UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended ~~June~~ September 30, ~~2005~~2007

¨	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

MTC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

Delaware

02-0593816

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


4032 Linden Avenue, Dayton, Ohio		45432
(Address of principal executive offices)		(Zip Code)

(937) 252-9199

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer ~~(as~~and ~~defined~~large accelerated filer” in Rule 12b-2 of the Exchange Act). ~~Yes x No ¨~~

~~The~~¨ Large ~~number~~Accelerated ofFiler x Accelerated ~~shares~~Filer ¨ Non-Accelerated ~~of Common~~Filer ~~Stock, $0.001 par value, of the registrant outstanding as of July 29, 2005 was 15,759,348.~~

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

The number of shares of Common Stock, $0.001 par value, of the registrant outstanding as of October 31, 2007 was 15,147,906.

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Index:

PART I. FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	1
		Condensed Consolidated Balance Sheets	1
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
		Condensed Consolidated Statements of Income (Unaudited)	2
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	21
		Condensed Consolidated Statements of Cash Flows (Unaudited)	3
	ITEM 4.	Controls and Procedures	22
		Notes to Condensed Consolidated Financial Statements	4
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	19
	ITEM 4.	Controls and Procedures	19
PART II. OTHER INFORMATION
	ITEM 1.	Legal Proceedings	1922
	ITEM 4.	Submission of Matters to a Vote of Security Holders	20
	ITEM 6.	Exhibits	22
	ITEM 6.	Exhibits	20
SIGNATURES			24
SIGNATURES			21
EXHIBIT INDEX			25
EXHIBIT INDEX			22

- i -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

PART I. Financial Information

ITEM 1.

Financial Statements

~~Condensed~~ Consolidated Balance Sheets

(~~dollar~~Dollar amounts in thousands, except per share amounts)

	(unaudited) June 30, 2005			December 31, 2004
	(unaudited)September 30,2007			December 31,2006
Assets
Current assets:
Cash and cash equivalents	$	~~1,214~~—		$	313,~~015~~342
Restricted cash		—3,654			~~871~~—
Accounts receivable, net		7485,~~386~~330			7290,~~541~~630
Costs and estimated earnings in excess of amounts billed on uncompleted contracts		918,~~543~~809			311,~~013~~671
Inventories		214,~~172~~082			411,~~344~~767
Prepaid expenses and other current assets		34,~~359~~184			24,~~913~~543
Total current assets		90126,~~674~~059			~~114~~121,~~697~~953
Property, plant and equipment, net		7,660			3,696
Property and equipment, net		26,605			20,559
Goodwill, net		~~135~~155,~~969~~373			57162,~~510~~770
Intangible assets, net		3023,~~503~~350			1727,~~657~~627
Other assets		~~240~~1,634			~~251~~1,400
	$	265,046		$	193,811
Total assets	$	333,021		$	334,309
Liabilities and Stockholders’ Equity
Liabilities and stockholders’ equity
Current liabilities:
Current maturities on long-term debt	$	6,000		$	—
Current maturities of long-term debt	$	10,985		$	8,500
Accounts payable		1628,~~646~~519			2135,~~430~~504
Restricted funds payable to the government		—			871
Compensation and related items		18,227			18,592
Compensation and related items		18,245			14,097
Billings in excess of costs and estimated earnings on uncompleted contracts		3,999			2,951
Billings in excess of costs and estimated earnings on uncompleted contracts		2,115			460
Income taxes payable and other current liabilities		4,344			3,509
Amounts due under earn out agreements and other distributions payable		—			4,858
Total current liabilities		66,074			69,056
Income taxes payable and other current liabilities		2,622			2,013
Long-term debt		73,540			80,300
Total current liabilities		45,628			43,729
Deferred income taxes and other long-term liabilities		6,133			6,070
Long-term debt		56,100			—
Deferred income tax liabilities		2,225			2,371
Other long-term liabilities		660			550
Stockholders’ equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 15,759,348 and 15,656,383 shares issued and outstanding, at June 30, 2005 and December 31, 2004, respectively		16			16
Common stock, $0.001 par value; 50,000,000 shares authorized; 15,145,406 and 15,219,231 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively		16			16
Paid-in capital		~~120~~122,~~987~~223			~~118~~121,~~013~~752
Retained earnings		4080,~~791~~233			3070,~~493~~486
Treasury stock		(1,361	)		(1,361	)
Other comprehensive (loss) income		(269	)		16
Total stockholders’ equity		160,433			147,161
Treasury stock		(14,929	)		(13,387	)
	$	265,046		$	193,811
Total stockholders’ equity		187,274			178,883
Total liabilities and stockholders’ equity	$	333,021		$	334,309

See accompanying Notes to ~~Condensed~~ Consolidated Financial Statements.

- 1 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~Item~~ITEM 1. Financial Statements

~~Condensed~~ Consolidated Statements of Income (Unaudited)

(~~dollar~~Dollar amounts in thousands, except per share amounts)

	Three months ended June 30,						Six months ended June 30,
	Three months endedSeptember 30,							Nine months endedSeptember 30,
	2005			2004			2005				2004
	2007			2006				2007				2006
Revenue	$	89114,~~655~~621		$	62105,~~679~~194		$	~~174,967~~$	321,681		$	~~122,547~~$	304,845
Cost of revenue		7498,~~949~~198			5287,~~847~~873			~~146,491~~	272,968			~~103,381~~	254,575
Gross profit		1416,~~706~~423			917,~~832~~321			~~28,476~~	48,713			~~19,166~~	50,270
General and administrative expenses		47,~~199~~177			26,~~812~~375			~~7,886~~	22,654			~~5,504~~	17,445
Intangible asset amortization		1,303			428			2,430				856
Restructuring charge		—			—				1,452				—
Operating income		9,204			6,592			18,160				12,806
Intangible asset amortization		1,537			1,536				4,609				4,375
Interest income		28			206			130				287
Operating income		7,709			9,410				19,998				28,450
Interest expense		(753	)		—			(1,240	)			—
Interest income		242			72				281				306
Interest (expense) income, net		(725	)		206			(1,110	)			287
Interest expense		(1,535	)		(1,500	)			(4,529	)			(3,934	)
Income before income tax expense		8,479			6,798			17,050				13,093
Interest expense, net		(1,293	)		(1,428	)			(4,248	)			(3,628	)
Income tax expense		3,358			2,641			6,752				5,131
Other income, net		593			—				593				—
Net income	$	5,121		$	4,157		$	10,298			$	7,962
Income before income tax expense		7,009			7,982				16,343				24,822
Basic earnings per common share	$	0.33		$	0.27		$	0.65			$	0.53
Income tax expense		2,782			3,145				6,341				9,780
Diluted earnings per common share	$	0.32		$	0.27		$	0.65			$	0.53
Net income	$	4,227		$	4,837			$	10,002			$	15,042
Weighted average common shares outstanding:
Basic and diluted earnings per common share	$	0.28		$	0.31			$	0.66			$	0.96
Basic		15,750,303			15,599,824			15,729,007				14,980,886
Weighted average common shares outstanding:
Diluted		15,813,235			15,635,883			15,790,489				15,020,892
Basic		15,145,406			15,605,610				15,165,574				15,713,958
Diluted		15,187,215			15,625,304				15,202,363				15,746,258

See accompanying Notes to ~~Condensed~~ Consolidated Financial Statements.

- 2 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~Item~~ITEM 1. Financial Statements

~~Condensed~~ Consolidated ~~Statements~~Statement of Cash Flows (Unaudited)

(~~dollar~~Dollar amounts in thousands)

	Six months ended June 30,
	Nine months ended September 30,
	2005			2004
	2007			2006
Cash flows from operating activities:
Net income	$	10,~~298~~002		$	715,~~962~~042
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes		(146	)		(219	)
Depreciation and amortization		7,835			6,883
Depreciation and amortization		3,370			1,165
Stock compensation expense		765			561
Other		59			204
Deferred income taxes		(219	)		(470	)
Changes in operating assets and liabilities:
Loss (gain) on sale of fixed assets		3			(126	)
Accounts receivable		5,589			(5,170	)
Changes in operating assets and liabilities (net of acquisitions):
Costs and estimated earnings in excess of billings on uncompleted contracts		3,221			1,430
Accounts receivable		4,173			9,264
Inventory		2,391			2,037
Costs and estimated earnings in excess of amounts billed on uncompleted contracts		(7,138	)		(4,681	)
Prepaid expenses and other assets		(173	)		356
Inventories		(2,315	)		(442	)
Accounts payable		(7,289	)		(6,610	)
Prepaid expenses and other assets		68			(181	)
Compensation and related items		3,188			490
Accounts payable		(6,985	)		(6,416	)
Billings in excess of costs and estimated earnings on uncompleted contracts		(4,389	)		(368	)
Compensation and related items		(365	)		1,820
Income taxes payable and other current liabilities		(1,787	)		(233	)
Billings in excess of costs and estimated earnings on uncompleted contracts		1,048			1,702
Net cash provided by operating activities		14,332			1,044
Income taxes payable and other current liabilities		657			943
Net cash provided by operating activities		7,529			23,899
Cash flows from investing activities:
Payments for acquired businesses		(105,685	)		(2,180	)
Net proceeds from (payments for) acquired businesses		8,149			(47,833	)
Purchase of property and equipment		(19,~~098~~281	)		(15,~~188~~129	)
Proceeds from sale of property and equipment		485			~~224~~963
Net cash used in investing activities		(~~106~~1,~~735~~127	)		(351,~~144~~999	)
Cash flows from financing activities:
Issuance of common stock		~~502~~—			~~59,453~~43
Borrowings under Term Loan		60,000			—
Gross borrowings on the revolving credit facility		127,800			95,550
Net proceeds from long-term borrowing		2,100			—
Gross repayments on the revolving credit facility		(135,700	)		(63,550	)
Net cash provided by financing activities		62,602			59,453
Payments on long-term borrowing		(6,375	)		(4,500	)
Net (decrease) increase in cash		(29,801	)		57,353
Net proceeds from issuance of bonds, net of restricted cash of $3,654		6,073			—
Cash and cash equivalents at beginning of period		31,015			15,050
Excess tax benefits from share-based payments		—			11
Cash and cash equivalents at end of period	$	1,214		$	72,403
Repurchase of common stock		(1,542	)		(8,463	)
Net cash (used in) provided by financing activities		(9,744	)		19,091
Net decrease in cash		(3,342	)		(9,009	)
Cash and cash equivalents at beginning of period		3,342			13,755
Cash and cash equivalents at end of period	$	—		$	4,746

See accompanying Notes to ~~Condensed~~ Consolidated Financial Statements.

- 3 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Notes to ~~Condensed~~ Consolidated Financial Statements

A. ~~Summary~~SUMMARY ofOF ~~Operations~~OPERATIONS ~~and~~AND ~~Significant~~SIGNIFICANT ~~Accounting~~ACCOUNTING ~~Policies~~POLICIES

Interim ~~financial information~~Financial Information—The consolidated financial statements as of ~~June~~ September 30, ~~2005~~2007 and ~~2004 and~~ for the three- and ~~six~~nine-month periods ended ~~June~~ September 30, ~~2005~~2007 and ~~2004~~2006 are unaudited and have been prepared on the same basis as our audited consolidated financial statements. MTC Technologies, Inc. (we, us, MTC or the Company) has continued to follow the accounting principles set forth in the consolidated financial statements included in its ~~2004~~2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring items, necessary to present fairly the periods indicated. Results of operations for the interim periods ended ~~June~~ September 30, ~~2005~~2007 and ~~2004~~2006 are not necessarily indicative of the results for the full year.

Business Segment—We operate as one segment, delivering a broad array of services primarily to the federal government in ~~four~~the areas~~, which~~ ~~are~~of ~~offered~~modernization ~~separately~~and orsustainment; inprofessional ~~combination~~services; ~~across~~command, ~~our~~control, ~~customer~~communications, computers, ~~base.~~intelligence, ~~These~~surveillance ~~services~~and ~~are~~reconnaissance ~~Systems~~(C4ISR); ~~Engineering~~ and ~~Technical~~logistics ~~Services,~~solutions. ~~Information~~We ~~Technology,~~offer ~~Intelligence~~these ~~and~~services ~~Program~~separately ~~Management.~~or ~~Although~~in wecombination ~~offer~~across ~~the~~our ~~services~~customer ~~referred~~base. ~~to above~~Accordingly, revenue isand profit are internally reviewed by our management primarily on a contract basis, making it impracticable to determine revenue and profit by services offered. ~~In addition, there were no sales to foreign customers.~~

~~Stock-Based~~Earnings ~~Compensation—~~per ~~As permitted under Statement of~~Common ~~Financial~~Share—Basic ~~Accounting~~earnings ~~Standards~~per ~~(SFAS)~~common ~~No.~~share ~~123,~~were ~~Accounting~~computed ~~for~~by ~~Stock-Based~~dividing ~~Compensation,~~net weincome ~~account~~available ~~for~~to ~~stock-based~~common ~~awards~~stockholders ~~using~~by the ~~intrinsic~~weighted ~~value~~average ~~method~~number ~~prescribed~~of inshares ~~Accounting~~of ~~Principles~~common ~~Board~~stock ~~(APB)~~outstanding ~~Opinion~~during ~~No.~~each ~~25, Accounting for Stock Issued to Employees~~period. ~~Compensation~~Shares ~~expense~~issued ~~for~~and ~~stock~~shares ~~options~~reacquired, ~~granted~~if any, toduring ~~employees under~~ the ~~2002~~period ~~Equity~~are ~~and~~weighted ~~Performance~~for ~~Incentive~~the ~~Plan~~portion ~~(Amended~~of ~~and~~the ~~Restated~~period ~~February~~during ~~25,~~which ~~2004)~~they iswere ~~recognized~~outstanding. ~~based~~The onweighted ~~the~~average ~~difference,~~shares iffor ~~any, between~~ the ~~quoted market~~three- ~~price of our stock~~ and ~~the~~nine-month ~~exercise~~periods ~~price~~ended ofSeptember 30, ~~the~~2007 ~~option~~and at2006 ~~the~~are ~~date~~as offollows: ~~grant.~~

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.


