. Although we have been successful in the past in obtaining financing for working capital and acquisitions, there can be no assurance that we will be able to obtain the additional financing we may need to fund our business, or that such financing will be available on acceptable terms.

If Technest is not successful in its businesses after the sale of EOIR, the anticipated benefits of the sale may not be realized.

Historically, EOIR had been the majority of Technest’s business operations. After the sale of EOIR, Technest operates independent of EOIR and EOIR’s resources. Achieving the anticipated benefits of the sale will depend, in part, on the Company’s success in leveraging opportunities and success in applying the proceeds of the sale. The challenges involved include the following:

shifting management’s primary focus to technologies in the fields of intelligent surveillance, three-dimensional facial recognition and three-dimensional imaging;

establishing new sales and vendor partner relationships in these fields;

demonstrating to customers that the sale will not result in adverse changes to the ability of the Company to address the needs of customers; and

retaining key employees.

It is not certain that Technest can be successful in a timely manner or at all or that any of the anticipated benefits of the sale will be realized. In addition, Technest cannot assure you that there will not be substantial unanticipated costs associated with the sale process, that the sale activities will not result in a decrease in revenues in Technest’s other businesses and/or a decrease in the value of Technest common stock, or that there will not be other material adverse effects from the sale. If the benefits of the sale do not meet the market expectations, the market price of Technest common stock may decline.

EOIR is in the “re-compete” process. If EOIR is not awarded a new contract, Technest will not receive the $23,000,000 contingent purchase price under the Stock Purchase Agreement.

On April 4, 2008, the U. S. Army issued EOIR a Notice of Intent to Issue an Award notifying EOIR that the Government intends to award the contract with the U.S. Army's Night Vision and Electronics Sensors Directorate to EOIR along with three other companies. The award is subject to all contract awardees meeting the small business criteria and size standard as determined by the Small Business Administration (“SBA”). EOIR has responded to its request for size standard information and anticipates receiving the contract award by the end of June 2008. Based on this information, the Company concluded that receipt of the award, and accordingly, payment of the contingent consideration, is determinable beyond a reasonable doubt. However, if for any reason EOIR is not awarded the contract, Technest may not receive the contingent portion of the purchase price to be paid in the transaction.

Our business may suffer if we cannot protect our proprietary technology.

Our ability to compete depends significantly upon our patents, our trade secrets, our source code and our other proprietary technology. Any misappropriation of our technology or the development of competing technology could seriously harm our competitive position, which could lead to a substantial reduction in revenue.

The steps we have taken to protect our technology may be inadequate to prevent others from using what we regard as our technology to compete with us. Our patents could be challenged, invalidated or circumvented, in which case the rights we have under our patents could provide no competitive advantages. Existing trade secrets, copyright and trademark laws offer only limited protection. In addition, the laws of some foreign countries do not protect our proprietary technology to the same extent as the laws of the United States, which could increase the likelihood of misappropriation. Furthermore, other companies could independently develop similar or superior technology without violating our intellectual property rights.

If we resort to legal proceedings to enforce our intellectual property rights, the proceedings could be burdensome, disruptive and expensive, distract the attention of management, and there can be no assurance that we would prevail.

Claims by others that we infringe their intellectual property rights could increase our expenses and delay the development of our business. As a result, our business and financial condition could be harmed.

Our industries are characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents, patents that may be issued in the future, or other intellectual property rights of others.

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

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

Fluctuations in our quarterly revenue and results of operations could depress the market price of our common stock.

Our future net sales and results of operations are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside our control. Accordingly, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that our revenue or results of operations in a quarter will fall below the expectations of securities analysts or investors. If this occurs, the market price of our common stock could fall significantly. Our results of operations in any quarter can fluctuate for many reasons, including:

	·	our ability to perform under contracts and manufacture, test and deliver products in a timely and cost-effective manner;

	·	our success in winning competitions for orders;

	·	the timing of new product introductions by us or our competitors;

	·	the mix of products we sell;

	·	competitive pricing pressures; and

general economic climate.

A large portion of our expenses, including expenses for facilities, equipment, and personnel, are relatively fixed. Accordingly, if our revenues decline or do not grow as much as we anticipate, we might be unable to maintain or improve our operating margins. Any failure to achieve anticipated revenues could therefore significantly harm our operating results for a particular fiscal period.

