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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

The number of shares of Common Stock, $0.001 par value, of the registrant outstanding as of May 8, 2003 was 13,110,146.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Index

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Item 1.  Financial Statements
Condensed Consolidated Balance Sheets
(Dollars in Thousands Except Per Share Data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Item 1.  Financial Statements
Condensed Consolidated Statements of Operations
(Dollars in Thousands Except Share and Per Share Data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Item 1.  Financial Statements
Condensed Consolidated Statements of Cash Flows
(Dollars in Thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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ITEM 1.  Financial Statements
Notes to Condensed Consolidated Financial Statements
(dollars amounts in thousands, except share and per share data)

A.  SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

          Interim financial information—The consolidated financial statements as of March 31, 2003 and for the three month periods ended March 31, 2003 and 2002 are unaudited and have been prepared on the same basis as our audited consolidated financial statements. 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 March 31, 2003 and 2002 are not necessarily indicative of the results for the full year.

          Income taxes—On June 28, 2002, we changed our S corporation status to C corporation status under Internal Revenue Service regulations. As a result of this change, we were required under Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, to establish deferred tax balances. During the third quarter of 2002, we began recording a provision for federal and state income taxes.

          Prior to June 28, 2002, under our S corporation election, all items of income and expense were “passed through” and taxed at the stockholder level. Therefore, we were not required to record a provision for federal and state income taxes.

B.  BUSINESS SEGMENT

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

C.  RELATED PARTY TRANSACTIONS

          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, our majority stockholder and Chairman of the Board of Directors. The following is a summary of transactions with related parties:

See Related Party Transactions Continued on following page.

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ITEM 1.  Financial Statements
Notes to Condensed Consolidated Financial Statements
(dollars amounts in thousands, except share and per share data)

C.  RELATED PARTY TRANSACTIONS - Continued

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

          In the first quarter of 2003, we purchased at fair value a 10% ownership interest in an airplane owned by Soin Aviation for approximately $42.  We have also entered into a sharing arrangement with Soin Aviation under which we are responsible for a pro rata share of the fixed and marginal costs associated with aircraft owned by us and Soin Aviation.

          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 March 31, 2003 and December 31, 2002, amounts due from related parties were $527 and $307, respectively.   At March 31, 2003 and December 31, 2002, amounts payable to related parties were $59 and $41, respectively.  

D.  STOCK-BASED COMPENSATION 

          Stock-compensation expense— In March, 2002, Mr. Soin, the sole stockholder prior to our initial public offering, made a binding commitment to award $5,215 in stock-based compensation to three key members of our senior management, Michael Solley, President and Chief Executive Officer, David Gutridge, Chief Financial Officer, and Benjamin Crane, Chief Operating Officer, to reward the executives for their major contributions to our past profitability, growth and financial strength. The award in March was to be settled either by delivery to the recipients of a fixed number of fully vested shares or of a number of fully vested options with an intrinsic value of approximately $5,215 (the difference between the exercise price and the estimated fair value of the shares of $16.75 per share). We recorded the $5,215 expense associated with this stock compensation award in March, 2002.  The liability recorded in March was classified as a current liability.

          In April, 2002, to achieve certain tax benefits for the executives, the sole stockholder decided to issue stock options to satisfy the $5,215 stock compensation award. Stock option agreements to purchase

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ITEM 1.  Financial Statements
Notes to Condensed Consolidated Financial Statements
(dollars amounts in thousands, except share and per share data)

D.  STOCK-BASED COMPENSATION - Continued

415,273 shares of our common stock at $4.19 per share were entered into with the executives. These options were formalized on May 3, 2002, when stock option agreements were signed by the grantees, which established the measurement date. The options were immediately exercisable after that date. Mr. Solley was awarded an option to purchase up to 346,061 shares. Messrs. Gutridge and Crane each were awarded options to purchase up to 34,606 shares. These options expire ten years from their date of grant.  Once the liability for the stock compensation was settled by the issuance of stock options the $5,215 liability was reclassified to paid-in capital on our balance sheet.  As of May 1, 2003, all of these options were exercised.