	Three months ended September 30,		Nine months ended September 30,
	2007	2006	2007	2006
Basic weighted average common shares outstanding	15,145,406	15,605,610	15,165,574	15,713,958
Effect of potential exercise of stock options	41,809	19,694	36,789	32,300

Diluted weighted average common shares outstanding	15,187,215	15,625,304	15,202,363	15,746,258

~~Pro~~Comprehensive ~~forma~~Income—The ~~disclosure:~~components of comprehensive income are as follows (in thousands):

(dollar amounts in thousands, except per share data)


	Three months ended September 30,						Nine months ended September 30,
	2007			2006			2007			2006
Net income	$	4,227		$	4,837		$	10,002		$	15,042
Change in fair value of interest rate swap, net of tax (benefit) expense of ($56) and $184, respectively, for the quarter and ($19) and $21, respectively, for the year to date		(443	)		(284	)		(285	)		32

Comprehensive income	$	3,784		$	4,553		$	9,717		$	15,074

	Three months endedJune 30,						Six months endedJune 30,
	2005			2004			2005			2004
Net income, as reported	$	5,121		$	4,157		$	10,298		$	7,962
Add: Stock based compensation included in reported net income, net of related tax benefits		—			14			—			14
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(170	)		(117	)		(559	)		(368	)
Pro forma net income	$	4,951		$	4,054		$	9,739		$	7,608
Earnings per share:
Basic – as reported	$	0.33		$	0.27		$	0.65		$	0.53
Basic – pro forma	$	0.31		$	0.26		$	0.62		$	0.51
Diluted – as reported	$	0.32		$	0.27		$	0.65		$	0.53
Diluted – pro forma	$	0.31		$	0.26		$	0.62		$	0.51

Recent Accounting Pronouncements—In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), which clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted the provisions of FIN 48 during the first quarter of 2007. As a result of the implementation of FIN 48, we recognized a $0.3 million increase in liability for

- 4 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~On December 16, 2004, the Financial Accounting Standards Board~~ ~~(FASB)~~unrecognized ~~issued~~tax ~~SFAS No. 123(R)~~benefits, ~~Share-Based~~which ~~Payment~~was ~~(SFAS~~accounted ~~No.~~for ~~123(R)),~~as ~~which is~~ a ~~revision~~reduction ~~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 ~~dates of grant~~January 1, ~~and~~2007 tobalance ~~be expensed over the applicable vesting period. Pro forma disclosure~~ of ~~the~~retained ~~income statement effects of share-based payments will no longer be an alternative~~earnings. ~~SFAS~~See ~~No.~~Note ~~123(R)~~F ~~is effective~~ for ~~all~~further information ~~stock-based awards granted on or after January 1, 2006. 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~~FIN ~~No.123(R)~~48 toon our consolidated ~~results~~financial ~~of operations~~statements.

~~Earnings~~Stock-Based Compensation—Effective ~~per~~January 1, ~~Common~~ 2006, we adopted the fair value recognition provisions of FASB Statement No. 123(R), Share~~—Basic~~-Based ~~earnings~~Payments ~~per~~(SFAS ~~common~~No. 123 ~~share~~(R)), using the modified prospective transition method. As a result, in 2006, our operating income and income before taxes were ~~computed~~reduced by ~~dividing~~$0.5 million, our net income ~~available~~was toreduced ~~common~~by ~~stockholders~~$0.3 million, and our basic and diluted earnings per share were reduced by $0.02. For the ~~weighted~~nine ~~average~~months ~~number~~ended September 30, of2007, ~~shares~~our ofoperating ~~common~~income ~~stock~~and ~~outstanding~~income ~~during~~before ~~each~~taxes ~~period~~were reduced by $0.5 ~~Shares~~million, ~~issued~~and ~~during~~our basic and diluted earnings per share were reduced by $0.02. For the ~~period~~nine months ended September 30, 2007 and the year ended ~~shares~~December 31, ~~reacquired~~2006, ifwe ~~any,~~recognized ~~during~~financing ~~the~~cash ~~period~~inflows ~~are~~of ~~weighted~~$0 and $11,000, respectively, for ~~the~~tax ~~portion~~benefits ofrelated ~~the~~to ~~period~~stock ~~during~~option transactions, which ~~they~~benefits ~~were~~would ~~outstanding~~previously have been recorded as cash flows from operations. The ~~weighted~~above ~~average~~amounts approximate ~~shares~~the ~~for~~incremental ~~the~~impact ~~three~~of ~~and~~adopting ~~six~~SFAS ~~months~~No. 123(R) ~~ended~~as ~~June~~compared ~~30,~~to ~~2005~~the ~~and~~application ~~2004~~of ~~are~~the asoriginal ~~follows:~~provisions of SFAS No. 123.

	Three months ended June 30,		Six months ended June 30,
	2005	2004	2005	2004
Basic weighted average common shares outstanding	15,750,303	15,599,824	15,729,007	14,980,886
Effect of potential exercise of stock options	62,932	36,059	61,482	40,006
Diluted weighted average common shares outstanding	15,813,235	15,635,883	15,790,489	15,020,892

Options. Stock options outstanding as of December 31, 2006 and September 30, 2007, and changes during the nine-month period ended September 30, 2007, were as follows:

B. STOCKHOLDERS’ EQUITY


	Shares		Weighted Average Exercise Price
Outstanding at December 31, 2006	258,568		$	25.69
Granted	122,842		$	21.42
Exercised	—			—
Forfeited or expired	(1,000	)	$	17.00

Outstanding at September 30, 2007	380,410		$	24.33

Vested and unvested expected to vest at September 30, 2007	374,335		$	24.36

Exercisable at September 30, 2007	239,071		$	26.03

InThe ~~February~~aggregate ~~2004,~~intrinsic ~~the~~value ~~Company and a selling stockholder completed a public offering~~ of ~~2,250,000~~vested ~~primary~~ and ~~1,500,000~~unvested ~~secondary~~expected ~~shares~~to ofvest ~~our~~options ~~common stock~~at September 30, ~~and~~2007 ~~the~~was ~~Company received net proceeds of approximately~~ $590.31 million., ~~The~~with ~~primary~~a ~~shares~~weighted ~~were~~average ~~issued~~remaining bycontractual ~~the~~life ~~Company~~of ~~and the secondary shares were sold by the selling stockholder~~7.7 ~~The Company did not receive any proceeds from the sale of the shares by the selling stockholder~~years.

WeThe ~~have~~following ~~used~~table ~~the~~summarizes certain ~~net~~information ~~proceeds~~for ~~from~~options ~~the~~currently ~~offering~~outstanding ~~(together with cash on hand~~ and ~~additional~~exercisable ~~borrowings)~~at ~~for working capital and general corporate purposes~~September 30, ~~including~~ to2007: ~~finance the purchase of all or a portion of certain complementary businesses we have acquired.~~

In the first quarters of 2005 and 2004, we issued 79,880 and 133,074 shares of our common stock, respectively, with a value of approximately $2.5 million and $3.6 million, respectively, in connection with the fourth quarter 2003 acquisition of International Consultants, Inc.


	Options Outstanding						Options Exercisable
Option Price	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Intrinsic Value		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life	Intrinsic Value
$16 - $21	178,282	$	19.33	7.9 years	$	135,219	73,717	$	17.61	5.6 years	$	135,219
$23 - $27	121,628	$	25.74	7.5 years		—	84,854	$	26.47	6.9 years		—
$29 - $34	80,500	$	33.29	7.5 years		—	80,500	$	33.29	7.5 years		—
Total	380,410	$	24.33	7.7 years	$	135,219	239,071	$	26.03	6.7 years	$	135,219

C.- ~~ACQUISITIONS~~5 -

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. Additionally, acquisition related closing expenses of approximately $0.2 million were incurred. The purchase price was reduced by $0.4 million in June 2005 after settlement of the escrow agreement under the stock purchase agreement. OnBoard’s shareholder may also receive additional cash payments through 2007 if

-5-

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~certain~~We ~~operating~~estimate ~~goals~~the ~~are~~fair ~~achieved.~~value Itfor isstock ~~anticipated~~options ~~that~~at wethe ~~will~~date ~~realize certain~~of ~~income~~grant ~~tax~~using ~~benefits~~the inBlack-Scholes ~~future~~option pricing ~~periods~~model, aswhich arequires ~~result~~us ofto ~~the~~make ~~OnBoard~~certain ~~shareholder~~assumptions. ~~agreeing~~We toselected athe ~~Section~~assumptions ~~338(h)(10)~~used ~~election~~in ~~under~~ the ~~Internal~~Black-Scholes ~~Revenue~~pricing ~~Code~~model ofusing ~~1986.~~the following criteria:

~~The~~Risk-free ~~purchase~~interest ~~price~~rate. We ~~for~~base the ~~OnBoard~~risk-free ~~acquisition~~interest ~~was~~rate ~~allocated~~on asimplied ~~follows~~yields ~~(in~~available ~~thousands):~~on a U.S. Treasury note with a maturity term equal to or approximating the expected term of the underlying award.

Cash and equivalents	$	1,943
Accounts receivable, net		1,972
Prepaids and other current assets		152
Property and equipment, net		844
Intangible assets – Purchase price allocated to contracts		2,800
Goodwill		29,515
Current liabilities		(3,226	)
Long-term liabilities		(184	)
Net assets acquired	$	33,816

Dividend yield. We do not intend to pay dividends on our common stock for the foreseeable future and, accordingly, use a dividend yield of zero.

Volatility. The ~~value~~expected volatility of ~~the customer~~our ~~contract~~common ~~intangible~~stock ~~asset~~ was ~~based on an independent appraisal. The customer contract intangible asset is being amortized over four years, which is the~~ estimated ~~remaining~~based ~~life~~upon of the ~~contracts including renewals. Goodwill recognized under~~historical ~~the~~volatility ~~agreement~~of isour ~~deductible~~common ~~for~~stock ~~income~~share ~~tax purposes~~price.

~~Manufacturing~~Expected ~~Technology~~life. The expected life of the option grants represents the period of time options are expected to be outstanding and is based on the contractual term of the grant, ~~Inc~~vesting schedules, and past exercise behavior.

~~In February~~We ~~2005,~~used ~~we purchased all of~~ the ~~outstanding~~following ~~capital~~weighted ~~stock~~average ofassumptions ~~Manufacturing~~in ~~Technology, Inc. (MTI). MTI’s customer base consists primarily of~~ the ~~U.S.~~Black-Scholes ~~Air~~option ~~Force,~~pricing ~~the~~model ~~U.S.~~to ~~Navy,~~determine ~~and large prime contractors for~~ the ~~Department~~fair ofvalues 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 approximately $68.0 million of which was borrowed under our then~~stock-~~effective~~based ~~revolving~~compensation ~~credit~~awards ~~facility.~~granted ~~Additionally,~~during acquisition related closing expenses of approximately $0.3 million were incurred. MTI shareholders may receive additional cash payments of up to $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~~nine ~~shareholders~~months ~~agreeing~~ended toSeptember 30, a2007 ~~Section~~and ~~338(h)(10) election under~~ the ~~Internal~~year ~~Revenue~~ended December 31, ~~Code~~2006: ~~of 1986.~~

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


	2007		2006
Expected life of options	7.8 years		7.4 years
Risk-free interest rate	4.6% - 4.7	%	4.6% - 5.0	%
Expected stock price volatility	39.3	%	39.6	%
Expected dividend yield	0.0	%	0.0	%

Cash and equivalents	$	301
Accounts receivable, net		5,462
Costs and estimated earnings in excess of billings		9,750
Inventory		219
Prepaids and other current assets		148
Intangible assets - Purchase price allocated to contracts		11,500
Capitalized software		585
Property and equipment, net		2,943
Goodwill		48,800
Current liabilities		(9,398	)
Net assets acquired	$	70,310

The fair value of options outstanding was $4.7 million at September 30, 2007 and $3.4 million at December 31, 2006. The fair value of the shares vested during the nine months ended September 30, 2007 was $0.7 million and $0.8 million during the year ended December 31, 2006. No stock options were exercised in the nine months ended September 30, 2007. The total intrinsic value of stock options exercised during the year ended December 31, 2006 was $29,000. The weighted average per share fair value of stock options granted during the nine months ended September 30, 2007 was $11.18 and during the year ended December 31, 2006 was $11.89. As of September 30, 2007, we had unrecognized compensation cost related to non-vested stock options of $1.3 million, which we expect to be recognized over a weighted average period of approximately 3.6 years.

