MTCT Mtc Technologies (MM)

GENERAL OVERVIEW

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

We provide modernization and sustainment; professional services; command, control, communications, computers, intelligence, surveillance and reconnaissance (C4ISR); and logistics solutions, focusing primarily on U.S. federal government agencies such as the Department of Defense, various intelligence agencies and other companies that serve these same markets. Our services encompass the full system life cycle from requirements definition, design, development and integration, to upgrade, sustainment and support for mission critical information and weapons systems. For the nine months ended September 30, 2007 and 2006, approximately 98% and 97%, respectively, of our revenue was derived ultimately from our customers in the Department of Defense and the intelligence community, including the U.S. Air Force, U.S. Army and joint military commands.

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In July 2001, we were one of six awardees of the Federal Acquisition and Sustainment Tool (FAST) contract with a ceiling of $7.4 billion and with a period of performance, including option years, that extends to 2008. Our revenue under the FAST contract was approximately 27% and 21% of total revenue for the three- and nine-month periods ended September 30, 2007, respectively, and 19% and 21% of total revenue for the three- and nine-month periods ended September 30, 2006, respectively. FAST revenue was comprised of approximately 59 separate task orders, the largest of which amounted to approximately 6% and 3% of total revenue, for the three- and nine-month periods ended September 30, 2007, respectively. In prior years, we performed some of the work we are now performing on the FAST contract on other contract vehicles. While the FAST contract represents a significant percentage of our total revenue, we believe that the broad array of engineering, technical and management services we provide to the federal government through various contract vehicles allows for diversified business growth. No other task order, including individual contracts under our General Services Administration (GSA) vehicles, accounted for more than 6% and 3%, respectively, of revenue for the three- and nine-month periods ended September 30, 2007.

Under the FAST contract, we have the potential to compete for millions of dollars in task orders over the FAST contract’s approximately one-year remaining life as the U.S. Air Force maintains and modernizes aircraft and defense systems. In addition, a few of our FAST task orders have a period of performance extending into 2011. As of September 30, 2007, we have been awarded multiple individual task orders under the FAST contract with a remaining potential award value of approximately $323 million if all options are exercised. Although we believe the FAST contract presents an opportunity for additional growth and expansion of our services, we expect that many of the task orders we may be awarded under the FAST contract will be for lead system integrator and program management services, which historically have been less profitable than our other activities because these activities typically involve a significantly greater use of subcontractors. Margins on subcontractor-based revenue are typically lower than the margins on our direct work. Since the FAST contract is expected to remain a significant part of our business, 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, 2005, and the rates have been agreed to. We do not anticipate any material adjustment to our consolidated financial statements in subsequent periods for audits not yet completed.

For the nine months ended September 30, 2007 and 2006, approximately 65% and 74%, 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 75% and 74% of our revenue for the nine months ended September 30, 2007 and 2006, respectively, consisted of the work of our employees, and the balance was provided by the work of subcontractors. Our work as a prime contractor on the FAST contract has resulted, and is expected to continue to result, in a significant use of subcontractors. The increased use of subcontractors on the FAST contract has been partially offset by the business model of our recent acquisitions, which typically have not used subcontractors to a great extent.

Our federal government contracts are subject to funding availability and current market conditions, such as the ongoing war on terror and other factors. These conditions are causing delays in the bidding/award process, are affecting funding availability and the availability of assets to be repaired or upgraded.

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

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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 revenue and percentage of revenue attributable to each of these types of contracts for the periods indicated:

Funded Backlog. We define funded backlog as the portion of total backlog (our estimate of the total potential value of all orders for services under existing signed contracts and task orders, assuming, where appropriate, the exercise of all options and add-ons relating to those contracts and task orders, subject to available ceiling remaining on those contracts and task orders) for which funding currently is appropriated and obligated to us under a contract or other authorization for payment signed by an authorized purchasing authority, less the amount of revenue we have previously recognized. Funded backlog excludes options and add-ons to existing contracts for which we have not yet received funding. Our funded backlog does not include the full potential value of our contracts because funds for a particular program or contract are regularly funded on a yearly or even shorter basis, even though the contract may call for performance over a number of years.

