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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

For the Quarterly Period Ended March 31, 2005

OR

For the transition period from             to            .

Commission file number 000-49890

MTC TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

(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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x     No  ¨

The number of shares of Common Stock, $0.001 par value, of the registrant outstanding as of April 29, 2005 was 15,746,752.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

Index

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Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(dollar amounts in thousands, except per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Item 1. Financial Statements

Condensed Consolidated Statements of Income (Unaudited)

(dollar amounts in thousands, except per share amounts)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Item 1. Financial Statements

Condensed Consolidated Statements of Cash Flows (Unaudited)

(dollar amounts in thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

A. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Interim financial information—The consolidated financial statements as of March 31, 2005 and 2004 and for the three-month periods ended March 31, 2005 and 2004 are unaudited and have been prepared on the same basis as our audited consolidated financial statements. MTC Technologies, Inc. (MTC or the Company) has continued to follow the accounting principles set forth in the consolidated financial statements included in its 2004 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 March 31, 2005 and 2004 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 areas, which are offered separately or in combination across our customer base. These services are Systems Engineering and Technical Services, Information Technology, Intelligence and Program Management. Although we offer the services referred to above, revenue is internally reviewed by our management primarily on a contract basis making it impracticable to determine revenue by services offered. In addition, there were no sales to foreign customers.

Stock Based Compensation— As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, we account for stock-based awards using the intrinsic value method prescribed in Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Compensation expense for stock options granted to employees under the 2002 Equity and Performance Incentive Plan is recognized based on the difference, if any, between the quoted market price of our stock and the exercise price of the option at the date of grant. There was no compensation expense recognized for the three month periods ended March 31, 2004 and 2005.

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

Earnings per Common Share—Basic earnings per common share were computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during each period. Shares issued during the period and shares reacquired, if any, during the period are weighted for the portion of the period during which they were outstanding. The weighted average shares for the three months ended March 31, 2005 and 2004 are as follows:

Recent Accounting Pronouncements—On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)), which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25.  SFAS No. 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the dates of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments will no longer be an alternative. SFAS No. 123(R) is effective for all 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 No. 123(R) to our consolidated results of operations.

Reclassifications—Certain reclassifications have been made to all prior periods presented to conform to the current period presentation.

B. STOCKHOLDERS’ EQUITY

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

We have used the net proceeds from the offering (together with cash on hand and additional borrowings) for working capital and general corporate purposes, including to finance the purchase of all or a portion of the 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.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

C. ACQUISITIONS

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. OnBoard’s shareholder may also receive additional cash payments through 2007 if certain operating goals are achieved. It is anticipated that we will realize certain income tax benefits in future periods as a result of the OnBoard shareholder agreeing to a Section 338(h)(10) election under the Internal Revenue Code of 1986.

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

The above purchase price allocation is preliminary and is dependent on the completion of the review of the closing balance sheet and tangible net worth calculation as outlined in the related stock purchase agreement.

The value of the customer contract intangible asset was based on an independent appraisal. The customer contract intangible asset is being amortized over four years, which is the estimated remaining life of the contracts including renewals. Goodwill recognized under the agreement is deductible for income tax purposes.

Manufacturing Technology, Inc.

In February 2005, we purchased all of the outstanding capital stock of Manufacturing Technology, Inc. (MTI). MTI’s customer base consists primarily of the U.S. Air Force, the U.S. Navy, and large prime contractors for the Department of Defense, and MTI supports sensitive government programs and specializes in total product life cycle support for electronic and other systems used in military and commercial applications. The initial purchase price was $70.0 million paid in cash at closing, of which approximately $2.0 million was from available cash on hand and approximately $68.0 million of which was borrowed under our revolving credit facility. Additionally, 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 shareholders agreeing to a Section 338(h)(10) election under the Internal Revenue Code of 1986.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

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

The above purchase price allocation is preliminary and is dependent on the completion of the review of the closing balance sheet and tangible net worth calculation as outlined in the related stock purchase agreement.