~~The~~Restricted ~~above~~Share ~~purchase price~~Units. ~~allocation~~The isfollowing ~~preliminary~~outlines ~~and~~the unrecognized iscompensation ~~dependent~~cost onassociated ~~the~~with ~~completion of~~ the ~~review~~outstanding ofrestricted ~~the~~share ~~closing~~unit ~~balance~~awards ~~sheet~~for ~~and~~the ~~tangible~~nine ~~net~~months ~~worth~~ended ~~calculation~~September 30, as2007 ~~outlined~~(dollar amounts in ~~the~~thousands, ~~related~~except ~~stock~~per ~~purchase~~share ~~agreement.~~amounts):

-6-


	Restricted Share Units	Weighted Average Grant Date Fair Value per Share		Unamortized Grant Date Fair Value
Non-vested at December 31, 2006	60,142	$	26.81	$	1,135
Granted	30,991	$	20.57		637
Vested	—		—		—
Forfeited	—		—		—
Expense recognized	—		—		(295	)

Unamortized balance at September 30, 2007	91,133	$	24.69	$	1,477

- 6 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~The~~As ~~value~~ of ~~the~~September 30, ~~customer~~2007, ~~contract~~we ~~intangible~~had ~~asset~~unrecognized ~~was~~compensation ~~based~~cost related to outstanding onrestricted anshare ~~independent~~units ~~appraisal~~of $1.5 ~~The~~million, ~~customer~~which ~~contract~~we ~~intangible~~expect ~~asset~~to isbe ~~being~~recognized ~~amortized~~ over 10the remaining weighted vesting period of approximately 3.54 years,. ~~which~~Vesting is dependent on continuous service by our directors throughout the ~~estimated~~award ~~remaining~~period ~~life~~for a period of five ~~the~~years ~~contacts~~from ~~including~~date ~~renewals~~of grant. ~~Goodwill~~Upon ~~recognized~~vesting, ~~under~~all ~~the~~restrictions ~~agreement~~initially isplaced ~~deductible~~upon ~~for~~the ~~income~~common ~~tax purposes~~shares lapse.

DThe weighted average per share grant-date fair value of restricted share units granted during 2007 and 2006 was $20.57 ~~RELATED~~and ~~PARTY~~$25.58, ~~TRANSACTIONS~~respectively.

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

	Three months endedJune 30,				Six months endedJune 30,
	2005		2004		2005		2004
Included in general and administrative expenses:
Aircraft usage charges paid to Soin International, LLC	$	7	$	93	$	7	$	151
Rent and maintenance costs paid to related parties		1		1		14		7
	$	8	$	94	$	21	$	158
Rent included in cost of revenues paid to related parties	$	13	$	13	$	27	$	27
Subcontracting services purchased from related parties:
Corbus India, Private, Ltd.	$	82	$	122	$	163	$	240
Subcontract services provided to related parties:
Integrated Information Technology Corporation 1	$	—	$	196	$	—	$	506

We subcontract to, purchase services from, rent a portion of our facilities from, and utilize aircraft from various entities that are controlled by Mr. Rajesh K. Soin, a significant stockholder, Chief Executive Officer, and Chairman of the Board of Directors of MTC. The following is a summary of transactions with related parties (in thousands) for the three- and nine-month periods ending September 30, 2007 and 2006:

1 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.


	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007		2006
Included in general and administrative expenses:
Aircraft usage and transportation charges paid to Soin International, LLC	$	—	$	2	$	11	$	4
Rent and maintenance costs paid to related parties		17		89		49		91

	$	17	$	91	$	60	$	95

Sub-contracting services paid to related parties:
Corbus, LLC	$	—	$	15	$	45	$	1,396

Revenues from related parties:
Corbus, LLC	$	411	$	411	$	1,233	$	1,233

Aerospace Integration Corporation ⁽¹⁾	$	—	$	—	$	—	$	29

We(1) ~~jointly~~Revenues ~~own~~from ~~certain~~Aerospace ~~aircraft~~Integration ~~with~~Corporation ~~Soin~~(AIC) ~~Aviation,~~in ~~LLC.~~2006 Wewere ~~have~~prior ~~also~~to ~~entered~~our ~~into~~acquisition ~~a sharing arrangement with Soin Aviation under which we are responsible for a pro-rata share~~ of ~~the fixed and marginal costs associated with the aircraft jointly owned by us and Soin Aviation~~AIC.

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 ~~June~~ September 30, ~~2005~~ 2007 and December 31, ~~2004~~2006, ~~the~~there ~~amounts~~were ~~payable~~no toamounts ~~related~~due ~~parties~~from ~~were~~or ~~approximately~~payable ~~$87,000~~to ~~and~~related ~~$101,000, respectively~~parties.

- 7 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

EC. INVENTORY

Inventories are valued at the lower of cost or market using the first-in, first-out method. The components of inventories as of September 30, 2007 and December 31, 2006 are as follows (in thousands):

The components of inventories as of June 30, 2005 and December 31, 2004 are as follows (in thousands):


	September 30, 2007		December 31, 2006
Raw materials	$	115	$	—
Work-in-process		13,742		11,767
Finished goods		225		—

	$	14,082	$	11,767

	June 30,2005		December 31,2004
Raw materials	$	147	$	—
Work-in-process		2,016		4,344
Finished goods		9		—
	$	2,172	$	4,344

D. LONG-TERM DEBT

FIn April 2005, we entered into a five-year Credit and Security Agreement, dated as of April 21, 2005 (the Credit Agreement), with National City Bank, Branch Banking and Trust Company, KeyBank National Association, Fifth Third Bank, JPMorgan Chase Bank, N.A., ~~GOODWILL~~Comerica ~~AND~~Bank, ~~INTANGIBLE~~and ~~ASSETS~~PNC Bank, N.A. The Credit Agreement, which is scheduled to expire on March 31, 2010, allows us to borrow up to $145.0 million in the form of an $85.0 million revolving loan and a $60.0 million term loan. The interest rates on borrowings under the term loan range from the prime rate to the prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) rate plus 125 to 225 basis points, and under the revolving loan are the prime rate, or the LIBOR rate plus 100 to 200 basis points, depending in most instances on the ratio of our consolidated funded debt to consolidated pro forma earnings before interest, taxes, depreciation, and amortization (EBITDA).

OnThe ~~January~~borrowing 1,availability ~~2002~~at September 30, we2007 ~~adopted~~under ~~SFAS~~the ~~No.~~revolving ~~142,~~loan ~~Goodwill and~~portion ~~Other~~of ~~Intangible~~our ~~Assets~~Credit ~~(SFAS~~Agreement Nowas $55.1 million. ~~142),~~Borrowings ~~which~~under ~~eliminated~~our ~~the~~Credit ~~amortization~~Agreement ofare ~~goodwill~~secured ~~and~~by ~~other~~a ~~intangibles~~general ~~with~~lien ~~indefinite~~on ~~useful~~our ~~lives~~consolidated assets. In ~~the fourth quarter of 2004~~addition, we ~~performed~~are ansubject ~~impairment~~to ~~test~~certain ofrestrictions, ~~goodwill~~ and ~~determined~~we ~~that~~are ~~no impairment~~required ofto ~~the~~meet ~~recorded~~certain ~~goodwill~~financial ~~existed~~covenants. WeThese ~~based~~covenants ~~our~~require ~~assessment~~that ofwe, among ~~possible~~other ~~impairment on the discounted present value of the operating cash flows of our consolidated reporting unit. In accordance with SFAS No. 142~~things, ~~goodwill~~maintain ~~will~~certain befinancial ~~tested~~ratios ~~for impairment at least annually~~ and ~~more~~minimum ~~frequently~~net ifworth ~~an event occurs which indicates the goodwill may be impaired~~levels. OnAs anof ~~annual~~September 30, ~~basis~~2007, ~~our~~we ~~impairment~~were ~~testing~~in ~~will~~compliance bewith ~~performed~~these ~~during the fourth quarter~~covenants.

The components of other intangibles at June 30, 2005 and December 31, 2004 are as follows (in thousands):


	September 30, 2007 (in thousands)
Credit Agreement, due March 31, 2010
Term loan	$	44,625
Revolving loan		29,900
Bonds payable, due March 1, 2018		10,000

Total debt		84,525
Less—current maturities		(10,985	)

	$	73,540

	June 30, 2005			December 31,2004
Purchase price allocated to customer contracts	$	35,654		$	21,000
Capitalized software		622			—
Non-compete covenants		25			25
		36,301			21,025
Accumulated amortization		(5,798	)		(3,368	)
	$	30,503		$	17,657

In October 2005, we entered into an interest rate swap agreement with National City Bank under which we exchange floating-rate interest payments for fixed-rate interest payments on our term loan. The amount of the interest rate swap is equal to 50% of the outstanding balance of our term loan, or $22.3 million as of September 30, 2007, and is reduced as the loan amortizes. The swap provides for payments over approximately a four-year period that began in December 2005 and is settled on a quarterly basis. The fixed interest rate provided by the agreement is 4.87 % plus our spread at September 30, 2007 of 200 basis points, or 6.87%. At September 30, 2007, the interest rate on the

~~The~~- ~~capitalized software~~8 costs of $0.6 million represent certain computer software costs capitalized by MTI in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. MTI has also capitalized certain costs of computer software developed for or obtained for internal use in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. Once technological feasibility has been established, software development costs are captured in MTI’s job costing system under specific projects related to the development effort.

Costs related to software developed for external use will be amortized using the straight-line method beginning when the products are available for general release to customers. Amortization of the costs of software used in delivery of MTI’s services is charged to cost of revenue as incurred. Costs related to internal use software will be amortized by MTI over three to seven years.

-8-

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~Estimated~~ portion ~~annual~~of ~~intangible~~the ~~amortization~~term ~~expense~~loan ~~for~~that was not subject to the ~~remainder~~interest ofrate ~~2005~~swap ~~and~~agreement ~~the~~was ~~next~~5.25% ~~five~~plus ~~years~~our spread at September 30, 2007 of 200 basis points, ~~(in~~or ~~thousands):~~7.25%.

~~For~~Effective ~~the~~April 5, ~~remaining~~2006, ~~six~~we ~~months~~entered ~~ending~~into ~~December~~an interest rate swap agreement with National City Bank under which we exchange floating-rate interest payments for fixed-rate interest payments. The agreement covers a combined notional amount of debt equal to $20.0 million and the agreement ends March 31, ~~2005~~2008. $2The swap provides for payments over a two-year period that began in June 2006,~~606~~ and is settled on a quarterly basis. The fixed interest rate provided by the agreement was 5.44% plus our spread at September 30, 2007 of 175 basis points, or 7.19%. The weighted average interest rate for the portion of the revolving loan that is not subject to the interest rate swap, as of September 30, 2007, was 7.49 %, including our spread at September 30, 2007 of 175 basis points.

~~Estimated~~On ~~annual~~March 30, 2007, MTC Technologies, Inc., an Ohio corporation and our wholly owned subsidiary, entered into a guaranty in connection with the ~~intangible~~issuance ~~amortization~~of ~~expense~~$10 (million in ~~thousands~~principal amount of Variable Rate Industrial Development Bonds (Bonds) ~~for~~by the ~~next~~Industrial ~~five~~Development ~~years:~~Board of the City of Albertville, Alabama (IDB) on behalf of AIC. The Bonds were issued to finance the construction by AIC of an aircraft completion center at the Albertville, Alabama airport. AIC received $2.2 million in proceeds from the Bonds at the closing and paid transaction costs of $0.2 million. AIC has received an additional $4.1 million, in proceeds as project reimbursements during the second and third quarters of 2007. The remaining $3.7 million of proceeds is held in escrow and will be paid to AIC as additional capital expenditures are made on the aircraft completion center in Albertville, Alabama. The parcel of land on which such construction is occurring, has been leased to AIC by the City of Albertville.

Year Ending December 31,
2006	$	5,212
2007		5,212
2008		4,662
2009		2,869
2010		2,695

Concurrently with the issuance of the Bonds, AIC entered into a lease agreement (Lease Agreement) with the IDB whereby AIC will complete the construction of and furnish the equipment for the aircraft completion center located at the airport. The Lease Agreement provides that AIC will make lease payments sufficient to pay the principal of and interest on the Bonds. The Bonds are secured by a direct pay letter of credit (Letter of Credit) issued by National City Bank (Bank), which expires on March 16, 2010 subject to extensions as agreed to by AIC and the Bank. In consideration for the issuance of the Letter of Credit, AIC has entered into a reimbursement agreement (Reimbursement Agreement) obligating AIC to pay the Bank for all drawings made on the Letter of Credit. In addition, the Company has entered into a guaranty with the Bank guaranteeing the payment and performance of AIC under the Reimbursement Agreement. AIC’s obligations under the Reimbursement Agreement are secured by a mortgage of its leasehold interest in the ground lease and a security interest in its personal property. The Company’s obligations under the guaranty are secured by a security interest in its personal property.

The ~~changes~~Bonds inare scheduled to mature on March 1, 2018. AIC will pay only the ~~carrying~~ ~~amount~~interest on the Bonds for a period of ~~goodwill~~one year, followed by ten years of quarterly principal and interest payments beginning on March 1, 2008. The interest rate on the Bonds is determined on a weekly basis by the remarketing agent for the ~~six~~Bonds, ~~months~~NatCity ~~ended~~Investments, ~~June~~Inc. 30AIC has the right to convert the variable weekly interest rates to a fixed interest rate upon written notice to the trustee for the Bonds, ~~2005~~the ~~are~~Bank asand ~~follows~~NatCity Investments, Inc. Principal payments will be made on the Bonds beginning March 2008 and will continue through the maturity date (inor such ~~thousands~~earlier date on which the Bonds may be redeemed):. The Bonds may be redeemed at the option of AIC and are subject to mandatory redemption in the event that the interest on the Bonds is determined to be subject to income taxation under the Internal Revenue Code.

