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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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



For the fiscal year ended December 31, 2004



Or



| ̈ | 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 000-49890



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MTC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 02-0593816                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4032 Linden Avenue, Dayton, OH                                 |  | 45432                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code (937) 252-9199



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



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None               

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

Common Stock, par value $0.001 per share



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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 file such reports), and (2) has
been subject to such filing requirements for the past 90 days.x  Yes ̈No



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Exchange Act Rule 12b-2). Yesx    No ̈



As of June 30, 2004, the
aggregate market value of the voting stock held by non-affiliates of the registrant was $259,978,149.



As of February 28, 2005, there were 15,738,763 shares of common stock, $0.001 par value, outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the registrants definitive proxy statement for its 2005
Annual Meeting of Stockholders are incorporated by reference into Part III of this report.



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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES



INDEX TO FORM 10-K



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  |                                                                                                              |  | Page
|         |  |                                                                                                             
|         |  | Part I.                                                                                                      |  |     
|Item 1.  |  | Business                                                                                                     |  | 3   
|Item 2.  |  | Properties                                                                                                   |  | 22  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 23  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 23  
|         |  |                                                                                                             
|         |  | Part II.                                                                                                     |  |     
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 23  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 25  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 26  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 36  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 37  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 63  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 63  
|Item 9B. |  | Other Information                                                                                            |  | 64  
|         |  |                                                                                                             
|         |  | Part III.                                                                                                    |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 64  
|Item 11. |  | Executive Compensation                                                                                       |  | 65  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 65  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 65  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 65  
|         |  |                                                                                                             
|         |  | Part IV.                                                                                                     |  |     
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 65  



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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES



PART I.



Item 1.    Business



Overview



MTC Technologies, Inc. was
incorporated in Delaware in April 2002 and holds all of the capital stock of MTC Technologies, Inc., an Ohio corporation incorporated in 1985 that was formerly known as Modern Technologies Corp. We provide sophisticated systems engineering,
information technology, intelligence and program management services primarily to U.S. defense, intelligence and civilian federal government agencies. Our services encompass the full system life cycle from requirements definition, design,
development and integration to upgrade, sustainment and support for mission critical information and weapons systems. For the years ended December 31, 2004, 2003, and 2002, about 96%, 95%, and 87%, respectively, of our revenue was derived from our
customers in the Department of Defense and the intelligence community, including the U.S. Air Force, U.S. Army and joint military commands. Having served the Department of Defense since our founding in 1984, we believe we are well positioned to
assist the federal government as it conducts the war on global terrorism and modernizes its defense capabilities.



Our people develop and implement innovative, practical solutions to complex engineering, technical and management problems. We have approximately 2,100
employees, of whom approximately 65% hold the necessary credentials to work on sensitive government projects, including approximately 15% with the necessary credentials to work on the federal governments most sensitive projects. A substantial
majority of our employees has prior military or government industry experience and over 80% of our employees work on-site at our customers facilities. The credentials, experience and locations of our employees allow us to combine a
comprehensive knowledge of our customers business processes with the practical application of advanced engineering and information technology tools, techniques and methods to create value-added solutions. For the year ended December 31, 2004,
we generated approximately 77% of our revenue as a prime contractor, where we delivered many mission critical services and solutions. Serving as a prime contractor in close proximity to our customers has allowed us to maintain long-standing
relationships that have been important to our growth. We have provided services to the U.S. Air Force since our founding, the U.S. Army for 16 years and NASA for 11 years.



We believe we are well positioned to continue our internal revenue growth by leveraging our existing customer relationships
and diverse array of contract vehicles, including General Service Administration (GSA) schedules and Blanket Purchase Agreements (BPAs). Our contract base is well diversified with in excess of 100 active contracts, not including task orders on GSA
contracts and major government-wide acquisition contracts (GWACs). As of December 31, 2004, we had in excess of 500 task orders under these contracts. In July 2001, we were one of six awardees of the U.S. Air Forces Flexible Acquisition and
Sustainment Tool (FAST) contract with a ceiling of $7.4 billion. From the inception of the FAST contract through December 31, 2004, we have been awarded over half of the dollar value of the $1.7 billion in task orders that have been competitively
bid, based on the aggregate potential value of these task orders and assuming the exercise of all option periods. As of December 31, 2004, we have been awarded over 75 task orders under the FAST contract with a remaining potential award value of
approximately $914.0 million if all options are exercised. We have the potential to compete for hundreds of millions of dollars in task orders over the remaining contract life of approximately three and a half years, as the U.S. Air Force maintains
and modernizes aircraft and weapons systems. Additionally, during the third quarter of 2004, we were awarded an 18-month U.S. Army contract worth over $35.0 million to reconstitute its 1stArmored Division in Germany, which extends and expands our activities in reconstituting the U.S. Armys combat equipment. We should recognize our first
revenue on this contract in the second quarter of 2005.



Acquisitions



We employ a highly disciplined process to evaluate
the strategic, financial, operational and legal aspects of acquisitions. Since our initial public offering, we have completed six strategic acquisitions. Each of the acquired businesses has been accretive to earnings and has expanded our customer
reach and technical capabilities.



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AMCOMP.    In October 2002, we acquired all of the
outstanding capital stock of AMCOMP Corporation (AMCOMP). AMCOMP provides engineering, information technology and other technical services, primarily in the areas of space systems and global positioning systems, to the Department of Defense and
other government agencies. The initial purchase price was $7.3 million. In both April 2003 and 2004, we paid additional consideration of $1.1 million to the former shareholders of AMCOMP as a result of the achievement of certain performance goals
under an earn-out provision in the stock purchase agreement. We accrued an additional $1.1 million of consideration in December 2004 for the achievement of certain performance goals under the 2004 earn-out provision in the stock purchase agreement.
We expect to make this payment in the second quarter of 2005. It is anticipated that we will realize certain income tax benefits in future periods as a result of the AMCOMP shareholders agreeing to a Section 338(h)(10) election under the Internal
Revenue Code of 1986.



ICI.    In
October 2003, we acquired all of the outstanding capital stock of International Consultants, Inc. (ICI). ICI specializes in program management, information technology and logistics management services. ICI provides support to customers such as the
U.S. Army Forces Command (FORSCOM) and the Tank-Automotive and Armaments Command (TACOM). The initial purchase price was $10.2 million, which consisted of shares of our common stock with a value of $2.4 million, the repayment of $7.5 million of
ICIs indebtedness at the closing and $0.3 million for related acquisition costs. During 2004, we paid additional consideration of $5.7 million, which consisted of shares of our common stock with a value of $4.5 million and $1.2 million in
cash, to the former shareholders of ICI as the result of the achievement of certain performance goals. We also accrued an additional $3.0 million of purchase consideration in December 2004 for the achievement of certain performance goals under the
2004 earn-out and contingency provisions. This payment was made in the first quarter of 2005, and the consideration consisted of shares of our common stock with a value of $2.5 million and $0.5 million in cash.



Vitronics.    In October 2003, we acquired all of
the outstanding capital stock of Vitronics Inc. (Vitronics). Vitronics specializes in systems engineering, information technology, software development, command and control systems integration and urban warfare technologies. Vitronics key
customers include the U.S. Armys Communications Electronics Command (CECOM), the Research Development and Engineering Command (RDECOM) and the Defense Advanced Research Projects Agency (DARPA). The initial purchase price, including related
acquisition costs, was approximately $9.0 million. Under an earn-out provision in the stock purchase agreement, we accrued an additional $0.8 million of consideration in December 2004 for the achievement of certain performance goals under the 2004
earn-out provision, which amount will be paid in 2005. It is anticipated that we will realize certain income tax benefits in future periods as a result of the Vitronics shareholders agreeing to a Section 338(h)(10) election under the Internal
Revenue Code of 1986.



CTI.    On
July 1, 2004, we acquired all of the outstanding capital stock of Command Technologies, Inc. (CTI) from CTIs shareholders. CTIs customer base consists primarily of the Department of Defense and national security agencies, and CTI
specializes in professional and technical services, information technology, and technology applications for training, simulation, and modeling. The initial purchase price was $45.0 million, which was paid from cash on hand at closing. The purchase
price was reduced by $0.7 million in December 2004 as a result of the release from the escrow. An additional $4.5 million of initial purchase price is being held in escrow until December 2005 to satisfy any general indemnification obligations under
the stock purchase agreement. It is anticipated that the Company will realize income tax benefits with a net present value of approximately $9 million in future periods as the result of CTI shareholders agreeing to a Section 338(h)(10) election
under the Internal Revenue Code of 1986.



OnBoard.    In January 2005, we purchased all of the outstanding capital stock of OnBoard Software, Inc. (OnBoard) from its sole shareholder. OnBoards customer base consists primarily of the U.S. Air Force
and large prime contractors for the Department of Defense, and OnBoard supports programs with technical development for a wide range of innovative and cost-effective hardware/software systems. The initial purchase price was $34.1 million, which was
paid from cash on hand at closing. In addition, OnBoards shareholder may receive additional cash payments through 2007 if certain operating goals are achieved. It is anticipated that the Company will realize income tax benefits with a net
present value of approximately $7 million in future periods as the result of the OnBoard shareholder agreeing to a Section 338(h)(10) election under the Internal Revenue Code of 1986.



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MTI.    In February 2005, we
purchased all of the outstanding capital stock of Manufacturing Technology, Inc. (MTI). MTIs customer base consists primarily of the U.S. Air Force, the U.S. Navy, and large prime contractors for the Department of Defense, and MTI supports
sensitive government programs and specializes in total product life cycle support for electronic and other systems used in military and commercial applications. The initial purchase was $70.0 million paid in cash at closing, of which approximately
$2.0 million was from available cash on hand and $68.0 million of which was borrowed under our revolving credit facility. MTI shareholders may receive additional cash payments of up to $5.0 million if certain operating goals are achieved in
2005. It is also anticipated that the Company will realize income tax benefits with a net present value of approximately $12 million in future periods as the result of the MTI shareholders agreeing to a Section 338(h)(10) election under the Internal
Revenue Code of 1986.



Our Services and Solutions



We operate through four principal service areas, which are offered
separately or in combination across our customer base:



Systems Engineering and Technical Services.    We offer a broad range of systems engineering and technical services to enhance the functionality and performance of defense systems, weapons platforms, battlefield
personnel and delivery systems. Our systems engineering and technical services include determination of systems requirements and goals, rapid prototyping, design, development and integration of new systems, and subsequent sustainment and support. We
evaluate system designs to determine if performance enhancements or cost savings can be derived through the integration of new technologies. Our engineering services also include reverse engineering older systems, modeling and simulation of proposed
systems, and performance testing of prototypes and final systems.



Information Technology.    We design, develop, upgrade and integrate complex, mission-critical information technology systems. Our services also include security engineering, network design, software development,
enterprise application integration, database development, test and evaluation, configuration management, training and implementation support. We also provide simulation and modeling services that enable us to evaluate the efficiency and value of
technology systems before they are implemented. Some of our engagements include the web-enablement and integration of legacy business systems, allowing our customers to benefit from their prior investments. We also design, install and maintain local
area and wide area networks.



Intelligence.    We provide Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) services to intelligence agencies. In connection with these services, we design,
develop and manage reconnaissance platforms, real-time signal processing systems, sensors, ground stations and data links, as well as evaluate and support ongoing operational intelligence collection activities. We offer specialized capabilities such
as airborne and space intelligence, surveillance and reconnaissance (ISR), signals and imagery intelligence, and strategic warfare planning. We also support a variety of data collection and analysis activities. We maintain a fully accredited
Sensitive Compartmented Information Facility (SCIF) including communications and processing capabilities for technical support of specialized systems and sensitive technologies. Much of this work is tightly controlled within compartmented and
special access security channels.



Program
Management.    We provide program management support that extends the useful life of existing defense systems and reduces life-cycle costs, and sustains these systems in combat. Program management activities include
developing and implementing acquisition strategies, cost modeling, identification of suppliers and vendors, provision planning, contract performance monitoring, program planning and scheduling, financial management, operational effectiveness
analysis, risk analysis and security planning. Specifically, we provide engineering and sustainment support, and modifications of and upgrades to defense systems featuring new sensor devices, radios, engines and other electronic components. We are
involved in support programs to extend the service of aging aircraft and other defense systems and components, which includes the sourcing and repair of diminishing parts for our customers. In addition, it is not uncommon for our other service
offerings to lead to program management services, such as in the case of the Roll-On Beyond Line-of-Sight Enhancement (ROBE), Forward Looking Infrared (FLIR) and MH-53 modification programs. Our program management capabilities are now being
expanded to support the readiness of active duty and National Guard organizations committed to combat operations.



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Our Core Capabilities



We apply the following core capabilities across our four service areas
described above:



Systems
Support.We provide complete life-cycle support of military, defense, intelligence and information technology systems. The activities start with requirements analysis and system design, and then move to acquisition and
integration of these systems. We continue our support into the operation and support phases and provide continuing improvements and sustainment, and, when systems are committed to combat operations, perform reconstitution activities upon
redeployment.



Acquisition
Management.    We assist our customers with strategy and planning, cost analysis, scheduling and delivery assessment for the acquisition of systems and services. Many of our managers previously served as acquisition managers
for the government and have extensive knowledge of the process and program needs.



Systems Integration.    We provide systems integration of hardware and software components for our customers legacy systems. We analyze customer systems, applications and platforms and
develop solutions to sustain or improve system performance and increase system availability.



Network Design and Maintenance.    We provide network support services for complex communications systems. Our communications engineers and technicians provide site surveys, engineering and
installation support for local area networks, wide area networks, telephone switches and cable plants, including the installation of fiber-optic cable systems at government facilities throughout the world.



Information Assurance.    We provide comprehensive
information assurance programs that assess and implement integrated physical, technical, operations, personnel, computer and communication security requirements, including disaster recovery assessment. We design, test and certify security systems as
well as perform audits and inspections. These services are provided for both classified and unclassified systems.



Logistics Management.    We design and develop integrated logistics support plans designed to optimize the deployment,
readiness, performance and subsequent extraction of military personnel and equipment. We also design sophisticated platforms that coordinate and integrate information management systems.



Testing and Evaluation.    We test and evaluate complex, mission-critical hardware and software
systems. Our services improve the performance, reliability, maintainability, supportability and effectiveness of many defense and weapon systems. We develop and operate customized testing and evaluation facilities that are both fixed and mobile.



Business Process Outsourcing.    We
assist customers in the management of certain supply processes to improve performance and reduce costs. We develop training programs, define meaningful performance metrics, support process definition and reengineering, perform cost modeling and
source and procure parts.



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The following chart shows how our core capabilities cross over our four
service areas:



Capabilities by Service Area



|                               |  |                                         |  |                       |  |                     |  |                  
|------------------------------ |  | --------------------------------------- |  | --------------------- |  | ------------------- |  | -----------------
|                               |  | Systems EngineeringandTechnicalServices |  | InformationTechnology |  | Intelligence(C4ISR) |  | ProgramManagement
|Systems Support                |  |  ̈                                       |  |  ̈                     |  |  ̈                   |  |  ̈                
|Acquisition Management         |  |  ̈                                       |  |  ̈                     |  |  ̈                   |  |  ̈                
|Systems Integration            |  |  ̈                                       |  |  ̈                     |  |  ̈                   |  |  ̈                
|Network Design and Maintenance |  | O                                       |  |  ̈                     |  |  ̈                   |  |                  
|Information Assurance          |  | O                                       |  |  ̈                     |  | O                   |  | O                
|Logistics Activities           |  |  ̈                                       |  |  ̈                     |  | O                   |  |  ̈                
|Testing and Evaluation         |  |  ̈                                       |  | O                     |  | O                   |  |  ̈                
|Business Process Outsourcing   |  | O                                       |  | O                     |  |                     |  |  ̈                

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Major Area of
Emphasis: ̈

Supporting Area of Emphasis: O



Our Customers



Our customers are primarily U.S. federal government
intelligence, military and civilian agencies. Our revenue derived from federal government customers, consisting primarily of the Department of Defense and the intelligence community, accounted for about 96%, 95%, and 87% of our total revenue for the
years ended December 31, 2004, 2003, and 2002, respectively. Our federal government customers typically exercise independent contracting authority so that even offices or divisions within an agency may, either directly or through a prime contractor,
use our services as separate customers so long as the customers have independent decision making and contracting authority within their organizations. For the year ended December 31, 2004, we derived approximately 77% of our revenue as a prime
contractor and approximately 23% of our revenue as a subcontractor to other defense companies.



Our Diverse Contract Vehicles



We compete for task orders through a variety of arrangements or contract vehicles. Our vehicles include GWACs, BPAs, GSA schedules and indefinite delivery, indefinite quantity (IDIQ) contracts. We have contract
vehicles in each of our service areas, allowing us to compete for business from a variety of customers. In addition, we have several blanket arrangements under which we can work with customers in multiple service areas. Our contract vehicles are
structured with various terms and include time-and-materials, fixed-price and cost-plus contracts. Approximately 26% of our revenue for the year ended December 31, 2004 was under the FAST contract. Our tasks under the FAST contract support or have
supported 17 different customer organizations using over 75 individual task orders. In prior years, we performed a portion of the work we are now performing on the FAST contract on other contract vehicles. While we continue to increase the amount of
revenue earned using the FAST contract, we believe that the broad array of engineering, technical and management services we provide to the federal government through various contract vehicles allows for diversified business growth. Also,
approximately 9% of our revenue for the year ended December 31, 2004 was under one contract vehicle, the Aeronautical Systems Center Blanket Purchase Agreement (ASC/BPA). The ASC/BPA, which was originally awarded as a small business set-aside
contract, expires on August 7, 2005, and the replacement contract will also be a small business set-aside contract for which we will not qualify to bid as a prime contractor. While we believe we have a viable strategy to retain the bulk of our work
and profitability on the replacement contract by becoming a subcontractor for a number of small businesses bidding on the re-compete, our ability to retain work under the replacement contract is uncertain. It is possible that some of our current
work under the ASC/BPA could be converted to GSA schedules or other contract vehicles.



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Our contract base is well diversified with in excess of 100 active contract
vehicles, not including task orders on GSA contracts and major GWACs. As of December 31, 2004, we had in excess of 500 task orders under these contracts. The typical initial terms for our government contracts range from three years to five years,
with most having an initial term of three years. The customer may extend the contracts for additional years.



The following table identifies some of our GSA, GWAC and IDIQ contract vehicles that have undefined scopes and significant ceilings:



|                                                                          |  |                       |  |                |  |          |  |                |  |              
|------------------------------------------------------------------------- |  | --------------------- |  | -------------- |  | -------- |  | -------------- |  | -------------
|                                                                          |  | Period of Performance |  | OptionEnd Date |  | Customer |  | CurrentCeiling
|                                                                          |  | Start                 |  | End            |  |          | 
|FAST                                                                      |  | 09/26/01              |  | 09/25/06       |  | 09/25/08 |  | U.S. Air Force |  | $7.4 billion 
|GSA corporate contract                                                    |  | 07/01/01              |  | 02/28/10       |  | 02/28/20 |  | GSA            |  | No ceiling   
|Special Operations ForcesSupport Services Contract II (SOC-SSSC II)      |  | 09/03/02              |  | 09/02/07       |  | 09/02/17 |  | U.S. Air Force |  | $440 million 
|ASC/BPA                                                                   |  | 08/08/00              |  | 08/07/05       |  | None     |  | U.S. Air Force |  | No ceiling   
|MTC GSA Professional Engineering Services (PES)                           |  | 11/17/99              |  | 03/03/10       |  | 03/3/15  |  | GSA            |  | No ceiling   
|CTI GSA Professional Engineering Services (PES)                           |  | 10/20/00              |  | 09/30/09       |  | 10/19/15 |  | GSA            |  | No ceiling   
|Technical Acquisition Support Services                                    |  | 03/31/00              |  | 03/30/06       |  | None     |  | U.S. Air Force |  | No ceiling   
|Tank-Automotive and Armaments Command (TACOM)OMNIBUS I                    |  | 06/17/99              |  | 12/30/05       |  | None     |  | U.S. Army      |  | $22.5 million
|Tank-Automotive and Armaments Command (TACOM) OMNIBUS II                  |  | 12/20/02              |  | 12/20/07       |  | None     |  | U.S. Army      |  | $19.0 million
|Program Executive Office/Program Manager (PEO-PM) Soldier Systems         |  | 01/01/03              |  | 12/31/07       |  | None     |  | U.S. Army      |  | $40.0 million
|GSA Management, Organizational and Business Improvement Services (MOBIS)  |  | 06/15/99              |  | 06/14/09       |  | None     |  | GSA            |  | No ceiling   
|MTC GSA Logistics Worldwide (LOG WORLD)                                   |  | 08/20/02              |  | 08/19/07       |  | 08/19/17 |  | GSA            |  | No ceiling   
|CTI GSA Logistics Worldwide (LOG WORLD)                                   |  | 04/26/02              |  | 04/25/07       |  | 04/25/17 |  | GSA            |  | No ceiling   
|Commercial Enterprise Omnibus Support Services (CEOss) BPA                |  | 08/19/03              |  | 08/18/08       |  | 08/18/18 |  | GSA            |  | No ceiling   
|Logistics Joint Administrative and Management Support Services (LOGJAMMS) |  | 01/10/05              |  | 01/09/06       |  | 01/09/10 |  | Army           |  | $54.4 million
|GSA Tri-Service Standoff Attack Missile (TSSAM) BPA                       |  | 10/22/04              |  | 10/21/05       |  | 10/21/09 |  | GSA            |  | No ceiling   



Backlog



Backlog, which consists of funded and unfunded portions, is our estimate of
the remaining future revenue from existing signed contracts, assuming the exercise of all options relating to those contracts. This estimate includes revenue for solutions that we believe will be provided in the future under the terms of executed,
multiple-award contracts in which we are not the sole provider, meaning that the customers could turn to our competitors to fulfill the contract. It also includes an estimate of revenue on existing task orders that are under IDIQ contracts.



We define funded backlog as the portion of backlog for which
funding currently is appropriated and obligated to us under the contract by the purchasing agency or otherwise authorized for payment to us by the customers upon completion of a specified portion of work, less revenue previously recognized. Our
funded backlog does not include the full potential value of our contracts because Congress often appropriates funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance over a number
of years.



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We define unfunded backlog as the net of the total estimated potential value
of our contracts, less revenue recognized to date. Our assessment of a contracts potential value is based upon factors such as historical trends, competition and budget availability. However, there can be no assurance that the unfunded
contract value will be realized as contract revenue or earnings. We review unfunded backlog on a quarterly basis to determine whether any adjustments are necessary.



The primary source of our backlog is contracts with the federal government. Our estimated backlog at the end of the two most
recently completed fiscal years was as follows:



|                        |  |                   |  |  |  |                  
|----------------------- |  | ----------------- |  |  |  | -----------------
|                        |  | December 31, 2004 |  |  |  | December 31, 2003
|Estimated Total Backlog |  | $ 1.5 billion     |  |  |  | $ 1.3 billion    
|Funded Backlog          |  | $316 million      |  |  |  | $166 million     



Of our funded backlog
as of December 31, 2004, approximately 35.6%, or $112.4 million, will remain at the end of the 2005 fiscal year. We have increased our funded backlog by $150 million from December 31, 2003, primarily due to the 2004 acquisition of CTI and funding
increases in the FAST, TACOM OMNIBUS, LOGJAMMS, PM Soldier Systems and other contracts. Although our funded backlog at December 31, 2004, was approximately 116% of our revenue for the year ended December 31, 2004, we feel that a more typical funded
backlog is in the range of 40% to 60% of trailing twelve-month revenue.



Sales and Marketing



We have a highly
disciplined sales and marketing process that utilizes the relationships of our senior management and business development staff. We also seek to leverage existing customer relationships and respond to competitive solicitations. We identify, assess
and respond to new business opportunities quickly. We draw on the experience and knowledge of senior personnel across the company, including those working on-site with our customers. We have also established a formal process for evaluating new
business opportunities and use our tracking systems to track the status of each bid opportunity. We have effectively used GSA contracts to respond quickly to emerging customer requirements.



To supplement and complement our core competencies, we have relationships
with industry partners that enable us to work together on contracts. While we are the prime contractor on most of our contracts, we serve as subcontractor when teaming in that manner furthers our goals of expanding our customer base or pursuing high
growth markets.



Foreign Operations



For the years ended December 31, 2004, 2003 and 2002, 100% of our revenue
was derived from services provided under contracts with U.S.-based customers. We treat sales to United States government customers as sales within the United States, regardless of where the services are performed.



Employees



As of December 31, 2004, we had approximately 2,100 employees, including approximately 65% with the necessary credentials to
work on sensitive government projects, including approximately 15% with the necessary credentials to work on the federal governments most sensitive projects. Obtaining these credentials requires a candidate to be sponsored by the government
with respect to a particular requirement, entails extensive background investigations that typically take from six months to a year or more and, for the more restricted access, requires successful completion of polygraph testing. Non-technical
employees serve primarily in support roles. None of our employees is a party to any collective bargaining agreements. We consider our relations with employees to be good.



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We believe that we are successful in retaining our employees by offering
competitive salary structures, attractive incentive compensation and benefits programs, career growth opportunities, flexibility in work assignments and the opportunity to perform mission-critical services, often in classified environments. Before
we pursue external recruiting, we typically offer our current employees the opportunity to respond to new internal job opportunities.



Competition



We believe that the major competitive factors in our market are strong customer relationships, a reputation for quality, a record of successful past
contract performance, a seasoned management team with domain expertise, and a staff with distinctive technical competencies, security clearances and competitive prices. Our key competitors currently include: divisions of large defense contractors,
such as Boeing, Lockheed Martin, Northrop Grumman, Raytheon, and L-3 Communications; engineering and technical services firms, such as SAIC, Jacobs Engineering Group and Anteon; and information technology service companies, such as CACI
International, Computer Sciences Corporation and DynCorp. Our strategy to compete with these companies includes growing our business with existing customers by targeting new outsourcing opportunities and expanding our customer base by targeting
potential U.S. Air Force, U.S. Army and intelligence community customers. As part of our competitive strategy, we plan to expand our geographic coverage and customer base by selectively pursuing strategic acquisitions of other service providers. We
envision pursuing acquisitions of companies valued between $10 million and $100 million. We expect that competition in this field will intensify in the future. Some of our competitors have longer operating histories, significantly greater research
and development, financial, technological, marketing and human resources capabilities, as well as greater name recognition and a larger customer base than we have.



Intellectual Property



Our solutions are not generally dependent upon patent protection, but we do file patents when our inventions are solely of MTC origin or the contract with
our customer otherwise allows us to. To protect our trade secrets, we routinely enter into confidentiality and non-disclosure agreements with our employees, consultants, subcontractors and prospective consultants and subcontractors.



Our rights in intellectual property that we develop depend in part on the
degree to which the intellectual property is developed with our private funds, rather than with funds of the federal government. Our federal government contracts routinely provide that we may retain ownership rights in works of authorship and
inventions developed during the performance of those contracts. However, the rights granted to the federal government are, from time to time, the subject of negotiation and typically include the right of the federal government to use and share our
intellectual property with other government contractors, making it impossible for us to prevent their non-exclusive use of our intellectual property. Our ability to protect our rights in intellectual property developed or delivered under government
contracts also is dependent upon our compliance with applicable federal procurement statutes and regulations. There can be no assurance that the steps we take to protect our intellectual property will be adequate to deter misappropriation or to
prevent use by others of our intellectual property.



Risk Factors



RISKS RELATED TO OUR BUSINESS



We are dependent on contracts with the U.S. federal government for
substantially all of our revenue.



For the year ended
December 31, 2004, we derived over 96% of our revenue from federal government contracts, either as a prime contractor or a subcontractor. We expect that federal government contracts will continue to be the primary source of our revenue for the
foreseeable future. If we were suspended or debarred



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from contracting with the federal government generally, or any significant agency in the
intelligence community or Department of Defense, or if our reputation or relationship with government agencies were impaired or the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us,
our business, prospects, financial condition or operating results would be materially harmed.



We could be debarred or suspended for, among other things, actions or omissions that are deemed by the government to be so serious or compelling that they affect our contractual responsibilities. For example, we could
be debarred for committing a fraud or criminal offense in connection with obtaining, attempting to obtain or performing a contract, or for embezzlement, fraud, forgery, falsification or other causes identified in Subpart 9.4 of the Federal
Acquisition Regulations. In addition, changes in federal government contracting policies could directly affect our financial performance. Among the factors that could materially adversely affect our federal government contracting business are:



| |  |  | budgetary constraints affecting federal government spending generally, or defense and intelligence spending in particular, and annual changes in fiscal policies or available
funding;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in federal government programs, priorities, procurement policies or requirements;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | new legislation, regulations or government union pressures, on the nature and amount of services the government may obtain from private contractors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | federal governmental shutdowns (such as occurred during the governments 1996 fiscal year) and other potential delays in the government appropriations process; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in the payment of our invoices by government payment offices due to problems with, or upgrades to, government information systems, or for other reasons.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



These or other factors could cause federal
governmental agencies, or prime contractors where we are acting as a subcontractor, to reduce their purchases under contracts, to exercise their right to terminate contracts or to not exercise options to renew contracts, any of which could have a
material adverse effect on our financial condition and operating results.



Our FAST contract is likely to affect our operating results.



The FAST contract is a multiple award, IDIQ contract with a $7.4 billion ceiling supporting the U.S. Air Force over its approximate three and a half year
remaining life. The FAST contract accounted for approximately 26% of our 2004 revenue. If the FAST contract is terminated, or if we fail to be awarded tasks as anticipated, our revenue growth could suffer. Although we believe the FAST contract
presents an opportunity for significant additional growth and expansion of our services, we expect that many of the task orders we may be awarded under the FAST contract will be for program management services, which historically have been less
profitable than our other activities. In addition, the FAST contract involves a significantly greater use of subcontractors than we have used historically. Margins on subcontractor-based revenue are typically lower than the margins on our direct
work. Since the FAST contract is expected to be a significant part of our business for the next several years, we anticipate our operating income, as a percentage of total revenue, will diminish, although we anticipate it will grow in absolute
dollars.



We face competition, including under the FAST
contract, from other firms, some of which have substantially greater resources, industry presence and name recognition.



We operate in highly competitive markets and generally encounter intense competition to win contracts and task orders. We compete with many other firms,
ranging from small specialized firms to large diversified firms, some of which have substantially greater financial, management and marketing resources than we do. For example, under the FAST contract, we regularly compete for task orders with
companies that have annual



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operating revenue exceeding $20 billion. Our competitors may be able to provide customers
with different or greater capabilities or benefits than we can provide in areas such as geographic presence, price and the availability of key professional personnel. Our failure to compete effectively with respect to any of these or other factors
could have a material adverse effect on our business, prospects, financial condition or operating results.



Our revenue will be adversely affected if we are unable to retain work previously performed under the ASC/BPA when it expires in August 2005.



Historically, a significant amount of our revenue has
been earned under the ASC/BPA. For example, revenue under the ASC/BPA was approximately 9%, 13%, and 20% of our total revenue for the years ended December 31, 2004, 2003, and 2002, respectively, and the largest task order under the ASC/BPA amounted
to approximately 1%, 2%, and 2% of our total revenue for the years ended December 31, 2004, 2003, and 2002, respectively. The ASC/BPA, which was originally awarded as a small business set aside contract, expires on August 7, 2005 and the replacement
contract will also be a small business set-aside contract for which we will not qualify to bid as a prime contractor. While we believe we have a viable strategy to retain the bulk of our work and profitability on the replacement contract by becoming
a subcontractor for a number of small businesses bidding on the re-compete, our ability to retain work under the replacement contract is uncertain. It is possible that some of our current work under the ASC/BPA could be converted to GSA schedules or
other contract vehicles.



If our subcontractors fail to
perform their contractual obligations, our prime contract performance and our ability to obtain future business could be materially and adversely impacted.



Our performance of government contracts may involve the issuance of subcontracts to other companies upon which we rely to
perform all or a portion of the work we are obligated to deliver to our customers. There is a risk that we may have disputes with subcontractors concerning a number of issues, including the quality and timeliness of work performed by the
subcontractor, customer concerns about the subcontractor, or our decision not to extend existing task orders or issue new task orders under a subcontract. A failure by one or more of our subcontractors to satisfactorily deliver on a timely basis the
agreed-upon supplies and/or perform the agreed-upon services may materially and adversely impact our ability to perform our obligations as a prime contractor. As we continue to expand into the program management area under the FAST contract, our
exposure to this risk will increase as a result of our reliance on subcontractors that provide specialized products. In extreme cases, subcontractor performance deficiencies could result in the government terminating our contract for default. A
default termination could expose us to liability for excess costs of reprocurement by the government and have a material adverse effect on our ability to compete for future contracts and task orders.



Each of our contract types, to differing degrees, involves the risk
that we could underestimate our costs, and, accordingly, a change in our contract mix could increase our risk of incurring losses.



We enter into three types of federal government contracts for our services: time-and-materials, fixed-price and cost-plus. For the year ended December 31,
2004, we derived 53%, 30%, and 17% of our revenue from time-and-materials, fixed-price and cost-plus contracts, respectively. For 2003, these percentages of revenue were 50%, 35%, and 15%, respectively. For 2002, these percentages were 61%, 24%, and
15%, respectively.



Each of these types of contracts, to
differing degrees, involves the risk that we could underestimate our cost of performance, which may result in a reduced profit or a loss on the contract for us. Under time-and-materials contracts, we are reimbursed for labor at negotiated hourly
billing rates and for certain expenses. We assume minimal financial risk on time-and-materials contracts because we only assume the risk of performing those contracts at negotiated hourly rates. Under fixed-price contracts, we perform specific tasks
for a fixed price, which means we assume higher risk. Compared to time-and-materials and cost-plus contracts, fixed-price contracts generally offer higher margin opportunities, but involve greater financial risk because we bear the



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impact of cost overruns and receive the benefit of cost savings. Under cost-plus contracts,
we are reimbursed for allowable costs and paid a fee, which may be fixed or performance-based. To the extent that the actual costs incurred in performing a cost-plus contract are within the contract ceiling and allowable under the terms of the
contract and applicable regulations, we are entitled to reimbursement of our costs, plus a profit. However, if our costs exceed the ceiling or are not allowable under the terms of the contract or applicable regulations, we may not be able to recover
those costs. Because we assume the most risk for cost overruns and contingent losses on fixed-price contracts, an increase in the percentage of fixed-price contracts in our contract mix would increase our risk of suffering losses.



Our profits could be adversely affected if our costs under any of these
contracts exceed the assumptions we used in bidding for the contract. Although we believe that we have recorded adequate provisions in our consolidated financial statements for losses on our contracts, our contract loss provisions may not be
adequate to cover all actual losses that we may incur in the future.



Our quarterly operating results may vary widely.



Our quarterly revenue and operating results may fluctuate significantly in the future. A number of factors cause our revenue, cash flow and operating results to vary from quarter to quarter, including:



| |  |  | fluctuations in revenue earned on fixed-price contracts and contracts with a performance-based fee structure;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | commencement, completion or termination of contracts during any particular quarter;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | timing of spending activities by the federal government;
| | - |  | --------------------------------------------------------



| |  |  | variable purchasing patterns under government GSA schedules, BPAs and IDIQ contracts;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | changes in Presidential administrations, Congressional majorities and other senior federal government officials that affect the funding of programs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in policy or budgetary measures that adversely affect government contracts in general;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the timing, nature and cost of hardware requirements for our program management services, particularly in light of our expected expansion of these services under the FAST contract;
and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | scheduling of holidays and vacations, which reduce revenue without a significant reduction in costs.
| | - |  | ----------------------------------------------------------------------------------------------------



Changes in the volume of services provided under existing contracts and the number of contracts commenced, completed or
terminated during any quarter may cause significant variations in our cash flow from operations because a relatively large amount of our expenses are fixed. We incur significant operating expenses during the start-up and early stages of large
contracts and typically do not receive corresponding payments in that same quarter. We may also incur significant or unanticipated expenses when contracts expire, are terminated or are not renewed. In addition, payments due to us from government
agencies may be delayed due to billing cycles or as a result of failures of governmental budgets to gain Congressional and Executive approval in a timely manner.



Our senior management is important to our customer relationships.



We believe that our success depends in large part on the continued
contributions of our senior management team. We rely on our executive officers and senior managers to generate business and execute programs successfully. In addition, the relationships and reputations that members of our management team have
established and continue to maintain with government and military personnel contribute to our ability to maintain good customer relations and to identify new business opportunities. The loss of any member of our senior management team could impair
our ability to identify and secure new contracts.



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Failure to maintain strong relationships with other contractors or
subcontractors could result in a decline in our revenue.



For the years ended December 31, 2004, 2003, and 2002, we derived approximately 23%, 17%, and 23%, respectively, of our revenue from contracts in which we acted as a subcontractor to other contractors or from teaming activities in which we
and other contractors bid on and execute particular contracts or programs. We expect to continue to depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Our business, prospects, financial condition
or operating results could be adversely affected if other contractors eliminate or reduce their subcontracts or teaming relationships with us, either because they choose to establish relationships with our competitors or because they choose to
directly offer services that compete with our business, or if the government terminates or reduces these other contractors programs or does not award them new contracts. Consolidation in the industry may result in increased cost and lack of
availability of subcontractors, which could adversely affect our business, prospects, financial condition or operating results.



We must recruit and retain skilled employees to succeed in our labor-intensive business.



We believe that an integral part of our success is our ability to provide
our customers with skilled employees who have advanced information technology and engineering technical services skills and who work well with our customers. These employees are in great demand and are likely to remain a limited resource in the
foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, our ability to maintain and grow our business could be negatively impacted. We obtain some of our contracts on the strength of certain personnel our
customers consider key to our successful performance under these contracts. If we are unable to hire and retain these key personnel, these customers may not continue to fund the contracts or award task orders to us.



If we fail to manage our growth, including the expansion of our program
management activities under the FAST contract, our revenue and earnings could be adversely impacted.



Our business strategy is to continue to expand our operations, including the expansion of our program management activities under the FAST contract. This
strategy may strain our management, operational and financial resources. If we make mistakes in deploying our financial or operational resources or fail to hire the additional qualified personnel necessary to support higher levels of business, our
revenue and earnings could be adversely affected.



Covenants in our credit facility may restrict our financial and operating flexibility.



As of February 28, 2005, we had $65.5 million in outstanding borrowings under our revolving credit facility. This credit facility expires in December
2006, but can be extended for additional one-year terms by mutual agreement with our lenders. We are subject to certain covenants that limit or restrict our ability, among other things, to: borrow money outside of the amounts committed under our
credit facility; make acquisitions; dispose of our assets outside the ordinary course of business; use borrowings for particular purposes; create or hold subsidiaries; transfer equity interests in subsidiaries; extend credit or become a guarantor;
encumber our property or assets; invest more than a limited amount in fixed assets or improvements; change our accounting policies or the nature of our business; purchase real estate; merge or consolidate; and pay dividends. The agreement also
requires us to maintain specified financial standards relating to our net worth, our fixed charge coverage, our interest coverage and the ratio of our funded indebtedness to our adjusted earnings. We are also subject to other financial covenants
that are typical to an agreement of this type. In addition, the ratio of our funded indebtedness to our adjusted earnings can affect the interest rates we pay, even if we satisfy the minimum required standard. Our ability to satisfy these standards
can be affected by events beyond our control, and we cannot assure you that we will satisfy them. We have pledged substantially all our personal property to secure our repayment of any borrowings that we make under our credit facility. Any default
by us under our credit agreement could have a material adverse effect on our business if our creditors do not waive the default. In addition, any refusal by our lenders to consent to certain transactions could prohibit us from undertaking actions
that are necessary to maintain or expand our business.



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We may have difficulty identifying and completing acquisitions on
favorable terms and, therefore, may grow at slower than anticipated rates.



One of our key growth strategies is to selectively pursue acquisitions of companies that provide services to specific governmental agencies. Since our initial public offering, we have completed acquisitions of six
complementary businesses. Through acquisitions, we hope to expand our base of federal government clients, increase the range of solutions that we offer our clients and deepen our penetration of existing clients. We may encounter difficulty
identifying suitable acquisition candidates at prices that we consider appropriate. Even if we identify an appropriate acquisition candidate, we may not be able to negotiate satisfactory terms for the acquisition or finance the acquisition. If we
fail to complete acquisitions, we may not grow as rapidly as the market expects, which could adversely affect the market price of our common stock.



We may have difficulty integrating the operations of any companies that we acquire, which may adversely affect our results of operations.



The success of our acquisition strategy will depend
upon our ability to successfully integrate any businesses that we may acquire into our existing business. The integration of acquired business operations could disrupt our business by resulting in unforeseen operating difficulties, diverting
managements attention from day-to-day operations and requiring significant financial resources that would otherwise be used for the ongoing development of our business. The difficulties of integration may be increased by the necessity of
coordinating geographically dispersed organizations, integrating personnel with disparate business backgrounds and combining different corporate cultures. We also may not realize cost efficiencies or synergies that we anticipated when selecting our
acquisition candidates. Further, our decision to acquire a company may not be driven by cost efficiencies, synergies or increasing revenue. For example, we may seek to acquire one or more of our subcontractors because we do not want to risk losing
our relationship with the subcontractor if it is acquired by one of our competitors. In addition, we may need to record write-downs from future impairments of intangible assets, which could reduce our future reported earnings. At times, acquisition
candidates may have liabilities or adverse operating issues that we fail to discover through due diligence prior to the acquisition. Any of these outcomes could adversely affect our results of operations.



We may not be able to realize anticipated future income tax benefits,
which would adversely affect our earnings.





We anticipate realizing future income tax benefits as a result of the former shareholders of AMCOMP, Vitronics, CTI, OnBoard and MTI agreeing to Section
338(h)(10) elections under the Internal Revenue Code of 1986 in connection with our acquisitions of these companies. However, our ability to realize these income tax benefits is dependent on us continuing to generate earnings. If we are unable to
generate earnings or if we sustain substantial losses for the future, our ability to realize these income tax benefits may be limited or even eliminated, which would adversely affect our earnings.



RISKS RELATED TO GOVERNMENT CONTRACTING



Federal government spending priorities may change in a manner adverse
to our business.



Our business depends upon continued
federal government expenditures on intelligence, defense and other programs that we support. The overall U.S. defense budget declined from time to time in the late 1980s and the early 1990s. While spending authorizations for intelligence and
defense-related programs by the government have increased in recent years, and in particular after the September 11, 2001 terrorist attacks, future levels of expenditures and authorizations for those programs may decrease, remain constant or shift
to programs in areas where we do not currently provide services. A significant decline in government expenditures, or a shift of expenditures away from programs that we support, could adversely affect our business, prospects, financial condition or
operating results.



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Our federal government contracts may be terminated by the government at
any time, and if we do not replace them, our operating results may be adversely affected.



We derive most of our revenue from federal government contracts that typically span one or more base years and one or more option years. The option
periods may cover more than half of the contracts potential duration. Federal government agencies generally have the right not to exercise these option periods. In addition, our contracts typically also contain provisions permitting a
government customer to terminate the contract for its convenience, as well as for our default. A decision by a government agency not to exercise option periods or to terminate contracts could result in significant revenue shortfalls.



If the government terminates a contract for convenience, we may recover only
our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. We cannot recover anticipated profit on terminated work. If the government terminates a contract for default, we may not recover even those
amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source.



Federal government contracts contain other provisions that may be unfavorable to contractors.



Federal government contracts contain provisions and are subject to laws and
regulations that give the government rights and remedies not typically found in commercial contracts. As described above, these allow the government to terminate a contract for convenience or decline to exercise an option to renew. They also permit
the government to do the following:



| |  |  | reduce or modify contracts or subcontracts;
| | - |  | -------------------------------------------



| |  |  | cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | claim rights in products and systems produced by us; and
| | - |  | --------------------------------------------------------



| |  |  | suspend or debar us from doing business with the federal government.
| | - |  | --------------------------------------------------------------------



We must comply with complex procurement laws and regulations.



We must comply with and are affected by laws and regulations relating to the formation, administration and performance of
federal government contracts, which affect how we do business with our customers and may impose added costs on our business. Among the most significant regulations are:



| |  |  | the Federal Acquisition Regulations, and agency regulations supplemental to the Federal Acquisition Regulations, which comprehensively regulate the formation, administration and
performance of government contracts;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Truth in Negotiations Act, which requires certification and disclosure of all cost and pricing data in connection with contract negotiations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Cost Accounting Standards and Cost Principles, which impose accounting requirements that govern our right to reimbursement under certain cost-based government contracts; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and
technical data.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Moreover, we are subject to
industrial security regulations of the Department of Defense and other federal agencies that are designed to safeguard against foreigners access to classified information. If we were to come under foreign ownership, control or influence, our
federal government customers could terminate or decide not to renew our contracts, and it could impair our ability to obtain new contracts.



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Our contracts are subject to audits and cost adjustments by the federal
government.



The federal government audits and reviews
our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. Like most large government contractors, our direct and indirect contract costs are audited and reviewed on a continual
basis. Although audits have been completed on our incurred contract costs through 2001, audits for costs incurred or work performed after 2001 remain ongoing and, for much of our work in recent years, have not yet commenced. In addition, non-audit
reviews by the government may still be conducted on all our government contracts. An audit of our work, including an audit of work performed by companies we have acquired or may acquire, could result in a substantial adjustment to our revenue
because any costs found to be improperly allocated to a specific contract will not be reimbursed, and revenue we have already recognized may need to be refunded. If a government review or investigation uncovers improper or illegal activities, we may
be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of claims and profits, suspension of payments, treble damages, statutory penalties, fines and suspension or debarment from doing
business with federal government agencies, which could materially adversely affect our business, prospects, financial condition or operating results. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made
against us.



Restrictions on or other changes to the
federal governments use of service contracts may harm our operating results.



We derive a significant amount of revenue from service contracts with the federal government. The government may face restrictions from new legislation, regulations or government union pressures on the nature and
amount of services the government may obtain from private contractors. For example, the Truthfulness, Responsibility and Accountability in Contracting Act, proposed in 2001, would have limited and severely delayed the governments ability to
use private service contractors. Although this proposal was not enacted, it or similar legislation could be proposed at any time. Any reduction in the governments use of private contractors to provide services would adversely impact our
business.



Our participation in the competitive bidding
process, from which we derive significant revenue, presents a number of risks.



We derive significant revenue from federal government contracts that were awarded through a competitive bidding process. Most of the business that we expect to seek in the foreseeable future likely will be awarded
through competitive bidding. Competitive bidding presents a number of risks, including the:



| |  |  | need to bid on programs in advance of the completion of their design, which may result in unforeseen technological difficulties and cost overruns;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may not be awarded to us;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | need to accurately estimate the resources and cost structure that will be required to service any contract we are awarded; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, and the risk that any such protest or challenge
could result in the resubmission of bids on modified specifications, or in termination, reduction or modification of the awarded contract.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, pricing pressures may arise from increased competition and therefore reduce our operating margins.



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If we are unable to win particular contracts that are awarded through the
competitive bidding process, we may not be able to operate in the market for services that are provided under those contracts for a number of years. If we are unable to consistently win new contract awards over any extended period, our business and
prospects will be adversely affected.



We may not receive
the full amount authorized under contracts that we have entered into and may not accurately estimate our backlog and GSA schedule contract value.



The maximum contract value specified under a government contract that we enter into is not necessarily indicative of revenue that we will realize under
that contract. For example, we derive some of our revenue from government contracts in which we are not the sole provider, meaning that the government could turn to other companies to fulfill the contract, and from IDIQ contracts, which specify a
maximum but only a nominal minimum amount of goods or services that may be provided under the contract. In addition, Congress often appropriates funds for a particular program on a yearly basis, even though the contract may call for performance that
is expected to take a number of years. As a result, contracts typically are only partially-funded at any point during their term, and all or some of the work to be performed under the contracts may remain unfunded unless and until Congress makes
subsequent appropriations and the procuring agency allocates funding to the contract. As described above, most of our existing contracts are subject to modification and termination at the federal governments discretion. Moreover, we cannot
assure you that any contract included in our estimated contract value that generates revenue will be profitable. Nevertheless, we look at these contract values, including values based on the assumed exercise of options relating to these contracts,
in estimating the amount of our backlog. Because we may not receive the full amount we expect under a contract, our backlog may not accurately estimate our revenue. Also, in recent years we have been deriving an increasing percentage of our revenue
under GSA schedules. GSA schedules are procurement vehicles under which government agencies may, but are not required to, purchase professional services or products. We have developed a method of calculating GSA schedule value that we use
to evaluate estimates for the revenue we may receive under our GSA schedules. We believe our method of determining GSA schedule value is based on reasonable estimates and assumptions. However, there can be no assurance that our methodology
accurately estimates GSA schedule value. Estimates of future revenue included in backlog and GSA schedule value are not necessarily precise and the receipt and timing of any of this revenue is subject to various contingencies, many of which are
beyond our control. For a discussion of these contingencies, see Backlog above. We may never realize the revenue on programs included in backlog and GSA schedule value.



Security breaches in classified government systems could adversely affect our business.



Many of the programs we support and systems we develop, install and maintain
involve managing and protecting information involved in intelligence, national security and other classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and
prevent us from being eligible for further work on critical classified systems for federal government customers. Losses that we could incur from such a security breach could exceed the policy limits that we have for errors and omissions insurance,
which generally do not exceed $1 million per task order awarded.



Our business is dependent upon obtaining and maintaining required security clearances.



Many of our federal government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain
facility security clearances complying with federal government requirements. Obtaining and maintaining security clearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who already hold
security clearances. If our employees are unable to obtain or retain security clearances or if our employees who hold security clearances terminate employment with us, the customer whose work requires cleared employees could terminate the contract
or decide not to renew it upon its expiration. In addition, we expect that many of the contracts on which



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we will bid will require us to demonstrate our ability to obtain facility security clearances
and perform work with employees who hold specified types of security clearances. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we may not be
able to bid on or win new contracts, or effectively re-compete on expiring contracts or follow-on task orders.



Our employees may engage in misconduct or other improper activities.



We are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by employees could include
intentional failures to comply with federal government procurement regulations and failing to disclose unauthorized activities to us. Employee misconduct could also involve the improper use of our customers sensitive or classified information,
which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling
unknown or unmanaged risks or losses.



RISKS RELATED TO OUR COMMON STOCK



Our stock price may be extremely volatile, and you
may not be able to resell your shares at or above your acquisition price.



Prior to June 28, 2002, there was no public market for our common stock. An active trading market for our common stock may not be sustained, which could affect your ability to sell your shares.



Additionally, the price of our common stock may fluctuate widely, depending
upon many factors, including:



| |  |  | our perceived prospects;
| | - |  | ------------------------



| |  |  | the prospects of the information technology and government contracting industries in general;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | differences between our actual financial and operating results and those expected by investors and analysts;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | changes in analysts recommendations or projections;
| | - |  | ----------------------------------------------------



| |  |  | changes in general valuations for information technology and technical services companies; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | changes in general economic or market conditions and broad market fluctuations.
| | - |  | -------------------------------------------------------------------------------



Sustained threats of terrorist attacks and global unrest contributed to an economic slowdown and to instability in the U.S.
and other global financial equity markets. The armed hostilities that were initiated as a result of the September 11, 2001, attacks and future responses by the federal government may lead to further acts of terrorism in the United States or
elsewhere, and such developments could cause instability in global financial markets. All of these factors may increase the volatility of, or decrease, our stock price and could have a material adverse effect on your investment in our common stock.
As a result, our common stock may trade at prices significantly below your acquisition price, and you could lose all or part of your investment in the event you choose to sell your shares.



Mr. Soin, who is our founder and Chairman of our board of directors,
has a significant ownership interest in our company.



Mr. Soin owns or controls approximately 35% of the voting power and outstanding shares of our common stock. Accordingly, Mr. Soin has significant influence on all matters submitted to a vote of the holders of our common stock. Mr.
Soins voting power may have the effect of discouraging transactions involving an actual or a potential change of control of our company, regardless of whether a premium is offered over then-current market prices.



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We currently conduct, and in the past we have conducted, business with
entities that are controlled by or otherwise related to Mr. Soin.



The interests of Mr. Soin may conflict with the interests of other holders of our common stock.



We have contracts with entities that are owned or controlled by, or otherwise affiliated with, Mr. Soin.



We currently lease one of our properties from B.C. Real Properties, LLC.,
which is controlled by Mr. Soin. We also utilize aircraft partially owned by us and partially owned by a partnership controlled by Mr. Soin. From time to time, we enter into subcontracting relationships with other government contractors that are
affiliated with Mr. Soin. While we believe that the terms and conditions of these agreements with entities owned or controlled by, or otherwise affiliated with, Mr. Soin reflect or will reflect prevailing market conditions, we cannot assure you that
they are or will be as favorable to us as the terms and conditions that might be negotiated by independent parties on an arms-length basis.



A substantial number of shares of our common stock are eligible for sale by Mr. Soin, which could affect the market price of our common stock.



As of December 31, 2004, approximately 15,656,383
shares of our common stock were outstanding. Of these shares, Mr. Soin beneficially owned approximately 35%, of our outstanding common stock, all of which are eligible for sale by Mr. Soin under Rule 144 of the Securities Act, subject to the volume
restriction and manner of sale requirements imposed on affiliates.



We cannot predict the effect that any future sales of shares of our common stock by Mr. Soin, or the availability of such shares for sale, will have on the market price of our common stock. We believe that sales of substantial numbers of
shares of our common stock by Mr. Soin, or the perception that such sales could occur, could depress or otherwise adversely affect the market price of our common stock, which could make it difficult or impossible for us to sell additional shares of
common stock when we need to raise capital.



Under a
registration rights agreement, Mr. Soin has demand registration rights as well as piggyback registration rights in connection with future offerings of our common stock. Demand registration rights will allow Mr.
Soin to cause us to file a registration statement registering all or some of his shares. Piggyback registration rights will require us to provide notice to Mr. Soin if we propose to register any of our securities under the Securities Act
and grant him the right to include his shares in our registration statement. If Mr. Soin exercises these registration rights, he will be able to sell his shares included on a registration statement without the volume restriction and manner of sale
requirements imposed on affiliates under Rule 144.



Provisions in our charter documents could make a merger, tender offer or proxy contest difficult.



Our certificate of incorporation and bylaws may discourage, delay or prevent a change in control of our company that stockholders may consider favorable.
In addition, provisions in our certificate of incorporation and bylaws and in the Delaware corporate law may make it difficult for stockholders to change the composition of the board of directors in any one year and thus may make it difficult to
change the composition of management. Our certificate of incorporation and bylaws:



| |  |  | authorize the issuance of blank check preferred stock that could be issued by our board of directors to thwart a takeover attempt;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibit cumulative voting in the election of directors, which would otherwise allow holders of less than a majority of the stock to elect some directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | stagger our board of directors, making it more difficult to elect a majority of the directors on our board and preventing our directors from being removed without cause;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES



| |  |  | limit who may call special meetings of stockholders;
| | - |  | ----------------------------------------------------



| |  |  | prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | establish advance notice requirements for nominating candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | require that vacancies on our board of directors, including newly created directorships, be filled only by a majority vote of directors then in office.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Section 203 of the Delaware General Corporation Law may
discourage, delay or prevent a change in control by prohibiting the Company from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder.



Executive Officers of the Registrant



The following table identifies our executive officers and indicates their
ages and positions as of December 31, 2004:



|                     |  |     |  |                                                             
|-------------------- |  | --- |  | ------------------------------------------------------------
|Name                 |  | Age |  | Position                                                    
|Rajesh K. Soin       |  | 57  |  | Chairman of the Board and Director                          
|David S. Gutridge    |  | 58  |  | Chief Executive Officer, Secretary and Director             
|John E. Longhouser   |  | 61  |  | President                                                   
|Michael I. Gearhardt |  | 50  |  | Chief Financial Officer, Senior Vice President and Treasurer
|Donald H. Weisert    |  | 61  |  | Chief Operating Officer and Executive Vice President        
|James C. Clark       |  | 63  |  | Executive Vice President                                    
|Billy J. Bingham     |  | 65  |  | Senior Vice President                                       
|Rebecca S. Morgann   |  | 57  |  | Vice President, Director of Contracts                       



Set forth below is
biographical information for our executive officers:



Rajesh
K. Soinhas served as our Chairman of the Board since May 1984 and Chief Executive Officer from 1984 until May 2002. Mr. Soin has also served as Chairman of the Board of Directors and Chief Executive Officer of Soin International, LLC, a holding
company previously known as MTC International, LLC and an affiliate of ours, since 1998.



David S. Gutridgehas served as our Chief Executive Officer since October 2003 and as Secretary since April 2002. He also served as Chief Financial Officer, Treasurer and Executive Vice President from April
2002 until his appointment as Chief Executive Officer in October 2003. Mr. Gutridge joined us in 1993 and served as a Group President and Chief Operating Officer for us or one of our affiliates until becoming our Chief Financial Officer in April
2002. Prior to joining us, Mr. Gutridge had an extensive business career including approximately 12 years with the Fortune 500 company, Dayco Corp., where he was a director and held various offices such as Executive Vice President and Chief
Financial Officer, and President and Chief Operating Officer. Mr. Gutridge has been a director of ours since 2002.



John E. Longhouser, Retired Major General, U.S. Army, was appointed our President in November 2003. From July 2003 to November 2003, he served as
our Senior Vice President for Land Forces and Strategic Planning. Before joining us, he served as Senior Vice President, U.S. Army Programs for Burdeshaw Associates Ltd., a defense industry-consulting firm, from 1997 to 2003. Prior to joining
Burdeshaw Associates, Mr. Longhouser served in the U.S. Army for 33 years, managing the Armys combat vehicle programs and culminating with his appointment as Commanding General, U.S. Army Test and Evaluation Command, at Aberdeen Proving
Ground, Maryland.



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Michael I. Gearhardt has served as our Chief Financial Officer, Senior
Vice President and Treasurer since October 2003. From 2001 until he joined us, Mr. Gearhardt served as President for the worldwide operations of Carlisle Power Transmission Products, Inc., an industrial power transmission products manufacturer. From
1991 to 2001, Mr. Gearhardt served in various financial roles within Mark IV Industries, at the time a publicly traded automotive and industrial manufacturing company, including three years as Executive Vice President and Chief Financial Officer of
the Industrial Division.



Donald H. Weisert, Retired
Colonel, U.S. Air Force, joined us in 1992 and serves as our Executive Vice President and Chief Operating Officer. Mr. Weisert served as our Senior Vice President and Assistant Chief Operating Officer from 2002 to 2003, Vice President and Director
from 1999 to 2002, Department Manager from 1994 to 1999 and Program Manager from 1992 to 1994. Prior to joining us, Mr. Weisert served in the U.S. Air Force for 26 years, concluding as the Chief of Engineering and Manufacturing Development of
the B-2 Advanced Technology Bomber Program Office.



James C.
Clark, Retired Colonel, U.S. Air Force, joined us in 1991 and serves as our Executive Vice President with direct oversight of all our Air Force Programs. Mr. Clark served as our Vice President, Senior Vice President and Director from 1999 to
2002, and in various technical and management positions from 1991 to 1999. Prior to joining us, Mr. Clark served in the U.S. Air Force for 26 years, concluding as the Chief, Logistics Research Division.



Billy J. Bingham, Retired Brigadier General, U.S. Air Force, joined us
in 2004 and serves as our Senior Vice President of our National Security Group. Prior to joining us, he served as Senior Vice President of Science Applications International Corporation (SAIC), a research and engineering firm, where he was
responsible for its strategic and tactical intelligence business and for oversight of its U.S. Air Force C4ISR activities. Mr. Bingham joined SAIC as director of signals intelligence requirements in 1994 after his retirement from the U.S. Air Force
after 30 years of service, concluding as the assistant deputy director for operations and deputy chief, Central Security Service, National Security Agency (NSA).



Rebecca S. Morgann, joined us in 1994 and serves as our Vice President and Director of Contracts. Ms. Morgann
served as our Manager of Contracts and our Director of Contracts prior to her promotion to Vice President. Ms. Morgann has more than 25 years experience in contract management and government and commercial purchasing.



Each such officer shall hold such office until a successor is selected and
qualified.



Available Information



We make available free of charge on or through our Internet website our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Our internet address is http://www.mtctechnologies.com. The information contained on our website is not incorporated by reference
in this annual report on Form 10-K and should not be considered a part of this report.



Item 2.    Properties



We have maintained our corporate headquarters in Dayton, Ohio since 1984. We presently lease an approximately 60,000 square foot facility at 4032 Linden Avenue. The lease expires on November 16, 2018.



We lease a total of approximately 260,000 square feet in 42 locations
throughout the United States. Our aggregate monthly lease payment is approximately $274,000.



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We maintain one Sensitive Compartmented Information Facility, comprising
approximately 1,000 square feet in Dayton, Ohio. This is a reinforced facility with multiple secure zones, protected electronically and restricted to special classified need to know program access. This facility is also cleared for
Top-Secret Sensitive Compartmented Information (SCI) and Special Access data handling and storage. Eleven of our other locations in the United States are cleared for secret handling and storage.



Item 3.    Legal Proceedings



From time to time, we are involved in legal proceedings arising in the ordinary course of business. We do not believe that any pending litigation will have a material adverse effect on our financial condition, results
of operations, or cash flows.



Item 4.    Submission of Matters to a Vote of Security Holders



No matter was submitted to a vote of security holders during the fourth quarter of the year ended December 31, 2004, through the solicitation of proxies
or otherwise. We intend to present the following matters to a vote of security holders in connection with the Companys 2005 Annual Meeting of Stockholders on April 20, 2005:



| | 1. |  | Elect three directors
| | -- |  | ---------------------

| | 2. |  | Ratify the selection of Ernst & Young LLP as independent accountants
| | -- |  | --------------------------------------------------------------------

| | 3. |  | Transact any other business that may properly come before the Annual Meeting of Stockholders
| | -- |  | --------------------------------------------------------------------------------------------



PART II.



Item 5.    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



Market Information



Our common stock is quoted on the Nasdaq National Market, and began trading under the symbol MTCT on June 28, 2002. As of February 28,
2005, there were 15,738,763 shares of common stock outstanding and twelve stockholders of record. The number of stockholders of record is not representative of the number of beneficial stockholders due to the fact that many shares are held by
depositories, brokers, or nominees.



The following table lists
the high and low per share sales prices for our common stock as quoted on the Nasdaq Stock Market, where the stock trades under the symbol MTCT for the periods indicated.



|                             |  |             |       |     |   |      
|---------------------------- |  | ----------- | ----- | --- | - | -----
|                             |  | Sales Price
|                             |  | High        |       | Low
|Year Ended December 31, 2003 |  |             |       |     |   |      
|First quarter                |  | $           | 25.50 |     | $ | 17.10
|Second quarter               |  |             | 27.14 |     |   | 16.42
|Third quarter                |  |             | 28.40 |     |   | 21.45
|Fourth quarter               |  |             | 33.41 |     |   | 22.75
|                             |  |            
|Year Ended December 31, 2004 |  |             |       |     |   |      
|First quarter                |  | $           | 31.97 |     | $ | 21.50
|Second quarter               |  |             | 27.40 |     |   | 22.96
|Third quarter                |  |             | 27.79 |     |   | 23.08
|Fourth quarter               |  |             | 35.64 |     |   | 25.92



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Dividend Policy



We currently intend to retain any future earnings to support the development
and expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Payment of future dividends will be at the discretion of our board of directors after taking into account various factors, including our financial
condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. Our current revolving credit facility has limitations on our ability to pay dividends. In addition, the terms of any
future credit agreement may prevent us from paying any dividends or making any distributions or payments with respect to our capital stock.



All of our assets consist of the stock of one of our subsidiaries. We will have to rely upon dividends and other payments from our subsidiaries to
generate the funds necessary to make dividend payments, if any, on our common stock. Our subsidiaries, however, are legally distinct from us and have no obligation to pay amounts to us. The ability of our subsidiaries to make dividend and other
payments to us is subject to, among other things, the availability of funds, the terms of our subsidiaries indebtedness and applicable state laws.



Unregistered Sales of Securities



In January 2004, March 2004 and November 2004, we issued an aggregate of 166,842 shares of our common stock, with a value of approximately $4.5 million,
to the former shareholders of ICI as the result of the achievement of certain performance goals under the 2004 earn-out and contingency provisions contained in the stock purchase agreement. Shares of our capital stock issued in connection with the
earn-out and contingency provisions were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) thereof.



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Item 6.    Selected Financial Statement Data



The tables shown below set forth selected consolidated financial data for the years ended December 31, 2000 through 2004. There were no cash dividends declared or paid in any of the periods presented. Prior to
June 28, 2002, we were an S corporation for income tax purposes, and as a consequence, we paid no federal income tax and paid only certain state income taxes.



This selected financial data should be read in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our financial statements and the related notes included elsewhere in this document.



|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | ---- | ---------- |  | ---- | --------- | - |  | - | --------- | -
|                                                                                                              |  | Years Ended December 31,                        |           
|                                                                                                              |  | 2004                                            |            |   | 2003 |   |            | 2002 |  | 2001 |            |  | 2000 |          
|                                                                                                              |  | (in thousands, except share and per share data) |           
|Income statement data:                                                                                        |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Revenue                                                                                                       |  | $                                               | 273,027    |   |      | $ | 188,707    |      |  | $    | 118,540    |  | $    | 92,590    |   |  | $ | 75,961    |  
|Cost of revenue                                                                                               |  |                                                 | 229,622    |   |      |   | 158,058    |      |  |      | 96,356     |  |      | 75,248    |   |  |   | 61,866    |  
|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Gross profit                                                                                                  |  |                                                 | 43,405     |   |      |   | 30,649     |      |  |      | 22,184     |  |      | 17,342    |   |  |   | 14,095    |  
|General and administrative expenses excluding management fees to related party and stock compensation expense |  |                                                 | 12,098     |   |      |   | 9,525      |      |  |      | 7,792      |  |      | 5,074     |   |  |   | 4,965     |  
|Management fees to related party(1)                                                                           |  |                                                 |           |   |      |   |           |      |  |      | 556        |  |      | 2,395     |   |  |   | 2,549     |  
|Stock compensation expense(2)                                                                                 |  |                                                 |           |   |      |   |           |      |  |      | 5,215      |  |      |          |   |  |   |          |  
|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Total general and administrative expenses.                                                                    |  |                                                 | 12,098     |   |      |   | 9,525      |      |  |      | 13,563     |  |      | 7,469     |   |  |   | 7,514     |  
|Intangible asset amortization(3)                                                                              |  |                                                 | 2,508      |   |      |   | 742        |      |  |      | 119        |  |      | 1,086     |   |  |   | 471       |  
|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Operating income                                                                                              |  |                                                 | 28,799     |   |      |   | 20,382     |      |  |      | 8,502      |  |      | 8,787     |   |  |   | 6,110     |  
|Net interest expense (income)                                                                                 |  |                                                 | (547       | ) |      |   | (288       | )    |  |      | 160        |  |      | 570       |   |  |   | 618       |  
|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Income from continuing operations before income tax expense                                                   |  |                                                 | 29,346     |   |      |   | 20,670     |      |  |      | 8,342      |  |      | 8,217     |   |  |   | 5,492     |  
|Income tax expense                                                                                            |  |                                                 | 11,685     |   |      |   | 8,181      |      |  |      | 656        |  |      |          |   |  |   |          |  
|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Income from continuing operations                                                                             |  |                                                 | 17,661     |   |      |   | 12,489     |      |  |      | 7,686      |  |      | 8,217     |   |  |   | 5,492     |  
|Loss from discontinued operations(4)                                                                          |  |                                                 |           |   |      |   |           |      |  |      |           |  |      | (453      | ) |  |   | (1,182    | )
|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Net income                                                                                                    |  | $                                               | 17,661     |   |      | $ | 12,489     |      |  | $    | 7,686      |  | $    | 7,764     |   |  | $ | 4,310     |  
|                                                                                                              |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Basic and diluted earnings per common share from continuing operations                                        |  | $                                               | 1.15       |   |      | $ | 0.95       |      |  | $    | 0.67       |  | $    | 0.83      |   |  | $ | 0.56      |  
|Weighted average basic shares outstanding                                                                     |  |                                                 | 15,300,608 |   |      |   | 13,083,578 |      |  |      | 11,405,351 |  |      | 9,887,482 |   |  |   | 9,887,482 |  
|Weighted average diluted shares outstanding                                                                   |  |                                                 | 15,347,548 |   |      |   | 13,185,424 |      |  |      | 11,538,802 |  |      | 9,887,482 |   |  |   | 9,887,482 |  
|                                                                                                              |  |                                                 |            |   |     
|Balance sheet data:                                                                                           |  |                                                 |            |   |      |   |            |      |  |      |            |  |      |           |   |  |   |           |  
|Working capital                                                                                               |  | $                                               | 70,968     |   |      | $ | 32,539     |      |  | $    | 36,895     |  | $    | 10,115    |   |  | $ | 11,311    |  
|Total assets                                                                                                  |  |                                                 | 193,811    |   |      |   | 102,267    |      |  |      | 71,488     |  |      | 25,734    |   |  |   | 41,003    |  
|Long-term obligations                                                                                         |  |                                                 |           |   |      |   |           |      |  |      |           |  |      | 13,075    |   |  |   | 18,418    |  
|Stockholders equity (deficiency in net assets)                                                               |  |                                                 | 147,161    |   |      |   | 65,235     |      |  |      | 49,778     |  |      | (121      | ) |  |   | 10,913    |  



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---

|(1) |  | The management fees to a related party were paid to a wholly owned affiliate of our then sole
stockholder. The nature of the services received from the affiliate included our then sole stockholders services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition
candidates and legal services. These fees ceased on March 31, 2002. Although the management fees have been eliminated, most of these costs have been replaced on an annual recurring basis, and by virtue of being a public company, we now incur certain
general and administrative costs not previously incurred.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Non-cash stock compensation expense of $5.2 million was recognized in March 2002, in
connection with the issuance to three senior executives of non-qualified options to purchase 415,273 shares of common stock pursuant to Rule 701 under the Securities Act of 1933. The charge represents the difference between the option price of $4.19
and the estimated fair market value of the common stock on the date of grant of $16.75 per share. For more information, please see Managements Discussion and Analysis of Financial Condition and Results of Operations and Note L to
our consolidated financial statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | We adopted SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002, and discontinued the amortization of goodwill as of that date. In addition, we
achieved full amortization of the purchase price allocated to the contracts of RJO Enterprises, Inc. in September 2001. The intangible asset amortization recognized in 2002 through 2004 relates to the purchase price allocated to the acquisitions
that were made beginning in October 2002.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | In anticipation of our initial public offering, we disposed of or discontinued substantially all of our operations that were not related to our core business.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis should be read in conjunction with Selected Consolidated Financial Data and our consolidated
financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Portions of this document that are not statements of historical or current fact are forward-looking statements. The forward-looking statements in this
document involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this document should be read as applying to all related forward-looking statements wherever they
appear. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause our actual results to differ materially from those anticipated include, but are not limited to, the following:
risks related to the growth of our FAST contract, including strains on resources and decreases in operating margins; federal government audits and cost adjustments; differences between authorized amounts and amounts received by us under government
contracts; government customers failure to exercise options under contracts; changes in federal government (or other applicable) procurement laws, regulations, policies and budgets; our ability to attract and retain qualified personnel; our
ability to retain contracts during re-bidding processes; pricing pressures; undertaking acquisitions that might increase our costs or liabilities or be disruptive; integration of acquisitions, including the acquisitions of CTI, MTI, and OnBoard; and
changes in general economic and business conditions.



Overview



We provide sophisticated systems engineering, information
technology, intelligence and program management services primarily to U.S. defense, intelligence and civilian federal government agencies. Our services encompass the full system life cycle from requirements definition, design, development and
integration to upgrade, sustainment and support for mission critical information and weapons systems. For the years ended December 31, 2004, 2003, and 2002, about 96%, 95%, and 87%, respectively, of our revenue was derived from our customers in the
Department of Defense and the intelligence community, including the U.S. Air Force, U.S. Army and joint military commands. Having served the Department of Defense since our founding in 1984, we believe we are well positioned to assist the federal
government as it conducts the war on global terrorism and modernizes its defense capabilities.



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We report operating results and financial data as a single segment and
believe our contract base is well diversified. However, a significant amount of our revenue has in recent years been earned under two contracts, the ASC/BPA and the FAST contract. Revenue under the ASC/BPA was approximately 9%, 13%, and 20%, of our
total revenue for the years ended December 31, 2004, 2003, and 2002, respectively. The largest task order under the ASC/BPA amounted to approximately 1%, 2%, and 2% of total revenue for the years ended December 31, 2004, 2003, and 2002,
respectively. The ASC/BPA, which was originally awarded as a small business set-aside contract, expires on September 30, 2005 and the replacement contract will also be a small business set-aside contract for which we will not qualify to bid as a
prime contractor. While we believe we have a viable strategy to retain the bulk of our work and profitability on the replacement contract by becoming a subcontractor for a number of small businesses bidding on the re-compete, our ability to retain
work under the replacement contract is uncertain. It is possible that some of our current work under the ASC/BPA could be converted to GSA schedules or other contract vehicles.



In July 2001, we were one of six awardees of the FAST contract with a ceiling of $7.4 billion and with a period of
performance, including option years, which extends to 2008. Revenue under the FAST contract was approximately 26%, 33%, and 17%, of total revenue for the years ended December 31, 2004, 2003, and 2002, respectively. FAST contract revenue for the year
ended December 31, 2004 was comprised of over 75 separate task orders, the largest of which amounted to approximately 5% of total revenue for that period. In prior years, we performed some of the work we are now performing on the FAST contract on
other contract vehicles. While the FAST contract represents a significant percentage of our total revenue, we believe that the broad array of engineering, technical and management services we provide to the federal government through various
contract vehicles allows for diversified business growth. No other task order, including individual contracts under our GSA vehicles, accounted for more than 3% of revenue for the year ended December 31, 2004.