          Accounting for stock-based compensation—We apply APB 25 and related interpretations in accounting for our stock option plans.  Accordingly, no compensation cost has been recognized for the stock options issued under the 2002 Equity and Performance Incentive Plan because the options were granted with an exercise price equal to the stock price on the date of grant.  Compensation expense was recognized on the options that were granted in May, 2002, to the extent that the estimated fair value of the options exceeded the option price as discussed above.  Had compensation costs been determined based on the fair value of the options on the grant dates consistent with the methodology prescribed by SFAS No. 123, our net income and earnings per share would have been reduced to the pro forma amounts indicated below.  Prior to May, 2002, there were no stock options outstanding; therefore, pro forma disclosures for only the three months ended March 31, 2003 have been presented.

          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.

          Pro forma disclosure:

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ITEM 1.  Financial Statements
Notes to Condensed Consolidated Financial Statements
(dollars amounts in thousands, except share and per share data)

E.  EARNINGS (LOSS) PER COMMON SHARE

          Basic earnings (loss) per common share were computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired, if any, during the period are weighted for the portion of the period during which they were outstanding. Diluted weighted average shares outstanding equal basic weighted average shares outstanding for the three months ended March 31, 2002 because there were no common stock equivalents outstanding during this period. The weighted average shares for the three months ended March 31, 2003 are as follows:

F.  RECENT ACCOUNTING PRONOUNCEMENTS

          In November, 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others, (FIN 45).  FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain agreements and warranties it has issued.  It also requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of an obligation undertaken in issuing the guarantee.  The recognition requirements are effective for guarantees initiated after December 31, 2002.  The adoption of the fair value provisions of FIN 45 did not have an impact on our results of operations, financial positions or cash flows as there were no guarantees or modifications of guarantees for the three months ended March 31, 2003.

          In December, 2002, the Emerging Issues Task Force (EITF) issued EITF 00-21, Revenue Arrangements with Multiple Deliveries, (EITF 00-21).  EITF 00-21 provides guidance on determining whether a revenue arrangement contains multiple deliverable items and, if so, requires revenue to be allocated among the different items based on fair value.  EITF 00-21 also requires that revenue on any item in a revenue arrangement with multiple deliverables that are not delivered completely must be deferred until delivery of the item is completed.  EITF 00-21 is effective for revenue arrangements entered into beginning after July 1, 2003.  We do not believe that the adoption of EITF 00-21 will have a significant impact on our consolidated financial statements.

          In January, 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN 46).  FIN 46 provides guidance for identifying a controlling interest in a Variable Interest Entity (VIE) established by means other than voting interests.  FIN 46 also requires consolidation of a VIE by an enterprise that holds such controlling interest.  The effective date for FIN 46 will be July 1, 2003.  We do not believe we have any interests qualifying as VIEs as of March 31, 2003 and we do not anticipate that the provisions of FIN 46 will have an impact on our consolidated financial statements.

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ITEM 1.  Financial Statements
Notes to Condensed Consolidated Financial Statements
(dollars amounts in thousands, except share and per share data)

G.  ACQUISITION OF AMCOMP CORPORATION

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

          We used $7,343 of the proceeds from our recent initial public offering to purchase 100% of the stock of AMCOMP and pay acquisition costs.  Through 2004, we may be required to make additional annual payments to AMCOMP’s shareholders as part of an earn-out provision of the stock purchase agreement.  Under the earn-out agreement, we could be required to pay up to an additional $3,300 in purchase price should cumulative earnings meet certain goals over the period October 11, 2002 through December 31, 2004.  Based on the operating results of AMCOMP for the year ended December 31, 2002, we paid $1,100 to the former AMCOMP shareholders in April, 2003.  We recorded this earn-out payment as an increase in goodwill and as an amount due under earn-out agreement in our December 31, 2002 balance sheet and in April, 2003, when we made this payment, we reduced the amount due under the earn-out agreement. 