Balance as of December 31, 2004	$	57,510
Additional goodwill from 2004 earn-out related to our Vitronics Inc. acquisition		19
Additional goodwill arising from our Command Technologies, Inc. acquisition		125
Goodwill arising from our OnBoard acquisition		29,515
Goodwill arising from our MTI acquisition		48,800
Balance as of June 30, 2005	$	135,969

The Reimbursement Agreement contains customary events of default, including failure to make required payments when due, failure to comply with certain covenants, breaches of certain representations and warranties, certain events of bankruptcy and insolvency, amendments to the Lease Agreement without the prior consent of the Bank, and an “event of default” under the Credit Agreement. Upon any such event of default, the maturity of the Bonds can be accelerated, causing payment by the

~~G. LONG~~-~~TERM~~ ~~DEBT~~9 -

In April 2005, we entered into a five-year Credit and Security Agreement, dated as of April 21, 2005 (the “Credit Agreement”), with National City Bank, Branch Banking and Trust Company, KeyBank National Association, Fifth Third Bank, JPMorgan Chase Bank, N.A., Comerica Bank, and PNC Bank, N.A. The Credit Agreement, which is scheduled to expire on June 30, 2010, allows us to borrow up to $145.0 million in the form of an $85.0 million revolving loan and a $60.0 million term loan. The interest rates on borrowings under the term loan range from the prime rate to the prime rate plus 25 basis points, or the LIBOR rate plus 125 to 225 basis points, and under the revolving loan are the prime rate, or the LIBOR rate plus 100 to 200 basis points, depending in most instances on the ratio of our consolidated funded debt to consolidated pro-forma earnings before interest, taxes, depreciation, and amortization (EBITDA).

The borrowing availability at June 30, 2005 under our Credit Agreement was $82.9 million. Borrowings under our Credit Agreement 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. As of June 30, 2005, we were in compliance with these covenants. As of December 31, 2004, we did not have any amounts outstanding under our then-existing credit facility.

	June 30, 2005
Credit Agreement, due June 30, 2010 (in thousands):
Term Loan (5.00% at June 30, 2005)	$	60,000
Revolving Loan 1 (4.6875% at June 30, 2005)		2,100
Total debt		62,100
Less—current maturities		(6,000	)
	$	56,100

1 Interest rate varies daily based on the overnight money market rate plus 1.50%

-9-

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Bank under the Letter of Credit and an immediate reimbursement obligation of AIC for the amount of accelerated Bonds pursuant to the Reimbursement Agreement.

Effective March 30, 2007, AIC entered into an interest rate swap agreement with the Bank under which it exchanged floating-rate interest payments for fixed-rate interest payments. The amount of the interest rate swap is equal to the full amount of the Bonds and ends March 1, 2017. The swap provides for payments over ten years and is settled on a quarterly basis commencing June 1, 2007. The fixed interest rate provided by the agreement is 3.91%.

We account for our interest rate swap agreements under the provisions of SFAS No. 133 and have determined that the swap agreements qualify as effective hedges. Accordingly, the fair value of the swap agreements, net of income tax benefits, will be reported in other assets or other long-term liabilities, and the effective portion of the change in fair value, net of income tax benefit, will be reported as other comprehensive income or loss on the consolidated balance sheet.

E. STOCK REPURCHASE PROGRAM

In October 2006, our Board of Directors authorized the repurchase of up to $10 million of outstanding shares of MTC common stock in the open market, including, without limitation, pursuant to a Rule 10b5-1 trading plan, or in privately negotiated transactions.

As of September 30, 2007, the Company had repurchased a total of 159,193 shares at an aggregate cost of $3.5 million and was authorized to repurchase up to an additional $6.5 million of shares under the program.

F. ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES (FIN 48)

We adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, we recognized a $0.3 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. The total amount of net unrecognized tax benefits that, if recognized, would affect income tax expense is $0.3 million.

We file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, we are no longer subject to U.S. federal examinations by tax authorities for years before 2002 and state and local examinations by tax authorities for years before 2002.

As of September 30, 2007, the liability for unrecognized tax benefits was $0.3 million. This balance was recorded in other current liabilities as prescribed by FIN 48. We do not currently anticipate that the total amount of unrecognized tax benefits will significantly increase or decrease by the end of 2007.

G. RESTRUCTURING ACTIVITIES

In June 2007, management approved a restructuring plan to consolidate the Company’s organizational structure to improve customer focus and operational effectiveness. The measure, which consists of workforce reductions, is intended to improve efficiency and reduce expenses. As a result of this action, the Company recorded a pre-tax restructuring charge as a component of operating income in the income statement totaling approximately $1.5 million to cover costs associated with staff reductions, which are expected to be completed in 2007, with payments extending into the first quarter of 2008. Annual cost savings resulting from the restructuring plan, upon completion, are anticipated to be approximately $6 million.

- 10 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

A rollforward of the restructuring reserve in association with this initiative follows (in thousands):


Accrued restructuring charge as of December 31, 2006	$	—
Restructuring charge in June 2007		1,452
Cash payments		(870	)

Accrued restructuring charge as of September 30, 2007	$	582

H. GOODWILL AND INTANGIBLE ASSETS

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), we performed an impairment test of goodwill during the fourth quarter of 2006 and determined that no impairment of the recorded goodwill existed. We based our assessment of possible impairment on the discounted present value of the operating cash flows of our consolidated reporting unit. In accordance with SFAS No. 142, goodwill will be tested for impairment at least annually and more frequently if an event occurs which indicates the goodwill may be impaired. On an annual basis, our impairment testing will be performed during the fourth quarter.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 are as follows (in thousands):


Balance as of December 31, 2006	$	162,770
Reduction in goodwill arising from our Manufacturing Technology, Inc. (MTI) acquisition		(6,604	)
Reduction in goodwill arising from our AIC acquisition		(793	)

Balance as of September 30, 2007	$	155,373

The reduction in goodwill of our previously completed acquisition of MTI in 2006 relates to a negotiated purchase price adjustment determination in the third quarter of 2007, net of expenses. The reduction in goodwill of our AIC acquisition is primarily due to a $1.9 million release from escrow, which reduced goodwill, partially offset by other purchase price adjustments.

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL OVERVIEW

The following discussion summarizes the significant factors affecting the consolidated operating results of MTC Technologies, Inc. and its subsidiaries (we, us, MTC or the Company) for the three- and ~~six~~nine-month ~~months~~periods ended ~~June~~ September 30, ~~2005~~2007 compared to the three- and ~~six~~nine-month ~~months~~periods ended ~~June~~ September 30, 2006 ~~2004~~ and the financial condition of MTC at ~~June~~ September 30, ~~2005~~2007 compared to December 31, ~~2004~~2006. This discussion should be read in conjunction with the ~~Condensed~~ Consolidated Financial Statements and Notes to ~~the Condensed~~ Consolidated Financial Statements included elsewhere in this ~~document~~Quarterly Report.

We provide ~~sophisticated~~modernization ~~systems engineering~~ and ~~technical~~sustainment; professional services; command, ~~information technology~~control, ~~obsolescence management~~communications, ~~services~~computers, ~~software development,~~ intelligence ~~services~~, surveillance and ~~program~~reconnaissance ~~management~~(C4ISR); ~~services~~and logistics solutions, focusing primarily on U.S. federal government agencies such as the Department of Defense, ~~and~~ various intelligence agencies and other companies that serve these same markets. 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 ~~three~~nine ~~and six~~ months ended ~~June~~ September 30, ~~2005~~2007 and ~~2004~~2006, ~~over~~approximately 9598% and 97%, respectively, of our revenue was derived ultimately 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.

We report operating results and financial data as a single segment and believe our contract base is well diversified. However, in recent years a significant amount of our revenue has been earned under two contracts, the Aeronautical Systems Center Blanket Purchase Agreement (ASC/BPA) and the Flexible Acquisition and Sustainment Tool (FAST) contract. Revenue under the ASC/BPA was approximately 7% of our total revenue for each of the three and six months ended June 30, 2005, and approximately 10% of our total revenue for each of the three and six months ended June 30, 2004. The largest task order under the ASC/BPA amounted to approximately 1% of total revenue for the three and six months ended June 30, 2005. The ASC/BPA, which was awarded as a small business set-~~aside~~ ~~contract,~~11 ~~was to expire on September 30, 2005, but has now been extended to February 7, 2006. 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. Some of our work under the ASC/BPA has been converted to other contract vehicles over the last six months.

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, that extends to 2008. Revenue under the FAST contract was approximately 18% and 21% of total revenue for the three and six months ended June 30, 2005, respectively. Revenue under the FAST contract was approximately 30% of total revenue for each of the three and six months ended June 30, 2004. For the three and six months ended June 30, 2005, FAST revenue was comprised of 61 separate task orders, the largest of which amounted to approximately 3% and 4% of total revenue for the three and six months ended June 30, 2005, respectively. 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 each of the three and six months ended June 30, 2005.

Under the FAST contract, we have the potential to compete for hundreds of millions of dollars in task orders over the FAST contract’s approximately three-year remaining life as the U.S. Air Force

-10-

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~maintains~~In ~~and~~July ~~modernizes~~2001, ~~aircraft~~we ~~and~~were ~~defense~~one ~~systems. As~~ of ~~June~~six ~~30,~~awardees ~~2005,~~of wethe ~~have~~Federal ~~been~~Acquisition ~~awarded~~and ~~over~~Sustainment 82Tool ~~individual~~(FAST) ~~task~~contract ~~orders~~with ~~under~~a ~~the~~ceiling ~~FAST~~of ~~contract~~$7.4 billion and with a ~~remaining~~period ~~potential award value~~ of ~~approximately~~performance, ~~$887~~including ~~million~~option ifyears, ~~all~~that ~~options~~extends ~~are~~to ~~exercised~~2008. ~~Although~~Our werevenue ~~believe~~under the FAST contract ~~presents~~was anapproximately ~~opportunity~~27% ~~for~~and ~~significant~~21% ~~additional~~of ~~growth~~total revenue for the three- and ~~expansion~~nine-month ofperiods ended ~~our~~September 30, ~~services~~2007, werespectively, ~~expect~~and ~~that~~19% ~~many~~and 21% of total revenue for the ~~task~~three- ~~orders~~and wenine-month ~~may~~periods beended ~~awarded~~September 30, ~~under~~2006, ~~the~~respectively. FAST ~~contract~~revenue ~~will~~was becomprised ~~for~~of ~~program~~approximately ~~management~~59 ~~services~~separate task orders, ~~which~~the ~~historically~~largest ~~have~~of ~~been~~which amounted ~~less~~to ~~profitable~~approximately ~~than~~6% ~~our~~and ~~other~~3% ~~activities.~~of Intotal ~~addition~~revenue, for the ~~FAST~~three- ~~contract~~and ~~involves~~nine-month ~~a significantly~~periods ~~greater~~ended ~~use~~September 30, of2007, ~~subcontractors~~respectively. ~~than~~In weprior ~~have~~years, ~~used~~we ~~historically.~~performed ~~Margins~~some onof ~~subcontractor-based~~the ~~revenue~~work we are ~~typically~~now ~~lower~~performing ~~than~~on the ~~margins~~FAST contract on ~~our~~other ~~direct work~~contract vehicles. ~~Since~~While the FAST contract isrepresents ~~expected~~a tosignificant ~~continue~~percentage toof beour atotal ~~significant~~revenue, ~~part~~we believe that the broad array of engineering, technical and management services we provide to the federal government through various contract vehicles ~~our~~allows for diversified business ~~for~~growth. ~~the~~No ~~next~~other ~~several~~task ~~years~~order, itincluding isindividual ~~possible~~contracts ~~that~~under our ~~operating~~General ~~income~~Services Administration (GSA) vehicles, asaccounted afor ~~percentage~~more ofthan ~~total~~6% ~~revenue~~and 3%, ~~could diminish~~respectively, ~~while~~of ~~growing~~revenue infor ~~absolute~~the ~~dollars~~three- and nine-month periods ended September 30, 2007.

~~Our~~Under ~~federal~~the ~~government~~FAST ~~contracts~~contract, ~~are~~we ~~subject~~have the potential to ~~government~~compete ~~audits~~for millions of ~~our~~dollars ~~direct~~in task orders over the FAST contract’s approximately one-year remaining life as the U.S. Air Force maintains and ~~indirect~~modernizes ~~costs~~aircraft and defense systems. ~~The~~In ~~incurred~~addition, ~~cost~~a ~~audits~~few of our FAST task orders have a period of performance extending into 2011. As of September 30, 2007, we have been ~~completed~~awarded ~~through~~multiple ~~December~~individual ~~31,~~task ~~2003~~orders under the FAST contract with a remaining potential award value of approximately $323 million if all options are exercised. Although we believe the FAST contract presents an opportunity for additional growth and expansion of our services, we expect that many of the ~~rates~~task orders we may be awarded under the FAST contract will be for lead system integrator and program management services, which historically have been less ~~agreed~~profitable tothan our other activities because these activities typically involve a significantly greater use of subcontractors. WeMargins doon ~~not~~subcontractor-based ~~anticipate~~revenue ~~any~~are ~~material~~typically ~~adjustment~~lower than the margins on our direct work. Since the FAST contract is expected to remain a significant part of our ~~financial~~business, ~~statements~~it inis ~~subsequent~~possible ~~periods~~that ~~for~~our ~~audits~~operating ~~not~~income, ~~yet~~as ~~completed~~a percentage of total revenue, could diminish, while growing in absolute dollars.

~~For~~Our ~~the~~federal ~~six~~government ~~months~~contracts ~~ended~~are ~~June~~subject ~~30,~~to ~~2005,~~government ~~and~~audits ~~2004, approximately 76% and 79%, respectively,~~ of our ~~revenue~~direct ~~came from work provided to our customers as a prime contractor~~ and ~~the~~indirect ~~balance came from work provided as a subcontractor~~costs. ~~Approximately~~The ~~75%~~incurred ~~and~~cost ~~70%~~audits ofhave ~~our~~been ~~revenue~~completed ~~for the three and six months ended June 30~~through December 31, 2005, and ~~2004,~~ ~~respectively, consisted of~~ the ~~work~~rates ofhave ~~our~~been ~~employees,~~agreed ~~and the balance was provided by the work of subcontractors~~to. ~~Our~~We ~~work~~do asnot aanticipate ~~prime~~any ~~contractor~~material onadjustment ~~the FAST contract has resulted, and is expected~~ to ~~continue~~our toconsolidated ~~result,~~financial statements in asubsequent ~~significant~~periods ~~use~~for ~~of subcontractors.~~audits ~~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~~yet ~~subcontractors to a great extent~~completed.

~~Our~~For ~~federal~~the ~~government~~nine ~~contracts~~months ~~are~~ended ~~subject~~September 30, to2007 ~~funding~~and ~~availability~~2006, approximately 65% and ~~current~~ ~~market~~74%, ~~conditions~~respectively, ~~such~~of our revenue came from work provided to our customers as a prime contractor, and the ~~ongoing~~balance ~~war~~came onfrom ~~terror~~work ~~and~~provided ~~other~~as ~~factors~~a subcontractor. ~~These~~Approximately ~~conditions~~75% ~~are~~and ~~causing~~74% ~~delays~~of inour revenue for the ~~bidding/award~~nine ~~process~~months ended September 30, ~~are~~2007 ~~affecting~~and ~~funding~~2006, ~~availability~~respectively, consisted of the ~~availability~~work of ~~assets~~our toemployees, and bethe ~~repaired~~balance orwas ~~upgraded~~provided by the work of subcontractors. Our work as a prime contractor on the FAST contract has resulted, and ~~certain~~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, ~~primarily~~model atof our ~~OnBoard~~recent ~~and~~acquisitions, ~~MTI~~which ~~operations,~~typically tohave benot ~~pushed~~used ~~out~~subcontractors to ~~2006~~a great extent.

WeOur ~~typically~~federal ~~provide~~government ~~our services under~~ contracts ~~with~~are asubject ~~base~~to ~~term,~~funding ~~often~~availability ~~of three years,~~ and ~~option~~current ~~terms,~~market ~~typically two to four additional one-year terms or more~~conditions, ~~which~~such as the ~~customer~~ongoing ~~can~~war ~~exercise~~ on anterror ~~annual~~and ~~basis. We~~other ~~also have contracts with fixed terms, some extending as long as five or six years~~factors. ~~Although~~These weconditions ~~occasionally~~are ~~obtain~~causing ~~government~~delays ~~contracts~~in ~~for which~~ the ~~contracting~~bidding/award process, ~~agency~~are ~~obligates~~affecting funding ~~for~~availability ~~the~~and ~~full term of~~ the ~~contract,~~availability ~~most~~ of ~~our~~assets ~~government contracts receive incremental funding, which subjects us~~ to ~~the~~be ~~risks~~repaired ~~associated~~or ~~with the government’s annual appropriations process~~upgraded.

~~Contract~~We ~~Types.~~typically ~~When~~provide ~~contracting~~our services under contracts with ~~our~~a ~~government~~base ~~customers~~term, weoften ~~enter~~of ~~into~~three years, and option terms, typically two to four additional one-year ofterms ~~three~~or ~~basic~~more, ~~types~~which ofthe customer can exercise on an annual basis. We also have contracts: ~~time-and-materials~~with fixed terms, some extending as long as ~~fixed-price~~five ~~and~~or ~~cost-plus.~~six

~~• Time~~-~~and-materials~~ ~~contracts.~~12 ~~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 contact, 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 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.

-11-

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

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 contact, we can either make more or less money than we originally anticipated.

•

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 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 attempt to avoid undertaking high-risk work, such as software development or research and development efforts, 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 revenue and percentage of revenue attributable to each of these types of contracts for the periods indicated:

	Three months ended June 30,				Six months ended June 30,
	Three months endedSeptember 30,				Nine months endedSeptember 30,
	2005		2004		2005		2004
	2007		2006		2007		2006
Time-and-materials	5243	%	5053	%	5248	%	5053	%
Fixed-price	3446	%	3033	%	3339	%	3233	%
Cost-plus	1411	%	2014	%	1513	%	1814	%
Total	100	%	100	%	100	%	100	%

Funded Backlog. ~~Backlog,~~ ~~which~~We ~~consists~~define of funded ~~and~~backlog ~~unfunded~~as ~~portions,~~the isportion of total backlog (our estimate of the ~~remaining~~total ~~future~~potential ~~revenue~~value ~~from~~of all orders for services under existing signed contracts and task orders, assuming, where appropriate, the exercise of all options and add-ons relating to those contracts. Weand ~~define~~task ~~funded~~orders, ~~backlog~~subject asto ~~the~~available ~~portion of~~ceiling ~~backlog~~remaining on those contracts and task orders) for which funding currently is appropriated and obligated to us under ~~the~~a contract or other authorization for payment signed by ~~the~~an authorized purchasing ~~agency~~authority, orless ~~otherwise~~the ~~authorized~~amount ~~for~~of ~~payment~~revenue towe ushave previously byrecognized. ~~the~~Funded ~~customers~~backlog ~~upon~~excludes ~~completion~~options ofand aadd-ons ~~specified~~to ~~portion~~existing ofcontracts ~~work,~~for ~~less~~which ~~revenue~~we ~~previously recognized~~have not yet received funding. Our funded backlog does not include the full potential value of our contracts because ~~Congress often appropriates~~ funds for a particular program or contract are regularly funded on a yearly or ~~quarterly~~even shorter basis, even though the contract may call for performance over a number of years.

The primary source of our backlog is contracts ~~with~~to perform work for the federal government. Our estimated funded backlog at ~~June~~ September 30, ~~2005~~2007 was approximately $~~281~~312 million as compared to ~~approximately $204 million at June 30, 2004. We have increased our funded backlog by approximately $61~~ million from June 30, 2004, due to the acquisitions of Command Technologies, Inc. (CTI) in the third quarter of 2004 and OnBoard Software, Inc. (OnBoard) and Manufacturing Technology, Inc. (MTI) in the first quarter of 2005. Approximately $16 million of the increase resulted from funding increases in the ASC/BPA, FAST, Intermediate Ready Force Support, Command & Control Directorate Quick Reaction and Battle Command Support, Division Engineering, Design Acquisition, Fabrication and Installation Support, and Project Manager Soldier contracts, as well as other contracts that were partially offset by a decrease in the funded backlog for our commercial and NASA contracts. Although our funded backlog at June 30, 2005 was approximately 86% of our trailing twelve-month revenue, we believe that a more typical funded backlog is in the range of 40% to 60% of trailing twelve-month revenue.

~~Critical~~- ~~Accounting~~13 ~~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

-12-

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts (SOP 81-1),~~ ~~revenue~~approximately is$273 ~~recognized~~million onat ~~the percentage of completion method using costs incurred in relation to total estimated costs or upon delivery of specific products or services~~September 30, ~~as appropriate~~2006. ~~For~~The ~~fixed-price-completion~~approximate ~~contracts~~$39 ~~that~~million ~~are~~increase 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 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~~funded ~~to the~~backlog ~~allowable~~resulted ~~costs~~primarily ~~incurred~~from ~~in performance of~~ the ~~contract,~~Santa ~~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~~Rosa ~~consider~~underground ~~performance-based~~cable ~~fees,~~installation ~~including award fees, under any~~ contract ~~type~~and toadditional befunding ~~earned only when we can demonstrate satisfaction~~ of ~~a specific performance goal or we receive contractual notification from a customer that~~ the ~~fee~~FAST 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~~.

Our funded backlog at September 30, 2007 was approximately 72% of our trailing twelve-month revenue, which is higher than the range of typical industry averages for funded backlog of 40% to 60% of trailing twelve-month revenue.

Restructuring Charge. In June 2007, management approved a restructuring plan to consolidate our organizational structure to improve customer focus and operational effectiveness. The measure, which consists of workforce reductions, is intended to improve efficiency and reduce expenses. As a result of this action, we recorded pre-tax restructuring provisions in our income statement totaling approximately $1.5 million to cover costs associated with staff reductions, which are expected to be completed by the end of 2007, with payments extending into the first quarter of 2008. Annual cost savings resulting from the restructuring plan, upon completion, are anticipated to be approximately $6 million.

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 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 our 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.

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.

WeOur ~~record~~ work-in-process inventory ~~when certain of our task orders reach the production delivery stage. On these task orders, we are 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~~Inventories ~~work-in-process~~are ~~inventory is~~ stated at the lower of cost or market, ~~and is~~ computed on an average cost basis. ~~Raw materials~~ ~~and finished goods are also stated at the lower of cost or market. The total raw material and finished goods amount represents 7% of the inventory balance at June 30, 2005.~~

~~Goodwill~~- ~~and~~14 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.

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

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 charge was required in 2006.

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.

~~-13-~~Beginning January 1, 2007, the Company adopted FIN 48, “Accounting for Uncertainty in Income Taxes.” Refer to Notes A and F in the Notes to Consolidated Financial Statements for details related to the adoption of FIN 48. The adoption of FIN 48 resulted in recording a $0.3 million adjustment to our beginning retained earnings and did not have any impact on our Consolidated Statements of Income.

FORWARD-LOOKING STATEMENTS

Portions of this Quarterly Report that are not statements of historical or current fact are forward-looking statements. The forward-looking statements in this Quarterly Report 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: 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; delays in the bidding/award process; our ability to attract and retain qualified personnel; our ability to retain contracts during re-bidding processes; pricing pressures; undertaking acquisitions, including the acquisition of AIC, that might increase our costs or liabilities or be disruptive; integration of acquisitions; and changes in general economic and business conditions.

- 15 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Forward-looking Statements

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: 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; delays in the bidding/award process; 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; and changes in general economic and business conditions.

RESULTS OF OPERATIONS

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

	Three months ended June 30,													Six months ended June 30,
	Three months ended September 30,												Nine months ended September 30,
	2005							2004						2005							2004
	2007						2006						2007						2006
Revenue	$	89114.76		100.0	~~100.0~~%	%	$	$105.2	~~62.7~~	100.0	~~100.0~~%	%	$	$321.7	~~175.0~~	100.0	%	~~100.0~~	%$	304.8	$	~~122~~100.50	%	~~100.0~~	%
Cost of revenue		7598.02		85.7	~~83.6~~			87.9	~~52.9~~	83.5	~~84.3~~			273.0	~~146.5~~	84.9		~~83.7~~		254.6		~~103~~83.35		~~84.3~~
Gross profit		1416.74		14.3	~~16.4~~			17.3	~~9.8~~	16.5	~~15.7~~			48.7	~~28.5~~	15.1		~~16.3~~		50.2		1916.25		~~15.7~~
General and administrative expenses		47.2		6.3	~~4.7~~			6.4	~~2.8~~	6.0	~~4.5~~			22.6	~~7.9~~	7.0		~~4.5~~		17.4		5.57		~~4.5~~
Intangible asset amortization		1.3			1.4				0.4		0.7				2.4			1.4				0.9		0.7
Restructuring charge		—		—				—		—				1.5		0.5				—		—
Operating income		9.2			10.3				6.6		10.5				18.2			10.4				12.8		10.5
Intangible asset amortization		1.5		1.3				1.5		1.5				4.6		1.4				4.4		1.5
Net interest (expense) income		(0.7	)		(0.8	)			0.2		0.3				(1.1	)		(0.6	)			0.3		0.2
Operating income		7.7		6.7				9.4		9.0				20.0		6.2				28.4		9.3
Net income before income taxes		8.5			9.5				6.8		10.8				17.1			9.8				13.1		10.7
Net interest expense		1.3		1.1				1.4		1.4				4.3		1.3				3.6		1.2
Income tax expense		3.4			3.8				2.6		4.2				6.8			3.9				5.1		4.2
Other income, net		0.6		0.5				—		—				0.6		0.2				—		—
Net income	$	5.1			5.7	%		$	4.2		6.6	%		$	10.3			5.9	%		$	8.0		6.5	%
Net income before income taxes		7.0		6.1				8.0		7.6				16.3		5.1				24.8		8.1
Income tax expense		2.8		2.4				3.2		3.0				6.3		2.0				9.8		3.2
Net income	$	4.2		3.7	%		$	4.8		4.6	%		$	10.0		3.1	%		$	15.0		4.9	%

THREE MONTHS ENDED ~~JUNE~~ SEPTEMBER 30, ~~2005~~2007

COMPARED TO THREE MONTHS ENDED ~~JUNE~~SEPTEMBER 30, ~~2004~~2006

Revenue. Revenue for the three months ended ~~June~~ September 30, ~~2005~~2007 increased 438.09%, or $279.04 million, as compared to the same period in ~~2004.~~2006, ~~Organic~~due ~~growth~~primarily ofto ~~approximately~~an ~~11%~~increase ~~accounted for $6.9 million~~ of ~~the~~ $2711.05 million ~~increase~~ in revenue, ~~and~~under ~~the~~our ~~remaining~~Flexible ~~$20.1~~Acquisition ~~million~~and ofSustainment ~~revenue~~Tool ~~growth,~~(FAST) ~~or 32.0%~~contract, ~~came~~as ~~from~~well ~~acquisitions.~~as ~~Our organic growth of $6.9 million was~~ the ~~result~~Santa ofRosa anunderground ~~increase~~cable ininstallation ~~work~~program onand ~~new~~PM orSoldier ~~increased~~Systems ~~contracts and task orders~~Project, which ~~consisted~~contributed ~~primarily~~additional revenue of ~~growth~~$5.8 inmillion ~~Logistics Joint Administrative~~ and ~~Management~~$2.9 ~~Support Services~~million, respectively, ~~Program~~in ~~Manager~~the ~~Soldier~~quarter. ~~Systems,~~These ~~Defense~~increases ~~Information~~were ~~Systems Network,~~partially ~~and~~offset ~~Omnibus~~by IIa ~~task~~net ~~orders.~~decrease ~~The increase~~ in revenue from ~~these~~the ~~contracts~~former ~~and~~Aeronautical ~~task~~Systems ~~orders~~Center ~~was~~Blanket ~~partially~~Purchase ~~offset~~Agreement by(ASC/BPA) contract and a decrease of $210.60 million ~~decrease~~ in revenue ~~under~~from our wholly-owned ~~FAST~~subsidiary ~~contract,~~Aerospace ~~reflecting~~Integration ~~variations~~Corporation ~~in customer delivery patterns~~(AIC).

-Gross profit. Gross profit for the three months ended September 30, 2007 decreased 5.2%, or $0.9 million, as compared to the same period in 2006. This change primarily relates to increased cost of revenue. Gross profit as a percentage of revenue was 14-.3% for the three months ended September 30, 2007, compared to 16.5% for the same period in 2006, primarily due to decreased margins caused by a higher volume of FAST subcontracting revenue, decreased gross margins realized by AIC and additional costs involved for the TIER II Unmanned Aircraft System flight testing. Partially offsetting these reductions in gross profit were savings resulting from the restructuring initiated in the second quarter of 2007.

General and administrative expenses. General and administrative expenses for the three months ended September 30, 2007 increased 12.6%, or $0.8 million, as compared to the same period in 2006. The change was due primarily to $1.2 million in additional bid and proposal costs due to increased bid activity. General and administrative expenses as a percentage of revenue were 6.0% of revenue for the three months ended September 30, 2006 compared to 6.3% for the three months ended September 30, 2007.

- 16 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~Gross~~Operating ~~profit~~income. ~~Gross~~Operating ~~profit~~income for the three months ended ~~June~~ September 30, ~~2005~~2007 decreased ~~increased 49~~18.61%, or $41.97 million, as compared to the ~~same~~three ~~period~~months inended ~~2004~~September 30, 2006. This ~~increase~~change ~~primarily~~in ~~relates~~operating toincome ~~increased~~primarily ~~revenue.~~reflects ~~Gross~~the decreased gross profit ascombined awith ~~percentage~~the ofincrease ~~revenue~~in ~~increased~~general ~~from~~and 15administrative expenses.7% Operating inincome ~~the~~as ~~second~~a ~~quarter~~percentage of ~~2004~~revenue towas 169.40% inof ~~the~~revenue ~~second~~for ~~quarter~~the ofthree ~~2005~~months ~~primarily due~~ended toSeptember 30, ~~the~~2006 ~~accretive~~compared ~~nature~~to of6.7% for the ~~acquisitions~~three ~~made~~months inended ~~the~~September 30, ~~first~~2007, ~~quarter~~primarily offor ~~2005~~the ~~and~~reasons ~~changes~~addressed ~~in business mix~~above.

~~General~~Other ~~and administrative expenses~~income. ~~General~~Other ~~and~~income ~~administrative expenses~~ for the three months ended ~~June~~ September 30, ~~2005~~2007 increased ~~49.3%,~~by or $10.4 6 million, asdue ~~compared~~primarily to the negotiated ~~same~~purchase ~~period~~price inadjustment ~~2004.~~determination ~~General~~for ~~and administrative expenses as~~ a ~~percentage~~previously ofcompleted ~~revenue increased from 4~~acquisition.5% of revenue for the three months ended June 30, 2004 to 4.7% for the three months ended June 30, 2005. These increases were primarily the result of increased salary and benefit expenses resulting from the addition of personnel to support our growth.

~~Intangible~~Income ~~asset~~tax ~~amortization~~expense. ~~Intangible~~Income ~~asset~~tax expense ~~amortization~~ for the three months ended ~~June~~ September 30, ~~2005~~2007 ~~increased~~decreased approximately 11.5%, or $0.94 million, as compared to the same period in ~~2004~~2006. ~~This~~Our ~~increase~~effective ~~was~~income ~~the~~tax ~~result~~rates offor the ~~amortization~~quarters ofended ~~the~~September 30, ~~intangible~~2007 ~~assets~~and ~~that~~2006 were ~~acquired~~39.7% ~~in connection with the acquisitions made in the third quarter of 2004~~ and 39.4%, ~~the first quarter of 2005~~respectively.

~~Operating~~Net income. ~~Operating~~Net income for the three months ended ~~June~~ September 30, ~~2005~~2007 ~~increased~~decreased 3912.6%, or approximately $20.6 million, as compared to the three months ended ~~June~~ September 30, ~~2004~~2006. This ~~increase~~change in ~~operating~~net income was primarily the result of ~~increased~~the ~~gross~~lower ~~profit~~operating ~~that~~income, ~~was~~ partially offset by ~~higher~~the ~~general~~increase ~~and~~in ~~administrative expenses~~other ~~and intangible asset amortization. Operating~~ income asand athe ~~percentage of revenue~~ decreased ~~from 10.5% of revenue for the three months ended June 30, 2004 to 10.3% for the three months ended June 30, 2005, due primarily to increased intangible~~income ~~asset~~tax ~~amortization~~expense.

~~Net~~NINE ~~interest~~MONTHS ~~(expense)~~ENDED ~~income. The~~SEPTEMBER ~~$0.9 million increase in net interest expense related to the borrowings made under our credit facility in 2005~~30, ~~which~~2007 ~~were used primarily to fund the acquisitions made in the first quarter of 2005. We did not have any borrowings outstanding under our then-effective credit facility in 2004.~~

~~Income~~COMPARED ~~tax~~TO ~~expense.~~NINE ~~Income~~MONTHS ~~tax~~ENDED ~~expense~~SEPTEMBER ~~for the three months ended June~~ 30, ~~2005~~2006 ~~increased approximately $0.7 million as compared to the same period in 2004. Our effective income tax rate for the quarters ended June 30, 2005 and 2004 was 39.6% and 38.8%, respectively.~~

~~Net income~~Revenue. ~~Net~~Revenue ~~income~~ for the ~~three~~ nine months ended ~~June~~ September 30, ~~2005~~2007 increased 235.25%, or ~~approximately~~ $016.98 million, as compared to the ~~three~~same ~~months~~period ~~ended~~in ~~June 30, 2004~~2006. ~~This~~Revenue ~~increase~~growth inresulted ~~net income was~~ primarily ~~the~~from ~~result~~revenue ofincreases ~~increased~~for ~~operating income~~the ~~that~~FAST, ~~was~~PEO ~~partially~~Soldier ~~offset~~Systems byand the ~~increased~~Santa ~~interest~~Rosa ~~and~~underground ~~income~~cable installation ~~tax expense~~contracts.

~~SIX~~Gross ~~MONTHS~~profit. ~~ENDED~~Gross ~~JUNE~~profit for the nine months ended September 30, ~~2005~~2007 decreased 3.0%, or $1.5 million, as compared to the same period in 2006. Gross profit as a percentage of revenue was 15.1% for the nine months ended September 30, 2007 compared to 16.5% in the same period in 2006. This change resulted primarily from lower margins due to higher volume of FAST subcontracting revenue, decreased gross margins realized by AIC and additional costs involved for the TIER II Unmanned Aircraft System flight testing. Partially offsetting these reductions in gross profit were savings resulting from the restructuring initiated in the second quarter of 2007.

~~COMPARED~~General TOand ~~SIX~~administrative ~~MONTHS~~expenses. General ~~ENDED~~and ~~JUNE~~administrative expenses for the nine months ended September 30, ~~2004~~2007 increased 29.9%, or $5.2 million, as compared to the same period in 2006. Included in general and administrative expenses for the nine months ended September 30, 2007 is approximately $1.2 million of additional general and administrative expenses from AIC, which was acquired in the second quarter of 2006, additional bid and proposal costs and increased salary and benefit expenses resulting from the addition of personnel. General and administrative expenses as a percentage of revenue were 5.7% of revenue for the nine months ended September 30, 2006 compared to 7.0% for the nine months ended September 30, 2007.

~~Revenue.~~Restructuring ~~Revenue for the six months ended June 30, 2005 increased 42~~charge.~~8%,~~ orA ~~$52.4~~plan ~~million, as compared~~ to ~~the~~consolidate ~~same~~our ~~period~~organizational instructure ~~2004.~~was ~~Organic~~initiated ~~growth of approximately 14.2% accounted for $17.4 million of the $52.4 million increase~~ in ~~revenue,~~June ~~and the remaining $35~~2007.0 ~~million~~We ofrecorded ~~revenue~~pre-tax ~~growth, or 28.6%, came~~restructuring ~~from~~expense ~~acquisitions.~~totaling ~~Our~~approximately ~~organic growth of~~ $171.45 million ~~was~~in the ~~result~~second ofquarter ~~an increase in work on new or increased contracts and task orders, which consisted primarily~~ of ~~growth~~2007 into ~~ASC/BPA,~~cover ~~Logistics~~costs ~~Joint~~associated ~~Administrative~~with ~~and~~staff ~~Management Support Services, Program Manager Soldier Systems, Defense Information Systems Network, Logistics Worldwide, Omnibus II, and U~~reductions.~~S. Army Europe Combat Equipment Reconstitution task orders.~~

~~-15-~~Operating income. Operating income for the nine months ended September 30, 2007 decreased 29.7%, or $8.4 million, as compared to the nine months ended September 30, 2006. This change in operating income primarily reflects the lower gross profit, increased general and administrative

- 17 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~Gross profit. Gross profit for the six months ended June 30~~ expenses, ~~2005~~and ~~increased~~a ~~48.6%, or~~ $91.35 million, asrestructuring ~~compared~~charge torecorded ~~the same period~~ in ~~2004.~~the ~~This~~second ~~increase~~quarter ~~primarily~~of ~~relates to increased revenue~~2007. ~~Gross~~Operating ~~profit~~income as a percentage of revenue ~~increased~~was ~~from 15~~9.63% ~~for~~of revenue for the ~~six~~nine months ended ~~June~~ September 30, ~~2004~~2006 compared to 166.32% for the ~~six~~nine months ended ~~June~~ September 30, ~~2005 primarily due to the accretive nature of the acquisitions made in the first quarter of 2005 and changes in business mix~~2007.

~~General~~Net ~~and administrative expenses~~interest expense. ~~General~~The ~~and administrative expenses for the six months ended June 30, 2005 increased 43.3%, or~~ $20.4 6 million, asincrease ~~compared to the same period~~ in ~~2004.~~net ~~This~~interest ~~increase~~expense ~~was~~related ~~primarily~~to the ~~result of~~ increased ~~salary~~borrowings ~~and~~made ~~benefit~~under ~~expenses resulting from the addition of personnel to support~~ our ~~growth.~~credit ~~General~~facility ~~and~~in ~~administrative~~2006, ~~expenses~~which aswere aused ~~percentage~~primarily ~~of revenue~~to ~~remained~~fund ~~unchanged~~the atacquisition ~~4.5%~~ of ~~revenue~~AIC ~~for~~made in the ~~six~~second ~~months~~quarter ~~ended~~of ~~June 30, 2005 and 2004~~2006.

~~Intangible~~Other ~~asset amortization~~income. ~~Intangible~~Other ~~asset~~income ~~amortization~~ for the ~~six~~nine months ended ~~June~~ September 30, ~~2005~~2007 increased by $10.6 million asdue ~~compared~~primarily to the ~~same period in 2004. This increase was the result of the~~ ~~amortization~~negotiated ofpurchase ~~the~~price ~~intangible~~adjustment ~~assets~~determination ~~that~~for ~~were~~a ~~acquired~~previously incompleted ~~connection with the acquisitions made in the third quarter of 2004 and the first quarter of 2005~~acquisition.

~~Operating~~Income ~~income~~tax expense. ~~Operating~~Income ~~income~~tax expense for the ~~six~~nine months ended ~~June~~ September 30, ~~2005~~2007 ~~increased~~decreased 41approximately 35.82%, or $53.4 million, as compared to the same period in ~~2004~~2006. ~~This~~Our ~~increase~~effective ~~in operating~~ income ~~was~~tax ~~primarily~~rates the result of increased gross profit that was partially offset by higher general and administrative expenses and intangible asset amortization. Operating income as a percentage of revenue slightly decreased from 10.5% of revenue for the ~~six~~nine months ended ~~June~~ September 30, ~~2004~~2007 toand 102006 were 38.48% and ~~for the six months ended June 30~~39.4%, ~~2005~~respectively.

Net ~~interest~~income. ~~(expense)~~Net income. ~~The~~for ~~$1.4~~the ~~million~~nine ~~increase~~months inended ~~net~~September 30, ~~interest~~2007 ~~expense~~decreased ~~related~~33.5%, or $5.0 million, as compared to the ~~borrowings~~nine ~~made~~months ~~under~~ended ~~our~~September 30, ~~credit~~2006. ~~facility~~This change in ~~2005~~ ~~which~~net ~~were~~income ~~used~~was primarily ~~to fund~~ the ~~acquisitions~~result ~~made~~of in the ~~first~~change ~~quarter~~in ofoperating ~~2005.~~income Weand ~~did~~net ~~not~~interest ~~have~~expense, ~~any~~partially ~~borrowings~~offset ~~outstanding~~by ~~under~~the ~~our~~increased ~~then-effective~~other ~~credit~~income ~~facility~~and indecreased ~~2004~~income tax expense.

Income tax expense. Income tax expense for the six months ended June 30, 2005 increased 31.6%, or approximately $1.6 million, as compared to the same period in 2004. Our effective income tax rates for the six months ended June 30, 2005 and 2004 were 39.6% and 39.2%, respectively.

Net income. Net income for the six months ended June 30, 2005 increased 29.3%, or approximately $2.3 million, as compared to the six months ended June 30, 2004. This increase in net income was primarily the result of increased operating income that was partially offset by the increased interest and income tax expense.

QUARTERLY FLUCTUATIONS

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 and timing of government awards. 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. In addition, a change in Presidential administration, in Congressional majority 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. As a result of the above factors, period-16to-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.

- 18 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

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.

LIQUIDITY AND CAPITAL RESOURCES

Historically, our positive cash flow from operations, ~~our~~ proceeds from stock offerings, and ~~our~~borrowings ~~available~~under our credit ~~facility~~facilities 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 $0 and $3.3 million on September 30, 2007 and December 31, 2006, respectively. Our working capital was approximately $4560.0 million at ~~June~~ September 30, ~~2005~~2007 and approximately $7152.09 million at December 31, ~~2004~~2006. Our working capital ~~decreased~~ increased $267.01 million in the first ~~six~~nine months of 2007 ~~2005~~ primarily ~~for~~due ~~the following reasons~~to:

• a $293.87 million ~~decrease~~increase in ~~cash~~restricted ~~and~~ cash ~~equivalents~~held ~~primarily reflecting an increase of approximately $105.7 million~~ in ~~payments~~escrow infrom ~~connection~~the ~~with~~issuance ~~our acquisitions~~ of ~~OnBoard and MTI that was partially offset by~~ $~~62.1~~10 million in ~~net~~industrial ~~proceeds~~development ~~from~~bonds ~~borrowings~~(discussed ~~under our credit facility~~below);

• a $2.23 million ~~decrease~~increase in ~~inventory~~inventories;

• ana $87.41 million net increase in ~~accounts~~cost ~~receivable~~ and ~~costs and~~ estimated earnings in excess of amounts billed. ~~The~~on ~~increase~~uncompleted in accounts receivable primarily related to the acquisitions made in the first quarter of 2005. Our days sales outstanding (DSOs) in accounts receivable decreased to 76 days at June 30, 2005, as compared to 89 days at December 31, 2004. The decrease in DSOs from December 31, 2004 resulted from our concerted collection efforts during the first six months of 2005 as well as lower DSOs for the companies we acquired in 2005. The inclusion of OnBoard and MTI resulted in a 3-day improvement in DSOs as of June 30, 2005contracts; and

• a $17.~~9 million increase in current liabilities primarily due to $6.~~0 million ~~in current maturities under the term loan portion of our credit facility, and a $4.9 million~~ decrease in ~~amounts~~accounts ~~due~~payable; ~~under~~but ~~earn out agreement payments related to our acquisitions.~~was

~~Our~~• ~~operating~~partially ~~activities~~offset ~~provided~~by ~~cash~~a ~~of approximately~~ $145.3 million ~~for~~decrease ~~the~~in ~~six~~net ~~months~~accounts ~~ended June 30~~receivable, ~~2005. The cash provided from operations~~ primarily ~~represented net income adjusted for depreciation and amortization and changes~~ in ~~working~~unbilled ~~capital as discussed above. For the six months ended June 30~~receivables, ~~2004,~~a ~~our net operating activities generated cash of approximately~~ $12.05 million, ~~primarily~~increase ~~represented~~in bycurrent ~~net~~maturities ~~income~~of ~~adjusted~~long ~~for~~term ~~depreciation~~debt and ~~amortization~~ ~~and~~a ~~deferred tax expense of~~ $93.13 million, ~~partially~~decrease ~~offset by $8.1 million~~ in ~~net working capital payments~~cash.

~~-17-~~Our operating activities provided net cash of approximately $7.5 million for the nine months ended September 30, 2007. The cash used in operations primarily represented net income of $10.0 million adjusted for depreciation and amortization of $7.8 million and changes in working capital as discussed above. For the nine months ended September 30, 2006, our operating activities provided net cash of approximately $23.9 million, primarily represented by net income of $15.0 million adjusted for depreciation and amortization of $6.9 million, and a $2.0 million decrease in working capital.

Our investing activities used net cash of approximately $1.1 million for the nine months ended September 30, 2007 as a result of approximately $9.3 million of capital expenditures, $5.7 million of which related to construction of the aircraft completion center described below. We currently anticipate 2007 aggregate capital expenditures to range between $12 and $15 million for additional facilities, software tools and computer equipment to support our growth, including the $10 million to be used for the construction of the aircraft completion center. Net proceeds for businesses purchased for the nine months ended September 30, 2007 were related to purchase price adjustments on two previously completed acquisitions. Net cash used by investing activities for the nine months ended September 30, 2006 of $52.0 million consisted primarily of approximately $47.8 million of payments made primarily in connection with our acquisition of AIC and other strategic investments, as well as $5.1 million of capital expenditures.

Our financing activities used net cash of approximately $9.7 million for the nine months ended September 30, 2007, which primarily consisted of $14.3 million in net repayments of debt under our credit facility and repurchase of outstanding MTC common stock during the period for $1.5 million, offset by $6.1 million of proceeds from the issuance of bonds to finance construction of the aircraft completion center discussed below. Our financing activities provided net cash of approximately $19.1 million for the nine months ended September 30, 2006, which primarily consisted of $27.5 million in net borrowings under our credit facility for the acquisition of AIC, offset by the Company’s repurchase of outstanding MTC common stock during the period for $8.5 million.

In April 2005, we entered into a five-year Credit and Security Agreement, dated as of April 21, 2005 (the Credit Agreement), with National City Bank, Branch Banking and Trust Company, KeyBank National Association, Fifth Third Bank, JPMorgan Chase Bank, N.A., Comerica Bank, and PNC Bank, N.A. The Credit Agreement, which is scheduled to expire on March 31, 2010, allows us to borrow up to

- 19 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

~~Our~~ $145.0 ~~investing~~million ~~activities~~in ~~used~~the ~~cash~~form of ~~approximately~~an $~~106~~85.70 million ~~for~~revolving ~~the~~loan ~~six~~and ~~months~~a ~~ended~~$60.0 ~~June~~million ~~30, 2005~~term asloan. aThe ~~result~~interest ofrates ~~approximately~~on ~~$105.7~~borrowings ~~million~~under ofthe ~~payments~~term ~~made~~loan ~~primarily~~range infrom the ~~connection~~prime ~~with~~rate ~~our~~to ~~acquisitions~~the ofprime ~~OnBoard~~rate ~~and~~plus ~~MTI~~25 ~~and~~basis ~~$1.0~~points, ~~million~~or ofthe ~~capital~~London ~~expenditures.~~Interbank ~~Cash~~Offered ~~used~~Rate by(LIBOR) ~~investing~~rate ~~activities~~plus ~~for~~125 ~~the~~to ~~six~~225 ~~months~~basis ~~ended June 30~~points, ~~2004 consisted~~and ofunder ~~$2.2~~the ~~million~~revolving ofloan ~~payments~~are ~~made~~the inprime ~~connection~~rate, ~~with~~or ~~acquisitions~~the ~~and~~LIBOR ~~$1.2~~rate ~~million~~plus of100 ~~capital~~to ~~expenditures.~~200 Webasis ~~currently~~points, ~~anticipate~~depending ~~2005~~in ~~aggregate~~most instances ~~capital~~on ~~expenditures~~the ~~will~~ratio ~~range~~of ~~between~~our ~~$6.0~~consolidated ~~and~~funded ~~$7.0~~debt ~~million~~to ~~for~~consolidated ~~additional~~pro ~~facilities, software~~forma ~~tools~~earnings ~~and~~before ~~computer~~interest, ~~equipment~~taxes, todepreciation, ~~support~~and ~~our~~amortization ~~growth~~(EBITDA).

~~Our~~As ~~financing activities provided net cash~~ of ~~approximately $62.6 million for the six months ended June~~ September 30, ~~2005~~2007, ~~which~~we ~~consisted~~had ~~of borrowings under the term loan portion of our credit facility of~~ $6074.05 million, ~~net~~outstanding ~~proceeds of $2.1 million in net borrowings~~ under the ~~revolving~~Credit ~~portion of our credit facility~~Agreement, ~~and~~compared ~~$0.5 million from common stock issuances related~~ to ~~the exercise of stock options. This compares to cash provided from financing activities of~~ $5988.58 million ~~for~~outstanding ~~the six~~as ~~months ended June 30, 2004 from the public offering~~ of 2December 31,~~250,000~~ ~~share of common stock completed in February 2004~~2006.

InBorrowings ~~April~~under ~~2005, we entered into a five-year Credit and Security Agreement, dated as of April 21, 2005 (~~the “Credit Agreement~~”),~~ ~~with~~are ~~National City~~secured ~~Bank,~~by ~~Branch~~a ~~Banking~~general ~~and~~lien ~~Trust~~on ~~Company,~~our ~~KeyBank~~consolidated ~~National~~assets. ~~Association,~~We ~~Fifth~~are ~~Third~~also ~~Bank,~~subject ~~JPMorgan~~to ~~Chase~~certain ~~Bank~~restrictions, ~~N.A., Comerica Bank,~~ and ~~PNC Bank, N.A. The Credit Agreement replaced our then-effective Credit Agreement, dated as of January 31,~~are ~~2003,~~required asto ~~amended~~meet ascertain offinancial ~~December~~covenants. ~~31,~~These ~~2003,~~covenants ~~July~~require ~~12,~~that ~~2004 and December 28~~we, ~~2004~~among ~~(the~~other ~~“Prior Credit Agreement”)~~things, ~~with~~maintain ~~National~~certain ~~City~~financial ~~Bank,~~ratios ~~KeyBank National Association, Fifth Third Bank,~~ and ~~Branch~~minimum ~~Banking~~net ~~and~~worth ~~Trust Company, which was repaid and terminated as of April 21, 2005~~levels. ~~Borrowings~~As ~~outstanding under the Prior Credit Agreement, which totaled $67.4 million as~~ of ~~April 21~~September 30, ~~2005~~2007, we were ~~refinanced~~in compliance with ~~borrowings~~these ~~under the Credit Agreement~~covenants.

~~The~~On ~~Credit~~March 30, ~~Agreement~~2007, ~~which~~MTC isTechnologies, ~~scheduled~~Inc., toan ~~expire~~Ohio oncorporation ~~June~~and ~~30,~~our ~~2010~~wholly owned subsidiary, ~~allows us~~entered tointo ~~borrow~~a upguaranty toin connection with the issuance of $~~145.0~~10 million in principal amount of Variable Rate Industrial Development Bonds (Bonds) by the ~~form~~Industrial Development Board of the City of Albertville, Alabama (IDB) on behalf of AIC. The Bonds were issued to finance the construction by AIC of an aircraft completion center at the Albertville, Alabama airport. AIC received $852.02 million ~~revolving~~in ~~loan~~proceeds from the Bonds at the closing and apaid transaction costs of $~~60.~~0.2 million. ~~term~~AIC ~~loan.~~has Asreceived ofan ~~June~~additional ~~30,~~$4.1 ~~2005~~million, wein ~~had~~proceeds as project reimbursements during the second and third quarters of 2007. The remaining $623.17 million ~~outstanding~~is ~~under~~being held in escrow and will be paid to AIC as additional capital expenditures are made on the ~~Credit~~aircraft ~~Agreement~~completion center in Albertville, Alabama. The Weparcel ~~had~~of noland ~~debt~~on ~~outstanding~~which insuch ~~2004~~construction is occurring has been leased to AIC by the City of Albertville.

~~Borrowings~~Concurrently ~~under~~with the issuance ~~Credit~~of the Bonds, AIC entered into a lease agreement (Lease Agreement) with the IDB whereby AIC will complete the construction of and furnish the equipment for the aircraft completion center located at the airport. The Lease Agreement provides that AIC will make lease payments sufficient to pay the principal of and interest on the Bonds. The Bonds are secured by a ~~general~~direct ~~lien~~pay letter of credit (Letter of Credit) issued by National City Bank (Bank), which expires on ~~our~~March 16, 2010 ~~consolidated~~subject ~~assets~~to extensions as agreed to by AIC and the Bank. WeIn ~~are~~consideration ~~also~~for ~~subject~~the toissuance ~~certain~~of ~~restrictions~~the Letter of Credit, ~~and~~AIC ~~are~~has ~~required~~entered into a reimbursement agreement (Reimbursement Agreement) obligating AIC to ~~meet~~pay ~~certain~~the ~~financial~~Bank ~~covenants.~~for ~~These~~all ~~covenants~~drawings ~~require~~made ~~that~~on ~~we,~~the Letter ~~among~~of ~~other~~Credit. ~~things~~In addition, ~~maintain~~the ~~certain~~Company ~~financial~~has ~~ratios~~entered into a guaranty with the Bank guaranteeing the payment and ~~minimum~~performance ~~net~~of ~~worth~~AIC ~~levels~~under the Reimbursement Agreement. AsAIC’s ofobligations ~~June~~under the Reimbursement Agreement are secured by a ~~30,~~mortgage ~~2005,~~of weits ~~were~~leasehold interest in ~~compliance~~the ~~with~~ground ~~these~~lease ~~covenants~~and a security interest in its personal property. The Company’s obligations under the guaranty are secured by a security interest in its personal property.

