##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, DC 20549




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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED DECEMBER 31,
2003.


COMMISSION FILE NUMBER
33389756



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(ALION SCIENCE AND TECHNOLOGY LOGO)

ALION SCIENCE AND TECHNOLOGY
CORPORATION

(Exact Name of Registrant as Specified in Its
Charter)


|                                                                   |  |                                                                          
|------------------------------------------------------------------ |  | -------------------------------------------------------------------------
|DELAWARE                                                           |  | 54-2061691                                                               
|(State or Other Jurisdiction of
    Incorporation of Organization) |  | (I.R.S. Employer
    Identification No.)                                 
|                                                                  
|10 West 35th Street
    Chicago, IL 60616
    (312) 567-4000       |  | 1750 Tysons Boulevard, Suite 1300
    McLean, VA 22102
    (703) 918-4480

(Address, including Zip Code and Telephone Number
with


Area Code, of Principal Executive Offices)





(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.


[X]Yes     [ ] 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 outstanding of Alion Science
and Technology Corporation

common stock as of December 31, 2003, was:


Common Stock 2,923,782










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##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

FORM 10-Q INDEX


FOR QUARTER ENDED DECEMBER 31, 2003


|                               |  |                                                                                             |    |  |    | 
|------------------------------ |  | ------------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I  FINANCIAL INFORMATION |  |                                                                                             | 1  | 
|                              
|Item 1.                        |  | Financial Statements                                                                        |    |  | 1  | 
|                               |  | Consolidated Balance Sheets                                                                 |    |  | 1  | 
|                               |  | Consolidated Statements of Operations                                                       |    |  | 2  | 
|                               |  | Consolidated Statement of Operations and Pro
    Forma Consolidated Statement of Operations |    |  | 3  | 
|                               |  | Consolidated Statements of Cash Flows                                                       |    |  | 4  | 
|                               |  | Notes to Consolidated Financial Statements                                                  |    |  | 5  | 
|                              
|Item 2.                        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations   |    |  | 12 | 
|                              
|Item 3.                        |  | Quantitative and Qualitative Disclosures About
    Market Risk                              |    |  | 23 | 
|                              
|Item 4.                        |  | Controls and Procedures                                                                     |    |  | 23 | 
|PART II  OTHER INFORMATION    |  |                                                                                             | 24 | 
|                              
|Item 1.                        |  | Legal Proceedings                                                                           |    |  | 24 | 
|                              
|Item 2.                        |  | Changes in Securities and Use of Proceeds                                                   |    |  | 25 | 
|                              
|Item 3.                        |  | Defaults Upon Senior Securities                                                             |    |  | 25 | 
|                              
|Item 4.                        |  | Submission of Matters to a Vote of Security
    Holders                                     |    |  | 25 | 
|                              
|Item 5.                        |  | Other Information                                                                           |    |  | 25 | 
|                              
|Item 6.                        |  | Exhibits and Reports on Form 8-K                                                            |    |  | 26 | 



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##### 



PART I  FINANCIAL
INFORMATION



ITEM 1: FINANCIAL STATEMENTS


ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Balance Sheets


As of December 31, 2003 (Unaudited) and
September 30, 2003

(In thousands, except share
information)


|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |         |         | 
|---------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------- | ------ | ------------- | ------- |  | ------ | ------- | ------- | 
|                                               |                                                                                                                                                                                                                                                         | December 31,                                          |        | September 30,
|                                               |                                                                                                                                                                                                                                                         | 2003                                                  |        | 2003         
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |              
|Assets                                         |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|Current assets:                                |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               | Cash                                                                                                                                                                                                                                                    |                                                       | $      | 606           |         |  | $      | 494     |        
|                                               | Restricted cash                                                                                                                                                                                                                                         |                                                       |        |              |         |  |        | 5       |        
|                                               | Accounts receivable, less allowance of $2,552 at
    December 31, 2003 and $2,484 at September 30, 2003                                                                                                                                                 |                                                       |        | 46,282        |         |  |        | 42,777  |        
|                                               | Stock subscriptions receivable                                                                                                                                                                                                                          |                                                       |        |              |         |  |        | 1,246   |        
|                                               | Prepaid expense                                                                                                                                                                                                                                         |                                                       |        | 1,902         |         |  |        | 974     |        
|                                               | Other current assets                                                                                                                                                                                                                                    |                                                       |        | 2,942         |         |  |        | 2,155   |        
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               |                                                                                                                                                                                                                                                         | Total current assets                                  |        |               | 51,732  |  |        |         | 47,651  | 
|Fixed assets, net                              |                                                                                                                                                                                                                                                         |                                                       | 8,785  |               |         |  | 8,696  |        
|Intangible assets, net                         |                                                                                                                                                                                                                                                         |                                                       | 20,256 |               |         |  | 22,788 |        
|Goodwill                                       |                                                                                                                                                                                                                                                         |                                                       | 74,893 |               |         |  | 65,522 |        
|Other                                          |                                                                                                                                                                                                                                                         |                                                       | 97     |               |         |  | 97     |        
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               |                                                                                                                                                                                                                                                         | Total assets                                          |        | $             | 155,763 |  |        | $       | 144,754 | 
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|Liabilities and Shareholders
    Equity       |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|Current liabilities:                           |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               | Note payable to bank                                                                                                                                                                                                                                    |                                                       | $      | 8,300         |         |  | $      |        |        
|                                               | Current portion of senior note payable                                                                                                                                                                                                                  |                                                       |        | 5,000         |         |  |        | 5,000   |        
|                                               | Acquisition obligations                                                                                                                                                                                                                                 |                                                       |        | 8,584         |         |  |        |        |        
|                                               | Trade accounts payable and accrued liabilities                                                                                                                                                                                                          |                                                       |        | 15,260        |         |  |        | 9,661   |        
|                                               | Accrued payroll and related liabilities                                                                                                                                                                                                                 |                                                       |        | 11,065        |         |  |        | 15,385  |        
|                                               | Advance payments                                                                                                                                                                                                                                        |                                                       |        |              |         |  |        | 5       |        
|                                               | ESOP liabilities                                                                                                                                                                                                                                        |                                                       |        | 1,181         |         |  |        | 320     |        
|                                               | Billings in excess of costs and estimated
    earnings on uncompleted contracts                                                                                                                                                                         |                                                       |        | 475           |         |  |        | 409     |        
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               |                                                                                                                                                                                                                                                         | Total current liabilities                             |        |               | 49,865  |  |        |         | 30,780  | 
|Long-term debt                                 |                                                                                                                                                                                                                                                         |                                                       | 466    |               |         |  | 2,928  |        
|Senior note payable, excluding current portion |                                                                                                                                                                                                                                                         |                                                       | 21,759 |               |         |  | 22,903 |        
|Mezzanine note payable                         |                                                                                                                                                                                                                                                         |                                                       | 17,112 |               |         |  | 17,636 |        
|Subordinated note payable                      |                                                                                                                                                                                                                                                         |                                                       | 33,619 |               |         |  | 33,437 |        
|Agreement with officer                         |                                                                                                                                                                                                                                                         |                                                       | 748    |               |         |  | 743    |        
|Accrued postretirement benefit obligation      |                                                                                                                                                                                                                                                         |                                                       | 3,364  |               |         |  | 3,319  |        
|Deferred rent                                  |                                                                                                                                                                                                                                                         |                                                       | 501    |               |         |  | 346    |        
|Redeemable common stock warrants               |                                                                                                                                                                                                                                                         |                                                       | 15,454 |               |         |  | 14,762 |        
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               |                                                                                                                                                                                                                                                         | Total liabilities                                     |        |               | 142,888 |  |        |         | 126,854 | 
|Shareholders equity, subject to redemption:   |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               | Common stock (subject to redemption), $0.01 par
    value, 15,000,000 shares authorized, 2,973,813 shares and
    2,973,813 shares issued, 2,923,782 and 2,973,813 shares
    outstanding, at December 31, 2003 and September 30,
    2003 respectively |                                                       |        | 29            |         |  |        | 29      |        
|                                               | Additional paid-in capital                                                                                                                                                                                                                              |                                                       |        | 30,579        |         |  |        | 30,578  |        
|                                               | Treasury stock, at cost (50,031 shares)                                                                                                                                                                                                                 |                                                       |        | (736          | )       |  |        |        |        
|                                               | Accumulated deficit                                                                                                                                                                                                                                     |                                                       |        | (16,997       | )       |  |        | (12,707 | )      
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               |                                                                                                                                                                                                                                                         | Total shareholders equity, subject to
    redemption |        |               | 12,875  |  |        |         | 17,900  | 
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        
|                                               | Total liabilities and shareholders equity,
    subject to redemption                                                                                                                                                                                   |                                                       | $      | 155,763       |         |  | $      | 144,754 |        
|                                               |                                                                                                                                                                                                                                                         |                                                       |        |               |         |  |        |        

See accompanying notes to consolidated financial
statements.

1



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##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Statements of
Operations


Quarter Ended December 31, 2003


and Interim Period Ended December 20,
2002


(In thousands, except share
information)


(Unaudited)


|                                                                 |                               |                                   |           |                |        |   |    |    |    | 
|---------------------------------------------------------------- | ----------------------------- | --------------------------------- | --------- | -------------- | ------ | - | -- | -- | -- | 
|                                                                 |                               | Quarter                           |           | Interim Period
|                                                                 |                               | Ended                             |           | Ended         
|                                                                 |                               | December 31,                      |           | December 20,  
|                                                                 |                               | 2003                              |           | 2002          
|                                                                 |                               |                                   |           |               
|Contract revenue                                                 |                               | $                                 | 58,591    |                |        | $ |   |   
|Direct contract expense                                          |                               |                                   | 42,113    |                |        |   |   |   
|                                                                 |                               |                                   |           |                |        |   |    |   
|                                                                 |                               | Gross profit                      |           |                | 16,478 |   |    |    |   | 
|                                                                 |                               |                                   |           |                |        |   |    |   
|Operating expenses:                                              |                               |                                   |           |                |        |   |    |   
|                                                                 | Indirect contract expense     |                                   |           | 3,989          |        |   |    |   |   
|                                                                 | Research and development      |                                   |           | 74             |        |   |    |   |   
|                                                                 | General and administrative    |                                   |           | 7,385          |        |   |    | 41 |   
|                                                                 | Rental and occupancy expense  |                                   |           | 2,513          |        |   |    |   |   
|                                                                 | Depreciation and amortization |                                   |           | 3,104          |        |   |    |   |   
|                                                                 | Bad debt expense              |                                   |           | 42             |        |   |    |   |   
|                                                                 |                               |                                   |           |                |        |   |    |   
|Total operating expenses                                         |                               |                                   | 17,107    |                |        |   | 41 |   
|                                                                 |                               |                                   |           |                |        |   |    |   
|                                                                 |                               | Operating income (loss)           |           |                | (629   | ) |    |    | 41 | 
|Other income (expense):                                          |                               |                                   |           |                |        |   |    |   
|                                                                 | Interest income               |                                   |           | 2              |        |   |    |   |   
|                                                                 | Interest expense              |                                   |           | (3,236         | )      |   |    |   |   
|                                                                 | Other                         |                                   |           | (429           | )      |   |    |   |   
|                                                                 |                               |                                   |           |                |        |   |    |   
|                                                                 |                               | Income (loss) before income taxes |           |                | (4,292 | ) |    |    | 41 | 
|                                                                 | Income tax expense            |                                   |           |               |        |   |    |   |   
|                                                                 |                               |                                   |           |                |        |   |    |   
|                                                                 |                               | Net income (loss)                 |           | $              | (4,292 | ) |    | $  | 41 | 
|                                                                 |                               |                                   |           |                |        |   |    |   
|Basic and diluted loss per share                                 |                               | $                                 | (1.45     | )              |        |   |    |   
|                                                                 |                               |                                   |           |                |        |   |    |   
|Basic and diluted weighted average common shares
    outstanding |                               |                                   | 2,966,743 |                |        |   |    |   

See accompanying notes to consolidated financial
statements.