Under the FAST contract, we have the potential to compete for hundreds of
millions of dollars in task orders over its approximately three and a half year remaining life as the U.S. Air Force maintains and modernizes aircraft and defense systems. As of December 31, 2004, we have been awarded over 75 individual task orders
under the FAST contract with a remaining potential award value of approximately $914.0 million if all options are exercised. Although we believe the FAST contract presents an opportunity for significant additional growth and expansion of our
services, we expect that many of the task orders we may be awarded under the FAST contract will be for program management services, which historically have been less profitable than our other activities. In addition, the FAST contract involves a
significantly greater use of subcontractors than we have used historically. Margins on subcontractor-based revenue are typically lower than the margins on our direct work. Since the FAST contract is expected to be a significant part of our business
for the next several years, it is possible that our operating income, as a percentage of total revenue, could diminish, while growing in absolute dollars.



Our federal government contracts, which comprised over 96% of our revenue in 2004, are subject to government audits of our direct and indirect costs. The
incurred cost audits have been completed through December 31, 2001 and the rates have been agreed to. We do not anticipate any material adjustment to our financial statements in subsequent periods for audits not yet completed.



For the years ended December 31, 2004, 2003, and 2002, approximately 77%,
83%, and 77%, respectively, of our revenue came from work provided to our customers as a prime contractor and the balance came from work provided as a subcontractor. Approximately 74%, 64%, and 79% of our revenue for the years ended
December 31, 2004, 2003, and 2002, respectively, consisted of the work of our employees, and the balance was provided by the work of subcontractors. Our work as a prime contractor on the FAST contract has resulted, and is expected to continue
to result, in a significant use of subcontractors. The increased use of subcontractors on the FAST contract has been partially offset by the business model of our recent acquisitions, which typically have not used subcontractors to a great extent.



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We typically provide our services under contracts with a base term, often of
three years, and option terms, typically two to four additional terms of one year or more, which the customer can exercise on an annual basis. We also have contracts with fixed terms, some extending as long as five or six years. Although we
occasionally obtain government contracts for which the contracting agency obligates funding for the full term of the contract, most of our government contracts receive incremental funding, which subjects us to the risks associated with the
governments annual appropriations process.



Contract
Types.    When contracting with our government customers, we enter into one of three basic types of contracts: time-and-materials, fixed-price and cost-plus.



| |  |  | Time-and-materials contracts.    Under a time-and-materials contract, we receive a fixed hourly rate for each direct labor hour worked, plus reimbursement
for our allowable direct costs. To the extent that our actual labor costs vary significantly from the negotiated rates under a time-and-materials contract, we can either make more money than we originally anticipated or lose money on the contract.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fixed-price contracts.    Under fixed-price contracts, we agree to perform specified work for a firm, fixed price. If our actual costs exceed our estimate
of the costs to perform the contract, we may generate less profit or incur a loss. A significant portion of our fixed-price contract work is under a fixed-price level-of-effort contract, which represents a similar level of risk to our
time-and-materials contracts, under which we agree to perform certain units of work for a fixed price per unit. We generally do not undertake high-risk work, such as software development, under fixed-price contracts.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cost-plus contracts.    Under cost-plus contracts, we are reimbursed for allowable costs and receive a supplemental fee, which represents our profit.
Cost-plus fixed fee contracts specify the contract fee in dollars or as a percentage of anticipated costs. Cost-plus incentive fee and cost-plus award fee contracts provide for increases or decreases in the contract fee, within specified limits,
based upon actual results as compared to contractual targets for factors such as cost, quality, schedule and performance.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table provides information about the percentage of revenue attributable to each of these types of contracts for the periods indicated:



|                   |  |                          |   |  |      |   |  |      |  
|------------------ |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                   |  | Years ended December 31, |  
|                   |  | 2004                     |   |  | 2003 |   |  | 2002 |  
|Time-and-materials |  | 53                       | % |  | 50   | % |  | 61   | %
|Fixed-price        |  | 30                       |   |  | 35   |   |  | 24   |  
|Cost-plus          |  | 17                       |   |  | 15   |   |  | 15   |  
|                   |  |                          |   |  |      |   |  |      |  
|Total              |  | 100                      | % |  | 100  | % |  | 100  | %
|                   |  |                          |   |  |      |   |  |      |  



Critical Accounting Policies



Revenue Recognition.    Our
critical accounting policies primarily concern revenue recognition and related cost estimation. We recognize revenue under our government contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services
or products has occurred, and collection of the contract price is considered probable and can be reasonably estimated. Revenue is earned under time-and-materials, fixed-price and cost-plus contracts.



We recognize revenue on time-and-materials contracts to the extent of
billable rates times hours delivered, plus expenses incurred. For fixed-price contracts within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue
is recognized on the percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services, as appropriate. For fixed-price-completion contracts that are not within the scope



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of SOP 81-1, revenue is generally recognized as earned according to contract terms as the
service is provided. We will provide our customer with a number of different services that are generally documented through separate negotiated task orders that detail the services to be provided and the Companys compensation for these
services. Services rendered under each task order represent an independent earnings process and are not dependent on any other service or product sold. We recognize revenue on cost-plus contracts to the extent of allowable costs incurred plus a
proportionate amount of the fee earned, which may be fixed or performance-based. We consider fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract, which generally corresponds
to the timing of contractual billings. We record provisions for estimated losses on uncompleted contracts in the period in which we identify those losses. We consider performance-based fees, including award fees, under any contract type to be earned
only when we can demonstrate satisfaction of a specific performance goal or we receive contractual notification from a customer that the fee has been earned. In all cases, we recognize revenue only when pervasive evidence of an arrangement exists
(including when waiting for formal funding authorization under federal government contracts), services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured.



Contract revenue recognition inherently involves estimation. From time to
time, facts develop that require us to revise the total estimated costs or revenues expected. In most cases, these changes relate to changes in the contractual scope of the work and do not significantly impact the expected profit rate on a contract.
We record the cumulative effects of any revisions to the estimated total costs and revenues in the period in which the facts become known.



We began recording work-in-process inventory during the second quarter of 2003 because some of our task orders under the FAST contract have reached the
production delivery stage. On these task orders, we are now required to meet customer delivery schedules as part of our program management services. The inventory relates to costs accumulated under fixed-price-type contracts accounted for under the
completed contract method and certain output measures, such as units delivered, of the percentage-of-completion method. The work-in-process inventory is stated at the lower of cost or market and is computed on an average cost basis.



Goodwill and Intangible Assets.    Goodwill
represents the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired companies. Purchase price allocated to intangible assets is amortized using the straight-line method over the estimated terms of the
contracts, which range from three to eight years. We perform impairment reviews on an annual basis. We have elected to conduct our annual impairment reviews as of the fourth quarter of each year. We base our assessment of possible impairment on the
discounted present value of the operating cash flows of our consolidated operating unit. We determined that no impairment charges were required in 2004 and 2003.



Income Taxes.    We calculate our income tax provision using the asset and liability method.
Under the asset and liability method, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates
would be recognized in income in the period that includes the enactment date.



Prior to June 28, 2002, the date that we changed our S corporation status to C corporation status, all items of income and expense were passed through and taxed at the stockholder level. Therefore, we were
not required to record a provision for federal and state income taxes. Accordingly, the December 31, 2002 income statement does not reflect an income tax provision for the periods prior to June 28, 2002.





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Results of Operations



Our results of operations may not be directly comparable on a year-to-year basis due to acquisitions we made throughout the
three years ended December 31, 2004. We acquired CTI in July, 2004, Vitronics and ICI in October, 2003, and AMCOMP in October, 2002. Additionally, in the first quarter of 2005, we acquired MTI and OnBoard. As part of our overall strategy to expand
our customer reach and technical capabilities, we expect to continue to strategically acquire complementary businesses in the future.



The following table sets forth, for each period indicated, the percentage of items in the statement of income in relation to revenue:



|                                          |  |                          |   |  |       |   |  |       |  
|----------------------------------------- |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                          |  | Years ended December 31, |  
|                                          |  | 2004                     |   |  | 2003  |   |  | 2002  |  
|Revenue                                   |  | 100.0                    | % |  | 100.0 | % |  | 100.0 | %
|Cost of revenue                           |  | 84.1                     |   |  | 83.8  |   |  | 81.3  |  
|                                          |  |                          |   |  |       |   |  |       |  
|Gross profit                              |  | 15.9                     |   |  | 16.2  |   |  | 18.7  |  
|General and administrative expenses:      |  |                          |   |  |       |   |  |       |  
|Third party                               |  | 4.3                      |   |  | 4.8   |   |  | 6.1   |  
|Related party                             |  | 0.1                      |   |  | 0.2   |   |  | 0.9   |  
|Stock compensation expense                |  |                         |   |  |      |   |  | 4.4   |  
|                                          |  |                          |   |  |       |   |  |       |  
|Total general and administrative expenses |  | 4.4                      |   |  | 5.0   |   |  | 11.4  |  
|Intangible asset amortization             |  | 0.9                      |   |  | 0.4   |   |  | 0.1   |  
|                                          |  |                          |   |  |       |   |  |       |  
|Operating income                          |  | 10.6                     |   |  | 10.8  |   |  | 7.2   |  
|Net interest income (expense)             |  | 0.2                      |   |  | 0.2   |   |  | (0.1  | )
|                                          |  |                          |   |  |       |   |  |       |  
|Income before income tax expense          |  | 10.8                     |   |  | 11.0  |   |  | 7.1   |  
|Income tax expense                        |  | 4.3                      |   |  | 4.4   |   |  | 0.6   |  
|                                          |  |                          |   |  |       |   |  |       |  
|Net income                                |  | 6.5                      | % |  | 6.6   | % |  | 6.5   | %
|                                          |  |                          |   |  |       |   |  |       |  



Prior to June 28,
2002, we operated as an S corporation and were not subject to federal or certain state income taxes for the first six months of 2002. See income tax discussion below.



Comparison of Year Ended December 31, 2004 and Year Ended December 31, 2003



Revenue:    Revenue for the year ended December
31, 2004 increased 44.7%, or $84.3 million, to $273.0 million as compared to $188.7 million for 2003. Organic growth of approximately 17% amounted to $31.9 million of the $84.3 million increase in revenue, and the remaining $52.5 million of revenue
growth, or approximately 28%, came from acquisitions. Our organic growth of $31.9 million was the result of an increase in work on new or existing contracts and task orders, primarily from growth in FAST, Defense Information Systems Network, PM
Soldier Systems, and C4ISR task orders.



Gross
profit:    Gross profit for the year ended December 31, 2004 increased 41.6%, or $12.8 million, to $43.4 million as compared to $30.6 million for 2003. This increase primarily reflects the significant increase in revenue.
Gross profit as a percentage of revenue for the year ended December 31, 2004 was 15.9% as compared to 16.2% for 2003. This decrease in gross margin as a percentage was primarily due to the increase in cost-plus contracts for 2004 as compared to
2003.



General and administrative
expenses:    Total general and administrative expenses for the year ended December 31, 2004 increased 27.0%, or approximately $2.6 million, to $12.1 million as compared to $9.5 million for the year ended December 31, 2003.
This increase was primarily the result of increased salary and benefit expenses resulting from the addition of personnel to support our growth as well as an increase in professional fees associated with establishing our office in Germany and for
compliance with Section 404 of the Sarbanes-Oxley Act of 2002. However, general and administrative expenses declined from approximately 5.0% of revenue in 2003 to approximately 4.4% of revenue in 2004 as a result of operating efficiencies.



Intangible asset
amortization:    Intangible asset amortization for the year ended December 31, 2004 increased approximately $1.8 million to $2.5 million as compared to $0.7 million for the year ended



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December 31, 2003. This increase is a result of a full year of amortization of the
purchase price allocated to the intangible assets of ICI and Vitronics of $1.2 million as well as the $0.8 million of intangible asset amortization recorded in the third and fourth quarters of 2004 relating to the acquisition of CTI.



Operating income:    Operating income for the year
ended December 31, 2004 increased 41.3%, or $8.4 million, to $28.8 million as compared to $20.4 million for the year ended December 31, 2003, primarily resulting from the increased gross profit, partially offset by higher general and administrative
expenses and intangible asset amortization. It should be noted that operating income as a percentage of revenue was approximately 10.6% in 2004 compared to approximately 10.8% in 2003. Operating income as a percentage of revenue decreased because of
the increase in intangible amortization expense, which increased as a percentage of revenue from approximately 0.4% in 2003 to approximately 0.9% in 2004. The decline in operating income as a percentage caused by increased intangible amortization
expense was partially offset by an improvement in the operating leverage of cash expenses.



Net interest income:    Net interest income for the year ended December 31, 2004, increased by $259,000 to $547,000 as compared to net interest income of $288,000 for the year ended December
31, 2003. Interest income increased as a result of the investment of the proceeds received in February 2004 from a public offering of our common stock.



Income tax expense:    For the year ended December 31, 2004, our effective income tax rate was 39.8% compared with an effective
tax rate of 39.6% for the year ended December 31, 2003.



Net
income:    Net income increased 41.4%, or approximately $5.2 million, to $17.7 million for the year ended December 31, 2004, compared to $12.5 million for the year ended December 31, 2003. This increase in net income was
primarily the result of increased operating income, which was partially offset by the increased income tax expense.



Comparison of Year Ended December 31, 2003 and Year Ended December 31, 2002



The comparability of general and administrative expense, operating income, income tax expense, and net income for the years
ended December 31, 2003 and 2002 was affected by the following significant items:



| |  |  | the $5.2 million non-cash stock compensation expense recorded in March 2002;
| | - |  | ----------------------------------------------------------------------------



| |  |  | non-cash deferred income tax benefit of $2.6 million recorded in June 2002, when the company changed its S corporation status to C corporation status; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | income tax expense being recorded for the year ended December 31, 2003 and not during the six months ended June 30, 2002 (by virtue of the company being an S corporation until June
28, 2002).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In order to depict general and
administrative expense, operating income, income tax expense, and net income on a more directly comparable basis, the following table shows 2002 as reported and, along with the following discussion of results of operations, considers the above items
on a pro forma basis and assumes a 40% effective tax rate:



|                                   |  |                                        |        |                       |   |        |                                       |  |   |       
|---------------------------------- |  | -------------------------------------- | ------ | --------------------- | - | ------ | ------------------------------------- |  | - | ------
|                                   |  | Year endedDecember 31,2002 As reported |        | Pro forma Adjustments |   |        | Year ended December 31,2002 Pro forma
|                                   |  | (in thousands)                        
|General and administrative expense |  | $                                      | 13,563 |                       | $ | (5,215 | )                                     |  | $ | 8,348 
|Operating income                   |  |                                        | 8,502  |                       |   | 5,215  |                                       |  |   | 13,717
|Income before income taxes         |  |                                        | 8,342  |                       |   | 5,215  |                                       |  |   | 13,557
|Income tax expense                 |  |                                        | 656    |                       |   | 4,767  |                                       |  |   | 5,423 
|Net income                         |  | $                                      | 7,686  |                       | $ | 448    |                                       |  | $ | 8,134 



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Revenue:    Revenue for the year ended December
31, 2003 increased 59.2%, or $70.2 million, to $188.7 million as compared to $118.5 million for 2002. Organic growth of approximately 43% amounted to $50.8 million of the $70.2 million increase in revenue, and the remaining $19.4 million of revenue
growth, or approximately 17%, came from acquisitions. $40.2 million of our organic growth was delivered through the use of subcontractors, primarily in connection with several task orders under the FAST contract. The balance of our organic growth
was the result of a $13.7 million increase in work by our own people on new or increased contracts and task orders, primarily from growth in FAST, ASC/BPA and GSA task orders. The increase in direct revenue was partially offset by a $2.9 million
decrease in revenue from our two largest non-defense customer groups and decreased revenue on task orders that ended after December 31, 2002.



Gross profit:    Gross profit for the year ended December 31, 2003 increased 38.2%, or $8.5 million, to $30.6 million as
compared to $22.2 million for 2002. This increase primarily reflects the significant increase in revenue. Gross profit as a percentage of revenue for the year ended December 31, 2003 was 16.2% as compared to 18.7% for 2002. This decrease in gross
margin percentage is primarily attributable to the previously forecasted increase in the use of subcontractors. Margins on subcontractor-based revenue are typically lower than the margins on our direct work.



General and administrative expenses:    Total
general and administrative expenses for the year ended December 31, 2003, decreased 29.8%, or approximately $4.0 million, to $9.5 million as compared to $13.6 million for the year ended December 31, 2002. This decrease is solely attributable to the
$5.2 million non-cash stock compensation expense that was recorded in March 2002, as discussed below. Without this charge, general and administrative expenses for the year ended December 31, 2003 would have increased 14.1%, or $1.2 million as
compared to the prior year, primarily as a result of increased salary and benefit expenses resulting from the addition of personnel to support our growth as well as increased insurance and bid and proposal costs. However, the percentage of general
and administrative expenses before stock compensation declined as a percentage of revenue from 7.0% for the year ended December 31, 2002 to 5.0% for 2003.



Non-cash stock compensation expense of $5.2 million was recorded in March 2002 in connection with the issuance to three senior executives of non-qualified
options to purchase 415,273 shares of common stock. The charge represents the difference between the option price of $4.19 and the estimated fair market value of the common stock on the date of grant of $16.75 per share. All other options issued
since March 2002 have an option price equal to the estimated fair market value of the shares at the date of the grant and as such require no charge against earnings.



Intangible asset amortization:    Intangible asset amortization for the year ended December 31,
2003 increased approximately $0.6 million, to $0.7 million as compared to $0.1 million for the year ended December 31, 2002. This increase is a result of a full year of amortization of the purchase price allocated to the contracts of AMCOMP of
$0.4 million as well as the $0.3 million of intangible asset amortization recorded in the fourth quarter of 2003 for the acquisitions of ICI and Vitronics.



Operating income:    Operating income for the year ended December 31, 2003 increased 139.7%, or $11.9 million, to $20.4 million
as compared to $8.5 million for the year ended December 31, 2002. A major cause of this increase in operating income was primarily the result of the $5.2 million non-cash stock compensation expense that was recorded in March 2002, as discussed
above. Without this charge, operating income for the year ended December 31, 2003 would have increased 48.6%, or $6.7 million as compared to 2002, primarily resulting from the increased gross profit, partially offset by higher general and
administrative expenses (excluding the non-cash stock compensation expense) and intangible asset amortization. Excluding the stock compensation expense, operating income as a percentage of revenue decreased from 11.6% of revenue for the year ended
December 31, 2002 to 10.8% for 2003.



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Net interest income (expense):    Net interest
income for the year ended December 31, 2003, increased by $0.5 million, to $0.3 million as compared to net interest expense of $0.2 million for the year ended December 31, 2002. We repaid all outstanding debt in July 2002 with proceeds from our
initial public offering and invested the balance of the proceeds, which has resulted in net interest income.



Income tax expense:    We did not record a provision for income taxes for the periods prior to June 28, 2002 because we were an
S corporation for income tax purposes and, as a result, were not subject to federal or certain state income taxes. On June 28, 2002, we changed from an S corporation to a C corporation under Internal Revenue Service code. As a result of this change,
we were required under SFAS No. 109 to establish deferred tax balances. As a result, a non-cash deferred tax benefit of $2.6 million and current and non-current deferred tax assets were recorded in June 2002, primarily for timing differences between
book and tax reporting associated with accrued compensation items. During the third quarter of 2002, we began recording a provision for federal and state income taxes. Accordingly, an income tax provision is included in the income statements for all
periods after June 28, 2002. Since we have started paying income taxes, our effective rate has remained relatively unchanged at approximately 40%.



Net income:    Net income increased 62.5%, or approximately $4.8 million, to $12.5 million for the year ended December 31,
2003, compared to $7.7 million for the year ended December 31, 2002. This increase in net income was primarily the result of increased operating income. Excluding the $5.2 million non-cash stock compensation expense and the $2.6 million non-cash
deferred tax benefit recorded during the year ended December 31, 2002 and assuming that a 40% income tax rate had been effective for the entire twelve months ended December 31, 2002, net income for the year ended December 31, 2003 would have
increased 53.5%, or $4.4 million, as compared to 2002.



Liquidity and
Capital Resources



Historically, our positive cash flow
from operations and our available credit facility have provided us adequate liquidity and working capital to fund our operational needs and support our acquisition activities.



Our cash and cash equivalents balance was $31.0 million and $15.1 million on December 31, 2004 and 2003, respectively. Our
working capital was $71.0 million and $32.5 million at December 31, 2004 and 2003, respectively. Our working capital increased $38.5 million in 2004 primarily as a result of the following fluctuations:



| |  |  | a $15.9 million increase in cash and cash equivalents; and
| | - |  | ----------------------------------------------------------



| |  |  | a $27.3 million increase in accounts receivable and costs and estimated earnings in excess of amounts billed resulting from the significant increase in revenue in 2004 as well as
the acquisition of CTI in the third quarter of 2004; partially offset by
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an $8.5 million increase in current liabilities primarily resulting from a $4.3 million increase in compensation and related accruals due primarily to the increased number of
employees; a $2.9 million increase in accounts payable from non-labor costs, such as subcontract costs and direct materials, resulting from the increased revenue in 2004 and a $1.3 million increase in other current liabilities for
acquisition-related retention payments due in 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our operating activities provided cash of $5.2 million for the year ended December 31, 2004. The cash provided by operating activities was primarily composed of net income adjusted for $3.2 million of depreciation and amortization expense
and $16.2 million of cash used for working capital purposes as discussed above.



Our operating activities provided cash of $11.4 million for the year ended December 31, 2003 and $7.2 million for the year ended December 31, 2002. The $4.2 million increase in cash provided by operating activities in
2003 was primarily a result of a $4.8 million increase in net income offset by a $0.4 million net increase in working capital requirements.



Our investing activities used cash of $49.0 million for the year ended December 31, 2004, as a result of $47.2 million in payments made in connection with
acquisitions. The $47.2 million includes the additional



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consideration of $1.1 million paid to the former shareholders of AMCOMP in April 2004, $1.2
million in earn out and contingency payments made to former shareholders of ICI in 2004, and the purchase price and acquisition related payments totaling $44.8 million paid in the third quarter of 2004 for the acquisition of CTI. We currently
anticipate that capital expenditures for 2005 will range between $6.0 and $7.0 million and will be primarily for additional facilities, software tools and computer equipment to support our growth.



Our investing activities used cash of $18.9 million for the year ended
December 31, 2003 compared with $8.1 million in the same period of 2002. The 2003 increase in cash used in investing activities was due primarily to the additional consideration of $1.1 million paid to the former shareholders of AMCOMP in April 2003
and the purchase price and acquisition related payments totaling $16.8 million paid in the fourth quarter of 2003 for the acquisitions of ICI and Vitronics.



Our financing activities provided net cash of $59.8 million for the year ended December 31, 2004, primarily from the net proceeds from the public offering
of 2,250,000 shares of common stock that was completed in February 2004, as well as the effect of common stock issuances related to stock option transactions.



During the year ended December 31, 2003, cash provided from financing activities was $0.6 million, primarily due to net
common stock issuances and surrenders related to stock option transactions. During the year ended December 31, 2002, cash provided from financing activities was $22.7 million. The cash was primarily provided by the net proceeds of our initial public
offering of $43.8 million. We used a portion of these proceeds to repay our total bank debt outstanding on July 3, 2002, reducing the amount outstanding under those instruments from $14.1 million as of December 31, 2001 to zero. Prior to our initial
public offering, we also made $9.2 million of distributions to our then sole stockholder, offset by a $2.0 million capital contribution from our then sole stockholder.



In February 2004, we completed a public offering of 2,250,000 shares of common stock. Our net proceeds from the sale of the
shares, after the underwriting discount and other expenses, were $59.3 million. We used the net proceeds from the offering (together with cash on hand and additional borrowings) for working capital and general corporate purposes, as well as for the
acquisition of complementary businesses.



Certain
contingent payment obligations related to the acquisitions made since October 2002 require us to make additional cash payments and issue additional shares of our common stock in 2005. See BusinessAcquisitions above.



In January 2005, we purchased all of the outstanding capital stock of OnBoard
from its sole shareholder. The initial purchase price was $34.1 million paid from cash on hand at closing. In addition, OnBoards shareholder may receive additional cash payments through 2007 if certain operating goals are achieved. It is
anticipated that the Company will realize income tax benefits with a net present value of approximately $7 million in future periods as the result of the OnBoard shareholder agreeing to a Section 338(h)(10) election under the Internal Revenue Code
of 1986.



In February 2005, we purchased all of the outstanding
capital stock of MTI. The initial purchase price was $70.0 million paid in cash at closing, of which approximately $2.0 million was from available cash on hand and $68.0 million of which was borrowed under on our revolving credit facility. MTI
shareholders may receive additional cash payments of up to $5.0 million if certain operating goals are achieved in 2005. It is also anticipated that the Company will realize income tax benefits with a net present value of approximately $12 million
in future periods as the result of the MTI shareholders agreeing to a Section 338(h)(10) election under the Internal Revenue Code of 1986.



During 2004, we had a $55.0 million revolving credit facility that could be increased to $80.0 million subject to meeting certain requirements and
obtaining our lenders approval. The credit agreement governing this revolving credit facility was initially scheduled to expire on December 31, 2005; however, in July 2004, we amended the agreement to extend the term to December 31, 2006. The
credit agreement can be extended for

additional one-year terms by mutual agreement with our lenders. In December 2004, we amended the credit



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agreement with the same four banks, increasing the borrowing availability to $85.0 million,
as well as modifying certain financial covenants.