~~Part~~The Bonds are scheduled to mature on March 1, 2018. AIC will pay only the interest on the Bonds for a period of one year, followed by ten years of ~~our~~quarterly ~~growth~~principal ~~strategy~~and interest payments beginning on March 1, 2008. The interest rate on the Bonds is todetermined ~~pursue~~on ~~strategic~~a ~~acquisitions~~weekly ofbasis ~~businesses~~by the remarketing agent for the Bonds, NatCity Investments, Inc. WeAIC ~~have~~has ~~made~~the ~~acquisitions~~right into convert the ~~past,~~variable weekly ~~and~~interest ~~intend~~rates to ~~make~~a ~~acquisitions~~fixed ininterest rate upon written notice to the ~~future.~~trustee ~~Historically~~for the Bonds, wethe ~~have~~Bank ~~financed~~and ~~our~~NatCity ~~acquisitions~~Investments, ~~with~~Inc. Principal payments will be made on the ~~proceeds~~Bonds ~~from~~beginning ~~our~~March ~~public~~2008 ~~stock~~and will continue through the maturity date (or ~~offerings,~~such ~~cash~~earlier date on ~~hand~~which ~~and~~the ~~shares~~Bonds ofmay ~~our~~be ~~common stock~~redeemed). WeThe ~~expect~~Bonds tomay ~~finance~~be ~~any~~redeemed ~~future~~at ~~acquisitions~~the ~~with~~option ~~proceeds~~of ~~from~~AIC ~~cash~~and ~~generated~~are bysubject ~~operations,~~to ~~additional~~mandatory ~~sales~~redemption orin ~~issuances~~the ofevent ~~shares~~that ofthe ~~our~~interest ~~common~~on ~~stock,~~the ~~borrowings~~Bonds ~~under~~is ~~our~~determined ~~Credit~~to ~~Agreement or~~be asubject ~~combination~~to ofincome taxation under the Internal ~~foregoing~~Revenue Code.

~~Management~~The ~~believes~~Reimbursement ~~that the cash generated by operations and amounts available under our Credit~~ Agreement ~~will~~contains becustomary ~~sufficient~~events toof ~~fund our working capital requirements~~default, ~~debt~~including ~~service~~failure ~~obligations,~~to ~~purchase~~make ~~price~~required ~~commitments~~payments ~~for completed acquisitions and capital expenditures~~when ~~for~~due, ~~the~~failure ~~next~~to ~~twelve~~comply ~~months~~with ~~and~~certain ~~through June 2010~~covenants, ~~when~~breaches ~~our~~of ~~Credit~~certain ~~Agreement matures.~~

~~Our ability to generate cash from operations depends to a significant extent on winning new and re~~-~~competed~~ ~~contracts~~20 ~~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.~~

-18-

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

representations and warranties, certain events of bankruptcy and insolvency, amendments to the Lease Agreement without the prior consent of the Bank, and an “event of default” under the Credit Agreement. Upon any such event of default, the maturity of the Bonds can be accelerated, causing payment by the Bank under the Letter of Credit and an immediate reimbursement obligation of AIC for the amount of accelerated Bonds pursuant to the Reimbursement Agreement.

We have made acquisitions in the past and may pursue selective acquisitions in the future. Historically we have financed our acquisitions with the proceeds from our public stock offerings, cash on hand, borrowings under credit facilities, and shares of our common stock. We expect to finance any future acquisitions with proceeds from cash generated by operations, borrowings under our Credit Agreement or a combination of the foregoing.

Management believes that the cash generated by operations and amounts available under our Credit Agreement 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 March 2010, when our Credit Agreement matures.

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.

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk relates to changes in interest rates for borrowings under our ~~credit facility. During 2004, we did not have any outstanding borrowings under our Prior~~ Credit Agreement. ~~Primarily~~and ~~in connection~~Bonds ~~with~~payable. ~~our~~As ~~acquisition~~ of ~~MTI~~September 30, ~~during February 2005~~2007, we ~~borrowed~~had ~~funds under our Prior Credit Agreement~~$74.5 Asmillion ~~discussed~~of ~~above~~borrowings outstanding under ~~“Management’s~~the ~~Discussion~~Credit ~~and~~Agreement ~~Analysis Regarding Financial Condition~~ and ~~Results of Operations –~~$10 ~~Liquidity~~million ~~and~~in ~~Capital~~Bonds ~~Resources”,~~payable. weWe ~~entered~~have ~~into~~offset ~~the~~a ~~Credit~~portion ~~Agreement~~of onour ~~April~~interest ~~21,~~rate ~~2005~~risk ~~and~~by ~~had~~entering ~~$62.1~~into ~~million~~interest ~~outstanding~~rate asswap ~~of June 30, 2005~~agreements.

AIn ~~hypothetical~~October 2005, ~~10%~~we ~~increase~~entered ininto an interest ~~rates~~rate ~~during~~swap agreement with the ~~first~~Bank ~~six~~under ~~months~~which ofwe ~~2005~~exchange ~~would~~floating-rate ~~have~~interest ~~resulted~~payments infor anfixed-rate ~~increase~~interest inpayments on our term loan. The amount of the interest ~~expense~~rate swap is equal to 50% of ~~approximately~~the outstanding ~~$78~~balance of our term loan,~~000~~ ~~and~~or $~~123~~22.3 million as of September 30,~~000~~ ~~for~~2007, and is reduced as the ~~three~~loan amortizes. The swap provides for payments over an approximately four-year period that began in December 2005 and ~~six~~is ~~months~~settled ~~ended~~on ~~June~~a quarterly basis. The fixed interest rate provided by the agreement is 4.87% plus our spread at September 30, ~~2005~~2007 of 200 basis points, ~~respectively~~or 6.87%. At September 30, 2007, the interest rate on the portion of the term loan that was not subject to the interest rate swap agreement was 5.25% plus our spread at September 30, 2007 of 200 basis points, or 7.25%.

Effective April 5, 2006, we entered into an interest rate swap agreement with the Bank under which we exchange floating-rate interest payments for fixed-rate interest payments. The agreement covers a combined notional amount of debt equal to $20.0 million, and the agreement ends March 31, 2008. The swap provides for payments over a two-year period that began in June 2006 and is settled on a quarterly basis. The fixed interest rate provided by the agreement was 5.44% plus our spread at September 30, 2007 of 175 basis points, or 7.19%. The weighted average interest rate for the portion of the revolving loan that is not subject to the interest rate swap, as of September 30, 2007, was 7.49%, including our spread at September 30, 2007 of 175 basis points.

On March 30, 2007, MTC Technologies, Inc., an Ohio corporation and our wholly owned subsidiary, entered into a guaranty in connection with the issuance of $10 million in principal amount of Bonds by the IDB on behalf of AIC. The Bonds are being issued to finance the construction by AIC of an aircraft completion center at the Albertville, Alabama airport. AIC entered into a ten year interest

- 21 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

rate hedge on the full amount of the Bonds at a fixed rate of 3.91%. The all-in interest rate is approximately 5.4%, including amortization of issuance costs. The Bonds are interest only for the first year with quarterly principal payments beginning in March 2008 and ending in March 2018. The September 30, 2007 balance sheet reflects the $10 million of bonds payable as well as $3.7 million of restricted cash that will be released as AIC makes additional capital expenditures on the aircraft completion center.

Although the Company’s financial results are affected by changes in short-term interest rates on its borrowings, the effects of interest rate changes are limited by the use of interest rate swaps. A hypothetical 100 basis point increase in interest rates, for example, would have resulted in an increase in interest expense of approximately $0.3 million on borrowings not subject to the interest rate swaps for the nine months ended September 30, 2007.

ITEM 4.

Controls and Procedures

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) ~~evaluated~~, together with other members of senior management, evaluated 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 ~~June~~ September 30, ~~2005~~2007. Based on this review, our CEO and CFO have concluded that, as of ~~June~~ September 30, ~~2005~~2007, our disclosure controls and procedures were 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 were effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the ~~Securities and Exchange Commission~~SEC’s rules and forms.

~~Other than changes resulting from our acquisition of OnBoard and MTI, there~~ There were no changes in our internal control over financial reporting during the three months ended ~~June~~ September 30, ~~2005~~2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In January 2005, we acquired all of the outstanding capital stock of OnBoard and, in February 2005, we acquired all of the outstanding capital stock of MTI. Excluding intercompany payables and receivables, OnBoard and MTI accounted for approximately $5.4 million and $14.5 million, respectively, of our consolidated assets as of June 30, 2005, and excluding intercompany revenues, OnBoard and MTI accounted for approximately $1.4 million and $15.3 million, respectively, of our consolidated revenues for the six months ended June 30, 2005. Although our management will diligently conduct an assessment of all of our internal control over financial reporting for the year ending December 31, 2005, including OnBoard’s and MTI’s internal control over financial reporting, management has not yet completed its assessment of OnBoard’s and MTI’s internal control over financial reporting since the respective dates of acquisition.

PART II. OTHER INFORMATION

ITEM 1.

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.

~~-19-~~ITEM 6. Exhibits


Exhibit No.		Description
10.1		Letter Agreement and Release, effective as of July 20, 2007, by and between MTC Technologies, Inc., a Delaware corporation, and John Longhouser (incorporated by reference to Exhibit 10.1 to MTC Technologies, Inc.’s Current Report on Form 8-K (Commission No. 000-49890), filed on July 26, 2007).

10.2		Letter Agreement and Release, effective as of September 25, 2007, by and between MTC Technologies, Inc., a Delaware corporation, and James Clark (incorporated by reference to Exhibit 10.1 to MTC Technologies, Inc.’s Current Report on Form 8-K (Commission No. 000-49890), filed on September 28, 2007).

- 22 -

MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

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


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.

~~Our~~- ~~Annual~~23 ~~Meeting~~- ~~of Stockholders was held on April 20, 2005 (“Annual Meeting”). The following matters were voted upon at the Annual Meeting.~~

Matter 1: To elect three directors, Rajesh K. Soin, Kenneth A. Minihan, and William E. MacDonald, III, each to serve for a term of three years and until a successor is elected and qualified;

Matter 2: To ratify the selection of Ernst & Young LLP as the independent accountants of MTC Technologies, Inc. for the year ending December 31, 2005.

A summary of the voting for each director nominee and other matters voted upon at the Annual Meeting is as follows:

Nominee/Matter	For	Against orWithheld	Abstain	Broker Non-Votes
Matter 1:
Rajesh K. Soin	14,611,282	354,889	—	775,925
Kenneth A. Minihan	14,931,528	34,643	—	775,925
William E. MacDonald, III	14,766,004	200,167	—	775,925
Matter 2	14,622,055	342,616	1,500	775,925

The Directors not up for re-election whose terms of office as a director continued after the meeting are:

• Don R. Graber

• David S. Gutridge

• Lawrence A. Skantze

• Lester L. Lyles

ITEM 6. Exhibits

Exhibit No.		Description
10.1		Credit and Security Agreement, dated as of April 21, 2005, by and among MTC Technologies, Inc., a Delaware corporation, and MTC Technologies, Inc., an Ohio corporation, as Borrowers, National City Bank, for itself and as Lead Arranger and Administrative Agent, Branch Banking and Trust Company, for itself and as Syndication Agent, KeyBank National Association, for itself and as Co-Documentation Agent, Fifth Third Bank, for itself and as Co-Documentation Agent, JPMorgan Chase Bank, N.A., Comerica Bank, and PNC Bank, N.A. (incorporated by reference to Exhibit 10.1 to MTC Technologies, Inc.’s Current Report on Form 8-K (Commission No. 000-49890), filed on April 27, 2005).
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.

-20-

SIGNATURES

Pursuant to the requirements 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.
Date: August 8, 2005
Date: November 6, 2007
	By:	/s/ Michael I. Gearhardt
		(Signature)
		Michael I. Gearhardt
		Chief Financial Officer
		(Duly authorized officer and Principal Financial Officer)
		(Duly authorized officer and principal financial officer)

-21 24 -

EXHIBIT INDEX

Exhibit No.		Description
10.1		~~Credit~~Letter Agreement and ~~Security Agreement~~Release, ~~dated~~effective as of ~~April~~July 2120, ~~2005~~2007, by and ~~among~~between MTC Technologies, Inc., a Delaware corporation, and ~~MTC~~John ~~Technologies,~~Longhouser Inc., an Ohio corporation, as Borrowers, National City Bank, for itself and as Lead Arranger and Administrative Agent, Branch Banking and Trust Company, for itself and as Syndication Agent, KeyBank National Association, for itself and as Co-Documentation Agent, Fifth Third Bank, for itself and as Co-Documentation Agent, JPMorgan Chase Bank, N.A., Comerica Bank, and PNC Bank, N.A. (incorporated by reference to Exhibit 10.1 to MTC Technologies, Inc.’s Current Report on Form 8-K (Commission No. 000-49890), filed on ~~April~~July 2726, ~~2005~~2007).
10.2		Letter Agreement and Release, effective as of September 25, 2007, by and between MTC Technologies, Inc., a Delaware corporation, and James Clark (incorporated by reference to Exhibit 10.1 to MTC Technologies, Inc.’s Current Report on Form 8-K (Commission No. 000-49890), filed on September 28, 2007).
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.

-22 25 -

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Filing Compare · MTC TECHNOLOGIES INC