2



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##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Statement of Operations


Quarter Ended December 31, 2003


Pro Forma Consolidated Statement of Operations
(See Note 11)


Interim Period Ended December 20,
2002


(In thousands, except share
information)


(Unaudited)


|                                                                          |                                 |                          |           |                |        |   |           |        |        |  
|------------------------------------------------------------------------- | ------------------------------- | ------------------------ | --------- | -------------- | ------ | - | --------- | ------ | ------ | -
|                                                                          |                                 |                          |           | Pro Forma     
|                                                                          |                                 | Quarter                  |           | Interim Period
|                                                                          |                                 | Ended                    |           | Ended         
|                                                                          |                                 | December 31,             |           | December 20,  
|                                                                          |                                 | 2003                     |           | 2002          
|                                                                          |                                 |                          |           |               
|Contract revenue                                                          |                                 | $                        | 58,591    |                |        | $ | 47,265    |       
|Direct contract expenses                                                  |                                 |                          | 42,113    |                |        |   | 34,655    |       
|                                                                          |                                 |                          |           |                |        |   |           |       
|                                                                          |                                 | Gross profit             |           |                | 16,478 |   |           |        | 12,610 |  
|                                                                          |                                 |                          |           |                |        |   |           |       
|Operating expenses:                                                       |                                 |                          |           |                |        |   |           |       
|                                                                          | Indirect contract expense       |                          |           | 3,989          |        |   |           | 2,568  |       
|                                                                          | Research and development        |                          |           | 74             |        |   |           | 36     |       
|                                                                          | General and administrative      |                          |           | 7,385          |        |   |           | 5,313  |       
|                                                                          | Non-recurring transaction costs |                          |           |               |        |   |           | 5,448  |       
|                                                                          | Rental and occupancy expense    |                          |           | 2,513          |        |   |           | 2,201  |       
|                                                                          | Depreciation and amortization   |                          |           | 3,104          |        |   |           | 2,883  |       
|                                                                          | Bad debt expense                |                          |           | 42             |        |   |           | 120    |       
|                                                                          |                                 |                          |           |                |        |   |           |       
|Total operating expenses                                                  |                                 |                          | 17,107    |                |        |   | 18,569    |       
|                                                                          |                                 |                          |           |                |        |   |           |       
|                                                                          |                                 | Operating loss           |           |                | (629   | ) |           |        | (5,958 | )
|Other income (expense):                                                   |                                 |                          |           |                |        |   |           |       
|                                                                          | Interest income                 |                          |           | 2              |        |   |           | 22     |       
|                                                                          | Interest expense                |                          |           | (3,236         | )      |   |           | (2,252 | )     
|                                                                          | Other                           |                          |           | (429           | )      |   |           | (23    | )     
|                                                                          |                                 |                          |           |                |        |   |           |       
|                                                                          |                                 | Loss before income taxes |           |                | (4,292 | ) |           |        | (8,211 | )
|                                                                          | Income tax expense              |                          |           |               |        |   |           | (27    | )     
|                                                                          |                                 |                          |           |                |        |   |           |       
|                                                                          |                                 | Net loss                 |           | $              | (4,292 | ) |           | $      | (8,238 | )
|                                                                          |                                 |                          |           |                |        |   |           |       
|Basic and diluted loss per share                                          |                                 | $                        | (1.45     | )              |        |   |           |       
|                                                                          |                                 |                          |           |                |        |   |           |       
|Basic and diluted weighted average common shares
    outstanding          |                                 |                          | 2,966,743 |                |        |   |           |       
|Proforma basic and diluted loss per share                                 |                                 |                          |           |                |        | $ | (3.20     | )     
|                                                                          |                                 |                          |           |                |        |   |           |       
|Proforma basic and diluted weighted average
    common shares outstanding |                                 |                          |           |                |        |   | 2,575,508 |       

See accompanying notes to consolidated financial
statements.

3



---



##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

Consolidated Statements of Cash
Flows


Quarter Ended December 31, 2003


and Interim Period Ended December 20,
2002


(In thousands, except share
information)


(Unaudited)


|                                                                                |                                                                                                          |              |        |                |   |   |         |         |  
|------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | ------------ | ------ | -------------- | - | - | ------- | ------- | -
|                                                                                |                                                                                                          | Quarter      |        | Interim Period
|                                                                                |                                                                                                          | Ended        |        | Ended         
|                                                                                |                                                                                                          | December 31, |        | December 20,  
|                                                                                |                                                                                                          | 2003         |        | 2002          
|                                                                                |                                                                                                          |              |        |               
|Cash flows from operating activities:                                           |                                                                                                          |              |        |                |   |   |         |        
|                                                                                | Net loss                                                                                                 |              | $      | (4,292         | ) |   | $       | (41     | )
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                                                                          |              |        |                |   |   |         |        
|                                                                                | Depreciation and amortization                                                                            |              |        | 3,105          |   |   |         |        |  
|                                                                                | Accretion of debt to face value                                                                          |              |        | 413            |   |   |         |        |  
|                                                                                | Amortization of debt issuance costs                                                                      |              |        | 106            |   |   |         |        |  
|                                                                                | Change in fair value of redeemable common stock
    warrants                                             |              |        | 693            |   |   |         |        |  
|Changes in assets and liabilities, net of effect
    of acquisition:            |                                                                                                          |              |        |                |   |   |         |        
|                                                                                | Accounts receivable, net                                                                                 |              |        | (1,644         | ) |   |         |        |  
|                                                                                | Other assets                                                                                             |              |        | (185           | ) |   |         |        |  
|                                                                                | Trade accounts payable and accruals                                                                      |              |        | 976            |   |   |         | 36      |  
|                                                                                | Other liabilities                                                                                        |              |        | 199            |   |   |         |        |  
|                                                                                |                                                                                                          |              |        |                |   |   |         |        
|Net cash used in operating activities                                           |                                                                                                          |              | (629   | )              |   |   | (5      | )      
|Cash flows from investing activities:                                           |                                                                                                          |              |        |                |   |   |         |        
|                                                                                | Cash paid for acquisition, net of cash acquired                                                          |              |        | (3,703         | ) |   |         | (58,571 | )
|                                                                                | Capital expenditures                                                                                     |              |        | (641           | ) |   |         |        |  
|                                                                                | Purchase of non-marketable securities                                                                    |              |        | (1,333         | ) |   |         |        |  
|                                                                                |                                                                                                          |              |        |                |   |   |         |        
|Net cash used in investing activities                                           |                                                                                                          |              | (5,677 | )              |   |   | (58,571 | )      
|Cash flows from financing activities:                                           |                                                                                                          |              |        |                |   |   |         |        
|                                                                                | Proceeds from senior note payable                                                                        |              |        |               |   |   |         | 35,000  |  
|                                                                                | Payment of debt issuance costs                                                                           |              |        |               |   |   |         | (1,700  | )
|                                                                                | Repayment of senior note payable                                                                         |              |        | (1,250         | ) |   |         |        |  
|                                                                                | Repayment of mezzanine note payable                                                                      |              |        | (750           | ) |   |         |        |  
|                                                                                | Repayment of ITSC revolving credit agreement                                                             |              |        | (375           | ) |   |         |        |  
|                                                                                | Repayments under IITRI revolving credit agreement                                                        |              |        |               |   |   |         | (6,188  | )
|                                                                                | Borrowings under revolving credit facility                                                               |              |        | 8,300          |   |   |         | 7,000   |  
|                                                                                | Repayment of note payable to bank                                                                        |              |        |               |   |   |         | (10     | )
|                                                                                | Cash paid for Daedalic acquisition earnout                                                               |              |        | (18            | ) |   |         |        |  
|                                                                                | Purchase of 50,031 shares from ESOP Trust                                                                |              |        | (736           | ) |   |         |        |  
|                                                                                | Payment of stock subscription for common stock
    issued to ESOP Trust                                  |              |        | 1,247          |   |   |         | 25,458  |  
|                                                                                |                                                                                                          |              |        |                |   |   |         |        
|Net cash provided by financing activities                                       |                                                                                                          |              | 6,418  |                |   |   | 59,560  |        
|                                                                                |                                                                                                          |              |        |                |   |   |         |        
|Net increase in cash                                                            |                                                                                                          |              | 112    |                |   |   | 984     |        
|Cash at beginning of period                                                     |                                                                                                          |              | 494    |                |   |   | 5       |        
|                                                                                |                                                                                                          |              |        |                |   |   |         |        
|Cash at end of period                                                           |                                                                                                          | $            | 606    |                |   | $ | 989     |        
|                                                                                |                                                                                                          |              |        |                |   |   |         |        
|Supplemental disclosure of cash flow information:                               |                                                                                                          |              |        |                |   |   |         |        
|                                                                                | Cash paid for interest                                                                                   |              | $      | 1,151          |   |   | $       |        |  
|Non-cash investing and financing activities:                                    |                                                                                                          |              |        |                |   |   |         |        
|                                                                                | Mezzanine note and warrants issued in connection
    with acquisition of selected operations of IITRI    |              |        |               |   |   |         | 20,343  |  
|                                                                                | Subordinated note and warrants issued in
    connection with acquisition of selected operations of IITRI |              |        |               |   |   |         | 39,900  |  
|                                                                                | Issuance of 29,637 shares of common stock to ESOP
    Trust for amount due to ESOP Trust                 |              |        |               |   |   |         | 296     |  
|                                                                                | Deferred compensation arrangement with officer                                                           |              |        |               |   |   |         | 857     |  

See accompanying notes to consolidated financial
statements.

4



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##### 



ALION SCIENCE AND TECHNOLOGY
CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


Quarter Ended December 31, 2003 and Interim
Period Ended December 20, 2002 (unaudited)



|   |                                              
|-- | ---------------------------------------------
|1. | Description and Formation of the
    Business

Alion Science and Technology Corporation (Alion
or the Company) provides scientific and engineering expertise to
research and develop technological solutions for problems
relating to national defense, public health and safety. The
Company provides these research services primarily to agencies
of the federal government and, to a lesser extent, to commercial
and international customers.

Alion, a for-profit S Corporation, was formed in
October 2001 for the purpose of purchasing substantially all of
the assets and certain of the liabilities of IIT Research
Institute (IITRI), a not-for-profit membership corporation
affiliated with and controlled by the Illinois Institute of
Technology. Prior to the acquisition of substantially all of the
assets and liabilities of IITRI (the Transaction), the
Companys activities had been organizational in nature.

On December 20, 2002, Alion acquired
substantially all of the assets and liabilities of IITRI
(Business), excluding the assets and liabilities of IITRIs
Life Sciences Operation, for aggregate total proceeds of
$127.3 million consisting of (in thousands):



| |   |                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $58,571 cash, consisting of $56,721 paid to IITRI
    and $1,517 paid for certain transaction expenses on behalf of
    IITRI, and $333 paid for other transaction expenses;                                                                                                      
|
| |  | $39,900 in seller notes to IITRI, with detachable
    warrants representing approximately 26% of the outstanding
    common stock of Alion (on a fully diluted basis). The seller
    notes bear interest at an effective interest rate of 6.71% per
    annum. See notes 4 and 6;
|
| |  | $20,343 in mezzanine notes to IITRI, with
    detachable warrants representing 12% of the outstanding common
    stock of Alion (on a fully diluted basis). The mezzanine notes
    bear interest at 12% per annum. See notes 4 and 6;                                            
|
| |  | $2,300 in transaction costs less the $1,517
    referenced above;                                                                                                                                                                                                                 
|
| |  | $6,188 in assumed IITRI debt due to its bank; and                                                                                                                                                                                                                                 
|
| |  | $1,520 in additional amounts due to IITRI for
    purchase price adjustments related to the Life Sciences
    Operation.                                                                                                                                                          

The acquisition was accounted for using the
purchase method. The purchase price has been allocated to the
acquired assets and assumed liabilities based on their estimated
fair values at the date of acquisition. As a result of the
Transaction, the Company recorded goodwill of approximately
$63.6 million, which is subject to an annual impairment
review, as discussed below. In addition, the Company recorded
intangible assets of approximately $30.6 million, comprised of
purchased contracts. The intangible assets have an estimated
useful life of three years and are amortized using the
straight-line method.

5



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##### 



The total purchase consideration of approximately
$127.3 million was allocated to the fair value of the net
assets acquired as follows (in thousands):

|                         |  |   |         |  
|------------------------ |  | - | ------- | -
|Cash and restricted cash |  | $ | 1,187   |  
|Accounts receivable      |  |   | 47,485  |  
|Other current assets     |  |   | 3,784   |  
|Acquired contracts       |  |   | 30,645  |  
|Goodwill                 |  |   | 63,610  |  
|Fixed assets             |  |   | 9,094   |  
|Liabilities assumed      |  |   | (28,500 | )
|                         |  |   |         |  
|                         |  | $ | 127,305 |  
|                         |  |   |         |  



|   |                      
|-- | ---------------------
|2. | Basis of Presentation

The accompanying unaudited consolidated financial
statements include the accounts of Alion and its wholly owned
subsidiary Human Factors Applications, Inc. (HFA) and have
been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission regarding interim financial
information. Certain information and note disclosures normally
included in the annual financial statements, prepared in
accordance with accounting principles generally accepted in the
United States of America, have been condensed or omitted
pursuant to those rules and regulations. In the opinion of
management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter ended
December 31, 2003 are not necessarily indicative of the
results that may be expected for the fiscal year ending
September 30, 2004. For further information, refer to the
consolidated financial statements and notes thereto included in
the Post Effective Amendment No. 4 to the Companys
registration statement on Form S-1 (No. 333-89756)
filed with the SEC on January 22, 2004.

