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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, 2004

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 October 29, 2004 was 15,606,852.

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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

(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

(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 September 30, 2004 and for the three and nine months ended September 30, 2004 and 2003 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 2003 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 September 30, 2004 and 2003 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. Therefore, it would be impracticable to determine revenue by services offered.

Stock Based Compensation—We apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for our stock option plans. Compensation expense for stock options to employees under the 2002 Equity and Performance Incentive Plan is recognized based on the difference, if any, between the fair value of our stock and the exercise price of the option at the date of grant. Had compensation costs been determined based on the fair value of the options on the grant dates consistent with the methodology prescribed by Statement of Financial Accounting Standard No. 123, Accounting for Stock Based Compensation (SFAS No. 123), our net income and earnings per share would have been reduced to the pro forma amounts indicated below.

Because future stock option awards may be granted and because it is unlikely that actual events will ever match the assumptions used in making these calculations, the pro forma impacts shown below are probably not indicative of the impact in future years.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

Pro forma disclosure (amounts in thousands, with the exception of per share data):

B. STOCKHOLDERS’ EQUITY

The Company and a selling stockholder completed a public offering of 2,250,000 primary and 1,500,000 secondary shares, respectively, of MTC common stock in February 2004. 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. The Company received net proceeds of $59.3 million from the offering, after deducting the Company’s portion of expenses and the underwriting discount.

We intend to use the remaining proceeds from the offering (together with cash on hand and additional borrowings) for working capital and general corporate purposes including possible strategic acquisitions.

In the first quarter of 2004, we issued 133,074 shares of our common stock, with a value of $3.6 million, in connection with the fourth quarter 2003 acquisition of International Consultants, Inc. See Note C. Acquisitions.

C. ACQUISITIONS

International Consultants, Inc.

On October 1, 2003, we signed a stock purchase agreement and acquired International Consultants, Inc. (ICI) from ICI’s shareholders. Essentially all of ICI’s work is in the defense industry where its main focus has been to support the United States Army. ICI specializes in program management, information technology and logistics services and operations.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

The initial purchase price for 100% of the outstanding common stock of ICI was $10.2 million, which was paid with $2.4 million in our common stock, $7.5 million in repayment of ICI debt at the closing (of which approximately $3.0 million arose in connection with payments to ICI’s shareholders) and $0.3 million for related acquisition costs, all of which was immediately paid with cash on hand. In the first quarter of 2004, we paid additional consideration of $4.6 million, which consisted of shares of our common stock with a value of $3.6 million and $1.0 million in cash, to the former shareholders of ICI as a result of the achievement of certain performance goals under an earn-out provision in the stock purchase agreement. We could be required to pay the former shareholders of ICI up to an additional $4.5 million under such provision, payable in a combination of our common stock and cash, if certain other performance goals are achieved through 2005. As of September 30, 2004 we accrued an additional $0.6 million of consideration for the achievement of certain performance goals. We have recorded this earn-out payment as an increase in goodwill and as an amount due under earn-out agreement on our September 30, 2004 balance sheet. If all contingent amounts are earned, the total acquisition price could reach $19.3 million. Any future payments will also be paid in a combination of our common stock and in cash. If the maximum purchase price is paid, the total payments will have been made 50% in cash (including repayment of debt) and 50% in our common stock. Shares of our common stock issued in connection with our acquisition of ICI were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) thereof.

Vitronics Inc.

Effective October 24, 2003, we acquired all of the outstanding stock of Vitronics Inc. (Vitronics) from Vitronics’ shareholders. All of Vitronics’ work is in the defense industry where its main focus has been to support the United States Army. Vitronics specializes in research and development, systems engineering, information technology, software development, and system integration services.

The initial purchase price for 100% of the outstanding stock of Vitronics and related acquisition costs was $9.0 million, which was paid from cash on hand at closing on October 31, 2003. Vitronics’ former shareholders may receive additional cash payments through 2007 if certain operating goals are achieved or contracts are awarded. Based on our current estimates, we expect the total purchase price will be approximately $9.7 million.

Command Technologies, Inc.

On July 1, 2004, we acquired all of the outstanding stock of Command Technologies, Inc. (CTI) from CTI’s shareholders. CTI’s customer base consists primarily of the Department of Defense and national security agencies, and CTI specializes in professional and technical services, information technology, and technology applications to training, simulation, and modeling.

The initial purchase price for 100% of the outstanding stock of CTI was $45 million, which was paid from cash on hand at closing on July 1, 2004. Additionally, acquisition related closing expenses of approximately $0.2 million were incurred. In addition to the amount paid to shareholders, certain employees will receive payments, through 2007, in the amount of $2 million for services provided prior to the acquisition. It is also anticipated that we will realize future income tax benefits with a net present value of approximately $9 million as the result of CTI 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 of the CTI acquisition was allocated as follows (amounts in thousands):

Goodwill recognized under the agreement is deductible for income tax purposes.

The value of the customer contract intangible asset was based on an independent appraisal. The customer contract intangible asset is being amortized over 7.5 years, the estimated remaining life of the contracts including renewals.

The acquisition is consistent with our growth strategies to acquire complementary businesses to reach new customers and technologies. The previously private-held company, headquartered in Warrenton, Virginia, with major facilities in Florida, Texas, and Colorado, augments MTC’s thrust to expand its role in support of the U.S. intelligence communities. CTI brings a wealth of in-depth knowledge and experience in assisting the military and intelligence communities build and maintain the Nation’s defenses. The acquisition also supports the expansion efforts of our National Security Group.

The revenue of CTI reflected in our consolidated statement of income for the three and nine months ended September 30, 2004 was approximately $10.0 million.

Pro Forma Information (unaudited) – Pro forma results of operations, as if the acquisition of CTI occurred as of the January 1, 2003 is presented below. These pro forma results may not be indicative of the actual results that would have occurred under our ownership and management.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

Pro forma adjustments for the three months ended September 30, 2003 and the nine months ended September 30, 2004 and 2003 include:

D. GOODWILL AND INTANGIBLE ASSETS

On January 1, 2002, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, which eliminated the amortization of goodwill and other intangibles with indefinite useful lives. In the fourth quarter of 2003, 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.

The components of other intangibles at September 30, 2004 and December 31, 2003 are as follows (in thousands):

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

Aggregate amortization expense for intangible assets for the nine months ended September 30, 2004 and 2003 were $1.7 million and $0.4 million, respectively. Purchased contracts are amortized on a straight-line basis.

Estimated annual intangible amortization expense for the remainder of 2004 and the next 5 years (in thousands):

The changes in the carrying amount of goodwill as of September 30, 2004 are as follows (in thousands):

E. 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 (amounts in thousands):

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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 jointly owned aircraft. In addition, we lease one facility from an entity related to Mr. Soin.

During the second quarter of 2004, we sold our 10% interest in one aircraft and our 90% interest in a second aircraft, which we jointly owned with Soin Aviation, to an unrelated party and recognized a net loss of approximately $182,000. Also during the second quarter of 2004, we purchased a 10% interest in an aircraft owned by Soin Aviation and sold to Soin Aviation a 10% interest in an aircraft we purchased from an unrelated party. The exchange of the aircraft was made in order to increase operating efficiency and to enhance the availability of the aircraft.

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 September 30, 2004 and December 31, 2003, amounts due from related parties were $0 and $259,000, respectively. At September 30, 2004 and December 31, 2003, amounts payable to related parties were $28,900 and $180,000 respectively.

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ITEM 1. Financial Statements

Notes to Condensed Consolidated Financial Statements

F. 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 and nine months ended September 30, 2004 and 2003 are as follows:

G. COMMITMENTS AND CONTINGENCIES

In July 2004, we signed a definitive settlement agreement with Bear Stearns Merchant Fund Corp. settling the lawsuit filed by Bear Stearns Merchant Fund Corp. alleging breach of contract and other matters in connection with its proposal to purchase Modern Technologies Corp. (our principal subsidiary, an Ohio corporation that is now known as MTC Technologies, Inc.). The expense associated with this settlement is included in the accompanying financial statements for the nine months ended September 30, 2004 and was not material to the financial statements.

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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 and nine months ended September 30, 2004 compared to the three and nine months ended September 30, 2003 and the financial condition of MTC for September 30, 2004 compared to December 31, 2003. 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 and program management services focusing primarily on U.S. defense, intelligence and civilian federal government 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 and nine months ended September 30, 2004 and 2003, over 95% and 93%, 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, U.S. Navy, and joint military commands.