H.  SUBSEQUENT EVENTS

          Mr. Solley, our Chief Executive Officer, terminated his Rule 10b5-1 trading plan immediately following his April 3, 2003, exercise of options and subsequent sale of common stock acquired upon such exercise under the plan.  Mr. Solley’s 10b5-1 trading plan was established in November, 2002, and the plan provided, beginning in January, 2003, for the automatic exercise of options covering 10,000 shares of our common stock per month and the sale of our common stock acquired upon such exercise, assuming the stock price exceeded a prearranged minimum stock price.  Mr. Solley has been accumulating shares of our common stock through option exercises and terminated his 10b5-1 plan to accelerate the exercise of his remaining options.

I.  CONTINGENCIES

          We are a defendant in a lawsuit filed by Bear Stearns Merchant Fund Corp. for breach of contract and other matters in connection with their proposal to purchase Modern Technologies Corp.  The suit asks for damages in an amount of at least $2,000.  Our outside counsel has advised us that at this stage in the proceedings he cannot offer an opinion as to the probable outcome.  We believe that the suit is completely without merit and intend to vigorously defend our position.

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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 subsidiaries (MTCT or the Company) for the three months ended March 31, 2003 compared to the three months ended March 31, 2002 and the financial condition of MTCT for March 31, 2003 compared to December 31, 2002.  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.

          We provide sophisticated systems engineering, information technology, intelligence operations and program management services focusing primarily on U.S. defense, intelligence and civilian federal government agencies. For the three months ended March 31, 2003 and March 31, 2002, approximately 90% and 85%, respectively, of our revenue was derived from our customers in the Department of Defense and the intelligence community, including the U.S. Air Force, U.S. Army and joint military commands.

          We report operating results and financial data as a single segment and believe our contract base is well diversified. While approximately 17% and 22% of our revenue for the three months ended March 31, 2003 and 2002, respectively, was under one contract vehicle, the Aeronautical Systems Center Blanket Purchase Agreement, or ASC/BPA, which expires in September, 2005, some of that work was previously performed on GSA schedules and could possibly, if necessary, be converted to General Service Administration, or GSA, vehicles or other contracts. The largest task order under this contract amounted to approximately 2% of total revenue for the three months ended March 31, 2003.  In July, 2001, we were one of six awardees of the Flexible Acquisition and Sustainment Tool, or FAST, contract with a ceiling of $7.4 billion.  Revenue under the FAST, contract was approximately 28% of total revenue for the three months ended March 31, 2003 and approximately 3% of total revenue for the three months ended March 31, 2002.  The first quarter 2003 FAST revenue was comprised of 32 separate task orders, the largest of which amounted to approximately 10% of total revenue.  In prior years, we performed a portion of the work we are now performing on the FAST contract on other contract vehicles.  While the FAST contract represents an increasingly large 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 6% and 8% of revenue for the three months ended March 31, 2003 and 2002, respectively.

          Under the FAST contract, we expect to have the opportunity to compete for several hundred million dollars in task orders each year over its approximately five and one-half year remaining life as the U.S. Air Force maintains and modernizes aircraft and defense systems. As of May 6, 2003, we had been awarded 35 task orders under the FAST contract with an expected award value of approximately $830 million if all options are exercised. Although we believe the FAST contract presents an opportunity for significant additional growth and expansion of our services, we expect that many of the task orders we may be awarded under the FAST contract will be for program management services, which historically have been less profitable than our other activities. In addition, the FAST contract will involve significantly greater use of subcontractors than the Company has historically used.  Margins on subcontractor-based revenues are less favorable than the margins on our direct work.  Since the FAST contract is expected to be a significant part of our business for the next several years, we anticipate our operating margins, as a percentage of total revenue, will be diminished, while growing in absolute dollars.