The preparation of financial statements, in
conformity with generally accepted accounting principles,
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosures of contingencies at the date of the financial
statements as well as the reported amounts of revenues and
expenses during the reporting period. Estimates have been
prepared on the basis of the most current and best available
information and actual results could differ from those estimates.



|   |                                               
|-- | ----------------------------------------------
|3. | Summary of Significant Accounting
    Policies

The consolidated financial statements are
prepared on the accrual basis of accounting and include the
accounts of Alion prior to the Transaction and the accounts of
Alion and its wholly owned subsidiary HFA subsequent to the
Transaction. All significant intercompany accounts have been
eliminated in consolidation.



| |                                    
| | -----------------------------------
| | Fiscal, Quarter and Interim Periods

The Companys fiscal year ends on
September 30. Beginning with the fiscal year ending
September 30, 2004, the Company has been operating based on
a three-month quarter, four-quarter fiscal year whereas for the
fiscal year ended September 30, 2003 the Company operated
on a 13-period fiscal year that consisted of three, four-week
periods in its first interim period; three, four-week periods in
its second interim period; four, four-week periods in its third
interim period; and the balance of the fiscal year of
approximately three, four-week periods in its fourth interim
period. For the quarter ended December 31, 2003, there were
sixty-four available work days (based on a standard work week of
Monday through Friday and excluding designated holidays
recognized by Alion) as compared to fifty-eight available
workdays for the interim period ended December 20, 2002.
Accordingly, comparisons between the three-

6



---



##### 



month quarter ended December 31, 2003 and
the twelve-week interim period ended December 20, 2002 will
need to consider the differing lengths of time.




| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

On January 12, 2004, the Financial
Accounting Standards Board (FASB) issued Staff Position
No. FAS 106-1 Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (FSP 106-1). FSP 106-1
permits employers that sponsor postretirement benefit plan to
defer accounting for any effects of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 that was signed
into law on December 8, 2003.

In accordance with the FSP 106-1, neither the
accumulated postretirement benefit obligation nor the net
periodic postretirement benefit costs reflected in the
accompanying financial statements reflect the effect of the
Medicare Prescription Drug Improvement and Modernization Act of
2003 on Alions plan. Authoritative guidance, when issued,
could require the Company to change previously reported
information.



|   |                          
|-- | -------------------------
|4. | Earnings (Loss) Per Share

For the pro forma interim period ended
December 20, 2002, pro forma loss per share has been
computed as though the 2,575,408 shares of common stock sold by
the Company to the employee stock ownership plan
(ESOP) component of its Employee Ownership Savings and
Investment Plan (KSOP) on December 20, 2002 to fund
the Transaction described in Note 1, were outstanding for the
entire period presented. Prior to the sale of shares of common
stock to the ESOP, the Companys capital structure
consisted of 100 shares of common stock issued and outstanding.
Accordingly, historical earnings per share information for
periods prior to the Transaction has not been presented as it is
not indicative of the Companys ongoing capital structure.

Loss per share excludes the impact of warrants
and stock appreciation rights described herein as the impact of
their inclusion would be anti-dilutive for all periods presented.



|   |                               
|-- | ------------------------------
|5. | Goodwill and Intangible Assets

The Company accounts for goodwill and other
intangible assets in accordance with the provisions of SFAS
No. 142, which requires, among other things, the
discontinuance of goodwill amortization. In addition, goodwill
is to be reviewed at least annually for impairment. The Company
has elected to perform this review annually at the end of each
fiscal year. The accompanying pro forma statement of operations
excludes historical goodwill amortization expense.

As a result of the Transaction described in Note
1, for the fiscal year ended September 30, 2003, the
Company recorded goodwill of approximately $63.6 million, which
is subject to the aforementioned annual impairment review.
During fiscal year 2003 and for the quarter ended
December 31, 2003, goodwill increased by $1.9 million
and $9.4 million, respectively, as a result of recording
additional obligations related to earnout arrangements and the
acquisition described in Note 9. In addition, the Company
recorded intangible assets of approximately $30.6 million
during fiscal year 2003 comprised primarily of purchased
contracts. The intangible assets have an estimated useful life
of three years and are being amortized using the straight-line
method.



|   |                                 
|-- | --------------------------------
|6. | Redeemable Common Stock Warrants

In connection with the issuance of the Mezzanine
Note, Subordinated Note, and the Deferred Compensation Agreement
described in Note 7, the Company issued 524,229, 1,080,437, and
22,062, respectively, detachable redeemable common stock
warrants (the Warrants) to the holders of those instruments. The
Warrants have an exercise price of $10 per share and are
exercisable until December 20, 2008 for the warrants
associated with the Mezzanine Note and the Deferred Compensation
Agreement and until December 20, 2010 for the warrants
associated with the Subordinated Note. In addition, the

7



---



##### 



Warrants enable the holders to sell the warrants
back to the Company, at predetermined times, at the then current
fair value of the common stock less the exercise price.
Accordingly, the warrants are classified as debt instruments in
accordance with Emerging Issues Task Force Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Companys Own Stock. The
estimated fair value of the Warrants of approximately
$10.3 million on the date of issuance was recorded as a
discount to the face value of the notes issued and as a
liability in the accompanying consolidated balance sheet. The
estimated fair value of the Warrants was $15.5 million as
of December 31, 2003. Changes in the estimated fair value
of the Warrants are recorded as interest expense in the
accompanying consolidated statement of operations.




|   |               
|-- | --------------
|7. | Long-term Debt

On December 20, 2002, the Company executed a
senior credit agreement among LaSalle Bank National Association,
US Bank, National Cooperative Bank, Orix Financial Services,
Inc. and BB&T Bank to refinance and replace IITRIs
prior credit arrangements and to finance, in part, the
Transaction. The senior credit facility consists of a
$25.0 million revolving credit facility and a
$35.0 million term loan. All principal obligations under
the revolving credit facility are to be repaid in full no later
than December 20, 2007. The senior credit facility is
secured by a first priority, perfected security interest in all
of the Companys current and future tangible and intangible
property. As of December 31, 2003, the Company had
approximately $8.3 million borrowed under the revolving
credit facility.

As of December 31, 2003, the remaining
principal repayments (taking into account previous repayments)
of $28.0 million under the term loan will be payable in
quarterly installments, yielding remaining fiscal year
repayments in the following amounts:

|                                 |  |                |       | 
|-------------------------------- |  | -------------- | ----- | 
|Fiscal Year Ending September 30, |  | (In thousands)
|2004                             |  | $              | 3,750 | 
|2005                             |  | $              | 6,875 | 
|2006                             |  | $              | 8,250 | 
|2007                             |  | $              | 8,875 | 
|2008                             |  | $              | 250   | 

For the periods until the receipt of the
compliance certificate and audited financial statements for the
fiscal year ended September 30, 2003, the Companys
borrowings under the senior credit facility were to bear
interest at either of two floating rates: a per year rate equal
to the Eurodollar rate plus 350 basis points, or LaSalles
prime rate (base rate) plus 200 basis points.

Effective February 14, 2003, the Company
exercised its right and elected that the term note bear interest
at a Eurodollar rate. This election did not affect the interest
rate applicable to amounts borrowed under the revolving line of
credit. As a result, interest under the term note was payable at
the prime rate (base rate) plus 200 basis points until
February 14, 2003. Thereafter and until December 28,
2003, the term note bore interest at the Eurodollar rate plus
350 basis points.

After December 28, 2003, based on
calculation of the Companys leverage ratio as of
September 30, 2003, borrowings under the term note will
bear interest at the Eurodollar rate plus 325 basis points.

The Company entered into an interest rate cap
agreement effective as of February 3, 2003 with one of its
senior lenders. Under this agreement, the Companys maximum
effective rate of interest payable on the first $25 million
of principal under of its term note is not to exceed 6%. Any
interest the Company pays on the first $25 million of
principal in excess of 6% will be calculated and reimbursed to
the Company semiannually by the senior lender pursuant to the
cap agreement. This cap agreement expires February 3, 2007.
As of December 31, 2003, the cap agreement had a fair value
of approximately $0.1 million, which has been recorded in
the accompanying consolidated balance sheet.

On December 20, 2002, the Company paid
$1.7 million to obtain a senior credit facility that
includes a $35 million Senior Term Note and a
$25 million revolving credit facility which was recorded as
debt

8



---



##### 



discount. The Company is using the effective
interest method to accrete the value of long-term debt to its
face value. For the quarter ended December 31, 2003, the
Company recognized approximately $0.5 million of interest
expense related to accretion of this discount.


On February 6, 2004, Amendment Number 1
to the Senior Credit Agreement was entered into, whereby the
definition of Borrowing Base (Senior Debt) was
redefined for the fiscal period ending December 31, 2003.
As such, the amended definition potentially increases the
Companys borrowing capacity under the senior credit
agreement.

On December 20, 2002, the Company issued to
IITRI a Mezzanine Note securities purchase agreement (Mezzanine
Note) with a face value of approximately $20.3 million. The
Mezzanine Note served as part of the consideration for the
Transaction. The Company is required to pay interest on the
Mezzanine Note at a rate of 12% per year, based on a 360-day
year of twelve 30-day months. Interest is payable quarterly in
cash. The Company is required to pay the outstanding principal
amount of the Mezzanine Note in a lump sum on December 20,
2008. The Mezzanine Note is subordinate to the senior credit
facility, but ranks senior to the subordinated note.

On March 28, 2003, an officer of the Company
purchased a portion of the Companys Mezzanine Note owned
by IITRI for $750,000, its face value, along with warrants to
purchase 19,327 shares of Alions common stock at an
exercise price of $10.00 per share. On November 12, 2003,
the Company purchased the Mezzanine Note and warrants from the
officer for an aggregate purchase price of $1,034,020.

Also, on December 20, 2002, the Company
issued a seller note to IITRI under a seller note securities
purchase agreement (Subordinated Note) with a face value of
$39.9 million. The Subordinated Note served as part of the
consideration for the Transaction. The Subordinated Note bears
interest at a rate of 6% per year through December 2008 payable
quarterly by the issuance of non-interest bearing notes
(paid-in-kind notes or PIK notes) maturing at the same time as
the Subordinated Note. The issuance of the PIK notes will have
the effect of deferring the underlying cash interest expense on
the Subordinated Note, but because the PIK notes will not
themselves bear interest, they will not have the effect of
compounding any interest on these interest payment obligations.
Commencing December 2008, the Subordinated Note will bear
interest at 16% per year payable quarterly in cash through the
time of repayment in full of the Subordinated Note. Principal on
the Subordinated Note will be payable in equal installments of
$19.95 million in December 2009 and December 2010; the PIK
notes are also due in equal installments of $7.2 million on
these same dates.

On December 20, 2002, the Company entered
into a deferred compensation agreement with Dr. Bahman
Atefi, its President, CEO and Chairman, as a condition to
completing the Transaction. Under the deferred compensation
agreement, Dr. Atefi is entitled to a payment of approximately
$857,000 on December 20, 2008, plus 12% cash interest per
year.

Under the terms of the Senior Credit Facility and
Mezzanine Note, the Company is subject to covenants including
financial covenants with respect to minimum fixed charge
coverage, maximum total senior leverage, maximum total leverage,
maximum capital expenditures, minimum EBITDAE, as defined, and
other customary covenants. As of December 31, 2003, the
Company was in compliance with these financial covenants.

