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

FORM 10-Q

(Mark One)

             For the Quarterly Period Ended September 30, 2002

OR

            For the transition period from to.

Commission file number 000-49890

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                                 No     x    

The number of shares of Common Stock, $0.001 par value, of the registrant
outstanding as of November 8, 2002 was 12,866,074.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

See accompanying Notes to Condensed Consolidated Financial Statements.

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See accompanying Notes to Condensed Consolidated Financial Statements.

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See accompanying Notes to Condensed Consolidated Financial Statements.

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See accompanying Notes to Condensed Consolidated Financial Statements.

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MTC TECHNOLOGIES, INC. AND SUBSIDIARIES

A. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Interim financial information —The consolidated financial statements as of September 30, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 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 (except for our initial public offering of common stock and related transactions), necessary to present fairly the periods indicated. Results of operations for the interim periods ended September 30, 2002 and 2001 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. In June, 2002, we recognized a deferred income tax benefit of $2,644 on our income statement and a current deferred income tax asset of $610, included in prepaid expenses and other current assets on our balance sheet, and a non-current deferred income tax asset of $2,034, included in other assets on our balance sheet, primarily for timing differences between book and tax reporting associated with accrued compensation items. During the third quarter of 2002, we began recording a provision for federal and state income taxes.

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.

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

Reclassifications—Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to the 2002 presentation.

B. STOCKHOLDERS’ EQUITY

At December 31, 2001, Mr. Rajesh K. Soin, our sole stockholder prior to the initial public offering, agreed to contribute $2,000 to our wholly-owned subsidiary, Modern Technologies Corp. We recorded the amount due from stockholder as a reduction in stockholders’ equity with a corresponding increase to additional paid-in capital. Mr. Soin contributed the $2,000 during the first quarter of 2002. Upon payment we reduced the amount due from stockholder.

In April, 2002, MTC Technologies, Inc. (MTCT or the Company) was incorporated in Delaware. On May 3, 2002, Mr. Soin contributed all of the issued and outstanding shares of Modern Technologies Corp. (MTC) to the Company in exchange for 9,887,482 shares (post stock split as discussed below) of MTC Technologies, Inc. resulting in Mr. Soin owning all of the shares of MTC Technologies, Inc. and Modern Technologies Corp. becoming a wholly owned subsidiary of MTC Technologies, Inc. All shares, per share data and other equity amounts in the accompanying financial statements have been adjusted to give retroactive effect to the transaction.

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In May, 2002, the Directors approved the 2002 Equity and Performance Incentive Plan. As of September 30, 2002, 74,720 options were awarded under this plan.

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

On July 3, 2002 we successfully completed our initial public offering of common stock and received net proceeds of approximately $43,835 from the offering, after deducting our portion of estimated expenses and the underwriting discount. The proceeds were used to pay off approximately $21,000 of our debt, with the balance invested in short-term investment grade, interest-bearing securities and guaranteed obligations of the United States and its agencies. On October 18, 2002, we used $7,200 of these proceeds to acquire 100% of the outstanding common stock of AMCOMP Corporation. We plan to use the remaining proceeds for working capital and general corporate purposes, possibly including the acquisitions of additional complementary businesses.

C. LONG-TERM DEBT

Our borrowing limit at September 30, 2002, under our revolving credit agreement, was $15,000, subject to borrowing base requirements and customary loan covenants. The interest rate applicable to the revolving line of credit is dependant on our funded debt to EBITDA ratio. If we were to currently borrow against the revolving line of credit, we would pay our choice of either 0.25% less than the prime rate or 1.75% above the LIBOR rate. On July 3, 2002 we paid all debt outstanding under the term loan and the revolving credit facility with the proceeds from our initial public offering. In the event that we utilize our revolving credit facility, we would be subject to certain restrictions and would be required to meet certain financial covenants. The restrictions include, among other things, limitations on our ability to pay dividends if we are, or after payment of the proposed dividends would be, in default under the credit facility.

D. BUSINESS SEGMENT

We have no sales to foreign customers and 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, Information Technology,

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Intelligence Operations and Program Management. Although we offer the services referred to above, we review revenue internally primarily on a contract basis. Therefore, it would be impracticable to determine revenue by services offered.