          Our federal government contracts are subject to government audits of our direct and indirect costs. The incurred cost audits have been completed through December 31, 2000 and the rates have been agreed to.  We do not anticipate any material adjustment to our financial statements in subsequent periods for audits not yet completed.

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          For the three months ended March 31, 2003 and 2002, approximately 77% and 69%, respectively, of our revenue came from services provided directly to our customers as a prime contractor and the balance came from services provided indirectly as a subcontractor.  Approximately 78% of our revenue for the three months ended March 31, 2003 consisted of the work of our employees, and the balance was provided by the work of subcontractors.   We anticipate that our work as a prime contractor on the FAST contract will involve a significant increase in the use of subcontractors. 

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

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

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

          Funded Backlog.  Backlog, which consists of funded and unfunded portions, is our estimate of the remaining future revenue from existing signed contracts, assuming the exercise of all options relating to those contracts.  We define funded backlog as the portion of backlog for which funding currently is appropriated and obligated to us under the contract by the purchasing agency or otherwise authorized for

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payment to us by the customers upon completion of a specified portion of work, less revenue previously recognized. Our funded backlog does not include the full potential value of our contracts because Congress often appropriates funds for a particular program or contract on a yearly or quarterly basis, even though the contract may call for performance over a number of years.

          The primary source of our backlog is contracts with the federal government. Our estimated funded backlog at March 31, 2003 was approximately $151 million as compared to approximately $91 million at March 31, 2002.  We have increased our funded backlog by approximately $60 million from March 31, 2002, primarily due to the funding increases in the ASC/BPA and FAST contracts, as well as the additional funded backlog which came from our wholly owned subsidiary, AMCOMP Corporation (AMCOMP), which was acquired in the fourth quarter of 2002.  Although our funded backlog at March 31, 2003, is in excess of our trailing twelve-month revenue, we believe that a more typically sustainable funded backlog is in the range of 40% to 60% of trailing twelve-month revenue.

Critical accounting policies

          Revenue Recognition.    Our critical accounting policies primarily relate to revenue recognition and related cost estimation. We recognize revenue on time-and-materials contracts to the extent of billable rates times hours delivered plus the costs of any allowable expenses incurred. We recognize revenue on fixed-price contracts under the percentage-of-completion method based on costs incurred in relation to total estimated costs, or upon delivery of specific products or services, as appropriate. We recognize revenue on cost-plus contracts to the extent of allowable costs incurred plus a proportionate amount of the fee earned. We consider performance-based fees, including award fees, under any contract type to be earned only when we can demonstrate satisfaction of a specific performance goal or we receive contractual notification from a customer that the fee has been earned. In all cases, we recognize revenue only when pervasive evidence of an arrangement exists (including when waiting for formal funding authorization under federal government contracts), services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured.

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

          Cost of revenue.    Cost of revenue primarily consists of the costs for providing our services to customers, which primarily include the salaries and wages, plus associated fringe benefits, of our employees directly serving customers, plus the occupancy and other infrastructure costs necessary to support those employees. Cost of revenue also includes the cost of subcontractors and outside consultants, third-party materials, such as hardware and software, that we purchase and provide to the customer as part of the contract, depreciation and any other costs, such as travel expenses, incurred to support contract efforts.

          General and administrative expenses.    General and administrative expenses include the salaries and wages, plus associated fringe benefits, of our employees not performing work directly for customers. Among the functions included in these expenses are contracts, administration, business development, accounting, human resources, information systems support, and executive and senior management. General and administrative expenses also include depreciation and amortization, occupancy and travel expenses for employees performing general and administrative functions. For the three months ended March 31, 2002, it also includes approximately $5.2 million in non-cash stock compensation expense. 