The primary source of our backlog is contracts to perform work for the federal government. Our estimated funded backlog at September 30, 2007 was approximately $312 million as compared to

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approximately $273 million at September 30, 2006. The approximate $39 million increase in funded backlog resulted primarily from the Santa Rosa underground cable installation contract and additional funding of the FAST contract.

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

Our work-in-process inventory relates to costs accumulated under fixed-price-type contracts accounted for under certain output measures, such as units delivered, of the percentage-of-completion method. Inventories are stated at the lower of cost or market, computed on an average cost basis.

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Goodwill and Intangible Assets. Goodwill represents the excess of cost over the fair value of net tangible and identifiable intangible assets of acquired companies. Purchase price allocated to intangible assets is amortized using the straight-line method over the estimated terms of the contracts, which range from three to eight years. We perform impairment reviews on an annual basis. We have elected to conduct our annual impairment reviews as of the fourth quarter of each year. We base our assessment of possible impairment on the discounted present value of the operating cash flows of our consolidated operating unit. We determined that no impairment charge was required in 2006.

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

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

FORWARD-LOOKING STATEMENTS

Portions of this Quarterly Report that are not statements of historical or current fact are forward-looking statements. The forward-looking statements in this Quarterly Report involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this document should be read as applying to all related forward-looking statements wherever they appear. Our actual results could differ materially from those anticipated in the forward-looking statements. Factors that could cause our actual results to differ materially from those anticipated include, but are not limited to, the following: strains on resources and decreases in operating margins; federal government audits and cost adjustments; differences between authorized amounts and amounts received by us under government contracts; government customers’ failure to exercise options under contracts; changes in federal government (or other applicable) procurement laws, regulations, policies and budgets; delays in the bidding/award process; our ability to attract and retain qualified personnel; our ability to retain contracts during re-bidding processes; pricing pressures; undertaking acquisitions, including the acquisition of AIC, that might increase our costs or liabilities or be disruptive; integration of acquisitions; and changes in general economic and business conditions.

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THREE MONTHS ENDED SEPTEMBER 30, 2007

COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2006

Revenue. Revenue for the three months ended September 30, 2007 increased 8.9%, or $9.4 million, as compared to the same period in 2006, due primarily to an increase of $11.5 million in revenue under our Flexible Acquisition and Sustainment Tool (FAST) contract, as well as the Santa Rosa underground cable installation program and PM Soldier Systems Project, which contributed additional revenue of $5.8 million and $2.9 million, respectively, in the quarter. These increases were partially offset by a net decrease in revenue from the former Aeronautical Systems Center Blanket Purchase Agreement (ASC/BPA) contract and a decrease of $10.0 million in revenue from our wholly-owned subsidiary Aerospace Integration Corporation (AIC).

Gross profit. Gross profit for the three months ended September 30, 2007 decreased 5.2%, or $0.9 million, as compared to the same period in 2006. This change primarily relates to increased cost of revenue. Gross profit as a percentage of revenue was 14.3% for the three months ended September 30, 2007, compared to 16.5% for the same period in 2006, primarily due to decreased margins caused by a higher volume of FAST subcontracting revenue, decreased gross margins realized by AIC and additional costs involved for the TIER II Unmanned Aircraft System flight testing. Partially offsetting these reductions in gross profit were savings resulting from the restructuring initiated in the second quarter of 2007.

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

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Operating income. Operating income for the three months ended September 30, 2007 decreased 18.1%, or $1.7 million, as compared to the three months ended September 30, 2006. This change in operating income primarily reflects the decreased gross profit combined with the increase in general and administrative expenses. Operating income as a percentage of revenue was 9.0% of revenue for the three months ended September 30, 2006 compared to 6.7% for the three months ended September 30, 2007, primarily for the reasons addressed above.

Other income . Other income for the three months ended September 30, 2007 increased by $0.6 million due primarily to the negotiated purchase price adjustment determination for a previously completed acquisition.

Income tax expense. Income tax expense for the three months ended September 30, 2007 decreased approximately 11.5%, or $0.4 million, as compared to the same period in 2006. Our effective income tax rates for the quarters ended September 30, 2007 and 2006 were 39.7% and 39.4%, respectively.