E. RELATED PARTY TRANSACTIONS

We subcontract to, purchase services from, and rent a portion of our facilities from various entities that are controlled by Mr. Soin, our majority stockholder and Chairman of the Board of Directors. The following is a summary of transactions with related parties:

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 second quarter of 2002, we purchased, at fair value of approximately $405, a 90% ownership interest in an airplane owned by Soin Aviation. 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

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substantially similar terms to those that might be negotiated by independent parties on an arm’s-length basis.

At September 30, 2002 and December 31, 2001, amounts due from related parties were $273 and $600, respectively.

F. STOCK COMPENSATION

In March, 2002, the sole stockholder 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 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. In June, 2002, 80,667 of these options were exercised.

G. 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 that they were outstanding. Diluted earnings (loss) per share and basic earnings (loss) per share for the three and nine months ended September 30, 2001 were equal because there were no common stock equivalents outstanding during any of those periods. The weighted average shares for the three and nine months ended September 30, 2002 are as follows:

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H. ACCOUNTING CHANGES

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwill’s impairment and that intangible assets other than goodwill be amortized over their useful lives. This statement requires that goodwill be tested for impairment initially as of January 1, 2002, and thereafter at least annually. We adopted SFAS No. 142 on January 1, 2002. We have performed the first step of the goodwill impairment test and have concluded that goodwill is not impaired. The table below shows the effect on net income had SFAS No. 142 been adopted in prior periods:

I. RECENT ACCOUNTING PRONOUNCEMENTS

In June, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is required to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We do not anticipate any near term impact on the financial statements as a result of adopting this statement.

In April, 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued (SFAS No. 145). SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from the Extinguishment of Debt-an amendment of APB Opinion No. 30, which required all gains or losses from extinguishment of debt, if material, to be classified as an extraordinary item, net of related income tax effect. As a result, the criteria set forth by APB Opinion No. 30 will now be used to classify those gains or losses. SFAS No. 64 amended SFAS No. 4, and is no longer necessary because SFAS No. 4 was rescinded. SFAS No. 44 was issued to establish accounting requirements for the effect of transition to the provisions of the Motor Carrier Act of 1980, which is no longer necessary. SFAS No. 145 also amends SFAS No. 13, Accounting for Leases, (SFAS No. 13) to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 becomes effective for fiscal years beginning after May 15, 2002, with early application encouraged, with the exception of the provisions of this Statement relating to

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the amendment of SFAS No. 13, which are effective for transactions occurring after May 15, 2002. We do not believe the adoption of SFAS No. 145 will have a material impact on the financial statements.

J. SUBSEQUENT EVENTS

On October 17, 2002, MTC Technologies, Inc. announced that it and its wholly-owned subsidiary, Modern Technologies Corp. (MTC), signed a stock purchase agreement to acquire AMCOMP Corporation (AMCOMP) from AMCOMP ’s current 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. The acquisition was completed on October 18, 2002.

MTC used $7,200 of the proceeds from the recent initial public offering of MTCT to purchase 100 percent of the stock of AMCOMP. Through 2004, MTC may be required to make additional annual payments to the AMCOMP’s shareholder’s as part of an earn-out provision of the stock purchase agreement. Under the earn-out agreement, MTC could be required to pay up to an additional $3,300 in additional purchase price should cumulative earnings meet certain goals over the period October 11, 2002 through December 31, 2004.

The acquisition is consistent with MTCT ’s growth strategies to acquire complementary businesses to reach new customers and technologies. This acquisition will enable MTC to expand efforts in United States Air Force Space Systems activities, and provides MTC access to new markets including Global Positioning Systems test, integration, and engineering as well as adding the Space and Missile Command as a new customer. AMCOMP has key operating locations in Los Angeles, CA, Alamogordo, NM and Colorado Springs, CO.

On November 1, 2002, our Chief Executive Officer, Michael W. Solley, signed a Prearranged Trading Plan for Stock to Be Acquired Upon Exercise of Non-Qualified Stock Options. Under this plan, beginning January 2003, for a period of twelve months, Mr. Solley will exercise 10,000 options per month and sell all of the stock acquired upon exercise, assuming the stock price exceeds a prearranged minimum stock price.