          Included in general and administrative expenses for the three months ended March 31, 2002, were management fees paid to a related party. The management fees were paid to a wholly owned affiliate of

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our then sole stockholder. The nature of services received from the affiliate included our then sole stockholder’s services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition candidates and legal services. These fees ceased on March 31, 2002. We continue to utilize aircraft that we jointly own with and rent certain facilities from entities related to our majority stockholder.  Although the management fees have been eliminated, most of these costs have been replaced on a recurring basis and, by virtue of being a public company, we now incur certain general and administrative costs not previously incurred.

          Net Interest Income (Expense).    Net interest income (expense) is primarily related to interest income generated by our investments and interest expense accrued under any outstanding borrowings.  We repaid all outstanding debt in July, 2002 with a portion of the proceeds from our initial public offering and invested the balance of the proceeds.

          Income taxes.    On June 28, 2002, we changed our S corporation status to C corporation status under Internal Revenue Service regulations. As a result of this change, we were required under Statement of Financial Accounting Standard (SFAS) No. 109, Accounting for Income Taxes, to establish deferred tax balances. During the third quarter of 2002, we began recording a provision for federal and state income taxes.

          Prior to June 28, 2002, under our S corporation election, all items of income and expense were “passed through” and taxed at the stockholder level. Therefore, we were not required to record a provision for federal and state income taxes.

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:  risks related to the growth of our FAST contract, including strains on resources and decreases in operating margins; federal government audits and cost adjustments; differences between authorized amounts and amounts received by us under government contracts; government customers’ failure to exercise options under contracts; changes in federal government (or other applicable) procurement laws, regulations, policies and budgets; our ability to attract and retain qualified personnel; our ability to retain contracts during re-bidding processes; pricing pressures;  undertaking acquisitions that might increase our costs or liabilities or be disruptive; integration of acquisitions; and changes in general economic and business conditions.

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RESULTS OF OPERATIONS

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

          Prior to June 28, 2002, we operated as an S corporation and were not subject to federal or certain state income taxes during the three months ended March 31, 2002.  See income tax discussion below.

THREE MONTHS ENDED MARCH 31, 2003
COMPARED TO THREE MONTHS ENDED MARCH 31, 2002

          Revenue.  Revenue for the three months ended March 31, 2003 increased 51.4%, or approximately $12.3 million, to $36.1 million as compared to $23.9 million in the same period in 2002.  This increase in revenue was primarily the result of organic growth and the acquisition of AMCOMP as described below:

          Gross profit.  Gross profit for the three months ended March 31, 2003 increased 55.7%, or approximately $2.3 million, to $6.4 million as compared to $4.1 million in the same period in 2002.  This increase primarily relates to increased revenue.  Gross profit as a percentage of revenue for the three months ended March 31, 2003 increased to 17.6% as compared to 17.1% for the corresponding period in 2002.  This improvement in gross profit percentage is primarily the result of lower overhead costs as a

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percentage of revenue.  This reflects the semi-fixed nature of these costs (i.e., they increase at a rate less than the rate of increase in revenue).

          General and administrative expenses.  General and administrative expenses for the three months ended March 31, 2003 decreased 67.1%, or approximately $4.9 million, to $2.4 million as compared to $7.3 million in the same period in 2002.  This decrease was the result of the approximately $5.2 million non-cash stock compensation expense that was recorded in March, 2002, as discussed below.  Without this charge, general and administrative expenses for the three months ended March 31, 2003, would have increased 14.7%, or $0.3 million as compared to the prior year, primarily as a result of increased insurance, director, and professional fees incurred as a result of becoming a publicly traded company. 

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

          Intangible asset amortization.  Intangible asset amortization of approximately $0.1 million was recorded during the three months ended March 31, 2003.  In October, 2002, after acquiring AMCOMP, we began amortizing the $3.0 million of purchase price allocated to the contracts of AMCOMP over their estimated useful life of 6.5 years as determined by an independent appraiser, resulting in a charge to earnings of approximately $119,000.   We had no intangible amortization in the three months ended March 31, 2002.