Generally,
the interest rate we pay on borrowings range from the prime rate less 25 basis points to prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) plus 150 to 225 basis points, depending on the ratio of our funded debt to
earnings before interest, taxes, depreciation and amortization (EBITDA).



Borrowings under our revolving credit facility are secured by a general lien on our consolidated assets. We are also subject to certain restrictions and we are required to meet certain financial covenants. These
covenants require that we, among other things, maintain certain financial ratios and minimum net worth levels. These covenants also restrict our activities regarding the incurrence of additional indebtedness in excess of $60.0 million other than the
debt incurred under the revolving credit facility. As of December 31, 2004, we were in compliance with these covenants.



As of February 28, 2005 we had $65.5 million outstanding under our revolving credit facility. Borrowings under the revolving credit facility bear interest
at a rate of prime less 25 basis points. The Company is required to pay interest in March, June, September, and December of each calendar year beginning in March 2005.



Part of our growth strategy is to pursue strategic acquisitions of businesses. We have made acquisitions in the past, and
intend to make acquisitions in the future. Historically, we have financed our acquisitions with the proceeds of our public common stock offerings, cash on hand and shares of our common stock. We expect to finance future acquisitions with cash
generated by operations, additional sales or issuances of shares of our common stock, borrowings under our credit facility or a combination of the foregoing. We will take actions to increase the availability under our credit facility as needed to
support our future growth.



Management believes that the cash
generated by operations and amounts available under our credit facility, will be sufficient to fund our working capital requirements, debt service obligations, purchase price commitments for completed acquisitions and capital expenditures for the
next twelve months and through December 2006 when our revolving credit facility expires.



Our ability to generate cash from operations depends to a significant extent on winning new and re-competed contracts and/or task orders from our customers in competitive bidding processes. If a significant portion of
our government contracts were terminated or if our win rate on new or re-competed contracts and task orders were to decline significantly, our operating cash flow would decrease, which would adversely affect our liquidity and capital resources.



Off-Balance Sheet Arrangements



We do not participate in transactions that generate relationships with
unconsolidated entities or financial partnerships, such as special purpose entities (SPEs) or variable interest entities (VIEs), which would have been established for the purpose of facilitating off-balance sheet arrangements or other limited
purposes. As of December 31, 2004, we were not involved in any unconsolidated SPEs or VIEs.



Contractual Obligations



Following is information regarding our long-term contractual obligations outstanding at December 31, 2004:



|                            |  |                       |        |                  |   |           |  |           |       |                   |   |       |  |   |      
|--------------------------- |  | --------------------- | ------ | ---------------- | - | --------- |  | --------- | ----- | ----------------- | - | ----- |  | - | -----
|                            |  | Payment due by period
|Contractual Obligations     |  | Total                 |        | Less than 1 year |   | 13 years |  | 35 years |       | More than 5 years
|                            |  | (in thousands)       
|Long-Term Debt Obligations  |  | $                     |       |                  | $ |          |  | $         |      |                   | $ |      |  | $ |     
|Capital Lease Obligations   |  |                       |       |                  |   |          |  |           |      |                   |   |      |  |   |     
|Operating Lease Obligations |  |                       | 13,035 |                  |   | 2,809     |  |           | 3,951 |                   |   | 3,309 |  |   | 2,966
|Purchase Obligations        |  |                       |       |                  |   |          |  |           |      |                   |   |      |  |   |     
|                            |  |                       |        |                  |   |           |  |           |       |                   |   |       |  |   |      
|Total                       |  | $                     | 13,035 |                  | $ | 2,809     |  | $         | 3,951 |                   | $ | 3,309 |  | $ | 2,966
|                            |  |                       |        |                  |   |           |  |           |       |                   |   |       |  |   |      



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Recent Accounting Pronouncements



On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee
stock options, to be valued at fair value on the date of grant and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. SFAS No. 123(R) is
effective for all stock-based awards granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested
awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We are currently assessing the impact of adopting SFAS 123(R) to our
consolidated results of operations.



QUARTERLY RESULTS OF OPERATIONS



Our results of operations, particularly our revenue,
gross profit and cash flow, may vary significantly from quarter to quarter depending on a number of factors, including the progress of contract performance, revenue earned on contracts, the number of billable days in a quarter, the timing of
customer orders or deliveries, changes in the scope of contracts and billing of other direct and subcontract costs, timing of funding of task orders, the commencement and completion of contracts we have been awarded and general economic conditions.
Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity, as well as in the number of contracts or task orders
commenced or completed during any quarter, may cause significant variations in operating results from quarter to quarter.



The federal governments fiscal year ends September 30. If a federal budget for the next fiscal year has not been approved by that date in each year,
our customers may have to suspend engagements that we are working on until a budget has been approved. Any suspensions may cause us to realize lower revenue in the fourth quarter of the year, and possibly ensuing quarters of the following year.
On October 28, 2004, President Bush signed the National Defense Authorization Act for Fiscal Year 2005. In addition, a change in Presidential administrations, Congressional majorities or in other senior federal government officials may
negatively affect the rate at which the federal government purchases technology and engineering services. The federal governments fiscal year end can also trigger increased purchase requests from customers for equipment and materials. Any
increased purchase requests we receive as a result of the federal governments fiscal year end would serve to increase our fourth quarter revenues, but will generally decrease profit margins for that quarter, as these activities typically are
not as profitable as our normal service offerings. Further, some of our subcontractors have calendar year ends and sometimes submit large billings at the end of the calendar year that can cause a spike in our revenue and expenses related to
subcontracts. This will also generally decrease our profit margins as revenues generated by billings from subcontractors generally have much lower margins than our revenues generated by direct work. As a result of the above factors, period-to-period
comparisons of our revenue and operating results may not be meaningful. Potential investors should not rely on these comparisons as indicators of future performance as no assurances can be given that quarterly results will not fluctuate, causing a
material adverse effect on our operating results and financial condition.



Item 7A.    Quantitative and Qualitative Disclosures about Market Risk



Our exposure to market risk relates to changes in interest rates for borrowings under our revolving credit facility. As a result of our initial public
offering that was completed July 3, 2002, all of the borrowings under our revolving credit facility were repaid. As of December 31, 2004, we did not have any outstanding borrowings under our revolving credit facility. Primarily in connection with
our acquisition of MTI, we borrowed funds under our revolving credit facility subsequent to December 31, 2004, and had $65.5 million outstanding as of February 28, 2005.



We have invested a significant portion of our cash and cash equivalents in short-term, investment grade, interest- bearing
securities including guaranteed obligations of the United States and its agencies. A hypothetical 10% change in interest rates on these securities would not have, and during the year ended December 31, 2004 and the preceding fiscal year would not
have had, a significant impact on future earnings or the fair market value of the securities.



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Item 8.    Financial Statements and Supplementary Data



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                                              |  | 38  
|Report of Independent Registered Public Accounting Firm                                              |  | 39  
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                         |  | 40  
|Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002               |  | 41  
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003 and 2002 |  | 42  
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002           |  | 43  
|Notes to the Consolidated Financial Statements                                                       |  | 44  



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors

MTC Technologies, Inc.



We have audited the consolidated balance sheets of MTC Technologies, Inc. as
of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders equity, and cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the financial statements referred
to above present fairly, in all material respects, the consolidated financial position of MTC Technologies, Inc. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the two years in the period
ended December 31, 2004, in conformity with accounting principles generally accepted in the United States.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of MTC
Technologies, Inc.s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission,
and our report dated February 28, 2005 expressed an unqualified opinion thereon.



/s/    Ernst & Young LLP



Dayton, Ohio

February 28, 2005



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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors

MTC Technologies, Inc.



We have audited the accompanying consolidated statements of income,
stockholders equity and cash flows of MTC Technologies, Inc. and subsidiaries (the Company) for the year ended December 31, 2002. These consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audit.



We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.



In our opinion, such
consolidated financial statements present fairly, in all material respects, the consolidated results of operations and cash flows of MTC Technologies, Inc. and subsidiaries for the year ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.



/s/    DELOITTE & TOUCHE LLP



Dayton, Ohio

February 19, 2003



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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                    |  | December 31,                                                    |        
|                                                                                                                                                                    |  | 2004                                                            |         |   | 2003 |  
|                                                                                                                                                                    |  | (dollar amounts inthousands, except share and pershare amounts) |        
|CURRENT ASSETS:                                                                                                                                                     |  |                                                                 |         |   |      |   |         |  
|Cash and cash equivalents (Note A)                                                                                                                                  |  | $                                                               | 31,015  |   |      | $ | 15,050  |  
|Restricted cash (Note A)                                                                                                                                            |  |                                                                 | 871     |   |      |   |        |  
|Accounts receivablenet (Notes A and B)                                                                                                                             |  |                                                                 | 72,541  |   |      |   | 46,004  |  
|Cost and estimated earnings in excess of billings on uncompleted contracts (Note B)                                                                                 |  |                                                                 | 3,013   |   |      |   | 2,249   |  
|Work-in-process inventories (Note A)                                                                                                                                |  |                                                                 | 4,344   |   |      |   | 2,488   |  
|Prepaid expenses and other current assets                                                                                                                           |  |                                                                 | 2,913   |   |      |   | 1,957   |  
|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  
|Total current assets                                                                                                                                                |  |                                                                 | 114,697 |   |      |   | 67,748  |  
|PROPERTY AND EQUIPMENTNet (Notes A and C)                                                                                                                          |  |                                                                 | 3,696   |   |      |   | 2,382   |  
|GOODWILL (Notes A, J and K)                                                                                                                                         |  |                                                                 | 57,510  |   |      |   | 23,817  |  
|INTANGIBLE ASSETS, NET (Notes A, I and K)                                                                                                                           |  |                                                                 | 17,657  |   |      |   | 8,164   |  
|OTHER ASSETS (Note A)                                                                                                                                               |  |                                                                 | 251     |   |      |   | 156     |  
|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  
|TOTAL ASSETS                                                                                                                                                        |  | $                                                               | 193,811 |   |      | $ | 102,267 |  
|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  
|                                                                                                                                                                    |  |                                                                
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                |  |                                                                 |         |   |      |   |         |  
|CURRENT LIABILITIES:                                                                                                                                                |  |                                                                 |         |   |      |   |         |  
|Accounts payable                                                                                                                                                    |  | $                                                               | 21,430  |   |      | $ | 18,572  |  
|Restricted funds payable to the government (Note A)                                                                                                                 |  |                                                                 | 871     |   |      |   |        |  
|Compensation and related items                                                                                                                                      |  |                                                                 | 14,097  |   |      |   | 9,774   |  
|Amount due under earn-out agreement (Note I)                                                                                                                        |  |                                                                 | 4,858   |   |      |   | 5,668   |  
|Billings in excess of costs and estimated earnings on uncompleted contracts (Note B)                                                                                |  |                                                                 | 460     |   |      |   | 481     |  
|Other current liabilities                                                                                                                                           |  |                                                                 | 2,013   |   |      |   | 714     |  
|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  
|Total current liabilities                                                                                                                                           |  |                                                                 | 43,729  |   |      |   | 35,209  |  
|LONG-TERM DEBT (Note D)                                                                                                                                             |  |                                                                 |        |   |      |   |        |  
|DEFERRED INCOME TAX LIABILITIES (Notes A and M)                                                                                                                     |  |                                                                 | 2,371   |   |      |   | 1,823   |  
|OTHER LONG-TERM LIABILITIES                                                                                                                                         |  |                                                                 | 550     |   |      |   |        |  
|COMMITMENTS AND CONTINGENT LIABILITIES (Notes D, E, I and N)                                                                                                        |  |                                                                 |         |   |      |   |         |  
|                                                                                                                                                                    |  |                                                                
|STOCKHOLDERS EQUITY:                                                                                                                                               |  |                                                                 |         |   |      |   |         |  
|Common stock, $0.001 par value, 50,000,000 shares authorized, 15,656,383 and 13,210,946 shares issued and outstanding at December 31, 2004,
and 2003, respectively, |  |                                                                 | 16      |   |      |   | 13      |  
|Preferred stock, $0.001 par value, 5,000,000 shares authorized, none of which is outstanding                                                                        |  |                                                                 |        |   |      |   |        |  
|Paid-in capital                                                                                                                                                     |  |                                                                 | 118,013 |   |      |   | 53,751  |  
|Retained earnings                                                                                                                                                   |  |                                                                 | 30,493  |   |      |   | 12,832  |  
|Treasury stock                                                                                                                                                      |  |                                                                 | (1,361  | ) |      |   | (1,361  | )
|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  
|Total stockholders equity                                                                                                                                          |  |                                                                 | 147,161 |   |      |   | 65,235  |  
|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                          |  | $                                                               | 193,811 |   |      | $ | 102,267 |  
|                                                                                                                                                                    |  |                                                                 |         |   |      |   |         |  



See notes to
consolidated financial statements.



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CONSOLIDATED STATEMENTS OF INCOME



|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|------------------------------------------- |  | ----------------------------------------------------------------- | ---------- | ---- | - | ---------- |  | - | ---------- | -
|                                            |  | Years ended December 31,                                          |           
|                                            |  | 2004                                                              |            | 2003 |   | 2002       | 
|                                            |  | (dollar amounts in thousands, except share and per share amounts) |           
|Revenue (Notes A and H)                     |  | $                                                                 | 273,027    |      | $ | 188,707    |  | $ | 118,540    |  
|Cost of revenue (Notes A and H)             |  |                                                                   | 229,622    |      |   | 158,058    |  |   | 96,356     |  
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|Gross profit                                |  |                                                                   | 43,405     |      |   | 30,649     |  |   | 22,184     |  
|                                            |  |                                                                   |           
|General and administrative expenses:        |  |                                                                   |            |      |   |            |  |   |            |  
|Third-party                                 |  |                                                                   | 11,814     |      |   | 9,015      |  |   | 7,285      |  
|Related party (Note H)                      |  |                                                                   | 284        |      |   | 510        |  |   | 1,063      |  
|Stock compensation expense (Notes A and L)  |  |                                                                   |           |      |   |           |  |   | 5,215      |  
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|Total general and administrative expenses   |  |                                                                   | 12,098     |      |   | 9,525      |  |   | 13,563     |  
|Intangible asset amortization (Note J)      |  |                                                                   | 2,508      |      |   | 742        |  |   | 119        |  
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|Operating income                            |  |                                                                   | 28,799     |      |   | 20,382     |  |   | 8,502      |  
|                                            |  |                                                                   |           
|Interest income (expense):                  |  |                                                                   |            |      |   |            |  |   |            |  
|Interest income                             |  |                                                                   | 547        |      |   | 288        |  |   | 236        |  
|Interest expense                            |  |                                                                   |           |      |   |           |  |   | (396       | )
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|Net interest income (expense)               |  |                                                                   | 547        |      |   | 288        |  |   | (160       | )
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|Income before income taxes                  |  |                                                                   | 29,346     |      |   | 20,670     |  |   | 8,342      |  
|Income tax expense (Note M)                 |  |                                                                   | 11,685     |      |   | 8,181      |  |   | 656        |  
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|Net income                                  |  | $                                                                 | 17,661     |      | $ | 12,489     |  | $ | 7,686      |  
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|Basic and diluted earnings per common share |  | $                                                                 | 1.15       |      | $ | 0.95       |  | $ | 0.67       |  
|                                            |  |                                                                   |            |      |   |            |  |   |            |  
|                                            |  |                                                                   |           
|Weighted average common shares outstanding: |  |                                                                   |            |      |   |            |  |   |            |  
|Basic                                       |  |                                                                   | 15,300,608 |      |   | 13,083,578 |  |   | 11,405,351 |  
|Diluted                                     |  |                                                                   | 15,347,548 |      |   | 13,185,424 |  |   | 11,538,802 |  





See notes to consolidated financial statements.



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CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY



|                                                                |  |                               |   |                |        |    |                           |   |         |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   |         |  
|--------------------------------------------------------------- |  | ----------------------------- | - | -------------- | ------ | -- | ------------------------- | - | ------- | ------------------- |  | - | ------------- | - |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                |  | Common Stock                  |   | Paid-InCapital |        |    | RetainedEarnings(Deficit) |   |         | Due FromStockholder |  |   | TreasuryStock |   |  | Total |       
|                                                                |  | Shares                        |   |                | Amount |    |                           |   |         |                    
|                                                                |  | (dollar amounts in thousands) |  
|BALANCEDecember 31, 2001                                       |  | 9,887,482                     |   |                | $      | 10 |                           | $ | 6,399   |                     |  | $ | (4,530        | ) |  | $     | (2,000 | ) |  | $ |       |   |  | $ | (121    | )
|Net income                                                      |  |                               |   |                |        |    |                           |   |         |                     |  |   | 7,686         |   |  |       |        |   |  |   |        |   |  |   | 7,686   |  
|Stockholder contribution                                        |  |                               |   |                |        |    |                           |   |         |                     |  |   |               |   |  |       | 2,000  |   |  |   |        |   |  |   | 2,000   |  
|Stockholder distributions                                       |  |                               |   |                |        |    |                           |   | (6,405  | )                   |  |   | (2,813        | ) |  |       |        |   |  |   |        |   |  |   | (9,218  | )
|Net proceeds from initial public offering offering              |  | 2,875,000                     |   |                |        | 3  |                           |   | 43,832  |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 43,835  |  
|Stock compensation expense related to issuance of stock options |  |                               |   |                |        |    |                           |   | 5,215   |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 5,215   |  
|Exercise of stock options                                       |  | 145,273                       |   |                |        |    |                           |   | 608     |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 608     |  
|Surrender of common stock from stock option transactions        |  | (17,518                       | ) |                |        |    |                           |   |         |                     |  |   |               |   |  |       |        |   |  |   | (412   | ) |  |   | (412    | )
|Other                                                           |  |                               |   |                |        |    |                           |   | 185     |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 185     |  
|                                                                |  |                               |   |                |        |    |                           |   |         |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   |         |  
|BALANCEDecember 31, 2002                                       |  | 12,890,237                    |   |                |        | 13 |                           |   | 49,834  |                     |  |   | 343           |   |  |       |       |   |  |   | (412   | ) |  |   | 49,778  |  
|Net income                                                      |  |                               |   |                |        |    |                           |   |         |                     |  |   | 12,489        |   |  |       |        |   |  |   |        |   |  |   | 12,489  |  
|Common stock issued in connection with acquisition activities   |  | 98,079                        |   |                |        |    |                           |   | 2,400   |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 2,400   |  
|Exercise of stock options                                       |  | 275,740                       |   |                |        |    |                           |   | 1,517   |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 1,517   |  
|Surrender of common stock from stock option transactions        |  | (53,110                       | ) |                |        |    |                           |   |         |                     |  |   |               |   |  |       |        |   |  |   | (949   | ) |  |   | (949    | )
|                                                                |  |                               |   |                |        |    |                           |   |         |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   |         |  
|BALANCEDecember 31, 2003                                       |  | 13,210,946                    |   |                |        | 13 |                           |   | 53,751  |                     |  |   | 12,832        |   |  |       |       |   |  |   | (1,361 | ) |  |   | 65,235  |  
|Net income                                                      |  |                               |   |                |        |    |                           |   |         |                     |  |   | 17,661        |   |  |       |        |   |  |   |        |   |  |   | 17,661  |  
|Common stock issued in connection with acquisition activities   |  | 166,842                       |   |                |        | 1  |                           |   | 4,424   |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 4,425   |  
|Exercise of stock options                                       |  | 28,595                        |   |                |        |    |                           |   | 542     |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 542     |  
|Net proceeds from public offering                               |  | 2,250,000                     |   |                |        | 2  |                           |   | 59,296  |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   | 59,298  |  
|                                                                |  |                               |   |                |        |    |                           |   |         |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   |         |  
|BALANCEDecember 31, 2004                                       |  | 15,656,383                    |   |                | $      | 16 |                           | $ | 118,013 |                     |  | $ | 30,493        |   |  | $     |       |   |  | $ | (1,361 | ) |  | $ | 147,161 |  
|                                                                |  |                               |   |                |        |    |                           |   |         |                     |  |   |               |   |  |       |        |   |  |   |        |   |  |   |         |  



See notes to
consolidated financial statements.



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CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                                                  |  | Years ended December 31,      |        
|                                                                                  |  | 2004                          |         |   | 2003 |   |         | 2002 | 
|                                                                                  |  | (dollar amounts in thousands) |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                             |  |                               |         |   |      |   |         |      |  |   |        |  
|Net income                                                                        |  | $                             | 17,661  |   |      | $ | 12,489  |      |  | $ | 7,686  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                               |         |   |      |   |         |      |  |   |        |  
|Stock compensation expense                                                        |  |                               | 69      |   |      |   |        |      |  |   | 5,215  |  
|Deferred income tax benefit (liability)                                           |  |                               | 228     |   |      |   | 1,344   |      |  |   | (1,268 | )
|Depreciation and amortization                                                     |  |                               | 3,239   |   |      |   | 1,172   |      |  |   | 513    |  
|Loss on sale of fixed assets                                                      |  |                               | 182     |   |      |   |        |      |  |   |       |  
|Other                                                                             |  |                               |        |   |      |   |        |      |  |   | 10     |  
|Changes in operating assets and liabilities (net of acquisitions):                |  |                               |         |   |      |   |         |      |  |   |        |  
|Accounts receivable                                                               |  |                               | (18,063 | ) |      |   | (7,259  | )    |  |   | (7,710 | )
|Costs and estimated earnings in excess of billings on uncompleted contracts       |  |                               | (764    | ) |      |   | (79     | )    |  |   | (1,653 | )
|Work in process inventories                                                       |  |                               | (1,856  | ) |      |   | (2,488  | )    |  |   |       |  
|Prepaid expenses and other assets                                                 |  |                               | (138    | ) |      |   | (54     | )    |  |   | (710   | )
|Accounts payable                                                                  |  |                               | 2,702   |   |      |   | 4,359   |      |  |   | 5,770  |  
|Compensation and related items                                                    |  |                               | 1,894   |   |      |   | 1,480   |      |  |   | 365    |  
|Billings in excess of costs and estimated earnings on uncompleted contracts       |  |                               | (21     | ) |      |   | 220     |      |  |   | (795   | )
|Other current liabilities                                                         |  |                               | 34      |   |      |   | 208     |      |  |   | (178   | )
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|Net cash provided by operating activities                                         |  |                               | 5,167   |   |      |   | 11,392  |      |  |   | 7,245  |  
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|                                                                                  |  |                               |        
|CASH FLOWS FROM INVESTING ACTIVITIES:                                             |  |                               |         |   |      |   |         |      |  |   |        |  
|Proceeds from sale of marketable equity securities                                |  |                               |        |   |      |   |        |      |  |   | 167    |  
|Payments for acquired businesses                                                  |  |                               | (47,192 | ) |      |   | (17,997 | )    |  |   | (7,343 | )
|Purchase of marketable equity securities                                          |  |                               |        |   |      |   |        |      |  |   | (10    | )
|Proceeds from sale of property and equipment                                      |  |                               | 224     |   |      |   |        |      |  |   |       |  
|Additions to property and equipment                                               |  |                               | (2,051  | ) |      |   | (863    | )    |  |   | (908   | )
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|Net cash used in investing activities                                             |  |                               | (49,019 | ) |      |   | (18,860 | )    |  |   | (8,094 | )
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|                                                                                  |  |                               |        
|CASH FLOWS FROM FINANCING ACTIVITIES:                                             |  |                               |         |   |      |   |         |      |  |   |        |  
|Proceeds from initial public offering                                             |  |                               |        |   |      |   |        |      |  |   | 43,835 |  
|Issuance of common stock                                                          |  |                               | 59,817  |   |      |   | 1,517   |      |  |   | 609    |  
|Net repayments on the revolving credit agreement                                  |  |                               |        |   |      |   |        |      |  |   | (9,075 | )
|Payments on long-term debt                                                        |  |                               |        |   |      |   |        |      |  |   | (5,000 | )
|Capital contribution                                                              |  |                               |        |   |      |   |        |      |  |   | 2,000  |  
|Repurchase of common stock                                                        |  |                               |        |   |      |   | (949    | )    |  |   | (412   | )
|Cash distributions to stockholder                                                 |  |                               |        |   |      |   |        |      |  |   | (9,218 | )
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|Net cash provided by financing activities                                         |  |                               | 59,817  |   |      |   | 568     |      |  |   | 22,739 |  
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|                                                                                  |  |                               |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                              |  |                               | 15,965  |   |      |   | (6,900  | )    |  |   | 21,890 |  
|CASH AND CASH EQUIVALENTS:                                                        |  |                               |         |   |      |   |         |      |  |   |        |  
|Beginning of period                                                               |  |                               | 15,050  |   |      |   | 21,950  |      |  |   | 60     |  
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  
|End of period                                                                     |  | $                             | 31,015  |   |      | $ | 15,050  |      |  | $ | 21,950 |  
|                                                                                  |  |                               |         |   |      |   |         |      |  |   |        |  



See notes to
consolidated financial statements.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



A.    SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES



OperationsWe provide sophisticated systems engineering, information technology, intelligence and program management services,
primarily to U.S. defense, intelligence and civilian federal government agencies.