We report operating results and financial data as a single segment and believe our contract base is well diversified. 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 9% and 10% of our total revenue for the three and nine months ended September 30, 2004, respectively, and was approximately 12% and 14% of our revenue for the three and nine months ended September 30, 2003, respectively. The largest task order under the ASC/BPA amounted to approximately 1% of total revenue for the three and nine months ended September 30, 2004. The ASC/BPA, which was originally awarded as a small business set aside contract, expires on September 30, 2005 and our ability to retain this contract is uncertain because the U.S. Air Force has preliminarily indicated that its acquisition strategy for the renewal of the ASC/BPA is to maintain the follow-on vehicle as a small business set aside. This means that we will need to be on the team of one or more successful small businesses that bid on the follow-on contract in order to maintain our current work or alternatively we would need to convert some of our current work under the ASC/BPA to other contract vehicles.

In July 2001, we were one of nine 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 21% and 27% of total revenue for the three and nine months ended September 30, 2004, respectively and was approximately 43% and 36% of our revenue for the three and nine months ended September 30 2003, respectively. The FAST revenue for the three and nine months ended September 30, 2004 was comprised of 59 separate task orders, the largest of which amounted to approximately 3% and 5% of total revenue for the three and nine months ended September 30, 2004, 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 Service Administration (GSA) vehicles, accounted for more than 3% of revenue for the three and nine months ended September 30, 2004.

Under the FAST contract, we have the potential to compete for hundreds of millions of dollars in task orders over its approximately four year remaining life as the U.S. Air Force maintains and modernizes aircraft and defense systems. As of September 30, 2004, we have been awarded 77 task

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orders under the FAST contract with a remaining potential award value of approximately $912 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 or system integration services, which historically have been less profitable than our other activities. The lower rate of profitability on program management/system integration services is the result of these services requiring significantly greater use of subcontractors than other services we perform. 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, we anticipate our operating income, as a percentage of total revenue, could diminish, although it will grow 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, 2001 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 and nine months ended September 30, 2004, approximately 75% and 78%, 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 73% and 71% of our revenue for the three and nine months ended September 30, 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.

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, that the customer can exercise on an annual basis. We also have contracts with fixed terms, some extending as long as five or nine 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. All of our work is subject to the risks associated with the government’s annual appropriations process.

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

Time-and-materials contracts. Under a time-and-materials contract, we receive a fixed hourly rate for each direct labor hour worked, plus reimbursement for our allowable direct costs. To the extent that our actual labor costs vary significantly from the negotiated rates under a time-and-materials contact, we can either make more money than we originally anticipated or lose money on the contract.

Fixed-price contracts. Under fixed-price contracts, we agree to perform specified work for a firm fixed price. If our actual costs exceed our estimate of the costs to perform the contract, we may generate less profit or incur a loss. A portion of our fixed-price contract work is under a fixed-price level-of-effort contract, which represents a similar level of risk to our time-and-materials contracts, under which we agree to perform certain units of work for a fixed price per unit. We generally do not undertake high-risk work, such as software development, under fixed-price contracts.

Cost-plus contracts. Under cost-plus contracts, we are reimbursed for allowable costs and receive a supplemental fee, which represents our profit. Cost-plus fixed fee contracts specify the contract fee in dollars or as a percentage of anticipated costs. Cost-plus incentive fee and cost-plus award fee contracts provide for increases or decreases in the contract fee, within specified limits, based upon actual results as compared to contractual targets for factors such as cost, quality, schedule and performance.

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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 September 30, 2004 was approximately $212 million as compared to approximately $136 million at September 30, 2003. Approximately $27 million, or 36%, of the $76 million increase in funded backlog resulted from funding increases in MTC’s organic contract base, primarily from the FAST, Defense Information Systems Network, PM Soldier Systems and Command and Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C⁴ISR) contracts. The remaining $49 million increase in funded backlog resulted from the acquisitions made during the last twelve months. Although our funded backlog at September 30, 2004 was approximately 83% of our trailing twelve-month revenue, we believe that a more typically sustainable funded backlog is in the range of 40% to 60% of trailing twelve-month revenue.

Critical accounting policies

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

We began recording work-in-process inventory during the second quarter of 2003 because some of our task orders under the FAST contract 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

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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.

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

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

General and Administrative Expenses. General and administrative expenses include the salaries and wages, plus associated fringe benefits, of our employees not performing work directly for customers. Among the functions included in these expenses are contracts, administration, business development, accounting, human resources, information systems support, and executive and senior management. General and administrative expenses also include related depreciation, amortization, and occupancy and travel expenses for employees performing general and administrative functions. Also included in general and administrative expenses are related party expenses associated with the rental of one facility and our utilization of aircraft that we jointly own with a significant stockholder.

Goodwill and Intangible Assets. Goodwill related to our acquisitions represents the excess of cost over the fair value of net tangible assets and separately identified intangible assets acquired. Upon adoption of Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Intangible Assets, on January 1, 2002, we discontinued amortization of goodwill, but rather test our goodwill for impairment at least annually. We have elected to conduct our annual impairment reviews during 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.

Purchase price allocated to intangible assets is amortized using the straight-line method over the expected life of the acquired contracted work.

Income Taxes. Deferred income taxes are recognized based on the estimated future tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized. Income tax expense represents the current tax provision for the period and the change during the period in deferred tax assets and liabilities.

Forward-looking statements

Portions of this document that are not statements of historical or current fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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

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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 income in relation to revenue:

THREE MONTHS ENDED SEPTEMBER 30, 2004

COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2003

Revenue. Revenue for the three months ended September 30, 2004 increased 46.9%, or approximately $23.6 million, to $74.0 million as compared to $50.4 million in the same period in 2003. Revenue from businesses acquired in the prior twelve months accounted for $20.4 million of the increase in revenue. Total organic growth of 6.4% reported in the third quarter of 2004 was lower than organic growth reported in prior quarters due to a $6.3 million decrease in FAST revenue, which reflects normal variations in customer delivery patterns. Excluding lower revenues under the FAST contract, we experienced substantial organic growth from increased work on new or existing contracts and task orders, primarily from growth in Information System Support, Commercial Enterprise Omnibus Support Services (CEOSS), Defense Information Systems Network, PM Soldier Systems, Technical Acquisition Support Services and C⁴ISR task orders.

Gross profit. Gross profit for the three months ended September 30, 2004 increased 52.9%, or approximately $4.1 million, to $12.0 million as compared to $7.8 million in the same period in 2003. This increase primarily relates to increased revenue. Gross profit as a percentage of revenue for the three months ended September 30, 2004 increased to 16.2% as compared to 15.5% for the corresponding period in 2003. This increase in gross margin percentage was primarily attributable to an increase in the direct work performed by our employees and a decrease in subcontractor-based revenues in the third quarter of 2004 because margins on subcontractor-based revenue are typically lower than the margins on our direct work. During the third quarter of 2004, our direct work was approximately 73% of revenue as compared to approximately 53% during the third quarter of 2003.

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General and administrative expenses. General and administrative expenses for the three months ended September 30, 2004 increased 51.8%, or approximately $1.2 million, to $3.4 million as compared to $2.2 million in the same period in 2003. This increase was primarily due to increased personnel costs associated with growing our business and additional professional fees associated with establishing our office in Germany and for compliance with Section 404 of the Sarbanes-Oxley Act of 2002. General and administrative expenses as a percentage of revenue modestly increased from 4.5% for the three months ended September 30, 2003 to 4.6% for the three months ended September 30, 2004.

Intangible asset amortization. Intangible asset amortization for the three months ended September 30, 2004 increased $0.7 million to $0.8 million as compared to $0.1 million in the same period in 2003. Amortization as a percentage of revenue increased from 0.2% for the three months ended September 30, 2003 to 1.2% for the three months ended September 30, 2004. This increase was the result of the amortization of the intangible assets related to the acquisitions that were made in the prior twelve month period.

Operating income. Operating income for the three months ended September 30, 2004 increased 41.2%, or approximately $2.3 million, to $7.7 million as compared to $5.5 million for the quarter ended September 30, 2003. This increase in operating income was primarily the result of increased gross profit, partially offset by higher general and administrative expenses and intangible asset amortization. Operating income as a percentage of revenue decreased from 10.8% of revenue for the three months ended September 30, 2003 to 10.4% for the three months ended September 30, 2004. This decrease was consistent with management’s expectations and was primarily the result of the increased intangible asset amortization as discussed above.

Income tax expense. For the three months ended September 30, 2004, our effective income tax rate was 39.6% compared with an effective tax rate of 40.0% for the three months ended September 30, 2003.

Net income. Net income for the three months ended September 30, 2004 increased 42.4%, or approximately $1.4 million, to $4.7 million as compared to $3.3 million for the three months ended September 30, 2003. This increase in net income was primarily the result of increased operating income, which was partially offset by the increased income tax expense.

NINE MONTHS ENDED SEPTEMBER 30, 2004

COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2003

Revenue. Revenue for the nine months ended September 30, 2004 increased 52.3%, or approximately $67.5 million, to $196.6 million as compared to $129.1 million in the same period in 2003. Organic growth of 19.7% amounted to $25.4 million of the $67.5 million increase in revenue, and the remaining $42.1 million of revenue growth, or 32.6%, came from acquisitions made in the prior twelve month period. Our organic growth of $25.4 million was the result of an increase in work on new or existing contracts and task orders, primarily from growth in FAST, Information System Support, CEOSS, Defense Information Systems Network, PM Soldier Systems, Technical Acquisition Support Services and C⁴ISR task orders.

Gross profit. Gross profit for the nine months ended September 30, 2004 increased 45.8%, or approximately $9.8 million, to $31.2 million as compared to $21.4 million in the same period in 2003. This increase primarily relates to increased revenue. Gross profit as a percentage of revenue for the nine months ended September 30, 2004 decreased to 15.9% as compared to 16.6% for the corresponding period in 2003. This decrease in gross margin percentage was primarily attributable to the previously forecasted increase in the use of subcontractors because margins on subcontractor-based revenue are typically lower than the margins on our direct work. Revenue from work performed through the use of subcontractors for the nine months ended September 30, 2004 increased approximately $11.2 million from the same period in 2003.

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General and administrative expenses. General and administrative expenses for the nine months ended September 30, 2004 increased 25.5%, or approximately $1.8 million, to $8.9 million as compared to $7.1 million in the same period in 2003. This increase was primarily the result of increased personnel costs to support our growth, increased professional fees and a $0.2 million loss realized on the sale of two aircraft during the second quarter of 2004. However, general and administrative expenses as a percentage of revenue declined from 5.5% for the nine months ended September 30, 2003 to 4.5% for the nine months ended September 30, 2004 as a result of operating efficiencies.

Intangible asset amortization. Intangible asset amortization for the nine months ended September 30, 2004 increased $1.3 million, to $1.7 million as compared to $0.4 million in the same period in 2003. Amortization as a percentage of revenue increased from 0.3% for the nine months ended September 30, 2003 to 0.9% for the nine months ended September 30, 2004. This increase was the result of the amortization of the intangible assets related to the acquisitions that we made in the prior twelve month period.

Operating income. Operating income for the nine months ended September 30, 2004 increased 47.7%, or approximately $6.6 million, to $20.5 million as compared to $13.9 million for the nine months ended September 30, 2003. This increase in operating income was primarily the result of increased gross profit, partially offset by higher general and administrative expenses and intangible asset amortization. Operating income as a percentage of revenue decreased from 10.8% of revenue for the nine months ended September 30, 2003 to 10.5% for the nine months ended September 30, 2004. This decrease was in line with management’s expectations and resulted from the decrease in gross profit as a percentage of revenue (due to the previously forecasted increase in use of subcontractors) and the substantial increase in intangible amortization.

Net interest income. Net interest income was $0.4 million for the nine months ended September 30, 2004 as compared to $0.2 million for the nine months ended September 30, 2003. Interest income increased during the nine months ended September 30, 2004 as a result of the investment of the proceeds received in February 2004 upon completion of a public offering of our common stock.

Income tax expense. For the nine months ended September 30, 2004, our effective income tax rate was 39.4% compared with an effective tax rate of 39.7% for the nine months ended September 30, 2003.

Net income. Net income for the nine months ended September 30, 2004 increased 49.1%, or approximately $4.2 million, to $12.7 million as compared to $8.5 million for the nine months ended September 30, 2003. This increase in net income was primarily the result of increased operating income and interest income, which 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 each year, our customers may have to suspend engagements that

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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 could increase our fourth quarter revenues, but will generally decrease profit margins for that quarter, as these activities typically are not as profitable as our normal service offerings. Further, some of our subcontractors have calendar year ends and sometimes submit large billings at the end of the calendar year that can cause a spike in our revenue and expenses related to subcontracts. This will also generally decrease our profit margins as revenues generated by billings from subcontractors generally have much lower margins than our revenues generated by direct work. As a result of the above factors, period-to-period comparisons of our revenue and operating results may not be meaningful. Potential investors should not rely on these comparisons as indicators of future performance as no assurances can be given that quarterly results will not fluctuate, causing a material adverse effect on our operating results and financial condition.

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents balance on September 30, 2004, was approximately $34.7 million. Historically, our positive cash flow from operations, our proceeds from equity offerings and our available credit facility have provided us adequate liquidity and working capital to fund the operational needs and support our acquisition activities.

Our working capital was $67.8 million at September 30, 2004 and $32.5 million at December 31, 2003. Our working capital increased $35.3 million in the first nine months of 2004 primarily for the following reasons:

Our operating activities generated cash of approximately $8.8 million for the nine months ended September 30, 2004. The net operating cash provided primarily represented net income adjusted for depreciation and amortization and the changes in working capital as discussed above. For the nine months ended September 30, 2003, the net operating cash generated in the amount of $11.7 million primarily represented net income adjusted for depreciation and amortization, combined with a $2.5 million increase in working capital.

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Our investing activities used cash of approximately $48.7 million for the nine months ended September 30, 2004, primarily as a result of $47.5 million of cash payments made in connection with acquisitions and $1.4 million of capital expenditures. Capital expenditures include the net purchase price of $0.9 million for an aircraft purchased during the second quarter of 2004. Additionally, net proceeds of $0.2 million were received during the second quarter of 2004 for the sale of two aircraft that we had an ownership interest in. Cash used by investing activities for the nine months ended September 30, 2003, consisted of $1.2 million of payments made in connection with acquisitions and $0.3 million of capital expenditures. We currently anticipate that total capital expenditures for 2004 will be approximately $2.0 million for general corporate purposes.

Our financing activities provided net cash of approximately $59.5 million for the nine months ended September 30, 2004, primarily from the net proceeds from the public offering of 2,250,000 shares of common stock that was completed in February 2004 as well as common stock issuances related to stock option transactions. This compares to cash provided from financing activities of $0.5 million for the nine months ended September 30, 2003, consisting of common stock issuances and surrenders related to stock option transactions.

In January 2004, we increased our $35 million revolving line of credit to $55 million. We can increase this line to $80 million subject to meeting certain requirements and obtaining our lenders’ approval. The credit agreement was initially scheduled to expire on December 31, 2005; however, in July 2004, we amended the agreement to extend the term to December 31, 2006. The credit agreement can be extended for additional one-year terms by mutual agreement with our lenders.

The interest rate we would pay if we have any borrowings will range from prime rate less 25 basis points to prime rate plus 25 basis points, or the London Interbank Offered Rate (LIBOR) rate plus 150 to 225 basis points, depending on the ratio of our funded debt to earnings before interest, taxes, depreciation, and amortization (EBITDA). Borrowings under our line of credit are secured by a general lien on our consolidated assets. In addition, we are subject to certain restrictions, and are required to meet certain financial covenants. As of September 30, 2004, we were in compliance with these financial covenants.

In February 2004, we completed a public offering of 2,250,000 shares of our common stock. The Company’s net proceeds from the sale of the shares, after the underwriting discount and other expenses, were $59.3 million. We intend to use the net proceeds from the offering (together with cash on hand and additional borrowings) for working capital and general corporate purposes, including all or a portion of the costs of any complementary businesses we selectively decide to acquire in the future.

On July 1, 2004, we acquired all of the outstanding stock of CTI from its shareholders. The initial purchase price for 100% of the outstanding stock of CTI was $45 million, paid from cash on hand at closing on July 1, 2004. In addition to the amount paid to shareholders, certain employees will receive payments, through 2007, in the amount of $2 million. It is also anticipated that the Company will realize future income tax benefits with a net present value of approximately $9 million as the result of CTI shareholders agreeing to a Section 338(h)(10) election under the Internal Revenue Code of 1986.

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 of our initial public offering, cash on hand and shares of our common stock. We expect to finance any future acquisitions with proceeds from our recent common stock offering, cash generated by operations, additional sales or issuances of shares of our common stock, borrowings under our credit facility or a combination of the foregoing.

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Management believes that the proceeds from the recent sale of shares by us and our cash and cash equivalents balance, together with cash generated by operations and amounts available under our credit facility, will be sufficient to fund our working capital requirements, debt service obligations, purchase price commitments for completed acquisitions and capital expenditures for the foreseeable future.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Our management, with the participation of the Company’s Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures and any change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting. Based on that evaluation, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report.

In connection with management’s evaluation, no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2004 were identified that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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. There is no litigation pending that could have a material adverse effect on our financial condition or results of operations.

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ITEM 6. EXHIBITS

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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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