          Operating income (loss).  Operating income for the three months ended March 31, 2003 increased 218.1%, or approximately $7.1 million, to $3.8 million as compared to an operating loss of $3.3 million for the quarter ended March 31, 2002.  This increase in operating income was primarily the result of the approximately $5.2 million non-cash stock compensation expense that was recorded in March, 2002, as discussed above. Without this charge, operating income for the three months ended March 31, 2003, would have increased 93.0%, or $1.8 million as compared to the same period in 2002, primarily resulting from the increased gross margin, partially offset by higher general and administrative expenses (excluding the non-cash stock compensation expense) and intangible asset amortization.

          Net interest income (expense).  Net interest income for the three months ended March 31, 2003 increased 144.6%, or approximately $0.2 million, to $0.1 million as compared to net interest expense of $0.2 million in the same period in 2002.  We repaid all outstanding debt in July, 2002, with proceeds from our initial public offering and invested the balance of the proceeds, which has resulted in net interest income.

          Income tax expense.  Our effective income tax rate for the quarter ended March 31, 2003 was approximately 40%.  We did not record a provision for income taxes for the quarter ended March 31, 2002, because we were an S corporation for income tax purposes and, under this election, all items of income and expense were “passed through” at the stockholder level.  On June 28, 2002, we changed our S corporation status to C corporation status under Internal Revenue Service regulations.

          Net income (loss).  Net income for the three months ended March 31, 2003 increased 169.2%, or approximately $5.8 million, to $2.4 million as compared to a net loss of $3.4 million for the three months ended March 31, 2002.  This increase in net income was primarily the result of the approximately $5.2 million non-cash stock compensation expense that was recorded in March, 2002, as discussed above. Without this charge, net income for the three months ended March 31, 2003, would have increased 30.0%, or $0.5 million as compared to the same period in 2002, primarily resulting from the increased

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operating income, which was partially offset by the income tax expense recognized in the first quarter of 2003.

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, changes in the scope of contracts and billing of other direct and subcontract costs, the commencement and completion of contracts we have been awarded and general economic conditions. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity, as well as in the number of contracts or task orders commenced or completed during any quarter, may cause significant variations in operating results from quarter to quarter.

          The federal government’s fiscal year ends September 30. If a federal budget for the next fiscal year has not been approved by that date in each year, our customers may have to suspend engagements that we are working on until a budget has been approved. Any suspensions may cause us to realize lower revenue in the quarter the suspension occurs.  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

          Our cash and cash equivalents balance on March 31, 2003, was approximately $19.9 million.  Historically, our positive cash flow from operations and our available credit facility have provided adequate liquidity to fund the operational needs of our federal government service business, as well as the operational needs of a number of unrelated businesses that have been disposed of or discontinued.  In the future, these funds will be available for pursuing our federal government service business. 

     Our working capital was $39.4 million at March 31, 2003 and $36.9 million at December 31, 2002.  Our working capital increased $2.5 million in the first three months of 2003 primarily for the following reasons:

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          Our operating activities used cash of approximately $2.0 million for the three months ended March 31, 2003. The net operating cash usage primarily represented net income adjusted for depreciation and amortization and the changes in working capital as discussed above.  For the three months ended March 31, 2002, the net operating cash usage of approximately $0.6 million primarily represented net loss adjusted for the approximately $5.2 million non-cash stock compensation expense, depreciation and amortization, combined with a $2.5 million increase in accounts receivable. 

          Our investing activities used cash of approximately $0.1 million for the three months ended March 31, 2003, primarily as a result of capital expenditures.  These capital expenditures included the purchase at fair value of a 10% ownership interest in an airplane owned by a related party for approximately $42,000.  Cash used by investing activities for the three months ended March 31, 2003, was approximately $0.6 million less than the same period of 2002. The primary difference in cash used in investing activities was a decrease in advances to affiliates. No further advances to affiliates have been or will be made subsequent to March 31, 2002, and all balances at that date have been disposed of.  We currently anticipate that capital expenditures for 2003 will be approximately $1.0 million for general corporate purposes.