Sales to the federal government represent substantially all of our revenue. Consequently, accounts receivable balances consist primarily of amounts due from the federal government. In 2004, there were two contract
vehicles containing over 145 task orders, which accounted for approximately 35% of our total revenue. In 2003 and 2002, these contracts accounted for approximately 46% and 37% of our total revenue, respectively. While the contract vehicles represent
a significant portion of our total revenues, we believe that the broad array of engineering, technical and management services we provide to the federal government through various contract vehicles allows for diversified business growth.



We operate as one segment, delivering a broad array of services primarily
to the federal government in four areas, which are offered separately or in combination across our customer base. These services are Systems Engineering and Technical Services, Information Technology, Intelligence and Program Management. Although we
offer the services referred to above, revenue is internally reviewed by our management primarily on a contract basis. Therefore, it would be impracticable to determine revenue by services offered. In addition, there were no sales to any foreign
customers.



Use of EstimatesThe
consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include amounts based on managements best estimates and judgments. The use of estimates and
judgments may affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.



Principles of ConsolidationThe consolidated financial statements include the accounts of MTC Technologies, Inc. and its subsidiaries. All intercompany transactions and balances have been eliminated.



Cash and Cash EquivalentsWe consider all highly
liquid investments with a maturity of three months or less when purchased to be cash equivalents. For these investments, the carrying amount is a reasonable estimate of fair value.



Restricted Cash and Restricted Funds Payable to the GovernmentRestricted cash and restricted
funds payable to the government of $871,000 at December 31, 2004, includes proceeds from sales of government property that we conducted on behalf of a government customer. We collect the funds from these sales and periodically pay them to the
government over the course of the contract.



Accounts
ReceivableAccounts receivable consist of amounts billed and currently due from customers, and include unbilled costs and accrued profits primarily related to revenues on long-term contracts that have been recognized for accounting
purposes but not yet billed to customers. As such revenues are recognized, appropriate amounts of customer advances, performance-based payments and progress payments are reflected as an offset to the related accounts receivable balance.



Revenue RecognitionWe recognize revenue under our
government contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred, and collection of the contract price is considered probable and can be reasonably estimated. Revenue
is earned under time-and-materials, fixed-price and cost-plus contracts.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



We recognize revenue on time-and-materials contracts to the extent of billable rates times hours
delivered, plus expenses incurred. For fixed price contracts within the scope of Statement of Position 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1), revenue is recognized on the
percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services, as appropriate. For fixed price-completion contracts that are not within the scope of SOP 81-1, revenue is
generally recognized as earned according to contract terms as the service is provided. We will provide our customer with a number of different services that are generally documented through separate negotiated task orders that detail the services to
be provided and the compensation for these services. Services rendered under each task order represent an independent earnings process and are not dependent on any other service or product sold. We recognize revenue on cost-plus contracts to the
extent of allowable costs incurred plus a proportionate amount of the fee earned, which may be fixed or performance-based. We consider fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of
the contract, which generally corresponds to the timing of contractual billings. We record provisions for estimated losses on uncompleted contracts in the period in which we identify those losses. We consider performance-based fees, including award
fees, under any contract type to be earned only when we can demonstrate satisfaction of a specific performance goal or we receive contractual notification from a customer that the fee has been earned. In all cases, we recognize revenue only when
pervasive evidence of an arrangement exists (including when waiting for formal funding authorization under federal government contracts), services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured.



Contract revenue recognition inherently involves estimation.
From time to time, facts develop that require us to revise the total estimated costs or revenues expected. In most cases, these changes relate to changes in the contractual scope of the work, and do not significantly impact the expected profit rate
on a contract. We record the cumulative effects of any revisions to the estimated total costs and revenues in the period in which the facts become known.



Our federal government contracts are subject to subsequent government audit of direct and indirect costs. The majority of such incurred cost audits have
been completed through 2001. Our management does not anticipate any material adjustment to the consolidated financial statements in subsequent periods for audits not yet completed.



Property and EquipmentWe record our property and equipment at cost. Depreciation and amortization of
property and equipment are provided using straight-line and accelerated methods over estimated useful lives. We use estimated useful lives of 3-7 years for equipment, 5 years for vehicles, 5-7 years for furniture and fixtures and 5-15 years for
leasehold improvements.



Other
AssetsOther assets are primarily comprised of security deposits made to our lessors in conjunction with operating leases. See Note E Operating Leases for further information. The security deposit balance at December 31,
2004 and 2003 was $251,000 and $156,000, respectively.



Work-in-process InventoryWe began recording work-in-process inventory during the second quarter of 2003 because some of our task orders under the Flexible Acquisition and Sustainment Tool (FAST) contract have reached the
production delivery stage. On these task orders we are now required to meet customer delivery schedules as part of our program management services. The inventory relates to costs accumulated under fixed-price-type contracts accounted for under the
completed contract method and certain output measures, such as units delivered, of the percentage-of-completion method. The work-in-process inventory is stated at the lower of cost or market and is computed on an average cost basis. The
work-in-process inventory balance at December 31, 2004 and 2003 has been reduced by $844,000 and $176,000, respectively, in progress payments.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Goodwill and Intangible AssetsGoodwill represents the excess of cost over the
fair value of net tangible and identifiable intangible assets of acquired companies. Purchase price allocated to intangible assets is amortized using the straight-line method over the estimated terms of the contracts, which range from three to eight
years. We perform impairment reviews on an annual basis. We have elected to conduct our annual impairment reviews as of the fourth quarter of each year. We base our assessment of possible impairment on the discounted present value of the operating
cash flows of our consolidated operating unit. See Note J, Goodwill and Intangible Assets.



Long-lived AssetsLong-lived assets and certain intangibles are reviewed for impairment, based upon the undiscounted expected future cash flows, whenever events or circumstances indicate that the
carrying amount of such assets may not be recoverable.



Fair Value of Financial InstrumentsThe carrying amount of our accounts receivable, accounts payable and accrued expenses approximate their fair value. As of December 31, 2004, there was no bank debt outstanding; however,
our revolving credit agreement has a floating interest rate that varies with current indices and, as such, the recorded value would approximate fair value.



Income TaxesWe calculate our income tax provision using the asset and liability method. Under the asset and liability method, deferred
income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates would be recognized in income in the period that
includes the enactment date.



Earnings Per Common
ShareBasic earnings per common share have been computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period
and shares reacquired during the period are weighted for the portion of the period that they were outstanding. The weighted average shares for the years ended December 31, 2004, 2003 and 2002 are as follows:



|                                                   |  |                          |  |            |  |           
|-------------------------------------------------- |  | ------------------------ |  | ---------- |  | ----------
|                                                   |  | Years ended December 31,
|                                                   |  | 2004                     |  | 2003       |  | 2002      
|Basic weighted average common shares outstanding   |  | 15,300,608               |  | 13,083,578 |  | 11,405,351
|Effect of potential exercise of stock options      |  | 43,980                   |  | 84,070     |  | 133,451   
|Effect of contingently issued shares               |  | 2,960                    |  | 17,776     |  |          
|                                                   |  |                          |  |            |  |           
|Diluted weighted average common shares outstanding |  | 15,347,548               |  | 13,185,424 |  | 11,538,802
|                                                   |  |                          |  |            |  |           



Stock-Based
CompensationAs permitted under SFAS No. 123, Accounting for Stock-Based Compensation, we account for stock-based awards using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees. Compensation expense for stock options granted to employees under the 2002 Equity and Performance Incentive Plan is recognized based on the difference, if any, between the fair value of our stock and
the exercise price of the option at the date of grant. Compensation expense of $5.2 million was recognized on options that were granted to three key members of our senior management in May 2002, to the extent that the estimated fair value of the
options exceeded the option price. The options granted fulfilled a stock compensation award that was made in March 2002.



Recent Accounting PronouncementsOn December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.
123(R), Share-Based Payment, which is a revision of SFAS No. 123 and



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at
fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. SFAS No. 123(R) is effective for all stock-based awards
granted on or after July 1, 2005. In addition, companies must also recognize compensation expense related to any awards that are not fully vested as of the effective date. Compensation expense for the unvested awards will be measured based on the
fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123. We are currently assessing the impact of adopting SFAS 123(R) to our consolidated results of operations.



B.    ACCOUNTS RECEIVABLE AND CONTRACTS IN PROGRESS



Unbilled recoverable costs and accrued profit represents
costs incurred and estimated fees earned on cost-plus fixed fee and time-and-materials service contracts for which billings have not been presented to customers. Unbilled amounts of approximately $0.6 million and $0.8 million at December 31, 2004
and 2003, respectively, represent retainers on government contracts that are expected to be collected during the next fiscal year.



|                                               |  |                |        |   |      |   |        |  
|---------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                               |  | December 31,   |       
|                                               |  | 2004           |        |   | 2003 |  
|                                               |  | (in thousands) |       
|Amounts billed:                                |  |                |        |   |      |   |        |  
|Federal government contracts                   |  | $              | 41,217 |   |      | $ | 32,735 |  
|Commercial contracts                           |  |                | 1,029  |   |      |   | 598    |  
|Related parties                                |  |                |       |   |      |   | 288    |  
|Other                                          |  |                | 186    |   |      |   | 348    |  
|                                               |  |                |        |   |      |   |        |  
|                                               |  |                | 42,432 |   |      |   | 33,969 |  
|Unbilled recoverable costs and accrued profit: |  |                |        |   |      |   |        |  
|Federal government contracts                   |  |                | 29,814 |   |      |   | 11,862 |  
|Commercial contracts                           |  |                | 633    |   |      |   | 151    |  
|Related parties                                |  |                | 12     |   |      |   | 189    |  
|                                               |  |                |        |   |      |   |        |  
|                                               |  |                | 72,891 |   |      |   | 46,171 |  
|Less allowance for doubtful accounts           |  |                | (350   | ) |      |   | (167   | )
|                                               |  |                |        |   |      |   |        |  
|Total accounts receivable                      |  | $              | 72,541 |   |      | $ | 46,004 |  
|                                               |  |                |        |   |      |   |        |  



The following relates
to fixed-price contracts:



|                                  |  |                                                |        |   |                                                |   |        |  
|--------------------------------- |  | ---------------------------------------------- | ------ | - | ---------------------------------------------- | - | ------ | -
|                                  |  | Costs andEstimatedEarningsin Excessof Billings |        |   | Billings inExcess ofCosts andEstimatedEarnings |  
|December 31, 2004 (in thousands): |  |                                                |        |   |                                                |   |        |  
|Costs and estimated earnings      |  | $                                              | 7,095  |   |                                                | $ | 1,496  |  
|Billings                          |  |                                                | (4,082 | ) |                                                |   | (1,956 | )
|                                  |  |                                                |        |   |                                                |   |        |  
|                                  |  | $                                              | 3,013  |   |                                                | $ | (460   | )
|                                  |  |                                                |        |   |                                                |   |        |  
|December 31, 2003 (in thousands): |  |                                                |        |   |                                                |   |        |  
|Costs and estimated earnings      |  | $                                              | 4,816  |   |                                                | $ | 4,449  |  
|Billings                          |  |                                                | (2,567 | ) |                                                |   | (4,930 | )
|                                  |  |                                                |        |   |                                                |   |        |  
|                                  |  | $                                              | 2,249  |   |                                                | $ | (481   | )
|                                  |  |                                                |        |   |                                                |   |        |  



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Allowance for doubtful accounts (in thousands):



|                        |  |                              |     |                      |   |                         |  |            |   |                        |   |     |  |   |    
|----------------------- |  | ---------------------------- | --- | -------------------- | - | ----------------------- |  | ---------- | - | ---------------------- | - | --- |  | - | ---
|Year ended December 31, |  | Balance atBeginningof Period |     | Charged toOperations |   | Chargedto OtherAccounts |  | Write-offs |   | Balanceat Endof Period
|2004                    |  | $                            | 321 |                      | $ | 66                      |  | $          |  |                        | $ | 37  |  | $ | 350
|                        |  |                              |     |                      |   |                         |  |            |   |                        |   |     |  |   |    
|2003                    |  | $                            | 126 |                      | $ | 63                      |  | $          |  |                        | $ | 22  |  | $ | 167
|                        |  |                              |     |                      |   |                         |  |            |   |                        |   |     |  |   |    
|2002                    |  | $                            | 149 |                      | $ | 71                      |  | $          |  |                        | $ | 120 |  | $ | 100
|                        |  |                              |     |                      |   |                         |  |            |   |                        |   |     |  |   |    



The 2004 Balance
at Beginning of Period includes the balance at the date of acquisition for Command Technologies, Inc. (CTI).



C.    PROPERTY AND EQUIPMENT



|                                          |  |                |        |   |      |   |        |  
|----------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                          |  | December 31,   |       
|                                          |  | 2004           |        |   | 2003 |  
|                                          |  | (in thousands) |       
|Equipment                                 |  | $              | 5,545  |   |      | $ | 4,922  |  
|Furniture and fixtures                    |  |                | 1,277  |   |      |   | 1,056  |  
|Leasehold improvements                    |  |                | 488    |   |      |   | 409    |  
|Vehicles                                  |  |                | 1,122  |   |      |   | 713    |  
|                                          |  |                |        |   |      |   |        |  
|                                          |  |                | 8,432  |   |      |   | 7,100  |  
|Accumulated depreciation and amortization |  |                | (4,736 | ) |      |   | (4,718 | )
|                                          |  |                |        |   |      |   |        |  
|Property and equipment, net               |  | $              | 3,696  |   |      | $ | 2,382  |  
|                                          |  |                |        |   |      |   |        |  



Depreciation expense
was $731,000, $430,000, and $395,000 for the years ended December 31, 2004, 2003 and 2002, respectively.



D.    LONG-TERM DEBT



During 2004, we had a $55.0 million revolving credit facility that could be increased to $80.0 million subject to meeting certain requirements and obtaining our lenders approval. The credit agreement governing
this revolving credit facility was initially scheduled to expire on December 31, 2005; however, in July 2004, we amended the agreement to extend the term to December 31, 2006. The credit agreement can be extended for additional one-year terms by
mutual agreement with our lenders. In December 2004, we amended the credit agreement with the same four banks, increasing the borrowing availability to $85.0 million, as well as modifying certain financial covenants. As of December 31, 2004, we did
not have any debt outstanding; however, we borrowed under our revolving credit facility in the first two months of 2005. See Note O, Subsequent Events footnote for further information.



The interest rate we pay on borrowings ranges from prime rate less 25 basis
points to prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) rate plus 150 to 225 basis points, depending on the ratio of our funded debt to earnings before interest, taxes, depreciation, and amortization (EBITDA).
Borrowings under our line of credit are secured by a general lien on our consolidated assets. In addition, we are subject to certain restrictions, and we are required to meet certain financial covenants. These covenants require that we, among other
things, maintain certain financial ratios and minimum net worth levels. These covenants also restrict



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



our activities regarding the incurrence of additional indebtedness in excess of $60.0 million other than the debt incurred under the revolving credit
facility. As of December 31, 2004, we were in compliance with these covenants.



E.    OPERATING LEASES



We
lease certain administrative facilities from related parties and others (See Note H). Operating leases require monthly payments and expire at various dates through 2018. Additionally, renewal options for additional terms of one to five years are
included in most agreements. Total operating lease expense totaled approximately $2.5 million, $2.3 million and $2.1 million for the years ended December 31, 2004, 2003 and 2002, respectively.



Minimum annual rental payments under operating leases are as follows (in
thousands):



|                         |  |   |       
|------------------------ |  | - | ------
|Year Ending December 31, |  |  
|2005                     |  | $ | 2,809 
|2006                     |  |   | 2,129 
|2007                     |  |   | 1,822 
|2008                     |  |   | 1,763 
|2009                     |  |   | 1,546 
|Thereafter               |  |   | 2,966 
|                         |  |   |       
|                         |  | $ | 13,035
|                         |  |   |       



F.    SUPPLEMENTAL CASH FLOW INFORMATION



Other cash flow information for the years ended December 31, 2004, 2003 and 2002 is as follows (in thousands):



|                                                 |  |              |        |      |   |       |  |   |      
|------------------------------------------------ |  | ------------ | ------ | ---- | - | ----- |  | - | -----
|                                                 |  | December 31,
|                                                 |  | 2004         |        | 2003 |   | 2002 
|Interest paid                                    |  | $            |       |      | $ |      |  | $ | 396  
|Federal, state and local income taxes paid       |  | $            | 11,409 |      | $ | 6,250 |  | $ | 2,294
|Amounts payable under earn-out agreements        |  | $            | 4,858  |      | $ | 5,668 |  | $ | 1,100
|Acquisition price paid in shares of common stock |  | $            | 4,424  |      | $ | 2,400 |  | $ |     



G.    PROFIT
SHARING PLAN



We sponsor a defined contribution 401(k)
profit sharing plan that covers all eligible full-time and part-time employees. An eligible employee may make pre-tax contributions to the plan of up to 15% of his or her compensation. We provide 50% matching funds for eligible participating
employees, limited to the employees participation of up to 10% of earnings. Our contributions to the plan totaled approximately $2.4 million, $1.9 million and $1.8 million for the years December 31, 2004, 2003 and 2002, respectively.



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H.    RELATED PARTY TRANSACTIONS



We subcontract to, purchase services from, rent a portion of our facilities,
and utilize aircraft from various entities that are controlled by Mr. Rajesh K. Soin, a significant stockholder and Chairman of the Board of Directors. The following is a summary of transactions with related parties (in thousands):



|                                                             |  |                          |     |      |   |       |  |   |       |  
|------------------------------------------------------------ |  | ------------------------ | --- | ---- | - | ----- |  | - | ----- | -
|                                                             |  | Years ended December 31, |    
|                                                             |  | 2004                     |     | 2003 |   | 2002  | 
|Included in general and administrative expenses:             |  |                          |     |      |   |       |  |   |       |  
|Shared services paid to related parties (Soin International) |  | $                        |    |      | $ |      |  | $ | 584   |  
|Shared services charged to related parties                   |  |                          |    |      |   |      |  |   | (28   | )
|Aircraft usage charges paid to Soin International            |  |                          | 185 |      |   | 61    |  |   | 34    |  
|Rent paid to related parties                                 |  |                          | 46  |      |   | 449   |  |   | 473   |  
|                                                             |  |                          |     |      |   |       |  |   |       |  
|                                                             |  | $                        | 231 |      | $ | 510   |  | $ | 1,063 |  
|                                                             |  |                          |     |      |   |       |  |   |       |  
|Other rent paid to related parties                           |  | $                        | 53  |      | $ | 132   |  | $ | 144   |  
|                                                             |  |                          |     |      |   |       |  |   |       |  
|Sub-contracting services paid to related parties:            |  |                          |     |      |   |       |  |   |       |  
|GTIC India                                                   |  | $                        | 430 |      | $ | 492   |  | $ | 482   |  
|                                                             |  |                          |     |      |   |       |  |   |       |  
|Aerospace Integration Corporation (AIC)                      |  | $                        |    |      | $ |      |  | $ | 146   |  
|                                                             |  |                          |     |      |   |       |  |   |       |  
|International Consultants, Inc. (ICI)(1)                     |  | $                        |    |      | $ | 24    |  | $ |      |  
|                                                             |  |                          |     |      |   |       |  |   |       |  
|Revenues from related parties:                               |  |                          |     |      |   |       |  |   |       |  
|Integrated Information Technology Company (IITC)(2)          |  | $                        | 506 |      | $ | 1,463 |  | $ | 1,730 |  
|                                                             |  |                          |     |      |   |       |  |   |       |  
|ICI(1)                                                       |  | $                        |    |      | $ | 177   |  | $ | 402   |  
|                                                             |  |                          |     |      |   |       |  |   |       |  

---

|(1) |  | Amounts for subcontract services provided to ICI in 2003 and 2002 were prior to our acquisition of ICI as discussed below in Note I.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Integrated Information Technology Corporation (IITC) was acquired by an unrelated party on May 28, 2004. Only transactions with IITC prior to May 28, 2004 are included in the
related party transactions noted above.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Prior to
March 31, 2002, we received administrative services from Soin International, LLC, which is wholly owned by an entity related to Mr. Soin. The charges for these services generally reflected the marginal cost of the service provided, plus a pro-rata
share of the associated fixed costs. In addition, we lease one facility, and utilize aircraft owned, or partially owned, by entities related to Mr. Soin.



In 2002, 2003, and 2004, we made the following purchases from a related party:



| |  |  | In June 2002, we purchased, at fair value of approximately $431,000, a 90% ownership interest in an airplane owned by Soin Aviation, LLC;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In March 2003, we purchased, at fair value of approximately $42,000, a 10% ownership interest in an airplane owned by Soin Aviation, LLC; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2004, we purchased, at fair value of approximately $150,000, a 10% ownership interest in an airplane owned by Soin Aviation, LLC.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



During the second quarter of 2004, we sold our 10% interest in one aircraft
and our 90% interest in a second aircraft, which we jointly owned with Soin Aviation, to an unrelated party and recognized a net loss of



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approximately $182,000. Also during the second quarter of 2004, we sold to Soin Aviation a 10% interest in an aircraft we purchased from an unrelated party.
The exchange of the aircraft was made in order to increase operating efficiency and to enhance the availability of the aircraft.



We have also entered into a sharing arrangement with Soin Aviation, LLC under which we are responsible for a pro-rata share of the fixed and marginal
costs associated with aircraft owned by us and Soin Aviation, LLC.



We believe that our subcontracting, lease, and other agreements with each of the related parties identified above reflect prevailing market conditions at the time they were entered into and contain substantially similar terms to those that
might be negotiated by independent parties on an arms-length basis.



At December 31, 2004 and 2003, amounts due from related parties were approximately $0 and $259,000, respectively. At December 31, 2004 and 2003, there were amounts payable to related parties of approximately $101,000
and $180,000, respectively.



I.     ACQUISITIONS



AMCOMP Corporation



On October 18, 2002, we
acquired all of the outstanding capital stock of AMCOMP Corporation (AMCOMP) from AMCOMPs shareholders. AMCOMP is a technology company providing engineering services, primarily in the area of Space Systems, Global Positioning Systems (GPS)
Engineering and Information Technology, to the Department of Defense, and other government agencies.



We have paid approximately $9.7 million to purchase all of the capital stock of AMCOMP and pay acquisition and other related costs. The initial purchase
price was $7.3 million. In both April 2003 and 2004, we paid additional consideration of $1.1 million to the former shareholders of AMCOMP as a result of the achievement of certain performance goals in 2002 and 2003 under an earn-out provision in
the stock purchase agreement, and also paid an additional $0.1 million in tax payments. We accrued an additional $1.1 million of consideration in December 2004 for the achievement of certain performance goals under the 2004 earn-out provision in the
stock purchase agreement. We have recorded this earn-out payment as an increase in goodwill and as an amount due under earn-out agreement on our December 31, 2004 balance sheet. We expect to make this payment in the second quarter of 2005.



The initial purchase price for the AMCOMP acquisition was
allocated as follows (in thousands):



|                                                                                  |  |   |        |  
|--------------------------------------------------------------------------------- |  | - | ------ | -
|Accounts receivable and other current assets                                      |  | $ | 1,094  |  
|Other assets                                                                      |  |   | 14     |  
|Intangible assetsPurchase price allocated to contracts and non-compete agreement |  |   | 3,025  |  
|Property and equipment                                                            |  |   | 3      |  
|Goodwill                                                                          |  |   | 5,471  |  
|Current liabilities                                                               |  |   | (2,264 | )
|                                                                                  |  |   |        |  
|Net assets acquired                                                               |  | $ | 7,343  |  
|                                                                                  |  |   |        |  



Goodwill recognized
under the agreement is deductible for income tax purposes.



The
value of the customer contract and non-compete covenant intangible assets was based on an independent appraisal. The customer contract intangible asset is being amortized over 6.5 years, the estimated remaining life of the contracts including
renewals, and the non-compete covenant intangible asset was being amortized over 2 years, the life of the agreement.



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The acquisition was consistent with our growth strategy to acquire complementary businesses to reach
new customers and increase our technical footprint. This acquisition is enabling us to expand efforts in U.S. Air Force Space Systems activities, and provided us access to new markets including GPS test, integration, and engineering as well as
adding the Space and Missile Command as a new customer. AMCOMP has key operating locations in Los Angeles, California, Alamogordo, New Mexico and Colorado Springs, Colorado.



The revenue of AMCOMP reflected in our 2004 and 2003 consolidated statement of income was approximately $15.4 million and
$13.8 million, respectively.



Pro Forma Information
(unaudited)Pro forma results of operations, as if the acquisition of AMCOMP occurred as of January 1, 2002, are presented below (amounts in thousands except per share data). These pro forma results may not be indicative of the actual
results that would have occurred under our ownership and management and should not be taken as representative of our future results of operations.



|                           |  |      |        
|-------------------------- |  | ---- | -------
|                           |  | 2002
|Revenue                    |  | $    | 128,419
|Net income                 |  | $    | 8,626  
|Earnings per common share: |  |      |        
|Basic                      |  | $    | 0.76   
|Diluted                    |  | $    | 0.75   



Pro forma adjustments
to 2002 net income and earnings per common share include:



| |  |  | Pro forma adjustment to give effect to a full year of amortization of intangibles recorded as a result of the acquisition, which would have resulted in $356,000 of additional
amortization expense in 2002.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pro forma adjustment to reflect income taxes as if both MTC and AMCOMP had been C corporations for the periods presented, at an estimated combined effective income tax rate of 40%.
The pro forma income tax expense for 2002 was $688,000.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pro forma adjustment to reflect the elimination of interest income earned from July 2002 through September 2002 on the $7.3 million of funds from our initial public offering that
were used to consummate the acquisition. The interest rate is estimated at 2% per annum based on the applicable interest rate being earned on the invested cash as of the date of the acquisition. The pro forma adjustment to 2002 reduced interest
income by $37,000.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



International Consultants,
Inc.



On October 1, 2003, we signed a stock purchase
agreement and acquired International Consultants, Inc. (ICI) from ICIs shareholders. Essentially all of ICIs work is in the defense industry where its main focus has been to support the U.S. Army. ICI specializes in program management,
information technology and logistics services and operations.



The initial purchase price for all of the outstanding capital stock of ICI was $10.2 million, which was paid with $2.4 million in our common stock, $7.5 million in repayment of ICI debt at the closing (of which approximately $3.0 million
arose in connection with payments to ICIs shareholders) and $0.3 million for related acquisition costs, all of which was immediately paid with cash on hand. During 2004, we paid additional consideration of $5.7 million, which consisted of
shares of our common stock with a value of $4.5 million and $1.2 million in cash, to the former shareholders of ICI as the result of the achievement of certain performance goals. We accrued an additional $3.0 million of consideration in December
2004 for the achievement of certain



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performance goals under an earn-out provision in the stock purchase agreement. We have recorded this earn-out payment as an increase in goodwill and as an
amount due under earn-out agreement on our December 31, 2004 balance sheet. The total acquisition price including earn-out payments totaled approximately $18.9 million. Shares of our common stock issued in connection with our acquisition of ICI were
issued pursuant to an exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) thereof.



ICIs selling shareholders are family members of Mr. Rajesh K. Soin, a significant stockholder and our Chairman of the Board of Directors. As a
result, Mr. Soin was not involved in the negotiation of the acquisition of ICI. The directors other than Mr. Soin elected a special committee of independent, non-management directors who evaluated and approved the acquisition of ICI, after engaging
separate legal counsel to represent and advise them and engaging Raymond James & Associates, Inc. as a financial advisor.



The initial purchase price for the ICI acquisition was allocated as follows (in thousands):



|                                                        |  |   |        |  
|------------------------------------------------------- |  | - | ------ | -
|Accounts receivable and other current assets            |  | $ | 8,274  |  
|Other assets                                            |  |   | 274    |  
|Intangible assetsPurchase price allocated to contracts |  |   | 3,500  |  
|Property and equipment                                  |  |   | 143    |  
|Goodwill                                                |  |   | 10,642 |  
|Current liabilities                                     |  |   | (6,644 | )
|Non-current deferred tax liability                      |  |   | (1,415 | )
|Amounts due under earn-out liabilities                  |  |   | (4,568 | )
|                                                        |  |   |        |  
|Net assets acquired                                     |  | $ | 10,206 |  
|                                                        |  |   |        |  



The customer contract
intangible asset value of $3.5 million was based on an independent appraisal, and is being amortized over an estimated useful life of 4.75 years.



This acquisition represented a significant step in our on-going strategy to acquire complementary businesses to reach new customers and increase our
technical footprint. This acquisition is enabling us to expand our support to the U.S. Army and provide access to new markets, such as the Army Forces Command (FORSCOM) and the Tank-Automotive and Armaments Command (TACOM). ICI has key operating
locations in Atlanta, Georgia and Warren, Michigan.



The
revenue of ICI reflected in our 2004 and 2003 consolidated statements of income was approximately $34.7 million and $7.7 million, respectively.



Pro Forma Information (unaudited)Pro forma results of operations, as if the acquisition of ICI occurred as of January 31, 2002 is
presented below (amount in thousands except per share data). These pro forma results may not be indicative of the actual results that would have occurred under our ownership and management and should not be taken as representative of our future
results of operations.



|                           |  |      |         |      |   |        
|-------------------------- |  | ---- | ------- | ---- | - | -------
|                           |  | 2003 |         | 2002
|Revenue                    |  | $    | 207,096 |      | $ | 137,506
|Net income                 |  | $    | 12,266  |      | $ | 8,181  
|Earnings per common share: |  |      |         |      |   |        
|Basic                      |  | $    | 0.93    |      | $ | 0.71   
|Diluted                    |  | $    | 0.93    |      | $ | 0.70   



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Pro forma adjustments to 2003 and 2002 net income and earnings per common share include:



| |  |  | Pro forma adjustment to give effect to a full year of amortization of intangibles recorded as a result of the acquisition, which would have resulted in $553,000 and $737,000,
respectively, of additional amortization expense in 2003 and 2002.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pro forma adjustment to reflect the elimination of interest income earned from July 2002 through September 2003 on the $7.8 million of funds from our initial public offering that
were used to consummate the acquisition. The interest rate is estimated at 1.5% per annum based on the applicable interest rate being earned on the invested cash as of the date of the acquisition. The pro forma adjustment to 2003 and 2002 reduced
interest income by approximately $88,000 and $56,000.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pro forma adjustment to reflect income taxes as if both MTC Technologies, Inc. and ICI had been C corporations for the periods presented, at an estimated combined effective
income tax rate of approximately 40%. The pro forma income tax expense for 2003 and 2002 was $8,042,000 and $1,046,000, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Vitronics Inc.



On October 24, 2003, we announced that we signed a stock purchase agreement to acquire Vitronics Inc. (Vitronics), effective October 24, 2003, from
Vitronics shareholders. All of Vitronics work is in the defense industry where its main focus has been to support the U.S. Army. Vitronics specializes in research and development, systems engineering, information technology, software
development, and system integration services.



The initial
purchase price for all of the outstanding capital stock of Vitronics and related acquisition costs was approximately $9.0 million, which was paid from cash on hand at closing on October 31, 2003. We accrued an additional $0.8 million of
consideration in December 2004 for the achievement of certain performance goals under an earn-out provision in the stock purchase agreement, which will be paid in 2005. Including the earn-out, the total purchase price of Vitronics was approximately
$9.7 million.



The initial purchase price for the Vitronics
acquisition was allocated as follows (in thousands):



|                                                        |  |   |        |  
|------------------------------------------------------- |  | - | ------ | -
|Accounts receivable and other current assets            |  | $ | 3,096  |  
|Other assets                                            |  |   | 10     |  
|Intangible assetsPurchase price allocated to contracts |  |   | 2,500  |  
|Property and equipment                                  |  |   | 153    |  
|Goodwill                                                |  |   | 4,919  |  
|Current liabilities                                     |  |   | (1,702 | )
|Long-term liabilities                                   |  |   | (12    | )
|                                                        |  |   |        |  
|Net assets acquired                                     |  | $ | 8,964  |  
|                                                        |  |   |        |  



Goodwill recognized
under the agreement is deductible for income tax purposes.



The
customer contract intangible asset value of $2.5 million was based on an independent appraisal, and is being amortized over an estimated useful life of 5 years.



The acquisition was another step in our on-going strategy to acquire complimentary businesses to reach new customers and increase our technical
footprint, enabling us to expand our support to the U.S. Army and, in particular, to the Armys Communications Electronics Command (CECOM) and the Defense Advanced Research Projects Agency (DARPA). Vitronics key operating location is in Fort
Monmouth, New Jersey.



The revenue of Vitronics included in our
2004 and 2003 consolidated statements of income was $18.1 million and $2.8 million, respectively.



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Command Technologies, Inc.



On July 1, 2004, we acquired all of the outstanding capital stock of Command Technologies, Inc. (CTI) from CTIs
shareholders. CTIs customer base consists primarily of the Department of Defense and national security agencies, and CTI specializes in professional and technical services, information technology, and technology applications to training,
simulation, and modeling. The initial purchase price was $45.0 million, which was paid from cash on hand at closing. The purchase price was reduced by $0.7 million in December 2004 as a result of the release funds to us from escrow. An additional
$4.5 million of the initial purchase price is being held in escrow until December 2005 to satisfy any general indemnification obligations under the stock purchase agreement.



The initial purchase price of the CTI acquisition was allocated as follows (in thousands):



|                                                        |  |   |        |  
|------------------------------------------------------- |  | - | ------ | -
|Cash and equivalents                                    |  | $ | 690    |  
|Accounts receivable, net                                |  |   | 9,095  |  
|Prepaids and other current assets                       |  |   | 503    |  
|Intangible assetsPurchase price allocated to contracts |  |   | 12,000 |  
|Property and equipment                                  |  |   | 449    |  
|Other assets                                            |  |   | 13     |  
|Goodwill                                                |  |   | 27,601 |  
|Current liabilities                                     |  |   | (4,801 | )
|Long-term liabilities                                   |  |   | (550   | )
|                                                        |  |   |        |  
|Net assets acquired                                     |  | $ | 45,000 |  
|                                                        |  |   |        |  



The customer contract
intangible asset value of $12.0 million was based on an independent appraisal. The customer contract intangible asset is being amortized over 7.5 years, the estimated remaining life of the contracts including renewals.



The acquisition is consistent with our growth strategies to acquire
complementary businesses to reach new customers and increase our technical footprint. CTI, headquartered in Warrenton, Virginia, with major facilities in Florida, Texas, and Colorado, augments MTCs thrust to expand its role in support of the
U.S. intelligence communities. CTI brings a wealth of in-depth knowledge and experience in assisting the military and intelligence communities build and maintain the Nations defenses. The acquisition also supports the expansion efforts of our
National Security Group.



The revenue of CTI reflected in our
consolidated statement of income for year ended December 31, 2004 was $19.1 million.



Pro Forma Information (unaudited)Pro forma results of operations, as if the acquisition of CTI occurred as of the January 1, 2003 is presented below (amounts in thousands except per share date).
These pro forma results may not be indicative of the actual results that would have occurred under our ownership and management and should not be taken as representative of our future results of operations.



|                           |  |      |         |      |   |        
|-------------------------- |  | ---- | ------- | ---- | - | -------
|                           |  | 2004 |         | 2003
|Revenue                    |  | $    | 292,218 |      | $ | 237,696
|Net income                 |  | $    | 18,137  |      | $ | 13,299 
|Earnings per common share: |  |      |         |      |   |        
|Basic                      |  | $    | 1.19    |      | $ | 1.02   
|Diluted                    |  | $    | 1.18    |      | $ | 1.01   



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Pro forma adjustments to 2004 and 2003 net income and earnings per common share include:



| |  |  | Pro forma adjustment to give effect to the amortization of the intangible asset recorded as a result of the acquisition, which would have resulted in $800,000 and $1,600,000 of
additional amortization expense in 2004 and 2003, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pro forma adjustment to reflect income taxes as if CTI had been a C corporation for the periods presented, at an estimated combined effective income tax rate of 40%. The pro forma
income tax expense for 2004 and 2003 was $317,000 and $540,000, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pro forma adjustment to reflect the elimination of CTI interest expense, reduce interest income on the $22.0 million of cash and cash equivalents available on January 1, 2003 to
fund the acquisition of CTI, as well as reflect interest expense on the approximate $23.0 million in debt that would have been used in addition to available cash to consummate the acquisition on January 1, 2003. The pro forma adjustment to 2004 and
2003 resulted in a net reduction of interest expense of $18,000 for 2004 and net increase in interest expense of $935,000 in 2003.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pro forma adjustment to give effect to the elimination of 2004 expense related to former CTI shareholders for certain bonus and fringe benefits payments as well as legal and
income taxes that became payable on the sale of CTI. The pro forma reduction in general and administrative expenses was $2,462,000 for 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



J.    GOODWILL AND INTANGIBLE ASSETS



Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets.SFAS 142 requires, among
other things, the discontinuance of goodwill amortization. In addition, SFAS 142 requires us to perform a transitional goodwill impairment test within six months from the date of adoption. In accordance with the standard, the Company completed the
transitional impairment test in the second quarter of 2002 and determined that no impairment charge was required. Under SFAS 142, goodwill is to be reviewed at least annually thereafter for impairment; we elected to perform impairment tests in the
fourth quarter of each calendar year. We determined that no impairment charges were required in 2004 and 2003. We based our assessment of possible impairment on the discounted present value of the operating cash flows of our consolidated reporting
unit.



The components of other intangibles at December 31, 2004
and 2003 are as follows (in thousands):



|                                               |  |                         |        |   |      |   |       |  
|---------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ----- | -
|                                               |  | Year EndingDecember 31, |       
|                                               |  | 2004                    |        |   | 2003 |  
|Purchase price allocated to customer contracts |  | $                       | 21,000 |   |      | $ | 9,000 |  
|Non-compete covenants                          |  |                         | 25     |   |      |   | 25    |  
|                                               |  |                         |        |   |      |   |       |  
|                                               |  |                         | 21,025 |   |      |   | 9,025 |  
|Accumulated amortization                       |  |                         | (3,368 | ) |      |   | (861  | )
|                                               |  |                         |        |   |      |   |       |  
|                                               |  | $                       | 17,657 |   |      | $ | 8,164 |  
|                                               |  |                         |        |   |      |   |       |  



Aggregate amortization
expense for intangible assets for the years ended December 31, 2004, 2003, and 2002 were $2,508,000, $742,000, and $119,000, respectively. Purchased contracts are amortized on a straight-line basis over a weighed average amortization period of 6.6
years.



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Estimated annual intangible amortization expense for the next 5 years (in thousands):



|                         |  |   |      
|------------------------ |  | - | -----
|Year Ending December 31, |  |  
|2005                     |  | $ | 3,298
|2006                     |  |   | 3,298
|2007                     |  |   | 3,298
|2008                     |  |   | 2,847
|2009                     |  |   | 1,715



The changes in the
carrying amount of goodwill for the years ended December 31, 2003 and 2004 are as follows (in thousands):



|                                                 |  |   |       
|------------------------------------------------ |  | - | ------
|Balance as of December 31, 2003                  |  | $ | 23,817
|Additional AMCOMP goodwill from 2004 earn-out    |  |   | 1,100 
|Additional ICI goodwill from 2004 earn-out       |  |   | 4,681 
|Additional Vitronics goodwill from 2004 earn-out |  |   | 772   
|Goodwill arising from the CTI acquisition        |  |   | 27,140
|                                                 |  |   |       
|Balance as of December 31, 2004                  |  | $ | 57,510
|                                                 |  |   |       



K.    STOCKHOLDERS EQUITY



In April 2002, MTC Technologies, Inc. was incorporated in Delaware to hold all of the capital stock of our principal subsidiary, Modern Technologies Corp, an Ohio corporation that was founded in 1984 and whose name was changed in 2003 to
MTC Technologies, Inc. On May 3, 2002, Mr. Soin contributed all of the issued and outstanding shares of Modern Technologies Corp. to the Company in exchange for 9,887,482 shares (post stock split as discussed below) of MTC Technologies, Inc.,
resulting in Mr. Soin owning all of the shares of the Company.



On June 11, 2002, our Directors authorized and declared a 2,471.8707-for-1 stock split effected in the form of a dividend of 2,470.8707 shares of the common stock, par value of $0.001 per share for each one share of common stock. All shares
and per share amounts in these consolidated financial statements have been adjusted to reflect this stock split. Our directors also increased the number of authorized shares of $0.001 par value common stock to 50 million and authorized 5 million
shares of $0.001 par value preferred stock, of which none is outstanding.



On July 3, 2002, we successfully completed our initial public offering of common stock and received net proceeds of approximately $43.8 million from the offering, after deducting our portion of estimated expenses and
the underwriting discount. The proceeds were used to pay off approximately $21.0 million of principal and accrued interest outstanding under our term loan and revolving credit facility, with the balance invested in short-term investment grade,
interest-bearing securities and guaranteed obligations of the United States and its agencies.



In February 2004, we successfully completed a public offering of 2,250,000 primary and 1,500,000 secondary shares, respectively, of our common stock and received net proceeds of approximately $59.3 million. The
primary shares were issued by the Company and the secondary shares were sold by the selling stockholder. The Company did not receive any proceeds from the sale of the shares by the selling stockholder.



We have used the net proceeds from the offering (together with cash on hand
and additional borrowings) for working capital and general corporate purposes, including all or a portion of the costs of any complementary businesses we have acquired or may selectively decide to acquire in the future.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



During 2004, we issued 166,842 shares of our common stock, with a value of approximately $4.5
million, in connection with the acquisition of ICI. See Note I. Acquisitions.



L.    STOCK-BASED COMPENSATION PLANS



In March 2002, Mr. Soin, our sole stockholder prior to our initial public offering, made a binding commitment to award approximately $5.2 million in stock-based compensation to three key members of our senior
management, Michael Solley, our then-President and Chief Executive Officer, David Gutridge, our then-Chief Financial Officer, and Benjamin Crane, our then-Chief Operating Officer, to reward the executives for their major contributions to our past
profitability, growth and financial strength. The award in March was to be settled either by delivery to the recipients of a fixed number of fully vested shares or of a number of fully vested options with an intrinsic value of approximately $5.2
million (the difference between the exercise price and the estimated fair value of the shares of $16.75 per share). We recorded the $5.2 million expense associated with this stock compensation award in March 2002.



In April 2002, to achieve certain tax benefits for the executives, Mr. Soin
decided to issue stock options to satisfy the $5.2 million stock compensation award. Stock option agreements to purchase 415,273 shares of our common stock at $4.19 per share were entered into with the executives. These options were formalized on
May 3, 2002, when stock option agreements were signed by the grantees, which established the measurement date. The options were immediately exercisable after that date. Mr. Solley was awarded an option to purchase up to 346,061 shares. Messrs.
Gutridge and Crane each were awarded options to purchase up to 34,606 shares. These options were to expire ten years from their date of grant. As of December 31, 2003, all 415,273 of these options were exercised.



In May 2002, our board of directors adopted our 2002 Equity and Performance
Incentive Plan with the approval of Mr. Soin. In April 2003, the 2002 Equity and Performance Incentive Plan was approved by our stockholders at our Annual Meeting. The 2002 Equity and Performance Incentive Plan provides for the grant of incentive
stock options and nonqualified stock options and the grant or sale of restricted shares of common stock to our directors, key employees and consultants. The board may provide for the payment of dividend equivalents, on a current or deferred or
contingent basis, on the options granted under the plan. The board may also authorize participants in the plan to defer receipt of their common stock upon exercise of their stock options and may further provide that such deferred issuances include
the payment of dividend equivalents or interest on the deferred amounts. The board may condition the grant of any award under the plan on a participants surrender or deferral of his or her right to receive a cash bonus or other compensation
payable by us. The board can delegate its authority under the plan to any committee of the board.



Shares Reserved; Plan Limits.    We have reserved a total of 474,599 shares of our common stock for issuance under the 2002
Equity and Performance Incentive Plan, subject to adjustment in the event of forfeitures, transfers of common stock to us in payment of the exercise price or withholding amounts or changes in our capital structure. The number of shares that may be
issued upon the exercise of incentive stock options or issuance of restricted stock or restricted share units will not exceed 474,599 shares. No participant may be granted options for more than 24,718 shares during any calendar year, and no
non-employee director will be granted awards under the plan for more than 24,718 shares during any fiscal year. The number of shares issued as restricted shares will not exceed 74,156 common shares. As of December 31, 2004 and 2003, 251,387 and
165,160 options and restricted share units were awarded under this plan, respectively.



Stock options will be exercisable from time to time prior to the tenth anniversary of the date of grant to the extent of: (i) thirty three and one-third percent (331/3%) of the optioned shares on the date of grant; and (ii) an additional thirty three and one-third percent (331/3%) of the optioned shares on the first and second anniversaries of the date of grant.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The following table summarizes activity in our stock-based compensation plans for the years ended
December 31, 2004, 2003, and 2002:



|                                 |  |         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |     
|-------------------------------- |  | ------- | - | ---- | ---------------------------- | ----- | ------ | -------- | - | ---------------------------- | - | ------ |  | -------- | ---------------------------- |  | - | ----
|                                 |  | 2004    |   | 2003 |                              | 2002 
|                                 |  | Shares  |   |      | WeightedAverageExercisePrice |       | Shares |          |   | WeightedAverageExercisePrice |   | Shares |  |          | WeightedAverageExercisePrice
|Outstanding at beginning of year |  | 148,920 |   |      | $                            | 19.18 |        | 344,720  |   |                              | $ | 6.96   |  |         |                              |  | $ |    
|Granted                          |  | 72,780  |   |      |                              | 26.73 |        | 90,440   |   |                              |   | 20.76  |  | 489,993  |                              |  |   | 6.14
|Exercised                        |  | (28,595 | ) |      |                              | 18.14 |        | (275,740 | ) |                              |   | 4.49   |  | (145,273 | )                            |  |   | 4.19
|Forfeited                        |  | (10,668 | ) |      |                              | 24.79 |        | (10,500  | ) |                              |   | 17.34  |  |         |                              |  |   |    
|                                 |  |         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |     
|Outstanding at end of year       |  | 182,437 |   |      | $                            | 22.03 |        | 148,920  |   |                              | $ | 19.18  |  | 344,720  |                              |  | $ | 6.96
|                                 |  |         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |     
|Exercisable at end of year       |  | 116,516 |   |      |                              |       |        | 73,507   |   |                              |   |        |  | 270,000  |                              |  |   |     
|                                 |  |         |   |      |                              |       |        |          |   |                              |   |        |  |          |                              |  |   |     



The following table
summarizes certain information for options currently outstanding and exercisable at December 31, 2004.



|       |  |                     |  |                                 |  |                              |       |                   |         |                              |   |      
|------ |  | ------------------- |  | ------------------------------- |  | ---------------------------- | ----- | ----------------- | ------- | ---------------------------- | - | -----
|       |  | Options outstanding |  | Options exercisable            
|       |  | Shares              |  | AverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | NumberExercisable |         | WeightedAverageExercisePrice
|$16-18 |  | 87,156              |  | 7.8 years                       |  | $                            | 17.18 |                   | 74,201  |                              | $ | 17.13
|$25-27 |  | 95,281              |  | 9.1 years                       |  | $                            | 26.46 |                   | 42,315  |                              | $ | 26.35
|       |  |                     |  |                                 |  |                              |       |                   |         |                              |   |      
|Total  |  | 182,437             |  |                                 |  |                              |       |                   | 116,516 |                              |   |      
|       |  |                     |  |                                 |  |                              |       |                   |         |                              |   |      



Pro Forma
Disclosures



As permitted under SFAS No. 123,
Accounting for Stock-Based Compensation, we account for stock-based awards using the intrinsic value method prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees. Compensation expense for stock options to employees
under the 2002 Equity and Performance Incentive Plan is recognized based on the difference, if any, between the fair value of our stock and the exercise price of the option at the date of grant. Compensation expense of $5.2 million was recognized on
options that were granted to three key members of our senior management in May 2002, to the extent that the estimated fair value of the options exceeded the option price. Had compensation costs been determined based on the fair value of the options
on the grant dates consistent with the methodology prescribed by SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below. Because future stock option awards may be granted and because it
is unlikely that actual events will ever exactly match the assumptions used in making these calculations, the pro forma impacts shown below are not necessarily indicative of the impact in future years.



|                                  |  |             |  |                                          |        |      |   |        |  |   |      
|--------------------------------- |  | ----------- |  | ---------------------------------------- | ------ | ---- | - | ------ |  | - | -----
|                                  |  |             |  | Years ended December 31,                
|                                  |  |             |  | 2004                                     |        | 2003 |   | 2002  
|                                  |  |             |  | (in thousands, except for pershare data)
|Net income                        |  | As reported |  | $                                        | 17,661 |      | $ | 12,489 |  | $ | 7,686
|                                  |  | Pro forma   |  | $                                        | 17,149 |      | $ | 12,083 |  | $ | 7,379
|Diluted earnings per common share |  | As reported |  | $                                        | 1.15   |      | $ | 0.95   |  | $ | 0.67 
|                                  |  | Pro forma   |  | $                                        | 1.12   |      | $ | 0.92   |  | $ | 0.64 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



The fair value of the options granted (which is amortized over the option vesting period in
determining the pro forma impact), is estimated on the date of grant using the Black-Scholes multiple option-pricing model with the following weighted average assumptions:



|                             |  |                         |  |         |  |        
|---------------------------- |  | ----------------------- |  | ------- |  | -------
|                             |  | Year Ended December 31,
|                             |  | 2004                    |  | 2003    |  | 2002   
|Expected life of options     |  | 5 years                 |  | 5 years |  | 3 years
|Risk-free interest rate      |  | 3.5%                    |  | 3.5%    |  | 4.03%  
|Expected volatility of stock |  | 48.9%                   |  | 44.4%   |  | 43.0%  
|Expected dividend yield      |  | 0.0%                    |  | 0.0%    |  | 0.0%   



The fair value of
options outstanding at December 31, 2004 was $1.8 million. For purposes of determining the pro forma amounts presented in that section, the weighted-average per-share fair value of stock options granted during 2004, 2003, and 2002 was $12.84, $9.27,
and $12.23 respectively.