9



---



##### 



In summary, for the aforementioned debt
agreements, as of December 31, 2003 the remaining fiscal
year repayments (at face amount before debt discount) are as
follows:

|                                          |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|----------------------------------------- |  | --------------------------------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ----- | --- |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                          |  |                                              
|                                          |  | Post-Transaction 8-Year Period (in thousands)
|                                          |  |                                              
|                                          |  | 2004                                          |       | 2005 |  | 2006 |       | 2007 |  | 2008 |       | 2009 |  | 2010 |       | 2011 |  | Total
|Principal payments                        |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |      
|Senior term note                          |  | $                                             | 3,750 |      |  | $    | 6,875 |      |  | $    | 8,250 |      |  | $    | 8,875 |      |  | $     | 250 |  |  |   |        |  |  |   |        |  |  |   |        |  |  | $ | 28,000 | 
|Mezzanine note and agreement with officer |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  | $ | 21,200 |  |  |   |        |  |  |   |        |  |  |   | 21,200 | 
|Subordinated note                         |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  | $ | 19,950 |  |  | $ | 19,950 |  |  |   | 39,900 | 
|                                          |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 
|Total principal payments                  |  | $                                             | 3,750 |      |  | $    | 6,875 |      |  | $    | 8,250 |      |  | $    | 8,875 |      |  | $     | 250 |  |  | $ | 21,200 |  |  | $ | 19,950 |  |  | $ | 19,950 |  |  | $ | 89,100 | 
|                                          |  |                                               |       |      |  |      |       |      |  |      |       |      |  |      |       |      |  |       |     |  |  |   |        |  |  |   |        |  |  |   |        |  |  |   |        | 



|   |                                                   
|-- | --------------------------------------------------
|8. | Segment Information and Customer
    Concentration

The Company operates in one segment, delivering a
broad array of scientific and engineering expertise to research
and develop technological solutions for problems relating to
national defense, public health and safety under contracts with
the U.S. Government, state and local governments, and commercial
customers. The Companys federal government customers
typically exercise independent contracting authority, and even
offices or divisions within an agency or department may
directly, or through a prime contractor, use the Companys
services as a separate customer so long as that customer has
independent decision-making and contracting authority within its
organization.

For the quarter ended December 31, 2003,
revenues from services provided to various agencies of the U.S.
Government represented $57.8 million or approximately 98%,
and $46.7 million or approximately 99% of revenues for the
interim period ended December 20, 2002. Contract
receivables from agencies of the U.S. Government represented
approximately $46.1 million, or 94%, of accounts receivable
at December 31, 2003 and $43.9 million, or 91%, at
December 20, 2002.

In addition, during the quarter ended
December 31, 2003, there were no sales by Alion to any
customers within a single country (except for the United States)
where the sales accounted for 10% or more of total revenue. The
Company treats sales to U.S. Government customers as sales
within the United States regardless of where the services are
performed. Substantially all of the Companys assets were
located within the United States for the quarter ended
December 31, 2003.



|   |                                                                 
|-- | ----------------------------------------------------------------
|9. | Acquisition of Innovative Technologies
    Solutions Corporation

On October 31, 2003, Alion acquired 100% of
the outstanding shares of Innovative Technologies Solutions
Corporation (ITSC) for $4.0 million. The transaction
is also subject to an earnout provision not-to-exceed
$2.5 million. ITSC is a New Mexico corporation with
approximately 53 employees, the majority of whom are located in
New Mexico. ITSC provides nuclear safety and analysis services
to the U.S. Department of Energy (DOE) as well as to the
commercial nuclear power industry. While the allocation of
purchase price is preliminary, the Company has recorded
approximately $3.7 million of goodwill as a result of the
acquisition.



|    |                              
|--- | -----------------------------
|10. | Commitments and Contingencies

On September 16, 2002, IITRI filed a lawsuit
against Clyde Andrews and William Bewley, former shareholders of
AB Technologies, Inc., in the U.S. District Court for the
Eastern District of Virginia. IITRI acquired substantially all
of the assets of AB Technologies in February 2000.

The lawsuit sought to compel the defendants to
submit disputed issues to an independent accounting firm, in
accordance with the terms of the asset purchase agreement. The
Company also sought declaratory judgment that it was entitled to
a downward adjustment to the purchase price and a finding that
it properly computed the earnout required by the asset purchase
agreement.

Messrs Andrews and Bewley filed a lawsuit against
IITRI for breach of the AB Technologies asset purchase agreement
claiming at least $8.2 million in damages. The
Andrews-Bewley lawsuit was removed

10



---



##### 



to federal court and consolidated into
IITRIs lawsuit. The federal court stayed the litigation
and ordered both parties to submit the dispute to the
independent accounting firm of Grant Thornton for arbitration.


On January 20, 2004, the arbitrator issued a
decision awarding $725,829 to Messrs. Andrews and Bewley as
a purchase price adjustment under the AB Technologies asset
purchase agreement and increasing the earnout payment amounts to
be paid by the Company under the asset purchase agreement. The
arbitrators adjustments reflect an increase from $457,086
to $771,038 for the fiscal year 2000 earnout payment, an
increase from $395,734 to $1,165,651 for the fiscal year 2001
earnout payment, and an increase from $741,690 to $1,826,187 for
the fiscal year 2002 earnout payment. In sum, the arbitrator
awarded Messrs. Andrews and Bewley approximately
$4.4 million of the at least $8.2 million in damages
that they sought, and the arbitrator also established guidelines
to be used to calculate future earnout payments through fiscal
year 2005. As a result of the arbitrators decision, the
total amount due to Messrs. Andrews and Bewley for purchase
price adjustment and earnout payments through fiscal year 2002
under the AB Technologies asset purchase agreement is
approximately $4.4 million, of which the Company had
already accrued approximately $2.9 million as of
September 30, 2003. The payment of the approximately
$4.4 million amount is due from the Company in the second
quarter of fiscal year 2004.



|    |                                          
|--- | -----------------------------------------
|11. | Acquisition and Pro Forma
    Information

On December 20, 2002, Alion acquired
substantially all of the assets and certain of the liabilities
of IITRI, excluding the assets and liabilities of IITRIs
Life Sciences Operation for approximately $127.3 million as
described in Note 1. In connection with the acquisition, the
Company formed the KSOP, which has an ESOP component. The ESOP
trustee, State Street Bank and Trust Company, used the proceeds
from the ESOP aggregating approximately $25.8 million to acquire
approximately 2.58 million shares or 100% of the
Companys outstanding common stock. The Company used the
funds from the sale of common stock to the ESOP and proceeds
from the other debt instruments described in Note 7, to fund the
Transaction. The acquisition was accounted for using the
purchase method. The acquisition occurred on the last day of the
Companys first interim period in fiscal 2003, and
accordingly, the accompanying consolidated statements of
operations exclude the results of operations of the acquired
business prior to the acquisition. The purchase price has been
allocated to the acquired assets and assumed liabilities based
on their estimated fair values at the date of acquisition.

Prior to the Transaction, the Companys
activities had been organizational in nature. The consolidated
balance sheet as of December 20, 2002 reflects the
estimated fair values of the acquired assets and assumed
liabilities, the sale of common stock to the ESOP, and the debt
and warrants issued as described in Notes 6 and 7.

The pro forma consolidated statement of
operations for the interim period ended December 20, 2002
has been prepared by giving effect to the following transactions
as if those transactions had been consummated on October 1,
2002:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | The incurrence of debt with detachable warrants
    to purchase common stock as described in Notes 6 and 7;
|
| |  | The consummation of the Transaction, accounted
    for using the purchase method; and                      
|
| |  | The purchase of common stock by the ESOP.                                                                  

For the interim period ended December 20,
2002, the pro forma consolidated statement of operations
includes pro forma adjustments to reverse historical
amortization expense related to pre-Transaction goodwill, to
record the amortization of identifiable intangible assets, to
record interest expense on debt issued to finance the
Transaction, to record the amortization of debt issuance costs,
and to record the accretion of debt to face value to reflect the
discount for the estimated fair value of Warrants issued.

The pro forma information does not purport to be
indicative of the results of operations that would have actually
been obtained if the transactions had occurred on the dates
indicated or the results of operations that will be reported in
the future.

11



---



##### 





|    |                 
|--- | ----------------
|12. | Subsequent Event

On February 13, 2004, the Company purchased
all the outstanding capital stock of Identix Public Sector, Inc.
(IPS), a Virginia corporation, for approximately
$8 million, using proceeds from the Companys existing
line of credit. In addition, at closing the Company reimbursed
IPSs parent company $0.9 million for intercompany
payables. A contingent payment of $0.5 million may be due
from the Company in the future. Alion expects the IPS
acquisition to enable the Company to expand its program
management support within the U.S. Navy and provide a new
core competency in facilities engineering management.



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF
    FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial
condition and results of operations should be read together with
the consolidated financial statements and the notes to those
statements. This discussion contains forward-looking statements
that involve risks and uncertainties. These statements relate to
our future plans, objectives, expectations and intentions and
are for illustrative purposes only. These statements may be
identified by the use of words such as believe,
expect, intend, plan,
anticipate, likely, will,
pro forma, forecast,
projections, and similar expressions.

The factors that could cause actual results to
differ materially from those anticipated include, but are not
limited to, the following: changes to the ERISA laws related to
the Companys Employee Ownership, Savings and Investment
Plan; changes to the tax laws relating to the treatment and
deductibility of goodwill, the Companys subchapter S
status, or any change in the Companys effective tax rate;
additional costs associated with compliance with the
Sarbanes-Oxley Act of 2002, including any changes in the
SECs rules, and other corporate governance requirements;
failure of government customers to exercise options under
contracts; funding decisions relating to U.S. Government
projects; government contract procurement (such as bid protest)
and termination risks; competitive factors such as pricing
pressures and/or competition to hire and retain employees; the
results of current and/or future legal proceedings and
government agency proceedings which may arise out of our
operations (including our contracts with government agencies)
and the attendant risks of fines, liabilities, penalties,
suspension and/or debarment; material changes in laws or
regulations applicable to the Companys businesses; as well
as other risk factors discussed in the Companys
registration statement on Form S-1 filed with the SEC on
January 22, 2004.

Readers are cautioned not to place undue reliance
on these forward-looking statements, which reflect
managements view only as of February 13, 2004. The
Company undertakes no obligation to update any of the
forward-looking statements made herein, whether as a result of
new information, future events, changes in expectations or
otherwise. This discussion addresses only our continuing
operations.



| |                                               
| | ----------------------------------------------
| | Critical Accounting Estimates and
    Policies

Our significant accounting policies are described
in Note 2 to the consolidated financial statements included in
Post-Effective Amendment No. 4 to the Companys
registration statement on Form S-1 (No. 333-89756)
filed with the SEC on January 22, 2004.

Critical accounting policies are defined as those
that are reflective of significant judgments and uncertainties,
which potentially result in materially different results under
different assumptions and conditions. Application of these
policies is a critical element in the portrayal of our financial
condition and results of operations. The discussion and analysis
of our financial condition and results of operations are based
on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these quarterly and interim period consolidated financial
statements requires management to make estimates and judgments
that affect the reported amount of assets, liabilities, revenues
and expenses. Actual results may differ from these estimates
under different assumptions or conditions.

12



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Our critical accounting policies are set forth
below:



| |                                                     
| | ----------------------------------------------------
| | Revenue Recognition, Cost Estimation and
    Payment

We recognize revenue when persuasive evidence of
an arrangement exists, services have been rendered, the contract
price is fixed or determinable, and collectibility is reasonably
assured. We have a standard internal process that we use to
determine whether all required criteria for revenue recognition
have been met. This standard internal process includes a monthly
review of contract revenues and expenses by several levels of
management. This review covers, among other matters, progress
against schedule, project staffing and levels of effort, risks
and issues, subcontract management, incurred and estimated
costs, and disposition of prior action items. This monthly
internal review is designed to determine whether the overall
progress on a contract is consistent with the effort expended
and revenue recognized to date.

Our revenues consist primarily of payments for
the work of our employees, and to a lesser extent, related costs
for materials and subcontract efforts under contracts with our
customers. Cost of services consists primarily of compensation
expenses for program personnel, the fringe benefits associated
with this compensation, and other direct expenses incurred to
complete programs, including cost of materials and subcontract
efforts.

The Companys revenue results from contract
research and other services under a variety of contracts, some
of which provide for reimbursement of cost plus fees and others
of which are fixed-price or time-and-material type contracts.
Absent evidence to the contrary, we recognize revenues as
follows:

Revenue on cost-reimbursement contracts is
recognized as costs are incurred and include an estimate of
applicable fees earned.

The percentage of completion method is used to
recognize revenue on fixed-price contracts based on various
performance measures. From time to time, facts develop that
require the Company to revise its estimated total costs or
revenues expected. The cumulative effect of revised estimates is
recorded in the period in which the facts requiring revisions
become known. The full amount of anticipated losses on any type
of contract are recognized in the period in which they become
known.

Under time-and-material contracts, labor and
related costs are reimbursed at negotiated, fixed hourly rates.
Revenue on time-and-material contracts is recognized at
contractually billable rates as labor hours and direct expenses
are incurred.

Contracts with agencies of the federal government
are subject to periodic funding by the contracting agency
concerned. Funding for a contract may be provided in full at
inception of the contract or ratably throughout the term of the
contract as the services are provided. If funding is not
assessed as probable, revenue recognition is deferred until
realization is probable.

Contract costs on federal government contracts,
including indirect costs, are subject to audit by the federal
government and adjustment pursuant to negotiations between the
Company and government representatives. All of the
Companys federal contract indirect costs have been audited
and agreed upon through fiscal year 2001. Contract revenues on
federal government contracts have been recorded in amounts that
are expected to be realized upon final settlement. The Company
has submitted its fiscal year 2002 indirect cost submission to
its cognizant government audit agency; this submission is
undergoing the audit process at this time. The Company intends
to submit its fiscal year 2003 indirect cost submission on or
about March 31, 2004.

The Company recognizes revenue on unpriced change
orders as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be
recovered. The Company recognizes revenue in excess of costs on
unpriced change orders only when management can also reliably
estimate the amount of excess and experience provides a
sufficient basis for recognition. The Company recognizes revenue
on claims as expenses are incurred only to the extent that the
Company expects it is probable that such costs will be recovered
and the amount of recovery can be reliably estimated.

13



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Contract revenue recognition inherently involves
estimation. Examples of estimates include the contemplated level
of effort to accomplish the tasks under contract, the cost of
the effort, and the ongoing assessment of our progress towards
completing the contract. From time to time, as part of our
standard management processes, facts develop that require us to
revise our estimated total costs or revenues. In most cases,
these revisions relate to changes in the contractual scope of
our work. To the extent that a revised estimate affects contract
profit or revenue previously recognized, we record the
cumulative effect of the revision in the period in which the
facts requiring the revision become known. Anticipated losses
are recognized in the accounting period in which they are first
determined.

For the quarter ended December 31, 2003, we
derived approximately 64%, 23% and 13% of our revenues from
cost-plus, time-and-material and fixed-price contracts,
respectively.

Our most significant expense is our cost of
services, which consists primarily of direct labor costs for
program personnel and direct expenses incurred to complete
contracts, including cost of materials and subcontract efforts.
Our ability to accurately predict personnel requirements,
salaries and other costs, as well as to manage personnel levels
and successfully redeploy personnel, can have a significant
impact on our cost of services. Overhead costs consist primarily
of indirect costs such as facility lease expenses, indirect
labor expenses, supplies and other office expenses in support of
our direct contract activities. General and administrative
expenses consist primarily of costs associated with our
management, finance and administrative groups; personnel
training; sales and marketing expenses which include bid and
proposal efforts; and certain occupancy, travel and other
corporate costs.

The majority of our revenues is earned under
contracts with various departments and agencies, or prime
contractors, of the federal government. Certain revenues and
payments we receive are based on provisional billings and
payments that are subject to adjustment under audit. Federal
government agencies and departments have the right to challenge
our cost estimates and allocations with respect to government
contracts. Also, contracts with such agencies are subject to
audit and possible adjustment to account for unallowable costs
under cost-type contracts or other regulatory requirements that
affect both cost-type and fixed-price contracts.



| |                                                
| | -----------------------------------------------
| | Goodwill and Identifiable Intangible
    Assets

The Company accounts for goodwill and other
intangible assets in accordance with the provisions of SFAS
No. 142, which requires, among other things, the
discontinuance of goodwill amortization. In accordance with the
provisions of SFAS No. 142, the Company no longer amortizes
goodwill, however goodwill is to be reviewed at least annually
for impairment. The Company has elected to perform the annual
review at the end of each fiscal year. In addition, the Company
will assess the impairment of goodwill and identifiable
intangible assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors
considered important to possibly trigger an impairment review
consist of:



| |   |                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------
| |  | Significant underperformance relative to expected
    historical or projected future operating results;      
|
| |  | Significant changes in the manner of use of the
    acquired assets or the strategy for the overall business;
|
| |  | Significant negative industry or economic trends;
    and                                                    
|
| |  | Significant decline in Alions stock price
    for a sustained period.                                       

When it is determined that the carrying value of
intangibles and goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment,
management measures any impairment based upon a projected
discounted cash flow method or other measure of fair value
including independent valuation.

As of December 31, 2003, the Company has
goodwill of approximately $74.9 million, which will be subject
to the aforementioned annual impairment review. In addition, in
connection with the IITRI acquisition, the Company recorded
intangible assets of approximately $30.6 million, comprised
primarily of

14



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##### 



purchased contracts. The intangible assets have
an estimated useful life of three years and are amortized using
the straight-line method.


Comparisons of Results of Operations

The Companys fiscal year ends on
September 30. Beginning with the fiscal year ending
September 30, 2004, the Company began operating on a
three-month quarter, four-quarter fiscal year whereas for the
fiscal year ended September 30, 2003 the Company operated on a
13-period fiscal year consisting of three, four-week periods in
its first interim period; three, four-week periods in its second
interim period; four, four-week periods in its third interim
period; and the balance of the fiscal year of approximately
three, four-week periods in its fourth interim period. For the
quarter ended December 31, 2003, there were sixty-four
available work days (based on a standard, five-day work week of
Monday through Friday and excluding designated holidays
recognized by Alion) as compared to fifty-eight available work
days for the interim period ended December 20, 2002.
Accordingly, comparisons between the three-month quarter ended
December 31, 2003 and the twelve-week interim period ended
December 20, 2002 will need to take into account the
differing lengths of time.

As described in the notes to the accompanying
consolidated financial statements, Alion completed the
acquisition of substantially all of the assets and certain of
the liabilities of IIT Research Institute on December 20,
2002, the last day of the Companys first interim period
for the fiscal year ended September 30, 2003. The following
discussion and analysis of results of operations relates to the
results of operations for the quarter ended December 31, 2003
and for the pro forma results of operations for the interim
period ended December 20, 2002, assuming that the IITRI
acquisition had been consummated on the first day of the interim
period, October 1, 2002.

The following table sets forth, for each period
indicated, the percentage of our revenues derived from each of
our major types of customers.

|                          |  |                   |       |                      |  |  |       |  
|------------------------- |  | ----------------- | ----- | -------------------- |  |  | ----- | -
|                          |  | Quarter Ended     |       | Interim Period Ended
|                          |  | December 31, 2003 |       | December 20, 2002   
|                          |  |                   |       |                     
|Department of Defense     |  |                   | 93.0  | %                    |  |  | 93.0  | %
|Federal Civilian Agencies |  |                   | 4.9   |                      |  |  | 5.8   |  
|Commercial/State/Local    |  |                   | 2.1   |                      |  |  | 1.2   |  
|                          |  |                   |       |                      |  |  |       |  
|Total                     |  |                   | 100.0 | %                    |  |  | 100.0 | %
|                          |  |                   |       |                      |  |  |       |  

Results of Operations

Quarter Ended December 31, 2003 Compared
to Pro Forma Interim Period Ended December 20,
2002

Revenues.Revenues
increased $11.3 million, or 24.0%, to $58.6 million
for the quarter ended December 31, 2003, from
$47.3 million for the interim period ended
December 20, 2002. This $11.3 million increase is
attributable to the following events or circumstances:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | For the quarter ended December 31, 2003
    there were sixty-four available workdays (based on a standard
    five-day work week of Monday through Friday and excluding
    designated holidays recognized by Alion) as compared to
    fifty-eight for the interim period ended December 20, 2002. The
    six-day increase in the number of available work days for the
    quarter ended December 31, 2003 resulted in additional
    revenue of approximately $5.4 million of the
    $11.3 million increase.
|
| |  | Alion completed the acquisition and purchase of
    Integrated Technology Solutions Corporation (ITSC) on
    October 31, 2003. For the nine-week period for
    November 1, 2003 to December 31, 2003, the revenue
    generated by the activities of ITSC was approximately
    $1.4 million which contributed to the $11.3 million
    increase in revenue.                                                                                                                                                   
|
| |  | Our performance of additional work under
    contracts that were in existence during the prior year. An
    increase in our decommissioning and demilitarization support
    services to the U.S. Armys                                                                                                                                                                                                                                                                                                         

15



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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Newport Chemical Agent Disposal Facility (NECDF),
    under a subcontract to Parsons Infrastructure and Technology
    Group, Inc., accounted for approximately $1.1 million of
    increased revenue, while our support to the Department of
    Defense Joint Spectrum Center (JSC) accounted for
    approximately $0.3 million of increased revenue. Additional work
    in modeling and simulation services performed under the MSIAC
    contract with the Department of Defense contributed
    approximately $0.2 million of the revenue increase.

On the balance of our contracts, revenue
increased approximately $2.9 million for the quarter ended
December 31, 2003 as compared to the interim period ended
December 20, 2002.

Excluding the $5.4 million and
$1.4 million increases in revenue associated with the
impact of the additional six working days during the quarter
ended December 31, 2003 and the purchase of ITSC operations
(which occurred on October 31, 2003), respectively, revenue
increased approximately $4.5 million, or 9.5%, to
$51.8 million (as adjusted) for the quarter ended
December 31, 2003 from $47.3 million for the interim
period ended December 20, 2002.

As a component of revenue, material and
subcontract (M&S) revenue increased approximately
$4.8 million, or 46.6%, to $15.1 million for the
quarter ended December 31, 2003 from $10.3 million for
the interim period ended December 20, 2002. Approximately
$1.4 million of the $4.8 million increase is due to
the six-day increase in available workdays for the quarter ended
December 31, 2003 as compared to the interim period ended
December 20, 2002. Also, approximately $0.5 million of
the $4.8 million increase in M&S revenue is related to
activities performed by ITSC, which began to be included in the
Companys operations on November 1, 2003.
Approximately $2.9 million of the $4.8 million
increase is associated with M&S activity on the balance of
our contracts. M&S revenues vary in both dollar amount and
schedule which are dependent on the requirements of the
contracts.

Direct Contract Expenses.Direct contract expenses increased
$7.4 million, or 21.3%, to $42.1 million for the
quarter ended December 31, 2003, from $34.7 million for the
interim period ended December 20, 2002. As a component of
direct contract expenses, direct labor costs for the quarter
ended December 31, 2003 increased by $3.5 million or
15.0%. Approximately $2.5 million of the $3.5 million
increase in direct labor cost is due to the impact of the
additional six working days in the quarter ended
December 31, 2003. Also, approximately $0.7 million of
the increase in direct labor cost is attributable to the direct
labor performed by ITSC, which was included in our operations
beginning November 1, 2003. The remaining $0.3 million
increase is attributable to increased direct labor cost incurred
on existing contracts. As a component of direct contract
expense, other direct costs (ODCs) increased by
$0.4 million or 24.0% when compared to the interim period
ended December 20, 2002. As a component of direct contract
expense, material and subcontract cost increased approximately
$4.4 million, or 46.3%, to $13.9 million for the
quarter ended December 31, 2003, compared to
$9.5 million for the interim period ended December 20,
2002. Approximately $1.3 million of the $4.4 million
increase in M&S costs is due to the impact of the additional
six working days that occurred for the quarter ended
December 31, 2003. Approximately $0.4 million of the
increase in M&S is related to the M&S activities
performed by the ITSC, which was included in our operations
beginning November 1, 2003. The remaining increase of
$2.7 million is attributable to increased M&S cost
incurred on existing contracts. As a percentage of revenue,
direct contract expenses decreased to 71.9% for the quarter
ended December 31, 2003 from 73.3% for the interim period
ended December 20, 2002.

Gross Profit.Gross
profit increased $3.9 million, or 30.9%, to $16.5 million
for the quarter ended December 31, 2003, from
$12.6 million for the interim period ended
December 20, 2002. Approximately $1.5 million of the
$3.9 million increase is due to the additional gross profit
recognized on the revenue generated during the six additional
working days during the quarter ended December 31, 2003.
Also, approximately $0.3 million of the $3.9 million
increase is attributable to the gross profit generated by the
contracts performed by ITSC which was included in our operations
beginning November 1, 2003. Gross profit as a percentage of
revenue increased to 28.1% for the quarter ended
December 31, 2003, from 26.7% for the interim period ended
December 20, 2002. For the interim period ended
December 20, 2002, revenue was partially offset by
approximately $0.6 million, or 1.3% of revenue, related to
certain additional

16



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##### 



costs on a fixed-price contract and
non-reimbursable direct costs on a cost-reimbursement contract.
Excluding this adjustment, gross margin for the interim period
ended December 20, 2002 would have been 28.0%, which is
comparable to the 28.1% gross margin for the quarter ended
December 31, 2003.


Operating Expenses.Operating expenses, net of
depreciation and amortization, decreased approximately
$1.7 million, or 10.8%, to $14.0 million for the
quarter ended December 31, 2003, from $15.7 million
for the interim period ended December 20, 2002. However,
included in the $15.7 million of operating expenses for the
interim period ended December 20, 2002 were approximately
$5.5 million of non-recurring transaction-related expenses
(e.g., third party legal, accounting, finance, etc.) incurred in
connection with the purchase of assets from IITRI. No such
transaction-related expenses were incurred for the quarter ended
December 31, 2003. Accordingly, operating expenses, net of
depreciation and amortization and adjusted for non-recurring
transaction-related expenses, increased approximately
$3.8 million, or 37.2%, to $14.0 million for the
quarter ended December 31, 2003 from $10.2 million
(i.e. $15.7 million less $5.5 million) for the interim
period ended December 20, 2002. Approximately $1.3 million
of the increase in total operating expenses is due to the impact
of the six additional working days during the quarter ended
December 31, 2003 as compared to interim period ended
December 20, 2002. Approximately $0.3 million of the
$3.8 million increase is attributable to the operating
expenses incurred by ITSC, which was included in our operations
beginning November 1, 2003.

As a component of our operating expenses,
overhead expenses for indirect personnel and facilities costs
related to rental and occupancy expenses increased approximately
$1.7 million, or 35.4%, to $6.5 million for the
quarter ended December 31, 2003, from $4.8 million for
the interim period ended December 20, 2002. Approximately
$0.6 million of the $1.7 million increase is due to
the additional six working days during the quarter ended
December 30, 2003, and approximately $0.3 million is
attributable to facility and occupancy costs incurred by ITSC.
The remaining $0.8 million increase was driven by
infrastructure needs in support of the revenue growth.

As a second component of our operating expenses,
general and administrative expense increased approximately
$2.1 million, or 39.6%, to $7.4 million for the
quarter ended December 31, 2003, compared to
$5.3 million for the interim period ended December 20,
2002. Approximately $0.7 million of the $2.1 million
increase is due to the impact of the additional six working
days. Additionally, outside legal fees of approximately
$0.5 million associated with the AB Technologies
arbitration proceedings and year-end audit fees of approximately
$0.2 million were incurred for the quarter ended
December 31, 2003. The remaining $0.7 million increase
is due to additional costs to support the infrastructure. As a
percentage of revenues, general and administrative expenses
increased to 12.6% for the quarter ended December 31, 2003,
compared to 11.3% for the interim period ended December 20,
2002. For the quarter ended December 31, 2003,
approximately 1.1 percentage points of the 12.6% is
associated with the approximate $0.7 million increase in
general and administrative expenses related to outside legal and
audit fees.

Depreciation and Amortization.Depreciation and amortization expense
increased approximately $0.2 million, or 6.9%, to
$3.1 million for the quarter ended December 31, 2003,
as compared to $2.9 million for the interim period ended
December 31, 2003. The increase in depreciation expense is
due to the amortization associated with approximately
$1.3 million of capital expenditures incurred during the
year ended September 30, 2003. For each respective quarter
or interim period, approximately $2.4 million of total
amortization expense was incurred associated with the intangible
asset value assigned to purchased customer contracts.
Additionally, for each respective quarter or interim period,
approximately $0.1 million of depreciation expense was
incurred associated with the fair market value assigned to the
purchased assets.

Income from Operations.For the quarter ended
December 31, 2003, we sustained a $0.6 million loss
from operations compared with $6.0 million operating loss
for the interim period ended December 20, 2002. For the
interim period ended December 20, 2002, the
$6.0 million operating loss included approximately
$5.5 million of transaction-related expenses, described
above. Transaction-related costs of a similar nature did not
occur during the quarter ended December 31, 2003.

17



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Other Income and Expense.Other expenses increased approximately
$1.4 million, or 60.8%, to $3.7 million for the quarter
ended December 31, 2003 as compared to $2.3 million
for the interim period ended December 20, 2002.
Approximately $0.9 million of the $1.4 million
increase is associated with the interest expense incurred
related to the debt financing associated with the purchase of
the assets from IITRI; specifically, the warrant liabilities
increased as a result of an increase in the share price of
Alions common stock which resulted in additional interest
expense. Also, approximately $0.4 million of the
$1.4 million increase is associated with an increase in the
deferred compensation expense related to Alions stock
appreciation rights and Phantom Stock plans. For the quarter
ended December 31, 2003, the deferred compensation expense
was approximately $0.4 million while for the interim period
ended December 20, 2002, the deferred compensation expense
was zero. The remaining $0.1 million of the
$1.4 million increase is associated with interest expense
on the revolving credit facility.

Income Tax (Expense) Benefit.Our wholly-owned subsidiary, HFA, had
operating income of approximately $0.4 million for the
quarter ended December 31, 2003, compared to $0.1 million
for the interim period ended December 20, 2002. As of
December 20, 2002, HFA was determined to be a qualified
subchapter S subsidiary and is no longer treated as a
taxable corporation for federal income tax purposes. As a
result, HFA recorded no income tax provision for the quarter
ended December 31, 2003 and approximately
$0.03 million for the interim period ended
December 20, 2002.

Net Income (Loss).The net loss of $4.3 million for
the quarter ended December 31, 2003, as compared to net
loss of $8.2 million for the interim period ended
December 20, 2002, is due to the factors discussed above.

Recent Accounting Pronouncements.

On January 12, 2004, the Financial
Accounting Standards Board (FASB) issued Staff Position
No. FAS 106-1 Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003
(FSP 106-1). FSP 106-1 permits employers that sponsor
postretirement benefit plans to defer accounting for any effects
of the Medicare Prescription Drug Improvement and Modernization
Act of 2003 that was signed into law on December 8, 2003.

In accordance with FSP 106-1, neither the
accumulated postretirement benefit obligation nor the net
periodic postretirement benefit costs reflected in the
accompanying financial statements reflect the effect of the
Medicare Prescription Drug Improvement and Modernization Act of
2003 on Alions plan. Authoritative guidance, when issued,
could require the Company to change previously reported
information.

Liquidity and Capital Resources.

Historically, primary sources of liquidity of the
business we acquired on December 20, 2002 have been cash
provided by operations and revolving credit and term-loan
facilities. We intend to fund our operations primarily through
cash provided by operating activities and drawdowns from our
revolving credit facility.

The following discussion relates to both the cash
flows of Alion for the quarter ended December 31, 2003 and
the cash flows of the business we acquired from IITRI for the
interim period ended December 20, 2002. Alions
Consolidated Statements of Cash Flows are provided herein. The
statements of cash flow for the business we acquired from IITRI
are included in Post-Effective Amendment No. 4 to the
Companys Registration Statement on Form S-1 filed
with the SEC on January 22, 2004.

Net cash used in operating activities was
$0.6 million for the quarter ended December 31, 2003,
a decrease in use of $3.3 million from $3.9 million
used in operating activities of the business we acquired on
December 20, 2002 for the interim period ended
December 20, 2002. The primary reason for this
$3.3 million decrease in cash used in operations was that
during the interim period ended December 20, 2002,
approximately $3.2 million in cash was used to pay the
transaction costs associated with IITRIs sale of assets to
Alion. For the quarter ended December 31, 2003, there were
no such transaction-related costs incurred.

Net cash used in investing activities was
$4.3 million for the quarter ended December 31, 2003,
and $0.5 million for the interim period ended December 20,
2002 of the business we acquired on December 20,

18



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2002. Approximately $3.7 million of the
$4.3 million of cash used during the quarter ended
December 31, 2003 was for the acquisition and purchase of
ITSC. During the interim period ended December 20, 2002,
the cash Alion paid for the selected operations of IITRI was
$58.6 million. Cash of $25.5 million was generated
from the sale of Alion common stock to the ESOP Trust, and
$33.1 million resulted from borrowings under the Senior
Term Note.


Net cash provided by financing activities was
$6.4 million for the quarter ended December 31, 2003,
compared to cash provided by financing activities of
$4.0 million for the interim period ended December 20,
2002 of the business we acquired on December 20, 2002. This
increase of $2.4 million in net cash provided by financing
activities was primarily due to an increase in borrowings under
Alions working capital bank facility. For the quarter
ended December 31, 2003, the balance drawn under the
working capital facility was approximately $8.3 million. For the
interim period ended December 20, 2002, the balance drawn
was approximately $6.1 million. During the 2002 interim
period, the additional financing required to complete the
purchase of the selected operations of IITRI included a
$35.0 million Senior Term Note, a $20.3 million
Mezzanine Note (with warrants), a $39.9 million
Subordinated Note (with warrants), and the sale of
$25.5 million of common stock to the ESOP Trust.

For the quarter ended December 31, 2003, net
cash used in operating activities of $2.0 million is
associated with approximately a $1.6 million increase in
accounts receivable related to growth in our business. Other
assets increased approximately $1.5 million associated with
a $1.3 million investment in non-marketable securities and
$0.2 million in prepaid insurance. Increases in trade
accounts payable and other liabilities resulted in cash provided
by operations of approximately $1.0 million and $0.2
million, respectively.

Discussion of debt structure

On December 20, 2002, the Company entered
into a senior credit agreement among LaSalle Bank National
Association, US Bank, National Cooperative Bank, Orix Financial
Services, Inc. and BB&T Bank to refinance and replace
IITRIs prior credit arrangements. The new agreement
consists of a $25.0 million revolving credit facility and a
$35.0 million term loan to finance, in part, the IITRI
acquisition. Principal repayments under the term loan are
payable in quarterly installments. As of December 31, 2003,
the approximate remaining fiscal year principal repayments
(taking into account previous repayments) of $28.0 million
are as follows:

| |                                      |  |  |   |             | 
| | ------------------------------------ |  |  | - | ----------- | 
| | Fiscal Year Ended September 30, 2004 |  |  | $ | 3.8 million | 
| | Fiscal Year Ended September 30, 2005 |  |  | $ | 6.9 million | 
| | Fiscal Year Ended September 30, 2006 |  |  | $ | 8.3 million | 
| | Fiscal Year Ended September 30, 2007 |  |  | $ | 8.3 million | 
| | Fiscal Year Ended September 30, 2008 |  |  | $ | 0.3 million | 

The Company must repay all principal obligations
under the revolving credit facility no later than
December 20, 2007. The senior credit facility is secured by
a first priority, perfected security interest in all of the
Companys current and future tangible and intangible
property.

From December 20, 2002 until
January 31, 2004, the term note and the revolving line of
credit under the senior credit facility bore interest at either
of two floating rates at the Companys choice: an annual
rate equal to the Eurodollar rate plus 350 basis points, or the
LaSalle Bank prime rate plus 200 basis points. After
January 31, 2004, the interest rate equals the Eurodollar
rate or the prime rate plus margins which will vary depending
upon the Companys leverage ratio. Leverage is the ratio of
total funded debt, excluding the Subordinated Note (described
below), to earnings before interest, taxes, depreciation,
amortization, ESOP repurchase obligations and non-cash
compensation expenses.

19



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##### 



|                                                        |  |         |                      |          |  |           |                  |          |  |  |                  |  |  |  |                     | 
|------------------------------------------------------- |  | ------- | -------------------- | -------- |  | --------- | ---------------- | -------- |  |  | ---------------- |  |  |  | ------------------- | 
|Revolving Credit                                        |  |         |                      |          |  |           |                  |         
|and Term Loan                                           |  | Level I |                      | Level II |  | Level III |                  | Level IV
|                                                        |  |         |                      |          |  |           |                  |         
|Leverage ratio                                          |  |         | Less than 2.0 to 1.0 |          |  |           | Less than 2.5 to |          |  |  | Less than 3.0 to |  |  |  | Greater than or     | 
|                                                        |  |         |                      |          |  |           | 1.0 and greater  |          |  |  | 1.0 and greater  |  |  |  | equal to 3.0 to 1.0 | 
|                                                        |  |         |                      |          |  |           | than or equal to |          |  |  | than or equal to |  |  |  |                     | 
|                                                        |  |         |                      |          |  |           | 2.0 to 1.0       |          |  |  | 2.5 to 1.0       |  |  |  |                     | 
|Base rate margin                                        |  |         | 125 basis points     |          |  |           | 150 basis points |          |  |  | 175 basis points |  |  |  | 200 basis points    | 
|Eurodollar margin                                       |  |         | 275 basis points     |          |  |           | 300 basis points |          |  |  | 325 basis points |  |  |  | 350 basis points    | 
|Commitment fee (usage less than 40%)                    |  |         | 100 basis points     |          |  |           | 100 basis points |          |  |  | 100 basis points |  |  |  | 100 basis points    | 
|Commitment fee (usage greater than or equal to
    40%) |  |         | 50 basis points      |          |  |           | 50 basis points  |          |  |  | 50 basis points  |  |  |  | 50 basis points     | 

Effective February 14, 2003, the Company
exercised its right to have the term note bear interest at a
Eurodollar rate. This does not affect the interest rate on the
revolving line of credit. Interest on the term note was payable
at the LaSalle Bank prime rate plus 200 basis points through
February 14, 2003. Thereafter and until December 28,
2003, the term note bore interest at the Eurodollar rate plus
350 basis points.

After December 28, 2003, based on
calculation of the Companys leverage ratio as of
September 30, 2003, borrowings under the term note will
bear interest at the Eurodollar rate plus 325 basis points.

On February 6, 2004, Amendment Number 1
to the Senior Credit Agreement was executed by and among the
parties whereby the definition of Borrowing Base (Senior
Debt) has been redefined for the fiscal period ending
December 31, 2003. As such, the amended definition
potentially increases the Companys borrowing capacity
under the Senior Credit Agreement.

The Company and one of its senior lenders entered
into an interest rate cap agreement which runs from
February 3, 2003 through February 3, 2007. Under this
agreement, the Companys maximum effective interest rate on
the first $25.0 million of term loan principal will not
exceed 6%. The senior lender counterparty to the cap agreement
will semiannually calculate and reimburse the Company for all
interest payments in excess of this 6% ceiling.

On July 3, 2003, July 18, 2003, and
September 18, 2003, the Company made $0.6 million,
$0.7 million, and $0.7 million advance payments,
respectively, on the senior term loan. The Company paid the
second, third and fourth quarterly installments of
$1.25 million each on the senior term loan on Monday,
July 7, 2003 (with the approval of the senior lender
because Friday, July 4, 2003, was a bank holiday) ,
September 30, 2003, and December 19, 2003
respectively. On December 31, 2003, the Company had
approximately $28.0 million in borrowings outstanding under
the senior term note with approximately $8.3 million
outstanding under the revolving credit facility.

The revolving credit facility bears interest at
the LaSalle Bank prime rate plus 200 basis points, which was
6.0% as of December 31, 2003. The approximately
$28.0 million balance remaining under the senior term note
bears interest at the Eurodollar rate plus 350 basis points,
which was 4.61% as of December 31, 2003.

The Company may prepay its borrowings under the
senior credit facility in designated minimum amounts without
premium or penalty, other than (i) customary breakage costs
related to repayment of Eurodollar-based loans prior to the end
of an interest period, and (ii) breakage costs associated
with the early termination of any interest rate derivative
related to the senior credit facilities. The Company must prepay
its borrowings with a portion of its excess cash flow each year
along with proceeds of any permitted debt or equity issuance or
asset sale.

On December 20, 2002, the Company issued a
Mezzanine Note to IITRI with a face value of approximately
$20.3 million, as part of the consideration for the IITRI
acquisition. The Mezzanine Note is junior to the senior credit
facility, but ranks senior to the Subordinated Note. The Company
must pay the outstanding Mezzanine Note principal in a lump sum
on December 20, 2008. Each quarter, the Company

20



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##### 



must pay interest on the Mezzanine Note, in cash,
at a rate of 12% per year, based on a 360-day year of twelve
30-day months.


On March 28, 2003, an officer of the Company
purchased a portion of the Companys mezzanine note owned
by IITRI for $750,000, its face value, along with warrants to
purchase 19,327 shares of Alions common stock at an
exercise price of $10.00 per share. On November 12, 2003,
the Company purchased the Mezzanine Note and warrants from the
officer for an aggregate purchase price of $1,034,020.

Also on December 20, 2002, the Company
issued the Subordinated Note to IITRI, with a face value of
$39.9 million, as part of the consideration for the IITRI
acquisition. The Subordinated Note bears interest at a rate of
6% per year through December 2008, payable quarterly by the
issuance of non-interest bearing notes, called paid-in-kind or
(PIK) notes, which mature at the same time as the
Subordinated Note. Issuance of the PIK notes will have the
effect of deferring the underlying cash interest expense on the
Subordinated Note. The PIK notes do not bear interest and
therefore will not compound any interest on these payment
obligations. Commencing December 2008, the Subordinated Note
will bear interest at 16% per year payable quarterly in cash
until the Subordinated Note has been repaid in full. Principal
on the Subordinated Note is payable in equal installments of
$19.95 million in December 2009 and December 2010; the PIK notes
are also due in equal installments of $7.2 million on these
same dates.

On December 20, 2002, the Company entered
into a $0.9 million deferred compensation agreement with
Dr. Atefi, with payment terms substantially equivalent to
those of the Mezzanine Note previously described.

The Company issued detachable warrants with the
Mezzanine Note and the Subordinated Note. The outstanding
warrants associated with the Mezzanine Note represent the right
to buy approximately 12% of the Companys shares of common
stock on a fully diluted basis (assuming the exercise of all
warrants outstanding on September 30, 2003), at an exercise
price of $10.00 per share. These warrants are exercisable until
December 20, 2008 and contain a put right giving the holder
the right to require the Company to purchase the warrants back
at the then-current fair value of the Companys common
stock, minus the warrants exercise price. The put right
can be exercised within thirty days after a change in control,
or within thirty days prior to December 20, 2008, or within
thirty days after delivery to the current holders of an
appraisal of the per share value of the Companys common
stock as of September 30, 2008, if the ESOP still exists
and no public market price exists for the Companys common
stock. The warrants associated with the Subordinated Note
represent the right to buy approximately 26% of the
Companys shares of common stock on a fully diluted basis
(assuming the exercise of all warrants outstanding on September
30, 2003), at an exercise price of $10.00 per share. These
warrants are exercisable until December 20, 2010 and also
contain a put right giving the holder the right to require the
Company to purchase the warrants back at the then-current fair
value of the Companys common stock, minus the
warrants exercise price. This put right applies to up to
50% of these warrants within thirty days prior to
December 20, 2009 (or within thirty days after delivery to
the warrantholders of an appraisal of the per share value of the
Companys common stock as of September 30, 2009, if
the ESOP still exists and no public market price exists for its
common stock), and up to 100% of these warrants within thirty
days prior to December 20, 2010 (or within thirty days
after delivery to the warrant holders of an appraisal of the per
share value of its common stock as of September 30, 2010,
if the ESOP still exists and no public market value exists for
its common stock). All put rights terminate upon one or more
underwritten public offerings of Alion common stock resulting in
aggregate gross proceeds of at least $30.0 million to the
sellers (excluding proceeds received from certain affiliates of
Alion).

Under the terms of the senior credit facility,
the Company is subject to covenants including financial
covenants with respect to minimum fixed charge coverage, maximum
total senior leverage, maximum total leverage, maximum capital
expenditures and minimum EBITDAE. EBITDAE is defined in the
senior credit facility as earnings before interest, taxes,
depreciation, amortization, ESOP repurchase obligations and
non-cash compensation expenses. The Mezzanine Note contains
financial covenants similar to those contained in the senior
credit facility, but on less onerous terms mutually agreed upon
by the Company,

21



---



##### 



IITRI and the senior lenders. The Subordinated
Note includes covenants customary for deeply subordinated
obligations, such as the timely payment of principal and
interest.


The Company has a maximum $11.5 million
earnout payment obligation to the former shareholders of AB
Technologies arising from IITRIs acquisition of their
company. The earnout arrangement applies to results of certain
operations for part of fiscal year 2000, all of fiscal years
2001 through 2004, and part of fiscal year 2005. Messrs. Andrews
and Bewley filed a lawsuit against IITRI for breach of the AB
Technologies asset purchase agreement claiming at least
$8.2 million in damages. The Andrews-Bewley lawsuit was
removed to federal court and consolidated into IITRIs
lawsuit. The federal court stayed the litigation and ordered
both parties to submit the dispute to the independent accounting
firm of Grant Thornton for arbitration.

On January 20, 2004, the arbitrator issued a
decision awarding $725,829 to Messrs. Andrews and Bewley as
a purchase price adjustment under the AB Technologies asset
purchase agreement and increasing the earnout payment amounts to
be paid by the Company under the asset purchase agreement. The
arbitrators adjustments reflect an increase from $457,086
to $771,038 for the fiscal year 2000 earnout payment, an
increase from $395,734 to $1,165,651 for the fiscal year 2001
earnout payment, and an increase from $741,690 to $1,826,187 for
the fiscal year 2002 earnout payment. In sum, the arbitrator
awarded Messrs. Andrews and Bewley approximately
$4.4 million of the at least $8.2 million in damages
that they sought, and the arbitrator also established guidelines
to be used to calculate future earnout payments through fiscal
year 2005. As a result of the arbitrators decision, the
total amount due to Messrs. Andrews and Bewley for purchase
price adjustment and earnout payments through fiscal year 2002
under the AB Technologies asset purchase agreement is
approximately $4.4 million, of which the Company had
already accrued approximately $2.9 million as of
September 30, 2003. The payment of the approximately
$4.4 million amount is due from the Company in the second
quarter of fiscal year 2004.

The Companys minimum lease payment
obligations under non-cancelable operating leases for years
ending 2004, 2005, 2006, 2007 and 2008, are $8.3 million,
$7.5 million, $5.4 million, $5.2 million and
$5.2 million, respectively. The remaining aggregate
obligations on these leases thereafter are approximately
$7.4 million. Commercial facility lease expenses are
included in these amounts. These commercial facility lease
obligations are currently reimbursable costs under the
Companys government contracts.

Other contingent liabilities which will impact
the Companys cash flow relate to:



| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | Repurchase obligations under the KSOP which may
    be significant commencing in 2004;           
|
| |  | Obligations related to the holders put
    right associated with the Mezzanine Note warrants;   
|
| |  | Obligations related to the holders put
    right associated with the Subordinated Note warrants;
|
| |  | Obligations relating to our stock appreciation
    rights and phantom stock programs; and        
|
| |  | Obligations relating to deferred compensation
    programs for senior managers.                  

In December 2003, the Company spent
$0.7 million to re-purchase 50,031 shares of its
common stock from the ESOP Trust at $14.71 per share to
satisfy obligations to terminated employees.

The Company believes that cash flow from
operations and cash available under its revolving credit
facility will provide it with sufficient capital to fulfill its
current business plan and to fund its working capital needs for
at least the next 36 months. Although the Company expects
to continue to have positive cash flow from operations, it will
need to generate significant additional revenues beyond its
current revenue base and to earn net income in order to repay
principal and interest on the indebtedness it assumed to finance
the IITRI acquisition.

Additionally, the Companys business plan
calls for it to continue to acquire companies with complementary
technologies. If the Company does not have sufficient cash on
hand to fund such acquisitions, it will be required to obtain
financing to do so. Such financing may not be available to us on
favorable terms, if at all.

22



---



##### 



Given the Companys significant obligations
that become due in years 2007 through 2010, it expects that it
will need to refinance a portion of its indebtedness at least by
fiscal year 2007. The Companys cash from operations will
be insufficient to satisfy all of its obligations and it cannot
be certain that it will be able to refinance on terms that will
be favorable to the Company, if at all. Moreover, if the
Companys plans or assumptions change, if its assumptions
prove inaccurate, if it consummates investments in or
acquisitions of other companies, if it experiences unexpected
costs or competitive pressures, or if its existing cash and
projected cash flow from operations prove insufficient, it may
need to obtain greater amounts of additional financing and
sooner than expected. While it is the Companys intention
only to enter into new financing or refinancing that it
considers advantageous, it cannot be certain that such sources
of financing will be available to the Company in the future, or,
if available, that financing could be obtained on terms
favorable to the Company.

ITEM
3.     QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

The Companys exposure to interest rate risk
is primarily due to the additional debt it incurred to finance
the IITRI acquisition. The Mezzanine Note and Subordinated Note
have fixed interest rates, and therefore present no risk of
change to interest charges as a result of an increase in market
interest rates. The balance drawn under the $25.0 million
senior revolving credit facility and $3.0 million of the
Companys $28.0 million remaining balance on its
senior term note, however, bear interest at variable rates tied
to the Eurodollar rate. Such variable rates increase the risk
that interest charges will increase materially if market
interest rates increase. The Company has reduced, in part, the
maximum total amount of variable interest rate risk by entering
into an interest rate cap agreement which caps at 6% the first
$25.0 million of principal borrowed under the term note
effective until February 3, 2007. For a description of the
arrangement, refer to Discussion of Debt Structure
in Managements Discussion and Analysis of Financial
Condition and Results of Operations.

The Company does not use derivatives for trading
purposes. It invests its excess cash in short-term, investment
grade, and interest-bearing securities.

Because the Companys expenses and revenues
from its international research contracts are generally
denominated in U.S. dollars, the Company does not believe that
its operations are subject to material risks associated with
currency fluctuations.

The Companys exposure to change in the fair
market value of Alions stock as the economic basis for the
estimate of contingent liabilities relates to:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | Repurchase obligations under the KSOP which may
    be significant commencing in 2004;            
|
| |  | Obligations related to the holders put
    rights associated with the Mezzanine Note warrants;   
|
| |  | Obligations related to the holders put
    rights associated with the Subordinated Note warrants;
|
| |  | Obligations relating to its stock appreciation
    rights and phantom stock programs; and         
|
| |  | Obligations relating to deferred compensation
    programs for senior managers.                   

ITEM 4.     CONTROLS
AND PROCEDURES



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Disclosure Controls and Procedures.The Companys management, with
    the participation of the Companys Chief Executive Officer
    and Chief Financial Officer, has evaluated the effectiveness of
    the Companys disclosure controls and procedures (as such
    term is defined in Rule 15d15(e) under the Securities
    Exchange Act of 1934, as amended (the Exchange Act))
    as of the end of the period covered by this quarterly report.
    Based on such evaluation, the Companys Chief Executive
    Officer and Chief Financial Officer have concluded that, as of
    the end of such period, the Companys disclosure controls
    and procedures are effective in recording, processing,
    summarizing and reporting, on a timely basis, information
    required to be disclosed by us in the reports that the Company
    file or submit under the Exchange Act.

23



---



##### 





|    |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Internal Control Over Financial Reporting.There have not been any changes in the
    Companys internal control over financial reporting (as
    such term is defined in Rule 15d15(f) under the
    Exchange Act) during the fiscal quarter to which this report
    relates 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

On September 16, 2002, IITRI, Alions
predecessor entity, filed a lawsuit against Clyde Andrews and
William Bewley in the U.S. District Court for the Eastern
District of Virginia, which we refer to as the Court.
Messrs. Andrews and Bewley were formerly the shareholders
of AB Technologies, Inc. IITRI acquired substantially all of the
assets of AB Technologies in February 2000.

The lawsuit sought to compel the defendants to
submit disputed issues to an independent accounting firm, in
accordance with the terms of the asset purchase agreement. The
Company also sought declaratory judgment that it is entitled to
a downward adjustment to the purchase price and a finding that
it properly computed the earnout required by the asset purchase
agreement.

Messrs. Andrews and Bewley filed a lawsuit
against IITRI for breach of the AB Technologies asset purchase
agreement claiming at least $8.2 million in damages. The
Andrews-Bewley lawsuit was removed to federal court and
consolidated into IITRIs lawsuit. The federal court stayed
the litigation and ordered both parties to submit the dispute to
the independent accounting firm of Grant Thornton for
arbitration. The consolidated federal action was subsequently
dismissed without prejudice. Alion assumed responsibility for
and acquired all claims under both of these lawsuits, and the
ensuing arbitration, as part of its acquisition of IITRIs
assets.

On January 20, 2004, the arbitrator issued a
decision awarding $725,829 to Messrs. Andrews and Bewley as
a purchase price adjustment under the AB Technologies asset
purchase agreement and increasing the earnout payment amounts to
be paid by the Company under the asset purchase agreement. The
arbitrators adjustments reflect an increase from $457,086
to $771,038 for the fiscal year 2000 earnout payment, an
increase from $395,734 to $1,165,651 for the fiscal year 2001
earnout payment, and an increase from $741,690 to $1,826,187 for
the fiscal year 2002 earnout payment. In sum, the arbitrator
awarded Messrs. Andrews and Bewley approximately
$4.5 million of the $8.2 million in damages that they
sought, and the arbitrator also established guidelines to be
used to calculate future earnout payments through fiscal year
2005. As a result of the arbitrators decision, the total
amount due to Messrs. Andrews and Bewley for purchase price
adjustment and earnout payments through fiscal year 2002 under
the AB Technologies asset purchase agreement is approximately
$4.4 million, of which the Company had already accrued
approximately $2.9 million as of September 30, 2003.
The payment of the approximately $4.4 million amount is due
from the Company in the second quarter of fiscal year 2004.

On February 28, 2003, Alion filed a lawsuit
against Isovac Products, L.L.C., Inteledatics, Inc., James R.
Gauger, George L. Stefanek and Joseph J. Petrovic in the Circuit
Court of Cook County, Illinois, Chancery Division.
Messrs. Gauger, Stefanek and Petrovic were formerly
employed by IITRI.

Alions complaint alleges that:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Under contract to the U.S. Army, IITRI developed
    a mobile rescue device  an Emergency Personal Isolation
    and Containment (EPIC®) Pod  to enable
    rescuers to safely attend to and support victims of chemical or
    biological attacks;                                                                                                                                                                  
|
| |  | IITRI assembled a team of employees to conceive
    the device, including Messrs. Gauger, Stefanek and
    Petrovic, each of whom executed an agreement assigning to IITRI
    all intellectual property rights arising out of his employment.
    Messrs. Gauger, Stefanek and Petrovic also acknowledged
    receipt of the IITRI Code of Ethics prohibiting outside
    activities in conflict with IITRIs interests;
|
| |  | In December 1998, IITRI filed a provisional
    patent application for the device;                                                                                                                                                                                                                                                                                                                                       

24



---



##### 





| |   |                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In August 1999, Messrs. Gauger, Stefanek and
    Petrovic and IITRI employee Robert Mullins jointly filed a
    patent application, which assigned the patent to IITRI and that
    related back to IITRIs December 1998 provisional patent
    application. The patent was awarded to IITRI in November 2001;
|
| |  | Messrs. Gauger, Stefanek and Petrovic began
    a process starting in March 1999, while they were still IITRI
    employees, to form companies that would compete with IITRI using
    IITRIs trade secrets;                                                                                                  
|
| |  | Isovac Products, L.L.C., Inteledatics, Inc.,
    James R. Gauger, George L. Stefanek and Joseph J. Petrovic,
    collectively the defendants, misappropriated IITRIs trade
    secrets and filed a patent application on behalf of Isovac
    Products, L.L.C.;                                               
|
| |  | Mr. Petrovic defamed IITRIs product in
    an interview with the New York Times for the defendants
    pecuniary gain and to cause harm to the reputation of
    IITRIs products; and                                                                                                                       
|
| |  | IITRI assigned to Alion its intellectual property
    rights in the EPIC Pod and its rights to claims against the
    defendants as part of Alions purchase of substantially all
    of IITRIs assets.                                                                                                       

Discovery has commenced and is ongoing. Alion is
seeking an injunction barring the defendants from using
Alions trade secrets, as well as exemplary damages.

Other than the foregoing actions, the Company is
not involved in any legal proceeding other than routine legal
proceedings occurring in the ordinary course of business.

As a government contractor, the Company may be
subject from time to time to federal government inquiries
relating to our operations and audits of our accounting
procedures by the Defense Contract Audit Agency. Government
contractors who are found to have violated the False Claims Act,
or who are indicted or convicted for violations of other federal
laws, may be suspended or debarred from government contracting
for some period. Such an event could also result in fines or
penalties. Given the Companys dependence on federal
government contracts, suspension or debarment could have a
material adverse effect on the Company. The Company is not aware
of any such claims or investigations against it.

ITEM 2.     CHANGES
IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.     DEFAULTS
UPON SENIOR SECURITIES

None.

ITEM
4.     SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS

None.

ITEM 5.     OTHER
INFORMATION

None.

25



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##### 



ITEM 6.     EXHIBITS
AND REPORTS ON FORM 8-K

(a)

|        |    |             |  |                                                                                                                                                                                                           
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|No.     |    | Description
|        |    |            
|        | 3  | .1          |  | Second Amended and Restated Certificate of
    Incorporation of Beagle Holdings, Inc.(1)                                                                                                                  
|        | 3  | .2          |  | Amended and Restated By-laws of Alion Science and
    Technology Corporation.(3)                                                                                                                          
|        | 4  | .1          |  | Amended and Restated Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(2)                                                                                     
|        | 4  | .2          |  | First Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(4)                                                                               
|        | 4  | .3          |  | Second Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                                                              
|        | 4  | .4          |  | Third Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan. (5)                                                                              
|        | 4  | .5          |  | Fourth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan. (5)                                                                             
|        | 10 | .29         |  | First Amendment to the Credit Agreement by and
    among LaSalle Bank National Association as agent, various
    lenders and Alion Science and Technology Corporation.                                    
|        | 31 | .1          |  | Certification of Chief Executive Officer of Alion
    Science and Technology Corporation pursuant to
    Rule 15d-14(a) promulgated under the Securities Exchange
    Act of 1934, as amended.            
|        | 31 | .2          |  | Certification of Chief Financial Officer of Alion
    Science and Technology Corporation pursuant to 15d-14(a)
    promulgated under the Securities Exchange Act of 1934, as
    amended.                 
|        | 32 | .1          |  | Certification of Chief Executive Officer of Alion
    Science and Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.
|        | 32 | .2          |  | Certification of Chief Financial Officer of Alion
    Science and Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.



---



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 2 to the Registration Statement
    on Form S-1 filed with the Securities and Exchange
    Commission on September 17, 2002 (File no. 950133-2-3224).   
|   
|(2) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 3 to the Registration Statement
    on Form S-1 filed with the Securities and Exchange
    Commission on October 7, 2002 (File no. 950133-2-3343).      
|   
|(3) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 2 to the Registration
    Statement on Form S-1 filed with the Securities and
    Exchange Commission on December 9, 2002 (File no.
    950133-2-4018).
|   
|(4) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 3 to the Registration
    Statement on Form S-1 filed with the Securities and
    Exchange Commission on March 24, 2003 (File no.
    950133-3-862).   
|   
|(5) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    quarterly report on Form 10-Q for the quarterly period
    ended July 4, 2003, filed with the Securities and Exchange
    Commission on August 15, 2003 (File no. 950133-03-002960).

(b) Reports on Form 8-K:

During the quarter, the Company did not file a
Report on Form 8-K.

26



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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.



| |                                         
| | ----------------------------------------
| | ALION SCIENCE AND TECHNOLOGY CORPORATION



Date: February 17, 2004

| |     |                   
| | --- | ------------------
| | By: | /s/ John M. Hughes

| |                                            
| | -------------------------------------------
| |                                            
| | Name: John M. Hughes                       
| | Title: Chief Financial Officer             
| | (Principal Financial and Accounting Officer
| | and Duly Authorized Officer)               

27



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##### 



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                                                                                           
|------- | ----- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|No.     |       | Description
|        |       |            
|        | 3.1   |             |  | Second Amended and Restated Certificate of
    Incorporation of Beagle Holdings, Inc.(1)                                                                                                                  
|        | 3.2   |             |  | Amended and Restated By-laws of Alion Science and
    Technology Corporation.(3)                                                                                                                          
|        | 4.1   |             |  | Amended and Restated Alion Science and Technology
    Corporation Employee Ownership, Savings and Investment Plan.(2)                                                                                     
|        | 4.2   |             |  | First Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(4)                                                                               
|        | 4.3   |             |  | Second Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan.(5)                                                                              
|        | 4.4   |             |  | Third Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan. (5)                                                                              
|        | 4.5   |             |  | Fourth Amendment to The Alion Science and
    Technology Corporation Employee Ownership, Savings and
    Investment Plan. (5)                                                                             
|        | 10.29 |             |  | First Amendment to the Credit Agreement by and
    among LaSalle Bank National Association as agent, various
    lenders and Alion Science and Technology Corporation.                                    
|        | 31.1  |             |  | Certification of Chief Executive Officer of Alion
    Science and Technology Corporation pursuant to
    Rule 15d-14(a) promulgated under the Securities Exchange
    Act of 1934, as amended.            
|        | 31.2  |             |  | Certification of Chief Financial Officer of Alion
    Science and Technology Corporation pursuant to 15d-14(a)
    promulgated under the Securities Exchange Act of 1934, as
    amended.                 
|        | 32.1  |             |  | Certification of Chief Executive Officer of Alion
    Science and Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.
|        | 32.2  |             |  | Certification of Chief Financial Officer of Alion
    Science and Technology Corporation, pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.



---



|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 2 to the Registration Statement
    on Form S-1 filed with the Securities and Exchange
    Commission on September 17, 2002 (File no. 950133-2-3224).   
|   
|(2) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Pre-Effective Amendment No. 3 to the Registration Statement
    on Form S-1 filed with the Securities and Exchange
    Commission on October 7, 2002 (File no. 950133-2-3343).      
|   
|(3) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 2 to the Registration
    Statement on Form S-1 filed with the Securities and
    Exchange Commission on December 9, 2002 (File no.
    950133-2-4018).
|   
|(4) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    Post-Effective Amendment No. 3 to the Registration
    Statement on Form S-1 filed with the Securities and
    Exchange Commission on March 24, 2003 (File no.
    950133-3-862).   
|   
|(5) | Incorporated by reference to the corresponding
    exhibit previously filed as an exhibit to the Companys
    quarterly report on Form 10-Q for the quarterly period
    ended July 4, 2003, filed with the Securities and Exchange
    Commission on August 15, 2003 (File no. 950133-03-002960).