          Our financing activities provided net cash of approximately $12,000 for the three months ended March 31, 2003, primarily through common stock issuances and repurchases related to stock option transactions. This compares to cash provided from financing activities of $1.3 million for the three months ended March 31, 2002, consisting of net borrowings of approximately $2.0 million, a $2.0 million capital contribution from our then sole stockholder, partially offset by approximately $2.7 million in distributions to our then sole stockholder.

          In January, 2003, we replaced our $15 million revolving line of credit with a $35 million revolving line of credit. We can increase this line to $50 million subject to meeting certain requirements and obtaining our banks’ approval.  The agreement is for an initial term of three years and has an “evergreen” feature whereby it can be extended an additional year, each year, by mutual agreement with our banks.

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

          In the event that we utilize the new revolving line of credit, any borrowings under the agreement would be secured by a general lien on our consolidated assets, we would be subject to certain restrictions, and we would be required to meet certain financial covenants. The restrictions include, among other things, limitations on our ability to pay dividends.

          Management believes that the cash and cash equivalent balance, together with cash generated by operations and amounts available under our credit facility, will be sufficient to fund our working capital requirements, debt service obligations and capital expenditures for the foreseeable future.

          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

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contracts and task orders were to decline significantly, our operating cash flow would decrease, which would adversely affect our liquidity and capital resources.

RECENT ACCOUNTING PRONOUNCEMENTS

          In November, 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness of Others, (FIN 45).  FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain agreements and warranties it has issued.  It also requires the guarantor to recognize, at the inception of the guarantee, a liability for the fair value of an obligation undertaken in issuing the guarantee.  The recognition requirements are effective for guarantees initiated after December 31, 2002.  The adoption of the fair value provisions of FIN 45 did not have an impact on our results of operations, financial positions or cash flows as there were no guarantees or modifications of guarantees for the three months ended March 31, 2003.

          In December, 2002, the Emerging Issues Task Force (EITF) issued EITF 00-21, Revenue Arrangements with Multiple Deliveries, (EITF 00-21).  EITF 00-21 provides guidance on determining whether a revenue arrangement contains multiple deliverable items and, if so, requires revenue to be allocated among the different items based on fair value.  EITF 00-21 also requires that revenue on any item in a revenue arrangement with multiple deliverables that are not delivered completely must be deferred until delivery of the item is completed.  EITF 00-21 is effective for revenue arrangements entered into beginning after July 1, 2003.  We do not believe that the adoption of EITF 00-21 will have a significant impact on our consolidated financial statements.

          In January, 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN 46).  FIN 46 provides guidance for identifying a controlling interest in a Variable Interest Entity (VIE) established by means other than voting interests.  FIN 46 also requires consolidation of a VIE by an enterprise that holds such controlling interest.  The effective date for FIN 46 will be July 1, 2003.  We do not believe we have any interests qualifying as VIEs as of March 31, 2003 and we do not anticipate that the provisions of FIN 46 will have an impact on our consolidated financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Our exposure to market risk relates to changes in interest rates for borrowings under our revolving credit agreement. As a result of the initial public offering that was completed July 3, 2002, all of the borrowings under our revolving credit facility were repaid.  We have no outstanding borrowings under our new credit agreement.  We have invested a significant portion of our cash and cash equivalents in short-term, investment grade, interest-bearing securities or guaranteed obligations of the United States and its agencies.  A hypothetical 10% change in interest rates on these securities would not have, and during the preceding fiscal year would not have had, a significant impact on future earnings or the fair market value of the securities.

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ITEM 4.  CONTROLS AND PROCEDURES

          We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.  Within the 90–day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures.  Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.

          Subsequent to the date of evaluation, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls. 