M.    INCOME TAXES



On June 28, 2002, we changed our S corporation status to
C corporation status under Internal Revenue Service code. As a result of this change, we were required under SFAS No. 109, Accounting for Income Taxes, to establish deferred tax balances. In June 2002, we recognized a deferred income tax
benefit of $2.6 million on our income statement and a current deferred income tax asset of $0.6 million, included in prepaid expenses and other current assets on our balance sheet, and a non-current deferred income tax asset of $2.0 million,
included in other assets on our balance sheet, primarily for timing differences between book and tax reporting associated with accrued compensation items. For the twelve months ended December 31, 2004 and 2003, and the six months ended December 31,
2002, we recorded a provision for domestic federal and state income taxes.



Deferred tax assets (liabilities) are comprised of the following (in thousands):



|                                                                             |  |                         |        |   |      |   |        |  
|---------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | -
|                                                                             |  | Year Ended December 31, |       
|                                                                             |  | 2004                    |        |   | 2003 |  
|Deferred tax assets related to:                                              |  |                         |        |   |      |   |        |  
|Bad debt reserves                                                            |  | $                       | 115    |   |      | $ | 66     |  
|Other accruals                                                               |  |                         | 1,404  |   |      |   | 956    |  
|Other                                                                        |  |                         |       |   |      |   | 109    |  
|                                                                             |  |                         |        |   |      |   |        |  
|Total deferred tax assets                                                    |  |                         | 1,519  |   |      |   | 1,131  |  
|                                                                             |  |                         |        |   |      |   |        |  
|Deferred tax liabilities related to:                                         |  |                         |        |   |      |   |        |  
|Depreciation                                                                 |  | $                       | (809   | ) |      | $ | (327   | )
|Earnings recognized under percentage of completion provision:                |  |                         | (227   | ) |      |   | (346   | )
|Other current assets                                                         |  |                         | (201   | ) |      |   |       |  
|Goodwill and Intangible amortization                                         |  |                         | (1,562 | ) |      |   | (1,496 | )
|                                                                             |  |                         |        |   |      |   |        |  
|Total deferred tax liabilities                                               |  |                         | (2,799 | ) |      |   | (2,169 | )
|                                                                             |  |                         |        |   |      |   |        |  
|Total net deferred tax liability                                             |  |                         | (1,280 | ) |      |   | (1,038 | )
|Current portion of deferred tax asset included in prepaid expenses and other |  |                         | 1,091  |   |      |   | 785    |  
|                                                                             |  |                         |        |   |      |   |        |  
|Long-term portion                                                            |  | $                       | (2,371 | ) |      | $ | (1,823 | )
|                                                                             |  |                         |        |   |      |   |        |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Income tax expense included in the income statement is as follows (in thousands):



|                                   |  |                         |        |      |   |       |  |   |        |  
|---------------------------------- |  | ----------------------- | ------ | ---- | - | ----- |  | - | ------ | -
|                                   |  | Year Ended December 31, |       
|                                   |  | 2004                    |        | 2003 |   | 2002  | 
|Current income tax expense:        |  |                         |        |      |   |       |  |   |        |  
|U.S. Federal                       |  | $                       | 9,409  |      | $ | 5,453 |  | $ | 1,708  |  
|State and local                    |  |                         | 2,048  |      |   | 1,384 |  |   | 402    |  
|                                   |  |                         |        |      |   |       |  |   |        |  
|Total current income tax expense   |  |                         | 11,457 |      |   | 6,837 |  |   | 2,110  |  
|                                   |  |                         |        |      |   |       |  |   |        |  
|Deferred income tax expense:       |  |                         |        |      |   |       |  |   |        |  
|U.S. Federal                       |  |                         | 202    |      |   | 1,154 |  |   | 911    |  
|State and local                    |  |                         | 26     |      |   | 190   |  |   | 279    |  
|Conversion from S to C corporation |  |                         |       |      |   |      |  |   | (2,644 | )
|                                   |  |                         |        |      |   |       |  |   |        |  
|Total deferred income tax expense  |  |                         | 228    |      |   | 1,344 |  |   | (1,454 | )
|                                   |  |                         |        |      |   |       |  |   |        |  
|Total income tax expense           |  | $                       | 11,685 |      | $ | 8,181 |  | $ | 656    |  
|                                   |  |                         |        |      |   |       |  |   |        |  



The effective tax
rates differ from the U.S. Federal income tax rate for the following reasons (in thousands):



|                                              |  |                         |        |      |   |       |  |   |        |  
|--------------------------------------------- |  | ----------------------- | ------ | ---- | - | ----- |  | - | ------ | -
|                                              |  | Year Ended December 31, |       
|                                              |  | 2004                    |        | 2003 |   | 2002  | 
|Income tax expense at the U.S. statutory rate |  | $                       | 10,271 |      | $ | 7,024 |  | $ | 2,836  |  
|Conversion from S to C corporation            |  |                         |       |      |   |      |  |   | (2,644 | )
|State and local taxes                         |  |                         | 1,349  |      |   | 1,039 |  |   | 405    |  
|Other                                         |  |                         | 65     |      |   | 118   |  |   | 59     |  
|                                              |  |                         |        |      |   |       |  |   |        |  
|Income tax expense                            |  | $                       | 11,685 |      | $ | 8,181 |  | $ | 656    |  
|                                              |  |                         |        |      |   |       |  |   |        |  



N.    CONTINGENCIES



In
July 2004, we signed a definitive settlement agreement with Bear Stearns Merchant Fund Corp. settling the lawsuit filed by Bear Stearns Merchant Fund Corp. alleging breach of contract and other matters in connection with its proposal to purchase
Modern Technologies Corp. (our principal subsidiary, an Ohio corporation that is now known as MTC Technologies, Inc.). The expense associated with this settlement is included in the accompanying financial statements for the year ended December 31,
2004 and was not material to the financial statements.



O.    SUBSEQUENT EVENTS



Acquisition of OnBoard Software, Inc.



In January 2005, we purchased all of the outstanding capital stock of OnBoard Software, Inc. (OnBoard) from its sole shareholder. OnBoards customer base consists primarily of the U.S. Air Force and large prime contractors for the
Department of Defense, and OnBoard supports programs with technical development for a wide range of innovative and cost-effective hardware/software systems. The initial purchase price was $34.1 million paid from cash on hand at closing. In addition,
OnBoards shareholder may receive additional cash payments through 2007 if certain operating goals are achieved. It is anticipated that we will realize certain income tax benefits in future periods as a result of the OnBoard shareholder
agreeing to a Section 338 (h)(10) election under the Internal Revenue Code of 1986.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Acquisition of Manufacturing Technology, Inc.



In February 2005, we purchased all of the outstanding capital stock of
Manufacturing Technology, Inc. (MTI). MTIs customer base consists primarily of the U.S. Air Force, the U.S. Navy, and large prime contractors for the Department of Defense, and MTI supports sensitive government programs and specializes in
total product life cycle support for electronic and other systems used in military and commercial applications. The initial purchase price was $70.0 million paid in cash at closing, of which approximately $2.0 million was from available cash on hand
and $68.0 million of which was borrowed under our revolving credit facility. MTI shareholders may receive additional cash payments of $5.0 million if certain operating goals are achieved in 2005. It is anticipated that we will realize certain
income tax benefits in future periods as a result of the MTI shareholders agreeing to a Section 338 (h)(10) election under the Internal Revenue Code of 1986.



Borrowing under Revolving Credit Facility



As of February 28, 2005 we had $65.5 million outstanding under our revolving credit facility. Borrowings under the revolving
credit facility bear interest at a rate of prime less 25 basis points. The Company will pay interest in March, June, September, and December of each calendar year beginning in March 2005.



P.    QUARTERLY FINANCIAL DATA (UNAUDITED)



Unaudited quarterly financial data for the years ended December 31, 2004 and 2003 are as follows (in thousands):



|                                     |  |              |        |              |   |               |  |              |        |              |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|------------------------------------ |  | ------------ | ------ | ------------ | - | ------------- |  | ------------ | ------ | ------------ | - | ------------ |  | ------------- | ------ | ------------ | - | ------ |  | - | ------ |  | - | ------
|For the quarter ended                |  | Mar. 31,2003 |        | June 30,2003 |   | Sept. 30,2003 |  | Dec. 31,2003 |        | Mar. 31,2004 |   | June 30,2004 |  | Sept. 30,2004 |        | Dec. 31,2004
|Income statement data:               |  |              |        |              |   |               |  |              |        |              |   |              |  |               |        |              |   |        |  |   |        |  |   |       
|Revenue                              |  | $            | 36,109 |              | $ | 42,565        |  | $            | 50,422 |              | $ | 59,611       |  | $             | 59,868 |              | $ | 62,679 |  | $ | 74,046 |  | $ | 76,434
|Gross profit                         |  |              | 6,343  |              |   | 7,184         |  |              | 7,847  |              |   | 9,275        |  |               | 9,334  |              |   | 9,832  |  |   | 11,995 |  |   | 12,244
|Operating income                     |  |              | 3,820  |              |   | 4,613         |  |              | 5,468  |              |   | 6,481        |  |               | 6,214  |              |   | 6,592  |  |   | 7,721  |  |   | 8,272 
|Income before income taxes           |  |              | 3,895  |              |   | 4,689         |  |              | 5,542  |              |   | 6,544        |  |               | 6,295  |              |   | 6,798  |  |   | 7,844  |  |   | 8,409 
|Income tax expense                   |  |              | 1,540  |              |   | 1,850         |  |              | 2,218  |              |   | 2,573        |  |               | 2,490  |              |   | 2,641  |  |   | 3,110  |  |   | 3,444 
|Net income                           |  | $            | 2,355  |              | $ | 2,839         |  | $            | 3,324  |              | $ | 3,971        |  | $             | 3,805  |              | $ | 4,157  |  | $ | 4,734  |  | $ | 4,965 
|Basic and diluted earnings per share |  | $            | 0.18   |              | $ | 0.22          |  | $            | 0.25   |              | $ | 0.30         |  | $             | 0.26   |              | $ | 0.27   |  | $ | 0.30   |  | $ | 0.32  



******



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Item 9.    Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure



None.



Item 9A.    Controls and Procedures



Our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO) evaluated, together with other members of senior management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December
31, 2004. Based on this review, our CEO and CFO have concluded that, as of December 31, 2004, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure, and are effective to ensure that such information is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms.



Managements Report on Internal Control Over Financial Reporting



Our management is also responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce
reliable financial statements in conformity with accounting principles generally accepted in the United States. Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework. Based on this assessment, management concluded that, as of
December 31, 2004, our internal control over financial reporting was effective based on those criteria. There were no material weaknesses in internal control over financial reporting identified by our management.Our independent registered
accounting firm, Ernst & Young LLP, has issued an attestation report on managements assessment of our internal control over financial reporting. This attestation report appears below.



Changes in Internal Control



There was no change in our internal control over financial reporting during
the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.



Report of Independent Registered Public Accounting Firm of Managements Assessment on Internal Control over Financial Reporting



The Board of Directors and Shareholders of MTC Technologies, Inc.



We have audited managements assessment, included in
the accompanying Managements Report on Internal Control over Financial Reporting which is located under Item 9A. Controls and Procedures, that MTC Technologies, Inc. maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). MTC Technologies, Inc.s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of the companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.



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A companys internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.



Because of its
inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that MTC Technologies, Inc. maintained effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, MTC Technologies, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on
the COSO criteria.



We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of MTC Technologies, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders
equity, and cash flows for each of the two years in the period ended December 31, 2004 and our report dated February 28, 2005 expressed an unqualified opinion thereon.



|                        
|------------------------
|/s/    Ernst & Young LLP
|Ernst & Young LLP       
|Dayton, Ohio            
|February 28, 2005       





Item 9B.    Other Information



None.



PART III.



Item 10.    Directors and Executive Officers of the Registrant



Information regarding Directors of the Company, and the Code of Business Conduct and Ethics, as required by Part III, Item 10, is incorporated herein by
reference to information that will be contained in the Companys definitive proxy statement for its 2005 Annual Meeting of Stockholders under the heading Election of Directors (Proposal No. 1).



Information regarding compliance with Section 16(a) of the Exchange Act, as
required by Part III, Item 10, is incorporated herein by reference to information that will be contained in the Companys definitive proxy statement for its 2005 Annual Meeting of Stockholders under the heading Section 16(a) Beneficial
Ownership Reporting Compliance.



Information regarding
the executive officers of the Company is included in this Annual Report on Form 10-K in Part I, Item 1, under the heading Executive Officers of the Registrant.



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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES



Item 11.    Executive Compensation



Information regarding Executive Compensation, as required by Part III, Item 11, is incorporated herein by reference to information that will be contained in the Companys definitive proxy statement for its 2005
Annual Meeting of Stockholders under the headings Director Compensation, Compensation of Executive Officers and Compensation Committee Interlocks and Insider Participation.



|Item 12.    Security | Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------------------- | -------------------------------------------------------------------------------------



Information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, as
required by Part III, Item 12, is incorporated herein by reference to information that will be contained in the Companys definitive proxy statement for its 2005 Annual Meeting of Stockholders under the headings Security Ownership of
Management and Certain Beneficial Owners and Compensation of Executive OfficersEquity Compensation Plan Information Table.



Item 13.    Certain Relationships and Related Transactions



Information regarding Certain Relationships and Related Transactions, as required by Part III, Item 13, is incorporated herein by reference to information
that will be contained in the Companys definitive proxy statement for its 2005 Annual Meeting of Stockholders under the heading Certain Relationships and Related Party Transactions.



Item 14.    Principal Accountant Fees and Services



Information regarding Principal Accountant Fees and Services, as required by Part III, Item 14, is incorporated herein by reference to information that
will be contained in the Companys definitive proxy statement for its 2005 Annual Meeting of Stockholders under the heading Ratify Selection of Independent Accountants (Proposal No. 2).



Part IV.



Item 15.    Exhibits and Financial Statement Schedules



|1. |  | Financial Statements:
|-- |  | ---------------------



|                                                                                                    |  |     
|--------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                    |  | Page
|Report of Independent Registered Public Accounting Firm                                             |  | 38  
|Report of Independent Registered Public Accounting Firm                                             |  | 39  
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                        |  | 40  
|Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002              |  | 41  
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2004, 2003and 2002 |  | 42  
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002          |  | 43  
|Notes to the Consolidated Financial Statements                                                      |  | 44  



|2. |  | Financial Statement Schedules:
|-- |  | ------------------------------



All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.



|3. |  | Exhibits
|-- |  | --------



The exhibits listed on the accompanying Exhibit Index are filed as part of this Report.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.



MTC TECHNOLOGIES, INC.By:

/s/    MICHAEL I. GEARHARDTMichael I. Gearhardt Chief Financial Officer




Dated: March 11, 2005



Pursuant to the requirements of
the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                |  |                                                                                                                             |  |               
|----------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signatures                                      |  | Title                                                                                                                       |  | Date          
|                                                |  |                                                                                                                            
|*Rajesh K. Soin                                 |  | Chairman of the Board                                                                                                       |  | March 11, 2005
|                                                |  |                                                                                                                            
|/s/    DAVID S. GUTRIDGEDavid S. Gutridge       |  | Chief Executive Officer, Secretary and Director (Principal Executive
Officer)                                               |  | March 11, 2005
|                                                |  |                                                                                                                            
|/s/    MICHAEL I. GEARHARDTMichael I. Gearhardt |  | Chief Financial Officer, Senior Vice President and Treasurer (Principal
Financial Officer and Principal Accounting Officer) |  | March 11, 2005
|                                                |  |                                                                                                                             | 
|                                                |  |                                                                                                                            
|*Don R. Graber                                  |  | Director                                                                                                                    |  | March 11, 2005
|                                                |  |                                                                                                                            
|*William E. MacDonald, III                      |  | Director                                                                                                                    |  | March 11, 2005
|                                                |  |                                                                                                                            
|*Lawrence A. Skantze                            |  | Director                                                                                                                    |  | March 11, 2005
|                                                |  |                                                                                                                            
|*Kenneth A. Minihan                             |  | Director                                                                                                                    |  | March 11, 2005
|                                                |  |                                                                                                                            
|*Lester L. Lyles                                |  | Director                                                                                                                    |  | March 11, 2005



|* |  | The undersigned, by signing his name hereto, does sign and execute this Annual Report on Form 10-K for the above-named directors of the registrant as indicated pursuant to the
powers of attorney executed by such directors that are filed with the Securities and Exchange Commission on behalf of such directors as Exhibit 24.1 to this Annual Report on Form 10-K.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|    |  |                                      
|--- |  | -------------------------------------
|    | 
|By: |  | /s/    MICHAEL I. GEARHARDT          
|    |  | Michael I. Gearhardt Attorney-in-Fact

March 11, 2005



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EXHIBIT INDEX



|           |   |  |                                                                                                                                                                                                                                                                                                                                                        
|---------- | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |   |  | Description                                                                                                                                                                                                                                                                                                                                            
|           |  
|2.1        |   |  | Stock Purchase Agreement, dated October 17, 2002, by and among Modern Technologies Corp., MTC Technologies, Inc. and the Shareholders of
AMCOMP Corporation (incorporated by reference to Exhibit 2.1 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on October 18, 2002).                                   
|           |  
|2.2        |   |  | Stock Purchase Agreement, dated as of October 1, 2003, by and among MTC Technologies, Inc., Modern Technologies Corp., Vishal Soin, Amol
Soin and Indu Soin (incorporated by reference to Exhibit 2.1 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on October 1, 2003).                                    
|           |  
|2.3        |   |  | Stock Purchase Agreement, dated October 24, 2003, by and among MTC Technologies, Inc., William B. Farmer, Michael A. Cinque and Frank C.
Muzzi (incorporated by reference to Exhibit 2.1 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on October 29, 2003).                                                
|           |  
|2.4        |   |  | Stock Purchase Agreement, dated as of June 28, 2004, by and among MTC Technologies, Inc., an Ohio corporation, MTC Technologies, Inc., a
Delaware corporation, and the shareholders named therein (incorporated by reference to Exhibit 2.1 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on July 14, 2004).
|           |  
|2.5        |   |  | Stock Purchase Agreement, dated as of January 18, 2005, by and between MTC Technologies, Inc., an Ohio corporation, and David A. Spencer
(incorporated by reference to Exhibit 2.1 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on January 24, 2005).                                                      
|           |  
|2.6        |   |  | Stock Purchase Agreement, dated as of December 27, 2004, by and among MTC Technologies, Inc., an Ohio corporation, and Dr. Paul Hsu and
Majes Hsu (incorporated by reference to Exhibit 2.1 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on February 17, 2005).                                            
|           |  
|2.7        |   |  | Amendment to Stock Purchase Agreement, dated as of February 11, 2005, by and among MTC Technologies, Inc., an Ohio corporation, and Dr.
Paul Hsu and Majes Hsu (incorporated by reference to Exhibit 2.2 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on February 17, 2005).                               
|           |  
|3.1        |   |  | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to MTC Technologies,
Inc.s Registration Statement on Form S-1 (Commission No. 333-87590), filed on June 12, 2002).                                                                                                                     
|           |  
|3.2        |   |  | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to MTC Technologies, Inc.s Registration
Statement on Form S-1 (Commission No. 333-87590), filed on June 12, 2002).                                                                                                                                           
|           |  
|4.1        |   |  | Specimen certificate for shares of common stock (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to MTC Technologies,
Inc.s Registration Statement on Form S-1 (Commission No. 333-87590), filed on June 24, 2002).                                                                                                                       
|           |  
|4.2        | * |  | Registration Rights Agreement, dated as of June 11, 2002, by and between MTC Technologies, Inc. and Rajesh K. Soin (incorporated by
reference to Exhibit 4.2 to Amendment No. 1 to MTC Technologies, Inc.s Registration Statement on Form S-1 (Commission No. 333-87590), filed on June 12, 2002).                                                    
|           |  
|4.3        |   |  | Registration Rights Agreement, dated as of October 1, 2003, by and among MTC Technologies, Inc., Vishal Soin, Amol Soin and Indu Soin
(incorporated by reference to Exhibit 4.5 to MTC Technologies, Inc.s Registration Statement on Form S-3 (Commission No. 333-112056), filed on January 21, 2004).                                                



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|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           | 
|10.1       |  | Credit and Security Agreement, dated as of January 31, 2003, by and among MTC Technologies, Inc., Modern Technologies Corp., National City
Bank, for itself and as Agent, Keybank National Association, Fifth Third Bank, and Branch Banking and Trust Company (incorporated by reference to Exhibit 10.1 to MTC Technologies, Inc.s Annual Report on Form 10-K (Commission No. 000-49890),
filed on March 20, 2003).                                                                                                                                                          
|           | 
|10.2       |  | First Amendment to Credit Agreement and Revolving Credit Notes, dated as of December 31, 2003, by and among MTC Technologies, Inc., a
Delaware corporation, MTC Technologies, Inc. (formerly known as Modern Technologies Corp.), an Ohio corporation, National City Bank, for itself and as lead arranger and administrative agent, KeyBank National Association, Fifth Third Bank, and Branch
Banking and Trust Company (incorporated by reference to Exhibit 10.2 to MTC Technologies, Inc.s Annual Report on Form 10-K (Commission No. 000-49890), filed on March 2, 2004).
|           | 
|10.3       |  | Second Amendment to Credit Agreement, dated as of July 24, 2004, by and among MTC Technologies, Inc., a Delaware corporation, MTC
Technologies, Inc. (formerly known as Modern Technologies Corp.), an Ohio corporation, National City Bank, for itself and as lead arranger and administrative agent, KeyBank National Association, Fifth Third Bank, and Branch Banking and Trust
Company.                                                                                                                                                                                    
|           | 
|10.4       |  | Third Amendment to Credit Agreement, dated as of December 28, 2004, by and among MTC Technologies, Inc., a Delaware corporation, MTC
Technologies, Inc. (formerly known as Modern Technologies Corp.), an Ohio corporation, National City Bank, for itself and as lead arranger and administrative agent, KeyBank National Association, Fifth Third Bank, and Branch Banking and Trust Company
(incorporated by reference to Exhibit 10.1 to MTC Technologies, Inc.s Current Report on Form 8-K (Commission No. 000-49890), filed on January 3, 2005).                         
|           | 
|10.5*      |  | MTC Technologies, Inc. 2002 Equity and Performance Incentive Plan (Amended and Restated February 25, 2004)(incorporated by reference to
Exhibit 10.3 to MTC Technologies, Inc.s Annual Report on Form 10-K (Commission No. 000-49890), filed on March 2, 2004).                                                                                                                                                                                                                                                                                                                
|           | 
|10.6*      |  | Modern Technologies Corporation Master Savings Plan (incorporated by reference to Exhibit 4.3 to MTC Technologies, Inc.s Registration
Statement on Form S-8 (Commission No. 333-111537), filed on December 24, 2003).                                                                                                                                                                                                                                                                                                                                                          
|           | 
|10.7*      |  | Form of Directors and Officers Indemnification Agreement (incorporated by reference to Exhibit 10.4 to Amendment No. 1 to MTC Technologies,
Inc.s Registration Statement on Form S-1 (Commission No. 333-87590), filed on June 12, 2002).                                                                                                                                                                                                                                                                                                                                      
|           | 
|10.8*      |  | Tax Indemnification Agreement, dated as of June 10, 2002, by and between MTC Technologies, Inc. and Rajesh K. Soin (incorporated by
reference to Exhibit 10.5 to Amendment No. 1 to MTC Technologies, Inc.s Registration Statement on Form S-1 (Commission No. 333-87590), filed on June 12, 2002).                                                                                                                                                                                                                                                                            
|           | 
|10.9*      |  | Form of Nonqualified Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|           | 
|10.10*     |  | Form of Incentive Stock Option Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|10.11*     |  | Form of Director Restricted Share Units Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | 
|21.1       |  | Subsidiaries of MTC Technologies, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           | 
|23.1       |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           | 
|23.2       |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           | 
|24.1       |  | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           | 
|31.1       |  | Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|31.2       |  | Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           | 
|32.1       |  | Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                              

---

|* |  | Indicates management contracts or compensatory plans or arrangements.
|- |  | ---------------------------------------------------------------------



68