The value of the customer contract intangible asset was based on an independent appraisal. The customer contract intangible asset is being amortized over 10.5 years, which is the estimated remaining life of the contacts including renewals. Goodwill recognized under the agreement is deductible for income tax purposes.

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

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

We jointly own certain aircraft with Soin Aviation, LLC. 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 the aircraft jointly 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, 2005 and December 31, 2004, the amounts payable to related parties were $44,000 and $101,000, respectively.

E. INVENTORY

Inventories are valued at the lower of cost or market using the first-in, first-out method. The components of inventories as of March 31, 2005 and December 31, 2004, are as follows (in thousands):

F. GOODWILL AND INTANGIBLE ASSETS

On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which eliminated the amortization of goodwill and other intangibles with indefinite useful lives. In the fourth quarter of 2004, we performed an impairment test of goodwill 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.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

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

The capitalized software costs of $2.4 million represent certain computer software costs capitalized by MTI in accordance with Statement of Financial Accounting Standards 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.

Estimated annual intangible amortization expense for the remainder of 2005 and the next five years (in thousands):

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

The changes in the carrying amount of goodwill for the quarter ended March 31, 2005 are as follows (in thousands):

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

G. LONG-TERM DEBT

The borrowing availability at March 31, 2005 under our revolving credit facility was $85.0 million. In April 2005, we replaced this credit facility with a new credit facility. See Note H “Subsequent Event.” As of March 31, 2004, we had no debt outstanding under the credit facility.

Borrowings under our revolving credit facility were secured by a general lien on our consolidated assets. In addition, we were subject to certain restrictions, and we were required to meet certain financial covenants. These covenants required that we, among other things, maintain certain financial ratios and minimum net worth levels. These covenants also restricted our activities regarding the incurrence of additional indebtedness in excess of $60.0 million other than the debt incurred under the revolving credit facility. As of March 31, 2005, we were in compliance with these covenants.

H. SUBSEQUENT EVENT

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 $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).

Borrowings under the 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.

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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 its subsidiaries (MTC or the Company) for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 and the financial condition of MTC at March 31, 2005 compared to December 31, 2004. 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 and technical services, information technology, intelligence services and program management services focusing primarily on U.S federal government agencies, primarily the Department of Defense and various intelligence agencies. Our services encompass the full system life cycle from requirements definition, design, development and integration, to upgrade, sustainment and support for mission critical information and weapons systems. For the three months ended March 31, 2005 and 2004, approximately 96% and 95%, 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. However, in recent years a significant amount of our revenue has been earned under two contracts, the Aeronautical Systems Center Blanket Purchase Agreement, or ASC/BPA, and the Flexible Acquisition and Sustainment Tool, or FAST, contract. Revenue under the ASC/BPA was approximately 7% and 10% of our total revenue for the three months ended March 31, 2005 and 2004, respectively. The largest task order under the ASC/BPA amounted to approximately 1% of total revenue for the three months ended March 31, 2005. The ASC/BPA, which was originally awarded as a small business set- aside contract, expires on September 30, 2005 and the replacement contract will also be a small business set-aside contract for which we will not qualify to bid as a prime contractor. While we believe we have a viable strategy to retain the bulk of our work and profitability on the replacement contract by becoming a subcontractor for a number of small businesses bidding on the re-compete, our ability to retain work under the replacement contract is uncertain. It is possible that some of our current work under the ASC/BPA could be converted to General Service Administration (GSA) schedules or other contract vehicles.

In July 2001, we were one of six awardees of the FAST contract with a ceiling of $7.4 billion and with a period of performance, including option years, that extends to 2008. Revenue under the FAST contract was approximately 23% and 30% of total revenue for the three months ended March 31, 2005 and 2004, respectively. The first quarter 2005 FAST revenue was comprised of 52 separate task orders, the largest of which amounted to approximately 6% of total revenue. 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 4.0% of revenue for the three months ended March 31, 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 and a half year remaining life as the U.S. Air Force maintains and modernizes aircraft and defense systems. As of March 31, 2005, we have been awarded over 79 individual task orders under the FAST contract with a remaining potential award value of approximately $895 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

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many of the task orders we may be awarded under the FAST contract will be for program management services, which historically have been less profitable than our other activities. In addition, the FAST contract involves a significantly greater use of subcontractors than we have used historically. Margins on subcontractor-based revenue are typically lower than the margins on our direct work. Since the FAST contract is expected to continue to be a significant part of our business for the next several years, it is possible that our operating income, as a percentage of total revenue, could diminish, while growing in absolute dollars.

Our federal government contracts are subject to government audits of our direct and indirect costs. The incurred cost audits have been completed through December 31, 2002 and the rates have been agreed to. We do not anticipate any material adjustment to our financial statements in subsequent periods for audits not yet completed.

For the three months ended March 31, 2005 and 2004, approximately 81% and 80%, respectively, of our revenue came from work provided to our customers as a prime contractor and the balance came from work provided as a subcontractor. Approximately 74% and 70% of our revenue for the three months ended March 31, 2005 and 2004, respectively, consisted of the work of our employees, and the balance was provided by the work of subcontractors. Our work as a prime contractor on the FAST contract has resulted, and is expected to continue to result, in a significant use of subcontractors. The increased used of subcontractors on the FAST contract has been partially offset by the business model of our recent acquisitions, which typically have not used subcontractors to a great extent.

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.

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The following table provides information about the revenue and 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 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, 2005 was approximately $290 million as compared to approximately $185 million at March 31, 2004. We have increased our funded backlog by approximately $66 million from March 31, 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. The approximate $39 million balance of the increase resulted from funding increases in the ASC/BPA, FAST, 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 March 31, 2005 was approximately 97% 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 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 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

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proportionate amount of the fee earned, which may be fixed or performance-based. We consider fixed fees under cost-plus contracts to be earned in proportion to the allowable costs incurred in performance of the contract, which generally corresponds to the timing of contractual billings. We record provisions for estimated losses on uncompleted contracts in the period in which we identify those losses. We consider performance-based fees, including award fees, under any contract type to be earned only when we can demonstrate satisfaction of a specific performance goal or we receive contractual notification from a customer that the fee has been earned. In all cases, we recognize revenue only when pervasive evidence of an arrangement exists (including when waiting for formal funding authorization under federal government contracts), services have been rendered, the contract price is fixed or determinable, and collection is reasonably assured.

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

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

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

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.

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

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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.

RESULTS OF OPERATIONS

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

THREE MONTHS ENDED MARCH 31, 2005

COMPARED TO THREE MONTHS ENDED MARCH 31, 2004

Revenue. Revenue for the three months ended March 31, 2005 increased 42.5%, or $25.4 million, to $85.3 million as compared to $59.9 million for the same period in 2004. Organic growth of approximately 18.0% accounted for $10.5 million of the $25.4 million increase in revenue, and the remaining $14.9 million of revenue growth, or 25.0%, came from acquisitions. Our organic growth of $10.5 million was the result of an increase in work on new or increased contracts and task orders, which consisted primarily of growth in Logistics Joint Administrative and Management Support Services, Program Manager Soldier Systems, Technical Acquisition Support Services, Defense Information Systems Network and Tank-Automotive and Armaments Command Omnibus II task orders.

Gross profit. Gross profit for the three months ended March 31, 2005 increased 47.5%, or $4.4 million, to $13.8 million as compared to $9.3 million for the same period in 2004. This increase primarily relates to increased revenue. Gross profit as a percentage of revenue for the three months ended March 31, 2005 increased to 16.1% as compared to 15.6% for the corresponding period in 2004. This increase in gross margin percentage was primarily attributable to the accretive nature of the acquisitions made in the first quarter of 2005 and, to a lesser degree, on contract mix.

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2005 increased 37.0%, or $1.0 million, to $3.7 million as compared to $2.7 million for the same period in 2004. This increase was primarily the result of increased salary and benefit expenses resulting from the addition of personnel to support our growth.

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Intangible asset amortization. Intangible asset amortization for the three months ended March 31, 2005 increased $0.7 million to $1.1 million as compared to $0.4 million for the same period in 2004. This increase was the result of the amortization of the intangible assets that were acquired in connection with the acquisitions made in the third quarter of 2004 and the first quarter of 2005.

Operating income. Operating income for the three months ended March 31, 2005 increased 44.1%, or $2.8 million, to $9.0 million as compared to $6.2 million for the quarter ended March 31, 2004. This increase in operating income was primarily 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 increased from 10.4% of revenue for the three months ended March 31, 2004 to 10.5% for the three months ended March 31, 2005.

Net interest (expense) income. Net interest expense was approximately $0.4 million for the three months ended March 31, 2005 compared to interest income of approximately $0.1 million for the same period in 2004. This increase in expense related to the $63.3 million in net borrowings under our credit facility in the first quarter of 2005 to fund our acquisitions.

Income tax expense. Income tax expense for the three months ended March 31, 2005 increased 36.3%, or approximately $0.9 million, to $3.4 million as compared to $2.5 million for the same period in 2004. Our effective income tax rate for each of the quarters ended March 31, 2005 and 2004 was 39.6%.

Net income. Net income for the three months ended March 31, 2005 increased 36.1%, or approximately $1.4 million, to $5.2 million as compared to $3.8 million for the three months ended March 31, 2004. This increase in net income was primarily the result of increased operating income that was partially offset by the increased 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. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity, as well as in the number of contracts or task orders commenced or completed during any quarter, may cause significant variations in operating results from quarter to quarter.

The federal government’s fiscal year ends September 30. If a federal budget for the next fiscal year has not been approved by that date in each year, our customers may have to suspend engagements that we are working on until a budget has been approved. Any suspensions may cause us to realize lower revenue in the fourth quarter of the year, and possibly ensuing quarters of the following year. On October 28, 2004, President Bush signed the National Defense Authorization Act for Fiscal Year 2005. In addition, a change in Presidential administrations, Congressional majorities or in other senior federal government officials may negatively affect the rate at which the federal government purchases technology and engineering services. The federal government’s fiscal year end can also trigger increased purchase requests from customers for equipment and materials. Any increased purchase requests we receive as a result of the federal government’s fiscal year end would serve to increase our fourth quarter revenues, but will generally decrease profit margins for that quarter, as these activities typically are not as profitable as our normal service offerings. Further, some of our subcontractors have calendar year ends and sometimes submit large billings at the end of the calendar year that can cause a spike in our revenue and expenses

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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 available credit facility have provided us adequate liquidity and working capital to fund our operational needs and support our acquisition activities.

Our working capital was approximately $44.8 million at March 31, 2005 and approximately $71.0 million at December 31, 2004. Our working capital decreased $26.1 million in the first three months of 2005 primarily for the following reasons:

Our operating activities provided cash of approximately $10.9 million for the three months ended March 31, 2005. The cash provided from operations primarily represented net income adjusted for depreciation and amortization and the decrease in accounts receivable, net of acquisitions. For the three months ended March 31, 2004, our net operating cash usage of approximately $0.8 million primarily represented net income adjusted for depreciation and amortization, combined with $6.2 million increase in accounts receivable and cost and estimated earnings in excess of amounts billed, that was partially offset by a $1.9 million decrease in work-in-process inventory.

Our investing activities used cash of approximately $105.4 million for the three months ended March 31, 2005 as a result of approximately $104.9 million of payments made in connection with acquisitions and $0.5 million of capital expenditures. Cash used by investing activities for the three months ended March 31, 2004 consisted of $1.0 million of payments made in connection with acquisitions and $0.2 million of capital expenditures. We currently anticipate that capital expenditures for 2005 will range between $6.0 and $7.0 million for additional facilities, software tools and computer equipment to support our growth.

Our financing activities provided net cash of approximately $63.5 million for the three months ended March 31, 2005 which consisted of net proceeds of $63.3 million in net borrowings under our credit facility and of $0.2 million from common stock issuances related to the exercise of stock options. This compares to cash provided from financing activities of $59.3 million for the three months ended March 31, 2004 from the public offering of 2,250,000 share of common stock that was completed in February 2004.

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The borrowing availability at March 31, 2005 under our revolving credit facility was $85.0 million. As of March 31, 2005, we had $63.3 million outstanding under our revolving credit facility. We had no debt outstanding under the credit facility as of March 31, 2004. The interest rate we paid on borrowings under the credit facility ranged from prime rate less 25 basis points to prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) rate plus 150 to 225 basis points, depending on the ratio of our funded debt to earnings before interest, taxes, depreciation, and amortization (EBITDA).

Borrowings under our revolving credit facility were secured by a general lien on our consolidated assets. We were also subject to certain restrictions, and were required to meet certain financial covenants. These covenants required that we, among other things, maintain certain financial ratios and minimum net worth levels. These covenants also restricted our activities regarding the incurrence of additional indebtedness in excess of $60.0 million other than the debt incurred under the revolving credit facility. As of March 31, 2005, we were in compliance with these covenants.

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 replaced our then-effective Credit Agreement, dated as of January 31, 2003, as amended as of December 31, 2003, July 12, 2004 and December 28, 2004 (the “Prior Credit Agreement”), with National City Bank, KeyBank National Association, Fifth Third Bank, and Branch Banking and Trust Company, which was repaid and terminated as of April 21, 2005. Borrowings outstanding under the Prior Credit Agreement, which totaled $67.4 million as of April 21, 2005, were refinanced with borrowings under the Credit Agreement.

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 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 EBITDA.

Borrowings under our Credit Agreement are secured by a general lien on our consolidated assets. We are also subject to certain restrictions, and are required to meet certain financial covenants. These covenants require that we, among other things, maintain certain financial ratios and minimum net worth levels.

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

Management believes that the cash generated by operations and amounts available under our new credit facility will be sufficient to fund our working capital requirements, debt service obligations, purchase price commitments for completed acquisitions and capital expenditures, for the next twelve months and through March 2010, when our new credit facility 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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk related to changes in interest rates for borrowings under our revolving credit facility. As of December 31, 2004, we did not have any outstanding borrowings under our then-effective credit facility. Primarily in connection with our acquisition of MTI, during February 2005, we borrowed funds under our then-effective credit facility and had $63.3 million outstanding as of March 31, 2005. As discussed above under “Management’s Discussion and Analysis Regarding Financial Condition and Results of Operations—Liquidity and Capital Resources”, we entered into a new credit facility on April 21, 2005 and had $67.4 million outstanding as of that date.

We did not have any outstanding borrowings under our then-effective revolving credit facility in 2004. A hypothetical 10% increase in interest rates during the first quarter of 2005 would have resulted in an increase in interest expense of approximately $48,000 for the three months ended March 31, 2005.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) evaluated, together with other members of senior management, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of March 31, 2005. Based on this review, our CEO and CFO have concluded that, as of March 31, 2005, 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’s rules and forms, provided, that the evaluation of our disclosure controls and procedures did not include an evaluation of the effectiveness of the internal control over financial reporting for OnBoard and MTI, as described further below.

Other than changes resulting from our acquisition of OnBoard and MTI, there were no changes in our internal control over financial reporting during the quarter ended March 31, 2005 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 $5.2 million and $19.4 million, respectively, of our consolidated assets as of March 31, 2005, and excluding intercompany revenues, OnBoard and MTI accounted for $0.4 million and $5.4 million, respectively, of our consolidated revenues for the three months ended March 31, 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 made an 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 or results of operations.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In February 2005, we issued 79,880 shares of our common stock, with a value of approximately $2.5 million, to the former shareholders of International Consultants, Inc. as the result of the achievement of certain performance goals under the 2004 earn-out and contingency provisions contained in the stock purchase agreement. Shares of our capital stock issued in connection with the earn-out and contingency provisions were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) thereof.

ITEM 6. EXHIBITS

(a)

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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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EXHIBIT INDEX

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