Net income. Net income for the three months ended September 30, 2007 decreased 12.6%, or approximately $0.6 million, as compared to the three months ended September 30, 2006. This change in net income was primarily the result of the lower operating income, partially offset by the increase in other income and the decreased income tax expense.

NINE MONTHS ENDED SEPTEMBER 30, 2007

COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2006

Revenue. Revenue for the nine months ended September 30, 2007 increased 5.5%, or $16.8 million, as compared to the same period in 2006. Revenue growth resulted primarily from revenue increases for the FAST, PEO Soldier Systems and the Santa Rosa underground cable installation contracts.

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

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

Restructuring charge. A plan to consolidate our organizational structure was initiated in June 2007. We recorded pre-tax restructuring expense totaling approximately $1.5 million in the second quarter of 2007 to cover costs associated with staff reductions.

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

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expenses, and a $1.5 million restructuring charge recorded in the second quarter of 2007. Operating income as a percentage of revenue was 9.3% of revenue for the nine months ended September 30, 2006 compared to 6.2% for the nine months ended September 30, 2007.

Net interest expense. The $0.6 million increase in net interest expense related to the increased borrowings made under our credit facility in 2006, which were used primarily to fund the acquisition of AIC made in the second quarter of 2006.

Other income . Other income for the nine months ended September 30, 2007 increased by $0.6 million due primarily to the negotiated purchase price adjustment determination for a previously completed acquisition.

Income tax expense. Income tax expense for the nine months ended September 30, 2007 decreased approximately 35.2%, or $3.4 million, as compared to the same period in 2006. Our effective income tax rates for the nine months ended September 30, 2007 and 2006 were 38.8% and 39.4%, respectively.

Net income. Net income for the nine months ended September 30, 2007 decreased 33.5%, or $5.0 million, as compared to the nine months ended September 30, 2006. This change in net income was primarily the result of the change in operating income and net interest expense, partially offset by the increased other income and decreased 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, general economic conditions and timing of government awards. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, successful contract performance and variation in the volume of activity, as well as in the number of contracts or task orders commenced or completed during any quarter, may cause significant variations in operating results from quarter-to-quarter.

The federal government’s fiscal year ends September 30. If a federal budget for the next fiscal year has not been approved by that date in each year, our customers may have to suspend engagements that we are working on until a budget has been approved. Any suspensions may cause us to realize lower revenue in the fourth quarter of the year and possibly ensuing quarters of the following year. In addition, a change in Presidential administration, in Congressional majority or in other senior federal government officials may negatively affect the rate at which the federal government purchases technology and engineering services. The federal government’s fiscal year end can also trigger increased purchase requests from customers for equipment and materials. Any increased purchase requests we receive as a result of the federal government’s fiscal year end would serve to increase our fourth quarter revenues, but will generally decrease profit margins for that quarter, as these activities typically are not as profitable as our normal service offerings. As a result of the above factors, period-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.

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LIQUIDITY AND CAPITAL RESOURCES

Historically, our positive cash flow from operations, proceeds from stock offerings, and borrowings under our credit facilities have provided us adequate liquidity and working capital to fund our operational needs and support our acquisition activities.

Our cash and cash equivalents balance was $0 and $3.3 million on September 30, 2007 and December 31, 2006, respectively. Our working capital was approximately $60.0 million at September 30, 2007 and approximately $52.9 million at December 31, 2006. Our working capital increased $7.1 million in the first nine months of 2007 primarily due to:

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

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

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

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

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$145.0 million in the form of an $85.0 million revolving loan and a $60.0 million term loan. The interest rates on borrowings under the term loan range from the prime rate to the prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) rate plus 125 to 225 basis points, and under the revolving loan are the prime rate, or the LIBOR rate plus 100 to 200 basis points, depending in most instances on the ratio of our consolidated funded debt to consolidated pro forma earnings before interest, taxes, depreciation, and amortization (EBITDA).

As of September 30, 2007, we had $74.5 million outstanding under the Credit Agreement, compared to $88.8 million outstanding as of December 31, 2006.

Borrowings under the 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. As of September 30, 2007, we were in compliance with these covenants.

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

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

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

The Reimbursement Agreement contains customary events of default, including failure to make required payments when due, failure to comply with certain covenants, breaches of certain

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

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

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

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