Risks Related to Contracting with the United States Government

Our current revenues are derived from a small number of contracts within the U.S. government set aside for small businesses.

We currently derive substantially all of our revenue from Small Business Innovation Research contracts with the U.S. Government such that the loss of any one contract could materially reduce our revenues. As a result, our financial condition and our stock price would be adversely affected.

In order to receive these Small Business Innovation Research contracts, we must satisfy certain eligibility criteria established by the Small Business Administration. If we do not satisfy these criteria, we would not be eligible for these contracts and thus, our primary source of revenue would no longer be available to us. As a result, our financial condition would be adversely affected.

Our business could be adversely affected by changes in budgetary priorities of the Government.

Because we derive a substantial majority of our revenue from contracts with the Government, we believe that the success and development of our business will continue to depend on our successful participation in Government contract programs. Changes in Government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, or a shift of expenditures away from programs that we support, or a change in Government contracting policies, could cause Government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts. Any such actions could cause our actual results to differ materially from those anticipated. Among the factors that could seriously affect our Government contracting business are:

changes in Government programs or requirements;

budgetary priorities limiting or delaying Government spending generally, or specific departments or agencies in particular, and changes in fiscal policies or available funding, including potential Governmental shutdowns (as occurred during the Government’s 1996 fiscal year);

curtailment of the Government’s use of technology solutions firms.

Our contracts and administrative processes and systems are subject to audits and cost adjustments by the Government, which could reduce our revenue, disrupt our business or otherwise adversely affect our results of operations.

Government agencies, including the Defense Contract Audit Agency, or DCAA, routinely audit and investigate Government contracts and Government contractors’ administrative processes and systems. These agencies review our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. They also review our compliance with regulations and policies and the adequacy of our internal control systems and policies, including our purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, and any such costs already reimbursed must be refunded. Moreover, if any of the administrative processes and systems is found not to comply with requirements, we may be subjected to increased government oversight and approval that could delay or otherwise adversely affect our ability to compete for or perform contracts. Therefore, an unfavorable outcome to an audit by the DCAA or another agency could cause actual results to differ materially from those anticipated. If an investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeitures of profits, suspension of payments, fines and suspension or debarment from doing business with the Government. In addition, we could suffer serious reputational harm if allegations of impropriety were made against us. Each of these results could cause actual results to differ materially from those anticipated.

Unfavorable government audit results could force us to adjust previously reported operating results and could subject us to a variety of penalties and sanctions.

The federal government audits and reviews our performance on awards, pricing practices, cost structure, and compliance with applicable laws, regulations, and standards. Like most large government vendors, our awards are audited and reviewed on a continual basis by federal agencies, including the Defense Contract Management Agency and the Defense Contract Audit Agency. An audit of our work, including an audit of work performed by companies we have acquired or may acquire or subcontractors we have hired or may hire, could result in a substantial adjustment in our operating results for the applicable period. For example, any costs which were originally reimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be refunded and our operating margins may be reduced. To date, we have not experienced any significant adverse consequences as a result of government audits.

If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or debarment from doing business with U.S. Government agencies.

Risks Related To “Controlled Companies”

Technest’s controlling stockholder has significant influence over the Company.

According to the stock records of Technest, as of March 31, 2008, Southridge Partners LP, together with its affiliates, were the largest stockholders of Technest, owning approximately 65% of Technest’s outstanding common stock as the record holders of 13,404,387 shares. Recently, Southridge appointed three members to Technest’s board of directors (currently, there are a total of six directors on Technest’s board of directors). As a result, Southridge possesses significant influence over our affairs. Southridge’s stock ownership and relationships with members of Technest’s board of directors may have the effect of delaying or preventing a future change in control, impeding a merger, consolidation, takeover or other business combination or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of Technest, which in turn could materially and adversely affect the market price of Technest’s common stock.

A very small number of investors hold a controlling interest in our stock. As a result, the ability of minority shareholders to influence our affairs is extremely limited.

A very small number of investors collectively owned more than 65% of Technest’s outstanding common stock on a primary basis. As a result, those investors have the ability to control all matters submitted to the stockholders of Technest for approval (including the election and removal of directors). A significant change to the composition of our board could lead to a change in management and our business plan. Any such transition could lead to, among other things, a decline in service levels, disruption in our operations and departures of key personnel, which could in turn harm our business.

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

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

Risks Related To Capital Structure

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

We are obligated to register shares held by Markland Technologies, Inc. or any of its transferees as well as shares held by other holders. Our common stock is thinly traded. The registration of these shares for public resale may result in a greater number of shares being available for trading than the market can absorb. This may cause the market price of our common stock to decrease.

The sale of material amounts of common stock could encourage short sales by third parties and further depress the price of our common stock. As a result, you may lose all or part of your investment.

The significant downward pressure on our stock price caused by the sale of a significant number of shares could cause our stock price to decline, thus allowing short sellers of our stock an opportunity to take advantage of any decrease in the value of our stock. The presence of short sellers in our common stock may further depress the price of our common stock.

Risks Related To Investing In Low- Priced Stock

It may be difficult for you to resell shares of our common stock if an active market for our common stock does not develop.

Our common stock is not actively traded on a securities exchange and we do not meet the initial listing criteria for any registered securities exchange or the Nasdaq National Market System. It is quoted on the less recognized OTC Bulletin Board. This factor may further impair your ability to sell your shares when you want and/or could depress our stock price. As a result, you may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities because smaller quantities of shares could be bought and sold, transactions could be delayed and security analyst and news coverage of our company may be limited. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares.

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

Due to the current price of our common stock, many brokerage firms may not be willing to effect transactions in our securities, particularly because low-priced securities are subject to SEC rules imposing additional sales requirements on broker-dealers who sell low-priced securities (generally defined as those having a per share price below $5.00). These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our stock as it is subject to these penny stock rules. Therefore, stockholders may have difficulty selling those securities. These factors severely limit the liquidity, if any, of our common stock, and will likely continue to have a material adverse effect on its market price and on our ability to raise additional capital.

The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that:

(a)	contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading;

(b)	contains a description of the broker’s or dealer’s duties to the customer and of the rights and remedies available to the customer with respect to a violation to such duties or other requirements of securities laws;

(c)	contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price;

(d)	contains a toll-free telephone number for inquiries on disciplinary actions;

(e)	defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and

(f)	contains such other information and is in such form, including language, type, size and format, as the SEC may require by rule or regulation.

In addition, the broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with:

(a)	bid and ask quotations for the penny stock;

(b)	the compensation of the broker-dealer and its salesperson in the transaction;

(c)	the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and

(d)	monthly account statements showing the market value of each penny stock held in the customer’s account.

Also, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

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

The market price of our common stock may be volatile. As a result, you may not be able to sell our common stock in short time periods, or possibly at all.

Our stock price has been volatile. From January 2006 to April 2008, the trading price of our common stock ranged from a low price of $0.32 per share to a high price of $11.35 per share. Many factors may cause the market price of our common stock to fluctuate, including:

variations in our quarterly results of operations;

the introduction of new products by us or our competitors;

acquisitions or strategic alliances involving us or our competitors;

future sales of shares of common stock in the public market; and

market conditions in our industries and the economy as a whole.

In addition, the stock market has recently experienced extreme price and volume fluctuations. These fluctuations are often unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the market price of our common stock. When the market price of a company's stock drops significantly, stockholders often institute securities class action litigation against that company. Any litigation against us could cause us to incur substantial costs, divert the time and attention of our management and other resources or otherwise harm our business.

Risks Relating to New Corporate Governance Standards

We expect our administrative costs and expenses resulting from certain regulations to increase, adversely affecting our financial condition and results of operations.

We face new corporate governance requirements under the Sarbanes-Oxley Act of 2002, the NASDAQ Capital Market requirements and SEC rules adopted thereunder. These regulations when we become subject to them will increase our legal and financial compliance and make some activities more difficult, time-consuming and costly.

New corporate governance requirements have made it more difficult to attract qualified directors. As a result, our business may be harmed and the price of our stock may be adversely affected.

New corporate governance requirements have increased the role and responsibilities of directors and executive officers of public companies. These new requirements have made it more expensive for us to maintain director and officer liability insurance. We may be required to accept reduced coverage or incur significantly higher costs to maintain coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve as members of our board of directors.

If we fail to maintain effective internal controls over financial reporting, the price of our common stock may be adversely affected.

We are required to establish and maintain appropriate internal controls over financial reporting. Our internal controls over financial reporting may have weaknesses and conditions that need to be addressed, the disclosure of which may have an adverse impact on the price of our common stock.

Failure to establish those controls, or any failure of those controls once established, could adversely impact our public disclosures regarding our business, financial condition or results of operations. In addition, management's assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions that need to be addressed, disclosure of management's assessment of our internal controls over financial reporting or disclosure of our independent registered public accounting firm's attestation to or report on management's assessment of our internal controls over financial reporting may have an adverse impact on the price of our common stock.

Standards for compliance with Section 404 of the Sarbanes-Oxley Act of 2002 are uncertain, and if we fail to comply in a timely manner, our business could be harmed and our stock price could decline.

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting, and attestation of this assessment by our independent registered public accountant. We expect that these requirements will first apply to our annual report for the fiscal year ending June 30, 2008 and June 30, 2009, respectively. The standards that must be met for management to assess the effectiveness of the internal control over financial reporting are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. We may encounter problems or delays in completing activities necessary to make an assessment of its internal control over financial reporting. In addition, we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of its assessment by our independent registered public accountants. If management cannot assess our internal control over financial reporting as effective, or our independent registered public accounting firm is unable to issue an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

Item 3. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Based on our management's evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (ii) is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

There was no change in our internal control over financial reporting during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings.

Technest Holdings, Inc.

As of May 12, 2008, Technest has not been notified of a trial date for this matter.

On or about May 30, 2006, Deer Creek Fund LLC filed a claim for Interference with Contract and Breach of the Implied Covenant of Good Faith and Fair Dealing against Technest, seeking unspecified monetary damages. Deer Creek alleges misconduct on the part of Technest related to a proposed sale by Deer Creek of 157,163 shares of Technest common stock at $7.00 per share and the applicability of certain selling restrictions under a registration rights agreement entered into between the parties. Technest believes that the allegations in this lawsuit are entirely without merit. Technest has been aggressively defending this action. The trial for this claim took place on April 8, 2008. A decision has not been rendered as of May 12, 2008.

ITEM 6. Exhibits

Exhibit No.	Description	Filed with this Quarterly Report	Incorporated by reference
			Form	Filing Date	Exhibit No.
10.1	Employment Agreement between Gino M. Pereira and Technest Holdings, Inc. dated January 14, 2008.		8-K	January 18, 2008	10.1
10.2	Employment Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 14, 2008.		8-K	January 18, 2008	10.2
10.3	Restricted Stock Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 15, 2008.		8-K	January 18, 2008	10.3
10.4	Restricted Stock Agreement between David R. Gust and Technest Holdings, Inc. dated January 15, 2008.		8-K	January 18, 2008	10.5
10.5	Restricted Stock Agreement between Dr. Robert A. Curtis and Technest Holdings, Inc. dated January 15, 2008.		8-K	January 18, 2008	10.6
31.1	Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).	X
31.2	Certification by CFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).	X
32.1	Certification by CEO and CFO of Periodic Report Pursuant to 18 U.S.C. Section 1350.	X
99.1	Pro forma financial information.		8-K	January 4, 2008	99.2

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	TECHNEST HOLDINGS, INC.

Date: May 15, 2008	By:	/s/ Gino M. Pereira Gino M. Pereira Chief Executive Officer and President

Date: May 15, 2008	By:	/s/ Nitin V. Kotak
		Nitin V. Kotak Chief Financial Officer and Treasurer

EXHIBIT INDEX

Exhibit No.	Description	Filed with this Quarterly Report	Incorporated by reference
			Form	Filing Date	Exhibit No.
10.1	Employment Agreement between Gino M. Pereira and Technest Holdings, Inc. dated January 14, 2008.		8-K	January 18, 2008	10.1
10.2	Employment Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 14, 2008.		8-K	January 18, 2008	10.2
10.3	Restricted Stock Agreement between Nitin V. Kotak and Technest Holdings, Inc. dated January 15, 2008.		8-K	January 18, 2008	10.3
10.4	Restricted Stock Agreement between David R. Gust and Technest Holdings, Inc. dated January 15, 2008.		8-K	January 18, 2008	10.5
10.5	Restricted Stock Agreement between Dr. Robert A. Curtis and Technest Holdings, Inc. dated January 15, 2008.		8-K	January 18, 2008	10.6
31.1	Certification by CEO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).	X
31.2	Certification by CFO of Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a).	X
32.1	Certification by CEO and CFO of Periodic Report Pursuant to 18 U.S.C. Section 1350.	X
99.1	Pro forma financial information.		8-K	January 4, 2008	99.2