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 or results of operations.  See Note I. Contingencies for further discussion of pending litigation.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS 

          On June 27, 2002, our registration statement (No. 333-87590) relating to our initial public offering was declared effective by the Securities and Exchange Commission and the Company, Mr. Rajesh K. Soin and the underwriters signed an underwriting agreement pursuant to which the Company and Mr. Soin agreed to sell shares covered by the registration statement to the underwriters at $15.81 per share.  The Company agreed to sell 2,500,000 of these shares and Mr. Soin agreed to sell 2,500,000 of these shares.  The Company did not receive any of the proceeds from the sale of the shares by Mr. Soin.  The managing underwriters for the offering were Legg Mason Wood Walker, Incorporated, Raymond James & Associates, Inc., Jefferies/Quarterdeck, LLC and Jefferies & Company, Inc. and BB&T Capital Markets, a Division of Scott & Stringfellow, Inc.  The underwriters offered these shares to the public at $17.00 per share.  The initial public offering was consummated on July 3, 2002.

          All of the registered shares were sold in the public offering.  The aggregate price of the 2,500,000 shares registered on behalf of each of Mr. Soin and the Company was $42.5 million and the aggregate offering price of the 2,500,000 shares sold to date by each of Mr. Soin and the Company was $42.5 million.  The Company’s share of the total underwriting discount was approximately $3.0 million and the Company incurred approximately $1.4 million of other expenses (including filing, legal, and accounting fees), none of which was paid to the Company’s directors or officers or their affiliates or to persons owning 10% or more of any class of the Company’s common stock.  The Company’s net proceeds from the offering of the 2,500,000 shares were approximately $38.1 million. 

          The underwriters also had an option to purchase an additional 375,000 shares of common stock from the Company and an additional 375,000 shares from Mr. Soin to cover over-allotments.  This option was exercised in full by the underwriters on July 1, 2002 and all of these shares were sold by the underwriters for $17.00 per share.  The aggregate price of the 375,000 shares registered on behalf of each of Mr. Soin and the Company was $6.4 million and the aggregate offering price of the 375,000 shares sold to date by each of Mr. Soin and the Company was $6.4 million.  The Company’s share of the total underwriting discount was approximately $0.5 million and the Company incurred approximately $0.2

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million of other expenses (including filing, legal, and accounting fees), none of which was paid to the Company’s directors or officers or their affiliates or to persons owning 10% or more of any class of our common stock.  The Company’s net proceeds from the sale of the 375,000 shares were approximately $5.7 million. 

          In our registration statement relating to the initial public offering, we indicated that we intended to use our net proceeds from the offering to repay principal and accrued interest outstanding under our credit facility and possibly for acquisitions of complementary businesses, working capital and general corporate purposes.  Approximately $21.0 million of our net proceeds from this offering were used to repay the principal and accrued interest outstanding under our credit facility.  On October 18, 2002, we used approximately $7.3 million of our proceeds to acquire 100% of the outstanding common stock of AMCOMP Corporation. In April, 2003, we made an additional earn-out payment of $1.1 million under the earn-out agreement to AMCOMP’s previous shareholders.  Since our initial public offering, we have used more than $14.4 million of our cash and cash equivalents balance for working capital purposes, and have substantially replenished our cash and cash equivalents balance with cash generated from operations. We had a cash and cash equivalents balance of approximately $19.9 million at March 31, 2003.

          During the three months ended March 31, 2003, our Chief Executive Officer purchased the following shares of our common stock on the dates indicated for $4.19 per share upon his exercise of stock options granted prior to our initial public offering pursuant to Rule 701 under the Securities Act of 1933:  10,000 shares on January 3, 2003; 10,000 shares on February 3, 2003; 50,000 shares on March 7, 2003 and 10,000 shares on March 25, 2003, all for an aggregate consideration of $335,200.  

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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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.

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CERTIFICATIONS

I, Michael W. Solley, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MTC Technologies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

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CERTIFICATIONS

I, David S. Gutridge, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MTC Technologies, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 9, 2003

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EXHIBIT INDEX

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