K. 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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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 and nine months ended September 30, 2002 compared to the three and nine months ended September 30, 2001 and the financial condition of MTCT for September 30, 2002 compared to December 31, 2001. 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 quarters and nine months ended September 30, 2002 and September 30, 2001, over 85% 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 22% of our revenue for the three and nine months ended September 30, 2002 was under one contract vehicle, the Aeronautical Systems Center Blanket Purchase Agreement, or ASC/BPA, which expires in August, 2005, some of that work was previously performed on GSA schedules and could possibly, if necessary, be converted to GSA vehicles or other contracts. Revenue under the ASC/BPA for the three and nine months ended September 30, 2001 was approximately 21% and 23%, respectively of total revenue. Additionally, revenue under the Flexible Acquisition and Sustainment Tool (FAST) contract for the three and nine months ended September 30, 2002 was approximately 21% and 11%, respectively, of total revenue. We did not record any revenue from the FAST contract in 2001, although we previously 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 5% and 7% of revenue for the three and nine months ended September 30, 2002, respectively, or for more than 7% for the three and nine months ended September 30, 2001.

In July, 2001, we were one of six awardees of the FAST contract with a ceiling of $7.4 billion. Under the FAST contract, we expect to have the opportunity to compete for several hundred million dollars in task orders each year over the next six years as the Air Force maintains and modernizes aircraft and defense systems. As of November 8, 2002, we had been awarded 31 task orders with an expected award value of approximately $550 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. We are currently supporting the FAST contract by a combination of personnel hired to work on this contract and by having personnel engaged in supporting other tasks spend part of their time in supporting the FAST contract. As the contract matures, we expect to support it primarily with personnel hired specifically for this contract. In the event that the FAST contract or other similar contracts become a significant part of our business, our operating margins as a percentage of total revenue could be diminished due to the anticipated dramatic increase in the need to use subcontractors to perform a significant portion of the awards under these types of contracts.

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Our federal government contracts are subject to government audits of our direct and indirect costs. The majority of these incurred cost audits have been completed through December 31, 1999. We do not anticipate any material adjustment to our financial statements in subsequent periods for audits not yet completed.

For the nine months ended September 30, 2002 and 2001, approximately 74% and 68%, 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. Our services consist primarily of the work of our employees and, to a lesser extent, 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.

Included in general and administrative expenses for the three and nine months ended September 30, 2001 and the nine months ended September 30, 2002, were related party management fees. Subsequent to March 31, 2002, these fees are no longer being incurred. The management fees were paid to a wholly owned affiliate of our majority stockholder. The nature of services received from the affiliate included our sole stockholder’s (at that time) services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition candidates and legal services. Although the management fees have been eliminated subsequent to March 31, 2002, a portion of these costs have been replaced on a recurring basis and, by virtue of being a public company, we have incurred and will continue to incur certain general and administrative costs not incurred prior to March 31, 2002, including:

In addition to the expenses set forth above, there will be other expenses associated with being a public company, the amount of which cannot be estimated at this time.

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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 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 September 30, 2002 was approximately $131 million as compared to approximately $43 million at December 31, 2001. We have increased our funded backlog by approximately $88 million from December 31, 2001, primarily due to the funding increases in the ASC/BPA and FAST contracts. Although we currently have a higher percentage of funded backlog, we believe that the funded backlog as a percentage of twelve-month trailing revenue is more typically sustainable at a range of approximately 40% to 60% of twelve-month trailing revenue.

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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 collectibility 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 the circumstances become known.

Cost of revenue. Cost of revenue primarily consists of the direct 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 direct 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 nine months ended September 30, 2002, it also includes non-recurring, non-cash stock compensation expense, incurred in March, 2002.

Also included in general and administrative expenses for the three and nine months ended September 30, 2001 and for the nine months ended September 30, 2002 are related party general and administrative expenses. As discussed above, related party general and administrative expenses included management fees prior to March 31, 2002. The management fees were paid to a wholly owned affiliate of our majority stockholder. The nature of services received from the affiliate included our majority stockholder’s services as our Chief Executive Officer, assistance with negotiating financing arrangements, assistance with evaluating acquisition candidates and legal services. Subsequent to March 31, 2002, these fees are no longer being incurred. We continue to rent certain facilities from an entity related to our majority stockholder. Although the management fees have been eliminated, a portion of these costs have been replaced on a recurring basis and, by virtue of being a public company, we have incurred and will continue to incur certain general and administrative costs not previously incurred.

Net Interest Income (Expense). Net interest income (expense) is primarily related to interest expense accrued under any outstanding borrowings and interest income generated by our investments. We repaid

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all outstanding debt in July, 2002 with a portion of the proceeds from our initial public offering and invested the balance of the proceeds.

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.

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: